Real Simple at Roche

Roche is following the tide of its competitors in shrinking its R&D platform to focus on five therapeutic areas and speed up development time. "This is not a cost-cutting effort," said chairman and CEO Franz Humer at this month's annual media day. "On the contrary, our R&D spend has increased significantly in recent years, and will continue to increase in the future."

Indeed, Roche reported a banner year in 2006: Pharmaceutical sales grew 21 percent, more than three times the average global rate. Most of that growth was driven by its partnership with Genentech, and the continued success of designer cancer brands such as Herceptin (trastuzumab) and Avastin (bevacizumab).

The company will now group its R&D efforts into five distinct "disease biology areas" overseen by teams in its Switzerland, New Jersey, and California offices. While continuing to invest in the lucrative fields of oncology and virology, it will enter the autoimmune, central nervous system, and metabolic markets--making for some crossover with other companies that have also taken a strip-down-to-buff-up approach to drug development. The new year has already seen Pfizer and AstraZeneca make similar moves; Merck and GlaxoSmithKline have been operating this way for some time.

"By simplifying and accelerating the multiple decision-making processes involved, the model will be more efficient and effective in translating research activity...into clinically differentiated medicines," Humer said.

The two biggest problems facing pharma companies right now are, of course, high costs and low output. Scaling down to a handful of therapeutic categories allows companies to cut expenses in less profitable areas, while taking advantage of R&D's version of economies of scale--products can be combined to extend patents, regulators become more familiar with the company. "You're always looking for areas that have some synergies between them--it's not an arbitrary thing," said Gary Pisano, professor of business administration at Harvard Business School. Smaller units also mean that decision-making can happen with the same speed that it does at less bureaucratic companies.

Industry observers largely believe the trend is a good one. "Historically, companies tended to be in a smaller number of therapeutic areas," Pisano said. "And then what happened is everyone grew and they started to diversify their base of therapeutic areas--and they diversified their risk. It can be good to trim back and focus."

At the same time, some analysts caution that fixing pharma's pipeline problems will require a drastic shift in how companies think about their business models. "The whole economics of Big Pharma has changed dramatically," said Peter Young, president of specialty investment banking firm Young & Partners. "They're not investing fast enough; they're losing patent protection. I think [many companies] came to realize that the structural alignment doesn't match their economics."