Roche's Rush
By Kathleen Kingsbury
In a nondescript building in Nutley, N.J., nearly 1 million tiny glass plates most likely hold the future of Swiss pharmaceutical giant Roche. On each sits one of some 920,000 drug compounds Roche owns, which the researchers at its U.S. headquarters spend their day mixing and matching in the hope of finding the next cure for diabetes, rheumatoid arthritis or even cancer. Until now, however, 9 out of 10 times these searches have yielded only dead ends.
Those are odds most of corporate America would blanch at. But for drugmakers, high-priced gambles have long been the reality of research and development. To be sure, when they do hit the jackpot, the payoff can be enormous: Roche's pharmaceutical division alone raked in more than $30 billion in sales last year. Its total sales reached $43 billion, generating profits of $10.5 billion. Nonetheless, the days of this trial-and-error approach may soon be over. All of Big Pharma is feeling pressure--from Wall Street, regulators and customers--to take a smarter path to discovery for that next blockbuster drug. And who wins vs. who is left behind is still very much up in the air.
At Roche, the rush to innovate is palpable across the world's fifth largest pharmaceutical firm. In core research areas, scientists are mining new sources for inspiration, be it China or genetic engineering. At the same time, Roche's bosses, from their base in Basel, continue to lead the pack in acquiring expertise, a talent recently seen in the company's bid to control biotech superstar Genentech. Together, the two strategies form the nucleus of how Roche plans to deliver best-in-class products--faster, more cheaply and more reliably--to market. "The days of an attrition-based pipeline are over," says Lee Babiss, head of global pharma research. "We've responded by making R&D much more efficient."
In many ways, Big Pharma can't afford not to. Getting drugs to the market has never been more expensive. The price tag for developing a single medication can now top $1 billion, compared with less than $300 million 15 years ago. That rise is due, in large part, to a growing need to produce bigger and bolder breakthroughs as portfolios mature and patents lapse. The market wants fewer "me too" products, instead demanding originality. And drugmakers are working overtime to distinguish themselves: in 2006 the top seven pharmaceutical companies spent twice as much on marketing (33%) as on R&D (16%).
Meanwhile, not only are regulators scrutinizing steep pricing models, but in this post-Vioxx era, agencies like the U.S. Food and Drug Administration (FDA) are also requiring more and more testing. That has led many firms to consult regulators much earlier in the R&D process. "You must align expectations as early as you can with the FDA," Roche CEO Severin Schwan says. "It leads to a much more efficient, effective use of resources on both sides."
To combat soaring costs, Roche also plans to create more customized drugs and redesign the way it develops them. At the center of this push is the company's diagnostics unit, which Schwan oversaw before taking on the top job last year. Perhaps more than any of its rivals, Roche sees diagnostic machines and test kits as crucial to assessing and treating disease in the future. That belief, in turn, has led to a laser-sharp focus on "personalized medicine." So, for example, an oncologist will use a genetic test to pinpoint the exact kind of cancer her patient has and then proceed with a highly specific treatment course of Roche drugs. "For a long time, we acted as if all cancers are homogeneous," says David Heimbrook, Roche's V.P. for oncology discovery. "Now, because we can quickly analyze a tumor in greater detail, we have a much better sense of what's the best way to eradicate it."
The demand for cancer drugs, for one, will grow exponentially with this treatment approach. But more important, Roche can now use biomarkers to determine much earlier in the R&D process whether a drug will pan out. Down the pipeline, diagnostics identify which patients most benefit from a therapy, giving clinical trials tailored to that subset a better chance of succeeding. Moreover, any patient for whom the drug wouldn't work or whom the drug could harm can be excluded.
It's good medicine for the accountants too. Roche can better forecast its future customer base, allowing it to do much more precise cost-benefit analysis ahead of time. "A drug can take 12 years or longer to develop from start to finish," says Steve Sembler, who oversees Roche's U.S. commercial operations. "Diagnostics give us a much longer-term perspective and take a lot of the guesswork out of the process."
These tools can also grant older medications a new lease on life. Take the cancer drug MabThera, sold in the U.S. as Rituxan. MabThera was originally developed to treat non-Hodgkin's lymphoma. In 2006, Roche scientists noticed--again using biomarkers--that it was also extremely effective in certain cases of rheumatoid arthritis, a painful autoimmune condition that causes joint inflammation. Roche's sales to arthritis patients have already totaled more than $420 million.
Roche's risk profile has also extended to being one of the largest investors in a red-hot area of drug research: ribonucleic-acid-mediated interference, or RNAi for short. First identified a decade ago, RNAi is a mechanism that exists naturally within all cells. Its discovery offered scientists one of the first clues into how genes can be turned on and off. And since many diseases are caused by a malfunction of specific genes, the ability to control their expression through RNAi has enormous therapeutic potential. "As soon as we identify what gene to target, our pipeline could be full of new medications for any number of conditions within a few months," says John Reidhaar-Olson, a genomics researcher.
But obstacles still lie ahead for RNAi-based drugs, not least of which is how to best deliver them to patients. To solve that question, Roche turned to the outside. Last year Roche bought a 5% stake in Alnylam, a biotech start-up based in Cambridge, Mass., that's a leader in understanding RNAi.
When the Alnylam deal was announced in July 2007, Schwan quipped that it could become Roche's "second Genentech." In his wildest dreams. With a market cap of $95 billion, Genentech--of which Roche has owned a 55% majority stake since 1990--has produced some of the most cutting-edge best sellers on the pharmaceutical market today. Its pipeline remains one of the industry's most promising. In the past, Roche always applied a light touch to this golden goose, but this summer it became too tempting for Schwan. On July 21, in what will probably amount to a hostile takeover, Roche offered $44 billion for full control of the San Francisco--based firm.
Not surprising, Genentech's own board balked at the offer, which came to $89 a share. That price will surely rise--to more than $100 a share, by some estimates--but the deal will almost definitely go through. Nonetheless, Roche will have to work hard to hang on to Genentech's laid-back culture, one that has always attracted top minds. "They know there won't be the same flexibility and creativity Genentech is known for," says biotech analyst Geoff Porges of Sanford C. Bernstein & Co. "Roche is perhaps the industry's most brilliant acquirer, but it has never shown it can innovate internally."
Schwan argues that taking over Genentech will, in fact, allow it to focus even more on the science at its core. But he also recognizes the need for freedom. "Genentech research needs to stay autonomous," Schwan says. "That is the key to preserving the specific culture they have."
British forecaster EvaluatePharma says Roche is on track to take over as Big Pharma's top dog by 2014, up from No. 5 today. But it won't get there without a fight. Crosstown rival Novartis is also revamping how it does R&D and holds a 13% stake in Alnylam. U.K. concern GlaxoSmithKline already underwent its own re-engineering, and the results are evident. In 2000 its pipeline had two major prospects; now, stocked with 34 late-phase drugs on the horizon, it appears to be one of the industry's healthiest.
Roche, however, retains one key advantage: it has already seen its own line of attack succeed. The proof? Roche's first targeted breast-cancer drug, Herceptin. Developed by Genentech, Herceptin was marketed specifically to destroy cancers containing the her-2/neu protein, which doctors can detect using a 21-gene screen diagnostic. Herceptin has helped thousands of women combat breast cancer. But there's no doubt it has also helped Roche's bottom line: at $40,000 a year per patient, Herceptin grew globally in sales nearly 25%, to $4.1 billion, last year. "You need self-confidence to take risks," Schwan says. But, he adds, "if you are successful, you must be even more thoughtful about the future rather than dwelling on the past." And that prescription may be just what Big Pharma needs.