Roche Bioscience Business Information, Profile, and History
Palo Alto, California 94304
History of Roche Bioscience
Roche Bioscience was formed in 1995 following the acquisition of Syntex Corp. by Roche Holding Ltd. in November 1994. Roche, a Swiss pharmaceutical company, is one of the largest in the world with 56,000 employees and sales of SFr 14.7 billion in 1994. Roche took advantage of Syntex's strong research foundation and its location in California's high-tech Silicon Valley to create an organization that would focus on bringing new pharmaceutical products to market through scientific research and strategic marketing. Roche Bioscience consists primarily of two business areas, a neurobiology unit and a musculoskeletal/auto-immune business unit, that are working to develop new drug treatments for prostate disease, incontinence, pain, osteoporosis, osteoarthritis, rheumatoid arthritis and other inflammatory conditions. After purchasing Syntex, Roche Holding Ltd. became the fourth largest drug maker in the world and the largest in terms of market capital. Syntex USA continued in existence as a legal entity for continuing patents and contracts previously held by Syntex Corporation.
Syntex was founded in 1944 in Mexico by two German refugees. The company concentrated its efforts on research and manufacturing bulk steroid chemicals. After World War II, the work of two new employees, George Rosenkranz and Carl Djerassi, was responsible for changing the direction of Syntex's business. Rosenkranz and Djerassi pioneered research in the synthesis of compounds that led to the development of oral contraceptives. Not recognizing the potential of this groundbreaking work, Syntex's original owners wanted to continue producing bulk chemicals rather than invest in new developments. Syntex's fortunes changed when a Wall Street financier, Charles Allen, Jr., decided to invest in the company. Allen was the senior partner of Allen & Company, one of the leading investment banking firms in the United States. Allen was respected for his financial prowess and also for his ability to predict industry trends and evaluate securities. When Allen decided Syntex was a good prospect, other Wall Street investors followed with the loyalty of an army behind its commander.
In 1951 Allen became half-owner of the Ogden Corporation. Several companies were added to Ogden Corporation as subsidiaries, including Syntex. The acquisition of Syntex, however, created tax problems. As a result, Syntex was sold in 1958 to Ogden stockholders for only two dollars a share. Allen & Company ended up with about 40 percent, or over one million, of the 4.5 million Syntex shares outstanding.
Syntex was registered as a Panamanian company. Tax advantages convinced company management to reestablish business in Central America where much of the company's products were shipped through Panama's free zone. When Rosenkranz, a Hungarian-born naturalized Mexican citizen, became the company president, he kept headquarters in Mexico City even as Syntex's growing U.S. concern shifted the company's geographic emphasis. The company's independent stature enabled it to reach an agreement with Eli Lilly and Company, one of the industry leaders. Syntex's experience with producing bulk steroid chemicals (sex hormones had been extracted from the Mexican barbasco root) prepared it to enter the growing contraceptive market. The arrangement with Lilly paid for half of certain research costs at Syntex in exchange for Lilly's rights to market the results of that research. Instead of asking for royalties or fixed-price contracts from other major drug firms, Syntex arranged an innovative agreement where it earned a percentage of what those firms earned. Thus Syntex gained quick access not only to Lilly, but to Johnson & Johnson, Schering and Ciba-Geigy, all major manufacturers of oral contraceptives.
The company achieved Wall Street notoriety in the early 1960s when stock prices reached as much as 100 times earnings. By 1964 Syntex became a case in point of the virtues and vices of "a bubbling speculative market." Since the company was financed by such a prominent Wall Street figure, since contraceptives had become more popular and, finally, since 150,000 shares on file for registration in Washington promised a future stock option program, Syntex's stock price increased from a low in 1962 of 11 to a high in 1964 of 190. This enthusiasm was bolstered by a three-for-one stock split and a Wall Street Journal cover story on birth control. To the horror of some financial experts, the company market value peaked at $855 million while sales for the year were only $16 million.
Problems began to arise during the 1970 Senate hearings on the adverse affects of birth control pills. Sales dropped ten percent and earnings fell almost 50 percent. The price of Syntex stock mirrored these trends. The price slipped from over $80 to less than $20 a share. Although prices did eventually climb to another high of $113, this would not be the last time Syntex stockholders would experience such a volatile period of stock market valuations. Syntex management realized that the Senate hearing had seriously threatened the company's viability. Action was necessary in order to ensure that future company profits were no longer dependent on one product, namely, the sale of contraceptives. As a result of that experience, Syntex embarked on an effort to expand into a full-line manufacturer of pharmaceuticals.
