CONGRESS OF THE UNITED STATES
`CONGRESSIONAL BUDGET OFFICE
`
`A
`
`CBO
`
`S T U D Y
`
`© Unlisted images, Inc.
`
`OCTOBER 2006
`
`Research and
`Development in the
`Pharmaceutical
`Industry
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`Pub. No. 2589
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`A
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`CBO
`
`S T U D Y
`
`Research and Development in the
`Pharmaceutical Industry
`
`October 2006
`
`The Congress of the United States O Congressional Budget Office
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`Preface
`
`Perceptions that the pace of new-drug development has slowed and that the pharmaceuti-
`
`cal industry is highly profitable have sparked concerns that significant problems loom for
`future drug development. This Congressional Budget Office (CBO) study—prepared at the
`request of the Senate Majority Leader—reviews basic facts about the drug industry’s recent
`spending on research and development (R&D) and its output of new drugs. The study also
`examines issues relating to the costs of R&D, the federal government’s role in pharmaceutical
`research, the performance of the pharmaceutical industry in developing innovative drugs, and
`the role of expected profits in private firms’ decisions about investing in drug R&D. In keep-
`ing with CBO’s mandate to provide objective, impartial analysis, the study makes no recom-
`mendations.
`
`David H. Austin prepared this report under the supervision of Joseph Kile and David Moore.
`Colin Baker provided valuable consultation. Jim Baumgardner, Anna Cook, Doug Hamilton,
`and Dennis Zimmerman of CBO provided comments, as did Iain Cockburn of Boston Uni-
`versity, Mark Duggan of the University of Maryland, and Judith Wagner of the Institute of
`Medicine. (The assistance of external reviewers implies no responsibility for the final product,
`which rests solely with CBO.)
`
`Christian Howlett edited the study, and Kate Kelly proofread it. Angela Z. McCollough pre-
`pared drafts of the manuscript. Maureen Costantino prepared the report for publication, with
`assistance from Allan Keaton, and designed the cover. Lenny Skutnik printed the initial cop-
`ies, and Simone Thomas prepared the electronic version for CBO’s Web site (www.cbo.gov).
`
`October 2006
`
`Donald B. Marron
`Acting Director
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`Contents
`
`1 Introduction and Summary 1
`
`The Cost of Developing a New Drug 1
`The Role of Federal Research and Development 2
`Assessing the Drug Industry’s R&D Performance 3
`The Drug Industry’s Profits and R&D Investment 4
`
`2 Trends in R&D Spending and Output of New Drugs 7
`
`Spending for Research and Development 7
`R&D Intensity 9
`Output of Innovative New Drugs 11
`Leading Therapeutic Classes 12
`Modifications and Approved New Uses of Drugs 14
`
`Primary Determinants of R&D Costs 19
`Why Have R&D Costs Risen for Innovative New Drugs? 21
`
`3 What Does It Cost to Develop a New Drug? 19
`4 Does Federal R&D Spending Stimulate or Substitute for
`
`Private-Sector Spending? 27
`Public and Private R&D Spending 27
`Does Government R&D Crowd Out Private R&D? 29
`A Changing Role for Public-Sector Research 33
`
`5 Has the Drug Industry’s Innovative Performance Declined? 35
`
`Recent Innovative Performance 35
`Did Changes in the Size of Drug Companies Affect
`Research Productivity? 39
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`VI
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`RESEARCH AND DEVELOPMENT IN THE PHARMACEUTICAL INDUSTRY
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`6 Profitability and R&D Investment in the Drug Industry 43
`
`Recent Estimates of Profitability 43
`Expected Profits as a Signal for Performing Drug R&D 45
`
`References 51
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`CONTENTS
`
`VII
`
`Tables
`
`2-1.
`
`3-1.
`
`5-1.
`
`Figures
`
`2-1.
`
`2-2.
`
`2-3.
`
`2-4.
`
`3-1.
`
`3-2.
`
`4-1.
`
`4-2.
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`5-1.
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`5-2.
`
`6-1.
`
`Boxes
`
`4-1.
