COVER STORY
YARE HE GOES Serono's nimble CEO will need to navigate his company through biotech's shoals. BUSINESS
SERONO SETS SAIL CEO Ernesto Bertarelli is confident the Swiss biotechnology firm is well-positioned for international industry leadership MADELEINE JACOBS, C&EN WASHINGTON
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ERONO'S C H I E F E X E C U T I V E O F F I C E R E R N E S T O
Bertarelli is racing close hauled, trimming his com pany's sails to move it skillfully forward in the high ly 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 might ily, many promising drugs have failed in clinical trials or been re 22
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jected by the U.S. Food & Drug Adminis tration, and some companies have been absorbed by larger drug firms. 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 mil lion. Based on revenues, the company is the number one biotechnologyfirmin Eu rope; 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 multi ple sclerosis drug Rebif ( β-interferon) for sale in the U.S.; it is already the leading MS HTTP://PUBS.ACS.ORG/CEN
treatment outside t h e 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 C E O 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 ofa 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 gonadotropin— came under t h e 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-today operations. N o t 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 t h a t was valuable t o t h e 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 inJanuary 1996, the company has doubled its revenues, in-
SER0N0 AT A GLANCE Headquarters. Geneva, Switzerland Sales: $1.3 billion9 R&D expenditures: $309 million Net income: $317 million Employees: 4,600 Major products: Gonal-F (follitropin alfa) for infertility ($410 million); Rebif (interferon-beta 1a) for relapsing remitting multiple sclerosis ($380 million); Serostim and Saizen (somatropin) for treatment of HIV-associated wasting and growth retardation, respectively ($233 million total). 82% of all products are made by recombinant technology. Website: http://www.serono.com a Financial data are for 2001.
D I S T I N C T I V E Fumero touts the quality of Serono's drug pipeline.
creased 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-surVevey on Lake Geneva, and, in 1998, it acquired the Geneva Biomedical Research Institute from Glaxo ^vvellcome, 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 Amajor 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
The Serono spirit is the culture of the possible, the urgency to grow, and recognition that our most important element is people/' HTTP://PUBS.ACS.ORG/CEN
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COVER STORY RESEARCH
Serono Researchers Expect The Unexpected
F
rom the time Serono was founded in 1906, research has played a crucial role in its growth. Research, of course, is an absolutely essential ingredient in the success of pharmaceutical and biotechnology companies. But everyone at Serono agrees that a critical turning point for research and the future of the company occurred on Oct. 1,1997. That's the day that Glaxo Wellcome announced its intention to close the Geneva Biomedical Research Institute. Ph.D. chemists Timothy Wells and Eric Kawashima were Glaxo Wellcome employees back then. It was not a happy time. "GBRI was built to bring Glaxo into the molecular biology era," says Kawashima, now assistant head of discovery at Serono. "Then Glaxo fired almost everyone. We were all very depressed." Serono Chief Executive Officer Ernesto Bertarelli read about the closure on a plane en route to a business meeting. Six weeks later, he bought virtually the entire operation—130 people and the facility. "We reset our attitude and said, 'Let's do this for Serono,'" Kawashima says. "This" was establishing a counterpart to Serono's Reproductive Biology Research Institute, which is based in Boston and focuses on reproductive biology and endocrinology. The counterpart would be an institute aimed at discovering new therapeutic solutions in immunological, autoimmune, and neurological diseases and developing them as far as the preclinical phase. The vision for what became the Serono Pharmaceutical Research Institute was provided by Silvano Fumero, Serono's head of research and pharmaceutical development, and Wells, now vice president of research and head of discovery. Fumero notes that Serono has moved in the past two decades from a company whose products came primarily from extraction of biological fluids to one whose products result from understanding the human genome. "Our mission is to understand our molecules and the pathway from the gene Wells to the disease," he explains. This involves eight steps, all of which are carried out at Serono or in collaborations with universities, research institutes, and other companies: mining the genome for novel secreted proteins, using selective gene-splicing technology, applying protein conformation remodeling technology, creating computational lead prediction technology, synthesizing rationally designed small mole-
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 thefirstdrug to gain such approval in the 19-year history ofODA The U.S. is the key battleground for MS, where four drugs compete in a market
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cules, developing genetically engineered pharmacological models, using expression technologies and multiple processing, and designing drug-release formulation technologies. "In 1998, everything began taking off," Wells says. "Serono had one major therapeutic area: infertility." It did not have a particularly strong drug pipeline, but it had a lot of enthusiasm. "We had to deliver molecules that were active in year two of the research program. In a big company, you focus on barriers, what will stop you. But at Serono, we have a culture of trying to make everything happen. "At SPRI," Wells adds, "we attract the best scientists because we create an atmosphere that allows them to excel. We have an open, informal management style that emphasizes teamwork. We look for the right balance between encouraging individual initiative and achieving our common goals as one of the world's leading biotechnology companies. These goals inKawashima clude discovering novel targets in key diseases and finding proteins and small molecules as therapeutic agents that will act on these targets." SPRI has 170 people and as many as 30 visiting students and scientists who work in five major divisions. Wells describes the departments: "The molecular biology department uses genomic technologies to discover new therapeutic proteins and to identify new drug targets. DNA sequencing, differential gene expression, proteomics, and functional genomics are combined to decipher the function of new genes in health and disease. The cellular biochemistry department focuses on identifying the key points that control disease mechanisms and their targeting by proteins, peptides, and low-molecular-weight compounds to modify disease progression. "The biotechnology department," Wells continues, "provides a state-of-the-art drug discovery platform with high-throughout screening for the discovery of biologically active small molecules." Dennis Church, trained as a chemist and biochemical pharmacologist, has developed novel small molecule substructure searching algorithms that are based on the concept that pharmacological action is dictated by chemical determinants that are contained in the 2-D structures of molecules. Using these methods, his team has mapped the chemical determinants associated with over 800 biological outcomes. It uses the information
