(Joseph Jimenez, CEO of Novartis | Photo by The Washington Post)

As stories of jacked-up drug costs make news, and discussions of health-care reform pepper the campaign trail, Novartis CEO Joseph Jimenez sat down with The Washington Post to talk about how he views his responsibility as leader of one of the world's largest pharmaceutical companies.

Jimenez, 55, spent his early career working in the consumer packaged goods industry at companies including Clorox and H. J. Heinz Company. In 2010 he became CEO of Swiss-based Novartis, which brought in roughly $58 billion in revenue last year. The following conversation has been lightly edited for length and clarity.

Q. What do you see as your responsibility, and Novartis’s responsibility, for helping drive down drug costs?

A. Drug pricing is a very complicated topic because we invest in high-risk activity. This is very high-risk activity when you’re discovering and developing new drugs. When you look at the cost of development, it continues to go up and up and up. So when we price a drug, we price it based on the value it will bring into that marketplace, and also how its price compares to the other therapies currently on the market.

There’s been a lot of discussion about drug pricing. What we have to do is we have to shift that conversation away from the price toward the value. Like, what exactly is the value of this drug that is going to result in a positive outcome? And is society willing to pay for that drug?

At Novartis, we take a little bit of a different approach than our peers. Not only are we a large, innovative drug manufacturer, but we also are the second largest generics manufacturer. Many people ask, “Isn’t that schizophrenic?”—because generics try to break the patent of the innovative drug. I say it’s not inconsistent. We are pro-patent, because that’s how medical science advances: You invest, and you need time to recover that investment. I also believe at Novartis that the day that patents expire, it’s our obligation to offer a low-cost version in a generic form.

Q. On the whole, do you think drug prices are going to go up or down over time, as drugs get better and more personalized?

A. You have to think about drug pricing in two ways. One is: What is the absolute price? But then also, what is the effect on the overall health-care budget?

Technology has improved so much in drug development that we now can find genetic markers on patients to ensure that they will benefit from our drug, and we’ll know those patients who won’t benefit from the drug. For example, we just launched a new lung cancer drug that only works in about 3 percent of patients with lung cancer, because only 3 percent have this particular genetic mutation. So we’re able to go to the payers and say, “Yes, this is an expensive drug in absolute, when you think about one patient taking this drug, but you’re not going to waste one dollar on this drug, because we’re only giving it to 3 percent of this population and the impact on the budget is quite small.”

Q. So in very simple terms, does that mean the average person 10 years from now will likely spend the same amount as someone today, but will just have better targeted drugs?

A. No, I would say if you take the total health-care spend in the U.S. and look at how much is wasted because they’re not targeted therapies, we can take a tremendous amount of waste out of the system. So the absolute price of drugs might go up for an individual patient with personalized medicine, because these are new technologies.

But if you can do that and at the same time eliminate 50 percent waste or 75 percent waste, the total impact on the health-care budget might be zero—or it could be less because we’re taking waste out. So you might see actual unit cost go up, but you could see total budgets go down.

[How Martin Shkreli revealed a truth by jacking up a drug price]

Q. What’s one of the biggest leadership challenges facing CEOs in the pharma industry today?

A. A pretty significant change in the commercial model will occur over the next few years. If you go back 10 years, we had a very transactional approach—discovering and developing drugs, and selling those medicines to physicians and to systems around the world. But the population is increasing and getting older, so health systems are going to be under increasing pressure from a cost point. We have to shift from that transactional approach to what we call an outcomes-based approach.

Let me give you an example of what ‘outcomes’ means. We just launched a new heart-failure drug called Entresto, which reduces cardiovascular death by about 20 percent. But we know that many patients with heart failure don’t operate in a way that would keep them out of the hospital. So instead of just selling the drugs, we’re looking at things we can do to help patients stay out of the hospital—for example, some sort of remote monitoring, beyond the pill, that would help the patient understand if they need to enter the hospital or not. Our traditional associates would not necessarily know how to operate in that kind of a model.

