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Roche Pins Hopes On R&D

Swiss drug company continues to boost research spending even in downturn

by Patricia L. Short
February 16, 2009 | A version of this story appeared in Volume 87, Issue 7

Credit: Roche (Both)
Credit: Roche (Both)

THE WORLD is in the midst of what Roche acknowledges as "a highly volatile financial environment," and the temptation to slash research spending is high. But executives at the Swiss drugmaker are resisting the temptation, choosing instead to continue their support of R&D as a means of securing the firm's future.

That philosophy was hammered home at Roche's annual results press conference, held earlier this month in Basel, Switzerland. The company reported 2008 sales of $42.2 billion, a drop of 1% from 2007, although an increase of 6% when expressed in Swiss francs. Net earnings were $10.0 billion, down 5%.

Erich Hunziker, Roche's chief financial officer, said the company's R&D investment last year of $8.3 billion, or 20% of sales, was the second highest of all European companies; only cell phone maker Nokia's was greater. In fact, the R&D investment was at least the eighth largest of all the world's companies, Hunziker noted.

R&D spending will underpin Roche's corporate direction, emphasized Chief Executive Officer Severin Schwan. "In today's turbulent economic climate, we believe it is more important than ever for us to stay firmly focused on our strategy of innovation. We will not be tempted to go into other areas; we want to go deeper in the areas we already focus on," he said.

As for 2009, Schwan projected, "we expect the group's R&D spending to increase again and to reach roughly 10 billion Swiss francs"—$9.3 billion—for the first time.

He noted that Roche's R&D spending underscores the company's commitment to innovation. That also will be true, he added, for the research operations at Genentech, if Roche's bid to acquire the California-based biotech specialist is successful. Roche has vowed to maintain Genentech's South San Francisco site as an independent research center.

Indeed, the Roche research culture is one of decentralization, Schwan said. "Innovation can only thrive if you give people room to play, room to strive. You need to provide more room for staff to be experimental and to be brave. That's one reason we are successful with our experimental partners," he argued. "We provide the money needed to do their projects, but then we let them do their work."

Schwan's enthusiasm for R&D was mirrored in observations that Lee E. Babiss, the company's head of global pharma research, shared with reporters. A member of Roche's pharma executive committee, Babiss oversees research across the company's five disease-biology areas: virology and inflammation, in Palo Alto, Calif.; oncology, in Nutley, N.J.; and central nervous system and metabolic diseases, in Basel. He also chairs the scientific board for the company's R&D center in China.

After Roche's results press conference, Babiss held a briefing on pharmaceutical R&D for a group of South American and European journalists, plus a few reporters from international publications such as C&EN.

DRUG COMPANIES have two options for addressing the pharmaceutical industry's increasingly difficult environment, Babiss suggested. The first option is to diversify and enter the fields of generic drugs, over-the-counter remedies, and medical devices, for example. Such moves, he noted, would help to reduce R&D spending while generating consistent revenues.

The other option, Babiss said, is for companies to concentrate on the areas they are already in—that is the course Roche is taking with its businesses in pharmaceuticals and diagnostics.

But there is a kind of diversification in that approach as well. Roche puts considerable emphasis on accessing external expertise and innovation through partnerships with biotech firms and academia, Babiss said. "Some 99% of the world's science knowledge comes from outside Roche," he observed. "We have to make sure we get the best of what's out there."

The company also has been busy diversifying its portfolio over the past decade and now is on its way to becoming what Schwan said is the world's largest biotechnology company. According to Babiss, 97% of the company's drug sales in 2000 came from small molecules and 3% from biotherapeutics. By 2008, its sales were 65% from small molecules, 30% from biotherapeutics, and 5% from RNAi therapeutics.

Roche is diversifying its R&D geographically as well. It was the first multinational drug company to establish a wholly owned R&D center in China, Babiss noted. That center has built a network of partnerships with scientific institutions, academia, and other enterprises, he said, in order to tap into the strong science that is emerging from the country.

But there was another reason for establishing the Chinese center, he said. In Europe and the U.S., "many kids are not choosing to go into sciences. That is the primary reason we went to China. So many of the young people we were hiring were from China, so we thought, 'Why should they have to come to us? Let's go to them instead.' "

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