Not long ago, drug companies would break out quarterly income streams from the U.S., Europe, Japan, and something called ROW, as in rest-of-world. Investors usually didn’t care about the last numbers, because they were little more than a rounding error.
That’s not the case anymore, as these countries are often called “emerging markets.” They’ve grown enough that Chris Viehbacher, CEO of one of the world’s largest drug companies, Paris-based Sanofi-Aventis (NYSE: SNY), traveled to Seattle this week to curry favor with global health officials at the Pacific Health Summit. The head of a major drug company might have gotten a cold shoulder at a meeting like this a decade ago, but these officials welcomed Viehbacher. Sanofi made headlines at the summit, as it said it plans to donate as many as 100 million doses of flu vaccine to the World Health Organization to help poor countries cope with the swine flu pandemic.
This could all be written off as some kind of public relations exercise, but I wondered if there’s more to the story. The pharmaceutical industry is terrified by a series of patent expirations coming over the next few years, which will allow a flood of cheap generic copies to grab market share away from franchise products that generate an estimated $67 billion in annual sales. Not much has emerged in the industry’s R&D pipeline to replace all these aging blockbusters. Some analysts predict pharma companies will have to continue acquiring and partnering with innovative biotech companies to sustain themselves.
Sanofi has made a couple aggressive moves like this since Viehbacher took over Sanofi in December. Earlier this year, it acquired cancer drugmaker BiPar Sciences for $500 million (giving BiPar investor Paul Allen a big payday), and partnering with South San Francisco-based cancer drug developer Exelixis for a deal possibly worth more than $1 billion.
But Viehbacher also has his sights on making money on low profit-margin, high-volume products in parts of the world that are off the pharma industry’s beaten track. It’s part of a strategy to make Sanofi a more globally diversified company, rather than placing all its chips on the U.S. and Europe—where governments are looking for ways to trim healthcare spending.
Here are edited highlights of a wide-ranging conversation we had about industry trends, the reasons for donating flu vaccine, and how he likes to deal with biotechs.
Xconomy: Why come here to the Pacific Health Summit?
Chris Viehbacher: I laid out a strategy for the company in February, to become a global healthcare company, versus a pharmaceutical company focused on the U.S. and Europe. That means we want to be present in all countries, and therefore, you have to address all diseases in all countries. You can’t just take medicines doing well in the U.S., and try to find people rich enough in other countries to buy them. So, the company is hugely committed to these huge global health issues. We probably, I think, do more than just about anybody. We are very significant in malaria. We are the only company doing things for Sleeping Sickness. We have a new antibiotic coming for tuberculosis, which could cut the treatment time down to four months [from six months], which is huge in the area of TB. We are spending huge amounts of money developing a Dengue Fever vaccine and developing facilities for it. We have partnered with a lot of people in that room, whether it’s the Gates Foundation, GAVI[Global Alliance for Vaccines and Immunization], the Global Fund to Fight AIDS, Tuberculosis, and Malaria. Those are all people we try to work with on a regular basis. It’s very much in line with our strategy. I take a personal interest in these global health issues, and it’s good to meet folks.
X: To what extent does the donation of flu vaccine amplify the company’s global health effort, or show that you’re serious?
CV: The pandemic flu donation is exceptional. I’d normally say donations are not the way to deal with issues of access to medicine. It’s not sustainable. If we were dealing with malaria, or tuberculosis, then I wouldn’t probably propose that. But a pandemic is a different kettle of fish. It’s in a concentrated time frame potentially. So you don’t have time to build a tiered pricing model and everything else. If we really get into a pandemic, there’s going to be a significant amount of competition—we’re already seeing it—for the first doses off the line. From the interest of public health, it would be a mistake to say all the richest countries get the vaccine. This would put [World Health Organization director general] Margaret Chan and the WHO into an untenable position. So, we felt we needed to respond to Margaret Chan’s call to action collectively to provide a stock of vaccine doses that she could deploy on a rapid basis where [the] need is, and to ensure an element of solidarity between all countries and all patients. It’s an exceptional set of circumstances with a pandemic, and that’s why we need exceptional measures, a donation in this case.
