Pharmaceutical Industry Research And Development

Pharmaceutical-Industry-Research And Development | Rondaxe

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Each year, the pharmaceutical industry in the United States develops several new medications with substantial medical benefits. Unfortunately, many of these medications are expensive, leading to rising healthcare costs for the private and public sectors. Policymakers have looked at ways to reduce the cost of medications and government drug expenditure, and such restrictions would very likely reduce the pharmaceutical industry’s incentive to do new research.

In one study, the Congressional Budget Office (CBO) analyzes changes in pharmaceutical research and development (R&D) spending as well as the introduction of new medications. Additionally, the CBO examines the following factors that affect how much money pharmaceutical companies spend on research and development:

  • Anticipated worldwide profits from a new medication
  • Cost of developing a new drug
  • Government regulations that impact drug demand or supply (or both)

What are the Latest Trends in Pharmaceutical R&D and New Drug Approvals?

In 2019, the pharmaceutical sector invested $83 billion in research and development. These expenses were spent for various purposes including the discovery and testing of novel medications, the creation of incremental enhancements such as product expansions, and clinical testing for safety and marketing purposes. After inflation is considered, the total is about 10 times what the industry spent annually in the 1980s.

Additionally, pharmaceutical companies’ proportion of revenue spent on research and development has increased: Pharmaceutical companies spent almost a quarter of their revenues (net of expenses and buyer rebates) on research and development in 2019, nearly twice as much as they did in 2000. This revenue proportion is much higher than other knowledge-based industries such as semiconductors, specialized hardware and software.

Each year, the number of new medications approved has risen during the past decade. For example, from 2010 to 2019, the Food and Drug Administration (FDA) authorized an average of 38 new medicines each year (with a peak of 59 in 2018), a rate 60% greater than the average during the previous decade.

Numerous medications approved in the last few years have been categorized as “specialty drugs”. Specialty medications often treat chronic, difficult, or unusual illnesses that need specialized patient care or monitoring. Numerous specialty medications are biologicals (large-molecule pharmaceuticals derived from living cell lines), which are difficult to manufacture, duplicate and are often prohibitively expensive. Until recently, the majority of medications were composed of tiny molecules derived from chemical components. Even though they retained their patent protection, these medications were less costly than more modern specialized drugs. According to data on the kinds of medications now undergoing clinical trials, most of the industry’s creative effort is directed toward specialty pharmaceuticals that may provide new cancer therapies and treatments for nervous system illnesses such as Alzheimer’s and Parkinson’s disease.

What Factors Affect Research and Development Spending?

Three major factors affect pharmaceutical firms’ R&D expenditure decisions: anticipated expenses of developing new medication; global lifetime revenue projections for a new medication; and policies and initiatives affecting the supply and demand for prescription drugs.

Numerous variables affect companies’ expectations for a drug’s revenue stream, including the expected pricing in different countries and the estimated worldwide sales volume at those rates (given the potential number of persons who may use the medicine). Additionally, current pharmaceutical prices and sales volumes provide insight into customers’ desires and insurance plans’ readiness to pay for pharmacological treatments. Notably, when pharmaceutical companies set the price of a new medicine, they seek to maximize future revenues after subtracting manufacturing and distribution costs. Thus, a drug’s sunk R&D expenses—that is, the money spent earlier on developing the drug—does not affect its price.

Trends in R&D Spending and New Drug Development

Private investment in pharmaceutical research and development (and approval of new medications) has increased significantly in recent years, continuing a decades-long trend that was halted in 2008 by the availability of generic versions of several top-selling medications, as well as the 2007–2009 recession. Spending on pharmaceutical research and development, for example, increased by almost 50% between 2015 and 2019. Additionally, many medications approved in recent years are costly specialist therapies with a small patient population. On the other hand, the best-selling medications of the 1990s were low-cost pharmaceuticals with large patient populations.

R&D Spending

R&D expenditures in the pharmaceutical industry include a wide variety of activities, including the following:

  • The invention or the study and development of pharmaceuticals;
  • Clinical research and development, preparation and submission of FDA approval applications, and design of manufacturing processes for new medicines;
  • Incremental innovations including the development of novel dosage forms and delivery systems for existing medications and evaluating those medications for new purposes;
  • Product differentiation, or the clinical comparison of a novel medication to an existing competitor drug to demonstrate that the new medication is superior; and 
  • Safety monitoring, which the FDA may require to identify adverse effects that were missed during the drug’s development in shorter trials.

Private investment in pharmaceutical research and development by Pharmaceutical Research and Manufacturers of America (PhRMA) member firms was about $83 billion in 2019, up from approximately $5 billion in 1980 and $38 billion in 2000. Although those totals omit many smaller pharmaceutical companies that are not PhRMA members, the trend reflects the industry’s R&D expenditures. Additionally, a National Science Foundation (NSF) analysis of all pharmaceutical R&D spending in the United States (including smaller firms) reveals similar trends.

While total R&D spending by pharmaceutical firms has increased, small and large enterprises generally focus on distinct R&D activities. For example, small companies that are not members of PhRMA devote a greater part of their research to developing and testing new medications, the majority of which are ultimately acquired by larger corporations. On the other hand, larger pharmaceutical companies (including those in the PhRMA) devote a greater proportion of their R&D budgets to conducting clinical trials, developing incremental “line extension” improvements (new dosages or delivery systems, or new combinations of two or more currently available medications, for example), and conducting post-approval testing for safety monitoring or marketing purposes.

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