Sandoz AG, a subsidiary of Swiss pharmaceutical group Novartis, is the world’s second-largest generic drugs supplier after Teva, with $9.6 billion in sales last year. The company is based in Holzkirchen, south of Munich, and employees 3,700 people in Germany, and over 26,000 worldwide.
British-born manager Richard Francis studied economics in Manchester and began his career in 1998 at Sanofi Pharmaceuticals. Before moving to the top position at Sandoz in 2014, he spent 13 years at American biotech company Biogen, heading its U.S. business. He sat down with Handelsblatt to discuss trading in an office view of the Boston skyline for the Bavarian Alps – not a hard swap, in his opinion, when you’re a diehard soccer fan.
Mr. Francis, last year you went from an innovative biotech highflyer to a boring generics manufacturer. Have you overcome the shock?
This was not a big shock. At first glance, perhaps it may seem like a contrast. But I see it quite differently, as a logical step in my mission and career.
In what sense?
I always wanted to work in an industry whose products improve the lives of people. In the biotech industry it comes to finding drugs for diseases for which there were previously no treatments. But lack of therapies is not the only problem. High costs prevent patient access to the treatments they need. The generics industry therefore has an equally important role to play. Sandoz alone ensures that some 500 million people have access to goods and affordable medicines worldwide.
But the generics industry needs to live with far more modest margins than the biotech industry.
The business models are certainly very different. Biotech companies as a rule are highly specialized. Here at Sandoz we have a huge portfolio of products, albeit with lower margins than in biotech, but with extremely high volumes.
“We supply the monthly regimen of many drugs at the price of a cappuccino.”
And you have to live with declining prices.
This too is typical of our industry. The price competition is hard. On average, we have to live with price declines of 6 to 10 percent per year. But that delivers huge savings for healthcare systems, which then can be reinvested for innovative products again.
How do you still want to grow?
Above all, by investing heavily in product development and bringing constantly new drugs to market. That is the oxygen off which we live. And it is crucial that we focus on the right products and markets.
What goals have you set for yourself?
Strongly growing our business organically. We have shown in the last five quarters that we are capable of delivering this. In the last quarter, we grew 9 percent in constant currencies, and the long-term demand for affordable medicines keeps growing. My vision is that Sandoz can help provide in the foreseeable future a billion people with better and more cost-effective medical care.
What is the role of Sandoz in the Novartis Group?
With a portfolio of more than 1,000 molecules, Sandoz has a strategic role within the Novartis Group. While Novartis Pharmaceuticals is working on breakthrough therapies, Sandoz guarantees in more than 160 countries worldwide the foundation of medical supply. Both businesses are highly complementary, and we work closely with our pharma colleagues in the development and commercialization of important product groups.
Your major competitors rely primarily on external growth. Will Sandoz and Novartis get involved in a new round of industry consolidation?
At Sandoz, we have some appetite for acquisitions, but are not hungry for mega deals.
With around ten billion US dollars in sales and as the world’s number two in our industry, Sandoz is large enough to achieve economies of scale. With major acquisitions we would run the risk to buy too much additional complexity. We therefore pursue a more surgical approach to acquisitions.
Your competitor Teva just acquired the generics business of former Actavis. Were you not interested?
No. Some parts might have been interesting for us, but not the whole business.
Maybe because it was simply too expensive?
As far as the ratings for M&A transactions are concerned, there are certainly different views. I do not always see the potential in some transactions that others observe. Acquisitions must create sustainable value for shareholders and customers alike. Otherwise, this is a losing game. That is why we look at acquisitions in a far more selective way and base our strategy primarily on strong organic growth.
A company like the generic manufacturer Zentiva, whose sales Sanofi is considering, might thus be a better fit. Will you look at this?
While we of course monitor developments in the market and scout for opportunities that would fit our portfolio, you understand that we cannot comment on specific assets on the market.
Where do you see the main driver for organic growth?
As far as products are concerned, we see great potential, especially in biosimilars. Regionally, we intend to focus even more strongly on our key markets such as the United States, Germany and China.
The German market was not very attractive for the generics industry in recent years.
