This content is from: Home

Clinical trial

Buying Hexal and Eon will make Novartis No. 1 in generic drugs. Now can CEO Daniel Vasella crack the code for a truly transformative merger?

One rainy morning last October, Novartis chairman and CEO Daniel Vasella met briefly with architects renovating the Swiss pharmaceuticals company's Basel headquarters before catching the company plane to Barcelona. There he lingered just long enough at the annual confab of the International Federation of Pharmaceutical Manufacturers & Associations, the pharmaceuticals industry's lobby, to be elected its president. A day of meetings in Europe followed. Then on the weekend Vasella flew to Beijing. The 12-hour trip gave the 51-year-old physician time to catch up on his medical journals and spreadsheets.

It was a typical 48-hour stretch for the seemingly indefatigable Vasella, who until he was in his mid-30s practiced medicine full time. His former patients in Bern and Zurich may miss the understated physician with the winning bedside manner, but anyone who relies on one of the 13 medicines -- including the breakthrough cancer drug Glivec -- that Novartis has introduced since 2000 has reason to be grateful that Vasella chose to pursue a second career.

Swiss shareholders, however, have less cause to be enthralled with the good doctor: Novartis's share price has been virtually stagnant in recent years, trading in the Sf55-to-Sf60 ($47-to-$52) range, since 2002. Investors have refused to bid up Novartis's stock until they can get a better idea of when, and if, Vasella intends to acquire a major pharmaceuticals company. "There are continuous rumors that the company is interested in buying," notes Andreas Theisen, an analyst at WestLB. "Investors have no interest as long as there is this shadow." The CEO's bold purchase of German generic-medicine specialist Hexal and its U.S. arm, Eon Labs, for more than $8 billion last month does not change that, since generics are a modest, though fast-growing, proportion of Novartis's business. (The drugmaker's share price rose briefly around the time of the announcement, but that had to do mostly with the U.S. Federal Drug Administration's okaying Cox-2 pain inhibitors, like Vioxx; Novartis is developing its own Cox-2 medicine.)

What most worries investors is that Vasella, having been rebuffed twice on takeovers of major rivals -- Switzerland's F. Hoffmann-La Roche in 2003 and France's Aventis in 2004 -- will too rashly pursue a blockbuster deal in a bid to keep Novartis among the world's top pharamaceuticals companies. They also worry that he'll overpay in the process. U.S. and European pharmaceuticals outfits have been steadily combining in recent years, as they've sought to pool marketing efforts and plug gaps in product lines that their R&D divisions have been slow to fill.

Some analysts say, moreover, that Novartis may not be developing all the blockbuster drugs it needs to offset those whose patents are due to expire. And if that turns out to be the case, they warn, it could impel Novartis to enter into just the kind of hasty merger investors dread.

"Should the pipeline fall short of expectations, then I have little doubt that this will increase Novartis's resolve to pursue a major deal," says Deutsche Bank analyst Mark Clark. "Vasella is a forward-looking guy, and he's seeing his peers getting bigger through mergers -- investors get nervous about this."

The company already owns precisely 33.33304 percent of its neighbor across the Rhine, Roche, a stake it acquired in the form of a 20 percent block purchased from Swiss financier Martin Ebner and smaller chunks picked up in stealthy open-market buys. The holding is a hair under the one-third ownership threshold that would trigger a mandatory takeover offer under Swiss law. Vasella bowed to the wishes of Roche's controlling Oeri and Hoffmann families and agreed not to mount an unwanted bid for the maker of AIDS drug Fuzeon, hepatitis C medicine Pegasys and popular over-the-counter flu drug Tamiflu. Nevertheless, analysts point out that the two companies would complement each other, because their cancer drugs are compatible and Roche's fine diagnostics division would be a prize for Novartis.

Vasella insists that, although he remains on the lookout for M&A targets, he will strengthen Novartis in the meantime through organic growth and share buybacks. The company has repurchased $2 billion to $3 billion of its shares annually for the past three years, and in early February it announced a new, $3.3 billion buyback program.

