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Roche Scion of a Swiss dynasty on benefits of family ownership

André Hoffmann (pictured in 1996) is the great-grandson of Fritz Hoffmann-La Roche, the Swiss founder of the pharmaceutical giant.

(Keystone)

The great-grandson of Roche’s founder discusses corporate governance and pharmaceuticals.

André Hoffmann runs his affairs from a long, wood-floored office on the upper storey of a grand villa overlooking Lake Geneva in Morges, Switzerland. The snow-capped summit of Mont Blanc glistens in the distance, while the rigging of sailing boats clanks rhythmically in the nearby marina.

It is just the kind of setting that would be expected of the scion of one of Switzerland’s great business dynasties.

Mr Hoffmann, vice-chairman of Roche, the pharmaceuticals group his great-grandfather founded, knows this picture of inherited wealth and power rankles with some investors, not to mention corporate governance experts.

“I was born into those shares and therefore in some circles I’m considered not to be an appropriate board member,” he says, in a rare interview over lunch of local cheese, ham and salad.

After years spent studiously avoiding the spotlight, Mr Hoffmann wants to answer these critics at a time when family control of companies has been facing fresh scrutiny. Boardroom tensions at Volkswagen in April led to the resignation of Ferdinand Piëch as chairman of the company his grandfather helped create. Meanwhile, Samsung, the South Korean conglomerate, has been at war with US activist investors over efforts to shore up family control.

Such controversies are less likely at Roche, where the founding Hoffmann-Oeri family installed professional managers at an early stage and have been relatively hands-off guardians in the decades since. Yet, with half the shareholder voting rights to their name, the family maintains a firm grip.

“When I was doing my MBA at Insead [in 1990] the prevailing view was that family owners should get out of the way,” he says. “But this has changed as people have come to recognise the benefits of stable ownership.”

Viewed over the long term, shareholders have been given little reason to question the stewardship of Mr Hoffmann and his relatives. Roche has been one of the world’s best-performing pharma companies in the past decade as it seized leadership of the industry’s most valuable category: cancer drugs.

But sentiment has recently turned more cautious as investors fret about the company’s ability to sustain its dominance of oncology when blockbusters such as Avastin and Herceptin lose patent protection in years ahead. Shares in Roche are up almost 90% in the past five years but down 3% this year, while the S&P pharmaceuticals index is up 7%.

Mr Hoffmann says he is confident of the company’s ability to renew its drugs portfolio from what he describes as the strongest research and development pipeline in the industry. But he adds: “We are not complacent.”

Many drug companies have been seeking shortcuts to growth in a record round of mergers and acquisitions during the past year. Roche has been on the peripheries of the action with deals such as its $8.3 billion (CHF8.1 billion) takeover of InterMune of the US. Mr Hoffmann is wary of more transformational M&A. “There have not been many really large megadeals that have added value,” he says. “I’m not sure that is the best solution for the industry.”

One potential megadeal touted in the past was a tie-up between Roche and its local rival Novartis. The companies – Europe’s two largest pharma groups by revenues – are 3km apart on opposite banks of the river Rhine in Basel. Novartis owns 33% of the voting shares in Roche as a result of an abortive push by the former to engineer a merger 15 years ago. Mr Hoffmann does not expect the idea to be revived.

“Is Basel big enough for two major pharmaceuticals companies? I believe yes. The question will come back time and time again but, at the moment, the family is absolutely not interested in entering into any strategic collaboration [with Novartis].” He thinks Novartis may sell its stake eventually as the opportunity cost of tying up so much capital “burns a hole in their pocket”. But it is “a non-issue” for Roche. “We can go on like this for a long time.”

Aged 57, Mr Hoffmann succeeded his father, Luc, on the Roche board in 1996 and serves alongside his cousin Andreas Oeri. He combines the job with chairmanship of the family’s asset management company, Massellaz, and non-profit roles including the vice-presidency of the World Wide Fund for Nature, which his father co-founded.

Growing up in the wetlands of France’s Camargue region, where the Rhône meets the Mediterranean, Mr Hoffmann inherited his father’s passion for conservation. Business, on the other hand, was something he says he had to learn through stints as a banker in London and project manager at Nestlé. Some critics mutter about a lack of pharmaceuticals experience on the Roche board, particularly since Franz Humer, a company veteran, stepped down as chairman last year to be replaced by Christoph Franz, former chief executive of Lufthansa, the German airline.

Mr Hoffmann says he has built plenty of industry expertise over the past two decades and bristles at suggestions he is a passive figurehead. “I am an active participant,” he insists.

Family control of Roche is not quite as solid as it once was after Mr Hoffmann’s cousin, Maja Oeri, withdrew from the relatives’ collective voting pool in 2011. This reduced the pool’s holding from 50% to 45%, but Ms Oeri has said she does not expect to vote against the family even if she is no longer formally bound to the group. “It’s a little less robust than it was five years ago but it still works,” says Mr Hoffmann.

Dynastic power runs through both sides of Mr Hoffmann’s family. His mother was an Austrian countess descended from Russian nobility. This heritage is reflected in the large painting of Kirill Razumovsky, an 18th century Ukrainian statesman, which hangs over his desk. Just as Catherine the Great acted to abolish Razumovsky’s title of Grand Hetman, Mr Hoffmann says the family would act if things went wrong at Roche.

“The beauty of the structure is that we call the shots in the long run by controlling the AGM. But we can’t ignore short-term investor sentiment because it affects our cost of capital.” Mr Hoffmann reports an excellent relationship with Severin Schwan, Roche’s chief executive. But he adds: “If there was a manager who wasn’t good enough, they would go quickly.”

The patient capital approach

As his family’s senior representative on the board of Roche, André Hoffmann is responsible for safeguarding the legacy of his great-grandfather, who co-founded the 119-year-old company. But could he also help build a new force in the healthcare industry?

The 57-year-old Swiss was an early investor in the US start-up Inovalon, which manages and analyses healthcare data. It raised $600 million in a Nasdaq initial public offering in February and currently has a valuation of $3.2 billion. Mr Hoffmann owns 14% of the stock and sits on the board. The Maryland-based company aims to help care providers and insurers make sense of the proliferating volumes of medical data being generated as health systems are digitised.

Mr Hoffmann made his investment after being introduced to its founder, Keith Dunleavy, a medical doctor and computer scientist, by a mutual acquaintance 10 years ago. He says he has tried to bring the same long-term view to Inovalon as his family fosters at Roche.

Mr Dunleavy says Mr Hoffmann has been a valuable mentor. “He is very good at distilling enormous amounts of information and helping guide towards a decision.” There are no connections with Roche but drugmakers could benefit if Inovalon can help make health systems more efficient – freeing resources to spend on medicines. “Healthcare is moving from a world of volume to value and quality,” says Mr Dunleavy. “In order to make that shift, you need good data.”

Copyright The Financial Times Limited 2015

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