Serono S.A. Business Information, Profile, and History

Company Perspectives:

Vision: We develop innovative products to fight debilitating diseases and improve the lives of our patients. We aspire to create an environment that enables our people to excel and innovate and to contribute to the advancement of Serono as the leading company in the field of biotechnology. We are devoted to the improvement, promotion and nurturing of life.

History of Serono S.A.

Over nearly a century of activity, Serono S.A. has grown from a small pharmaceutical to the third largest biotechnology company in the world. The company first gained prominence as a producer of infertility treatments, and the fertility enhancer Gonal-F still accounts for nearly a third of the company's sales revenue. Serono's other major products target multiple sclerosis and growth and metabolism disorders. In the age of genetic engineering, Serono is positioning itself as a leader in the production of recombinant treatments, which are produced through DNA-splicing. Besides Gonal-F, the company has five other recombinant products on the market, including the multiple sclerosis treatment Rebif, the growth hormone Saizen, the AIDS wasting therapy Serostim, and the recently introduced infertility treatments Ovidrel and Luveris. In addition, Serono invests over 20 percent of its sales revenue in research and development in an effort to secure a healthy pipeline of new products. The company conducts research in the areas of breast and prostate cancer, gastrological and bowel disease, Hepatitis C, and rheumatoid arthritis.

Serono has headquarters in Geneva, a major operating center in Boston, and important manufacturing sites in Italy. Other production sites are located in Mexico, Puerto Rico, Israel, Switzerland, Spain, France, and Argentina. The company's major research and development laboratories are located in Geneva, Boston, and Israel. In addition, Serono's marketing subsidiaries are scattered across North and South America, Southeast Asia, and Europe. In all, Serono conducts operations in 45 countries and sells its products in 100. The company is led by Ernesto Bertarelli, who represents the third generation of his family to hold a head position at the company. The Bertarelli family holds just over half of Serono's stock and controls about 60 percent of the voting rights in the company.

Developing Infertility Treatments in Italy: 1906-77

In 1906 the Italian scientist Cesare Serono founded the Istituto Farmalogico Serono S.p.A. in Rome. In its early years, the company extracted proteins from chicken eggs to produce a product with a variety of medicinal applications. The chicken-egg extract remained the company's major product until 1949, when the breakthrough came that was to make Serono the world leader in the treatment of infertility. That year the chemist Piero Donini succeeded in extracting and purifying the first gonadotropin, a hormone that promotes egg and sperm production. The fertility enhancer Pergonal was developed on the basis of Donini's research. Production of the drug was a daunting operation. Thousands of liters of urine were collected annually from post-menopausal women to provide the raw material for extraction of the fertility-enhancing hormone.

The Vatican obtained control of the Istituto Farmalogico after Cesare Serono's death. Day-to-day management was in the hands of a man named Bertarelli who had worked his way up from financial comptroller to general manager. When Bertarelli died in 1965, the company's managers began turning to his son Fabio for advice. Three years later the board of directors invited the younger Bertarelli to take over the official management position.

Fabio Bertarelli had distanced himself from Serono as a young man. He fought in World War II with the Italian marines and was imprisoned by both the Germans and the Russians before escaping. After the war, he tried to work with his father at the institute but left shortly because of too much father-son conflict. He then gained some business experience selling glass and animal feed in Brazil, but by the early 1950s was back in Italy racing sailboats and only occasionally working at Serono. Once he was in charge of the company, however, his entrepreneurial flair blossomed. Bertarelli's flexible, responsive management transformed the small Istituto Farmalogico Serono into an internationally known company with a commanding presence in the infertility treatment niche. The company's first foreign subsidiary, Serono Laboratories Inc., was established in Boston in 1971 to market Pergonal. Doctors at the Boston laboratory researched and endorsed the fertility treatment, broadening its use in the United States. Infertile couples were willing to spend large amounts of money to improve their chances of having a child, and sales both in the United States and Europe grew at a moderate pace through the 1970s.

Bertarelli's next success was to secure ownership of Serono. The notorious Italian investor Michele Sindona had gained control of the company in the late 1960s as the Vatican's shares somehow ended up with firms he owned. In the early 1970s, Bertarelli organized a syndicate of small investors to challenge Sindona's ownership. Sindona fled Italy in 1974 with warrants out for his arrest. His shares were dumped on the market and Bertarelli managed to gain control of about three quarters of Serono at a low price.

