Alex Krauer: Ciba-Geigy

By McCarthy, Joseph L. | Chief Executive (U.S.), July/August 1992 | Go to article overview

Alex Krauer: Ciba-Geigy


McCarthy, Joseph L., Chief Executive (U.S.)


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 ones 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. …

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