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Roche Chief Warns of a Likely Shakeout Among Drugmakers
Wall Street Journal
Dec 8 2008
As the global pharmaceutical market gets tougher, some drug makers probably will fail because they won't have enough innovative medicines that health insurers will be willing to pay for, the chief executive of Roche Holding AG, Severin Schwan, said in an interview.
Some drug makers might be forced into bankruptcy in coming years, Mr. Schwan said. Others could be forced into mergers, or to diversify into other businesses.
The global economic downturn -- and a new Democratic-controlled Congress and White House in Washington -- will only heighten the frugality of health-care insurers and other payers, making them even less willing to pay for new drugs that don't show a clear benefit over older treatments, he said.
While the drug industry has struggled to bring new products to market in recent years for a variety of reasons, Mr. Schwan's assessment was unusually blunt.
Among the industry's problems, company scientists have been largely unsuccessful at discovering new medicines; regulators, including the U.S. Food and Drug Administration, are applying stricter safety standards in approving new drugs for sale; and budget-minded insurers have increasingly refused to pay for new drugs that cost more than older treatments without providing much additional benefit.
"Those who fail to bring sufficient innovation will be squeezed out of this market," Mr. Schwan said at Roche headquarters in Basel, Switzerland. "No one is immune to this failure. That applies equally to small companies and big companies," he said.
Roche's strategy is to be more selective about the drugs it chooses to develop, jettisoning all but the most promising. The company recently stopped investing in a diabetes drug that did well in studies, but didn't produce benefits far enough beyond a similar pill already sold by Merck & Co.
Roche is also boosting its research-and-development spending as a percentage of its sales, in a bid to spur drug development, Mr. Schwan said. Roche should be well-placed to succeed in the years ahead, he added, because its cancer medications, including Herceptin and Avastin, are effective in many patients and therefore widely covered by insurers.
A prominent executive at Roche's cross-town rival, Novartis AG, another of the world's biggest pharmaceutical companies, also expects some large drug makers to face serious problems. "In the '90s everybody won," Joe Jimenez, head of Novartis's pharmaceuticals division, said in an interview. But share prices of some companies have fallen sharply as investors worry about the companies' ability to keep growing.
Some stocks will continue to decline until the value of the companies' drugs and other assets exceeds their market capitalization, Mr. Jimenez said. At that point, they will be taken over by stronger companies and broken up, he said.


Roche and Novartis have stronger price/earnings ratios than most of their industry. Roche shares in Zurich trading are down 26% from a year ago, at 168.50 Swiss francs ($137.85), while Novartis shares are down 14 at 55.90 francs.
Soon after the 41-year-old Mr. Schwan, who had been head of Roche's diagnostics division, took over as CEO this year, Roche made a bid to buy the 44% of California biotech company Genentech Inc. it doesn't already own. Roche's takeover bid is stalled, however, because Genentech's board rejected Roche's offer of $44 billion, or $89 a share, as too low, and because tight credit markets are making it tough for Roche to raise funding for the purchase, according to people familiar with the matter.
"We are committed to the deal, and as such, we are committed to make everything happen which will eventually make this transaction happen," Mr. Schwan said.
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