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Alex Krauer.

Ciba-Geigy Chairman Alex Krauer might be forgiven a little unabashed enthusiasm when describing his company's performance and prospects. The diversified Swiss pharmaceutical, industrial and agrichemical concern is coming off a strong 1991, in which group operating profit jumped 24.3 percent to $1.28 billion Swiss francs ($879.1 million). More of the same is expected this year: London-based County NatWest Securities estimates earnings per share growth for the company of 24 percent--exceeding the brokerage firm's projections for Ciba-Geigy's European rivals, Merck A.G., Roche and Sandoz. Ciba-Geigy has a pre-eminent position in many of its key markets, and several of its most successful drug products face limited competition in niche areas. And it is the world's leading agrichemical maker, ahead of Germany's Bayer AG and Rhone-Poulenc Rorer of France.

But at a recent breakfast meeting, Krauer eschews image-polishing in favor of analysis. Before his eggs hit the plate, he serves up a biting commentary on what's wrong with Ciba-Geigy and outlines the company's plans to grab a competitive edge in the 1990s.

In the rough-and-tumble world of pharmaceuticals, Krauer says, "sales of some older products are slow, and there's pressure on prices because of efforts worldwide to reduce health-care costs." Too, Ciba-Geigy awakened late in the 1980s and found itself a lumbering giant with a top-heavy management hierarchy and a culture that placed too little emphasis on innovation. Rising personnel costs in Switzerland--partly the result of the automatic indexing of salaries under collective labor agreements in the country--have hurt productivity/cost ratios. And in recent years, Krauer notes, Ciba-Geigy has been vulnerable to currency fluctuations because of a strong Swiss franc--which decreases the value of exports--and the fact that the company generates 97 percent of sales outside its tiny home market.

Thus outlining the problem, Krauer tackles the solution. He's moved to downsize the organization--last year Ciba-Geigy offered early retirement to 1,600 employees, most of whom accepted. He's increased R&D spending across the board--most notably in pharmaceuticals, to 16 percent of sales from 10 percent--to keep the new-product pipeline filled. He's moved to adopt so-called International Accounting Standards, slated to take effect in 1993, to smooth seasonal earnings fluctuations and minimize currency distortions. Moreover, he's split Ciba-Geigy into 14 divisions, each with a high degree of autonomy.

"The new organization is intended to permit Ciba-Geigy not to navigate any longer as a cumbersome supertanker, but as a flotilla with an independent captain on every ship," Krauer says.

This no-nonsense approach is winning kudos from institutional investors in the U.S. Impressive, considering there are a spate of high-performing domestic health-care companies on which to place one's bets. But many fund managers see the stocks of European drug manufacturers as significantly undervalued. As a result, they are advising their clients to rotate their portfolios geographically, particularly toward major Swiss companies.

"European health-care stocks have generally underperformed their U.S. counterparts over the past two to three years," says David H. Talbot, vice president at New York-based brokerage Arnhold and S. Bleichroeder. "Now we believe the tide has turned in the opposite direction."

Talbot expects Ciba-Geigy's earnings to soar 25 percent this year and another 20 percent in 1993.

These days, many large companies are bringing in outsiders to crack the whip and revitalize moribund corporate cultures. But Krauer, 61, is a member of Ciba-Geigy's old guard, having joined the company in 1956. Also noteworthy is that Krauer--in contrast to senior executives at many pharmaceutical companies who've been recruited from the marketing or research segments of the business--got his start in finance. He spent 15 years on the finance side with Ciba-Geigy's Italian Group company. Krauer was elected chairman and managing director of the parent company in 1987.

While many of Ciba-Geigy's top-selling drugs were launched a generation ago, the company has successfully defended its turf in areas where patents have expired by reducing dosage sizes for over-the-counter sales and launching innovative, transdermal delivery systems.

Among newer products, for example, is Nicotinell TTS/Habitrol, a drug in patch form that delivers nicotine through the skin. It is off to a fast start, particularly in the U.S., where first-quarter sales hit SFr 240 million, up from a worldwide SFr 40 million last year. Total sales are expected to surge to SFr 800 million by 1994, as an increasing number of smokers attempt to kick the habit.

During his tenure, Krauer has tilted Ciba-Geigy's product mix toward pharmaceuticals and agrichemicals--and away from the more volatile industrial/chemical businesses. Pharmaceuticals now comprise 59 percent of total profits, up from 49 percent three years ago.

"The growth potential is in the biological area," Krauer says. "But we also want to add businesses which are close to our existing activities.

"Our fastest-growing business segment has been CIBA Vision, which offers a range of contact lenses, lens care and ophthalmic products and services."

In the agricultural and industrial arenas, Ciba-Geigy is solidly positioned and has high hopes for the North American market, including the U.S.

"We are investing heavily in U.S. facilities," Krauer says. "Last year, we opened a state-of-the-art facility for textile dyestuffs in St. Gabriel, LA.

"You might be surprised that we decided to put that plant here and not somewhere in the Far East," he says. "We did it because after a very painful restructuring of the U.S. textile industry, we considered that sector to be again very competitive."

In the long term, Krauer reckons, time and trends are on his side: "People are always getting older," he says. "So health care should continue to be a growth business."

But for all of Ciba-Geigy's plans and programs, Krauer, an opera buff, knows well the company's success remains dependent on what the Italian composer, Giuseppe Verdi, called "La forza del destino"--the force of destiny.

"Normally, for every 10,000 molecules you research and develop, there will be only one product you can put on the market," Krauer says. "That product will have to pay for all you have invested in the others.

"Our scientists don't like to hear it, but serendipity is a crucial factor."
COPYRIGHT 1992 Chief Executive Publishing
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:N.B.; chairman of Ciba-Geigy Corp.
Author:McCarthy, Joseph L.
Publication:Chief Executive (U.S.)
Date:Jul 1, 1992
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