`
`Therapeutic Classes with Three or More Leading Brand-Name Drugs in 2003
`
`DiMasi and Others’ Estimate of Average Research Costs and Times for
`Successfully Developed New Molecular Entities
`
`Merger History of the Top Ten Pharmaceutical Companies in 2004 by
`Global Sales
`
`Estimates of the U.S. Drug Industry’s Annual Spending on Research and
`Development
`
`Research and Development Spending as a Percentage of Sales Revenue for
`Various U.S. Industries
`
`Number of New Molecular Entities Approved by the Food and Drug
`Administration Each Year
`
`Number of Non-NMEs Approved by the Food and Drug Administration
`Each Year, Compared with Total New-Drug Applications
`
`Various Estimates of the Average R&D Cost of a Successfully Developed
`New Molecular Entity
`
`Percentage of New Molecular Entities Entering Each Phase of Clinical Trials
`
`Annual Spending on Research and Development by Drug Companies and the
`National Institutes of Health
`
`NME Approvals and Public-Sector Spending on Basic Research
`
`NME Approvals and Drug Companies’ Spending on Research and Development
`
`Research and Development Spending and Productivity for Various U.S. Industries
`
`Return on Assets for Drug Companies Versus for All Major Companies, by
`Standard Accounting Methods
`
`Do Private Firms Benefit Disproportionately from Taxpayer-Funded
`Basic Research?
`
`6-1.
`
`Drug Prices and Consumer Value in R&D Spending
`
`13
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`20
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`40
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`8
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`10
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`11
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`15
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`22
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`23
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`28
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`32
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`36
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`38
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`44
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`30
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`46
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`C H A P T E R
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`1
`
`Introduction and Summary
`
`Recent concerns about escalating drug prices and
`
`rising health care spending have sparked considerable
`interest in how new drugs are discovered, tested, and
`sold—and in how well those processes serve the interests
`of U.S. consumers. Public dialogue on those issues, how-
`ever, suggests that the complex economic forces that gov-
`ern the drug-discovery process are not widely understood.
`Even some of the basic economic facts about the pharma-
`ceutical industry have been subject to debate. This study
`describes the current state of pharmaceutical research and
`development (R&D), analyzes the forces that influence
`it, and considers how well markets are working to deliver
`new drugs.
`
`Much of the public interest in pharmaceutical R&D con-
`cerns the relationship between drug prices, drug firms’
`costs, and the pace and direction of innovation. Average
`prices of new drug products have been rising much faster
`than the rate of inflation, and annual R&D spending has
`grown faster still. Nevertheless, introductions of innova-
`tive new drugs have slowed. At the same time, drug com-
`panies have been able to charge high retail prices for new
`drugs that are only incrementally different from older
`drugs whose prices have fallen. With consumers paying
`more for new drugs in the United States than almost any-
`where else in the world, and with the perception that the
`drug industry has become less innovative, many observers
`have wondered whether some kind of policy intervention
`is warranted.
`
`Pharmaceutical markets, however, are extremely complex
`in many respects. Large public-sector investments in basic
`biomedical R&D influence private companies’ choices
`about what to work on and how intensively to invest in
`research and development. The returns on private-sector
`R&D are attractive, on average, but they vary consider-
`ably from one drug to the next. Consumer demand for
`prescription drugs is often indirect, mediated by doctors
`and health insurers. New drugs must undergo costly and
`
`time-consuming testing before they can be sold. More-
`over, it may cost hundreds of millions of dollars to
`develop an innovative new drug that then will cost only a
`few cents per dose to manufacture—and the price of the
`drug will have no obvious connection to either cost.
`Comparative information about drug quality from
`unbiased, head-to-head clinical trials of competing drugs
`is seldom published, although it would help drug pur-
`chasers make the best choices—and in turn improve the
`market signals that guide private companies’ decisions
`about research and development. An understanding of
`how such factors interact with the industry’s R&D pro-
`cess is necessary to recognize the underlying causes of any
`failure of the market to encourage a socially optimal level
`of drug R&D.
`
`This study presents basic facts about the pharmaceutical
`industry’s spending on research and development and
`about the types and numbers of new drugs that result
`from it. The study also analyzes several major issues
`related to pharmaceutical R&D:
`
`B What explains the cost of developing new drugs?
