CEO Daniel Vasella has a hot cancer drug and billions in the bank. What's his next big move?

Novartis (NVS ) Chairman and CEO Daniel L. Vasella doesn't take no for an answer. The head of the world's sixth-largest drugmaker (by sales) goes after what he wants and, more often than not, gets it. When the Swiss company began work on a $4 billion research facility in Cambridge, Mass., last year, Vasella decided to draft a world-famous scientist to run it. But his candidate, Dr. Mark C. Fishman, a renowned geneticist and cardiologist at Harvard Medical School, flatly refused, saying he was happy in his current job. "It has been years since that happened to me," Vasella recalls with a laugh. But Vasella wore him down. After six months of persistent wooing on two continents, the Cambridge center was up and running by the end of March with Fishman in charge.

Hiring Fishman -- and turning the Cambridge center into a leader in the discovery of cardiovascular, cancer, antiviral, and diabetes drugs -- are the latest elements of a grand plan that the courteous, soft-spoken Swiss has developed with a mixture of patience and quiet ferocity. The first stage was to generate some respect for Novartis, a product of the 1996 merger of two Swiss companies, Sandoz Ltd. and Ciba-Geigy. That was the hard part. Until two years ago, the industry dismissed Novartis as a sleepy European giant without the marketing and sales firepower to compete in the U.S., the world's most lucrative market for prescription drugs. There, Novartis was a midtier player -- certainly no match for Merck (MRK ) & Co. or Pfizer (PFE ) Inc. But Vasella, a physician himself, devoted every penny he could find to marketing and research and took the world by surprise in May, 2001, with Glivec, one of the most effective new cancer therapies going. "Novartis is emerging as one of the premier powerhouses in the global pharmaceuticals industry," says Richard R. Stover, senior analyst with brokerage Natexis Bleichroeder Inc. in New York.

Glivec's success set the stage for the next phase of the plan: creating a profit machine. On Apr. 15, Novartis reported a 24% jump in first-quarter operating earnings, to $1.4 billion, on sales of $5.7 billion. That news was better than expected, thanks partially to Novartis' decision to begin reporting results in dollars rather than in Swiss francs. A currency switch isn't the whole story, though. Despite higher spending on research and development, pharmaceutical margins at the Swiss drugmaker powered ahead, to 30.5% from 28.1% year on year. The stock has climbed 15% since mid-March and continues to outperform the industry (charts).

Now for stage three, elevating Novartis to the pantheon of the truly great global pharma giants. Novartis' No. 6 ranking is good, but more blockbusters such as Glivec would make it better. That's where hugely ambitious projects like the Cambridge research center come in. "Personally, I'd simply like to beat the competition," says Vasella.

That means building a portfolio of superior drugs. Making them in your own labs is one way to do that; buying them from rivals is another. Novartis certainly has money to spend. The Swiss company is sitting on $7 billion in net cash, more than any other drugmaker in Europe -- more even than the money-spinning GlaxoSmithKline (GSK ) PLC. And that figure is set to rise to $10 billion by yearend, estimates Marc Booty, European pharmaceuticals analyst at Commerzbank Securities in London.

Vasella has been carefully laying the groundwork for acquisitions. That's one reason he switched the company's financial reporting to dollars. It makes a deal with a U.S. company much easier for American investors to suss out (and signals to Pfizer and Merck that Novartis thinks it's in the same league). Takeover candidates? Schering-Plough (SGP ) Corp., for one. Vasella and Schering's newly appointed CEO, Fred Hassan, go way back, plus Schering has the exclusive rights to sell Novartis' Foradil for asthma in the U.S. Another possibility is Wyeth, whose pipeline would complement Novartis' own.

Big transatlantic deals are notoriously tough due to regulatory hurdles, so Vasella is not waiting around. In March, Novartis paid $225 million in cash for a majority stake in Cambridge (Mass.)-based Idenix Pharmaceuticals Inc. The acquisition gives Novartis access to a promising line of new drugs to treat hepatitis B and C.

Certainly, a play for a top American drugmaker would vastly strengthen Novartis' hand in the U.S., where all of the European pharmas get the bulk of their profits, thanks to higher prices for prescription drugs and doctors' willingness to prescribe innovative treatments, regardless of the cost. But Vasella is already working on a deal closer to home that could, in a stroke, turn Novartis into the second-biggest pharmaceutical company on the planet, behind Pfizer. This is a target Vasella can practically see from his office window: Roche Group, also based in Basel.

