The traditional meeting between Roche CEO Dr Severin Schwan and the AVR
Dr Schwan reported that the annual result had been good overall, despite 2020 being a "special" kind of year, hence the company was once again able to invest in research and development (R&D) in 2021.
Roche sales grew by 1% at group level in local currencies, which was at the lower end of the original guidance range targeted by the company. One pleasing aspect was that Roche had grown core earnings by 4%, at least in local currencies. Dr Schwan went on to point out that Roche would be increasing its dividend very slightly this year.
He observed that, while the 1% sales increase might look uninspiring at first glance, this figure obscured all sorts of developments in 2020, including substantial shifts in the product portfolio. The results were very heavily influenced by COVID-19. Pleasingly, new product sales had risen by CHF 4.7 billion, although Roche would have generated greater growth without COVID-19 as many patients had stayed away from hospital during the two lockdowns for fear of infection. This phenomenon had significantly slowed sales of certain drugs such as Ocrevus and Lucentis.
At the same time, the repercussions of biosimilar sales had been much greater than Roche had originally expected. At the start of 2020, Roche had anticipated a decline of around CHF 4 billion, but the biosimilar-driven decline actually amounted to CHF 5 billion – a full 1 billion more than Roche had expected at the start of the year.
In other words, the Pharmaceuticals Division had posted a negative result versus budget for two reasons: reduced sales owing to COVID-19, and the greater impact of biosimilars. Despite a strong start to the first quarter of 2020, in which a sales increase of 7% was recorded, pharma sales experienced an overall decline of 2% last year. Conversely, Diagnostics unveiled a pleasing result with a sales increase of 14%. In the second half of 2020 in particular, the pandemic-related declines in routine diagnostic procedures were more than offset by strong demand for COVID-19 tests.
Dr Schwan then turned his attention to interesting developments on the cost side:
despite weaker sales growth, he firmly believed it was important for Roche to continue to invest massively in research and development to secure the company’s long-term future. He pointed out that Roche had invested a further CHF 800 million in R&D, a rise of 8% compared to the 1% increase in sales.
This had been possible partly thanks to significant efficiency gains on the production side, which were the result of the many initiatives implemented over the last few years. In addition, impressive cost savings had been made in the area of marketing and distribution through various restructurings. Moreover, the pandemic had also itself led to savings – in the area of travel expenses alone, the company had recorded a year-on-year decrease of CHF 600 million at group level in 2020.
In Dr Schwan’s view, everyone at Roche should be proud that – even during such a difficult period – the company was in a position to invest massively in the future by channelling resources into research and development.
On the Pharma side, Roche had invested in Actemra production capacities in order to be prepared for COVID-19, but the initial study (COVACTA) had not delivered the desired result. By contrast, other studies (e.g. EMPACTA) had delivered positive results. All in all, demand for Actemra had so far been very strong, but without any dramatic upward trajectory. Further studies were currently being conducted.
However, Roche had also invested strongly in the production capacity of various biologics. This additional capacity was now available for use in the cooperation with Regeneron for the latter’s antibody cocktail.
On the Diagnostics side, a total of 15 solutions had been developed over the last year. These included the PCR test, in which Roche was very much a market leader, and the rapid tests that had only just come on stream and could now be used for broad swathes of the population.
Dr Schwan also reported that the new Pharma products had recorded 50% growth in the first quarter. Only then, with the first wave of infections, did sales fall sharply below expectations. A similar effect had been observed in the fourth quarter. On the Diagnostics side, developments could hardly have been more different: the company had been ramping up production capacity across the year and was now selling absolutely everything that could be produced by the PCR area. Sales had surged accordingly.
Dr Schwan believed the trend would continue through the first half of 2021, with very strong Diagnostics sales but further pressure on the Pharma side.
He expressed the hope that things would turn around here in the second half of the year as the pandemic was gradually brought under control. The expectation was that Pharma Division sales would then pick up strongly while Diagnostics sales would flatten off.
Despite uncertainty over the progress of the pandemic, Severin Schwan was prepared to give an approximate prediction for the current year. In his view, sales growth in low to middle single-digit percentage territory was realistic.
