F. Hoffmann-La Roche & Company A.G.

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F. Hoffmann-La Roche & Company A.G.

Grenzarcherstr 122
Basle, Baslestadt
Switzerland 4058
62 292

Public Company
Incorporated: 1919
Employees: 45,477
Sales: SFrl4.549 billion (US$8.94 billion)
Market Value: SFrl5.186 billion (US$9.331 billion)
Stock Index: Basle Zurich Geneva

At the beginning of this century Fritz Hoffmann-La Roche, the son of a wealthy Basle silk merchant, joined a local pharmaceutical company. Originally his family had hoped that he would become a scientist, but when he showed no interest in such a career they decided he should enter the business world. When his father bought a partnership in the company, the younger Hoffmann found himself promoted to a senior management position.

Although the weight of family wealth did him no harm, Fritz Hoffmann was a talented enterpreneur who soon proved a success in his own rightand ahead of his time. He was committed to standardized packaging, equally committed to maintaining product quality. He recognized the importance of forming ties between the pharmaceutical industry and the community of academic scientists. To this day Hoffmann-La Roche remains firmly committed to research. Company research is very generously funded, and various of the companys facilities around the world offer scientists a freedom in experimentation usually associated only with university laboratories.

Despite such well-intentioned policies, the young company experienced hardship in its early years; after only a few years in business, Hoffmann faced bankruptcy. Disregarding his fathers dying wish that he abandon the pharmaceutical business, Fritz arranged for recapitalization (mainly from his own family) and started again. This time the company enjoyed almost immediate success. Dr. Emil Barell, a young employee, developed several successful drugs: Thiocal, a cough medicine, and Digalen, an extract from the digitalis plant used in the treatment of heart disease; both products are still available today. Other products included Pantopon, a pain killer, and Sirolin, a cough syrup.

By the eve of World War I Hoffmanns products could be found on four continents. It was at this point that Hoffmanns wifes maiden name, Roche (Swiss custom combines both the husband and wifes surnames), appeared on several products. To standardize the marketing of products, the company adopted that name as its world trademark. The future looked promising. Yet World War I created a number of complications that threatened all the success of the recent past.

The companys new factory in Germany, at Grenzach, produced a major share of Roche Pharmaceuticals. But the Germans boycotted the company because they suspected it was supplying France; meanwhile, French doctors accused the company of being pro-German. In Britain, Roche products were blacklisted when the rumor spread that the company was producing poison gas for the German Army. Most devastating of all, the company lost more than a million francs in uncollected receivables in Russia during the Revolution.

This series of disasters forced the company to go public. Of the four million francs of paid-in capital used to reorganize the company, three million was supplied by Fritz Hoffmann; the remainder came from his brother-in-law, two associates, and Dr. Barell. The following year, 1920, the company asked shareholders to double their subscriptions. That marked the last time that Hoffmann-La Roche has resorted to the capital market; since then the company has relied solely on the strength of its profits for its funding. As late as 1971, heirs of the original shareholders continued to hold more than half of the voting shares and non-voting shares. Today, Hoffmann-La Roche remains a public company, but the combined family interests effectively control the company. Because of the scarcity of voting shares in the marketplace, and because of the very sound financial position of the company (there is virtually no long-term debt), Hoffmann-La Roche shares command a premium.

The year 1920 also marked the death of Fritz Hoffmann. Barell assumed the role of president and ushered in a new era of growth and expansion. Then a tragedy in the Hoffmann family changed the course of control in the company. Emanuel, Fritz eldest son, died in a car accident. In the late 1930s his widow married Paul Sacher, founder and conductor of the Basle Chamber Orchestra. Sacher is now responsible for voting 49% of the shares, which include the interests of his wife, his stepson Lukas Hoffmann (executive vice-president of the World Wildlife Fund), and his stepson-in-law, Jakob Oeri, a Basle surgeon. All three men sit on the board of directors.

