Pfizer's announcement last week that it will cut its research marks a watershed for the pharmaceutical industry (see page 466). Until now Pfizer, the leading drug company in terms of both sales and research spending, and an important industry bellwether, has refrained from cutting its efforts to discover new drugs. Yet its $7 billion in annual R&D expenditures has failed to generate anything near the number of discoveries needed to cover those costs.

The problems facing Pfizer also affect the rest of the industry. A November report by the US Government Accountability Office found that while the industry's US R&D spending rose by 147% from 1993 to 2004, applications for drug approvals to the US Food and Drug Administration rose by only 38%. Applications for drugs with ingredients never before marketed in the United States grew by just 7%.

Former Pfizer chief executive Hank McKinnell found a fix by buying blockbusters instead of discovering them. The acquisition in 2000 of Warner-Lambert gave Pfizer the cholesterol-lowering drug Lipitor, with almost $13 billion in 2006 sales. In 2003, Pfizer bought Pharmacia and with it the arthritis drug Celebrex, which brought in around $2 billion last year.

But last summer, Pfizer's board ousted McKinnell in a clear signal of its impatience with that strategy's lack of longer-term delivery, compounded by its concern about the spectre of expiring patents. Five Pfizer drugs worth nearly $9 billion a year will lose patent protection before Lipitor goes off-patent four years from now. The board wants a change in the firm's R&D strategy and allocation of resources. With new chief executive Jeffrey Kindler — a lawyer who has been at the company for five years — it is getting one.

However, it is not clear whether Kindler is inaugurating a bold era in drug discovery or a period of creeping retrenchment. He is cutting several layers of middle management and bringing together scientists working on each of ten disease areas, from cancer to cardiovascular disease. In so doing, Kindler is not only seeking simplified logistics but also giving Pfizer's researchers a sense of collaborative ownership of the drug-discovery process. By dropping some discovery efforts entirely, he is acknowledging that the company can no longer afford to play every slot machine in the room. In the best of worlds, this will lead to greater focus and productivity, with the company doing better work in fewer disease areas.

But pessimists see an axe at work rather than a surgical scalpel — with more blows to follow at both Pfizer and its big competitors. These could well include sending a significant amount of early drug discovery to India, China or Eastern Europe, following the route that many clinical trials are already taking.

Observers also predict that big companies will increasingly rely on partnerships with small and mid-sized drug and biotechnology firms to generate drug candidates. If the research labs of Pfizer and its competitors cannot match the productivity of smaller, more flexible firms, it is not hard to imagine the bulk of discoveries being driven by such alliances. Then the big drug firms would be able to focus on what they do best: the heavy lifting of late-stage development and marketing.

Even then, sustaining profits won't be easy. With most, if not all, of the low-hanging fruit having been picked in the past quarter-century, even successful drugs are likely to generate revenues in the hundreds of millions, rather than billions, of dollars.

The industry must acknowledge this if it is to prepare for what is rapidly becoming the post-blockbuster era. All the signs say that companies need to shift their research sights to tailored drugs with smaller, targeted populations. These are cheaper to develop and, importantly, would face less market competition than the mega-blockbuster. Reading between the lines, Pfizer's announcement last week may have opened a door that leads in that direction.