Swiss pharmaceutical company Roche CEO Severin Schwan attends an interview with Reuters at the company's headquarters in Basel September 14, 2010. Credit: Reuters/Christian Hartmann

Last summer, the leaders of some of the world's top drugmakers buttonholed Roche Chief Executive Severin Schwan and tried, unsuccessfully, to get him to change his mind.

The Swiss company -- arguably the world's most admired pharmaceuticals group, with an enviable list of drug successes -- had just announced it was quitting the U.S. industry lobby group Pharmaceutical Research and Manufacturers of America (PhRMA) to join the biotechnology association BIO.

It was a startling move by the youthful Schwan, a softly spoken lawyer by training with a background in economics. In effect, the boss was ditching Roche Holding AG's century-old identity as a traditional drugmaker and declaring it different from the rest of the industry.

For Schwan's rivals, the break in ranks was a serious concern. Roche is a major player in the United States: the rest of the industry wanted it to stay part of a lobby group embroiled in a fierce debate with President Barack Obama over healthcare reform.

During a series of informal conversations over coffee on the sidelines of industry meetings, several executives from rival companies urged Roche's CEO to reconsider. One of those pressing hard was AstraZeneca Plc boss David Brennan, the chairman of PhRMA at the time.

Schwan stuck to his guns. He argued that the future of his company, which had just bought the remainder of South San Francisco-based Genentech for $46.8 billion to become the world's biggest biotech group, was now firmly aligned to the Biotechnology Industry Organization (BIO). BIO's members, their business rooted in genetic engineering, had a jeans-and-sneakers approach far removed from the suits, traditional chemistry and mounting pricing pressures all too familiar to PhRMA members.

Behind the spat was a fundamental question. Basel-based Roche was the biggest supplier of modern drugs for cancer, the hottest area of pharmaceutical research and development, and the leader in hi-tech diagnostics, the field that holds the key to the new era of personalized medicine. Was Schwan making yet another smart move by throwing in his lot with biotech? Would the Swiss company now leave rivals in the dust as its profits and rating soared?

A year on, Schwan's peers might permit themselves a tinge of schadenfreude as they survey the raft of problems besetting Roche. The firm is far from the only pharmaceutical company to struggle in recent months, but few have faced such a rapid succession of threats to best-selling products and problems with upcoming lines.

Those setbacks have begun to hurt. So far this year, Roche's stock price is down around 20 percent, making it the worst performer in a global large-cap sector that has hardly sparkled. The run of bad news prompted Schwan to say he was disappointed three times within the first minute of the company's half-year results meeting with analysts in July. Earlier this month, the company launched a cost-cutting review in the hope of restoring its premium rating.

It is a moment of soul-searching for the family-controlled business, though Schwan insists the setbacks need to be seen in the context of the inevitable ups and downs of drug development.

It's the nature of our business. We have to cope with attrition and this attrition is not always evenly spread, he said, in an interview at the drugmaker's functional-looking Basel headquarters on the banks of the Rhine.


Roche certainly has a long-term perspective. Founded in 1896, the firm really built its fortune in the 1970s on sales of the tranquilizer Valium -- a poster product for the modern drug era that many believe inspired the Rolling Stones song Mother's Little Helper in 1966, the year before Schwan was born. In its day, Valium was the biggest-selling prescription medicine the world had even seen.

Today, Roche is the world's top supplier of cancer medicines, with oncology accounting for 53 percent of its drug sales. It is also a major manufacturer of drugs for transplantation patients, autoimmune diseases and virology, including the blockbuster flu medicine Tamiflu.

Despite those strengths, the drugmaker's strategic direction is suddenly looking uncertain. Some analysts think Roche could hack more than $2 billion from annual operating costs over the next couple of years as it adapts to straightened circumstances. That, they calculate, could boost flagging earnings by some 10 percent.

Will Schwan be able to deliver? Time is running out on the bread and butter franchises. Roche is sitting on a pile of net debt of 25 billion Swiss francs ($25 billion) and they have a pipeline they can't really count on. They need to take measures to get the company to return value to shareholders, said Karl-Heinz Koch, an industry analyst at brokerage Helvea.

The July meeting with analysts was uncharacteristically fraught according to Mike Ward of Ambrian Partners. But two months on, Schwan, 42, who took over the reins from veteran chairman and CEO Franz Humer, 64, in March 2008, seems to have recovered most of his poise. During a wide-ranging conversation in a no-frills meeting room at Roche HQ, a smiling and relaxed Schwan spoke passionately about the strengths of what he called one of the leading pipelines in the industry.

Jumping up to draw diagrams on a flipchart and keen to explain the ground-breaking mechanism of a new drug for melanoma, the enthusiasm exuded by Schwan -- a father of three young children -- can be infectious.