Novartis's purchase of Hexal/Eon has not stopped merger speculation from swirling around the company. As Vasella tells Institutional Investor: "In 1988 the top ten companies held a 25 percent share of the [pharmaceuticals] market. Now the top ten companies have a 50 percent share." Consolidation is bound to continue, he points out. Size brings substantial economies of scale in marketing and R&D. And sure, Vasella says, Pfizer and GlaxoSmithKline are bigger than Novartis. "But do we have to be that size? No. We have to be large enough to be competitive and innovative."

Novartis has added some of that desired heft. The Hexal/Eon deal makes Novartis's generics unit, Sandoz, the world's largest maker of these off-patent drugs. The pro forma combined sales of Sandoz, Hexal and Eon amounted to $5.1 billion last year, compared with $4.8 billion for current No. 1 generics maker Teva Pharmaceuticals of Israel. Hexal and Eon introduce Novartis to new generics fields. For instance, Eon has found a profitable niche in making difficult-to-reproduce generics, such as Buproprion, a knockoff of Glaxo's antidepressant Wellbutrin. Few competitors exist in this esoteric market, allowing Eon to achieve operating margins of 40 percent. Hexal is especially strong in patches and implants. Run by twin brothers Andreas and Thomas Strüngmann in Holzkirchen, it is the second-largest generics company in Germany, the world's second-largest generics market, behind the U.S. Last year Hexal, which employs 7,000 people spread across 40 countries, had sales of $1.65 billion. The brothers own two thirds of Lake Success, New York­based Eon, which employs 500 people and had $431 million in sales last year. (Novartis is making a tender offer for the roughly one third of Eon that is publicly held.)

"The generics market should grow to about $100 billion worldwide, and we would like to have a decent market share of that," Vasella tells II. The Hexal/Eon deal certainly gives Novartis a decent head start, although generics sales will still be less than one fifth of Novartis's total sales at first. Postmerger, the company will rank as the top seller of copycat drugs in Europe -- most important in the key German market -- and No. 2 in the U.S. behind Teva. The CEO believes Sandoz is well positioned in Asia, especially Japan, if generics ever take off there.

Vasella reckons that he can boost Novartis's margins by bundling together the manufacturing, sales and marketing of generics, patented drugs and over-the-counter medications. This ought to produce a few of those proverbial synergies and also give the company an edge in negotiating prices with government health agencies and other large drug purchasers. (Novartis keeps 25 employees in Bentonville, Arkansas, just to serve one big customer: Wal-Mart.) And in the short run, the CEO contends, the merger should save on costs by letting Novartis employ a single sales and marketing force for big clients. That can't hurt, since Novartis paid a putative premium for Hexal/Eon.

"With this acquisition, Novartis has again shown that they have taken the road less traveled," says Denise Anderson, an analyst at Kepler Equities. "There are some incremental benefits, but the deal doesn't take the place of a pharma acquisition." Of the other major pharmceuticals companies, only Sanofi-Aventis is venturing into generics in a similarly audacious fashion.

Skeptics of the Hexal/Eon strategy say that there are limits to any synergies between Novartis's generics unit and its pharmaceuticals arm: To avoid conflicts of interest -- and the resulting regulatory problems in this gray area -- the two must be run more or less separately. Otherwise, say doubters, Sandoz would have an inside track in competing with other generics producers to introduce copycat versions of Novartis products whose patents are running out. Suppose Sandoz had privileged access to Novartis's scientific data on pills whose patents were about to lapse -- wouldn't regulators deem that an unfair competitive advantage? And imagine the dilemma of a company salesperson whose bag contains both Novartis's own patented blood pressure medicine and Sandoz's generic version of a competitor's blood pressure drug. "We only bundle where we are legally allowed," Vasella makes a point of telling analysts.

But conflicts of interest aren't the only potential catch to the deal. In addition, skeptics say, the pricing pressure on generics in the U.S. and Europe can only increase. In Germany, for instance, generics penetration is high and price competition fierce. Notes Anderson, "The only way the prices can go is down."

That puts enormous pressure on Novartis and other generics manufacturers to contain costs. Sandoz's new CEO, Andreas Rummelt, admits, "The only possible way we can be more competitive is with more cost efficiencies." With Hexal, Sandoz acquires production facilities in Brazil, Turkey and China, so that it won't have to outsource more generics production from pricey Switzerland and thus can retain more of the profits.