Bertarelli then shepherded Serono through a relocation to Switzerland. A diagnostics division under the name Hypolab SA had been established in Switzerland in 1973, where it produced and distributed diagnostic products and test kits. In 1977, after gaining control of Serono, Bertarelli moved the company's headquarters to Geneva, Switzerland, leaving behind the instability and melodrama of the Italian business climate. At that time the company's name was changed from Istituto Farmalogico Serono to Ares-Serono. A year after the move, the world's first test tube baby, Louise Brown, was conceived with the help of Pergonal. Sales of the infertility treatment soared. In order to keep a strong hold on the U.S. market, Serono designated the Boston complex its "operational center" in 1983.

Developing Biotechnology Capabilities in the 1980s and 1990s

Although Serono was prospering with infertility treatments, Bertarelli recognized that the firm would be left behind if it failed to keep pace with scientific advances. Traditional biological extraction processes were beginning to be replaced by recombinant manufacturing techniques based on genetic engineering. In 1984 a new production facility for Serono's pharmaceutical branch was inaugurated in Aubonne, Switzerland. Three years later the center began to work on the manufacture of recombinant drugs. The U.S. biotechnology firm Genentech was already challenging Serono with its success in that area of recombinant technology, and Serono's new genetic engineering facility would have to work hard to keep pace. The company turned to outside investors for support in 1987 when it went public on the Swiss Exchange. That year Serono posted record sales of $327.7 million, a 44 percent increase over 1986. By now the company had diversified beyond the infertility niche. Serono had a substantial portion of the European and U.S. market for growth hormones and was also active in the area of immunology. Sales of diagnostic products were up 30 percent in 1987. The diagnostics division was expanded considerably the following year with the acquisition of Baker Instruments, a U.S. diagnostics group. Serono invested heavily in this division over the next few years. Two fertility centers in the United Kingdom were also acquired in 1988, the Bourn Hall clinic and the Hallam Medical Center. Serono planned to use the facilities to learn more about the needs of doctors treating infertility.

Internal growth nevertheless had precedence over acquisitions. Serono's sales grew more than tenfold in the 1980s. Europe was still the company's most important market, accounting for 70 percent of sales in 1989. Italy alone provided more than half of Serono's revenues, with Spain in second place in Europe. Only one-fifth of the company's sales were made in the United States, a market that Serono hoped to concentrate more on in the coming decade. Technological improvement also remained a central concern. In the first half of 1989, Serono bought the method for producing human fertility hormones through genetic engineering from Integrated Genetics, started a genetic engineering plant near Madrid, and doubled its research and development capacity in Italy with a new building near Rome. Later that year, Serono launched its first recombinant product, Saizen, a treatment used for growth hormone deficiency in children. Saizen captured one fifth of the European market after four years, but was shut out of the U.S. market under the Orphan Drug Act--a rule that gives a competing firm a seven-year monopoly for drugs that combat obscure disorders.

Pergonal remained Serono's flagship product even as the company made efforts to diversify. The drug was being produced on a large scale through a system that relied on 110,000 volunteer urine donors in Italy, Spain, Brazil, and Argentina. However, a new genetically engineered gonadotropin known as Gonal-F had the potential to eclipse Pergonal. The first births attributed to Gonal-F occurred in 1992, but the hormone still faced several years of clinical trials. Meanwhile, reorganization efforts allowed the company to function more effectively. A new regional management structure was set up in 1991, with separate divisions for Europe, North America, Latin America, Japan, and the rest of the world. In the spring of 1992 Serono sold its nonprescription drugs unit to an Italian branch of American Home Products. Results for 1992 painted a positive picture. Net profit was $107 million on sales of $855 million. Sales had risen an average of 22 percent over the past decade.

The fast-paced growth came to a stop in 1993, when some of Serono's products were removed from government reimbursement lists in Europe. A change in Italy's health plan alone wiped out $250 million in annual sales. As a result, annual sales fell 12 percent in 1993 to $755.3 million. Serono cut its dividend in response and hurt many international investors. The situation made it clear that heavy reliance on the European market would hurt Serono's bottom line.

