Roche swallows medicine but recovery may be elusive

Analysts say Humer has more work to do Keystone Archive

The decision by the Basel-based healthcare group, Roche to cut 3,000 jobs has received a muted response from many analysts, who believe the company has problems in its pharmaceuticals division that may be difficult to cure.

The cuts announced on Wednesday amount to around seven per cent of the drug division’s workforce and are being seen as a last-ditch attempt to modernise its sales structure. The measures aim to restore the unit’s profit margins to between 20 and 25 per cent by 2004, better than today but still below the industry average.

The cuts will mainly affect operations at Nutley in the United States where 900 jobs are to be lost. Another 200 positions will go in the Californian city of Palo Alto.

In Britain, some 700 jobs are to be cut at Welwyn and a further 600 will be axed in Basel. Roche also plans to phase out manufacturing operations in Welwyn and reduce chemical production in Basel.

“I am confident that the measures now being introduced will result in a sustained strengthening of our pharmaceuticals division,” said the company’s chairman and chief executive, Franz Humer.

But many analysts say Wednesday’s announcement was a necessary scaling back of Roche operations rather than a strategy for future success.

The underlying problem that faces the company is that its drugs sales are heavily dependent on just three drugs launched nearly 20 years ago.

Dormicum (an anaesthetic), Rocephin (an antibiotic) and Roaccuatone (an acne treatment) accounted for 65 per cent of pharmaceutical earnings last year. All three now face heavy pressure from generic products.

Profits on the much-hyped new anti-obesity drug, Xenical, are small in comparison. Tamiflu, a pill for influenza, might become a big earner but the hepatitis C treatment, Pegasys C, has come up against delays in passing the US Food and Drug Administration.

Having made a strategic retreat, analysts now say Humer needs to implement a plan for a future advance. That might entail the signing of a marketing alliance with a rival or making some acquisitions to bolster its business.

The only other possibility is a full-scale merger, though given its decline Roche might have to settle on being the junior partner. That would be a bitter pill for the founding Hoffmann family who have maintained the company’s independence for 105 years.

The most likely merger partner is the rival Swiss company, Novartis, which surprised analysts recently by purchasing 20 per cent of Roche’s voting shares.

Another possible contender is AstraZeneca which might be attracted by the oncology franchise and the neat fit between cholesterol and obesity drugs.

But whatever happens, most analysts agree that Wednesday’s cuts were not the final chapter in Roche’s bid to reposition itself in the pharmaceuticals industry.

swissinfo with agencies