The AVR thanked Dr Schwan for the presentation and the information, and expressed its gratitude for the excellent collaboration with Mr Erismann, Mr Weissen, and Ms Wilbur over the last year. The AVR expressed its satisfaction at having been able to reach an agreement following this year’s salary negotiations.
In keeping with the traditional format, the meeting then moved on to the AVR’s questions on the latest issues that are particularly preoccupying the AVR in its day-to-day business
AVR issue: What is Roche hoping the Atea partnership (announced on 22 October 2020) will deliver for COVID-19 patients, and can Roche actually produce the required volumes? What role will the Basel/Kaiseraugst site play in this partnership?
Dr Schwan said he believed that Roche would certainly be reliant on external companies: in the event of a successful pathway, high volumes would be required (although the market situation for small molecules was much better than for biologics or vaccines). PT was also analysing whether Basel would be able to make a contribution here (particularly in connection with spray drying).
AVR issue: “Roche’s 10-Year Ambitions” are often taken as another reason – in current or recently completed transformations – to cut costs more sharply and reduce headcount even further.
Was that really the Corporate Executive Committee’s idea when it conceived this initiative?
What is your view on that?
What kind of feedback are you receiving from the various functions and from customers, and what is your reaction?
Is there a risk of ending up with parallel structures?
The introduction of New Ways of Working and the associated organisational restructurings are being carried out under considerable time pressure. At the same time, employees from lower and middle management levels with considerable know-how are being let go. This is resulting in huge uncertainty and a loss of confidence.
What is your view on that?
To what extent is the pandemic influencing the company’s 10-year ambitions and its business strategy? What medium-term and long-term scenarios are being considered at executive level?
Dr Schwan explained that the 10-year goals were all about finding ways to ensure that we as a company could contribute to better healthcare provision in the longer term. Specifically, Roche was seeking to expand its portfolio of new products in Pharma and Diagnostics, build up the Insights business on the basis of healthcare data, and make integrated PHC solutions available to healthcare systems. At the same time, it was important to make further progress in the areas of diversity and sustainability.
With regard to restructuring and cost structures, the aim was not simply to achieve cost reductions across the board but to identify the best ways of deploying resources to achieve the company’s overarching 10-year goals. An important aspect was to invest more in R&D and to redistribute certain resources within R&D. This was true not just of Pharma and Diagnostics – digital offerings would also have to be expanded more effectively. Essentially, he said, everything being achieved internally only mattered if it ultimately led to better healthcare solutions. The goal was to double the company’s portfolio of new drugs over the next 10 years. That goal in turn presupposed a disproportionate investment in R&D.
Clearly this was resulting in considerable pressure, including in the areas of administration, production, and internal services – and would also lead to restructurings in these areas. If Shared Services could be provided in bundled form in the main centres, savings could be made in Switzerland and additional funds rerouted to R&D. Dr Schwan emphasised the importance of not keeping activities with low value creation and routine functions in Switzerland, as this was much too expensive and could be competently done elsewhere – in the longer term, preserving these functions in Switzerland could even be counter-productive. By contrast, work involving significant value creation absolutely should continue to be carried out in Switzerland. He pointed out that headcount in Switzerland had actually risen by more than 700 employees over the course of 2020. He explained that he was always looking for ways to make the company more efficient on an ongoing basis, and special projects would also be looked at in this light. He stressed that nothing would change in this respect – these were simply parameters that everyone had to get used to.
The AVR observed that the transformations were not always delivering efficiency improvements, and that they had been hearing quite the opposite; a redistribution of resources rather than a reduction of the same was their strong preference. Dr Schwan agreed the point – errors would have to be corrected rapidly if there was evidence that things were not functioning as planned. Circumspection and a commonsense approach should be applied to eliminate such errors. The AVR expressed its regret at the loss of know-how with these transfers.
AVR issue: STEP initiative of Pharma International after rapid introduction of ReModelGRA (after approx. 2 years).
What is your view on that?
What are your expectations of this initiative?