He is quick to defend the 2009 purchase of Genentech, the integration of which he said had exceeded expectations. The deal gave Roche the final 44 percent of the biotech company it did not already own, full ownership of market-leading products and new-economy swagger. Those attributes, the CEO insists, will yet prove the springboard to lift Roche out of the productivity slump dogging traditional pharma.

But the deal has also brought problems. The biggest disappointment has been top-selling cancer drug Avastin -- the key asset acquired with Genentech, with sales of $6 billion last year -- which has failed in clinical trials for prostate and stomach cancer and may soon have its U.S. license revoked as a treatment for advanced breast cancer. Members of a U.S. advisory panel said in July that Avastin's modest benefits in advanced breast cancer -- it delayed cancer growth by up to three months but didn't extend patients' lives in studies -- were not enough to justify the drug's serious side effects. A decision from the Food and Drug Administration is expected by September 17.

Avastin was supposed to help Roche regain the top slot in the global drugs market, with analysts tipping it to be the world's biggest selling drug by 2014. But sales expectations have plunged by $1.1 billion since April and, no matter the FDA decision, the drug looks set to lose out to Abbott Laboratories Inc's rheumatoid arthritis drug Humira, according to consensus sales figures compiled by Thomson Reuters.

Avastin is not the only difficulty. Roche is dealing with setbacks to key drugs coming down the pipeline, notably the experimental diabetes drug taspoglutide, which caused hypersensitivity and gastrointestinal reactions in late-stage studies, and ocrelizumab, a treatment for rheumatoid arthritis that was dropped after deaths following its use. In August, Roche announced a new breast cancer drug, T-DM1, would also be delayed.

The share price development is a reflection of the setbacks in our pipeline, Schwan said. What I like to point out is the strength of the overall pipeline. If we deliver in the short term on our marketed products and in the longer term on our pipeline projects -- and I'm convinced we can do -- then this over time also will be reflected in the share price.


Perhaps. But Roche must also face up to mounting concerns about whether it can sustain current high prices for cancer medicines in an age of austerity. Indeed, the company itself has cited pressures to curb healthcare costs -- especially in the United States and Europe -- as a key reason for its productivity drive.

Up to now, life-saving cancer drugs like Avastin and breast cancer blockbuster Herceptin -- another winner from the Genentech stable -- have been largely immune to the price pressure seen for mass-market medicines prescribed for problems like high cholesterol, heartburn and depression.

But that may be about to change, as governments around the world grapple with the thorny issue of whether it is sensible or fair to shell out tens of thousands of dollars a year for cancer drugs that extend life by a few months.

Few people know better what that debate means than Barbara Moss, a 55-year-old British teacher. Four years ago the mother of two from Worcester was given 3-5 months to live after being diagnosed with bowel cancer. When chemotherapy failed to help, doctors told Moss her only hope was Avastin -- a drug deemed too expensive for use on the state health service by Britain's National Institute of Health and Clinical Excellence (NICE). Faced with a stark choice, Moss cashed in her pension to help cover a 21,000 pounds ($33,000) private medical bill. The strategy paid off: her tumor shrank enough to allow surgery.

Today, although her cancer will inevitably return at some stage, she is well and an active campaigner for better access to modern cancer treatments: I know people who have died of the same illness that I had, but who weren't given the chance because they didn't have the money. I can't describe to you how that feels. It's really, really wrong, she told Reuters.

The dilemma of how to balance cost and benefit is likely to increase as medical care improves. Moss and many others hope NICE will relax its tough stance and allow the use of drugs widely prescribed in other countries. Many industry experts, however, see the closely watched British agency as a model of change that will see other health authorities and insurers around the world push back on treatment costs.

That's left many in the industry, including rivals, wondering how Roche will get through the austere times ahead.

There's huge respect for Roche but it looks increasingly vulnerable, largely because of the oncology environment, said one executive at a rival company, who asked not to be identified because he didn't want to be seen criticizing a competitor.

There is no doubt there is going to be significant pressure on cancer drug prices and to have so many eggs in that one basket must be a worry. Everything we see around oncology suggests it is a very rich area to mine for science, but the pricing environment around it is undoubtedly deteriorating.

Schwan puts a more positive spin on matters, insisting that pioneering cancer drugs that make a real difference will continue to be rewarded with high prices.

The pricing pressure is increasing in the U.S. and Europe, there's no doubt about that. But society will be prepared to pay a premium for cancer drugs which prolong life or improve the quality of life, he said. There is still a high unmet medical need in oncology, it remains an attractive field.

