413-096 Novartis: Leading a Global Enterprise

year alliance with the World Health Organization (WHO) to provide Coartem, Novartis’ breakthrough malaria medicine, without profit for use by public health systems in developing countries. Novartis provided Coartem for $1.57 per treatment and WHO distributed it through governments of malaria-endemic countries. Coartem obtained regulatory approval from three countries in 1999 and from the FDA in 2009. By 2013 Novartis had provided 500 million treatments without profit, making it one of the largest access-to-medicine programs.

Globalizing Novartis Research

Vasella’s boldest move came in 2002, when he abandoned the traditional drug-development model, declaring Novartis would only investigate diseases for which new drugs were desperately needed and where there were a solid scientific basis or hypothesis of the mechanisms (genetic and/or pathways) leading to the target illnesses. While other CEOs saw the pursuit of rare diseases as commercial suicide, Vasella believed many of the illnesses shared genetic underpinnings with more common ailments.14

Historically, both Sandoz and Ciba leaders felt they could attract the best scientists in the world to work in Basel. In contrast, Vasella felt the company needed to be where the talent pool was located and that Novartis needed to attract the top scientists in the U.S. Consequently, he shifted Novartis’s global research headquarters to the U.S. by establishing the Novartis Institutes for Biomedical Research (NIBR) in Cambridge, MA near Harvard University and MIT. While the Basel research site was maintained, the company closed its research center in New Jersey, transferring key scientists to Cambridge. The original investment was $1 billion.

To head NIBR, Vasella recruited Mark Fishman, M.D., chief of cardiology at Massachusetts General Hospital, a geneticist and top scientist. “We needed an M.D. with a modern approach to research with vast knowledge of molecular biology and genetics, and with broad clinical experience,” Vasella explained. His decisions set off a firestorm in Basel. Concerns were voiced about “abandoning Basel” and hiring an American academic medical scientist without industry experience.

Fishman recalled, “The original idea was actually to have a research site in the Boston-Cambridge area, but I thought it had to be the headquarters for research. You can’t change an organization by modifying it from within. Second, research could not be part of pharma. It had to be discovery- driven, not financially-driven by marketing as most pharmaceutical companies were.”

Vasella agreed on both points, having Fishman report directly to him rather than Ebeling. This also led to internal criticism because the pharmaceutical group felt strongly it had to control its own research. “Separating research out,” Vasella said, “allowed me to protect the investment; otherwise, people start to cut it due to budgetary pressures.”

NIBR’s mission was to discover innovative new drugs that would change the practice of medicine. Traditionally, drug researchers discovered medicines by bombarding an illness with a variety of chemicals until they hit a combination that treated it. A research strategy based on molecular pathways, by contrast, zeroed in on the exact molecular mechanisms that caused a disease.15 Fishman cancelled 30% of research projects to shift the focus to rare diseases. “First, we have to understand the unmet need,” he explained, “and then the mechanism and the path of physiology in order to make a medicine.”

Fishman also changed the way Novartis selected research projects and the kind of scientists it hired. While Fishman saw early progress with his new molecular pathways-focused methods, he noted “the hostility from the old guard.” NIBR hired 1,000 people in its first year. “The few who came

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Novartis: Leading a Global Enterprise 413-096

from Basel were very valuable in terms of forming liaisons,” Fishman noted. By 2012 NIBR had 10 research institutes around the world with approximately 6,000 scientists. As part of this growth, Novartis committed to invest $1 billion in a new research center in Shanghai, China, making it the largest research center in China. “Having a Chinese research institute has helped the commercial groups a lot,” said Fishman, “because it is a vote of confidence in the country, and the government loves having us there.”

In April 2012, Fishman joined Governor of Massachusetts Deval Patrick and other local notables to break ground on a new 550,000 square foot campus of lab, office, and retail space across the street from the NIBR headquarters—a $600 million expansion.

Globalizing the Investor Base

With most of its stock held by Swiss institutions, Vasella and Breu decided Novartis needed to develop a global shareholder base. They believed the discipline of listing on the New York Stock Exchange (NYSE) would be beneficial. Consequently, in May 2000 Novartis listed its stock on NYSE, with a simplified share structure and $2.5 billion share-repurchase program.16 In 2003 Novartis began reporting in U.S. dollars, initially reconciling results between U.S. and international GAAP.

