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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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« A Little Ranbaxy Example | Main | But Don't Drug Companies Spend More on Marketing? »

May 20, 2013

How Much Do Drug Companies Spend on R&D, Anyway?

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Posted by Derek

How much does Big Pharma spend on R&D, compared to what it takes in? This topic came up during a discussion here last week, when a recent article at The Atlantic referred to these expenditures as "only" 16 cents on the dollar, and I wanted to return to it.

One good source for such numbers is Booz, the huge consulting outfit, and their annual "Global Innovation 1000" survey. This is meant to be a comparison of companies that are actually trying to discover new products and bring them to market (as opposed to department stores, manufacturers of house-brand cat food, and other businesses whose operations consist of doing pretty much the same thing without much of an R&D budget). Even among these 1000 companies, the average R&D budget, as a per cent of sales, is between 1 and 1.5%, and has stayed in that range for years.

Different industries naturally have different averages. The "chemicals and energy" category in the Booz survey spends between 1 and 3% of its sales on R&D. Aerospace and defense companies tend to spend between 3 and 6 per cent. The big auto makers tend to spend between 3 and 7% of their sales on research, but those sales figures are so large that they still account for a reasonable hunk (16%) of all R&D expenditures. That pie, though, has two very large slices representing electronics/computers/semiconductors and biopharma/medical devices/diagnostics. Those two groups account for half of all the industrial R&D spending in the world.

And there are a lot of variations inside those industries as well. Apple, for example, spends only 2.2% of its sales on R&D, while Samsung and IBM come in around 6%. By comparison with another flagship high-tech sector, the internet-based companies, Amazon spends just over 6% itself, and Google is at a robust 13.6% of its sales. Microsoft is at 13% itself.

The semiconductor companies are where the money really gets plowed back into the labs, though. Here's a roundup of 2011 spending, where you can see a company like Intel, with forty billion dollars of sales, still putting 17% of that back into R&D. And the smaller firms are (as you might expect) doing even more. AMD spends 22% of its sales on R&D, and Broadcom spends 28%. These are people who, like Alice's Red Queen, have to run as fast as they can if they even want to stay in the same place.

Now we come to the drug industry. The first thing to note is that some of its biggest companies already have their spending set at Intel levels or above: Roche is over 19%, Merck is over 17%, and AstraZeneca is over 16%. The others are no slouches, either: Sanofi and GSK are above 14%, and Pfizer (with the biggest R&D spending drop of all the big pharma outfits, I should add) is at 13.5%. They, J&J, and Abbott drag the average down by only spending in the 11-to-14% range - I don't think that there's such a thing as a drug discovery company that spends in the single digits compared to revenue. If any of us tried to get away with Apple's R&D spending levels, we'd be eaten alive.

All this adds up to a lot: if you take the top 20 biggest industrial R&D spenders in the world, eight of them are drug companies. No other industrial sector has that many on the list, and a number of companies just missed making it. Lilly, for one, spent 23% of revenues on R&D, and BMS spend 22%, as did Biogen.

And those are the big companies. As with the chip makers, the smaller outfits have to push harder. Where I work, we spent about 50% of our revenues on R&D last year, and that's projected to go up. I think you'll find similar figures throughout biopharma. So you can see why I find it sort of puzzling that someone can complain about the drug industry as a whole "only" spending 16% of its revenues. Outside of semiconductors, nobody spends more

Comments (28) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


COMMENTS

1. Teddy Z on May 20, 2013 8:11 AM writes...

Very interesting of course. I wonder if the reason why JnJ and Abbott don't make the list is because they are also diagnostic/device companies and as such are not SOLELY pharma companies. I know it gets hard to pull our this stuff, and it will be interesting to see if Abbvie makes the next list.

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2. Curious Wavefunction on May 20, 2013 8:29 AM writes...

Interesting. However it's really important to know what "R&D" encompasses. For instance, is making generics or slightly improving the products of acquired companies labeled as "R&D"? My feeling is that "R&D" may not always refer to in-house, cutting-edge basic drug discovery research.

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3. Anonymous on May 20, 2013 8:31 AM writes...

They, J&J, and Abbott drag the average down by only spending in the 11-to-14% range - I don't think that there's such a thing as a drug discovery company that spends in the single digits compared to revenue.

I'm guessing that Valeant might disagree if they're still around. They seem to be the pharma version of a 2010 Dilbert where Wally hopes to hire lots of minimum-wage clones to attend meetings and do work so that he can get paid. (It doesn't work so well.)