Germany is certainly not an easy market. In the five years before I came on board, the business here was in decline. But with more than 10 percent share of our global sales, Germany is our second most important market after the U.S. We have great ambitions here, and we are investing to grow significantly again. This already has an impact. Last year we managed the turnaround, and in the first nine months of 2015, we recorded an 8 percent increase in sales. That’s twice as fast as the market.
More investments, what does that mean?
We invest heavily in the development of new products as well as distribution and logistics. These include in particular biosimilar products, which are a great opportunity for the German health system to help secure sustainable supplies of biotechnological products. We are currently preparing new biosimilar launches for the German market.
Many industry representatives say that there is no more money to be earned in the German generics business.
We are operating in a tough market for sure, but as Sandoz we do run a quite profitable business in Germany. What is important is to have world class development and production, and to constantly improve ourselves to be the best.
When we look at the global level, the return on capital employed in the business does not appear to be outstanding either. With $20 billion in total assets, Sandoz achieved just over $1 billion in operating profit.
Our return on capital is certainly not satisfactory yet. But we have improved our operating margins over the past five quarters significantly. And it is clearly our goal to make further progress in this area.
What role do biosimilars, the generic versions of biotechnologically manufactured drugs, play in your plans?
This area offers very significant potential for Sandoz. Over the next five years biotech drugs with around $100 billion in sales will lose patent protection.
In which product categories do you want to compete?
In all major product categories except insulin. With Zarxio, we have just launched the first ever biosimilar in the U.S., and in Europe we have already three biosimilars on the market. This makes us the clear industry leaders in the field. For the next three years we plan a further ten filings, including biosimilars of Rituxan and Humira, which is currently the top selling drug in the world.
AbbVie, the original manufacturers of Humira, has just claimed that we dispose at least in the United States over patent protection until 2023.
Our analysis of the patent situation comes to a different conclusion.
What does it say?
Without going into details of the patent situation: Sandoz is making every effort to offer patients in the U.S. a Humira biosimilar at the earliest opportunity.
Another question is how much of the $100 billion market will be accessible for generic companies.
The market volume for the generics industry will ultimately depend on how far prices will fall and how well the market will take up biosimilars. Market observers estimate a potential of about $20 billion or more by the year 2025. This is still a huge market for companies such as Sandoz.
How big is the risk that after patent expiry the originators will be able to keep biosimilars off the market with high discounts?
Of course originators will also have to reduce their prices, and they will probably do just that. But we have very competitive cost structures at Sandoz. Also, health insurance companies are interested in seeing increasing competition. Competition will only be secured in the long term, if the system allows sustainable business models and biosimilars can conquer a certain market share.
The tough price competition in generics seems to increasingly lead to quality problems and bottlenecks in supply. Will this force companies as Sandoz to invest more into its production base?
We do not compromise on the quality of our products, and we work on a very high level here. We see our product and quality standards in the Novartis group as a competitive advantage.
The industry as a whole has apparently not done enough.
The U.S. authorities have tightened their controls and requirements in recent years. This has forced some companies out of business, but we see this as an opportunity for us.
But Sandoz also produces in India and China or sources from these countries.
We do have some production in India and China, but only on a small scale. More than 80 percent of our worldwide production comes from European or American sites. We have thought hard about our production strategy and did not follow the general trend towards Asia. Over the medium term, the labor cost advantage in these countries will disappear.
Could that generally lead to a return of pharmaceutical production to Europe?
That is hard to say. We should not see this so much as a question of location itself. It comes down to the general philosophy in terms of quality.
Politicians recently demanded to oblige companies to maintain two production sites for key drugs. Is this a realistic option?
In principle, this could improve supply reliability. For many products we actually have at least two sources or manufacturing facilities. But this is something you cannot do for your entire portfolio as the additional costs would be too high. Look: We supply the monthly regimen of many drugs at the price of a cappuccino. If this is the ask, you cannot demand at the same time that companies keep a spare second production facility. Governments need to think about how to find the right balance.
This interview was conducted by Siegfried Hofmann, a Handelsblatt correspondent specializing in the pharmaceuticals industry. To contact him: email@example.com.