Fred Hassan, chief executive of Schering-Plough Corp. (SGP), believes the future leaders of the pharmaceutical industry need to focus on innovation and research, rather than transforming into industrial companies that will get stuck in a cycle of buying companies to sustain their growth.

Hassan, who's time at the helm is limited by Merck & Co.'s (MRK) pending $41 billion takeover of the Kenilworth, N.J., company, has spent much of his career near the top of major drug makers including Pharmacia and Wyeth (WYE). As the industry battles declining revenue growth, Hassan praised the strategy used by both Roche Holding AG (RHHBY) and Wyeth in building their biotech operations

"Cost efficiencies and cost reductions will help for two or three years, but then you have to start looking for growth," Hassan said Wednesday at Windhover's Pharmaceutical Strategic Alliances conference in New York.

"If you don't reinvent yourself every ten years, you aren't going to do very well," he said.

Although Big Pharma has been under pressure in recent years to produce products that can replace those coming off of patent protection, he believes the industry is turning the corner.

"I believe this is a cycle. We are at the beginning of another cycle where there will be new opportunities for growth," he said.

But those companies that aren't concentrating on research, and have a culture more focused on deals and development, are going to have a harder time in coming years and become dependent on acquisitions to sustain themselves, Hassan said.

He warned that integrating deals is challenging, and companies need to avoid declaring the "victory" too early in the process, which he said can take more than five years to fully complete.

Hassan, who is expected to leave the merged company after the Merck deal closes later this year, hinted that he might try his hand at running a smaller company, but would want a company that either already has cash flow or is close to attaining it.

"In smaller companies it is easier to make a big difference," he said, but conceded that larger companies have some advantages.

"This is a high-risk business, and size does help you reduce the shocks," he said.

Hassan said the industry needs to build its presence in biotechnology, and come to realize that "it isn't a failure of one's leadership if something successful comes from somewhere else."

He pointed to the similar structures used by Roche Holding and Wyeth in building their biotech operations by taking controlling stakes in companies that they eventually absorbed.

Wyeth, under its former name of American Home Products, bought a 60% stake in Genetics Institute Inc. in 1992, and then took over the company in 1996. Many of those acquired operations later became the backbone of Wyeth's biotech development operations, a key driver in Pfizer Inc.'s (PFE) agreement to buy Wyeth for $68 billion in January.

Similarly, Roche bought a majority stake in Genentech in 1990 and took complete control of the company earlier this year for $46.8 billion.

"I think it is a great model...It should be pursued more often," Hassan said, noting that the smaller company's culture is maintained, but the worry about funding and partnerships is removed.

But such deals can be difficult to complete because target companies don't always want to operate under an umbrella of control, and the larger companies can find it is difficult to justify paying a premium for a company that won't yield immediate cost efficiencies.

"It is really interesting that in the early '90s these two very good things happened, which both led to valuable changes in the parent companies, and yet our industry hasn't done more of these," he said.

For the longer-term, he believes that having all the drug development operations under the same roof is the best way to run the company, because keeping divisions too separated can lead to internal competition and friction, both of which are counterproductive.

-Thomas Gryta; Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com