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4. MoBio on May 20, 2013 8:41 AM writes...

Question: how much of R&D is devoted to post-marketing Phase IV-type trials?

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5. David Formerly Known as a Chemist on May 20, 2013 8:44 AM writes...

Though spending 16% of revenues on R&D sounds laudable, I think what tends to hack people off is realizing how much MORE could be spent on R&D rather than spending nearly double that amount on sales and marketing (see, for example, Gagnon M-A, Lexchin J (2008) The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States. PLoS Med 5(1): e1. doi:10.1371/journal.pmed.0050001). Also, constant stories of pharma companies paying generics manufacturers to delay launch of generics, paying conflicted doctors to promote their brands even while they're running clinical trials on their behalf, charging enormous amounts for their products to US citizens and fractions of those amounts to the rest of the world, the enormous executive salaries and bonuses, etc...you can see why the public has a negative view of pharma. It's no longer viewed as an ethical industry that saves lives by discovering and developing lifesaving products, it's viewed as a profit machine that will do anything to increase the wealth of management and shareholders. And the industry only has itself to blame for this perception, it's abandoned its original patient-centered values and become just another profit-generating industry. Nothing wrong with profits, but if you focus on the patient and create good products, profits will follow. Management has put profits first, which always fails in the long run.

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6. Anonymous on May 20, 2013 9:07 AM writes...

1) Comment 3 was mine. Sorry.

2) I don't know what development costs are like for semiconductors, but there are an awful lot of them for drugs. In the Cox response to discussion of Viehebacher's commentary/Demotivators poster caption, the figure was cited (by Rick) that 33% of R+D goes into early stage R+D, which leaves a lot for the later stages (although, unfortunately, people keep learning fundamental biology there). I don't know if the high R+D businesses are those that have a lot of development cosst, or actually do reflect lots of less directed research, as well. (There's also the possibility of accounting, where other expenses could be shuttled into R+D budgets to take advantaage of tax incentives, though I don't know if that ever happens).

3) I thought going after profits now works...for now. If you don't care about the future or won't be around, then all you need is money now. Someone else can spend the time and money to rebuild - isn't that the business model everyone is lusting for? "Let someone else do the work, and once it looks good, we can buy it and sell, sell, sell."

I also thought that marketing costs were supposed to generate more money for R+D than in their absence (so that marketing doesn't take money that R+D would have gotten, but is supposed to expand the pie.) I assume that the problem with marketing is that it is often over-marketing, marketing to people who likely should not take a drug or would not receive enough of a benefit to make its risks sensible, which may have possibly led to the increased barriers to drug approval and thus higher R+D costs (so that while it may have expanded the pie, it also meant you had to eat more to be satisfied). And of course, cashing out your reputation makes money now but diminishes the ability to sell anything in then future.

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7. Electrochemist on May 20, 2013 10:08 AM writes...

@#5, David Formerly Known as a Chemist – The Gagnon and Lexchin paper you cite is interesting for a number of reasons.
First, they compare data from IMS and another firm (CAM). In the opening of the paper, they thoroughly attack IMS and the validity of their data. But later (see Table 1), they use IMS marketing expenditure data for the cost of drug samples supplied to physicians because the IMS numbers are higher than the corresponding CAM data and better support their predetermined conclusion.
Second, for good measure, they tack on a 33.4% add-on to total marketing costs due to “a combination of promotion directed at categories of physicians that are not surveyed, unmonitored journals in which pharmaceutical promotion appears, and possibly unethical forms of promotion.”
Third, the data used in their paper were from 2004 (nearly a decade ago). The authors try to make the case that IMS data are artificially low because they do not include “the cost of meetings and talks sponsored by pharmaceutical companies featuring either doctors or sales representatives as speakers.” Whether this was actually true in 2004 is debatable, but what cannot be argued is that all major pharma companies have dramatically reduced spend on such meetings (and most have since been monitored for several years under a consent decree or corporate integrity agreement to prove it).
I don’t disagree with your points about why the pharma industry developed an image problem. But, I have issues with using data like these to draw conclusions about the current state of the industry, and to make quantitative comparisons to current R&D spend.

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8. qetzal on May 20, 2013 10:26 AM writes...

#5:

Though spending 16% of revenues on R&D sounds laudable, I think what tends to hack people off is realizing how much MORE could be spent on R&D rather than spending nearly double that amount on sales and marketing.

