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Novartis: Leading a Global Enterprise
How do you follow a legacy CEO? This is the hardest thing you could possibly encounter. Dan [Vasella] shaped the company, the portfolio, and the future of the company.
— Joe Jimenez, CEO
As the 2,688 attendees at the February 22, 2013 Novartis annual general meeting (AGM) filed out of the large assembly hall, 53-year-old Novartis CEO Joe Jimenez realized that the retirement of Daniel Vasella, MD as chair of the Novartis board meant the ball was entirely in his court. Since its formation 17 years earlier with the merger of Sandoz and Ciba-Geigy in 1996, Novartis had been led by Vasella, either as CEO, board chair or both. At the meeting vice chair Ulrich Lehner was elected interim chair to serve until August, 2013, when Joerg Reinhardt, former chief operating officer of Novartis and currently head of Bayer Healthcare, would return as chair of the Novartis board.
Vasella was elected honorary chair at the meeting, but would only attend board meetings as a guest and coach senior company executives without any other involvement. “I left the company with a good successor, a rich pipeline, a solid financial footing and a good top team,” Vasella said after the meeting. From its Basel, Switzerland headquarters Novartis leadership orchestrated 127,000 employees of 153 nationalities in 140 countries. With $56.7 billion in 2012 revenues and $9.6 billion in net income, Novartis ranked as one of the world’s largest and most profitable companies. (See Exhibits 1 for basic financials, 2 for milestones, and 3 for divestments and acquisitions.)
Jimenez, who succeeded Vasella as CEO in 2010, recognized that rapid changes in the global health care environment would create severe challenges for Novartis in the years ahead. “My greatest worry is taking a company that has been successful for a decade and a half and positioning it in today’s external environment,” he said. Among those challenges were changes in national health care systems, like the Affordable Care Act in the US, putting downward pressure on prices and changing the way companies got paid for their products from prices per pill to paying for patient outcomes, which no one had figured out how to measure precisely.
Jimenez was clear about his mandate as CEO: “My mission is turning us from a pharmaceutical company into a global healthcare company.” The pharmaceutical business provided 57% of sales and 66% of operating income, and dominated the culture. A survey of global executives conducted by
Professors William W. George and Krishna G. Palepu and Executive Director Carin-Isabel Knoop (Case Research & Writing Group) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Professor George served on the board of Novartis from February 1999 through February 2009, and also led Novartis leadership seminars in 2010-11. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2013, 2014 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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413-096 Novartis: Leading a Global Enterprise
Fortune Magazine ranked Novartis as the world’s most admired pharmaceutical company for the third consecutive year. It was best known for anti-hypertensive Diovan and its leukemia treatment Gleevec. “With financially troubled healthcare systems around the world, offering only innovative specialty pharmaceuticals would put us in a risk profile where we don’t want to be,” Jimenez said.
Reflecting on the company’s five other divisions—generic drugs, eye care products, over-the- counter medications (OTC), animal health, and vaccines and diagnostics—Jimenez worried that none of them alone was large enough to offset pressures on the pharmaceutical business (see Exhibit 4). Jimenez also was concerned that several of the company’s smaller units lacked the scale to operate as separate global units. He believed strongly in the global division structure with different business models, but was not comfortable with the infrastructure cost of duplicate functions. “If we could standardize our processes, we could free up resources to drop to the bottom line or reinvest in the business. Yet I fear taking away the autonomy of division management and in-country leadership. We’ve had knock-down, drag-out fights about this and still don’t have it resolved.”
In spite of its size and scope, the company had a long way to go to serve a high proportion of the world’s population, especially in rapidly growing developing countries like Brazil, China, India, and Russia. “We are working on developing global leaders from the fast-growing markets because that’s our biggest deficit,” Jimenez observed. “You look around our executive committee and there’s not one person from Brazil, China, or Russia. It’s not because we don’t look for them; it’s because we haven’t been able to develop them.”
Back in his office, Jimenez asked his assistant to put all these issues on the agenda for the next executive committee meeting to discuss with his top team.
The Birth of Novartis Born on December 23, 1996 from the merger of Sandoz and Ciba-Geigy, Novartis instantly became
one of the world’s leading life sciences companies. Former Ciba-Geigy chair Alex Krauer was elected to chair the new Novartis board. Krauer felt the two organizations were “perfectly matched in terms of professional skills, financial strengths and innovative capabilities to form a new company with tremendous growth potential.”1 The merger gave the two companies benefits of scale and extended their geographical reach. Recalled general counsel Urs Barlocher, “The old Swiss companies were export-oriented and went to countries with market potential, but were certainly not global.”
Daniel Vasella, a 42-year-old physician who has been head of Sandoz’s pharmaceutical business, was named CEO. After graduating with high honors from University of Bern, where he studied medicine and psychoanalysis in Zürich, Vasella practiced as an internist and specialist in psychosomatic medicine in teaching hospitals in Switzerland until 1988. He then accepted Sandoz’s offer in U.S. sales. Switching from medicine to business, he said, gave him the opportunity to do work that could benefit “not one but thousands” of people.2 He rose rapidly in Sandoz’s marketing organization in both the U.S. and Switzerland, becoming CEO of Sandoz pharmaceuticals in 1995. When Krauer retired in 1999, Vasella was also elected board chair, giving him the dual mandate.