A union between the crosstown rivals would have repercussions far beyond this picturesque city on the Rhine. The merged company would have sales of more than $45 billion, a nearly 7% share of the global market, a powerful cancer franchise, and one of the best biotech research facilities around, thanks to Roche's ownership of U.S. biotech Genentech (DNA ) Inc. Novartis already owns 32.7% of Roche, just under the one-third stake that would require the company to make a formal bid under Swiss stock exchange rules.

There's just one hitch: Roche CEO Franz B. Humer is staunchly opposed to any deal. "We are better off as an independent company, and a megamerger with Novartis or anyone else is not an answer," he says. And for now, at least, Humer has the backing of the descendants of founder Fritz Hoffman-La Roche, who control the majority of the company's voting rights despite owning less than 10% of the equity. André Hoffman, the family spokesman, vows Roche will elude takeover.

Vasella is equally determined to make it happen. "There has been value destruction [at Roche], and as a shareholder, one can't be happy with that," he says. "Roche's management and board need to do the right thing for all [of] their shareholders." Roche shares have declined 16% in the last 12 months. The company posted a $3 billion loss in 2002 due mainly to the poor performance of its investment portfolio.

Vasella can afford to bide his time. Novartis' pipeline is full, a rarity in the industry. The company has launched 10 drugs since 2000, three times more than its nearest rival. Another 15 are expected to debut by 2006. Among the current crop are Zelmac, a drug for irritable-bowel syndrome; eczema treatment Elidel; and Zometa, a treatment for bone metastases. What's more, none of Novartis' major moneymakers is set to go off-patent soon. Earnings should rise almost 10% this year; they would go higher were it not for Vasella's insistence on ramping up the research budget to $3.5 billion in 2003, equal to 17.5% of sales, well above the industry average.

Then there's Glivec, the first treatment ever proven to cause certain types of tumors to disappear. While other cancer drugs work indiscriminately, killing off healthy cells along with sick ones, Glivec is part of a new class of drugs that interfere with the proteins that cause tumors to grow. Initially approved for the treatment of chronic myeloid leukemia, Glivec also is used to treat other rare types of cancer such as gastrointestinal stromal tumors (GIST) and is now being tested in combination with other drugs in fighting prostate cancer. "Novartis shows other drugmakers that these little niches can be extraordinarily valuable scientifically, as well as commercially feasible," says Dr. George D. Demetri, director of the sarcoma center at Harvard Medical School's Dana-Farber Cancer Institute in Boston. Other drugmakers already are developing targeted drugs, such as AstraZeneca (AZN )'s Iressa for lung cancer, and ImClone (IMCLE ) Erbitux, for colorectal cancer.

Glivec, introduced in the U.S. in 2001 under the brand name Gleevec, was worth every penny that Novartis invested. Sales rose more than 300% in 2002, and could hit the $1 billion mark by the end of this year, according to Commerzbank's Booty. Although an annual course of Glivec can cost as much as $25,000, demand for the drug took off so quickly that Novartis was forced to run its production line around the clock. One of the first patients to have access to the medicine was Anita Scherzer of Little Falls, N.J. In 1994, the then 52-year-old Scherzer was diagnosed with gastrointestinal stromal tumors. She underwent countless surgeries to remove tumors in her stomach and liver, followed by chemotherapy, but the cancer kept spreading. She enrolled in a small clinical trial for Glivec in August, 2000. Just 10 days after taking her first dose of the drug, doctors were astonished to discover that a tumor in Anita's liver had shrunk. Just a month after starting treatment, she was in remission. "I knew I was getting better when I went for a biopsy and the doctor couldn't find the tumor," Scherzer says. Glivec is not a magic bullet, though. Some patients have developed resistance to the drug.

Glivec's success stems from Novartis' stress on science. Under the leadership of Joerg Reinhardt, a 20-year company veteran who heads global development, the company has shaved nearly two years off the time it takes to bring a drug from clinic to market. Novartis now needs just over 7 years -- 18 months less than the industry average.

He did it partly by running discovery-and-development projects in parallel instead of sequentially. That means a potential drug being tested for colon cancer might simultaneously be screened for effectiveness against lung cancer or even schizophrenia. Before the mapping of the human genome, scientists made such discoveries by chance. Today, technologies such as functional genomics, in which Novartis invests approximately $150 million a year, have given scientists a better understanding of the molecular causes of some diseases. Vasella wants the Cambridge center to be at the forefront of this type of research.

