SERONO SETS SAIL
CEO Ernesto Bertarelli is confident the Swiss biotechnology firm is well-positioned for international industry leadership
Serono's Chief Executive Officer Ernesto Bertarelli is racing close hauled, trimming his company's sails to move it skillfully forward in the highly competitive biotechnology waters.
An ardent yachtsman who is president of the Swiss challenge for the 2003 America's Cup, Bertarelli appreciates the challenges he faces as head of the Geneva-based biotechnology company. Biotechnology has had rough sailing in the past 12 months: Stocks of most companies have suffered mightily, many promising drugs have failed in clinical trials or been rejected by the U.S. Food & Drug Administration, and some companies have been absorbed by larger drug firms.
YARE HE GOES Serono's nimble CEO will need to navigate his company through biotech's shoals.
But Bertarelli believes he has reasons to be confident. Last year was a good year for Serono, with total revenues up 13.5% to $1.3 billion and a net income of $317 million. Based on revenues, the company is the number one biotechnology firm in Europe; after the merger of Amgen and Immunex is completed to form the world's largest biotech company, Serono will be solidly number three after Genentech.
Serono's good news continued this year. In March, FDA approved Serono's multiple sclerosis drug Rebif (-interferon) for sale in the U.S.; it is already the leading MS treatment outside the U.S. Last year, Serono invested $30 million in sales infrastructure in preparation for the U.S. launch, and Bertarelli is pleased with the first few weeks' sales performance (second-quarter sales figures will be released on July 24). He is also happy with first-quarter earnings for the company as a whole--product sales continued at a solid 10% growth pace and Rebif sales shot up a whopping 46%.
Add to this Serono's diverse portfolio, solid R&D operations, and pipeline of promising drugs and it's no wonder that the 36-year-old CEO is smiling. "I'm a competitor, so by definition I want to win the race," he tells C&EN.
THE RACE, in this case, is actually multiple competitions: to solidify Serono's place as the number one biotechnology company in Europe, to outpace rival Biogen's Avonex MS drug, to bring a host of new molecules to market, and, along the way, to win the 2003 America's Cup race.
Bertarelli exudes the confidence of a person born to win. He is the third generation of his family to head the company, which was founded by Cesare Serono in Rome in 1906 as the Istituto Farmacologico Serono. In the early days and for many years, the firm made several hundred products, mostly extracts from natural substances.
Serono's first big product--a fertility drug based on human gonadotrophin--came under the direction of Pietro Bertarelli, Ernesto's grandfather, after World War II. To produce the drug, the firm collected literally tankers full of postmenopausal urine from thousands of women across the world (among them a small number of elderly Italian nuns).
In 1977, Bertarelli's father Fabio moved the company to Geneva. Its next best seller was naturally derived growth hormone. For some time, Serono dominated the European market and ultimately captured 50% of the U.S. market for the drug. However, it soon faced a competitor, Genentech, which began making the product by recombinant technology.
And so began the transformation of the company, according to Silvano Fumero, senior executive vice president and head of research and pharmaceutical development. Fumero has been involved with Serono since 1971. "The transformation began in earnest in the 1980s, and by 1993 all of Serono's key products were being made by recombinant technology," he says.
In the same year, Ernesto received an M.B.A. from Harvard Business School. His father Fabio was already ill with cancer, and the son began taking over the day-to-day operations. Not much surprised Ernesto: While studying at Harvard, his father kept him informed continually about the company's goings-on.
Actually, the younger Bertarelli's involvement began as a child. At age six, he was presenting the employee of the year with a gift at the company's Christmas party; later he traveled with his father.
"I certainly believed our industry did something that was valuable to the world," Bertarelli says, yet he admits that he might not have followed in his father's footsteps due to a small rebellion in his teenage years. He credits "a very special high school in Geneva, which rescued me." To return the favor, he recently financed out of his own funds half of a new building for the school.
He began working seriously at Serono in 1985, during which time he held several positions of increasing responsibility in sales and marketing, and worked as a medical representative and product manager.
