Contrasting fortunes of Basel’s drug giants

A researcher at Novartis's Basel plant - Basel is the traditional centre of the Swiss drugs industry Keystone Archive

Two Basel-based companies, Novartis and Roche, have dominated the pharmaceutical sector - vital to the Swiss economy - for a number of years. But recently Novartis has clearly emerged as the company of choice among market analysts while the fortunes of its rival, Roche, have dipped.

“Novartis is our favourite among Swiss pharmaceutical companies,” Zurich Cantonal Bank analyst, Manfried Gyr, told swissinfo. “It has a strong near-term product pipeline and has focused its marketing efforts on the growth drivers, which are the most important products.”

Novartis, with its clutch of fresh drugs ready to hit the market, has seen its sales growth outstrip Roche, and is expected to grow faster both this year and next.

“Roche has not enough late stage products in its pipeline,” said Gyr.

The Roche group revealed last week that sales in its drug division dropped by two per cent over the first quarter, which compares to an average increase in sales of 10 per cent across the rest of the industry.

Roche is seen as the sick man of the European drugs sector, dragged down by the weak sales of its flagship anti-obesity drug, Xenical, and its lacklustre pharma pipeline.

One cure for Roche’s ills would be to make a corporate purchase of a firm with some late-stage drugs. In the past, two German drug companies – Schering or Bayer – have been mentioned as potential takeover targets.

Roche may need to make an acquisition, but it is Europe’s second largest drug group, Novartis, that has the money to make one.

“Novartis has SFr15 billion ($8.7 billion) net in financial assets and it’s considering the conversion of these assets into an operating business,” said Gyr.

One rumoured target has been the pharmaceutical business of the United States-based group DuPont. However, Gyr believes the purchase would better suit Novartis than Roche.

“DuPont has a good anti-Aids drug, and it also has two new anti-Aids drugs in pre-clinical trials,” said Gyr. “But it has no pharmaceutical products in late-stage clinical trials, so there are no possible product launches before 2004 and that means DuPont has some problems.”

Both Roche and Novartis have agreed to simplify their share structures. Novartis is offering investors 40 new shares for every old share, while Roche is offering 100 new shares in a similar deal.

The move is seen as an advantage for investors in the two companies and it’s expected to allow them more flexibility when dealing in the stock.

Roche’s share structure has recently come under further fire from Swiss financier, Martin Ebner – owner of the BZ Group – who attacked the family-dominated Roche board at the group’s annual general meeting.

Ebner wants one share in Roche to mean one vote, ridding the company of its two-tier structure of shares. This structure has guaranteed the founding families of Roche continued dominance of the company despite owning less than a majority stake.

“Roche is ready for a change in its capital structure,” explained Gyr. “But it would lose some of its flexibility with a change – and that flexibility is good for dealing with mergers and acquisitions.”

The Swiss drug sector is, however, more than just Basel – the country’s number three player, Serono, is located in Geneva.

Serono is a fast growing company, which has a strong position in the treatment of fertility and multiple sclerosis. Its products are the result of biotechnology processes, making it not only a pharmaceutical group but also a biotech company.

Overall, the Swiss pharmaceutical sector is in good shape compared to its international rivals, especially as its US competitors begin to suffer from the economic downturn.

by Tom O’Brien