Novartis was organized into three main businesses: health care (59% of sales), agribusiness (28%), and nutrition (13%), with the world’s largest agribusiness company, second largest pharmaceutical company (4.4% of global drug market), and Europe’s largest health food producer.3 The chemicals business was spun-off after the merger as Ciba Specialty Chemicals. In pharmaceuticals, Novartis held leading positions in several therapeutic areas, including immunology and inflammatory diseases, and strong positions in central nervous system disorders, cardiovascular, endocrine and metabolic diseases, oncology, dermatology and asthma.4
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Sandoz’s negotiating team for the merger consisted of Vasella, head of Sandoz’s pharmaceutical business, CFO Raymond Breu, General Counsel Urs Barlocher and Alex Jetzer, CEO of Sandoz. “The merger process itself went relatively smoothly, but the cultural differences between the two companies were surprising,” Barlocher observed. “At first I thought the talk about it was a bit ridiculous, but later I realized there were huge differences.” Breu observed, “Sandoz had a command and control culture, led by CEO Marc Moret. Ciba’s culture was one of constant debate, but implementation discipline wasn’t there.”
Former McKinsey Director Henri Vanni, who joined the Novartis board in 2011, recalled, “Ciba and Sandoz were two mid-tier pharmaceutical companies that were losing ground to the American players who were moving much faster in globalizing industry. The two companies had very different management approaches: Ciba had a more Swiss culture, with centralized research and large corporate functions, with thorough but slow decision-making. Sandoz had a more international culture, with a more agile organization and greater business decentralization, including research, and with quick top down decision making.” Vanni noted, “Vasella’s leadership was central to the new firm. He has a passion for the American way of doing business—moving rapidly to get results with a top-down style, very much aspiration-driven. Ciba’s style featured more extensive discussion, evaluating all possibilities, somehow slowing down decisions. Dan’s ability to have fast but thorough analytical discussions is pretty unique. He follows the reasoning, understanding fast scientific and business issues, before deciding the right thing to do.”
Creating a New Culture
Vasella wanted to create a dynamic global company that would be highly competitive around the world, far exceeding what Sandoz and Ciba had been. To him, that meant a results-oriented company with high aspirations and very clear values. He noted, “Novartis should have a worldwide reputation for successfully launching breakthrough products; be a company feared and respected by competition, where the best people want to work and inspire each other with a sense of pride; and be our customer’s reference for quality of products and services. Novartis should be one of the fastest- growing, most profitable companies in each business we are in.”5
The early years focused on building the global organization Novartis needed to realize these goals. Recognizing cultural differences between the companies, Vasella decided Novartis needed a new culture built on the strengths of each. He knew building Novartis into a global structure required creating a meritocracy providing advancement opportunities for talented people regardless of national origin. “To create a new culture, Dan hired many talented people from outside,” said Juergen Brokatzky-Geiger, human resources head. “In the early days 80% of openings in top positions went to people from other companies. Today 80% of our executives come from within.”
To put a closed-loop performance management system in place, Vasella and his team installed new controls and reporting. Some employees interpreted that to mean Vasella did not trust them. “When you deliver results, you get rewarded with greater autonomy,” he explained. “Big words aren’t credible, only results. This was a difficult transition for some people. It took more time than I anticipated turning around the attitudes in both companies.” The company spent two years bringing together its far-flung operations, while delivering promised cost savings from the merger of $1.4 billion over three years by cutting 12,000 jobs but leaving research and development spending intact. This resulted in one-time restructuring charges of $2.5 billion offset by extraordinary after-tax gains from divestitures of $1 billion. At the time Vasella said that more acquisitions were likely but “we are going to stick with the industrial portfolio we have—and not diversify.”
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413-096 Novartis: Leading a Global Enterprise
Vasella, who was always thinking ahead, had a reputation for challenging his staff. He could also be critical and demanding. Barlocher noted that Vasella had made a few key hiring mistakes and could be unforgiving of people who crossed or disappointed him. “You can argue with Daniel, but you need a good relationship, good arguments, and past successes. Sandoz was always ruled by dictators. Moret was used to dominating, and Daniel is also very dominant.”
Helmut Sihler, former vice chairman and lead director at Novartis from 1996 to 2006, said, “As I saw Vasella with the board, I was impressed with his ability, his intelligence, and his diplomacy. You could reach him, unlike many CEOs who have a wall outside of their egos that you cannot get through. Dan had all the prerequisites to be a global leader.” Added Vanni, “Dan created a culture of open debate, where everybody participated. He isn’t afraid to put a question on the table and say, ‘I’m not prepared yet to finalize a decision, but here’s what I think. What is your opinion?’”
In 1996, Vasella engaged Harvard Business School (HBS) to help him achieve a new company culture by bringing top executives to programs created by HBS faculty. “We needed to become one company,” he explained, “that was more Anglo-Saxon because that business model is much more successful. Our benchmarks were American companies.” He continued: “One way to bridge differences is learning new things together in teams and taking people out of their normal comfort zone. We wanted to get them out of their offices and into the classroom. We had programs at HBS, Basel or Bürgenstock, Switzerland, Shanghai and Mumbai—the latter two were emerging centers many executives had never visited.”
The spirit of innovation and development of new business models were top priorities, along with financial discipline and ensuring the organization delivered what it promised. “Within a year we implemented the finance system and monthly performance against targets,” Breu explained. “Ciba didn’t even have comprehensive monthly reporting. Once your systems are in place, the organization adapts to the discipline. Within three years the performance-based culture fully took hold.”