Roche Holdings, AG is a Basel, Switzerland-based global healthcare company. In 2014, Roche sales were CHF 49.9Bn (approximately $50.7Bn) and, at 25% of global production, the firm was the largest manufacturer in the biotech sector . Morgan Stanley Industry analysts predict Roche to experience a growth in EBITDA to a “best in class” 40% by 2018 . Roche’s success is due in large part to the alignment of its business model with its operating model; a feat made all the more challenging by Roche’s global network of subsidiaries and collaborators.
In its 2014 Annual report, Roche states that its business model seeks “to make a significant difference to patients, reaching as many people in need as possible whilst continuously reinvesting in innovation to develop diagnostic tests and breakthrough treatments” . After strategically divesting its applied sciences business in 2013, Roche has focused on creating and capturing value through the research, development, and production of pharmaceutical and medical diagnostic products worldwide. This involves not only developing innovative products that meet previously unmet medical needs, but producing and selling those drugs at low-cost as well. The business model’s focus on lowering cost is driven by factors that include increased scrutiny of healthcare costs by payer networks and the increased prevalence of generic and biosimilar pharmaceuticals.
In 2007, Roche re-organized its global pharmaceutical operations into geographically concentrated Disease Biology Areas (DBA) . This re-organization of the operating model co-located all Research and Development (R&D) and manufacturing personnel for a given DBA into singular geographic regions. The DBAs are responsible for managing compounds from drug discovery, through medical proof-of-concept, and to market . This operating model drives both collaborative innovation and drives down costs by both reducing overlap in R&D roles and by creating synergies between Roche’s manufacturing and research functions. The R&D and manufacturing/supply-chain elements of Roche’s operating model also individually complement the firm’s business model.
Roche’s operating model is more R&D-focused than those of its competitors. The firm spends over the industry average in R&D in a manner that is assessed to have a “higher focus (oncology, immunology, [Central Nervous System] and better prioritization (gated approach, faster development).” Additionally, analysts assess that “with more resources shifting to new and strategic products, [analysts] think that Roche can better absorb the ongoing increase of R&D costs” . Roche states in its 2014 annual report that it plans to spend CHF 3Bn over the course of ten years to build improved research facilities and open, modular office spaces at its Basel headquarters . Roche announced plans to divest itself of four underutilized global manufacturing facilities in order to commit CHF 300Mn into a facility dedicated to small molecule research in Kaiseraugst, Switzerland . While small molecules remain a core segment of Roche’s business, its R&D apparatus is heavily committed to the development of biologics (see image for differences in size and complexity between biologics and small molecules). This effort is apparent in Roche’s 1990 acquisition of a majority interest and 2008 purchase (for $49.5 Bn) of San Francisco-based biotechnology firm Genentech . This shift in R&D operations to biologics shielded Roche from recent revenue decreases suffered by Roche competitors due to patent expirations and development of generic drugs. In addition to collaborations with biopharma firms, Roche’s R&D operations model also leverages relationships with educational institutions such as Massachusetts General Hospital .
Comparison of Molecular Mass and Complexity of Small Molecules vs. Biologics
Roche’s internal and external collaborative efforts are highly dependent on human capital, and the human resources side of Roche’s operating model is appropriately structured with initiatives ranging from incentive-based compensation structures, paid sabbatical programs, and talent scouts that seek out the best R&D talent .
Manufacturing and Supply-Chain
In October of 2013, Roche announced that it would allocate CHF 800M to the construction of manufacturing facilities and manufacturing technology in order to account for increased demand for its biologics offerings . Additionally, Roche is investing in tracking and tracing technologies that will not only streamline its supply-chain, but will also cut losses that the company currently experiences due to counterfeiting of its products .
It remains to be seen whether the complementary nature of Roche’s business and operating models will shield it from the increasing prevalence of biosimilar compounds (loosely comparable to generic drugs in small molecules) or increasing cost-cutting pressure in the healthcare industry. For the time being, however, the synergies of these two models have served Roche well and make it a winner in the 2015 TOM challenge.
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- Media Credit: http://www.amgenbiosimilars.com/the-basics/the-power-of-biologics/