Dr Schwan conceded that there were many initiatives aimed at reducing duplications within Pharma International. However, he observed that it was not the objective of P. Ward, Head of Pharma International, to create additional central structures. The aim was rather for various countries to drive forward certain initiatives on a decentralised basis without the wheel having to be continually reinvented in all countries. There was no doubt that improved collaboration within the region could avoid duplications in certain areas, thereby paving the way for more efficient working. For that reason, Dr Schwan supported this approach, as overall it would end up requiring fewer resources, which would therefore allow some resources to be deployed elsewhere.
AVR issue: People & Culture Transformation: To what extent will the HR Department be valued now, after such a globally planned dramatic massive reduction?
Dr Schwan explained that Roche’s entire strategy was geared around innovation, which could only be delivered by creative minds. In his view, a motivating environment was needed as ultimately the company was a “people business”. For example, it made no difference what country Payroll was based in – what mattered here was pure efficiency, which is why there was no need for support functions and back offices to remain in Switzerland. Wherever efficiency gains appeared possible, he was keen to exploit these so that the money saved could be redirected to the development of new products, to production sites, or indeed salary increases. At the same time, however, care was needed to ensure that everything could continue to function and not stand still. Here too, Dr Schwan emphasised that the situation after implementation was key – progress had to be made, always keeping the well-being of patients in mind. He observed that patients had no interest in how Roche organised itself internally, and whether (and from where) it received internal support: what mattered for patients was only whether an innovative drug made it to the market or not.
Ms Cris Wilbur pointed out that, while Roche had talented employees, the company needed to establish where work could be carried out in the world, and how capacities could be best distributed and utilised. And whereas there was no such thing as “market compensation data” for comparison purposes 20 years ago, this was now available all around the world. At one point, Roche had been using 150 different systems: this simply made no sense, and had become much too expensive. The task now was to analyse the activities of employees worldwide, and establish what will still need to be done through personal contact in the future, and what would work equally well on a virtual basis. In the area of virtual support, standardisation made complete sense. The AVR asked for more details, and was extremely keen to have more precise information in the August meeting so as to better coordinate the transformation process. Dr Schwan stressed how important it was for feedback to be provided to the AVR, as this would make it possible to identify if things were going in the wrong direction at an earlier stage.
AVR issue (Rotkreuz): The transformation model of TransformD is being implemented on a top-down basis, with functions having been removed at the highest level of the hierarchy. In the case of the P&C transformation, it is our understanding that the highest hierarchical levels are not affected. This is the perception of employees, as submitted to us.
How can this be explained; what are the reasons behind it?
Dr Schwan responded that this was an interesting observation, and that he had never been aware of any such discrepancy. For TransformD, a number of different factors had been instrumental. In the traditional core business, silos within the various business areas needed to be broken up in order to facilitate better collaboration. By contrast, adjusting the structure was a global issue, and therefore had to start at a global level. Dr Thomas Schinecker had presumably involved many people throughout the organisation, but starting with changes “from the top”. Management positions in the new structure would now gradually be filled.
With regard to P&C, Ms Cris Wilbur observed that employees would often not notice the changes at management level, as these would be spread over a number of years. Only now that every role mattered and every individual position was being looked at were the adjustments becoming clear to everyone. The results would be published and all positions posted at the end of February or beginning of March. All levels had been analysed, hence changes were afoot at all levels, including for senior management.
AVR issue (Rotkreuz): Roche Diabetes Care (DC) has had serious problems for quite some time.
Where is this DC journey going, and is a medium-term turnaround still realistic?
Dr Schwan explained that DC was under pressure as developments were moving away from strips toward continuous monitoring systems. Things had gone better than feared last year, despite COVID-19: DC had defended its market position and even achieved positive cash flow. However, what was crucial in the long term was for DC to bring a solution to the market in the area of continuous glucose measurement. Roche was displaying “patience”, and was hopeful that the missing key technology could be delivered. As long as it remained possible to simultaneously keep the business stable, nothing would change in this respect – but if that no longer appeared to be the case, then alternatives would have to be explored.
As the time allotted for the meeting had already been exceeded, Dr Schwan ended the meeting with the observation that he was already looking forward to the August meeting, but hoped that this could once again take place in person. AVR President Adnan Tanglay thanked Dr Schwan for his time and echoed the same sentiment.
Written by Adnan Tanglay, President of AVR