ROCHE SALES FORCE IS BEING SPARED IN STAFF CUTS: 1,000 BEING TERMINATED AS PART OF $50 MIL. COST REDUCTIONS TO ADDRESS PROJECTED SALES AND PROFIT DITERIORATION

Roche's 750-person U.S. sales force will remain intact during the company's "renewal and regeneration" project aimed at trimming $50 mil. from annual operating costs. In a memo issued during the week of Jan. 28-Feb. 1, the firm reportedly assured the sales force that it would be protected from the one-in-nine staff cut reduction which is the core of a cost-reduction program. The sales force, which is coming off successful participation in the Zantac co-launch with Glaxo, is positioned at the beginning of a major new effort by Roche at the hospital antibiotic market. Roche began introducing Rocephin (ceftriaxone) and Coactin (amdinocillin) at the end of January. FDA approved both drugs on Dec. 21 (see related item, page 13). Roche is implementing 1,000 terminations Feb. 4, culminating a six-month internal review of operations in anticipation of "very serious problems" facing its existing businesses. Roche President Irwin Lerner informed the company of the staff cuts in a Jan. 28 inhouse newsletter. "As we have shared with you since the beginning of the project," Lerner stated, "the attainment of the savings [$50 mil.] will involve the separation of a significant number of people from the company. On Feb. 4, 1985, approximately 1,000 employees will be personally notified of their termination by their management." In the beginning of August, when Roche initially announced the plans to cut costs in 1985, the firm set a target of between six and nine months for completing the project. The Feb. 4 termination date occurs right at the beginning of that target, indicating the speed with which Roche pursued the internal review. By announcing the $50 mil. savings objective at the outset and issuing a number of interim reports on the internal review, Roche kept the cost-cutting project out in the open. During October and November, "several hundred senior management, corporate staff, and business unit and research and development personnel" participated in "broad-based interviews" to "review their business/functional plans and regular activities." The company also carried on Dialogue Sessions between members of the Executive Cmte. and groups of employees. Because of the size of the Roche cutbacks, the high concentration of employees near NYC and the natl. media, and the image of Roche as a wealthy private firm with almost limitless cash reserves, the announcement of layoffs is drawing wide news coverage. However, while the cuts are perhaps the largest single personnel action by a drug company to reduce costs since the Searle cuts in the mid-1970's, Roche is not alone among health care product mfrs. in trimming back its operating costs. The first wave of major cuts have been most pronounced in the medical device and dianostic products business, which have reacted to the tightening hospital expenditures. SmithKline Beckman, for example, told analysts in December that 700 people have left the diagnostics group over the last 15 months. Baxter Travenol similarly announced a 700-person layoff in November associated with the closing of a facility in Hays. Without major layoff announcements, Becton-Dickinson has reduced its workforce by almost 20% in two years from 21,200 to 17,700. In another form of employee cost control, Merck experienced a four-month strike during the summer in an attempt to negotiate reduced benefits and a salary increase schedule through 1986. Roche told its employees at the end of the summer that the company would have to go beyond attrition programs to cut costs. Lerner said in the Aug. 1 newsletter announcing the program that, "while we have generated some impressive savings in the past through such programs as cost-of-sales improvement, profit improvement and attrition, our projections indicate that costs will continue to rise at an alarming rate unless we do something substantial to reduce them." U.S. Subsidiary's Profit Position May Have Been Exacerbated By Puerto Rican Manufacturing The company portrayed the cuts as a preventive measure to assure profits and stability in the future and not as an ex post facto response to worsening results. In August, the firm said "total corporate sales in the years 1982 and 1983 set new records back-to-back, and there was modest improvement in profitability." In a recent year-end review on 1984, the company said the U.S. business "turned in a strong performance." Projections for the second half of this decade, however, indicated increased pressures, the firm said. In the August newsletter, Lerner said: "As we look ahead to the years 1985-1989 through our strategic planning process, we continue to face very serious problems that