At the same time that Barell became president of the company, the American Elmer H. Bobst became general manager of its U.S. subsidiary. The American branch had been established in 1905, and Bobst had initially joined the company as a sales representative. Bobsts advancement was rapid, and his regime a resounding success: under his leadership the company introduced Allonal, a pain reliever, which became the companys first million dollar product.

In the years preceding World War II the companys strategy shifted; it gradually moved from extracting medicines from natural sources to synthesizing them, and its most important breakthrough came in the large-scale production of synthetic bulk vitamins. Barell obtained a process for synthesizing vitamin C as early as 1933. Later successes included vitamins A and E. Today, Roches plant in New Jersey is the worlds largest producer of vitamin C. In 1971 the company enjoyed between 50 and 70% of the world market for vitamins, and production continues to grow.

As World War II approached, Roches American subsidiary assumed greater importance. In 1928, Nutley, New Jersey had become the site of the companys American headquarters; when war and possible Nazi invasion of Switzerland threatened, the company prepared to expand the Nutley site. Company interests were also transferred to a Canadian holding company called Sapac. This arrangement, originally meant to protect the company from the effects of war, remains in existence today. Thus, todays shareholder actually owns an interest in two companies Hoffmann-La Roche and Sapac. Though American operations in Nutley remain under the administration of Sapac, its vast production and research operations now make it virtually an independent company.

Not only were assets transferred in the early 1940s; Emil Barell himself moved to Nutley until the end of the war. Differences in their personalities and their approaches to business caused Bobst and Barell to disagree constantly, and in 1944 Bobst resigned. He went on to assume control of the struggling Warner-Lambert Company and directed one of the most impressive comebacks in the pharmaceutical industry.

When Bobst left the company, Barell hired Lawrence Barney to be president of the American branch. Recruited from the prestigious Wisconsin Alumni Research Foundation, he remained at Roche for the next 20 years. Emil Barell died in 1953 at the age of 79. His successor, Albert Caflisch, served until 1965. Yet the years between 1945 and 1965 were important to the company not only in terms of new executive personalities but also because of its innovations in research and development.

For this was the period during which Hoffmann-La Roche released its line of benzodiazepines, destined to be phenomenally successful. Many years of research, under the direction of the scientist Leo Sternbach, led to the development of drugs that are now household words, Valium and Librium.

Librium was introduced in 1960. This new tranquilizer was revolutionary in its ability to relieve tension without simultaneously causing apathy. Before long, the company was barely able to keep up with demand; it now held the patent to the one of the best-selling prescription drugs in the world the best-selling drug in the United States. In 1963 Hoffmann-La Roche introduced Valium to the market, and by 1969 it exceeded Librium in popularity. Never before had a pharmaceutical company introduced two significant market successes in so short a time. By 1971 some 500 million patients, generating an estimated $2 billion in sales, had used one or the other of the drugs. With several years to go before patents expired, the two drugs continued to break sales records.

The companys success in developing benzodiazepine tranquilizers, however, was no protection from the vicissitudes inherent in the daily operations of a large multinational company. Hoffmann-La Roches pricing policy came under attack when the British Monopolies Commission discovered that Roche Products Ltd., the U.K. subsidiary of Hoffmann-La Roche, was paying the parent company the sums of $925 a kilo for Librium and $2,300 a kilo for Valium. In Italy, a country in which there are no drug patents, the costs per kilo were $22.50 and $50 respectively. Based on these findings, the Monopolies Commission ordered the company to reduce its prices in the U.K. 50 to 60% and to repay excess profit estimated at $30 million.

In response, the company petitioned the House of Lords to overturn the government order. Adolf Jann, head of Hoffmann-La Roche since Caflischs death in 1965, vigorously defended the companys pricing policies. Formerly known for its unwillingness to disclose financial information, the company now put its financial cards on the table, running full-page newspaper advertisements defending its prices on the basis of its traditionally high costs for research and development. Information about company sales and profits were made public for the first time (in 1973 $500 million of the $1.2 billion volume at Hoffmann-La Roche was attributable to the sale of Valium and Librium).