X: How much is this costing the company, or hurting the bottom line?
CV: I have to say, I have no idea. At this stage, we don’t even know what the dose is yet. We’re doing clinical trials, so we don’t know what the cost of an individual dose of the vaccine is going to be. But it’s not going to have a negative impact on earnings, because there is no normal market for pandemic flu. If we donate 100 million, we can produce 800 million over a year. There will still be some incremental profit for the company, coming out of pandemic flu vaccine. This just ensures that everybody gets an equitable opportunity to get the vaccine.
X: So to clarify, you can make 800 million doses a year?
CV: Roughly, assuming a 15-milligram dose. That’s the dose of the seasonal flu. What we actually don’t know is what the actual dose [for pandemic flu] vaccine will be. We just all assume it’s the same dose. It could be [different]. We will do clinical trials at 7.5 milligrams, 15 milligrams, and 30 milligrams. That’s all without an adjuvant [an immune-boosting compound], and an adjuvant could potentially reduce the dose further. We’ve just basically said we produce 220 million doses of normal seasonal flu vaccine every year, and that’s with three strains. You’d triple that, because a pandemic flu vaccine will be a monovalent [single-strain] vaccine. Then you have to take into account that we don’t actually produce that seasonal flu vaccine year-round on a 24/7 basis. That gets you from 660 million doses to 800 million on a rough basis.
X: Are you confident this will work against H1N1?
CV: That’s why we’re all busy working on manufacturing clinical trial lots so we can do clinical trials. They won’t necessarily give us efficacy, they’ll give us safety. But if you think about the fact that there’s been four types of H1N1 flu virus in the normal seasonal flu vaccine over the past few years, and although this is a different strain, you’d gain some confidence from being able to produce a seasonal flu vaccine using a strain like that. But of course, we won’t really be able to judge that until we start using it.
X: How does TB fit into the bigger picture of your global health plan?
CV: We have a historical interest because it was one of our former companies, that developed rifampicin, which is the backbone therapy of TB treatment today. We have sales of that product. We also have a new antibiotic, called rifampentine, which we’re developing in collaboration with the TB Alliance. We have a research and development facility in Toulouse, France, which is focused on infectious disease in general. TB in particular. Notably, multidrug resistant TB. On the Sanofi-Pasteur side, we have a TB vaccine candidate that we have obtained from the Statens Serum Institut in Denmark, SSI, which we are developing collaboratively with Aeras, which is also in partnership with the Gates Foundation.
X: It’s been said a lot here at this meeting, it’s been 40 years since the last TB drug was developed. Why do it now, why the urgency now, why is it in your interest from a business perspective?
CV: Pharmaceutical companies have traditionally focused on Europe and the U.S. Now, Sanofi has already been very present in markets outside those areas. We get roughly one-third of our sales today from outside the U.S. and Europe. It’s more than anybody else has. If you take Sanofi-Aventis sales outside the U.S., Western Europe, and Japan, we have roughly 6 billion Euros in sales in 2008, that’s roughly $8.5 billion. We have roughly $1 billion in sales in Africa. You see a lot of European countries who are more present there. It’s largely because as European companies, we grew out of our natural markets much faster than American companies. Therefore, we were looking for more markets. Because of the multi-cultural heritage of Europe, there’s an ability to adapt to those markets in a better way.
So we were always there. But now everybody is interested in those markets because of the different changing patterns in economic growth. So you are seeing emerging middle classes in a number of markets. We know the investment in healthcare correlates with GDP growth. It may start from a much lower level. We’re talking about some countries that spend less than $500 per person per year on total healthcare costs. But, there’s significant growth there. There’s an estimate that 50 percent of the pharmaceutical industry growth will come over the next five years from outside the U.S. and Europe. So suddenly people are getting much more interested in all these countries. And we’re really looking at the healthcare issues there. When you start doing that, you start looking at TB among others. That’s why we’re present with malaria, TB, Dengue, and others.