The company had begun marketing products under its own label in the mid-1960s. In 1973 an independent marketing team was established with 400 salespeople operating in the United States and in foreign subsidiaries. Product expansion continued into the topical corticoid market. Aarane, an antiasthma drug, was also introduced on the market. Syntex had a large success with Naproxen, a nonsteroidal anti-inflammatory drug used to relieve arthritis symptoms. One year after being released abroad, it became the best selling product in its field in Mexico.
Through acquisitions Syntex moved into the fields of animal health and dental equipment. By 1973 the dental division accounted for 6.5 percent of sales and the animal health division generated 22 percent of sales. One successful product in the animal health division was Synovex, a natural cattle hormone that captured more than 50 percent of the market when diethylstilbestrol (DES), a synthetic hormone, was banned by the Food & Drug Administration.
Sales figures increased as a result of Syntex's new product development and marketing efforts. In 1972, sales reached $130 million, a nearly 30 percent increase from 1971. Net income surpassed $18 million and Syntex boasted a 21 percent profit margin, the highest in the industry for that year. Oral contraceptives accounted for only 28 percent of sales and 35 percent of profits, whereas in 1966 they accounted for 47 percent of profits.
Syntex's Palo Alto research center became the focal point of the company's expansion. Located near Stanford University, Syntex's highly respected research center displayed a sign designating it the company's U.S. headquarters. Domestic operations accounted for 60 percent of Syntex's sales. Research Director Djerassi earned the company even greater respect when he strengthened the research organization by recruiting talent through post-doctoral fellowships.
By the mid-1970s Syntex's plan to expand its product line and increase profits with two new drugs, Aarane and Naprosyn, had not progressed according to schedule. Due to the fact that sales of steroid drugs had reached a peak, Syntex executives had planned on Aarane capturing up to 75 percent, or $40 million, of the market. However, Aarane sales had reached only $6 million annually by 1976. For this reason the sale of Naprosyn became a company imperative.
The new antiarthritic was released in the United States during May 1976. Although sales registered at a high of $20 million annually, the timing for the release of this drug could not have been less fortunate for Syntex executives. The FDA, under pressure from consumer and Congressional criticism, began to regulate drug testing procedures more strictly. The agency charged that lab tests for Naprosyn, conducted by an independent contractor, were invalid. The FDA argued that by failing to fully investigate laboratory tests revealing long-term animal toxicity, the administration of these tests had not adhered to proper federal guidelines.
With the price of Syntex stock declining, company president Albert Bowers traveled to Washington confident that he could delay the FDA's plan to hold a hearing on Naprosyn. While the FDA did agree to allow Syntex a 24-month period to conduct a replacement study in support of Naprosyn's safety, company earnings declined for five consecutive quarters as a factor of the FDA encounter. With the end of the FDA investigation in sight, however, renewed promotional efforts behind the sale of Naprosyn, as well as an overall operating increase, helped Syntex to resume its expansion and growth. At this time, the drug was being marketed throughout the world with the exception of Japan, which represented a major untapped market. With the Japanese government awaiting FDA approval, worldwide sales of Naprosyn promised large financial returns.
By 1978 Bowers boasted of a "strong resumption of growth in earnings" as both sales and profits reached record levels. With sales reaching $400 million, Bowers could point to Naprosyn as a large contributing factor to these impressive figures. The FDA, still awaiting test results on toxicity of the drug, continued to threaten Syntex with removal of the drug from the market should the results be unsatisfactory. With an approval for marketing the drug in Japan, however, and a new drug application submitted to the FDA for naproxen sodium (later to be sold as Anaprox, a drug useful not only in the treatment of soft tissue inflammation and dysmenorrhea, but also as an analgesic), Bowers announced a $1 billion sales goal for the mid-1980s.
In 1979, Syntex continued to report record earnings, but the year also marked a period of lawsuits. A large number of British women filed suit against Syntex contending they had been harmed by using the company's birth control pill. One plaintiff charged the company with withholding information about dangerous side effects of the pill after she suffered a severe stroke. She sought $1 million in damages because, her counsel argued, she was unable to lead a normal life. That same year Syntex agreed to settle out of court all pending lawsuits with Syntex shareholders and Industrial Bio-Test Laboratories, the independent lab responsible for the Naprosyn testing. The class action lawsuit alleged that IBT laboratories were inefficient in performing and reporting a study of the drug. While the company admitted no wrongdoing and was still awaiting FDA response to its resubmitted tests, a $2.75 million settlement fund was established. Syntex contributed $575,000 to the fund along with contributions from IBT and Syntex's insurance company.