The company started to get back on track in 1994 with a clearer focus on its priorities. Serono sold its diagnostics division to BioChem Pharma of Montreal. The division had recently returned to profitability after struggling for several years, but it was out of line with Serono's need to focus on biotechnology. In efforts to improve its biotech capabilities, Serono was investing the money it saved with lower dividends in research and development projects. One promising product was Rebif, a recombinant beta interferon with potential for the treatment of multiple sclerosis. Serono also bought the French biotechnology firm Sorebio in 1994 and, despite the resistance of minority shareholders, increased its stake in Israel's InterPharm Laboratories Ltd. from 76 percent to 100 percent. At the end of the year, sales were down 5 percent from 1993 as the reimbursement reductions in Italy and Spain continued to exact a toll on revenues. Net income fell 61 percent to $28.2 million. However, there was reason to believe that better times lay ahead for Serono, since sales outside of Spain and Italy were up 22.3 percent.

But before reaching secure profitability, Serono had to weather a period of transition from traditional to recombinant drugs. The difficulties of changing to a new production method contributed to a shortage of Pergonal in 1995. The recombinant Gonal-F was not yet on the market at the time, and Metrodin, an alternative infertility treatment introduced in 1993, was taking resources away from Pergonal production. The easier-to-inject Metrodin sold well but used up more urine during production than Pergonal. Because Serono anticipated an imminent transition to Gonal-F, the company was reluctant to expand its urine collection centers. As a result, fertility centers were unable to obtain adequate supplies of Pergonal and expressed dissatisfaction with what they saw as an attempt on Serono's part to profit from Metrodin's higher cost. Together with the drug reimbursement changes in Europe, the shortage held back Serono's earnings, although sales in 1995 grew slightly to $682.3 million from $636.8 million in 1994.

Secure in the Era of Genetic Engineering: 1996-2002

In 1996 new product launches and a change in company leadership were clear indicators of a new era at Serono. The infertility treatment Gonal-F was finally ready for the market, and an AIDS wasting therapy known as Serostim was also introduced that year. The product launches boosted Serono's sagging profits and represented a payback from years of heavy investment in research and development. CEO Fabio Bertarelli, however, was ill with cancer and would have to entrust Serono to the next generation. His son Ernesto Bertarelli took control in 1996 at the age of 31. Ernesto was a graduate of Harvard Business School with a passion for yacht racing and experience as a salesman, project manager, and financial analyst at Serono. Unlike his father, he had been involved in Serono since his early childhood, presenting awards to employees at age five and sitting with his father at budget meetings. Yet when Ernesto was indicated as his father's successor in 1993, some longtime Serono employees expressed concern about his lack of managerial experience. He had to prove that he could contribute more than glamour.

Ernesto Bertarelli began by instituting a more rigid management structure than was seen under his flexible, entrepreneurial father. His goal was to create a well-run company with a reputation for growth. He also planned to continue the trends toward product diversification and a growing reliance on genetically engineered products. Serono's strategy seemed to be working, as sales in 1996 reached $805 million. In 1997 sales of Gonal-F alone were $116 million, contributing to a net income that, at $87.8 million, was 64 percent higher than the previous year. In the next two years several acquisitions supported Serono's increased production of recombinant drugs. A laboratory in Geneva, together with the scientists employed there, was purchased from Glaxo-Wellcome in 1998 and renamed the Serono Pharmaceutical Research Institute. In 1999 a new facility, combining advanced production capabilities and research capabilities under one roof, opened in Corsier-sur-Vevey, Switzerland.

By the end of the 1990s momentum had shifted conclusively toward the new production techniques: In 1998 biotechnology products accounted for half of sales, while in 1999 that figure grew to 70 percent. However, Serono's new recombinant multiple sclerosis treatment, Rebif, could not be sold in the lucrative U.S. market. The drug was first launched in Italy, Argentina, and Brazil in 1997 and was allowed into the European Union in mid-1998. But it was shut out of the United States under the Orphan Drug Act, legislation meant to encourage biotechnology firms to develop treatments that had limited sales potential. Serono's U.S. competitor Biogen had orphan drug status for its rival treatment Avonex until 2003. Although the two treatments were based on similar beta-interferon technology, Serono believed it could challenge Biogen's monopoly by proving that Rebif was a more effective product. To that end, the company pitted Rebif against Avonex in a costly head-to-head trial beginning in 2000.