Schwan may find it harder to explain the complications arising from the Roche drug Lucentis, which is designed to prevent blindness in people with wet age-related macular degeneration (AMD). Ironically, the problem for Lucentis is Roche's own cancer drug Avastin. Avastin is not licensed for use in the eyes but works in a very similar way to Lucentis. There's one big difference: the tiny amount of Avastin needed for eye injections costs around $50, against $1,950 for Lucentis. Some doctors are already using it as a cheap alternative and many more are likely to follow suit if a 1,200-patient U.S. National Eye Institute study, due to report in mid-2011, shows the two therapies to be equally good.

Such a finding would threaten Roche's $1.2 billion-a-year Lucentis franchise, which already faces looming competition from Regeneron Pharmaceuticals Inc and Bayer AG's VEGF Trap-Eye, which analysts expect to be a strong competitor when it gets to market in 2011 or 2012.


Compared to its rivals, Roche is far less exposed to the ruthless generic competition that is slashing profits on many conventional chemical-based medicines. That's because 67 percent of its drug sales are accounted for by biotech products -- complex proteins that are difficult to make and cannot be easily copied.

But generic versions of biotech drugs, known as biosimilars or follow-on biologics, are coming. Israel's Teva Pharmaceutical Industries Ltd, the world's biggest maker of generic drugs, is already developing a copy of Roche's blood cancer and arthritis drug Rituxan, or MabThera, that could reach the market in Europe in 2014, and regulators on both sides of the Atlantic are laying out a framework for approving such products.

The threat of generic competition from follow-on biologics has become real. Roche is no longer as insulated from the competition as it was, said Helvea's Koch. Many analysts are still giving Roche the benefit of the doubt and are not cutting their numbers enough. Damage will be done.

Schwan plays down the threat. He points out that key products such as Avastin, Lucentis and Herceptin have U.S. patent protection lasting until 2019 and argues that the hurdles will remain high for any generic drugmaker trying to win regulatory approval for a copy of a biotech medicine.

The test case is likely to be Rituxan. A successful launch of a biosimilar version in 2014 would unnerve investors.

It all adds up to a mighty challenge for Schwan -- an Austrian who collected his doctorate in law from the University of Innsbruck and also studied in Britain -- as he steers the 114-year-old company into the future. Schwan, whose dark hair now has flecks of gray, started his career in 1993 as a trainee in corporate finance before rapidly working his way up through the ranks. He has had postings in Brussels, Germany and Singapore, and between 2006 and 2008 was head of diagnostics.

Schwan is relatively young and has had a meteoric rise to the top. However, it is now a critical time for Roche, said Nick Draeger, a former Roche employee and now managing director of Cederberg Advisors in Basel. It's one thing to run a company when everything is going swimmingly. It's another when things start to become a bit wobbly. The problem is managing this huge machine and finding ways to keep it growing and ahead of the pack.

Crucially, Schwan continues to have the backing of the people who really matter -- the nine members of the immensely rich Hoffmann-Oeri family who together control 50.01 percent of the company's 160 million voting shares. Most of the company's investors own non-voting equity securities, of which there are 703 million.

The family's grip on Roche has not always been assured. Nine years ago, Roche's future was thrown into question when cross-town rival Novartis AG grabbed a one-third voting stake following a scandal at Roche over vitamin price-fixing. The firm battled back from the brink and a rising share price soon put it out of reach of Novartis as a takeover target. Roche's drive into cancer care under former CEO Franz Humer -- also an Austrian by birth and another alumnus of the University of Innsbruck -- further consolidated its independence. Humer is now group chairman and has a famously close relationship with the family, which likes its managers to stick around. Schwan is only the third CEO at Roche in 30 years.

Significantly, the family group last year extended its share-pooling agreement indefinitely, in a move that keeps Novartis and any other potential interlopers at bay.

That controlling stake -- which differentiates Roche from the world's other top 10 drugmakers -- was originally built up by Paul Sacher, a maestro of business and music who married the widow of the sole heir to the Hoffmann-La Roche fortune in 1934 and sat on the board of the drugmaker for nearly six decades until his death in 1999.

Across the Rhine from Roche's headquarters, Sacher's musical legacy lives on at the Paul Sacher Foundation, home to one of the world's most important collections of music manuscripts. Among the scores of works Sacher commissioned were pieces by Igor Stravinsky, Bela Bartok, Richard Strauss and Benjamin Britten -- an avant garde tradition that echoes the company's current embrace of cutting edge bioscience.

Having the founding families as a majority shareholder fosters a long-term thinking. This is essential in an industry with long lead times and 20-year product cycles, Schwan said.

You need a board and you need shareholders that think in decades. In a world where investors think in days and weeks, though, that can make for a rough ride.