The lawsuits did not seem to affect worldwide sales of the drug. By 1979, sales for Naprosyn reached $27.7 million in the second quarter and $56 million in the first half of the year. International sales of the drug accounted for 60% of total sales. A merger was completed by June of the same year with Den-Tal-Ez, a dental equipment manufacturer. With one lawsuit settled, good sales and expanding business, Syntex's future looked promising.
In the early 1980s, however, a new problem threatened Syntex's prosperity. The U.S. House of Representatives Subcommittee on Oversight and Investigations charged the company with failing to take action to protect the health of infants when reports linked Syntex-manufactured baby formulas to metabolic alkalosis. The company had removed salt from Neo-Mull-Soy and Cho-Free in response to evidence that salt intake by infants could possibly lead to hypertension when these infants became adults. Reports that babies who were given the formula were failing to gain weight and had lost their appetites led to a product recall in August of 1979. As a result, the National Institute of Health began a five-year follow-up study on the health of the afflicted children. In 1985, a $27 million verdict was awarded to two boys who sustained brain damage allegedly due to the salt removal from the formulas. The verdict represented the largest personal injury sum awarded in Illinois.
During this time, Albert Bowers replaced George Rosenkranz as the company's chief executive officer. With a Ph.D. in organic chemistry and 24 years with the company, Bowers was considered to be highly qualified for the position vacated by Rosenkranz. Bowers himself said that the move from the laboratory to the executive office was challenging, but that his strong background in chemical research was an invaluable asset in making him an effective leader.
Despite legal problems, Syntex continued to expand during the early and mid-1980s. The Den-Tal-Ez acquisition contributed to a third of total sales in 1980. Polycon contact lenses, still in the test stage, were predicted to earn $5 to $10 million in sales. Anaprox, the brand name for naproxen sodium, was selling quite well in foreign markets while awaiting FDA approval. The French pharmaceutical manufacturer Laroche Navarron was purchased and Syntex also announced plans to establish a subsidiary in Osaka.
Syntex also moved into the growing field of genetic engineering. The president of Syntex's diagnostics division viewed the laboratory work of several Seattle microbiologists and suggested a contract be drawn up where Syntex would pay $3 million for their research in exchange for the rights to manufacture and market tests developed for sexually transmissible diseases. When the agreement produced four successful products, a new venture was organized called Oncogen where Syntex and the microbiologists split profits 50--50. Later Bristol-Meyers was invited to join the venture by contributing $12 million. Eventually, however, the scientists sold their entire interest to Bristol-Meyers for $300 million. Bowers then proceeded to sell Syntex's portion of the venture to Bristol-Meyers and concentrated on in-house cancer research.
By 1988, Syntex had surpassed Bowers' goal of $1 billion in sales with revenues of $1.1 billion. Its naproxen and naproxen sodium products, sold as Naprosyn and Anaprox respectively, had performed so well that naproxen became the fifth best-selling prescription drug in the world and the third best in the United States and accounted for over 50 percent of Syntex's sales. However, a new problem faced the company: the patent on naproxen would expire in 1993, opening Syntex's best profit-maker to low-cost competition from generic drug manufacturers. Rather than reap the profits until the patent expired and accept a decrease in sales as the drug's market share shrank to name-brand loyal consumers, Syntex decided to invest in improving production techniques and reducing costs to stay competitive with the generic producers. Production costs had already come down 35 percent in real terms over the last seven years. To further improve efficiency, Syntex invested $9 million in a naproxen technology center in Boulder, Colorado, and planned to spend an additional $35 million over five years to test three new processes for making the substance. The company also agreed at the time to form a joint venture with Procter & Gamble to manufacture and market an over-the-counter version of naproxen. These companies planned to have the non-prescription version approved by the FDA and in the marketplace before the expiration of Syntex's patent.
To diversify the source of future earnings after the expiration of the naproxen patent, Syntex saw the need to bring new money-making products to market and boost international sales. In 1988, Financial World reported that Syntex spent a higher percentage of sales on research and development than any other company, spending 17 percent compared to the industry average of 13 percent. In mid-1988, researchers presented the results of studies on a new drug being developed by Syntex, Ticlid. The drug, developed to prevent strokes by thinning the blood, was found to be more effective than aspirin in preventing strokes since patients with stroke-like symptoms who were subsequently treated with Ticlid had 21 percent fewer strokes than those treated with aspirin. Ticlid was also considerably more effective in women than aspirin. Although Ticlid would not be on the market until 1991, some analysts predicted a $750 million annual demand for the drug.
