Roche Bets Twinning Tests, Drugs Will Boost Profit: Spotlight
Bloomberg News
September 2, 1998, 4:53 a.m. ET
Roche Bets Twinning Tests, Drugs Will Boost Profit: Spotlight
Basel, Switzerland, Sept. 2 (Bloomberg) -- As Roche Holding
prepares to introduce an AIDS drug in a European market dominated
by Merck & Co. and Agouron Pharmaceuticals Inc., it isn't content
to let the product, Fortovase, sell itself.
Instead, Roche is counting on regulators to approve the sale
of a new test that measures AIDS-causing HIV in patients' blood.
The 11th-largest drugmaker by sales is betting doctors will use
Roche tests to assess AIDS -- and eventually illnesses from flu
to cancer -- then prescribe related Roche drugs to treat.
It's a big bet. While competitors were busy merging with
each other to boost profits as competition in the $244 billion
industry intensifies, Roche last year spent $7 billion for a
German diagnostics company, Boehringer Mannheim GmbH.
Analysts scoff at spending so much for a company in the low-
profit diagnostics business -- a line that rivals have been
exiting, and one that may be made obsolete by genetic screening.
Roche insists it will pay.
''If drugs are equivalent, it helps a lot to have the right
package,'' said Klaus Strein, Roche's integrated health care
chief. ''If your drug is superior, then all you need is a big
pocket to hold the money you're going to be making.''
That's the plan: Doctors would use Roche tests to diagnose
diseases ranging from flu to osteoporosis to breast cancer, then
prescribe related Roche drugs to treat them. One day, kits for
some maladies will be so simple people can use them at home, like
pregnancy tests, and buy over-the-counter drugs to feel better.
Sales Forecast
Roche forecasts this strategy eventually will add 1 billion
Swiss francs ($697 million) in annual sales. Roche had sales of
18.8 billion francs last year.
Analysts, however, have their doubts. Even if doctors use a
Roche test to diagnose what drug a patient needs, they say, that
doesn't mean doctors would use Roche drugs. Glaxo Wellcome Plc of
the U.K., the world's second-biggest drugmaker behind Merck, for
example, is developing a flu treatment that's similar to one that
Roche is devising in conjunction with a medical test kit.
Even if Roche does boost drug sales with its test-kit tie-
in, analysts contend, it still would have been better off buying
another drugmaker and reaping the higher profit margin of drugs.
For these reasons, 33 of 58 analysts tracked by Bloomberg
Financial Markets rate Roche shares a ''hold'' and two recommend
investors sell their shares.
''For large diagnostics businesses, it's difficult to get
operative assets to sweat and get the right returns,'' said Robin
Campbell, an analyst at Paribas Capital Markets.
Profit Margin
Roche's operating margin -- profit before investment income,
taxes and one-time items as a percentage of sales -- fell to 17
percent in the first half of 1998 from 22 percent a year earlier.
Glaxo's operating margin last year was 35.4 percent, while that
of Merck, the world's biggest drugmaker, was 24.8 percent.
Investors have demonstrated their skepticism in the market.
Roche shares this year have risen 3.1 percent while the Swiss
Market Index has gained 7 percent. Glaxo has gained 25 percent,
Merck 20 percent. In the two years through 1996, Roche had gained
63 percent, while Glaxo shares rose 53 percent.
Roche is unrepentant. Chief Financial Officer Henri Meier
last month said the company plans to become one of the world's
three biggest drugmakers in terms of sales. To do that, it would
have to increase drug sales, which were $6.23 billion last year,
by $4 billion, or 64 percent, according figures from IMS Health
Inc., a U.S. research firm.
That reignited speculation that Roche, which is controlled
by the Hoffman, Oeri and Sacher families, will succumb to the
industry's consolidation trend and team up with a rival in the
years ahead.
That would be particularly necessary if Roche, now the world
leader in traditional diagnostic products, fails to keep up with
gene-based diagnostics being developed by biotechnology companies
such as Affymetrix Inc., which makes equipment to put patients'
genetic data on computer chips.
Gene Research
Roche has a head start in this, having bought the rights to
polymerase chain reaction (PCR), a technology that makes possible
the rapid duplication of genetic material, for about $300 million
in 1991.
Strein, the former head of research at Boehringer, says that
while working for Boehringer Mannheim before Roche bought it, he
was asked by the company to look for a cheaper alternative to
then-rival Roche's PCR -- and failed. ''It's nothing more and
nothing less than the ideal detection system,'' Strein said.
Roche cites PCR as an example of how it combines diagnostics
with treatment. It uses the process to track the concentration of
AIDS-causing HIV in a patient's blood and let doctors gauge how a
patient is responding to treatment. Soon, Roche says, PCR will be
able assess whether a virus strain is immune to some treatments.
''We think by measuring the genotype of the virus we can
predict which drug the virus is sensitive to, and we also think
our drugs are favorable compared with others,'' says Strein.
Diagnostic tools also can be helpful in discovering which
genes causes what diseases. That could lead to a whole new kind
of treatment, aimed at preventing diseases before they occur or
battling them at a genetic level rather than treating symptoms.
''Roche is planning to base its next generation of drugs on
genetic discovery,'' says Kari Stefansson, the chief executive of
Decode Genetics Inc., an Icelandic biotechnology company that is
working with Roche to study the genetic causes of disease in
Iceland's relatively homogenous population. ''So if we deliver,
as I believe we can, they will gain a lot from it.''
--Theresa Waldrop in the Zurich newsroom (41-1) 224 4111, with |