Among consumers increasingly alarmed about the escalating costs of drugs, the companys arguments were generally ignored, and Germany, the Netherlands, Australia, Sweden, and South Africa began investigations of their own.

By 1980, after years of litigation, Hoffmann-La Roche had emerged from the controversy virtually unscathed, having agreed to adhere thereafter to a system of voluntary price restraints.

The tumultuous price wars of the 1970s were not the only source of difficulties for the company. In 1976 a poison cloud of TCDD, a dioxin found in Agent Orange, escaped from Icmesa, an Italian chemical factory owned by Hoffmann-La Roche. TCDD is an unwanted byproduct of trichloropenol, a drug produced by Icmesa. Although the cause of the poison cloud remains speculative, experts believe that on the day of the accident the temperature in the reactor was accidentally allowed to rise to 300 degrees centigrade, 125 degrees more than the safe temperature for production.

Nearly 80,000 domestic fowl and half the pigs in the area died as a result of the accident. Six days after the blast the first case of chloracne, a human skin disease caused by TCDD, was reported. The company alerted the authorities by supplying a map of the area that they believed to be contaminated and advising that the area should be evacuated. The Italian government, with the full assistance of the company, initiated investigative procedures and decided to evacuate 267 acres on which some 700 people lived. An additional 5,000 people, living in the periphery of the area, were instructed in preventive measures. Despite these precautions, there were finally 136 confirmed cases of chloracne. Hoffmann-La Roche paid more than $17 million in 1978 to cover the costs of decontamination and the relocation and settlement of displaced people; in 1980, the company paid Italian authorities a further $114 million in compensation.

Recent developments at Hoffmann-La Roche have involved a joint venture with Glaxo, the British pharmaceutical company, to market Zantac, an anti-ulcer drug. Using 750 Hoffmann-La Roche salesmen, the two companies have challenged SmithKlines popular drug Tagamet, and their aggressive marketing strategies have caused Zantac to capture 25% of the market in just over six months. Hoffmann-La Roche has also been at the forefront of genetic engineering, particularly in its production of interferons. Roferon-A, released on the market in June of 1986, is marketed as a treatment for rare forms of cancer.

As the company enters the 1990s, Hoffmann-La Roches most immediate problem must be the expiration of its patents for Valium and Librium. The first of these patents expired in the mid-1970s; the last major onethe American patent of Valiumexpired in early 1985. With generic substitutes now on the market, the companys sales have begun to fall. In the short term, then, because there has been no compensation in the form of major new drugs, Hoffmann-La Roche seems destined for retrenchment. Yet Hoffmann-La Roche can be expected to retain its eminence in both marketing and research, insuring that that it will maximize its sales effort on its existing product line at the same time as it strives to develop new products, insuring, too, that it will remain one of the pre-eminent pharmaceutical companies in the world.

Principal Subsidiaries

F. Hoffmann-La Roche & Co. Ltd. Co.; Roche AG; Teranol AG; Lauduna AG; Biological and Medical Research Institute Ltd., Laboratoires Sauter S.A.; Givaudan S.A.; Givaudan Dubendorf A.G.; Givaudan Research Co. Ltd.; Kontron Holding AG; Kontron Electronic AG; Tegimenta AG; W + W Electronic AG; Dr. R. Maag AG; Socar AG. Hoffmann-La Roche also has subsidiaries in the following countries: Argentina, Austrialia, Austria, Belgium, Bolivia, Canada, Chile, Colombia, Costa Rica, Denmark, Dominican Republic, Ecuador, Egypt, Finland, France, Germany, Great Britain, Greece, Guatemala, Hong Kong, India, Indonesia, Iran, Ireland, Italy, Japan, Malaysia, Mexico, Morocco, The Netherlands, New Zealand, Nigeria, Norway, Pakistan, Panama, Peru, Philippines, Portugal, Puerto Rico, Singapore, South Africa, South Korea, Sweden, Taiwan, Thailand, Turkey, Uruguay, United States and Venezuela.