At the start of the meeting, CEO Dr Schwan presented the figures for the 2017 financial year. 2017 was extremely successful on the whole. Newly introduced medicines and diagnostic tests enabled both divisions to post good growth. The successful market launches of Ocrevus (for multiple sclerosis) and Hemlibra (for haemophilia) were especially worthy of note, and so was the positive development of immunodiagnostic products.
One challenge is biosimilars, which are now coming onto the market on a large scale – causing significant revenue losses in certain countries. But major progress in the product pipeline means that we should be well positioned to face the future. The overall balance sheet looks good. The headcount in Switzerland remains relatively stable, but, for the first time, it declined slightly versus the prior-year figure.
The AVR’s discussion points
Following Dr Schwan’s presentation, the AVR raised various concerns.
There was a substantial increase in reorganisations in the last quarter of 2017. Global and national organisations are under heavier pressure, triggering uncertainty and anxiety on the part of employees. How are we going to deal with that?
Dr Schwan conceded that growth slowed in 2017, and that the portfolio changes are ratcheting up the pressure, however, he assured the AVR that no major global job losses are currently being planned. The situation is different, however, in some countries and functions. The UK, France and Russia, for example, have taken big hits – and this is being addressed in very different ways.
The pace of change in Switzerland is increasing. Some of this is fairly complex – in Reinach, for example, where whole areas are being reorganised. These processes reflect changes in the environment and in society (due to digitalisation, for example). In the production area, the priority is efficiency – which must be constantly optimised – with outsourcing of routine activities.
The company must remain competitive in the long term. Roche will thus continue to invest disproportionately in research and development, and to ensure the successful launch of novel medicines like Ocrevus, Tecentriq and Hemlibra. It is also of strategic importance to adjust to digitalisation in healthcare. Additional investments are thus needed in this new area (access and analysis of real-world patient data at scale, advanced analytics tools such as machine learning or artificial intelligence, new Diagnostics software offerings like clinical decision support systems). If the company is to be able to fund all these investments, pressure on productivity and efficiency improvements must increase across all functions.
Dr Schwan emphasised that he was thus making every effort to bring Roche safely through current and impending changes. Cooperation with the AVR is extremely important here, focusing first and foremost on dealing fairly with each other, and on transparency.
In this connection, the discussion moved on to the subject of redundancy schemes. Management highlighted a clear, elementary distinction: reorganisations affect functions, not employee performance. Redundancy schemes are in no way performance appraisal mechanisms: they serve solely to find socially acceptable solutions for the employees affected. Performance appraisals – which are a managerial function – have to be addressed in advance.
Outlook for 2018/2019: how is Roche preparing itself for the eventuality that biosimilars will significantly hit revenues?
Dr Schwan said that various good and not-so-good scenarios would be run through for the Business Plan. The company would be well able to bridge short-term declines in revenue with impending product launches. If negative developments persist for an extended period, adjustments would be necessary. But the current positive development of the product pipeline suggests a positive outlook for business.
Nonetheless, Roche faces major challenges and changes due to the advent of biosimilars and the associated transition phase – if for no other reason than that revenue momentum at national level is far from uniform. It is important to protect long-term investments (R&D, new drug launches, digital transformation) and to constantly adjust to headlong change in the environment. Agility is required. The company cannot afford to wait and see what happens. It has to respond, and ask itself: what can we do better now?
Is increasing digitalisation affecting the organisational structure? Does Roche need a Chief Digital Officer?
At group level there are currently no plans to create the position of Chief Digital Officer.
In the divisions, though, structures are increasingly emerging that pool digital initiatives and exploit synergies. Dr Schwan referred in this connection to the two "PHC 2.0 organisations" within GPS (Ron Park) and Pharma Development (Marc Lee). In addition, there are dedicated structures in the Diagnostics Division: Diagnostics Information Solutions (DIS, Tim Jaeger) and a divisional Digital Transformation Office (Silke Hoernstein).
Dr Schwan told his listeners that the Diagnostics division is relying more and more on digital products that help doctors to select the best possible treatments. He said software sales and entering into partnerships on digital platforms are a new business area that will give rise to changes within the Diagnostics Division. The recently concluded agreement with GE Healthcare is a step in this direction.
Cost centre allocation procedures: production and productivity processes are often outsourced to Contract Manufacturing Organizations (CMOs). This is making the remaining in-house production less and less competitive, because the proportion of fixed allocations is rising. At PT, for example, cost allocations over which it has no operational control already make up around two-thirds of the total.
Dr Schwan explained that this cost allocation model is standard worldwide. There had been a structural problem in the Small Molecules field: capacity utilisation had been inadequate throughout the world. He said cost allocations were one of the most important topics at the site, and would remain so. Capacity utilisation influences revenue. Despite the low capacity utilisation at Small Molecules, building and machinery maintenance has to continue, which gives rise to the high fixed costs. This could also affect new buildings with new technologies – such as the ADC (antibody drug conjugate), for example, where capacity utilisation would emerge in the course of current projects.
At the end of the meeting, on behalf of the AVR, President Adnan Tanglay invited Dr Schwan to a further discussion during the second half of 2018, which he accepted.
The AVR thanked Dr Schwan for his presentation of the company's results, and for a constructive annual discussion in a congenial atmosphere. At this point, the AVR also thanked Cris Wilbur, Head of Group HR and member of the Corporate Executive Committee, Jürg Erismann, Head of the Basel/Kaiseraugst Site, and Bruno Weissen, Head of HR, Basel/Kaiseraugst, for the excellent cooperation.