(FORTUNE Magazine) – IN AN ERA when new products are often vital to corporate success, why do so many companies botch their development? Harvard business school professors Steven Wheelwright and Kim Clark, who have studied the problem, say it's mostly because companies spread themselves too thin. That's a sin Glaxo is obsessed with avoiding -- an important reason it is Britain's most valuable company and, after Merck, the world's second-largest prescription drugmaker. Hemant Shah, an independent financial analyst who has worked for both companies, says that when Glaxo's chief executive presents an annual overview of the company's research to security analysts, it commonly has dropped at least one-third of the projects presented the previous year. Says Shah, who describes Glaxo as the most commercial minded pharmaceutical company: ''That's a very good sign. They are willing to cut their losses quickly.'' Marshaling resources behind a few probable winners seems to work. Many industry observers believe Glaxo has the most promising new-product pipeline in the business. Three new drugs -- Zofran, which helps in postchemotherapy recovery, Serevent, a long-lasting asthma treatment, and Imigran, an antimigraine drug -- are likely blockbusters that could each eventually reach annual sales of $1 billion or more. Compounds like Zofran may also prove effective in treating age-associated memory loss and dementia. Glaxo focuses on a narrow band of about eight therapeutic categories with large markets in the developed world: antiulcerants, respiratory drugs (Glaxo leads in both categories), and migraine treatment, for example. Dr. Ernest Mario, 54, a charming and fiercely competitive American who took over as chief executive 3 1/2 years ago, says, ''We focus on categories that have the greatest need, which translates into the greatest commercial potential. Our first rule is to narrow the field of endeavor and prioritize.'' Dr. David Jack, a self-effacing Scot who was research director of Glaxo when it developed Zantac, the ulcer treatment that has become the world's best-selling drug, accounting for 44% of the company's sales last year, makes the point more bluntly: ''In research there is not safety in numbers. All there is in numbers is greater cost.'' On the projects Glaxo runs with, it runs hard. The company expects to spend about $1.5 billion on R&D and research-related capital expenditures this fiscal year, one-fourth of last year's sales. Even -- or as Mario insists, especially -- with so much money to spend, the company must keep relentless watch on product development. It concentrates research geographically, specializing in treatments for central nervous system maladies in Britain, for instance, or fungicides in Spain, based on a country's research strengths. Managers review projects monthly and will drop one if they don't get the efficacy they expected or if a competitor has charged too far ahead. Says Smith New Court analyst Paul Woodhouse: ''Their philosophy is that if a drug is only as good as another, they won't go ahead. It has to be better.'' If it is better, Glaxo figures it can charge more. This important element of the strategy has worked brilliantly so far, in part because doctors need little convincing. As Nigel Barnes, who works for the London securities firm Hoare Govett, explains, ''Most doctors' logic is 'Why is it more expensive? It must be better.' '' Increasing pressure on prices threatens that sweet equation. European governments, which usually negotiate the prices of prescription drugs with companies directly, have been slow to approve Imigran, the antimigraine drug, because they want the price cut. In France, Glaxo requested $93 for a box of two Imigran vials, usually enough to slay two migraines, says the company. The French approved the drug only after knocking some 20% off Glaxo's price. When Glaxo receives approval to market its antimigraine drug in the U.S., probably within the next few months, the expensive drug could become a magnet for criticism on Capitol Hill. The U.S. is the world's freest market for pharmaceuticals, but Congress looks likely to pass a bill that would effectively limit price increases on all existing drugs to less than the rate of inflation. Repeat: on existing drugs. The road is getting rougher for the industry, and Glaxo can't outdistance price controls, but its new-products machine looks like a winning vehicle.

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