The Fly In Roche's Ointment

Feisty shareholder Martin Ebner is challenging family control

Pity the plight of Franz B. Humer. The well-respected Austrian is chief of Basel-based Roche Holdings Ltd., Switzerland's biggest company and one of the world's heavyweight drugmakers. Running this complex giant is tough enough. But the 53-year-old Humer has another problem--a persistent, confrontational financier named Martin Ebner.

Ebner concedes that Humer is lining up an impressive array of new drugs and pumping up earnings at the century-old company. But the wily Swiss investor, whose BZ Group controls 16.3% of Roche's voting shares, wants Roche to forsake a two-tiered stock structure that keeps the company firmly under family control and, in his view, depresses the stock, now trading at $11,414. That makes it tough for Roche to use its stock to make the acquisitions it needs to stay on top. Of course, unifying the stock might clear the way for a takeover of Roche at a big premium. Ebner is also saying that his $4 billion investment should command a seat on the board--something the company is unlikely to grant anytime soon.

Ebner is not the only shareholder pushing for change. "This imbalance of equity and ownership is anathema to serious investors," says Andre Baladi, who owns a small stake in Roche and is a co-founder of the International Corporate Governance Network, which represents $6 trillion in institutional assets. "For me, investing any more in Roche is inconceivable until this dual share structure is changed," he adds. And last year, the family lost its biggest advocate for independence: Patriarch Paul Sacher, who served on the board for 60 years, died in May. No replacement has been appointed, and the other two family board members are not actively involved with the company. "It's not clear what strategy the family has in mind [for the company]," says Kurt Schiltknecht, director of Ebner's BZ Group.

Humer is unfazed by Ebner's bluster; he believes he has worked out a strategy to restructure Roche and keep pumping out new products. This May, Roche will spin off its flavors and fragrances unit, allowing Humer to focus on the company's three remaining businesses: pharmaceuticals, diagnostics, and vitamins. "We have the flexibility and agility to be very successful," says Humer.

He is already basking in the success of a new blockbuster medicine, the anti-obesity drug Xenical. Nicknamed the bikini drug, Xenical went on sale in the U.S. in May. Worldwide sales last year reached $353 million. Analysts believe Xenical's sales eventually will eclipse those of Roche's all-time hit, Valium, which is no longer under patent protection.

NO SIDE EFFECTS. A number of other key products should boost growth. This year, Roche is expected to launch Pegasys, a promising treatment for hepatitis C. Pegasys comes on the heels of flu drug Tamiflu and Bonviva, a drug to prevent osteoporosis. Sales of such new products are expected to reach $2.5 billion by 2003.

Roche is also helped by its 66% stake in the leading U.S. biotech company, Genentech Inc. This investment allows Roche access to Genentech technology and products like the new breast cancer drug Herceptin, the first drug to target a cancer-causing gene defect. Unlike chemotherapy or radiation, Herceptin has no disabling side effects. Roche also has genetic-research alliances with businesses such as Iceland's deCode, which has exclusive rights to a genetic database compiled by Iceland's government.

Still, an increasingly competitive global drug market could force Humer to do more restructuring, with or without Ebner. One option is to spin off the slow-growing vitamin division to focus on higher-margin drugs and diagnostics. For now, high earnings and family control give Humer free rein to implement his own plan. Analysts predict operating profits will be up 16%, to $3 billion, on $16.5 billion in sales when Roche reports earnings for 1999 on Mar. 30. But Humer is not out of the hot seat--the family may decide to give up control in exchange for a higher market valuation. One thing is certain: Ebner will keep on agitating for change.

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