Financial Times - May 8, 2002
COMMENT & ANALYSIS: Seeking freedom in New England: The decision by Novartis to move research to Boston is the latest step away from Europe by a big pharmaceutical
By DANIEL DOMBEY and VICTORIA GRIFFITH
In his three years as chairman of Novartis, the Swiss pharmaceuticals group, Daniel Vasella has missed few chances to claim that European regulation stifles his industry. But no comment has had the force of his decision to move the company's research operations to Boston, Massachussetts.
The Dollars 250m (Pounds 170m) investment in a new laboratory for 400 scientists on the Cambridge campus of the Massachusetts Institute of Technology is symbolic in three ways. First, Novartis has underlined both the growing ties between big pharmaceuticals groups and the biotechnology companies that proliferate in the Boston area. Second, the move shows the faith that pharmaceuticals executives are placing in emerging genetic research to revive their flagging drug discovery operations. Third, Novartis has underscored the steady decline in the importance of the European market for the pharmaceuticals industry.
The Novartis announcement came the day before a European Commission- chaired group bringing together industry, government and academia presented a report on ways to halt the decline in Europe's competitiveness. "Novartis' move is a sign that the lack of competitiveness in Europe is actually accelerating," said Chris Viehbacher, president of GlaxoSmithKline in Europe. "Other companies are bound to follow."
Novartis is not the first European group to move important operations to the US. GlaxoSmithKline still has its official headquarters in the UK but its chief executive and head of research are based in Philadelphia. Aventis, the Franco-German group, manages its research from New Jersey, while Pharmacia, which used to be a Swedish group, is now run from the US. Dr Vasella says Novartis may eventually move its operational base to the US but its headquarters will remain in Basle.
While its rivals have opted for the traditional pharmaceuticals base in the New Jersey area, Novartis is the first company to locate its research headquarters in Boston. Dubbed "gene town" by supporters, Boston has emerged as a rival to the San Francisco area as the most dynamic centre of the biotechnology industry.
The Boston area is renowed for its expertise in the expanding field of genetic-based drug research. Among the fast-growing companies based there are Biogen, Vertex and Millennium. The latter is a big operator in genomics - the use of genetic information to discover new drugs. "The biggest pool of untapped scientists and hospital research was in the Boston area," says Dr Vasella.
Novartis already has a collaboration with Vertex and its hub in Boston should make it easier for Novartis to strike alliances with the biotech companies in the area. As important, it will allow the group to build up its own expertise in genomics. Facing a decline in the productivity of their research laboratories, many pharmaceuticals companies have been investing heavily in genomics in the hope that it will revive the industry's research efforts.
Some executives are betting that only companies with the resources of a big pharmaceuticals group will be able to exploit fully new genomics technologies. "It is like a piano - if you want to play the tune, you need all the keys," says Paul Herrling, head of corporate research at Novartis.
The decision to relocate to the US is Novartis' latest attempt to shrug off its image as a sleepy Swiss company. It has invested heavily in building up its US operations and developed Gleevec, the leukaemia treatment that has been hailed as one of the most innovative drugs of recent years. It is now considered the most likely candidate to acquire Bristol-Myers Squibb, if the troubled US pharmaceuticals group is put up for sale.
Over the past decade, the US has reversed European dominance in drug research. In 1990, Europe was the home for Dollars 7.2bn of research spending by drugs companies, compared with Dollars 4.9bn for the US; last year the industry invested Dollars 23.7bn on research in the US and only Dollars 16.9bn in Europe. According to the Efpia, the European industry body, European companies conducted 34 per cent of their research and development in the US in 1999, compared with only 26 per cent in 1990.
The gap is most glaring in biotech. US companies have collective revenues four times the size of their European rivals. Amgen, the biggest US biotech company, has a market capitalisation similar to that of the entire European sector.
Underlying the industry investment is government spending on research at universities. British government figures suggest the US spends at least five times as much on publicly-financed medical research as the EU countries together. "There is an obvious brain drain going on," says Mr Viehbacher. "If you are a young, bright science graduate, there are many more opportunities to shine in the US."
Europe-based executives have a string of complaints about barriers the industry faces. In an attempt to control health costs, European governments impose prices for most drugs that are on average 30 per cent lower than in the US. The higher margins that US companies have achieved in their home market has given them bigger R&D budgets with which to find new drugs. About 60 per cent of the industry's profits are made in the US.
Moreover, drugs companies face strict controls in Europe on what information they can give about their products. "Margarine-makers run ads in Europe which claim that their products reduce cholesterol, yet pharmaceuticals manufacturers cannot even tell consumers that their scientifically proven medicines are available," says Per Wold-Olsen, Merck president for Europe, Middle East and Africa.
Yesterday's European Commission report bought some relief for the industry in Europe. It recommended that price controls should be lifted on drugs that the state did not pay for and encouraged some advertising for non-prescription medicines. But few executives are optimistic. "We did not take up the real issues of the pharmaceutical industry's competitiveness," says Jean-Francois Dehecq, president of the Efpia. "The European pharmaceuticals industry has lost its competitiveness because there is a problem of price - and innovation is not compensated."
Additional reporting by Victoria Griffith and Daniel Dombey