Though now a little larger, Novartis, like other pharmaceuticals companies, is still feeling symptomatic stresses and strains as it contends with the host of problems plaguing the global pharmaceuticals industry, from the prospect of longer, costlier procedures for getting drugs approved to political heat for cheaper drugs to escalating R&D costs.

And, as any physician knows, medicine doesn't always work the way it's supposed to. Since becoming CEO of Novartis in January 1996, Vasella has poured money into R&D and teamed up with biotech firms to try to keep the company's drug pipeline filled. He has cranked up marketing in the vast and vital U.S. market, expanded enthusiastically into emerging markets India and China (see box), made a costly commitment to generics and tried to be a standout global corporate citizen (distributing malaria pills, for instance, at cost and leprosy drugs for free to health organizations).

Vasella's tenure has been, by and large, salutary for the company, though not especially so for the stock. The group posted profits of $5.8 billion last year on sales of $28.3 billion -- both records for Novartis. The declining dollar, of course, was an active ingredient in the company's gains: Sales were up 9 percent in local currencies. And before that they had risen in double digits -- in local currencies -- since 2001.

Anne Marieke Ezendam, a portfolio manager for Threadneedle Investments' Global Healthcare Fund, which holds Novartis stock, likes the company and especially its CEO. "They have done everything they have promised," she explains. "They've kept volatility low. They are doing interesting things, they keep their promises, and they are innovative. They are the only company that has a strong generics business."

Yet the company's stock is practically flatlining. Novartis was trading on the Zurich bourse at Sf54 in 2001, and on March 1 of this year it was fetching Sf58.60. To be sure, virtually the whole pharmaceuticals industry is in the sick ward (Abbott Laboratories may be an exception: see CEO interview, page 15). And Novartis has fared no worse than the DRG global pharmaceuticals index. The company's price-earnings ratio of 16.5 actually represents a slight premium over the industry average.

And therein lies the great challenge for Vasella: How will Novartis overcome the pharmaceuticals industry's general malaise? Hexal/Eon is only one small pill. But if Vasella can come up with a remedy for Novartis's ills, he just might write a generic prescription for the whole ailing pharmaceuticals industry.

SWITZERLAND'S BIGGEST COMPANY BY MARKET capitalization ($118 billion), Novartis ranks sixth by sales among the world's pharmaceuticals companies. No. 1 Pfizer has not quite twice Novartis's revenues. Novartis does business in 140 countries, employs 81,400 people and sells some 1,400 different medicines (including generics).

The driver of two thirds of revenues (some $19 billion) is the pharmaceuticals division; its five top sellers all have annual revenues of more than $1 billion: bestseller Diovan, which lowers blood pressure; Glivec, the anticancer drug; Lamisil, which fights nail fungus; Neoral, for battling infection in transplant patients; and Zometa, for treating complications of breast cancer. Novartis's second-most-profitable division, with sales of $6.7 billion, is consumer health, which encompasses over-the-counter drugs, veterinary medicines, nutrition products, baby formula and Ciba Vision, a maker of contact lenses and lens solutions. The generics division posted $3 billion in sales last year; the Hexal/Eon deal should add a good $2 billion to that.

At its core Novartis remains a formidable research and marketing machine. Last year alone the company spent $4.2 billion on R&D and more than twice that -- $8.9 billion -- on sales support. Vasella has upped spending on R&D even as some other pharmaceuticals companies have cut back.

The doctor has headed Novartis ever since he helped to create it through the merger of two prosperous Swiss pharmaceuticals companies, Ciba-Geigy Corp. and Sandoz Group, eight years ago. Sandoz's chairman, Marc Moret, a sprightly 73-year-old (who happens to be the uncle of Vasella's wife, Anne-Laurence) recognized that Europe's pharmaceuticals industry was coming together and wanted to be sure that the Swiss segment remained vibrant, so he initiated talks with his Basel neighbor, Ciba. Vasella, then CEO of Sandoz's pharmaceuticals arm, played a pivotal role in the deal. When Moret stepped down after the merger to make way for a new boss, Vasella became chief executive of Novartis -- at the time, the world's second-biggest pharmaceuticals company -- vaulting over Sandoz Group CEO Alexandre Jetzer.

