NEW YORK It's a lousy time to work in a drug lab, but the pink slips handed out to tens of thousands of pharmaceutical industry employees may have a silver lining for investors.
Even as drugmakers cut research and development (R&D) budgets, there are tentative signs that the flow of new medicines is improving, potentially pointing to a long-awaited improvement in research productivity.
The $850-billion-a-year industry still doesn't have nearly enough new drugs to replace all those facing generic competition in the biggest wave of patent expirations in history.
But by adopting a far tougher approach to R&D spending in future, pharmaceutical executives believe they can fix lagging returns in R&D -- arguably the biggest single factor behind the declining valuations of the sector over the past decade.
Pfizer (PFE.N), the world's biggest drugmaker, has taken the most dramatic steps under new Chief Executive Ian Read, with plans to slash around a quarter of its R&D budget over the next two years as its labs focus only on the most lucrative areas.
It is not alone, however.
Industry leaders speaking at the Reuters Health Summit in New York this week agreed that industry-wide spending on R&D -- after years of strong increases -- is set to fall, although the pattern will vary from company to company.
"When we get the final numbers for 2010 over 2009 globally, I think we are going to see it is in decline," said AstraZeneca (AZN.L) Chief Executive David Brennan.
Chris Viehbacher, his counterpart at Sanofi (SASY.PA), sees the pace of cuts picking up this year and next, as the sector enters the heaviest period of generic erosion.
A number of huge products, like Pfizer's $11-billion-a-year cholesterol fighter Lipitor and Sanofi and Bristol-Myers Squibb's (BMY.N) blood thinner Plavix, go off patent in 2011 and 2012.
"Five years ago people would say 'the more I spend on R&D, the more shots in goal I will have, the more successful I will be,'" Viehbacher said.
"Now you have got some investors out there who believe that what we do in R&D is actually value destroying," he added.
Certainly, the glory days are over. Last year, the U.S. Food and Drug Administration's drugs division approved just 21 novel medicines -- less than half the level seen in 1996 and 1997.
Yet Dr. Janet Woodcock, head of the FDA's drugs center, said the agency had already approved 12 so far this year, partly thanks to the increasing number of smaller biotech companies coming forward with successful products.
"The nadir has been reached and we're coming up the other side," Woodcock said.
Investors will take some convincing, not least because the 13-year cycle for winning approval for a new drug makes it tricky to nail down just how much bang companies are getting for their R&D buck. And biting the bullet is not always easy.
"Every CEO believes they have a better mousetrap than everybody else, which sometimes gets in the way of making rational decisions," said Novo Nordisk (NOVOb.CO) CEO Lars Sorensen.
GlaxoSmithKline (GSK.L) is one company that has taken a stab at doing the math. It currently reckons its rate of return is around 11 percent and has set a goal of increasing this to 14 percent, an increase of 25 percent, over the medium term.
GSK has already cut back on research, with the number of staff working in R&D down 28 percent since 2006. It may go down more -- but further cuts will be constrained by the need to pay for a bunch of large late-stage clinical trials.
"Overall, we continue to push for getting better at what we spend, and hopefully that can lead to further reductions. But I think we do have a big pipeline to pull through, and that's going to limit our ability to be totally flexible," said Chief Financial Officer Simon Dingemans.
Not all drugmakers agree with the approach of Pfizer's Read, who cheered his investors in February by matching deep cuts in R&D with a $5 billion increase in the group's share buyback program.
Arch-rival Merck & Co (MRK.N) opted to withdraw its long-term profit forecast rather than take a hatchet to its research budget.
Some biotech companies, meanwhile, are basking in the success of recent products at a time when Big Pharma has been floundering and will be spending more. Celgene (CELG.O) CEO Robert Hugin said he expected record R&D spending in 2011.