`
`B Does federal investment in R&D stimulate or displace
`private investment?
`
`B Has the drug industry’s innovative performance
`declined?
`
`B How profitable are drug firms, and how do profits
`affect the amount and type of R&D that companies
`conduct?
`
`The Cost of Developing a New Drug
`Research and development costs vary widely from one
`new drug to the next. Those costs depend on the type of
`drug being developed, the likelihood of failure, and
`whether the drug is based on a molecule not used before
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`2
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`RESEARCH AND DEVELOPMENT IN THE PHARMACEUTICAL INDUSTRY
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`in any pharmaceutical product (a new molecular entity,
`or NME) or instead is an incremental modification of an
`existing drug.
`
`Innovative Drugs
`A recent, widely circulated estimate put the average cost
`of developing an innovative new drug at more than $800
`million, including expenditures on failed projects and the
`value of forgone alternative investments.1 Although that
`average cost suggests that new-drug discovery and devel-
`opment can be very expensive, it reflects the research
`strategies and drug-development choices that companies
`make on the basis of their expectations about future reve-
`nue. If companies expected to earn less from future drug
`sales, they would alter their research strategies to lower
`their average R&D spending per drug. Moreover, that
`estimate represents only NMEs developed by a sample of
`large pharmaceutical firms. Other types of drugs often
`cost much less to develop (although NMEs have been
`the source of most of the major therapeutic advances in
`pharmaceuticals).
`
`The study that produced that cost estimate also calcu-
`lated how long it takes to develop a new drug and the rel-
`ative contribution of capital costs to a drug’s total R&D
`costs. On average, developing an innovative new drug
`takes about 12 years, the study concluded, and a firm’s
`actual expenditures make up only about half of the total
`reported cost. The rest represents the financial cost of
`tying up investment capital in multiyear drug-
`development projects, earning no return until and unless
`a project succeeds. That “opportunity cost” of capital
`reflects forgone interest or earnings from alternative uses
`of the capital. (Opportunity costs are common to all
`innovative industries, but they are particularly large for
`pharmaceutical firms because of the relatively long time
`that is often required to develop a new drug.)
`
`Research and development spending per NME has grown
`significantly in recent years, for various reasons. First, fail-
`ure rates in clinical trials have increased, possibly because
`of greater research challenges or a willingness to test risk-
`ier drugs in such trials. Second, larger drug firms are said
`to have shifted the focus of their development efforts
`away from drugs for acute illnesses and toward drugs for
`
`1.
`
`Joseph A. DiMasi, Ronald W. Hansen, and Henry G. Grabowski,
`“The Price of Innovation: New Estimates of Drug Development
`Costs,” Journal of Health Economics, vol. 22, no. 2 (March 2003),
`pp. 151-185.
`
`chronic illnesses. Drugs that treat chronic illnesses can be
`more expensive to develop because they often require
`larger and longer clinical trials. Third, greater technologi-
`cal complexity in drug development and greater speci-
`ficity in disease targets have helped to raise average R&D
`costs, as firms now identify drugs with particular molecu-
`lar characteristics rather than using trial-and-error meth-
`ods to find compounds that work in some desired way.
`
`Not all new molecular entities provide unique therapeutic
`functions. Many NMEs are so-called “me-too” drugs.
`Despite that name, they are not necessarily imitations of
`other drugs. Rather, they may be innovative products that
`lost the race to be the first drug on the market in a given
`therapeutic class (such as antidepressants, antibiotics, or
`antihistamines). Such products can benefit consumers by
`competing with, and sometimes improving on, the pio-
`neering drug in a class.
`
`Incrementally Modified Drugs
`Most new drug products have much lower R&D costs
`than NMEs because they are incremental improvements
`on existing drugs. Those costs can still be considerable if
`the new product requires clinical trials. Nevertheless,
`because non-NMEs constitute about two-thirds of the
`drugs approved by the Food and Drug Administration
`but account for only about one-third of the industry’s
`R&D spending (by some estimates), their average direct
`cost may be only about one-fourth that of an NME.
`Their opportunity costs are also lower to the extent that
`they take less time to develop than drugs based on new
`molecules.
