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Why Pharmaceutical R&D investment can pay off

Posted on: 19 Jan 04


Obtaining a benefit from pharmaceutical R&D investment requires long-term planning and a consideration of how the commercial and technological environment in which the industry operates might change.

R&D intensity

Across the industrialised world, the pharmaceutical industry is considered to be one of the most highly R&D-intensive technology sectors. For example, a Canadian study of top corporate R&D spenders ranked the biopharmaceutical sector as second only to the information, communications and technology sector in terms of expenditures (1). The survey indicated that the biopharmaceutical sector also had the highest research intensity of any industry at a ratio of R&D to sales of 17.7%.

In 2000, around US$58 billion was invested in pharmaceutical R&D by companies worldwide and between 1990 and 2000, investment increased by 121% (2). It has been assumed that companies with high R&D expenditures will be the most innovative and productive, but the relationship has been shown to be much more complex as R&D strategy is equally important. The competitive and overcrowded nature of the pharmaceutical market means that companies are under pressure to make help them outperform their rivals. By taking the right decision in the discovery and development of products and terminating unsuccessful drugs early, companies will be able to be allocate resources more effectively and expedite development.

Obtaining a benefit from R&D investment therefore requires long-term planning and a consideration of how the commercial and technological environment in which the industry operates might change. For example, as drug development times lie between the 10 and 12-year range, predictions must be made about the future healthcare environment and how these fit in with the company’s objectives. Furthermore, the decision-making on projects needs to take account the ever increasing costs of drug development, the scientific hurdles that exist and the role of external partnerships. An increasing number of companies have sought collaborations with other companies in order to spread the risks and costs involved in drug development and also to gain access to new technologies and expertise that can drive innovation.

Taking the longterm approach

An example of the benefits of a long-term approach to R&D comes from a 2001 study carried out by the Council for Chemical Research (CCR) in the US (3). For the study the annual, audited financial statements of 83 publicly traded chemical companies were examined for the 20-year period of 1980–99. The authors found that a US$1 investment in chemical R&D produced about US$2 in income over a seven-year period, after accounting for taxes and inflation (3). Interestingly, for the companies examined the R&D to sales ratio had almost doubled over the period studied.

The performance of the US pharmaceutical industry also appears to back the long-term approach to R&D investment. In 1977, the US pharmaceutical industry invested around US$1.3 billion in R&D, but in 2000 this figure had risen to US$32 billion (4). As a result of this commitment, The Pharmaceutical Research and Manufacturers of America (PhRMA) notes that eight of the current top ten worldwide prescription pharmaceutical products have their origins in US R&D and that since 1990, the US pharmaceutical industry has grown twice as fast as the overall national economy.


Despite the technical difficulties of drug development, the lower number of new medicines being launched and the general economic downturn, total global pharmaceutical sales reached $430 billion in 2002 – an 8% increase over the previous year (5). Thus the continued growth of the pharmaceutical market, particularly the dominant North American region, provides a continuing incentive for companies to invest in R&D for new medicines on a proactive basis.


  1. Innovation Profile: The Canadian Pharmaceutical Industry. Canada's Innovation Strategy. April 2002.
  2. Kermani F and Findlay G (2000). The Pharmaceutical R&D Compendium. CMR International.
  3. Long J. (2001). Quantifying chemical R&D. Chemical & Engineering News. Volume 79, Number 24. pp. 5.
  4. Anon (2002). Industry Profile 2002. The Pharmaceutical Research and Manufacturers of America (PhRMA).
  5.  2002 World pharma sales growth: slower, but still healthy. IMS Health.


Dr Faiz Kermani

Last updated on: 27/08/2010 11:40:18

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