* R&D spending $68 bln in 2010 vs $70 bln in 2009
* First ever decline follows poor returns
* Trend set to continue as Pfizer, others cut more
LONDON, June 27 (Reuters) - The global drug industry cut its research spending for the first time ever in 2010, after decades of relentless increases, and the pace of decline looks set to quicken this year.
Overall expenditure on discovering and developing new medicines amounted to an estimated $68 billion last year, down nearly 3 percent on the $70 billion spent in both 2008 and 2009, according to Thomson Reuters data released on Monday.
The fall reflects a growing disillusionment with poor returns on pharmaceutical R&D. Disappointing research productivity is arguably the biggest single factor behind the declining valuations of the sector over the past decade.
"For the first time, drug companies are reducing costs in their R&D organisations and I believe we will see that trend continue," said Hans Poulsen, head of life sciences consulting at Thomson Reuters.
Traditionally, R&D laboratories have been largely immune to cost cutting but that has changed in the past year or so, and in recent months the pace of cutbacks has increased.
Pfizer , 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. Other companies have also made smaller cuts.
The winding back of research budgets represents a major change for an industry that has ploughed billions of dollars into the hunt for new drugs, often with little to show for it.
Since 2000, research investment by drug companies accounting for 80 percent of the industry's total R&D has increased by more 50 percent -- but output of new medicines has actually gone down.
Last year, 21 new molecular entities were launched on the global market, down from 26 in 2009, and only a third of those were from major drugmakers with annual research budgets of at least $2 billion, according to the 2011 Pharmaceutical R&D Factbook compiled by Thomson Reuters unit CMR International.
Between 2008 and 2010 there were 55 terminations of projects that had already reached the final Phase III stage of clinical testing, more than double the level of 2005-07, reflecting the growing difficulty of developing new drugs that are better than existing ones.
Faced with the loss of exclusivity on more than 110 products in the key U.S. market between 2012 and 2014, the industry has stepped up its drive to buy in promising experimental medicines from small biotech companies.
But this in-licensing strategy, too, is facing difficulty, as drugs that originate inside Big Pharma companies actually have a 20 percent higher chance of making it to market, according to CMR figures.
Recently, some experts have suggested that productivity in drug research may be improving, as evidenced by progress with breakthrough medicines like GlaxoSmithKline's new drug Benlysta for lupus and Bristol-Myers Squibb's melanoma treatment Yervoy.
Poulsen, however, believes it is too early to judge.
"We could see an improvement but it may take four to six years before we can really say the trend has been reversed," he said. (Editing by David Cowell)