Right away Vasella stepped up the company's sales push in America, a $220 billion marketplace today. Approximately 40 percent of Novartis's revenues come from the U.S., compared with less than one third in 1997. (The remainder: Europe, 35 percent; Africa, Asia and Australia, 16 percent; and Canada and Latin America, 8 percent.) Novartis has 6,800 salespeople in America and a U.S. marketing budget of $6 billion, roughly two thirds of its total sales spending.

The company's American franchise remains solid. "We are going to grow market share the same way we have the past four years -- we will exceed market growth," declares Paulo Costa, who heads U.S. marketing for Novartis. He argues that robust growth in blockbuster drugs like Diovan makes this a realistic goal. Vasella and Costa reorganized the U.S. operation to locate business units beside clinical development teams, so that marketers could interview patients during trials to determine how best to pitch the final product.

To feed his marketing machine, Vasella has championed lots of U.S.-based R&D. Over the next decade the company plans to sink more than $4 billion into Novartis Institutes for Biomedical Research, whose chief research facilities are in Basel and Cambridge, Massachusetts, just outside Boston. The latter NIBR site is designed to accommodate 1,000 scientists and technicians (about 800 work there now) and is situated to take advantage of the proximity of the Massachusetts Institute of Technology. The Cambridge center's scientists caution, however, against expecting any new drug compounds for five years. It typically takes ten to 15 years, from a scientist's eureka to a regulator's okay, to bring a drug to market.

The regulatory-vetting portion of the process, at least, might now drag on longer than in the past. In the 1990s conservative politicians kept urging the Federal Drug Administration to speed up drug approvals. But Merck & Co.'s recall last year of its arthritis painkiller, Vioxx, after it was shown to increase the risk of heart failure with prolonged use, caught the agency dozing. Now the FDA, under fire from Congress, appears poised to impose much tougher standards on the authorization of new drugs, making it more difficult and costly for Novartis and other R&D-oriented pharmaceuticals companies to deliver products to market. (The agency has allowed Vioxx back on the market, but Merck must put prominent warning labels on the bottle and cannot advertise the drug.)

In mid-February the agency created a Drug Safety Oversight Board to monitor existing drugs and recommend action to the FDA if any are found to be hazardous. However, the board, which is to be made up of FDA and other government officials, cannot pull medicines from the market on its own. Meanwhile, the European Medicines Agency is tightening its approval procedures.

Vasella, like other drug executives, must also contend with political pressure in the U.S. and Europe to cap prescription drug prices and provide easier access to medicines for the poor and the elderly around the world. Commendable though such ends might sound, doing so would, of course, eat into revenues and profits.

Novartis is already feeling a pricing squeeze in the U.S. "One of the uncertainties of 2005 is how much pressure will come from Medicare, from big purchasing organizations," says Novartis's chief financial officer, Raymund Breu. "How large are the discounts we will have to give?"

Vasella's vision for spurring sales, and profits, is to do what Novartis has always done: concoct more wonder drugs. "Our growth will continue to be driven by bringing innovative products to market," the CEO asserts. "We can expect, based on our new products and innovation flow, that we will continue to achieve high-single-digit-to-low-double-digit growth."

The company's relatively young -- in patent years -- line of drugs should keep growth on target for this year, but after that, say analysts, Novartis's prospects will dim, unless the company can replenish its medicine cabinet by replacing key drugs that go off patent. (Considering the long lead time for bringing medicines to market, any dearth of new drugs at Novartis can be traced to the pre-Vasella era.)

Novartis is unfortunately suffering a serious side effect of the Vioxx flap. When Merck recalled the painkiller last year, Novartis initially withdrew its U.S. and European applications for Prexige, because that drug is in the same class of Cox-2 inhibitors. Shelving Prexige hurt: It was considered one of Novartis's most promising earnings-boosters. Lehman Brothers calculated that it could reach annual sales of $2.4 billion.

Although Novartis successfully tested Prexige on 18,000 patients, that trial had a 12-month cutoff for treatment, and the damage caused by its chemical kin, Vioxx, didn't start showing up for 18 months. The Novartis CEO stands behind Prexige: "You should only drop a drug if you are not persuaded of its efficacy." He has said the medicine is safe if properly labeled and used. Nonetheless, analysts now doubt that the Novartis pill -- even if it does eventually win approval -- will ever account for significant sales in Europe or the U.S.