Since he became CEO in January 1996, the company has doubled its revenues, increased net profit 10-fold, and become one of the world's biotech leaders. Among other major projects, it built a state-of-the-art biomanufacturing facility at Corsier-sur-Vevey on Lake Geneva, and, in 1998, it acquired the Geneva Biomedical Research Institute from Glaxo Wellcome, which has opened up new areas of research for the company. Spending on R&D has nearly doubled since 1996 and now accounts for 25% of sales.
During this time, Bertarelli has also been involved with issues confronting the biotechnology industry at large. He's concerned about European policies and the public's attitude toward biotechnology; he's also president of Emerging Biopharmaceutical Enterprises, a European industry body.
A major step forward for Serono was the March 7 U.S. approval of Rebif for the treatment of patients with relapsing forms of MS. The approval was based on the results of two large multicenter studies in patients with relapsing remitting MS. Until then, Rebif could not be marketed in the U.S. due to the Orphan Drug Act (ODA) status of Avonex, whose exclusivity was granted in 1996 and will not expire until 2003.
Serono says Rebif was able to gain marketing approval under the terms of ODA by demonstrating clinical superiority over Avonex at 24 weeks in a head-to-head study known as EVIDENCE (Evidence for Interferon Dose-response European-North American Comparative Efficacy). "This was an important milestone for our company," Bertarelli says. One financial analyst goes further, calling Rebif's approval a "monumental achievement" as the first drug to gain such approval in the 19-year history of ODA.
The U.S. is the key battleground for MS, where four drugs compete in a market worth $1.3 billion, half of worldwide sales. A minor blip in this battle came last month when the Centers for Medicare & Medicaid Services issued program guidelines for health care carriers that indicated Biogen's Avonex likely would be covered by Medicare and Rebif would not. However, most people with MS are in their 30s, and Medicare accounts for well under 10% of all MS drug prescriptions.
Meanwhile, Biogen and Serono continue to issue dueling news releases on the efficacy of their respective treatments, with both companies claiming superiority. The studies and battles have been going on for several years and are not likely to end anytime soon with such a lucrative market at stake--worldwide, some 2.5 million people have MS.
Bertarelli tries not to dwell on the negative, however. Instead, he's focused on building the company. To this end, in July 2000, Bertarelli oversaw one of the largest secondary offerings on the New York Stock Exchange, raising $1 billion in cash. "Cash is not what's important. It's not my first priority," Bertarelli explains. "It's part of my toolbox" to keep Serono moving forward, he says.
He's well on his way as today Serono has 4,600 employees--1,500 of them involved in R&D--and offices in 45 countries. It sells six recombinant products: three related to infertility, one for growth hormone deficiency, one for treatment of HIV-associated wasting, and Rebif.
It also has 15 molecules in its development pipeline. Eight are recombinant proteins; the rest are small molecules. The therapeutic areas covered by these molecules include Serono's traditional area of reproductive health, as well as neurology, growth and metabolism, gastroenterology, inflammatory and autoimmune diseases, oncology, and cardiology.
Serono has been criticized by financial analysts for having a "thin" drug pipeline. Says one analyst: "We believe that Serono has many potentially exciting drugs in Phase I and II. However, we also estimate that the majority will start contributing to growth only in 2006 and beyond." Moreover, this analyst points out that the risk of drug failure for early-stage projects is high and the time to payoff is long.
Fumero acknowledges the criticisms, to a point. "The majority of our molecules right now are in Phase I and II," he says, so in that regard, the analysts are correct for the short term. "There isn't much right now in Phase III, but in 2004 and beyond we are moving very well," he says. In fact, "there's almost too much in the pipeline, and some of the leads we'll license out."
Moreover, he says, "it's not just having a lot of things in the pipeline, it's the quality of the pipeline. A lot of companies are doing the same thing" over and over again, "so that's why it is important to have a distinctive pipeline."
Serono does have some key strengths: It is less dependent on the sales of any single drug than most biotech companies. It also has a large number of commercial and academic collaborations aimed at identifying novel protein therapeutic approaches. Among its corporate partners are Inpharmatica, Vertex, Celgene, and Zymo- Genetics. The goal is to develop and speed up commercialization of new drugs.
Serono is also different from many other biotechs in that it does nearly everything itself, from the development of the molecule, to toxicological testing, to preclinical work, to manufacturing. Analysts are particularly impressed with Serono's manufacturing processes--an area that some biotech and pharmaceutical companies have lately found difficult.