Reinhardt's breakthrough is due in part to the constant pressure Vasella puts on employees to beat industry benchmarks. Employees describe him as a demanding boss with exceptionally high standards. When Vasella saw the early clinical results on Glivec, he gave the development team just two years to bring the drug to market. "When I think something needs to be done," says Vasella, "I generally think it needs to be done quickly."

Novartis' boss is an unusual mix, an aggressive manager who still keeps something of the gentle bedside manner he developed as a general practitioner. Although Vasella recognizes his first loyalty is to his shareholders, he never loses sight of the patients. It's an attitude that grows out of his own admiration for the doctors who treated him as a child, when he contracted tuberculosis and meningitis. Vasella is also an unbuttoned type who likes roaring around the Swiss countryside on his BMW bike.

Vasella's rivals underestimated him at first, especially when he embarked on the merger of Sandoz and Ciba. The companies were old-style conglomerates with roots in the agrichemicals industry, but with very different corporate cultures. Sandoz was autocratic and hierarchical, while at Ciba a collegial and informal atmosphere bred better morale but little accountability among the staff. "It was a difficult marriage to make work," says Natexis' Stover. Vasella's appointment to the top job at the newly merged company in March, 1996, fueled accusations of nepotism (his high-school sweetheart and wife of 25 years, Anne-Laurence, is the niece of Sandoz' former chairman) and grumblings that he was in over his head.

Determined to prove critics wrong, the new boss promptly set about cleaning house. After much-touted synergies failed to materialize, he dumped the company's ailing agrochemicals unit to focus on higher-margin pharmaceuticals. He also rapidly boosted R&D spending.

But one of Vasella's shrewdest moves was to sharpen marketing in the U.S., one of Novartis' big weaknesses. So in 1999, he hired Paulo Costa, a former Johnson & Johnson (JNJ ) exec, to head up Novartis' stateside pharmaceutical business. Costa doubled the size of the U.S. sales force to 6,200 and this year tripled spending on direct-to-consumer advertising to $120 million. So far, it seems to be working: Launched in March, 2002, with massive marketing support, Elidel became the No. 1 branded eczema product in the U.S. after just four months on the market. "They've changed the market's perception about how well a European company can compete in the U.S.," says Commerzbank's Booty. Today, U.S. sales account for 43% of overall revenues. Credit also goes to Thomas Ebeling, a marketing whiz from PepsiCo (PEP ) (PEP ) Inc., who was promoted in July, 2001, to head Novartis global pharmaceutical business. In a quest to create global brands, Ebeling decided to devote more than 50% of the Novartis' marketing budget to a handful of drugs, such as hypertension medicine Diovan, Lotrel, Glivec, and Zometa.

Vasella increasingly sees the U.S. as vital to the company's destiny (a merger with Roche, which relies so much on California-based Genentech for its pipeline and profits, would reinforce Novartis' American position). That's why he has been shifting more and more of the company's R&D to the U.S., a country which he says has a much better regulatory and scientific environment for drugmakers than Europe. This year alone, spending on R&D is set to rise by 20%, to $3.5 billion, to cover the development of new drugs such as Prexige, a treatment for osteoarthritis and acute pain, and Xolair, for severe asthma.

Still, there are considerable risks. Vasella concedes that the big boost in R&D spending will put pressure on margins and earnings. But he contends that this is inevitable if Novartis wants to keep innovating. "It's not an option to stand still," he says. His biggest challenge will be revving up sales of new drugs to offset the large increases in investment. It won't be easy. Many of Novartis' newer drugs are in either crowded or immature markets. Prexige, slated for launch in mid-2004, will be the fifth entrant into a large field dominated by Pharmacia's Celebrex. To make a dent, analysts estimate Novartis may have to spend as much as $1 billion in the first three years after launch.

Costly stuff. But Vasella has deep pockets. In March, Novartis acquired the rights to Pfizer's incontinence drug Enablex for $255 million, beating out bigger players such as GlaxoSmithKline. The drug, which Pfizer was forced to sell as part of an antitrust agreement before it could take over Pharmacia, is considered a potential billion-dollar blockbuster. One way or another, the doctor is determined to build his powerhouse.

By Kerry Capell in Basel

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