`
`Incrementally modified drugs sometimes provide sig-
`nificant benefits to consumers. For example, more-
`convenient dosing forms (say, a pill that can be taken
`once a day rather than every four hours) can increase
`the likelihood that patients will take their medicine as
`directed and can result in better health. At the same time,
`given the indirect nature of demand in pharmaceutical
`markets, the higher prices that are charged for some drugs
`that are merely extensions of current product lines may
`not be commensurate with the additional value that those
`drugs provide.
`
`The Role of Federal Research and
`Development
`The federal government spent more than $25 billion on
`health-related R&D in 2005. Only some of that spend-
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`CHAPTER ONE
`
`INTRODUCTION AND SUMMARY
`
`3
`
`ing is explicitly related to the development of new phar-
`maceuticals. However, much of it is devoted to basic
`research on the mechanisms of disease, which underpins
`the pharmaceutical industry’s search for new drugs.
`
`The primary rationale for the government to play a role
`in basic research is that private companies perform too
`little such research themselves (relative to what is best for
`society). In general, the information generated by basic
`research can be readily replicated at low cost. Thus, many
`of the benefits of that research accrue not to the company
`that performs it but to the public and to other firms.
`With pharmaceuticals, those spillover benefits can be sig-
`nificant because the development of new drugs depends
`on scientific advances. Federal funding of basic research
`directly stimulates the drug industry’s spending on
`applied research and development by making scientific
`discoveries that expand the industry’s opportunities for
`R&D.
`
`Government-funded basic research can also stimulate
`private-sector R&D indirectly. By supporting graduate
`students and postdoctoral researchers in academic labs
`where basic research is conducted, federal grants help to
`train many of the researchers who are hired by drug com-
`panies. That training enhances the productivity and prof-
`itability of the companies’ R&D investments, while also
`allowing researchers to command higher salaries.
`
`Given the extent of federal funding for life-sciences
`research, however, there is a risk that some of that fund-
`ing could crowd out private-sector investment in R&D.
`In general, the government tends to focus on basic
`research, whereas private firms focus much more on
`applied research and development. That difference
`diminishes the risk of direct crowding out. But the dis-
`tinction between basic and applied research is not well
`defined, and the division of labor between the two has
`become less pronounced as the potential commercial
`value of basic life-sciences research has become more
`widely recognized. Government and private R&D efforts
`have sometimes overlapped (as in the race to finish map-
`ping the human genome); thus, the government may
`have funded some research that the private sector other-
`wise would have financed. Identifying specific cases
`where direct crowding out has occurred is difficult, but it
`is probably most likely to happen when the government
`funds research whose potential commercial applications
`are obvious and valuable.
`
`Federal R&D spending can also crowd out private spend-
`ing indirectly by causing labor costs to rise. Although stu-
`dents and postdoctoral researchers form part of the work-
`force for federally funded research, the government and
`the drug industry both draw on the same supply of
`trained professional researchers. That supply is relatively
`fixed in the short run, and higher R&D spending in
`either sector can cause salaries to rise by increasing the
`demand for researchers. That is more likely to occur
`when R&D spending is growing rapidly. In recent years,
`both real (inflation-adjusted) salaries for biomedical
`researchers and total employment in biomedical research
`have increased along with real R&D spending. When
`R&D spending is growing more slowly, however, there is
`probably little such effect on labor costs for professional
`researchers.
`
`Assessing the Drug Industry’s
`R&D Performance
`Total spending on health-related research and develop-
`ment by the drug industry and the federal government
`has tripled since 1990 in real terms. However, the num-
`ber of innovative new drugs approved by the Food and
`Drug Administration each year has not shown a compa-
`rable upward trend. NME approvals shot up for a few
`years in the mid-1990s and then fell again; on the whole,
`such approvals have consistently ranged between about
`20 and 30 per year. Measured by the number of drugs
`approved per dollar of R&D, the innovative performance
`of the drug industry appears to have declined.
`
`However, if new drugs were of higher quality than older
`drugs, on average, that improvement would partly or
`fully make up for a decline in the raw number of drugs
`per R&D dollar. Drug quality is multidimensional and
`difficult to measure, however. As a result, no careful and
`comprehensive estimate exists to show how changes
`in quality have affected the industry’s actual R&D
`performance.
