In a move that was somewhat abrupt, but hardly surprising, Novartis on Jan. 26 announced that Joe Jimenez, who currently runs Novartis Pharmaceuticals, would become the company's CEO, effective Feb. 1. Long-time chairman and CEO David Vasella will remain as chairman.

In announcing Jimenez' appointment on the company's fourth-quarter earnings call, Vasella said the company was simplifying its organizational structure. As part of the move, David Epstein, currently head of the oncology business, which is the company's fastest-growing unit in pharmaceuticals, was named to replace Jimenez as global division head of pharmaceuticals. Jon Symonds will become CFO, replacing Raymund Breu, who is retiring.

The announcement brings some closure to a process that began officially more than a year ago, as Novartis worked to get its succession planning right. The last phase was set in motion in October 2008, when Joerg Reinhardt, then head of vaccines and diagnostics, was named to the newly created post of chief operating officer and several other top executives were shuffled around. At the time, Vasella explained that Reinhardt would be able to share some of the chairman's workload, a situation that led some to speculate he would be a strong candidate to succeed the CEO.

In the Jan. 26 announcement, however, Vasella said that three executive positions, including Reinhardt's, as well as the head of corporate affairs and head of group quality and technical operations, would be eliminated. As a result, the executives in those positions -Reinhardt and two other long-time members of the current executive board, Andreas Rummelt and Thomas Wellauer - are leaving the company, reducing the size of the executive board from 12 to nine.

Jimenez's Consumer Background is Unusual But Not Unique

In announcing the changes, Vasella didn't dwell on reasons for choosing Jimenez over other contenders, or future visions for the company, except to note briefly that priorities are already in place. "There's not much change. Certainly, in the short term, once we get approvals and agreements, the integration of Alcon will be crucial while continuing to invest in innovation," Vasella said on the earnings call. Novartis is in the process of buying the Swiss ophthalmology company Alcon for $50 billion.

Jimenez's background certainly could help Novartis as it struggles to overcome the 2012 patent expiration of its best-selling anti-hypertensive medication, Diovan (valsartan), and, three years after that, its oncology drug, Gleevec (imatinib). Diovan had worldwide sales of close to $6 billion in 2009, while Gleevec sales were close to $4 billion (Also see "Novartis Prepares For Diovan Patent Expiries; Looks To New Product Launches" - Pink Sheet, 26 October, 2009.). Before joining Novartis as head of consumer health in April 2007, he was a top executive at H.J. Heinz and had worked for other consumer goods companies--industries where cut-throat consumer marketing tactics and cost efficiency tend to be critical. He became head of pharmaceuticals in October 2007.

While his background is unusual for pharma, it is hardly unique, even within Novartis. Jimenez' predecessor as head of pharma, for example, Thomas Ebeling, had worked at Pepsi in Germany before joining Novartis and is now CEO of a German television company, ProSiebenSat1.

In his current position, Jimenez has been responsible for a division which accounted for $28.5 billion, or 64 percent, of Novartis' $44.3 billion in sales in 2009. Top-line year-on-year growth for the division was 8 percent in US currency (12 percent in local currencies), driven by several older blockbusters, such as Diovan and Gleevec, as well as demand for some smaller products. These include the eye drug Lucentis (ranibizumab injection), Exforge (a combination of two anti-hypertensives: the calcium channel blocker amlodipine besylate and the angiotension-receptor inhibitor valsartan), Exjade (deferasirox) for treating iron overload, Reclast/ Aclasta , for osteoporosis (zoledronic acid), Tekturna (aliskiren) for high blood pressure, Afinitor (everolimus) for renal cell carcinoma), and Ilaris (canakinumab) for treatment of a group of autoimmune diseases known as CAPS (cryopyrin-associated periodic syndromes).

Some speculate that Jimenez got the top job as a counterbalance to Vasella, who has a pharma background and wants to continue to take a hands on role in that area. Also with patent expirations looming and blockbuster replacements hard to come by, a key emphasis will have to be on cost cutting, areas where Jimenez has extensive experience. Under his watch, the pharma division has improved margins despite increased pipeline and new product launch expenditures, mostly by cutting sales and marketing and general administration expenses (Also see "No Sales Model Left Behind: Novartis Joins Firms In Changing Market Focus" - Pink Sheet, 27 October, 2008.).

However, to emphasize that the company plans to balance cost cuts with investment in the business, Symonds said on the earnings call that profit maximization is not an objective and "will never be" part of the company's plans for a long-term sustainable business.