X: Do you think the revenue of these potential products can really justify the investment in R&D?
CV: Yeah, it can. What we do are a couple things to make this work as a business model. First, on R&D, this is why partnerships with groups like Aeras and the Gates Foundation are important. And this has changed over the last 10 years. Largely, it’s because HIV changed a lot of things. It created the public-private partnerships. It created some of the pools of money like the Global Fund to Fight AIDS, Tuberculosis and Malaria, like PEPFAR [President’s Emergency Plan for AIDS Relief], like UNITAID. So there’s new money in the system to help defray some of the risk investment in R&D. Then you have to be able to produce these products at a price that has some relevance to that patient in local markets.
We sell today, roughly 50 percent of our volume outside the U.S. and Europe. We manufacture about 40 percent of our total volumes in those same countries. So we manufacture most everything in those countries. Malaria, the fixed dose combination, by manufacturing in a plant in Morocco, we’re able to get the cost down to a point where we can sell it on a nonprofit basis for $1 for 3-day course of treatment, for adults, and 50 cents for children. But what we do is, those who can’t afford it, we sell on a no-loss, no-profit basis. We also sell the product under a second name, which is sold to people who have more money to pay for it. So tiered pricing is more than just, well, this country is a GAVI-country and we give it that price, and another country is a middle-income country, so they get it at another price. We actually are able to segment within markets, and within disease areas, to see when there’s an ability to pay. Those who can’t pay, it’s essentially on a not-for-profit basis. But there are those who can pay. So we come back to looking at Africa. We have $1 billion in sales there, and it is profitable. And growing. It grew at 13 percent rate last year.
X: Is this part of Sanofi’s strategy to get around the patent expirations you face? The business is heading off a cliff, right, in the U.S. and Europe, for a lot of pharma companies?
CV: Absolutely, it’s going to do that. If you look at those markets today, patents don’t play much of a role anyway. We bought companies in Latin America this year. We have leading market positions in Latin America that are so-called generic companies. But as my general manager in Brazil would say, yes, but 95 percent of what we sell at Sanofi-Aventis isn’t patent-protected anyway. We have found a business model that allows us to sell on a basis that allows us to be profitable in those markets, but we’re not as dependent on the blockbuster patent cycle. One-third of our business is not in the U.S. and Europe. My objective is to develop a much more sustainable growth model, looking out towards 2013. That’s where we lose some of our own blockbuster products.
But it’s back to my vision of a global healthcare company. We started with a medicine and looked for customers. We typically looked for the wealthiest customers. Now, what we’re starting to do is say ‘let’s start with patients’ and say ‘what are their healthcare issues on a market-by-market basis?’ Where can we find a business opportunity to help them with their health care. It’s a much more patient-oriented, and customer-oriented approach than what we’ve had in the past.
X: I see you’ve made an effort to ramp up biotech expertise with the acquisition of BiPar Sciences and the partnership with Exelixis. Can you talk about your strategy to revitalize R&D?