`
`Other factors have contributed to the impression that the
`pharmaceutical industry’s innovative performance has
`declined. Over the past decade, a growing share of the
`industry’s R&D output has consisted of incremental
`improvements to existing drugs rather than new molecu-
`lar entities. Performance measures that consider only
`entirely new drugs—such as the number of NME
`approvals per year—miss that shift and undervalue the
`industry’s R&D output. Moreover, comparing output per
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`4
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`RESEARCH AND DEVELOPMENT IN THE PHARMACEUTICAL INDUSTRY
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`R&D dollar over long spans of time can be misleading
`because of shifts in the types of drugs being developed.
`Notwithstanding concerns about innovative performance
`and how to measure it, the range of illnesses for which
`drug therapies exist has never been broader, and techno-
`logical advances have yielded new drug treatments of
`increasing sophistication, convenience, and effectiveness.
`
`Even so, it is difficult to determine whether the returns to
`society from the money spent on drug R&D have
`declined or not. There are several possible reasons why
`the industry’s R&D performance could have slipped.
`Companies may not yet have fully mastered the complex
`new research technologies with which they work; the
`pool of relatively inexpensive research discoveries may be
`temporarily depleted, pending further advances in basic
`science; and strong consumer demand for new drugs may
`have encouraged firms to invest in R&D beyond the
`point of diminishing returns. Furthermore, the frequency
`with which leading drug companies have merged with
`one another over the past decade—which may have
`resulted partly from a decline in the number of new drugs
`in development—has sparked concerns about the indus-
`try’s R&D productivity. According to some observers,
`large firms tend to be less innovative than smaller firms.
`Those mergers have had little initial effect on the com-
`bined firms’ total R&D spending, although the ultimate
`impact on the introduction of innovative new drugs
`remains uncertain.
`
`If the industry’s R&D performance has slipped, recent
`advances in basic sciences (such as molecular and cellular
`biology and biochemistry) could eventually reverse that
`trend by stimulating the development of more new drugs.
`In addition, new-drug approvals could increase simply
`because of the rising number of potential new products
`that have entered the development pipeline in recent
`years, according to drug companies. The greater commer-
`cialization of basic R&D and the increased specialization
`that has occurred in the drug industry may also enhance
`productivity. At the same time, though, the greater role of
`the private sector in basic R&D may have made the pace
`and direction of progress in drug development more
`dependent on financial factors in the industry.
`
`industries in the United States. Those measures, however,
`treat most R&D outlays as expenditures rather than as
`investments that add to the value of a firm. Thus, they
`omit from a firm’s asset base the value of its accumulated
`stock of knowledge. For R&D-intensive industries, such
`as pharmaceuticals, that omission can significantly over-
`state profitability. Adjusted for the value of its R&D
`assets, the drug industry’s actual profitability still appears
`to be somewhat higher than the average for all U.S.
`industries, but not two to three times higher, as standard
`measures of profitability indicate.
`
`The notion that pharmaceutical companies enjoy extra-
`ordinary profits is reinforced by the relationship between
`prices and costs in the drug industry. The industry’s high
`R&D spending and relatively low manufacturing costs
`create a cost structure similar to that of, for example, the
`software industry. Both industries have high fixed costs
`(for research and development) and low variable costs (to
`put a software application onto a CD-ROM or to pro-
`duce a bottle of prescription medication). Consequently,
`prices in those industries are usually much higher than
`the cost of providing an additional unit of the product,
`because revenue from sales of the product must ulti-
`mately cover those fixed costs.2 Even though conven-
`tional accounting measures overstate the profitability of
`the drug industry, strong growth in the industry’s R&D
`spending over many years suggests that the returns on
`pharmaceutical R&D have been attractive.