In 1989, Syntex had five new drug applications under review at the Food and Drug Administration. Several new drugs were close to market in several different treatment areas, including Cardene, a calcium channel blocker for use in treating angina and hypertension; Toradol, a high-strength non-addictive pain reliever; Nafarelin, for treating endometriosis; and Cytovene, an AIDS drug. Some of the drugs were meeting with challenges before the FDA, however, and critics attributed Syntex's difficulty in bringing new products to market to spreading too few resources too far.
Despite the promising new research and Syntex's renown as a research house, the company came in last in Financial World's survey of research and development effectiveness over the past decade. Although Syntex had healthy earnings growth during this period, the success was primarily due to profits from Naprosyn sales which generated $700 million of $1.4 billion in sales in 1988. Earnings from new product sales had generated only $200 million. Some analysts attributed Syntex's research and development weakness to the fact that the company was the smallest player in the industry and its available capital too small to compete in the product development game. $200 million was considered the smallest amount of money necessary for research and development. Syntex just barely reached that level by dedicating 17 percent of sales to R & D. Without some big successes, that level of spending would begin to strain the company's finances, especially as the expiration of the naproxen patent approached. Moreover, Ciba-Geigy had recently introduced an anti-arthritic, Voltaren, that took 11 percent of the U.S. market in four months. In view of this crunch, analysts predicted that Syntex would be a prime take-over target.
At the time, the entire pharmaceuticals industry was beginning to undergo dramatic structural changes. Growing costs in research and development and in bringing new products to market required increasing amounts of capital. Companies were seeking opportunities to make their operations more efficient by spreading research dollars over a larger sales base. When Smith-Kline Beckman and Beecham revealed that they were in merger talks, other mergers were anticipated. Syntex was often cited as a likely target, and the Swiss pharmaceutical manufacturer Hoffmann-LaRoche seemed a likely suitor. Roche was highly capitalized and already had a co-marketing agreement with Syntex. Moreover, Allen & Co. was reportedly trying to sell its remaining six percent share in Syntex, and Hoffmann-LaRoche was reputedly in negotiations for it.
In 1990, Syntex's Cytovene, a treatment for eyesight loss due to retinal tissue damage caused by an infection resulting from AIDS, was approved by the FDA. It was the first approval for such a drug in the United States. The next year, Syntex launched a joint venture with the non-profit Hong Kong Institute of Biotechnology. The venture, HKIB/Syntex, was formed to examine the potential for making drugs from substances used in traditional Chinese medicine preparations. The interest was spawned by increasingly disappointing results from the conventional Western method of creating new drugs by altering the molecular structure of existing drugs.
Syntex and Procter & Gamble's joint venture to produce an over-the-counter version of Naprosyn resulted in the introduction of Aleve in 1994. The FDA approved Aleve in January of that year, the first time in ten years a new over-the-counter pain reliever had been approved. Naprosyn would remain on the market as a prescription anti-arthritic and the non-prescription Aleve would be sold as an analgesic for headache, cold symptoms, toothache, muscle aches, mild arthritis and menstrual cramps. One analyst predicted that Aleve would be the third-best selling non-prescription analgesic by the end of 1995. The $100 million marketing campaign emphasized Aleve's former prescription status and its long-lasting effects. By the end of the fourth week in the stores, Aleve had an impressive 7.5 percent market share by volume, following third after Tylenol and Advil.
The advent of managed care and group purchasing organizations in the late 1980s created a continuing pressure on drug companies' profit margin. Companies responded by cutting sales forces, refining marketing strategies and reducing advertising. Another outgrowth of the squeeze on profits was the continued consolidation of the industry. Four large mergers were formed in 1994, including the purchase for $5.3 billion of Syntex by Roche Holding, the parent company of Hoffmann-LaRoche. The acquisition of Syntex made Roche the fourth largest pharmaceutical company in the world. Some observers were surprised by the apparently inflated price Roche agreed to pay for Syntex, a premium of 57 percent over its publicly traded stock price. Other observers noted that Syntex's strong U.S. sales position and some promising new products would be valuable to Roche with its deep pockets.
From the merger of Roche and Syntex came Roche Bioscience, a research and product development venture located in Syntex's offices in Palo Alto, California. Syntex U.S.A. still existed as a legal entity for continuing contracts and patents. The new venture, Roche Bioscience, was designed with a flat management structure and integrated but separate research units to facilitate creativity, communication and rapid movement from concept to testing of new product ideas. With Syntex's research strength and U.S. positioning and Roche's financial backing and access to European markets, the new company seemed well-positioned to meet the challenges facing the industry at the end of the century.
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