Roche CEO Don’t Underestimate the Growing Understanding of Genetics and Molecular Biology

Severin Schwan, the CEO of Roche Holding AG—the world’s seventh-largest drug firm by sales—noted that while some would argue that “all the low-hanging fruits have been harvested and that the pharmaceutical industry is at an end,” these skeptics “are wrong.”

According to a recent article in the Wall Street Journal, Schwan maintained that, “those who shun the pharmaceutical sector for its lack of prospects don’t understand the potential created by a rapidly growing understanding of genetics and molecular biology, and the new drugs that will follow.”

Schwan told WSJ that he believes “there are enormous opportunities in this industry as we are only now beginning to understand how diseases are working.”

Eight months ago, the Swiss company embarked on a 2.7-billion-Swiss-franc ($3.4 billion) restructuring that is set to last two years. The revamp was needed in the wake of the failure of more than half a dozen drugs in development, including the shelving of diabetes compound taspoglutide, which had promised to become a blockbuster with more than $1 billion in annual peak sales.

The series of setbacks saw Roche’s share price fall 20% in 2010. Investors feared that, coupled with the U.S. health-care reform, drug-price cuts in Europe and increased regulatory scrutiny of its cancer drug Avastin as a breast-cancer treatment and its eye medicine Lucentis, the Swiss giant’s potential for growth had evaporated. Even the restructuring plan, announced in November, which involves shedding 4,800 jobs and aims to save around 2.4 billion Swiss francs in costs from 2012 onward, “left many investors unimpressed as growth concerns remained acute because of the growing insecurity about new drugs in its pipeline.”

The article noted that, “Roche’s problems were typical of the sector as a whole, hampered as it is by competition from generics and price cuts, which have seen the industry’s growth rate fall to around 4% in 2010, from annual growth rates of around 7% to 9% over the previous seven years, according to data from consultancy IMS Health.”

However, “Mr. Schwan is adamant about the sector’s prospects and is full of confidence when he talks about his belief in scientific progress.” For example, this year, all of Roche’s seven drug approval applications have been accepted by health authorities, including this month’s U.S. approval of skin-cancer treatment Zelboraf, which analysts estimate could help Roche generate more than $1 billion in annual peak sales if it is also accepted to treat other cancer forms.

The nod from the U.S. Food and Drug Administration (FDA), which came two months earlier than expected as regulators were impressed with the medicine’s effectiveness, is a major milestone for Roche as the drug belongs to the company’s growing class of targeted therapies.

These treatments come together with diagnostic tests that can identify whether a patient can benefit from a drug that targets a specific, genetically mutated protein that is believed to be the root cause of a disease.

Schwan noted that Roche has “a huge potential with their targeted therapies and believes that this strategy is working.”  He added that, “more is expected to come when we consider that all of today’s existing medicines address only some 150 different targets, whereas there are more than two million proteins in the human body, of which many potentially can cause diseases.”

Among Roche’s most promising experimental compounds, Mr. Schwan says, are lung-cancer treatment Metmab, asthma compound lebrikizumab and breast-cancer treatment pertuzumab. “If approved, the drugs could be used to treat hundreds of thousands of patients and could have blockbuster potential,” Mr. Schwan says. “But of course, these experimental compounds need to prove themselves first.”

Roche plans to file pertuzumab in Europe and in the U.S. later this year and is in the process of entering late stage trials for Metmab and lebrikizumab.

WSJ noted that, “part of the problem faced by high-end pharma products is governments’ increasing reluctance to pay for expensive medicines in a regulatory environment that prioritizes cost-cutting.” Schwan noted that, “pricing pressure, which is expected to cut our sales by 1% this year, is expected to continue.”  Nevertheless, he said that Roche is “confident that our strategic response with a clear focus on innovation will help us, going forward.”

In addition, Schwan noted that the company is “constantly working on productivity improvements across the entire organization,” which have helped put the company slightly ahead of schedule on its restructuring.

As for competition from generic-drug manufacturers—which analysts from brokerage Bernstein expect to lead to an annual sales loss of around 2% from 2014 to 2020 for Roche—Mr. Schwan thinks the likely impact has been exaggerated. “First, one has to be aware that in the medium term we will only lose the patents on two drugs in Europe, which are cancer drug Herceptin and rheumatoid arthritis and cancer medicine Rituxan,” he says.

He noted that, “both are biological medicines where identical copies are not possible and therefore regulatory hurdles will be much higher. While it is true that generic competition on simple small molecules can lead to price cuts of 80%, no one yet knows how this will work out for complex biologics.” WSJ noted that, due to the complexity of these drugs, price reductions for Roche may be limited but could reach more than 30%. Ultimately, Mr. Schwan said the company is on track to reach its financial guidance for the full year.