"Subcontracting may be good in some ways," Fumero says, "but the quality is different. Doing these things yourself gives you the information directly." Especially in the research area, information is sometimes gleaned that sets researchers off on another direction, and that information might not be as readily evident when the work is contracted out, he contends.
COMPETING AGAINST the resources of the big pharmaceutical companies does not faze Fumero or Bertarelli. "My personal vision of Serono is not to resemble a large chemical, pharmaceutical, or 'Big Brother' company," Bertarelli says, "but to demonstrate that a medium-sized entrepreneurial company can be truly international and successful."
Serono, in his view, has already distinguished itself from its competitors by managing a multiproduct portfolio. "We've gone through the hurdle in maturity," he says, "switching from a one-product company to a company where we have multiple products in a pipeline. We're moving parallel in several different areas--growth and metabolism, reproductive biology, and neurology. Manufacturing, which is an issue for many of our competitors, is not an issue for us. We are truly global, and beyond the U.S. and Europe, we have strong operations in Latin America, Asia, and Australia."
With a pile of cash, successful products, and a fruitful development pipeline, Serono might even appear to be an attractive merger target of a large pharmaceutical company. Bertarelli isn't interested. "I want to preserve the spirit of Serono," he says, "and a transaction like that would not preserve it. The Serono spirit is the culture of the possible, the urgency to grow, and recognition that our most important element is people.
"It is this spirit which I've seen allows people to achieve higher goals and to be inspired. It's a definition of happiness which I summarize as fun. If it's not fun anymore, we would have lost the spirit."
Clearly, Serono remains a top priority for Bertarelli, but he also finds time to devote himself to two other absorbing passions: his wife and young daughter, and sailing. For several years, he's been involved deeply in mounting the Swiss challenge--Team Alinghi--to the 2003 America's Cup, an effort that will cost $50 million, a combination of Bertarelli's private funds, funds from financial services group UBS, and other corporate partners. The race is next February in New Zealand.
Some critics contend that Bertarelli's time away from the company will hurt. Responding to those critics may be one of the reasons that last month Serono's board of directors appointed chief financial officer Jacques Theurillat as deputy executive officer; he will also continue as CFO. Theurillat has been with Serono since 1987 and has been on the executive committee since Bertarelli created it in 1996. "Jacques has been a key figure in the success of Serono," Bertarelli says. "I will now have a greater opportunity to focus on strategy and development opportunities for Serono."
DISTINCTIVE Fumero touts the quality of Serono's drug pipeline.
The appointment may also give him more time for the America's Cup. Bertarelli shrugs off that contention good-naturedly. He's heard the carping before. "My first priority is the business," he counters. "We're working a race to be number one. I devote five days a week to work, and I like it; I have fun. But life doesn't stop there. I have so much energy and competitive spirit, and I have to find activities that would be a match for what I live in the biotech world.
"I love to compete in an environment that is complex, that has many dimensions," he continues. "The America's Cup has the complexities of sailing--there's the water itself, the mechanical aspects, the technology aspects, and of course teamwork."
Still, in the biotechnology world, where investors easily become disenchanted, Bertarelli knows he has to stay focused on Serono to ensure smooth sailing in the years to come. And regardless of what he says, it is clear that Bertarelli is the consummate competitor who wants to finish in first place in whatever he does.
"What will it take to make us number one?" Bertarelli muses. "One more good product--we may not have that tomorrow morning, but in the medium term, there's that possibility." But more important to Bertarelli is how success is defined.
"The finish line at Serono is not defined by one parameter," he maintains. "Indeed, how do you define success? If it's sales or market capitalization, we clearly have not won. On the other hand, in other parameters we possibly are number one. We're number one in our ability to reinvent ourselves, to transform ourselves, and I think we're closer to the finish line than anyone else in establishing a truly international company. We're showing that we can develop a company based on multiple products."
Above all, being number one is about people, he says. "I truly enjoy success through the eyes and smiles of others. I hope competing in the America's Cup will be as inspiring as what we do at Serono, so in addition to winning the race, I want to inspire people."
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