Meet the Street: A Drug Industry Veteran on Size, Scale and the FDA

Investors often perceive drug companies as safe havens in times of uncertainty, and the current economic environment certainly gives investors plenty of reason to worry. Much attention is therefore being focused on pharmaceutical companies, including Swiss giant Novartis(NVS), which yesterday said it expects to achieve double-digit sales growth in 2002.

Paulo Costa President and CEO, Novartis Pharmaceuticals

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For today's Meet the Street, TSC spoke to Paulo Costa, the president and chief executive of Novartis Pharmaceuticals and head of the company's North American pharmaceuticals operations. Here he discusses his company's pipeline and plans, as well as the dynamics of the drug sector overall.

TSC: Do you see more mergers as a possibility for the pharmaceutical industry? Is there still enough room in the world for all these huge drugmakers?

Costa: The profile of the industry has changed a lot. It's likely consolidation will continue. This is an industry that depends on new products and new science. When companies don't have a strong pipeline, there aren't many options in terms of growth. So there is a natural tension in the market, and it's going to depend on the productivity of the research labs.

TSC: Is size the key to success? Isn't a biotech company based around one product going to have a hard time surviving?

Costa: There's clearly a benefit to size. People ask me all the time if size matters. It does matter up to a certain point. You must have enough size to stay competitive. You have 12 to 14 companies that have enough size and marketing to be competitive. But smaller companies can work. You have companies like Amgen that have done extremely well. A large company with many drugs could survive one product being pulled off the market. A small company might not.

TSC: You've been in the pharmaceutical industry since 1969. Has the FDA become more stringent over the years?

Costa: If you take a look at what happened in the last couple of years, there have been more drugs pulled from the market. A lot of drugs approved in 1997 have been pulled, not because the FDA has become more lax in approving products but because we've become more vigilant about product safety. One of the things the FDA has realized is that providing information in letters to physicians may not be enough. Physicians didn't always pay attention to those letters. Both the companies and the FDA are grappling with that because there are drugs that may benefit some patients and may have risks for others.

TSC: Where is the determination made about what diseases to treat? Do executives make that decision or do the company's researchers?

Costa: It happens both ways. If researchers have an interest in an area, then researchers guide some of what happens. In general terms, we try to provide some direction. Decisions are made based on diseases that are still poorly treated, where drugs weren't satisfactory and large populations are affected. It's a mix of the interest of researchers and companies trying to identify the disease.

TSC: What are some of the diseases that need research and treatment now?

Costa: Diseases that aren't well-treated are the focus of just about everyone in the pharmaceutical industry. Diabetes is one of them. Depression is another. Schizophrenia is a disease that's still poorly treated. And with cancer, the treatment-to-cure rates are 30% to 40%.

TSC: What are some of the drugs Novartis has in the pipeline that are particularly noteworthy?

Costa: We have continuing rollouts of Gleevec and Zometa in many new indications, and the mega clinical trials are currently in place for Diovan. The next product is Elidel, a topical treatment for eczema and dermatitis. It's nonsteroidal, and we've tested it in patients down to 3 months of age who have very delicate skin. That will be an exciting product because we're asking physicians to change the way they treat patients. Typically, they use steroids.

The next couple of products are Ritalin products. One is half the dose of the existing formulation, and it has the same efficacy. The second is a long-acting Ritalin. It's a nine-hour product. The way we're going to position the product is that it's strong enough for the school day. Parents don't want to give their children any more medication than necessary. Our next major launch is COX189 [a COXII inhibitor for pain]. This year we've had eight new products approved by the FDA. One of those was Gleevec [a drug for chronic myeloid leukemia].

TSC: Anthrax has obviously been in the news a lot lately. Does Novartis have a product for the treatment of anthrax or other diseases that might be used against bioterrorism?

Costa: A lot of our research in anti-infectives has been geared toward third-world countries and diseases like tuberculosis, malaria and leprosy. Geneva, our generic drugs company, has a formulation for Cipro, but that isn't off patent. There is a task force on bioterrorism, and Novartis is part of it.

TSC: Does Novartis plan to focus on marketing products in the U.S. or Europe or both?

Costa: Last year, 38% of our sales were from the U.S. This year we were up to 43%. Our U.S. growth [rate] is 25%. We have had one of the most aggressive field-force expansions and have grown our sales force from 2,800 at the end of 1998 to 5,200.

We have also improved our ranking in terms of the sales force with respect to physicians and HMOs. A survey conducted among sales reps indicated that the training of our reps has significantly improved. This was a deliberate effort on our part.

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