Merck KGaA showing Teva the way?

Dr. Stefan Oschmann  photo: Shlomi Yosef

Merck CEO Dr. Stefan Oschmann is reluctant to comment on Teva, but comparisons are inevitable.

In 2012, Merck Serono, the drug division of German company Merck KGaA, made a difficult decision. It closed its development center in Geneva, the heart of its biotechnology activity. The center previously belonged to veteran Swiss company Serono, which Merck acquired in 2007. 580 employees were laid off, mostly in R&D, and hundreds were transferred to other locations, among them Merck's headquarters in Germany and the new R&D center it opened in Boston.

The man behind this measure is Dr. Stefan Oschmann, Merck's VP strategy and pharma division head, who is now the company's CEO. "We had two development centers competing with each other," he admitted to "Globes." "We felt that this competition was not useful for us, and in any case, we also wanted a presence in the US."

When there are two different R&D sites with contrasting organizational cultures, one in the acquiring company and the other in the company being acquired, and one of them is suddenly shut down, it is liable to cause upset and anger in the company. Oschmann says, however, that the company weathered the transition in the most positive way. "We think that the consolidation of R&D sites eventually focused enthusiasm on research instead of on competition, and improved cooperation between researchers, so that everyone today enjoys his work more."

Closing down the development center was part of the "getting ready for 2018" plan, which was completed two years ahead of schedule. "Many of our successes resulted from this plan. The company is celebrating its 350th birthday. There aren't many companies as old as we are that are so innovative."

Two large companies, a different strategy

It is instructive to compare what happened to Merck and to Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) during this time. In 2012, the two companies were among the 20 largest pharma companies in the world, although not in the top 10. Today, Merck's market cap is €35 billion, close to Teva's average over the past five years, during which Teva's market cap first soared to a peak of $70 billion, then plunged to a low of $11 billion.

In contrast to Teva, Merck always operated in the innovative drug field, but it also has two other divisions - its ingredients and research equipment division and its advanced ingredients division. These divisions provide a more conventional and less volatile source of revenue. In this sense, they are somewhat similar to the stability that the generics sector is supposed to give Teva.

Both companies owe a substantial proportion of their success in recent years to a drug for treatment of multiple sclerosis: Teva's Copaxone and Merck's Rebif, a drug obtained by Merck when it acquired Serono. Both drugs were discovered at the Weizmann Institute in Israel, and the patents on both of them began to expire at the same time.

In 2012, when Oschmann designed Merck's new strategic plan, Merck did not have many innovative products in its pipeline, and its problems were therefore similar to those of Teva. The plan focused the company's pharma division on cancer, immunology, and the combination of the two - immunotherapy. The company also focused on the interface between immunology and neurology. This was natural for the company, given its drug for multiple sclerosis.

At the time, Teva was concentrating on almost the same areas, with one major difference: Teva gave priority to neurology, with cancer in second place, while Merck's priorities were the other way around.

"We considered 23 sectors, and chose these three," Oschmann says. "We invest $1.5-2 billion a year in research, and that is competitive with the large companies, but only if we are focused. The opportunity in neurology is tremendous, because of the tremendous shortage of drugs in the market and enormous damage that these diseases cause, but trials fail again and again, in the Alzheimer's Disease category, for example, because the disease's mechanism is not yet completely understood. In cancer, we have a better understanding of the disease's mechanism, but there is a lot of competition in this field."

Underlying the strategic plan devised by Jeremy Levin when he was Teva's CEO were the realization that the immuno-oncology sector was becoming crowded and the belief that neurology was going to be the next big thing. Levin believed that in this area, the company would be able to take maximum advantage of the unique sales power it had created for Copaxone, which Levin previously called "Teva's secret weapon."

Actually, both companies managed to carry out their strategic plans in the innovative sector: Teva acquired neurology products (Austedo for treatment of movement disorders and Fremanezumab for treatment of migraine headaches), which are due to reach the market in the coming years, and to establish interesting innovative activity for Teva, even if they cannot replace Copaxone.

Merck developed an immuno-oncology drug called Bavencio for treatment of bladder cancer in the secondaries stage, which is being sold in partnership with Pfizer. The company also launched a new multiple sclerosis product. There is another interesting product in its pipeline for treatment of inflammatory diseases that attack the brain, such as multiple sclerosis and lupus.

Teva took a gamble on Actavis during this period, however, which turned out to be a mistake, and a series of crises experienced by the company affected its day-to-day management. Quality control problems with its subcontractor that produces part of the product for treatment of migraines that it failed to detect in time also caused trouble for Teva. The launch of this product will probably be delayed, and it will encounter more competition, which is jeopardizing the company's guidance for the innovative sector.

Merck, on the other hand, successfully absorbed Serono (which was a big gamble when it was acquired). The company is paying off its debt on schedule, and even though it failed to grow substantially in 2017, and its profits are declining because of increased R&D investment and high marketing costs for its new products, Merck is hoping that the revenue from these products will change the situation in the coming year.

"Globes": What do you have to say about what happened to Teva?

Oschmann sighs and says that he does not want to talk about Teva, but it is clear that he is horrified at how quickly the company declined. At a different stage of the conversation, he says, "Sometimes, there is a good organizational culture, and management doesn't manage to apply it to a new vision, especially if it isn't clear. We also have a challenge to lead brilliant people who worked hard for a vision that was new to them. We had to make a great effort to persuade the entire organization to go with us."

"We are the Amazon of research equipment"

One of the major differences between Teva and Merck is that Merck has always had its own internal R&D, while Teva acquired its most prominent innovative drugs from outside. Merck's successful new drugs are also based primarily on its own R&D.

The theme of the company's 350th birthday celebration is "curiosity," and this may be the main thing that unifies the company's three divisions: pharma, advanced materials, and research services. The commercial synergies between them are enormous, but they definitely share the need for exact science.