Meanwhile, Serono became less closely held on July 27, 2000, with a listing on the New York Stock Exchange. The listing raised about $1 billion for the company, while the Bertarelli family sold another $1 billion worth of its own shares. The sale reduced the Bertarelli stake from 70 to just over 50 percent. The firm's name was also changed to Serono S.A. early in 2000. Sales that year continued their upward trend, reaching $1.14 billion. Rebif brought in $254 million in sales in Europe alone, where it accounted for over half of all new prescriptions. The results of the head-to-head trial with Avonex were announced in May 2001. The study overwhelmingly supported Rebif, showing that patients on Rebif had a 90 percent greater chance of avoiding a relapse than those treated with Avonex. On the basis of the study, Serono pushed to have Avonex's orphan status rescinded, finally winning approval from the U.S. Food and Drug Administration in March 2002. Two new recombinant treatments for infertility also came out in May 2001 under the brand names Ovidrel and Luveris. The products gave Serono a full line of recombinant treatments for every stage of the reproductive cycle. The following month Serono won the attention of the scientific community with a breakthrough in detecting mass-producing prions, the abnormal proteins that contribute to mad cow disease in cattle and Creutzfeldt-Jakob disease in humans. The detection process, reported in the journal Nature, could be used to develop more sensitive diagnostic tests in the early stages of the diseases.

The year 2001 was successful in the financial realm as well as the scientific. Sales reached $1.24 billion, with sales of the growth hormone Saizen up nearly 20 percent, Gonal-F up 15 percent, and Rebif sales up almost 50 percent. The only weak performer was the AIDS wasting therapy Serostim, which lost 8.6 percent in sales. Results for 2002 promised to be even better now that Rebif could be sold in the United States. With a diverse line of products and strong science to back them up, Serono had a reputation as a dynamic leader in the biotechnology industry. Bertarelli announced that Serono would maintain its leading position through research alliances with outside firms as well as internal development.

Principal Subsidiaries: Serono International S.A.; Serono Pharma Schweiz Zweigniedrlassung von Serono International S.A.; Laboratoires Serono S.A.; Laboratoires Serono S.A., succursale de Corseir-sur-Vevy; Ares Trading S.A.; Serono Argentina S.A.; Laboratorios Filaxis S.A. (Argentina); Serono Australia Pty Ltd; Serono Austria GmbH; Serono Benelux BV, Belgian Branch; Serono Produtos Farmaceuticos (Brazil); Serono Canada, Inc.; Serono de Colombia S.A.; Serono Pharma Services, s.r.o. (Czech Republic); Laboratoires Serono France S.A.; Sorebio S.à.r.l. (France); Simed S.A.; Serono Pharma GmbH (Germany); Serono Hellas A.E. (Greece); Serono Hong Kong Ltd; ASI Pharma Ltd; InterPharm Laboratories Ltd (Israel); Inter-Lab Ltd. (Israel); Istituto Farmacologico Serono S.p.A. (Italy; 96.7%); Industria Farmaceutica Serono S.p.A. (Italy; 96.7%); Istituto di Recerca Cesare Serono S.p.A. (Italy; 96.7%); Istituto di Recerche Biomediche 'Antoine Marxer' RBM S.p.A. (Italy; 96.7%); Serono Pharm S.p.A. (Italy); Serono Japan Co. Ltd; Serono Korea Co. Ltd; Serono de Mexico S.A. de C.V.; Serono Produtos Farmaceuticos Lda (Portugal); Serono Singapore Pte Ltd; Serono South Africa (Pty) Ltd; Laboratorios Serono S.A. (Spain); Serono Nordic AB (Sweden); Serono (Thailand) Co., Ltd; Serono Benelux B.V. (The Netherlands); Serono Ilaç Pazarlama ve Ticaret A.S. (Turkey); Serono Pharmaceuticals Ltd (U.K.); Bourn Hall Clinic (U.K.); Filaxis International S.A. (Uruguay); Serono Inc. (U.S.A.); Serono Reproductive Biology Institute Inc. (U.S.A.); Serono de Venezuela S.A.

Principal Competitors: Genentech Inc.; Amgen, Inc.; Biogen Inc.; Schering AG; Akzo Nobel N.V.; Roche Group.

Chronology

• Key Dates:
• 1906: Cesare Serono founds the Istituto Farmalogico Serono in Rome.
• 1949: A Serono scientist isolates a fertility-enhancing hormone, the basis for Pergonal.
• 1965: Fabio Bertarelli begins to take control after the death of his father.
• 1971: Serono founds its first international subsidiary in Boston.
• 1977: Serono relocates to Switzerland.
• 1978: The birth of the world's first test-tube baby drives up sales of Pergonal.
• 1989: Serono's first recombinant drug, the growth hormone Saizen, hits the market.
• 1996: Ernesto Bertarelli becomes CEO; recombinant infertility treatment Gonal-F is launched.
• 2002: The recombinant multiple sclerosis treatment Rebif is approved for sale in the United States.