By Katie Reid

BASEL (Reuters) - Roche <ROG.VX> expects a new generation of drugs targeted at specific groups of patients to make up half its portfolio in 10 years, a shift that is pushing the boundaries of modern medicine.

In an interview, Roche Chief Executive Severin Schwan compared advances in molecular biology that are improving understanding of how cells work to the revolution in medicine several centuries ago when doctors first started opening up patients' bodies.

"In 10 years we would see half of our portfolio to be targeted therapies. And if anything, I would assume in 20 years this percentage is going to increase," Schwan told Reuters.

Roche, the world's largest maker of cancer drugs, leads the pack in targeted therapies thanks in part to its closely integrated diagnostics arm that helps its pharma division pinpoint the gene mutations its drugs should zero in on.

Its 5.4 billion Swiss franc ($6.6 billion) breast cancer drug Herceptin broke new ground in the field a decade ago as a drug designed to treat only women who make too much of the HER2 protein, around 20 percent of sufferers.

Half of the products in Roche's late-stage pipeline already have companion diagnostics -- tests that determine if the patients are a genetic fit with the therapies.

The 115-year-old company has just won U.S. backing for a revolutionary melanoma drug and its companion test to treat those patients who have a specific mutation of this disease.

Players like cross-town rival Novartis <NOVN.VX> and U.S. group Pfizer <PFE.N>, which are also active in oncology, are among those following in Roche's footsteps, said Schwan, a lawyer by training who has a background in economics.

Schwan has high hopes for Roche's asthma drug Lebrikizumab, now in late-stage trials: "If this works, I believe this will change the standard of care for asthma treatment."

PRICING POWER

Schwan is convinced he will be able to charge a premium for targeted therapies despite worldwide healthcare spending cuts.

"Allocation of healthcare resources will go where you have the biggest impact in terms of improvement of health for the individual patient," Schwan said.

Better targeted medicines will also help cut costs as those patients whose genetic makeup means they will not benefit from a drug simply will not get it, reducing spending on administering drugs as well as the cost of potential side effects, he said.

The costs of developing drugs could potentially also fall, Schwan said, as fewer patients will be required for a drug to meet its endpoint in a late-stage trial.

Schwan, a softly-spoken Austrian with an Innsbruck University doctorate in law, said that making drugs for smaller patient populations did not spell the end of blockbusters, those that rake in sales of more than $1 billion, pointing to the success of Herceptin.

Illustrating his points by scribbling a graph or sketching a diagram, Schwan said another blockbuster candidate is MetMAb, a lung cancer drug targeting about 50 percent of patients who overexpress a receptor on the cancer cell:

"Imagine we move the standard of care for 50 percent of lung cancer patients. If it works ... of course it will be a blockbuster driven by the enormous medical value it offers."

ON TRACK

Despite a string of setbacks last year that prompted it to slash thousands of jobs in a cost saving program, Roche has been more than twice as successful as the rest of the industry at getting drugs to market over the past five years.

Some analysts have questioned whether the Swiss franc, which has soared this year, may have chewed up much of the progress made by Roche so far, but Schwan said the currency's fluctuations have not had any impact on the program.

"Just as innovation is not over, our productivity improvements will not be over," he said.

And he reaffirmed Roche's commitment to its home town despite the strong franc: "I'm really a big fan of Switzerland overall and of Basel in particular. Why is this the case? Most importantly because of the access to talent. Because in our business it's all about innovation." ($1 = 0.818 Swiss Francs)

(Additional reporting by Emma Thomasson and Paul Arnold; Editing by Andrew Callus)