CV: The traditional model of pharma was that we can do everything. From discovery through commercialization. The complete integrated pharma model. I think it’s clear we have a legitimacy in pieces of that value chain. Certainly in commercialization, the development side. We also have, because of our scale, we can have deep pools of competence in things like regulatory affairs, pharmaceutical development, high-throughput screening and the like. But in the 1990s, research changed, as translational research gained hold, and we saw more coming out of genomics. In research, there’s a piece around problem solving and process, but there’s also a piece around the true creative genius and innovative genius. That’s where I think the role of pharma is less clear. You clearly have a strong role within academic institutions, things like the NIH that are trying to find out things like the cause of a disease. Then there’s the translational piece. Then there’s a piece that says all these targets have arisen, which ones do we develop? There’s an entrepreneurial piece, before you even get into preclinical studies. So I think the front end of our business needs to be very close to the biotech and academic community, to capture some of that innovative genius and the translational research. We can try to replicate some of that within pharma. I can tell you it’s more than a size and structure issue. Just because you have the same size as a team, that’s the same size of a biotech, doesn’t mean you within pharma are like a biotech. I think when I sit with people from biotechs, there’s a different approach. Any CEO of a biotech will tell you about the horrendous battle they had to go through to get the first round of financing. And then you look for subsequent rounds of financing on the basis of progress. If you might, the ideas being developed by biotech have withstood a market test. A certain validation from outside experts. If you look at internal projects within pharma, we’ve typically had research and development centers. We usually talk about things like, ‘does your budget go up by 3 percent or 4 percent?’ There hasn’t been the same rigorous market test, or of peer review. That’s where we can learn from biotechs, in terms of the rigor it takes to get their ideas funded. If we do try to replicate a biotech, it’s to replicate elements of the culture, and create the working environments for people who like to work in biotech to also work in pharma.
Any big organization, once it gets to a certain size, has to have major control mechanisms because there are so many people at so many sites. The level of control we have to exert is not necessarily adapted to the stage of research, and doesn’t create the same environment that you have in a biotech. It makes things complex, and process-driven instead of innovation-driven.
But I don’t look at biotech simply as a source for new products. If you take the BiPar acquisition, for example, I had to step in personally to ensure that the company did not become integrated. This is a team of 18 people, a lot of them from Amgen and Genentech. It’s a spinoff from a university. If 18 people can bring a drug from zero to Phase II, and in a plenary session at the American Society of Clinical Oncology, these are 18 great people. You don’t want to lose them. I can tell you there was an immediate corporate reflex to “Sanofize” this company, and a lot of these people were about to leave on June 15. I said ‘No.’ So now we’re going through an interesting cultural exercise, in which we say, ‘how do we keep this company independent, but have it be able to plug into the pieces of Sanofi which are big, and which are good to be big in?’ So, BiPar already has relationships with the FDA. But as a Bay Area company, it didn’t have the resources to deal with European regulators. We can bring expertise in European regulatory affairs, to get this product approved globally. So I need to find a way so this company can stay independent, even while part of a big corporate group. Be plugged in where it needs to be, but not necessarily every part that wants to be, like finance and legal and all the other corporate functions. It’s an interesting corporate exercise.
Exelixis is a similar type of arrangement. They are extremely good at going from a target to Phase I trials. They’ve been able to demonstrate a lot of excellence in this area. It’s the type of company we want to partner with. But again, respecting the fact that they are good at what they do. We should partner in a way that’s productive for both sides. We do this with Regeneron in Westchester County, NY. They have a very good platform for generating monoclonal antibodies. We provide funding, and we have collaboration, but at the end of the day they do what they do well and we respect that.
I’m actually looking to move 50 percent of our discovery research be externally driven, and 50 percent be internally driven.
X: Any particular therapeutic areas you want to grow in or add?
CV: There are a couple areas we’re traditionally strong in and will continue to be, like diabetes and oncology, but I’ve moved away from thinking about therapeutic areas. I’m thinking more about personalized medicine. I think you have to look much more specifically at where unmet need is. You’re getting into a greater subcategorization of disease. You might say there’s not a lot of unmet need in cardiovascular disease. It may be true if you say there’s not unmet need in lowering LDL cholesterol, but there’s probably still unmet need in raising HDL. So you have to look much more closely. These broad categories people talk about will stop. The big one-size-fits-all medicine is a thing of the past. We’re going to see more targeted medicines.
X: Have you planted any seeds for new partnerships here in Seattle?
CV: No, but I do try to spend 20 percent of my time looking at external growth opportunities. I like to be personally involved. I’m actually regularly on the West Coast and will be meeting with people and looking for things. BiPar and Exelixis are just the start.