September 15, 2010 / 6:42 AM / 9 years ago

Roche rules out merging R&D units

BASEL, Switzerland (Reuters) - Roche Holding AG ROG.VX is sticking to its dual-track research structure that some analysts have urged it to dismantle as the Swiss drugmaker seeks ways to slash costs after pipeline setbacks.

Chief Executive Severin Schwan told Reuters the group would not ring-fence research and development (R&D) from cutbacks but said merging separate operations at Roche and its U.S. biotech unit Genentech would be “fundamentally wrong.”

“We will keep the two respective research and early development organizations as independent units. I am very firm on that and I don’t see any reason why you would put them together,” he said.

“You would kill innovation,” Schwan said in an interview at the 114-year-old group’s headquarters in Basel.

Roche, hit by a bout of setbacks for key drugs, announced an efficiency drive on September 3. Some analysts are worried the cuts may fall short of annual savings of 2 billion to 3 billion Swiss francs ($2-3 billion) that they believe can be made.

“The conviction of CEO Schwan to stick to the two-tiered early stage R&D structure is not surprising,” Vontobel analyst Andrew Weiss said.

“However, the fact that he does indicate that he will look at R&D suggests that funds to support these two structures are going to become scarcer.”

Schwan declined to comment on the scale of cost cutting, but said measures had to be carefully thought through and not implemented crudely across the board.

“We want to take enough time to really analyze the facts in the first phase — this will take us into October,” he said, adding detailed measures would be communicated before the end of the year.

One area that would be looked at was the primary care salesforce, after experimental diabetes treatment taspoglutide hit a setback, he said.

By 0957 GMT, Roche stock, which has lost 19 percent of its value so far this year, was trading 1.1 percent lower at 140.50 Swiss francs, underperforming a flat Swiss market .SSMI.

SLOWER GROWTH

Problems with cancer drug Avastin and taspoglutide have punched a big hole in Roche’s short-term growth potential and dented investor confidence in the group.

Schwan acknowledged times were tough but said he was confident the pipeline would start to deliver sales growth again after a lean couple of years.

“Growth is slowing down, and that is related on the one hand to the price pressure that we see both in the U.S. and in a number of European countries and it is related to the late-stage setbacks in our pipeline,” the 42-year-old said.

“However, growth rates will pick up again when our new products are coming through,” he said, adding sales are expected to pick up again after 2012.

“Yes, there have been setbacks, but I think it’s important to put it into perspective with our overall pipeline, which is very strong,” Schwan said, dismissing criticism that Roche’s pipeline is risky.

“It’s well diversified with projects across different therapeutic areas and different modes of action,” Schwan said, pointing out all of its upcoming products had proof of concept, except cholesterol drug dalcetrapib.

Some companies faced with product setbacks, such as AstraZeneca Plc (AZN.L) and Sanofi-Aventis SA (SASY.PA), have opted to give long-term guidance to reassure investors, but Schwan said Roche had no plans to follow suit.

“For the time being, we will stick to our usual annual guidance,” he said.

Adding to Roche’s worries is the looming threat of generic competition to some of its complex biological cancer drugs, such as MabThera and Herceptin, which could emerge in Europe as early as 2014 and 2015 when patents expire.

Schwan played down the impact that so-called biosimilars were likely to have on the group’s bottom line.

“If you look at our biologics, a big portion of turnover is protected for many years to come,” he said.

“The impact that we will see from biosimilars on MabThera and Herceptin, in particular, will be limited and I am confident that with our strong pipeline we can compensate and even over-compensate for that.”

Schwan said he expected further consolidation within the pharmaceutical industry as it faces more pressures, although Roche’s focus would remain on small and medium-sized deals.

(Additional reporting by Paul Arnold; Editing by Sharon Lindores)

$1=1.003 Swiss Franc

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