Revenue growth increases innovation – every study confirms.

WHO SHOULD BENEFIT? THE RELATIONSHIP BETWEEN REVENUE AND R&D

The increasing share of revenues being captured by middlemen is concerning because, as Sood and Brownlee both observed, a decrease in the share of revenues accruing to drug innovators means less resources going toward investing in future cures.

Indeed, as Joe Kennedy wrote in “The Link Between Drug Prices and Research on the Next Generation of Cures,” virtually all academic assessments find strong links between industry returns and R&D investments.42 For instance, academic research shows a statistically significant relationship between a biopharma enterprise’s profits from the previous year and its R&D expenditures in the current year.43 Likewise, Gambardella found that sales revenue from previous periods has a significant, positive impact on current-period biopharma R&D.44 Henderson and Cockburn have found that the pharmaceutical firms with the greatest sales are also the ones with the largest R&D investments.45 Dubois et al. made this dynamic quite evident, finding that every $2.5 billion of additional biopharmaceutical revenue leads to one new drug approval.46

The Organization for Economic Cooperation and Development (OECD) has also identified this dynamic, finding that “there exists a high degree of correlation between pharmaceutical sales revenues and R&D expenditures.”48 The OECD study finds that there exists an almost 1:1 correlation (0.97) between R&D expenditures and sales in the pharmaceutical industry. (See figure 10.)

Elsewhere, a recent study that reviews the literature on the relationship between revenue and R&D expenditures for pharmaceutical manufacturers by Tomas Philipson and Troy Durie estimates that the elasticity between revenue and R&D expenditures is approximately 1.5—that is, if biopharmaceutical company revenues increase by 1 percent, R&D expenditures are expected to increase by 1.5 percent.49 In total, the link between biopharmaceutical revenues and research expenditures is apparent throughout the literature.

The reality is the value society receives from each dollar earned by a biopharmaceutical company is substantially greater than the value generated when dollars are consumed by other actors in the pharmaceutical supply chain.