`
`Ultimately, how adequately prices and profits indicate the
`kinds of drugs that consumers want to buy determines
`the extent to which the pace and direction of drug inno-
`vation are themselves adequate. High prices on new drugs
`encourage continued innovation. But because health
`insurance (private plans as well as Medicaid and Medi-
`care) keeps consumers from bearing the full weight of
`those prices, the demand for new drugs is higher than it
`otherwise would be at any given price. That effect is mag-
`nified because employment-based health insurance bene-
`fits are not subject to income or payroll taxes, which
`reduces their cost to consumers. As a result, more people
`
`The Drug Industry’s Profits and
`R&D Investment
`By standard accounting measures, the pharmaceutical
`industry consistently ranks as one of the most profitable
`
`2. Strictly speaking, a product’s fixed development costs are not rele-
`vant to how it is priced because they are sunk (already incurred
`and not recoverable) before the product reaches the market. But a
`company incurs R&D costs in expectation of a product’s likely
`price, and on average, it must cover those fixed costs if it is to con-
`tinue to develop new products.
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`CHAPTER ONE
`
`INTRODUCTION AND SUMMARY
`
`5
`
`have health insurance, and many have higher levels of
`coverage, than would be the case otherwise.
`
`The effect of health insurance on drug companies’ reve-
`nues—combined with strong patent protection that helps
`firms maintain higher prices—may sometimes create
`incentives to invest too much in R&D (from the stand-
`point of the amount of investment that is optimal for
`society). The role of health insurance can be tempered in
`several ways, however. Insurers and other large buyers of
`
`drugs may be able to exercise more power to negotiate
`lower prices, and insurers can give patients and doctors
`stronger incentives to consider price differences between
`drugs. The more accurately a drug’s price reflects its value
`to consumers, the more effective the market system will
`be at directing R&D investment toward socially valuable
`new drugs. However, prices can only serve that directing
`role to the extent that good information exists about the
`comparative qualities of different drugs and that consum-
`ers and health care providers use that information.
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`C H A P T E R
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`2
`
`Trends in R&D Spending and
`Output of New Drugs
`
`The pharmaceutical industry spends more on
`
`research and development, relative to its sales revenue,
`than almost any other industry in the United States.
`According to various estimates, the industry’s real
`(inflation-adjusted) spending on drug R&D has grown
`between threefold and sixfold over the past 25 years—
`and that rise has been closely matched by growth in drug
`sales. Despite those increases, there has been little change
`in the number of innovative new drugs approved for use
`each year, even though the federal government has
`streamlined its drug-approval process.
`
`Only about one-third of the drugs approved annually in
`the United States are new compounds; the rest represent
`modified forms of—or new uses for—existing drugs.
`Firms develop new drug products in response to various
`factors. Those factors relate not only to likely demand in
`a given drug market—which is influenced by available
`health insurance coverage, doctors’ prescribing practices,
`and demographic changes—but also to government pol-
`icy toward drug safety and innovation and to the pace of
`scientific advances in the understanding and treatment of
`disease.
`
`Spending for Research and
`Development
`In 1980, U.S. companies spent a total of $5.5 billion (in
`2005 dollars) on research and development of pharma-
`ceuticals and medicines, according to the National Sci-
`ence Foundation (NSF). By 2003, that figure had grown
`to more than $17 billion—an average increase of 5 per-
`cent per year in real terms (see Figure 2-1). The pharma-
`ceutical industry’s trade association, Pharmaceutical
`Research and Manufacturers of America (PhRMA),
`reported even larger expenditures and faster growth.
`Spending by its member organizations rose more than
`
`sixfold between 1980 and 2004, from about $6 billion
`(in 2005 dollars) to $39 billion.1 Those figures represent
`a real growth rate of about 8 percent a year, on average.
`By comparison, drug firms’ gross margins—sales revenue
`minus costs and income taxes—have been increasing
`more slowly, by about 4 percent annually.2
`
`The differences between NSF’s and PhRMA’s estimates of
`R&D spending stem largely from differences in which
`drug companies are included in the samples and which
`expenditures are counted. PhRMA’s totals include all
`R&D spending in the United States by the association’s
`members (foreign and domestic) as well as expenditures
`abroad by U.S. firms and U.S. divisions of foreign firms.
`Spending by foreign companies that occurs outside the
`United States is excluded. NSF’s totals cover only domes-
`tic R&D spending by firms “engaged in for-profit activity
`in the United States.” They exclude all research and
`development not conducted in the United States, includ-
`ing that performed by foreign subsidiaries of U.S. firms
`or by other foreign organizations.3
`
`1. For comparison with NSF’s numbers, total R&D spending by
`PhRMA members in 2003 was $37.6 billion in 2005 dollars
`(including $29.6 billion for domestic R&D by U.S. firms).