Despite the Prexige setback, Novartis's pipeline appears to be pretty well stocked for the time being. Almost 40 percent of its experimental medicines are in the second of three phases of testing and trials necessary before they can be submitted for FDA approval. Six are in the last phase and are expected to be on the market, if approved, between now and 2007. Novartis reckons that three of these have annual sales potential of more than $1 billion: SPP100, to reduce hypertension (in combination with another drug); LAF237, to treat Type 2 diabetes; and PTK787, to fight cancer.

They will need to be wonder drugs in every sense. Novartis's newest medications must offset the loss of income that will result when four of its crucial drugs go off patent and face generic competition in the next couple of years: Exelon (for Alzheimer's), Lamisil, Tegretol-XR (for epilepsy) and Trileptal (for seizure control). Deutsche Bank's Clark estimates that as a result, Novartis could lose $2 billion in annual sales, starting in 2006.

Novartis's pharmaceuticals-development boss, Jörg Reinhardt, disputes Clark's sales assessments. He insists that the new drugs will more than compensate for those going off patent. What's more, he says, the company plans to market more drugs made by other companies. "We will be intensifying our licensing in '05 and beyond," Reinhardt explains. He expects Novartis to do as many as seven such deals this year, compared with four in 2004.

VASELLA'S INTEREST IN MEDICINE GOES BACK TO his childhood. Growing up the son of a history professor in the Swiss university town of Fribourg, he was plagued by asthma as a five-year-old, developed tuberculosis at eight and contracted meningitis a year later. His older sister died of cancer when he was ten. Three years later, Vasella's father died from complications following surgery. "All that death occupied his mind about how things could be better," says a onetime colleague, the former Sandoz executive Rainer von Milensky. "His love is medicine."

Vasella graduated from the University of Fribourg, where he was a leader among campus intellectuals and briefly embraced Trotskyism. "Students wanted more freedoms and felt that in many cases we were not being treated fairly," he recalls of his college activism. "Since that time -- even now -- I care a great deal about fairness and freedom of expression, but I dislike strict ideologies. The latter was the reason why I left the Trotskyist movement."

Vasella earned his medical diploma from the University of Bern in 1979. Trained as a psychoanalyst, he nevertheless chose to become an internist after having undergone psychoanalysis as part of qualifying to become a psychoanalyst. In 1988, the year he turned 35, Vasella left the practice of medicine to join Sandoz and was promptly sent to its Summit, New Jersey, laboratory in the U.S. to research drugs. He made the career switch, he says, only half kidding, because the business world allowed him to be aggressive. After Vasella made it clear that he didn't want to wear a lab coat forever, Sandoz's management conducted an experiment of its own: It named him product manager for Sandostatin, a new drug for treating the pituitary gland.

Few at Sandoz expected much in sales from so esoteric a product. But Vasella, drawing on his medical training, had an educated hunch that Sandostatin might have other uses, so, in what would become standard operating procedure for him, he pulled together a team of chemists to find those uses and a team of marketers to look into markets. It turned out that Sandostatin effectively prevents the rejection of transplanted organs, relieves symptoms of some cancers and treats retinopathy (eye disease). Slated for sales of at most $5 million in 1988, the medicine (sold under various brand names) generated revenues of $827 million for Novartis in 2004. Sandoz packed Vasella off to Harvard Business School in 1989 for a management program.

Not long after his return, he was made special projects manager and then head of development for Sandoz's pharmaceuticals division. Just four years after arriving at the company as a researcher, he became COO of the pharmaceuticals division and, in 1994, CEO of Sandoz Pharma. Within a few years he was heading Novartis.

Vasella is low-key for a high-powered CEO -- a carryover, no doubt, from his days as a doctor. His easy smile reveals a charming gap between his front teeth. But colleagues aren't fooled by the kindly-doctor persona: Vasella is a highly demanding boss. He drills executives for specific answers on the most minute matters. Although he rarely loses his composure, he can be intense.