Jimenez' elevation doesn't necessarily mean that Vasella will step out of the picture. Vasella has been at the Novartis helm practically since its inception in 1996, when the company was formed as a result of the merger of Ciba-Geigy and Sandoz. Under his watch, Novartis diversified away from non-healthcare businesses, quickly selling off its agriculture, nutrition, and chemicals properties.

He then led an aggressive and steady M&A strategy to build a diversified healthcare company by acquiring properties such as Chiron (acquired in 2006 for $5.4 billion), which gave it entree into vaccines and diagnostics, and a series of generics companies, which is has used to build Sandoz into the world's second largest generics supplier. Among the largest generics acquisitions were the German firm Hexal, and its US affiliate Eon Labs (acquired in 2005 for $7.4 billion); Sabex (acquired in 2002 for $565 million); and more recently, the Austrian generic oncology injectables business EBEWE (acquired in 2009 for $1.3 billion in cash). Now, Vasella is leading the company in its biggest deal yet--the deal for Alcon. Once the acquisition is completed, Alcon will be Novartis' second biggest division, Vasella said (Also see "CEO Interview: Novartis' Dan Vasella" - In Vivo, 1 April, 2007.) and (Also see "Novartis Seeks Eye Care Leadership With Full, $50 Billion Alcon Takeover" - Pink Sheet, 4 January, 2010.)

Vasella was one of first top pharma executives to understand that big Pharma's future was not likely to be a new generation of blockbusters, and would entail a move to specialty products, says a former Novartis executive. The chairman was adamant about diversification, for example, keeping CibaVision, a contact lens manufacturer, after Ciba-Geigy and Sandoz merged, despite pressures to sell it. He has been willing to sacrifice some of pharma's high margins if it means reducing dependence on the vagaries of pharma R&D and regulatory process.

Now diversification is making Novartis one of the stronger pharma companies, analysts say, even as it faces upcoming patent expirations of Diovan and Gleevec. In addition, Merck's Cozaar (losartan), a key competitor to Diovan, is slated to lose patent protection later this year, putting pressure on the entire anti-hypertension therapeutic area ("The Pink Sheet" Jan. 25, 2010). In previous calls, Novartis has outlined its strategy for managing Diovan after Cozaar goes generic and Diovan loses exclusivity in 2012 (Also see "Novartis Looks To Recent Launches To Bolster Diovan Against Generic Onslaught" - Pink Sheet, 16 July, 2009.).

Strong Growth in Vaccines Led by Demand for H1N1 Vaccines

While the succession announcement somewhat eclipsed other details, Novartis also reported that its vaccine and diagnostics business sales growth stood out, albeit from a smaller base. Driven by a rapid response to the swine flu outbreak in April 2009, the division's sales rose 39 percent in local currencies (38 percent in US dollars) to $2.4 billion. Only the Sandoz divison, which sells generics, seemed to lag. Sales rose 5 percent in local currencies (a 1 percent decline in US dollars), to $7.5 billion, although it too improved year on year, driven by new product launches and a sharper commercial focus, the company said. In generics, price erosion was offset by volume increases, and the EBEWE purchase in September also helped add one percent to sales growth.

The consumer health business was flat in US dollars but up 5 percent in local currencies, highlighted by launch of Prevacid24HR in November 2009.

Expectations that Novartis would soon appoint a successor to Vasella were high, but the timing of the announcement was uncertain. The company didn't say why it was making the change now, but Vasella's contract was due to expire early this year. The timing of the upcoming annual shareholder's meeting might also have played a role, given that the company has come under increasing pressure to split the chairman and CEO positions.

Epstein, who early in his career was head of Novartis sales in the US, has done a brilliant job as head of oncology, a former NVS exec said. It is the only therapeutic area with its own fully-freestanding business unit within the company.

Novartis sales rose 11 percent in local currencies to $44.3 billion (7 percent in dollars) year on year, bolstered by sales of more than 100 million doses of influenza A (H1N1) pandemic vaccine. But this was a one-time boost that is unlikely to repeat itself in 2010, Vasella warned.

Also on the call CFO Breu provided some insight into financing of the Alcon deal through a mix of cash and short and long-term debt for the 52 percent stake worth $28 billion, and equity through newly issued shares for the minority stake. The company expects to use its strong free cash flow to pay down all of the debt within four years, allowing some flexibility if opportunities present themselves, Breu said.

-Wendy Diller (w.diller@elsevier.com)

Novartis Splits Chair and CEO Positions, Names Joe Jimenez CEO

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