Roche's (OTC BB: RHHBY) Chief Executive Severin Schwan isn't worried about the economic crisis in Europe cutting into spending on drugs. Sure, the cuts will cause a shakeup, Schwan said during a press conference this week. But there are two groups he thinks will emerge from the crisis stronger than ever:

  • Large generic-drug makers. Teva Pharmaceuticals (Nasdaq: TEVA) and Novartis (NYSE: NVS) can use their size to offer value.
  • Innovative drugmakers. These companies offer value through useful drugs.

Offerings in the middle -- me-too drugs that lack innovation and don't offer any value for consumers -- aren't likely to survive. Schwan didn't call out any of his fellow drugmakers, but I'm more than willing to. For one, Bristol-Myers Squibb (NYSE: BMY) and AstraZeneca's Onglyza won't prosper in a cost-cutting environment when it provides no benefit over the current offering, Merck's (NYSE: MRK) Januvia.

Schwan spoke out because he obviously thinks Roche can innovate. I'd say he's right, especially after his company tied up Genentech last year. Pipeline candidates like its promising breast-cancer drug trastuzumab-DM1 should help the company grow, even in the face of pressure to decrease health-care spending in Europe and the U.S.

But Roche isn't the only company avoiding the middle ground. You don't necessarily have to head to the OTC or foreign exchanges to find innovation.

The key, as I see it, is to find diseases where current treatments are failing miserably. Innovators in these areas will be rewarded handsomely, because the value of next-generation drugs will be clear.

Of livers and brains
The current offerings for treating hepatitis C patients from Merck and Roche only cure about 50% of the patients who take the drugs. But Vertex Pharmaceuticals (Nasdaq: VRTX), Merck, and a few other drugmakers farther back are developing next-generation drugs that can cure substantially more patients on their first attempt. In its recently released phase 3 trial, Vertex set the bar at a 75% cure rate with its innovative drug telaprevir.

Once it hits the market, telaprevir will likely be expensive. However, Vertex and its international marketing partner Johnson & Johnson (NYSE: JNJ) won't have too much problem justifying the price, because their drug will cure people who might otherwise end up with more complicated (and expensive) liver issues if their hepatitis C infection isn't eradicated.

Alzheimer's disease is another area where current offerings are just plain pitiful. Patients still take treatments like Aricept from Eisai and Pfizer, and Forest Labs' Namenda, because they're better than nothing -- but just barely. The market is ripe for an innovative drug that can produce real results.

Unlike hepatitis C, there's more risk of a total flop for current phase 3 drugs for Alzheimer's disease partially because the disease is poorly understood. Pfizer and Medivation's Dimebon failed its first phase 3 attempt and I'm not sure investors should have much confidence in Pfizer's alternative, bapineuzumab, which is partnered with Johnson & Johnson and Elan.

But if one of those drugs -- or something farther back in development -- is able to demonstrate a meaningful effect on the disease progression, the sky's the limit. Sales of $10 billion have been bandied about for a successful Alzheimer's drug, which isn't unreasonable, considering the $172 billion per year currently spent to care for individuals in the U.S. with the disease.

Think like a broke patient
Health-care investors' biggest worry used to be whether a drug was approvable. Now, it's becoming increasingly important to recognize whether the drug provides value for the end user. Health care, just like every other industry, will need innovation to emerge from the economic crisis.

Pfizer is a Motley Fool Inside Value selection. Elan and Vertex Pharmaceuticals are Rule Breakers picks. Novartis is a Global Gains recommendation. Johnson & Johnson is an Income Investor recommendation. Motley Fool Options has recommended buying calls on shares of Johnson & Johnson. Try any of our Foolish newsletters today, free for 30 days. 

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.