Innovation in the Pharmaceutical Industry — Future Prospects

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Innovation in the Pharmaceutical Industry — Future Prospects Talk by Dr Franz B. Humer, Chairman of the Board of Directors and CEO of F. Hoffmann-La Roche Ltd, to the Zürcher Volkswirtschaftliche Gesellschaft Zurich, 16 March 2005 Ladies and Gentlemen, Anyone who has read the papers in recent months could easily get the impression that the pharmaceutical industry as a whole is not doing very well. Internationally, serious problems with world-famous drugs have hit the headlines. Prices and costs have come in for scrutiny in some countries including — and fairly vehemently of late — Switzerland. Confidence in the industry and its reputation have been damaged, mainly in the USA but also here in Switzerland. Over the past five years, the market capitalisation of the global pharmaceutical industry has halved to CHF 1.5 trillion. Of course the market value of other sectors also plummeted when the stock market bubble burst. However, it shows that the financial markets have greatly reduced their assessment of the industry’s prospects. Last year, the market capitalisation of pharmaceutical companies declined further. Pleasing exceptions to this trend were Roche and the other Basel-based pharmaceutical company. For the industry as a whole, therefore, 2004 was not a good year. However, that is no reason to grumble. A sector which needs 10 to 15 years to bring a new product to market readiness thinks, acts and plans in longer-term dimensions. It is commercial, scientific and political trends that are decisive for us. The political framework is particularly important, as there is probably no other industry that is as strictly regulated as the research-based healthcare sector. In the light of this situation, I would like to talk today about the challenges facing our sector and explain why I am still (very) confident about the future of companies like Roche. But before I look ahead to the future, let me give you a brief overview of the present situation (what we have achieved so far). Where is the pharmaceutical industry today? • Medical progress: Undeniably, research-based pharmaceutical companies have made enormous progress in the treatment of many illnesses, including infectious diseases, childhood diseases, some types of cancer, cardiovascular disease, diabetes and hepatitis. Looking back over the past century, it is clear that medical science has made breathtaking advances. This is shown, for instance, by the fact that life expectancy has risen enormously to

Presentation by F.B. Humer

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around 80 years, compared with 55 in the late nineteenth/early twentieth century when Roche was established. Even so, it is still not possible to treat the causes of most diseases. • Cost of research and development: However, remaining at the cutting edge of technology in the face of such rapid advancement is becoming increasingly expensive. Despite the enormous progress that has been made, developing a new drug is still a bit like looking for a needle in a haystack: only one in 10,000 substances screened eventually becomes a fully fledged product that can be used to treat patients. And as I have said, it takes 10 to 15 years to achieve that. That costs an average of about CHF 1 billion for each drug brought onto the market (including opportunity costs and the cost of failures). Over the past 20 years the cost of developing new drugs has increased by a factor of eight. Last year Roche invested more than CHF 5 billion in research and development and spending will be a good deal higher this year. Despite the high sums involved, there is still no guarantee of success, let alone a guarantee that prices or volume sales will be acceptable. The cost and complexity of research have increased substantially. At the same time, political pressure on prices has risen and that has evidently increased the attendant business risks. Those are the main reasons for the progressive consolidation of our industry. Fifteen years ago, the ten largest...
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