Every year, the pharmaceutical industry in the United States produces several new medicines that offer significant medical advantages. Unfortunately, many of these medicines are costly, contributing to increasing healthcare expenditures for the private and federal governments. Policymakers have explored measures that would decrease medication costs and government drug spending. Such regulations would very certainly decrease the motivation for the pharmaceutical sector to research new medicines.
The Congressional Budget Office (CBO) examines changes in drug research and development (R&D) expenditure as well as the launch of new medicines in this study. CBO also looks at the following variables that influence how much drug firms spend on R&D:
- Anticipated worldwide profits from a new medication.
- Cost of developing a new drug.
- Government regulations that impact drug demand, supply, or both.
In 2019, the pharmaceutical industry spent $83 billion on R&D. These costs were incurred for various activities, such as the discovery and testing of new medicines, the development of incremental improvements such as product expansions, and clinical testing for safety monitoring or marketing reasons. After adjusting for inflation, the sum is about ten times what the industry spent each year in the 1980s. Furthermore, the percentage of income that pharmaceutical firms spend on R&D has increased: In 2019, pharmaceutical firms spent about one-quarter of their sales (net of costs and buyer rebates) on R&D spending, almost twice as much as they did in 2000. This revenue share exceeds that of other knowledge-based sectors such as semiconductors, specialized hardware, and software.
Over the last decade, the number of new medicines authorized each year has likewise increased. For example, from 2010 through 2019, the Food and Drug Administration (FDA) approved 38 new medications each year on average (with a high of 59 in 2018), 60% higher than the preceding decade’s average.
Many of the medicines authorized in recent years have been classified as “specialty pharmaceuticals.” Specialty medicines are often used to treat chronic, complicated, or uncommon diseases requiring specific patient care or monitoring. Many specialty medicines are biologics (large-molecule drugs based on live cell lines), which are expensive to produce, difficult to copy, and often costly. Before now, the majority of medicines were small-molecule pharmaceuticals based on chemical components. Even when they were still under patent, such medicines were less expensive than more current specialty pharmaceuticals. According to information on the types of medicines now in clinical trials, most of the industry’s creative activity is focused on specialty drugs that might offer novel cancer therapies and treatments for nervous system diseases, including Alzheimer’s and Parkinson’s disease.
What Factors Influence R&D Spending?
Three primary elements influence drug companies’ R&D spending decisions: Expected costs to develop a new drug, Anticipated lifetime global revenues from a new drug, and Policies and programs that impact the supply and demand for prescription medicines.
Several factors influence businesses’ expectations regarding a drug’s income stream, including the anticipated prices it might fetch in various countries across the globe and the projected global sales volume at those rates (given the potential amount of persons who may use the medicine). Furthermore, current medicines’ pricing and sales volumes offer customers’ willingness and insurance plans to pay for pharmacological treatments. Importantly, when pharma firms establish a new medication’s pricing, they aim to maximize future profits after deducting production and distribution expenses. Thus, the sunk R&D expenses of a drug—that is, the expenditures previously spent in creating that drug—have no bearing on its pricing.
Private investment in pharmaceutical R&D and new medication approval have both risen significantly in recent years, continuing a decades-long trend that was halted in 2008 when generic copies of several top-selling medicines became accessible, as well as the 2007–2009 recession. Spending on medication R&D, for example, rose by almost 50% between 2015 and 2019. Furthermore, many of the medicines authorized in recent years are expensive specialty treatments for a limited number of prospective patients. The top-selling medicines of the 1990s, on the other hand, were lower-cost pharmaceuticals with huge patient populations.
In the pharmaceutical business, R&D expenditure includes a wide range of activities, including the following:
- The invention, or drug research and development;
- Development, or clinical testing, preparation and filing of FDA approval applications, and design of manufacturing procedures for new drugs;
- Incremental innovation includes the creation of new doses and delivery methods for current medicines, as well as evaluating those drugs for new indications;
- Product differentiation, or the clinical comparison of a novel medication to an existing competitor drug to demonstrate that the new drug is better; and
- Safety monitoring that the FDA may need to identify adverse effects that were not detected in shorter trials during the drug’s development.
In real terms, private investment in medication R&D among Pharmaceutical Research and Manufacturers of America (PhRMA) member companies was about $83 billion in 2019, up from around $5 billion in 1980 and $38 billion in 2000. Although those totals exclude expenditure by numerous smaller pharma firms that are not members of PhRMA, the pattern indicates the industry’s R&D spending. In addition, a study of all pharmaceutical R&D expenditure in the United States (including smaller companies) conducted by the National Science Foundation (NSF) shows similar patterns.
Even though overall R&D expenditure by all pharma companies has been increasing, small and big businesses typically concentrate on different R&D activities. For example, small businesses that are not members of PhRMA spend a higher portion of their research to discovering and testing novel medicines, many of which are eventually sold to more giant corporations. Conversely, larger drug companies (including those in PhRMA) devote a more significant portion of their R&D spending to conducting clinical trials, developing incremental “line extension” improvements (new dosages or delivery systems, or new combinations of two or more current medications, for example.), and conducting postapproval testing for safety monitoring or marketing purposes.
Over the last decade, the pharmaceutical sector has launched an increasing number of new medicines yearly. Between 2010 and 2019, an average of 38 new medicines was authorized per year. This is a roughly 60% growth over the preceding decade. The number of drug approvals hit a new high in 2018, exceeding the late 1990s record. (The number of new drug approvals is an imprecise but straightforward indicator of the output from the pharma industry’s R&D expenditure. The metric does not account for variations in the efficacy of new medicines compared to other therapies, nor does it account for the number of individuals who may benefit from the new drugs.)
Changes in retail expenditure across various therapeutic classes of medicines may infer information about new drugs that the pharmaceutical industry has launched. Therapeutic classes in which numerous costly specialty medicines have been launched during the last decade rank first, whereas classes in which the best-selling pharmaceuticals are now accessible in generic form rank lower than they did a decade ago. 6 Clinical trials under progress may provide insight into new medicines that the pharmaceutical industry may launch in the future.
Approval of New Drugs. R&D expenditure and drug approvals have both risen significantly during the last five years. However, their connection is complicated and changeable. For example, medication approvals lag behind underlying R&D expenditure because it may take a decade or more to create a new drug and successfully guide it through clinical trials. Because of this latency, interpreting the connection between R&D expenditure and new medication approvals is challenging.
Trends in Recent Drug Spending by Therapeutic Class. New or better specialty medicines for diabetes, different malignancies, autoimmune diseases, and HIV have resulted in significant retail expenditure increases in those therapeutic groups. Many new specialty medicines are biologics, meaning they are made from live-cell lines rather than active chemical components. For example, the latest antiretroviral treatments for HIV have been combinations of specialized medications that have simplified therapy.
Types of New Drugs in Development. Data from current clinical trials may provide insight into the kind of medicines that may be authorized in the future years. This information indicates that pharmaceutical firms focus on cancer and nervous system diseases such as Alzheimer’s and Parkinson’s disease. As of 2018, medicines in those two therapeutic groups accounted for more than twice as many human clinical studies as drugs in the following three categories combined (vaccines; pain, arthritis therapies; and dermatologic.)