worth $1.3 billion, half ofworldwide 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 ef-
ficacy 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^brk Stock HTTP://PUBS.ACS.ORG/CEN
to design compound libraries for screening against selected drug targets using different robotic systems, thereby delivering the first starting points for the drug discovery process. "The experimental biology and pharmacology department focuses on understanding fundamental mechanisms underlying healthy immune responses and immunopathologies," Wells says. "This knowledge is then applied to areas of strategic interest for Serono in order to validate novel targets and test hypotheses leading to the generation of new therapeutics." Chemistry is the fifth department. "'Chemistry creates its object,'" Wells says, quoting the 19th-century French chemist Marcellin Berthelot. "We harness the creative power of chemistry for design and synthesis of Objects' in order to find new drugs." Immediately after Serono took over the institute, Wells realized that Serono was lacking in the small-molecule side of the drug discovery process and that it was very important to have biology and chemistry in one place. Chemists have a different world, a different way of understanding, he believes. Biologists understand the disease function, and chemists make the target molecules that can interact in the disease process. "So we built a chemistry department in Geneva from scratch," he says. Serge Halazy, who is now worldwide head of chemistry at Serono, was the first hire in the chemistry area; he now has 59 chemists reporting to him (43 in Geneva, 16 in Boston). He has worked at Marion Merrell Dow and the Centre de Recherche Pierre Fabre in France. "Building a department is fantastic—you choose excited, enthusiastic people who are problem solvers," Halazy says. In his group, chemists work on projects from start to finish: taking a hit—a molecule active against a protein involved in a disease process—and modifying it until it is a lead, that is, a molecule active in an in vivo model with acceptable toxicity and potency. In parallel with this process, they look at the druglike profiles of the molecule—solubility, stability, and so forth. The goal is to optimize the lead to get it into preclinical trials. "The price you pay is that each chemist will need to learn new technologies and new speHalazy cialties all the time," he says, "but we've been able to do that." Halazy's group works on molecules for each of Serono's major therapeutic areas with strong support from "design technologies" experts including protein crystallographers, computational chemists, and cheminformaticians. Work in one relatively new area for Serono, neurodegenerative diseases, takes place in the team headed by Claudio Soto. His re-
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. HTTP://PUBS.ACS.ORG/CEN
searchers are studying the process of protein folding and how to prevent the formation of amyloid plaques found in such neurodegenerative diseases as Alzheimer's and new-variant CreutzfeldtJakob disease, the human equivalent of bovine spongiform encephalopathy ("mad cow" disease). Soto points out that plaque formation is also important in 90% of type 2 diabetes patients, who have amyloid plaques in their pancreas. Mad cow disease is caused by prions, a modified form of a normal protein. In prion-caused diseases, the normal protein adopts an abnormal shape known as the beta sheet. Serono's researchers developed an engineered peptide called a "beta-sheet breaker" that reverses the process, causing the prion to revert to a normal shape that is no longer infectious. The ultimate goal is to get a drug into Phase I trials with human volunteers in the near future. Soto's group also made another breakthrough in detecting prions. Using cyclic amplification (C&EN, June 18, 2001, page 9), Soto's team developed a simple technique for convertSoto ing the normal form of prion protein into the abnormal form. The technique is called protein-misfolding cyclic amplification and is like a polymerase chain reaction for prions. PMCA could result in the possibility of more sensitive diagnostic tests. In its traditional area of reproductive health, Serono scientists also discovered a small-molecule antagonist of the oxytocin receptor that is being tested for the prevention of premature childbirth. Oxytocin is a hormone that triggers labor contractions leading to delivery of the baby; in about 10% of all pregnancies—more than 600,000 cases in Europe and the U.S. every year—the hormone is secreted too early in the pregnancy. Currently, there is no effective treatment to counter the effects. Serono's lead compound, which was optimized in the chemistry department, is in the preclinical phase and is expected to enter Phase I trials in 2003. Other research at Serono takes place at facilities in Ivrea and Ardea, Italy (preclinical research and regulatory safety studies as well as formulation and analytical development), and in Corsiersur-Vevey, Switzerland (biotech process development). "In R&D," Fumero concludes, "we have discovered that small, interdisciplinary teams are the best way to make real breakthroughs. These teams share insights, challenge individual assumptions, and pursue the unexpected. The result is a working environment that fosters creativity, the source of our success and the engine of our future."
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 theriskof 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 C&EN
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COVER STORY 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 ZymoGenetics. 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. iCWeve 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. \ftfe'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, 26
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WHERE THE SALES ARE Traditional area of reproductive health is strong...
... and Europe and North America are major markets
Reproductive health
46%
Rest of world 7% Neurology 30%
Other 5%
Asia& Oceania 8% Latin America 11%
Growth & metabolism 19%
Europe 43%
North America 31%
2001 sales = $1.3 billion SOURCE: Serono
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 2 0 0 3 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." 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 pri-
ority 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 Were 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." • HTTP://PUBS. ACS.ORG/CEN
