Research and Development in the Pharmaceutical Industry

Research and Development in the Pharmaceutical Industry
Research and Development in the Pharmaceutical Industry
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A CBO study. Reviews basic facts about the drug industry's recent spending on research and development and its output of new drugs.

Perceptions that the pace of new-drug development has slowed and that the pharmaceutical 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 keeping with CBO’s mandate to provide objective, impartial analysis, the study makes no recommendations. 

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:

-What explains the cost of developing new drugs?

-Does federal investment in R&D stimulate or displace private investment?

-Has the drug industry’s innovative performance declined?

-How profitable are drug firms, and how do profits affect the amount and type of R&D that companies conduct?

Table of Contents

Table of 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

3 What Does It Cost to Develop a New Drug? 19

Primary Determinants of R&D Costs 19

Why Have R&D Costs Risen for Innovative New Drugs? 21

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

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


Target audience are pharmaceutical companies, investors in the pharmaceutical industry, members of the healthcare industry, and consumers whose interest in pharmaceutical R&D concerns the relationship between drug prices, drug firms’ costs, and the pace and direction of innovation, and how well all of these factors are serving consumer needs.

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Congress, Congressional Budget Office
  • Austin, David H.
Key Phrases:
  • CBO Study
  • Drug Industry
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