From a leadership challenge standpoint, that’s a big deal. It means hiring different skill sets, but it also means making sure that we have the right training and development in our current associate pool.

Q. Does this shift have to do with U.S. health-care reform, or do you see that as a separate trend?

A. It has a little bit to do with the changes that are going on in the U.S. health-care system. It is truly a global movement; but the shift in the United States from fee-for-service to an accountable care organization model, which is being initiated by the Affordable Care Act, is also driving this shift toward outcomes.

Q. You mentioned the drug Entresto that was recently approved. From a management perspective, what’s one of the hardest parts of getting a drug through the approval process?

A. The way that we develop drugs has changed over the last 10 years. Previously, the only thing that you had to do was prove that your drug was safe and effective. Now, there is much more onus on us to prove that the drug delivers more than that and has a positive patient outcome. So one of the hardest things we had to do in the development of Entresto was to agree with the FDA on the endpoints of the trial. How are we physically going to measure things like reduced hospitalization? There was a lot of back and forth.

Q. Your background is in consumer packaged goods. How did you go from that to being CEO of a pharma company, and how did you quickly scale up your knowledge of this industry?

A. I was in the consumer packaged goods industry for many years, and was asked to sit on the board of a major pharmaceutical company in Europe, because they wanted somebody with U.S. experience. I fell in love with the health-care industry, and the opportunity presented itself to join Novartis as head of their over-the-counter drug business. That was a very similar business to my background, because it deals with products you would find in the aisle, like Excedrin.

Very shortly after that, I was asked by the board to run the very large pharmaceutical division, and I about fell off of my chair because I said, “Look, I’m not a physician. I’m not a scientist.” The board said back, “We have a lot of physicians and a lot of scientists. What we need is somebody who can look at how the world is changing and how we should position our pharmaceutical division to be successful in that new world.”

It was a very steep learning curve at first. In fact, I hired a tutor to come in the mornings, before work, to help me understand each of our drugs—how they physically worked, the underlying disease state. In a period of weeks, I was able to become quite proficient.

Joe Jimenez talks about getting a tutor to help him better understand pharmaceuticals and the perspective of the company's scientists. (Lillian Cunningham, Jayne Orenstein, Randolph Smith and Julio Negron/TWP)

Q. What else did you do to build the trust of scientists and researchers there, and assure them you were fit to lead?

A. The first thing that I learned is: Don’t think you know more than you do. And don’t try to communicate that you know more than you know.

Learn enough so you can ask the right questions and so you can make sure that you have selected the best physicians and scientists in the world. Then give them the right budget to work their magic and things will take care of themselves.

Q. Earlier this summer a big ProPublica investigative report came out about hospitals and health care. One of the things they looked at was drug companies paying doctors to prescribe particular drugs. What’s your stance on that practice?

A. We’re a highly regulated industry, and there’s a clear line as to what you can do and can’t do. We have many, many field sales reps. We’ve spent a lot of time training them on compliance. If you think about society’s expectations about companies like Novartis, though, it’s changed over time. And what I tell my people is doing what’s legal is not always enough. We have to do what’s right.

A perfect example: When we launch a new drug, one of the ways we communicate that drug’s benefits is we would have a physician talk to other physicians about the benefit of our drug. And we would either pay that physician or we would create a situation where it was a dinner where the speaker came in and talked to his peers about the new drug. That’s perfectly legal from a regulatory standpoint. But think about if you’re a patient and you see that activity. You think, “Is my physician prescribing this new drug to me because they really believe in the drug, or because they just did a speaker program for some fee?”

It’s unfortunate, because that’s a situation where society’s expectations have changed to the point where even doing what’s legal is not doing what’s right. What we have to do is, we have to find new ways to educate physicians about our new drugs. Those speaker programs definitely served a purpose. Physicians would not know how to use Entresto if we didn’t have peer-to-peer communication of when the drug works, what kinds of patients you treat.

