Big Pharma's new prestige king
A mega-merger that worked. R&D that's paying off. While rivals like Merck and Pfizer suffer, Novartis has confounded drugmaking odds.

(FORTUNE Magazine) – Drug executives won't soon forget the snakebit parade that started last fall when once-mighty Merck yanked its painkiller Vioxx off the market. Then the Food and Drug Administration rejected AstraZeneca's vaunted new blood thinner, Exanta. Soon after, Chiron's flu-vaccine business blew up due to contamination at the company's British plant. This spring Biogen Idec and Elan saw their multiple-sclerosis drug Tysabri linked to a potentially fatal brain disease. Pfizer, the world's No. 1 drugmaker, reiterated a warning that expiring patents would hurt sales and also withdrew its Vioxx-like painkiller Bextra from the market.

Amid the general gloom, the brightest ray of light has been Novartis. The Swiss firm has emerged as the leading contender for the crown Merck once wore as the industry's most prestigious company. Though it is pharma's fourth-largest player in revenues, Novartis has led the industry in FDA approvals of novel medicines over the past five years. It boasts one of the industry's strongest pipelines, with some 75 drugs in clinical trials. And in 2001 it launched the most effective cancer drug ever: Gleevec, the first fruit of research on an exciting new class of drugs called kinase inhibitors.

"Novartis has blown past Pfizer, Merck, and GlaxoSmithKline" to become pharma's momentum leader, says Michael Muyot, president of Tracer Analytics, a New York City life-science consultant. (The firm measures momentum by tracking sales growth, breadth of product line, and other factors.) "It's firing on all eight cylinders."

It could still throw a piston, of course. As Merck's debacle with Vioxx has shown, embracing innovation means added risk. In fact, Novartis has been swept up in the controversy over the class of novel painkillers that includes Vioxx--it is developing a member of the class, Prexige, whose cardiac safety is also now in doubt.

Yet Novartis has made striking progress toward solving the industry's root problem: declining returns from the $39 billion a year its players collectively spend on R&D. And its emphasis on developing truly novel medicines for unmet needs is precisely what made Merck great.

The creed comes from the top: CEO Daniel Vasella, an MD, maintains a doctor's perspective on what matters in medicine. He has backed bold bets on life- saving drugs like Gleevec, which should have been a nonstarter according to the conventional wisdom--it was developed to treat a form of leukemia that strikes fewer than 7,000 people a year in the U.S., a laughably small market by Big Pharma standards. He also engineered a rare phenomenon: a merger that worked. (Ciba-Geigy and Sandoz combined in 1996 to form Novartis.) A former Sandoz executive, Vasella minimized post-merger turf wars by integrating the companies' operations so fast that would-be combatants had no time to dig in. "From day 15 or 20 after the merger, everyone understood what the new culture was going to be and who was in charge of what," says Jörg Reinhardt, head of pharmaceutical development.

Vasella has repeatedly updated Novartis's business mix to boost growth and avoid pitfalls. In 1999 the company spun off its agribusiness unit, distancing itself from the consumer backlash against bioengineered crops. Recently it agreed to buy two major generic-drug makers for $8.3 billion, positioning itself to capitalize on rising demand for relatively cheap, off-patent medicine. Vasella and company even tinker with success: They retooled Novartis's drug-discovery operation by moving the company's main lab from Europe to Cambridge, Mass. The two-year-old Novartis Institutes for Biomedical Research, based in a spectacularly renovated Cambridge candy factory, is bustling with hundreds of new hires and seems more like a huge, freewheeling biotech than a Big Pharma bastion--that's the point, of course.

So much for the ideas that the Swiss are insular conservatives, that medicines for narrow groups of patients can't become blockbusters, and that biggest is always strongest in the drug industry. If Novartis's recent history is any indication, another knee-jerk notion is also on the way out: that pharma has lost its creative touch.