I'm sure such thinking does indeed hack people off, but that doesn't make it correct. As Derek has pointed out repeatedly, the whole point of marketing is that the resulting extra sales revenue covers the cost of the marketing and then some. That's additional money that Pharma wouldn't otherwise have, a portion of which can then be added to the R&D spend.

If you stopped spending on marketing, you wouldn't suddenly have a bunch of extra cash to plough into R&D. You'd just lose the extra revenue that the marketing was bringing in. Total revenue would go down. R&D spending as a percentage of revenues might be higher, but as an actual dollar amount, it would go down!

Of course, this assumes that pharma really does get a positive return on their marketing efforts, but that seems like a reasonable assumption.

The other issues you highlight are much more legitimate criticisms of the industry, IMO.

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9. milkshake on May 20, 2013 10:27 AM writes...

Increased R&D effort can pay in 10-15 year horizon (bt then again it may not), whereas increased marketing can have some effect almost immediately.
So if you are a big pharma CEO who has obscene stock options and bonuses incentives to raise shareholders value by the end of the year, guess in which direction would you rather be spending the company revenue... And it both gets lumped under R&D

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10. Teddy Z on May 20, 2013 10:36 AM writes...

#8...I agree. But do we KNOW that Pharma marketing is generating more revenue than they cost? I think that is an assumption that should be tested, but I don't think it can be. We do know that sales reps are being laid off, but that there are still plenty out there. I would imagine that this sort of data would be more closely held than just about anything else.

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11. alig on May 20, 2013 10:46 AM writes...

Problem with R&D is cost is now but benefit is 10 years down the road. With Marketing, benefit is now, but true cost is 10 years down the road when you get the billion dollar fines for illegal marketing.

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12. Matthew Herper on May 20, 2013 11:29 AM writes...

@3 -- you mean Valeant, the company whose stock is up 1200% over five years and is currently trading at a 52-week high? I'd say they're doing better than Dilbert.

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13. Nekekami on May 20, 2013 11:36 AM writes...

As I said in the other post, it would be nice to see the top-12 or top-50 average in % for each field.

Another interesting thing to see would be a comparison of infrastructure costs between semiconductor industry(Particularly those who run fabs), and pharma. Those giant fabs Intel have aren't cheap, and need to be upgraded or built from scratch pretty regularly, as well as huge clean room areas.

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14. Hap on May 20, 2013 11:43 AM writes...

It's easy to get fat eating everyone else's seed corn, as long as you don't intend to enjoy a long retirement. At some point, people will probably stop growing things for other people to eat (or drugs for other people to sell) when it does them little good to do so. (I'm sure the people that own stock in companies Valeant bought, and their management did fine, but I'll guess that the worker bees did about as well as...worker bees). What happens to companies like Valeant (or industries like Valeant) then?

Btw, I was 3 and 6. I hate Corante's servers.

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15. johnnyboy on May 20, 2013 11:53 AM writes...

@12: I was going to reply the same to #3. Valeant is doing very well, but by their CEO's own admission, they are not a drug research company, so shouldn't even be part of this discussion.

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16. pgwu on May 20, 2013 12:00 PM writes...

#5. I agree it is largely an image problem. Even doubling the R&D spend is unlikely to make the issue go away. While pharma executives think themselves as saints, many in the public regard them as mercenaries. This is too bad since there are many genuine folks who contribute to the advancement of medicine.

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17. Hap on May 20, 2013 1:36 PM writes...

Isn't Valeant's model what has been suggested for pharma (which is made explicit in the link)? They may not be interested in R+D, but they are in drugs, just as larger pharmas are. And larger pharma seem to be counting on other entities (smaller pharma or universities) to come up with drugs for them to sell, presumably because they are cheaper. There would still need to be lots of D, but not so much R. (We wouldn't be thinking about this if R+D were more successful, but...) If they don't do drugs at all, I am confused, and sorry, but I thought they did, and that their model was relevant.

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18. johnnyboy on May 20, 2013 3:21 PM writes...

@17 - they do do drugs, just not research - at least not the research portion of R&D. As far as I get their business model, it's buying off other companies that are cheap for one reason or another (failing, etc...). It's opportunistic, and somewhat predatory, and it's working for them, but certainly wouldn't work for a whole industry. And the companies they buy aren't exactly selling cutting edge stuff: Obagi (skin care creams), Medicis (generics), Afexa (ginseng extract as cold remedy)... The CEO stated pretty clearly, when they merged with Biovail and scrapped their entire research effort, that he had no interest in research, and his primary objective was to make money. So while Valeant may be a good stock investment at the moment, I certainly wouldn't consider it a model for, or even part of, real pharma, whose main objective is to produce innovative drugs.

