Pharmaceutical industry trade groups commonly claim that growing revenues (supported by premium prices) are required to drive innovative R&D, whereas critics maintain that drug companies' outsized returns mainly support corporate infrastructures, fuel marketing budgets and enrich investors. In fact, both arguments are incompletely supported by available data.
To methodically examine the historical relationship between R&D spending, selling, general and administrative (SG&A) costs, and revenues, we studied a decade's worth of financial data from the 10 public pharmaceutical companies that had the largest R&D budgets in 2015, normalized for inflation (see Supplementary information S1 (box) for details). As a group over the decade, these companies grew their investment in R&D (compound annual growth rate (CAGR) of 1.76%) and cut SG&A (−1.12% CAGR), even as revenues remained essentially flat (−0.01% CAGR) (Fig. 1a). Individually, R&D growth rates exceeded revenue growth rates for 8 out of 10 companies over this 10-year period, and exceeded SG&A growth rates for 9 out of 10 companies (Fig. 1a).
The companies we studied also generally protected their R&D budgets even in the face of acute revenue pressures. Following significant revenue declines (>5% in constant dollars), companies' R&D spending in the subsequent year mostly either increased (9 out of 20) or decreased by a smaller percentage than SG&A (5 out of 20) (Fig. 1b).
So, the positions of both the pharmaceutical industry and its critics regarding the relationship between revenues, R&D and SG&A are somewhat overstated. Our data show that over the past decade, most drug companies have grown R&D spending more quickly than SG&A spending, even as inflation-adjusted revenues have stagnated. They also demonstrate that even in the face of steep revenue declines, some firms continue to invest in R&D, indicating that R&D budgets across the industry are not algorithmically related to revenues, but instead reflect each company's particular strategic priorities and vision.
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The authors work for Pharmagellan, an advisory firm that provides paid consulting services to pharmaceutical and biotechnology companies in areas related to the topics covered in this article.
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Dixit, R., David, F. Trends in pharmaceutical company R&D spending: 2005–2015. Nat Rev Drug Discov 16, 376 (2017). https://doi.org/10.1038/nrd.2017.81
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DOI: https://doi.org/10.1038/nrd.2017.81
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