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LONDON – By splitting its internal research effort into dozens of small teams, with each focusing on a particular disease or pathway, GlaxoSmithKline plc is on track to solve its productivity woes and push its return on investment in R&D to 14 percent.

"We are now more confident than ever we have the right model," said CEO Andrew Witty, following a three-year review of the 38 Discovery Performance Units (DPUs). GSK formed those in 2008 as it set about tackling patent expiries and the fact that for the previous decade new approvals had stalled at two product line extensions per year.

The DPUs are expected to deliver 30 new Phase IIb assets over the next three years. "This increase in productivity would mean GSK is moving toward sustainable replenishment of its late-stage pipeline with no increase in cost," Witty said.

R&D expenditure is no longer determined as a percentage of sales, but instead allocated using very strict return on investment criteria. In 2012, R&D spending will be broadly the same as 2007, at around £3.7 billion (US$5.9 billion). However, the introduction of DPUs saw R&D staff numbers fall by 4,500 to 10,500. The amount of lab space fell by 45 percent and fixed costs by 20 percent.

In 2006, London-based GSK had six compounds in Phase III; now it has 15 compounds in Phase III, with 30 ongoing Phase III trials, representing a very significant increase in output from that smaller cost base.

The DPUs were set up around four key principles, including focusing on the best science and going outside the company to find the best projects. As a result, the number of external partnerships at GSK has risen from 10 in 2006 to 50 now.

The reform of the R&D organization "has transformed the capability of the business," Witty said addressing GSK's annual results meeting in London Tuesday.

There are now more than 200,000 patients in active clinical trials compared to 100,000 in 2007 and the formation of DPUs "has brought back to life creativity" and "completely transformed the story of discovery," Witty said.

The DPUs will continue to be subject to regular and disciplined assessments. "We will consistently prune and focus," Witty added. The three-year review was carried out by a board that included senior R&D staff in GSK, alongside venture capital investors in pharma and biotech and payers.

At the heart of how DPUs have increased productivity has been giving scientists greater personal accountability and more scope to achieve their potential. Individual researchers are invited to suggest projects that GSK should follow, and new DPUs have been funded as a result. Putting all experts in the same place also has been helpful. Before the changes, GSK had neuroscience researchers spread across three sites in three time zones, and chemists and biologists were in separate laboratories.

The DPUs have "created greater potential for serendipity" and "the chance for spontaneous insights," Witty said. That may look like "back to the future" for anyone who worked in a drugs lab in the 1970s and 1980s, "but you can take it from me, it's transformed our culture," Witty said.

In parallel with reforming R&D, GSK has expanded into emerging markets and now derives 38 percent of its revenues from outside the traditional pharma markets in Europe and the U.S. The move has had the effect of depressing margins, but the new products that are coming through the pipeline will provide the opportunity to start increasing margins again. That will particularly be the case in the U.S., where Witty said GSK "has burnt off the patent cliff," and in Japan, where reforms to patents rules and pricing have made the country more receptive to innovative products.

Europe, on the other hand has slipped in terms of its willingness to pay for innovation.

"We have to face the reality that's it's about the U.S. and excitingly about Japan in terms of where innovation should be driven," Witty noted. Given a propensity "not to pay for innovation," Europe will not be driving the company's agenda in the same way. GSK has halved its headcount in Europe and will be staging fewer clinical trials there.

Although Europe is a very heterogeneous market, there are two general phenomena – price cuts and extensive delays in getting new products approved and reimbursed – that are discouraging GSK and leading it to focus elsewhere.

"Europe is stuck in a bad place," Witty said. "We will still register drugs in Europe, but we won't [shape] them for Europe."