will make it much harder for us to keep pace, much less grow, without an even deeper commitment to reducing costs and improving efficiency and effectiveness throughout the organization." Lerner specifically cited "a significant deterioration of revenue and sprofit projections between our 1983 and 1984 [strategic] plans." Lerner described the threats to Roche's U.S. business as "patent expirations, heightened price competition, shifting consumer purchase preferences, govt. cost containment programs and the very significant delays in availability of new products." In 1984, Rx pharmaceuticals were "the cornerstone" of Roche's U.S. business, with Accutane described as "a very strong performer" and "the number one dermatologic product prescribed in the U.S." The "outstanding performance" of Zantac was also a "contributing factor" to 1984 results. The company points out that Valium, Librium and Dalmane are attributed to the Puerto Rican affiliate Roche Products Inc. The firm said all three products had "exceptionally strong showings" in 1984. The pressure for cuts at Hoffmann-LaRoche Inc. (the U.S. subsidiary) may have been increased in part by shifting of profitable lines to the Puerto Rican subsidiary. That left the U.S. business with the continued high R&D and staff functions. That situation would be heightened for an operation reporting to an overseas headquarters. Roche U.S. does not get a direct benefit from sales in the U.S. of products manufactured in Puerto Rico. However, with the three major products from Puerto Rico facing increased competition, a cut-back of U.S. overhead would probably have been forced in the future even if the products had been part of Roche Labs. The chemical business has been a drag on Roche's U.S. operations. The firm said: "A harsh economic climate continues to plague the Roche Chemical Division's Fine Chemicals and Agriculture and Animal Health businesses, with the strength of the dollar providing the impetus for overseas competitors to penetrate the U.S. market with human and animal nutrition products at low prices." Among top level staff changes occurring with the cuts, Richard Murphy, previously VP Roche Diagnostics, expanded his executive functions to include the chemical business as Senior VP-Roche Chemicals and Diagnostics. He replaces Jack Kelly. While the extent of the cuts in Roche U.S. employment indicate that the number of research and development employees will be reduced, the company maintains that it will continue its commitment to new product research and basic work. For 17 years, Roche has maintained a basic research arm with the Institute for Molecular Biology. How that institute fares in the actual cuts will answer questions about the ability of Roche U.S. to stay in the direct funding of basic work. Roche Biomedical Labs and Medi-Physics Not Included In Initial Cuts; Units Undergoing Separate Reviews In year-end material, Roche maintained that its in-house research has new products for the U.S. market are close in the fields of arthritis, osteoporosis and anesthesia. The firm has NDAs pending for an NSAID, Rimadyl (carprofen), an injectable anesthetic, Versed (midazolam), and clinicals are underway for an osteoporosis use for Rocaltrol (calcitrol). Roche also has an application under review at FDA for Roferon-A (recombinant alpha interferon). If salary and benefits for each of the terminated employees approach the $50,000 per year level, then Roche could realize close to the $50 mil. in savings from the 1,000 terminations. The company has already had a wage and salary freeze in place since the review began in August. As part of the severance benefits, Roche is providing four weeks' base pay, one week base pay for each year with the company, all unused vacation, retirement benefits for eligible employees, and at least 90 days of health and insurance benefits. Roche's two U.S. diagnostics subsidiaries, Roche Biomedical Labs and Medi-Physics, are not included in the initial employment review. Those subsidiaries employ about 5,000 people. A separate review of those subsidiaries has begun as Phase II of the restructuring review. The company noted in year-end material that the diagnostic businesses remain a prime target for development outside the drug business. "The dynamic growth of each of these businesses over the last three years," the company said, "clearly reflects Roche's expanded commitment to diagnostics." Roche said "A particularly noteworthy performer in the diagnostics business was Abuscreen, a line of kits marketed by Roche Diagnostic Systems and used to test for the presence of drugs of abuse. Abuscreen sales substantially exceeded 1984 budget." The company pointed out that recent acquisitions to support the clinical lab and diagnostic products businesses were made in 1984.