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19. davesnyd on May 20, 2013 4:54 PM writes...

The roll-up figure for R&D doesn't provide much description-- it would be interesting to have a better sense of how that breaks down into pre-clinical, clinical, and post-approval (or, more specifically, marketing related expenditures).

My suspicion is that most people here are interested in the pre-clinical world-- or at least have felt the pain of, and are concerned about, pre-clinical cuts.

How has that ratio of pre-clinical to total R&D changed over the past decade or two? If it has decreased-- which is what one might suspect-- how has that impacted "productivity" (new approvals)?

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20. Shalon Wood on May 20, 2013 5:09 PM writes...

The thing is, if the _only_ thing that's going to keep your company alive in a decade is R&D done now, and the outcome is as uncertain as drug development is nowdays... shouldn't you be putting as much into it as possible?

It's the exact same reason you cut marketing last: because it brings in more money than it costs.

Semiconductor companies depend on the outcome of their research to stay relevant, and put in that much money _expecting R&D to succeed_ -- no other industry I'm aware of has the kind of R&D failure rates as drug development, which I would think argues that pharmaceutical companies really should be putting in a lot more money for R&D.

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21. petros on May 21, 2013 7:57 AM writes...

Interestingly even Forest, which licenses in all its drugs at some stage, spends 17.5% of its revenues on R&D

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22. PrairieBoy on May 21, 2013 12:56 PM writes...

Abbott is no longer a part drug company since it decoupled AbbVie off to the pharma side. So it's easy to check - the 2012 AbbVie R&D spending was 14.7% of sales according to the annual report.

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23. Anonymous on May 21, 2013 8:30 PM writes...

I wonder how much Steve Jobs would like to spend on drug research after cancer?

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24. LJStewartTweet on May 22, 2013 12:35 AM writes...

GEN | Magazine Articles: Top 20 Biopharma R&D Spenders http://bit.ly/12UHBV5

This is a good source of R&D spending data. Average 17% for top 20 Pharma

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25. LJStewartTweet on May 22, 2013 12:47 AM writes...

Marketing is usually spent on proven products and most executives see marketing costs as a % of revenue. The two are tied to each other. However R&D spending in Pharma can never be considered a % of revenue in the same light as marketing. Because most R&D is spent on failures that don't generate revenue. The comparison to other industries like chips planes or software is not fair because those industries don't suffer from Erooms law of declining productivity.

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26. Anonymous on May 22, 2013 9:08 PM writes...

MoBio, I think that phase IV costs got allocated to SG&A, not to R&D, although I can't find a cite on that.

Petros, the cost of doing in-licensing of not-yet unapproved products is allocated to R&D, at least under some conditions.

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27. torrent universal religion chapter 6 on January 14, 2014 11:21 PM writes...

Much has been said and discussed the crimes committed from the aborigines from the white man, nevertheless it should be remembered how the blacks got great provocation.

--LINK REMOVED -->Grammy Nominations 2011

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28. Lloyd T J Evans on January 15, 2014 2:28 AM writes...

#8:

"If you stopped spending on marketing, you wouldn't suddenly have a bunch of extra cash to plough into R&D."

If you cut the marketing budget down to zero money, then yes, this is true. However, cutting marketing partially (rather than completely) might make it possible to spend more on R&D, both as a percentage of revenue and in terms of the actual amount.

How? Because when you do start spending on marketing, it isn't always true that increasing marketing expenditure results in increased revenue. As you carry on raising marketing budgets, you eventually reach a point where increasing the marketing budget any further will not result in greater sales. At some stage you will saturate all the available advertising space. Your revenue will probably stop increasing even before you go that far.

For example, for drugs which can only be obtained on prescription, increasing direct to patient marketing is not necessarily going to translate to more sales - not unless the rate at which doctors prescribe also increases to match the expectation. This is certainly true if your adverts misinform patients about what the drug is prescribable for - which has arguably happened in some cases.

Even if you only focus on marketing to doctors, there have been many instances where doctors have been bribed (either effectively or outright) to overprescribe drugs, or to prescribe some drugs for un-tested indications.
If doctors fail to respond sufficiently to these bribes, then part of your marketing spending becomes pointless. You can only bully doctors so much before they begin to rebel.
Similarly, if such nefarious practices are discovered by the authorities and you end up being fined, that will inevitably remove at least part (if not all) if the extra revenue that your dodgy marketing practices initially generated.

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