`PhRMA estimates that total R&D spending by the drug industry,
`including nonmember firms, was $49 billion in 2004, the first
`year the association estimated that total. Overall R&D spending
`by PhRMA members has grown even though the number of
`members has fallen by more than half since the early 1990s (to 34
`organizations in 2004). Mergers account for some of that decline.
`
`2. F.M. Scherer, “The Link Between Gross Profitability and Pharma-
`ceutical R&D Spending,” Health Affairs, vol. 20, no. 5 (Septem-
`ber/October 2001), pp. 216-220.
`
`3. National Science Foundation table, “Company and Other (Except
`Federal) Funds for Industrial R&D Performance, by Industry and
`by Size of Company: 1953–98,” notes section, and “Technical
`Notes for 1998,” available at www.nsf.gov/statistics/iris/excel-files/
`NSF%2001-305/tn.doc.
`
`Abraxis EX2084
`Cipla Ltd. v. Abraxis Bioscience, LLC
`IPR2018-00162; IPR2018-00163; IPR2018-00164
`Page 13 of 56
`
`

`

`8
`
`RESEARCH AND DEVELOPMENT IN THE PHARMACEUTICAL INDUSTRY
`
`Figure 2-1.
`Estimates of the U.S. Drug Industry’s Annual Spending on Research and
`Development
`(Billions of 2005 dollars)
`
`PhRMA Estimatea
`
`National Science
`Foundation Estimateb
`
`40
`
`35
`
`30
`
`25
`
`20
`
`15
`
`10
`
`05
`
`1970
`
`1972
`
`1974
`
`1976
`
`1978
`
`1980
`
`1982
`
`1984
`
`1986
`
`1988
`
`1990
`
`1992
`
`1994
`
`1996
`
`1998
`
`2000
`
`2002
`
`2004
`
`Source: Congressional Budget Office based on the sources described below.
`Note: Spending was adjusted for inflation using the biomedical research and development price index from the Bureau of Economic Analysis.
`a. Expenditures reported by members of the Pharmaceutical Research and Manufacturers of America (PhRMA). Unlike the National Science
`Foundation data, PhRMA’s estimates include research and development performed outside the United States by U.S. companies (or U.S.
`divisions of foreign companies) as well as further research and development that occurs after a drug has gone on the market. The data
`come from Pharmaceutical Research and Manufacturers of America, Pharmaceutical Industry Profile 2006 (Washington, D.C.: PhRMA,
`March 2006).
`b. The data series starts in 1980 and ends in 2003. It includes only research and development conducted in the United States on drugs that
`have not yet reached the market. Data for 1980 to 1998 come from the National Science Foundation table “Company and Other (Except
`Federal) Funds for Industrial R&D Performance, by Industry and by Size of Company: 1953-98,” available at www.nsf.gov/statistics/iris/
`search_hist.cfm?indx=10 (see the row for “Drugs and Medicines”); data for 1999 to 2003 come from National Science Foundation, Divi-
`sion of Science Resources Statistics, annual “Research and Development in Industry” tables, available at www.nsf.gov/statistics/industry
`(see the rows for “Pharmaceuticals and Medicines”).
`
`The National Science Foundation’s estimates also exclude
`spending on phase IV clinical trials (which are conducted
`after a drug has reached the market) and on the develop-
`ment of manufacturing processes—both of which
`PhRMA counts as R&D. In addition, NSF’s figures do
`not include R&D by pharmaceutical firms that sell their
`own products, if sales activities account for the largest
`share of their payroll. (The Census Bureau classifies such
`firms as part of the “wholesale trade” sector.)4 NSF esti-
`mates that postmarketing expenditures have recently con-
`stituted nearly 20 percent of PhRMA’s total.5 With those
`expenditures and drug R&D by “wholesale trade” firms
`included, NSF’s total for 2003 would be within $1.7 bil-
`lion, or about 5 percent, of the PhRMA estimate.6 Much
`of the remaining difference can be explained