It was the CEO's unremitting pressure that sped Glivec to market just 32 months after the conclusion of its clinical trials. He has no compunction about firing underperforming managers -- as he did the head of the generics division last fall after a dismal third quarter. And Vasella has the instincts of a marketer: He even wrote a book about the discovery and development of Glivec, Magic Cancer Bullet.

Vasella's lifestyle sometimes raises eyebrows in Calvinist Switzerland. Imagine posing for the cover of a business magazine with your rottweiler and motorcycle. Vasella likes to ride his BMW and his Harley-Davidson on back roads. He has built a vast estate 100 kilometers from Basel in Zug, Switzerland's wealthiest canton, where he spends most weekends with his wife and their three children. Last year he passed his hunting exam -- no mean feat in Europe -- so that he can track and kill boar and deer in the woods near his mountain retreat.

Vasella can well afford his lifestyle. He is by far Switzerland's highest-paid chief executive; he earned Sf20.8 million in salary and bonus in 2004. The second- and third-highest-paid -- Marcel Ospel of UBS and Peter Brabeck of Nestlé -- earned Sf11.3 million and Sf8.1 million, respectively. Vasella is unapologetic about his compensation, noting that Novartis's pay is performance-based and that his and other company executives' rewards reflect record-breaking results.

"With our pay-for-performance system, which we started in 1996, every employee has a variable compensation element," points out Vasella. "In good years it leads to attractive salaries; in years that we miss our objectives, it is much less [generous]. Eighty percent of my income is variable. I believe that people are upset when they see that executives receive high payments for a lousy performance, and it is true in the business community that we see some widely publicized examples of this."

VASELLA IS THE FIRST CHIEF EXECUTIVE OF A MAJOR pharmaceuticals company to embrace generics as part of a growth strategy. Two years ago, that looked like a brilliant move. The CEO had combined Novartis's 14 generics subsidiaries into a new entity, Sandoz, borrowing the name of the maker of Saccharin (and also LSD) that was one of the core constituents of Novartis. The unit's sales soared 60 percent in 2003, chiefly because of the heavy marketing of AmoxC, a generic competitor to Glaxo's blockbuster antibiotic, Augmentin.

Last year, however, generics sales, which account for about 9 percent of Novartis's total sales, got caught in a downdraft. In Germany, Europe's biggest generics market, Hexal and another big drug company, Ratiopharm, started a rebate war. Meanwhile, the governments of France, Spain and the Netherlands mandated reductions in drug prices. Heated competition in the U.S. drug market hurt generics prices there too.

What's more, not many drugs came off their patents in 2004, and Sandoz was slow to knock off the ones that did. The division's earnings last year, $235 million, were half those of 2003. Vasella reacted swiftly to the earnings shortfall. In November he ousted Sandoz CEO Christian Seiwald and replaced him with Rummelt, head of Novartis's global technical operations. He told Rummelt to report directly to him and gave him tough orders: Straighten out the mess at Sandoz by the end of the year -- that is, within two months.

"One needs to be fast," contends Vasella. "One has to be developing new products rapidly, and one has to work constantly to contain costs." Seiwald was the right person to get the division going, he adds diplomatically, but technician Rummelt is the one to speed up production and control costs.

~!SIDEBAR 482595, 2, width /!~

Rummelt has largely restructured the generics business, consulting a blueprint drawn up by McKinsey & Co. and continuing the consolidation begun under Seiwald. Now Vasella wants the Sandoz CEO to rethink the company's whole approach to developing generics.

The Novartis CEO estimates that nearly $30 billion of prescription drugs worldwide are slated to lose their patents over the next five years. This year alone five major medicines with sales totaling $11 billion, such as Pravachol, made by Bristol-Myers Squibb Co., and Norvasc, made by Pfizer, are going off patent. The trick here -- and it's one that sleepy Sandoz has not fully mastered -- is to be unrelenting in going to court to force drugs off patent (ideally, early) and then claim the right under U.S. law to market the generic form exclusively for 180 lucrative days. "We will be quicker," Rummelt swears.

Separately, Sandoz and Hexal have been exploring a tantalizing generics frontier: biopharmaceuticals. It was once assumed that drugs made by biotech companies could not be turned into generics because their large and complex molecules made these biologics impossible to manufacture in bulk. But Sandoz contends that biologics can be replicated through sophisticated processes, and it has won approval in Australia for such a biogeneric, called Omnitrope, a human growth hormone.

