By Abrahm Lustgarten

(FORTUNE Magazine) – You might expect GlaxoSmithKline CEO Jean-Pierre Garnier to be keeping a low profile. After all, top Glaxo antidepressants, including Paxil, are under fire for possible links to childhood suicides, and at presstime the feds had just seized shipments of Paxil CR and diabetes medication Avandamet, citing manufacturing issues. But the charismatic Frenchman, who holds a Ph.D. from the University of Louis Pasteur in France and an MBA from Stanford, seems unruffled by the swirl of bad news. In a candid and wide-ranging conversation, he talked about the drug-marketing arms race, how he toppled Glaxo's "scientist pyramid," and why he's nicknamed "Dr. Gloom." -- Abrahm Lustgarten

It's been a rough year for the industry. What's the biggest challenge going forward?

Lots of distracting things are happening, but the real issue is whether the industry can discover meaningful drugs. This is not an industry for the faint-hearted. I've lost three top products in the past three years due to patent expirations. And I have to continue to grow financially. Do you think that is easy?

The industry is really struggling to come up with new drugs. How are you faring?

We as a company began to address this five years ago. My nickname was "Dr. Gloom and Doom" because I made all those speeches about R&D productivity going down the toilet, and nobody believed it! My peers said, "What are you talking about? We're fine." But anyone could see it coming. While annual R&D spending has multiplied by 15 times over the past 20 years, the number of novel drugs approved each year has remained the same. Suddenly it's no longer $200 million you need to discover a drug, it's a billion. Then the whole business model is in question. So we reconstructed the R&D process.

So what is your new R&D model?

First, we decided to use gene sequencing to make drug discovery more systematic. We were the first to sign with Human Genome Sciences to get access to its technology. We had also built a huge bureaucracy. I mean Big Pharma companies have pyramids of 15,000, 16,000, 20,000 scientists. I tried to change the structure at SmithKline, and all the top R&D guys rebelled against me. But the merger with Glaxo gave me the opportunity I needed. We don't have a big pyramid anymore. We have a head of R&D, and then we have seven small organizations--about 600 scientists each--that do the critical part of drug discovery. We are seeing phenomenal numbers. We have the largest pipeline of new drugs in the industry.

Regarding the Paxil issues, have you made mistakes?

Clinical studies in depression fail all the time. Our bad luck on Paxil was that the first pediatric studies were positive, so we thought we had it. That was a mistake. In terms of Paxil CR, we've identified the cause of the manufacturing issues and are in ongoing discussions with the FDA. I tell you that in general, the area where we and the industry as a whole have made mistakes is on promotional practices. Access to physicians is very hard, so sometimes sales representatives would try to buy them football tickets and dinners and the like. That led to doing things in a way that the public doesn't accept.

How have you managed to keep sane during these crises?

I've hired someone from outside the industry, whom I call an angel. I said to myself, "Maybe I'm too close to this. I want you from the outside to tell me all the things we do that could potentially lead to similar crises."

What about direct-to-consumer ads?

My DTC budget is just 10% of the U.S. sales and marketing budget. It's minor. What I need to do is cut the sales force and the promotion and reinvest it all in R&D. But I can't withdraw from the marketing battle --I have to protect my sales line.

If Pfizer streamlines its sales force, would Glaxo follow?

Yeah, well, let's see what they announce. If they cut their domestic sales force by 30%, then we are in a new era, because lots of companies will follow suit. In fact we already are--we're launching five new drugs this year without increasing our sales force. ■