“We began thinking about U.S. stock listing back in 1990,” Breu said, “when we realized that our main competition was in New Jersey, not across the Rhine. To attract the best talent, we knew we would have to play by U.S. rules.” Some security analysts saw the U.S. listing as a gateway to a major acquisition or merger enabling Novartis to strengthen its U.S. position. In 1999 it approached both Monsanto Co. and American Home Products Corp. about possible transactions.17 Other observers felt Novartis would be better off alone, questioning whether it needed a big acquisition with its solid pipeline of upcoming drugs.18

Recasting Basel

In 2001 Vasella launched a plan to transform its Basel headquarters from a rundown chemical complex into a modern state-of-the-art campus designed by world-famous architects such as Frank Gehry, Rafael Moneo, and Alvaro Siza. Many buildings were demolished, except the 1939 headquarters. New facilities were designed to improve communication between employees and facilitate their daily lives by providing grocery shopping, banking services and so on. Office floor layouts encouraged cross-disciplinary interaction, while beautiful parks and courtyards provided space for quiet reflection. To implement its new campus design, Novartis purchased adjacent land from the city of Basel and closed a street that connected with French border control. Vasella noted, “We put 100 million Swiss francs on the table and the government agreed.”19 By 2012 10 research and office buildings were completed, with seven additional buildings under construction.20

Strengthening Novartis’ Healthcare Portfolio

Also in 2000, Novartis began broadening its healthcare portfolio, expanding its subscale generics business by acquiring BASF Pharma’s European business, U.S.-based Apotheccon and Germany’s Grandis. Two years later, it bought Slovenia’s Lek Pharmaceuticals to gain a presence in Central and Eastern Europe. Other acquisitions included Sabex and Durascan, Astra-Zeneca’s generic company.

In 2004 Novartis united its global generics operations in a new division under the Sandoz name, mothballed since the merger. The following year it acquired Germany’s Hexal and its U.S. affiliate, Eon Labs. Although some analysts had misgivings about the $8.3 billion price tag, Vasella felt it was

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413-096 Novartis: Leading a Global Enterprise

inevitable that tighter healthcare budgets would boost generics.21 Sandoz headquarters was relocated to Hexal’s headquarters outside Munich, Germany, to separate it clearly from the pharma business.

In 2006 Novartis acquired the remaining 58% of California-based Chiron, having purchased 42% in the mid-1990s. Chiron’s vaccine business with more than 30 vaccines was the fifth largest vaccine company. Novartis hoped new technologies and a shake-out in vaccines would transform it from a low-growth, low-price business. The following year Novartis disposed of its remaining non- healthcare assets, selling its medical nutrition and Gerber baby food businesses to Nestlé.

Novartis made its biggest bet ever in 2008, when it agreed to acquire Alcon eye care from Nestlé for an amount which ultimately totaled $52 billion. Analysts were displeased. As one noted, “We struggle to see how acquiring a market leader at top multiples can create shareholder value.”22 Another opined, “This transaction annihilates Novartis’s key attraction for investors: undervalued cash generation.”23

“Although security analysts were advocating that Novartis be a pure pharmaceutical company,” Breu explained, “we decided to invest in generic drugs, consumer health, vaccines and eye care to reduce exposure to pharmaceutical pricing pressures. From a margin standpoint, acquiring vaccines was a disaster, but we believed it had great long-term prospects. We’re growing the company, not improving margins by cutting R&D and marketing. Our goal is to maximize net present value, not increase the short-term stock price.”

Between 2000 and 2012, price-to-earnings ratios for the pharmaceutical industry dropped from 25 times earnings to 10 times, as analysts worried about R&D productivity and pricing power, which had shifted to buyers of healthcare (see Exhibit 5 for stock price information). Against the industry trend, Novartis increased investments in R&D and marketing. Breu noted, “We needed to invest to make Novartis ‘the best-in-class company.’”

Upgrading Executive Leadership

Throughout his 14 years as CEO, Vasella made continual changes to his executive team to ensure Novartis had the right leaders in place as the company expanded. In 2006 American Joe Jimenez was hired from H. J. Heinz as global head of consumer health, pharmaceuticals development head Joerg Reinhardt was named head of vaccines and diagnostics following the completion of the Chiron acquisition, and Andreas Rummelt, head of pharmaceutical operations, was asked to lead Sandoz.

The next year Vasella switched Jimenez’s and Ebeling’s positions: Jimenez became global head of pharmaceuticals as Ebeling took over consumer health. In late 2008 Vasella appointed Reinhardt as chief operating officer with all business reporting to him. He also promoted two young executives in their thirties to the executive committee, Swiss-born Andrin Oswald (37) as global head of vaccines and diagnostics and American Jeff George (35) as global head of generics. (See Exhibit 6 for an organization chart and Exhibit 7 for leadership changes over time).

At the start of 2010 the Novartis board accepted Vasella’s recommendation to name Jimenez his successor as CEO. Subsequently, Reinhardt left to become head of Bayer Healthcare. David Epstein, who had run oncology and specialty medicines in pharmaceuticals, succeeded Jimenez as global head of pharmaceuticals. Breu retired as CFO and was replaced by Jon Symonds, who came from Goldman Sachs and AstraZeneca.

With these appointments Novartis completed its transition from the Swiss-dominated leadership to a multi-national team at the top. The new executive committee had an American CEO and head of

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