Novartis’s pathway to business longevity by Geoff Colvin @FortuneMagazine March 21, 2013, 11:32 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Is now a great time or an awful time to be running a global pharmaceutical giant? The bad news is that the U.S. Affordable Care Act aims to achieve much of its promised savings by squeezing payments to suppliers, and strapped European governments are trying to reduce their health care and drug payments. The good news is that medical science keeps gaining ground on the most dreaded conditions just as baby boomers are reaching ages when they need help the most. The job of Joe Jimenez, 53, is to navigate that world for Novartis NVS , the Swiss maker of drugs such as the breakthrough leukemia treatment Gleevec and consumer brands including Excedrin and Theraflu. He talked recently with Fortune’s Geoff Colvin about beating cancer, getting the most from R&D, why a shrinking Russia is a growing market, and much else. Edited excerpts: Q: Novartis is a major player in pharmaceutical research. What are the areas of greatest promise? Oncology is going to be an area of great medical breakthroughs in pharmaceutical development in the next five to 10 years. You’re seeing technology explode. The deep sequencing of the human genome and how inexpensive that has become have created a wealth of data that will allow new areas of discovery that have never been possible before. I also think regenerative medicine will be a growth area over the next 10 years. As people age, muscle loss becomes very common, as do sight and hearing loss. And the explosion of technology is allowing us to discover and develop innovative new medicines in those areas. It sounds as if the nature of medical research is changing. If it’s analyzing vast quantities of data that never used to be available, then doesn’t that call for new areas of expertise? It does. If you think about the amounts of data that are now available, bioinformatics capability is becoming very important, as is the ability to mine that data and really understand, for example, the specific mutations that are leading to certain types of cancers. For us, what it’s meant is that IT has become a very important part of drug discovery. In the future, you’re going to have to meld medical, scientific, and information technologies to create medical advancements. In the U.S. the growth of health care spending cannot continue at the current rate. The rate of growth has to come down. Is that fundamentally a good thing or a bad thing for a big pharmaceutical company? First of all, it’s a necessary thing because we can’t continue to see these increases in spending, particularly in the U.S. We have to get on a very solid financial footing. At the same time, pharmaceuticals are generally 15% or less of total health care spending. The big areas of spending in health care are hospitalization, physicians, nursing care. So I don’t think it’s necessarily good or bad for a pharmaceutical company. Our mission is to discover and develop new and innovative medicines, and if we are developing these new medicines that can change the practice of medicine in certain disease areas, then those drugs will be reimbursed. What will go away most likely is the incrementally bbetter new drug that comes out. But for the big medical breakthroughs, I think there will be reimbursement. Novartis has a way of pursuing those medical breakthroughs, getting to blockbuster drugs, that seems to be different from what some other companies are doing. Can you describe that approach? Yes, we took a different approach. Starting about 10 years ago, we started what’s called the pathways approach, where we understand the molecular pathway of a particular disease, usually in a rare disease where you have a very homogeneous patient population. But maybe a very small population. A small population, but a very homogeneous patient population that allows us to study the disease and the molecular pathway that leads to that disease. We then develop a drug that can interrupt that pathway, and then we look to mechanistically expand into other disease areas that are impacted by the same pathway. So essentially it doesn’t mean that blockbusters will go away, but the definition of a blockbuster will change pretty dramatically away from having one disease area to a drug that maybe is active in three or four or even five diseases. What’s an example? An example is our oncology drug called Afinitor, which is an mTOR [a type of protein in human cells] inhibitor. The mTOR pathway is implicated in many different types of diseases. So we initially developed Afinitor in renal cell cancer, and then we started testing Afinitor in many other cancers. Breast cancer is another indication that we just received approval for, and that’s now going to help more than 220,000 patients every year who have advanced breast cancer. So here’s an example of a drug that started in renal cell cancer, has expanded into breast cancer, and then there are a number of other indications. That together will make it a blockbuster. R&D is a huge investment for Novartis, as it is for your competitors. How do you get more than the other guys from a dollar of R&D? A good question — everybody’s trying to increase productivity in research and development. We’ve found a couple of things. First you have to find the right scientists. So we have built research centers where the scientists are. We have not asked them to come to a particular location. We’ve built research centers in the U.S., in Europe, and we’re building one in Shanghai. So we’re going where the talent is. That’s No. 1. The second is keeping spending strong in research and development. At Novartis we’ve made the commitment to spend about 20% of sales on research and development. In our pharma business, that’s over $9 billion a year that we invest. So if you have the right talent and the right amount of spending, we find that that’s the first part of success. Then you have to have the right approach, and I think that’s the pathways approach, taking a different look at how we’re going to discover and develop drugs. Where are the geographic areas of growth for you outside the U.S. and Western Europe? We have a very large and growing business in China, which has just become one of our top 10 markets. Last year it grew 24%. The Chinese government has made a massive commitment to improving health care among rural and urban Chinese, and so we see that as a continued growth area. Another area is Russia. Russia has a problem. It has a declining population. And the government in Russia has made the commitment to improve access to health care in ways that will reverse that population decline. There are many developing countries in which we’re investing quite heavily as growth areas. In markets like that, isn’t it a very different business? Those people are paying for their own medical care for the most part. Yes, it is. A lot of the drug payment in those countries is self-pay — people paying out of their own pockets. At the same time, think about the economic growth in China and the absolute size of the population. We have many innovative drugs that we have launched in China that are freely paid for by many of the Chinese who will pay out-of-pocket because they want the drug. How about Africa? I see Africa as the next set of emerging markets. Probably not in the next five years, but we have to start building infrastructure now in sub-Saharan Africa, countries like Nigeria and Kenya, because those economies are growing at 6% to 7% per year. Their health care infrastructures are in their infancy. You’re going to see an emerging middle class in those countries. In years five through 15, I see Africa as a tremendous growth opportunity for Novartis. Before joining Novartis in 2007, you’d spent most of your career in consumer products, including several years at H.J. Heinz HNZ . What’s your advice to any leader who may not have the technical expertise of some of the people he works with? Not being a physician or a scientist and running a science-based organization is a very interesting challenge. You have to know enough about the science to know who to listen to and who not to listen to. The advice I would give is to play to your strengths. I had the advantage of being able to look at the landscape outside of this industry and understand how the world was changing, and then help to position the company in a way that could take advantage of that. Not coming from a particular industry sometimes has its advantages. You don’t get caught up in a lot of the internal way of thinking. The Leadership series: Formerly called “C-Suite Strategies,” this is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership — plus find Colvin interviews with Charles Schwab, the team of Jeff Immelt (GE) and A.G. Lafley (P&G), former New York City schools chancellor Joel Klein, Pimco’s Mohamed El-Erian, Humana CEO Michael McCallister, and many more. This story is from the April 08, 2013 issue of Fortune.