"All the pharma companies are our customers," Oschmann says about the ingredients division. "In biotechnology, we make machines and raw materials that make it possible to grow the cells and produce the protein from them. There is a lot of high tech in this field. We have solutions for research laboratories, preparing the samples, and isolating materials from samples - this is sold online. We're the leaders in this category, and are regarded at the Amazon of research equipment."

You could base a large company on that. Are you considering selling other companies' products as well?

Oschmann: "We already sell products of other companies. We are growing faster than the market in this area, which is growing at 6% a year. To a great extent, this is our core business."

Is there synergy between the life sciences division and the drugs division?

"We're unable to take advantage of much synergy, because we have to establish a Chinese wall in order to make sure that we don't give our customers' commercial secrets to the pharma division, but we're studying very interesting methods in genetic engineering, for example. We're using methods that we have developed both with our customers and by ourselves."

In the materials category, Merck specializes in display screens. It also manufactures components for computer chips and pigments for the auto and cosmetics industries, for example, and even anti-forgery pigments. These are used in the new money in Israel, for example. "The idea is crypto-chemicals - unique molecules that make it possible to identify the product with certainty. For example, a telephone can be marked, and then identified with certainty. This helps, for example, in verifying blockchain deals, and in protecting intellectual property in patent-protected seeds in agriculture."

Merck acquired Jerusalem-based QLight in 2015. The company was founded on the basis of research at the Hebrew University of Jerusalem. Merck also recently announced that it was expanding that company's staff. "They have developed technology that makes screens clearer, expands the range of colors, and is likely to eliminate the back light. There is competition in this area, but QLight is giving us an advantage. They are also currently working on the development of cadmium-free screens, which is very important for the environment."

What is the future in this sector?

"The screen of the future is likely to be very thin and flexible, so that it can be folded like a napkin and put in your rear pocket. You will be able to spread it on the table in order to type on it comfortably, hang it on the wall in order to screen a presentation, or hear music through the vibration of the screen itself, without any loudspeakers. This is not far off; it will happen very soon.

"The semiconductor industry has not managed to comply with Moore's Law in recent years, according to which processing power doubles every two years. Chips have become so small that they have reached the frequency of light, and if we go below that, quantum effects are discovered that we don't know how to work with yet. The next generation of chips will be part of the quantum computer world, and will require completely different materials. We will build 3D chips engineered at the level of the individual atom."

You need completely new scientists

"This is a problem when you do R&D. You constantly have to replace some of the scientists. Some of our cultural revolution was about bringing new blood into the company in orderly fashion, without getting rid of older and more experienced people like me."

"Change our name? Would you change the name of Jerusalem?"

Pharmaceutical and chemicals company Merck was founded in 1668. During World War I, the US nationalized all German businesses in its territory, including Merck's US activity. The nationalized company developed and grew, and is now called Merck & Co. in the US, and Merck, Sharp, and Dohme (MSD) in other countries, in which German company Merck has the rights to the name. Due to the size of MSD (a $149 billion market cap on Nasdaq), it has become better known than the original company, and the German company is sometimes referred to as German Merck, the original 350 year-old Merck, the second Merck, or little Merck.

Have you ever considered changing the company's name?

Oschmann's answer shows that he has been deeply insulted. "Would Jerusalem change its name just because there is also a city in the US named Jerusalem?", he asks rhetorically.

Nevertheless, it's not pleasant being the "second Merck."

"I worked at MSD for many years, but I grew up in the same city that the founder, Friedrich Jacob Merck, came from. When I left MSD for Merck, I felt that I was joining the 'real' Merck."

Thanks to his career with both Mercks, Oschmannn was the ideal person to lead a compromise on the two companies' names. "It didn't work very well, but we're really not losing sleep over it," he says.

"Our next step in Israel will probably be in big data for medical R&D"

In 2004, Serono, the biotechnology company later acquired by Merck, decided to close down its production plant in Israel. The plant was founded by InterPharm Laboratories, the company founded by Serono with the Weizman Institute in order to develop drugs jointly owned by the two entities. Serono, however, decided that production in Israel was too expensive. The company retained Inter-Lab, a development center with 100 employees run by managing director Regine Shevach.

In the subsequent years, Serono, and then Merck after the acquisition, were very careful to bolster the connection with Israel, probably in order to wipe out the bad taste left by the plant's closing and out of real appreciation for the scientific and development capabilities here and the wish to maintain the connection with a country that brought Serono to greatness with inventions on which prominent Serono products were based: Rebif, Gonal-F, and Erbitux.

In addition to Inter-Lab's activity, the company has established an incubator (without support from the Innovation Authority) with an investment of €13 million, and is now founding a subcontracting company, in cooperation with venture capital funds Pontifax and Arkin Bio Ventures, to carry out clinical trials, and WuXi Israel, a fund for investing in medical companies at the early stages, in which it is investing €20 million. Merck is also a partner in PMatX, an incubator for compound materials, together with US company HP and Battery Ventures, and is also investing €20 million in this. The first company was accepted into this project in recent weeks.

"Israel is not just a market for us; it's a partnership. We are in very close contact with the Weizmann Institute. The quality of science here is really something else, and we have a strategic advantage - Regine Shevach. We are very attentive to the big data trend in medical R&D, and this will probably be our next step here."

Is there any chance of you bringing production back here?

"It's not on our agenda right now. In Israel, we need scientists. You Israelis are good in research, and we're good in development and marketing."

Published by Globes [online], Israel Business News - www.globes-online.com - on March 1, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Dr. Stefan Oschmann  photo: Shlomi Yosef
Dr. Stefan Oschmann photo: Shlomi Yosef
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