European and U.S. regulators, however, say that because they have no way to establish that the knockoff of a biologic drug is equivalent to the original, they will need to see extensive clinical trials of biogenerics, as if they were being introduced from scratch. So Novartis and other makers of generics are lobbying to persuade regulators to let them come up with simpler, less expensive tests.

The stakes are high. Biologic drugs with combined sales of more than $16 billion are due to go off patent by 2007, with more to follow. Moreover, because biologics involve refined manufacturing methods, only a handful of generics producers, like Sandoz, are capable of producing biogenerics; that should keep competition down and margins high. And biologic drugs command higher prices than standard medications, so biogenerics ought to do so as well. What's more, by buying Hexal, Novartis has absorbed a key price competitor in this realm.

What if the generics gambit proves disappointing nonethless? Would Novartis ever spin off Sandoz?

"For generics this is not a topic," says Vasella. "In general, if you sell something, you need to know what you are going to do with the money, and the money should produce more value than it produces currently."

THAT PRECEPT ALSO APPLIES, OF COURSE, TO BUY-ing something. Vasella, who has said on a number of occasions that size and synergy are the keys to survival in the global pharmaceuticals industry, has amassed a war chest for a possible deal, and even after paying the Hexal/Eon tab, he has plenty left. A few observers question, however, whether the doctor has the gumption to pull off a transformative merger; they cite as exhibit A his misalliance last spring with France's Aventis.

Playing the white knight, Novartis tried to rescue the company from a hostile bid by the French pharmaceuticals company Sanofi-Synthelabo. No less imposing a deus ex machina than Prime Minister Jean-Pierre Raffarin of France interceded, for transparently nationalistic reasons, fending off Novartis and engineering an arranged marriage between the two French pharmaceuticals companies last April.

Vasella would have investors believe that, far from kowtowing to the French, he beat a shrewd tactical retreat that represented a triumph of prudence over recklessness. "We looked at the price and the evolution of the price, and we said we would be interested in a friendly transaction, but we never, never were interested in entering an auction process," the CEO says. "It started to become an auction, and that's fine with us -- it increased the cost for the competition by around $8 billion."

As a deal maker, Vasella appears to exhibit, for better or worse, the patience of a family physician. "I can only tell you I don't have the guts to make a stupid move," he says. "One has to choose the right move, and if I have to say no to a deal ten times, I will have the guts to say no. Look, if you go into negotiations and you feel you have to make a deal, then you are already hostage."

That may be, but the French foray still hurt the company's, and Vasella's, credibility. "The bid for Aventis still lingers in the room," contends Birgit Kulhoff, an analyst at Bank Sal. Oppenheim in Zurich. "People are asking, Will Novartis make another bid? Will they go after Merck? Do they have the will to become No. 1 or No. 2? That can only be reached through a merger."

Paradoxically, investors appear to be worried that, on the one hand, Vasella will be rushed into doing a slapdash deal and, on the other, that he will balk at capitalizing on a genuine opportunity to pair Novartis with a compatible partner and reap synergies more potent than any miracle drug.

Some observers speculate that Vasella is secretly yearning to do a deal that would enhance Novartis's standing in the U.S. market -- one, for example, with Merck (whose Vioxx-related product liability problems might make it a problematic bargain at best). Others contend that his long-term ambition remains an all-Swiss combination with Roche -- a thesis that was buttressed when Vasella said he wouldn't have divested Novartis's Roche stake even if he had prevailed in his quest for Aventis.

He kept merger speculation churning when he told investors during a February conference call that although Novartis needed time to digest Hexal and Eon, he was ready to buy if a "jewel" happened to appear. Speaking of the merger trend in the pharmaceuticals industry, he added that "it is very unpredictable, and people don't always behave rationally."

If Vasella does elect to pursue a merger -- the names of AstraZeneca, Bristol-Myers Squibb Co. and Wyeth, as well as Merck and Roche, all get tossed around -- he had better not dawdle. He assured the board when he took the job in 1996 that he would step down in 12 years. If he's serious, he has just three years to find an ideal mate for Novartis, a process as complicated as discovering a new drug -- but without the clinical trials to test for efficacy beforehand.