We’re looking at ways digitally to communicate with physicians and at some new tools, so we can stay ahead of the curve. So rather than wait for regulations to change, Novartis can step back and say, “We’re going to do what society would expect us to do, not just do what’s legal.”

Q. There seems to be a rise in partnerships between pharma companies and academic labs. As leader of Novartis, how do you think through the benefits and potential downsides—one of which, I imagine, is whether such partnerships compromise overall scientific independence?

A. Academic collaborations are very important for the pharmaceutical industry because we do not spend money on basic research, we spend money on applied research. When there’s basic biology that has to be understood, an academic institution is going to be much better at doing that than Novartis. If we partner with them, we can take that learning and we can turn it into a drug.

We have many academic collaborations. For example, our headquarters for research is in Cambridge, Massachusetts. It’s right across from MIT and very close to Harvard. There’s a lot of collaboration that goes on. Probably 70 percent of our new drugs that are launched are internally developed, and about 30 percent would come from either outside academic institutions or outside biotechs. So I think it’s critically important, and I don’t think it compromises either of us in terms of working together if we all have as our objective delivering against unmet medical need.

Q. How do you think through your responsibility to improve the health of the globe, when in some cases—like malaria—there’s huge need but less revenue potential?

A. It’s our responsibility to identify some areas that are neglected—since no company can make money in them because of a state’s inability to pay or other reasons—and then go after those diseases because we can. Malaria is one of those. Our drug Coartem cures malaria in most cases in three days, and access is still not where it needs to be, particularly in sub-Saharan Africa. So for 10 years, we have sold Coartem at zero profit to states in sub-Saharan Africa, and we distribute in those countries to ensure that in health clinics they have access to it.

Q. What has changed most at Novartis since you entered?

A. The portfolio has changed quite a bit. Because of changing demographics, you better have two things as a company in health care, because it’s going to get ugly in terms of reimbursement. The first thing you better have is innovation power. If you’re innovating, if you can really deliver on that medical need, you’re going to get reimbursed. The second is you better have global scale, so that you can thread that innovation across multiple markets.

When I became CEO, we had six divisions. We looked at those and realized three had global scale and innovation power; three didn’t. So we did a significant portfolio transformation.

Q. That was the $20 billion deal between Novartis and GlaxoSmithKline. What exactly did that deal mean for Novartis?

A. It meant that six divisions would go to three divisions: innovative pharmaceuticals, generics and eye care. I acquired their oncology products, so I doubled down in my pharmaceutical business. Then I sold them my vaccines business because they already had a vaccines business, and they became No. 1 in vaccines. Then we combined our over-the-counter drug businesses, which were both sub-scale, to create one of the strongest over-the-counter drug businesses in the industry.

Q. What’s one of the biggest leadership lessons you learned the hard way in your own career?

A. One was that change doesn’t occur unless you help your associates understand why the change is important. When I was young, I thought: What is change management? Just tell people where you want to go and they’ll follow you. That was really a naive view, because people need to understand for themselves why they have to change what they’re doing.

Another thing that I learned early on was that it’s very important not to be afraid of failure, because you’re going to have a lot of it throughout your career. A good example was when I had worked my way up in a consumer packaged goods company, and the general manager came in and asked me to work on new products. The very first product I put into a test market failed. I thought my career was over.

I walked into his office, and I said, “Are you going to fire me?” And he said, “Only if you don’t learn from this failure. What did you learn from the test market? What did it tell you about the product and the way we marketed it? Now, go back and fix it.”

That was really a huge lesson for me, because, at Novartis, we’re talking about medical advancement—so we fail everyday. And in fact, our best people fail the most.

Read also:

How Martin Shkreli revealed a truth by jacking up a drug price

Like On Leadership? Follow us on Facebook and Twitter, and subscribe to our podcast on iTunes.