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What is the right amount to spend on biopharma R&D?

Nature Reviews Drug Discovery volume 16, pages 597–598 (2017)Cite this article

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This phenomenon is seen in the biopharma industry just as in the broader market, with some companies not just managing for steady EPS growth but also working to maintain a target ratio of R&D expenses to sales. If markets are indeed generally efficient, however, this is a poor way to set R&D spending levels. The right level of spending is not a function of current sales, other than in some specific parts of R&D such as pharmacovigilance in which activity scales with the size of the marketed drug portfolio. Rather, the right level of R&D spending is a function of the quality of R&D investment opportunities available both within and outside the firm, with R&D spending optimally set at the level at which the marginal investment is NPV neutral.

Admittedly, it can be difficult to ascertain this level given the ever-changing nature of R&D portfolio opportunities and the uncertainties involved in evaluating them. This may bias companies to adopt fairly static rules of thumb on R&D investment, such as the aforementioned target R&D/sales ratio. Firms with a large fraction of fixed R&D expenses (for example, spending that is difficult to ramp up or down in less than 1 year) may also suffer an additional pressure that biases them towards fixed rules on R&D spending.

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Figure 1: Analysing the impact of variability in the ratio of R&D spending to sales.
Figure 2: Total shareholder return relative to the S&P 500 index of companies with high or low R&D/sales ratio variability.

Change history

  • 11 July 2017

    The x axes of the graphs in Figure 1 were incorrectly labelled. This has now been corrected in the html and pdf versions.

Acknowledgements

The author is grateful for input from G. Hansell and M. Kothiyal.

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  1. The Boston Consulting Group, Exchange Place, Boston, 02109, Massachusetts, USA

    Michael S. Ringel

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  1. Michael S. Ringel
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Correspondence to Michael S. Ringel.

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Competing interests

The author of this article is an employee of The Boston Consulting Group (BCG), a management consultancy that works with the world's leading biopharmaceutical companies. The research for this article was funded by BCG's Health Care practice area.

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Ringel, M. What is the right amount to spend on biopharma R&D?. Nat Rev Drug Discov 16, 597–598 (2017). https://doi.org/10.1038/nrd.2017.114

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