Revenue from drug sales is not used to fund R&D activities --- empirics.

‌The biopharmaceutical industry has long argued that high prices are needed to sustain research and development (R&D) for new medicines. When asked to justify a price tag of $10 000 a month for a drug to treat prostate cancer, a senior executive at Johnson & Johnson responded: “The easy diseases have largely been solved. It gets harder and harder as we go after new treatments for ever more challenging diseases.”7 Drug companies often note how their shareholders and investors could easily shift their investments to other more profitable and less risky sectors. Indeed, there are large financial risks associated with bringing new medicines to market, as many candidate molecules will not make it because they are ineffective or harmful, or both. However, analysis of drug company spending and products raises questions about the claim that high drug prices are needed to sustain valuable innovation.

Accounting rules make comparisons of profits by the pharmaceutical and other industries complicated,8 but data suggest that drug companies are particularly profitable, even after adjusting for R&D spending as a share of revenues.910 There also seems to be a disconnect between product R&D costs and prices. One recent study found no association between how much drug companies spend on R&D and the prices they charge for new medicines.11

The justification of high drug prices also ignores the sizeable public investments in drug discovery and development, which contributed to the basic and translational research underpinning all new drugs approved by the FDA from 2010 to 2016 12; more than a quarter of new drugs approved by the FDA from 2008 to 2017 were linked to public investment during the late stages of development.13 This means that society is potentially paying twice for new drugs, first in the form of publicly subsidised research and second through high product prices.14

Most industry spending is not on research and development

Based on publicly available financial reports from 1999 to 2018, the 15 largest biopharmaceutical companies had total revenues of $7.7tr. Over this period, they spent $2.2tr on costs relating to selling, general, and administrative activities—a category that includes marketing and advertising, as well as almost all other business costs not directly attributable to manufacturing a product or performing a service—and $1.4tr on R&D (fig 1). The precise details of what is included within R&D and selling, general, and administrative activities can be unclear. For example, companies may conduct seeding trials of newly approved drugs as part of the reported R&D spending, but these have been described as having little or no scientific purpose,15 serving more as marketing strategies.16 Notwithstanding this limitation, it is clear that companies spent more on selling, general, and administrative activities than on R&D every year from 1999 to 2018, which is consistent with earlier evidence from 1975 to 2007.1

<FIGURE OMITTED>

Most of the same companies also spent more buying their own stocks, a practice known as share buybacks, than on R&D during this period. Share buybacks are expected to lift share prices and thus benefit shareholders. These include senior company executives, whose income is often directly linked to the share price. A drug pricing investigation by the US House Committee on Oversight and Reform showed that, from 2016 to 2020, the 14 largest pharmaceutical companies spent $577bn on share buybacks and dividends—$56bn more than on R&D—at a time when annual executive compensation grew by 14%.18 An earlier analysis by the Institute for New Economic Thinking using data from 2006 to 2015 also found that 18 large US drug companies spent more on share buybacks and dividends than on R&D,19 seemingly prioritising short term financial returns over long term investments in innovation.

This trend reflects the growing financialisaton of the pharmaceutical industry in the past decades, which has generally focused on maximising shareholder value.20 At the same time, share buybacks may signal that a company has more cash than investment opportunities and therefore the company chooses to return “unproductive” cash on the books to shareholders. However, if excessive buybacks take place repeatedly over many years, it raises questions about commitments to truly valuable and risky biopharmaceutical research.

Although companies spent more on both selling, general, and administrative activities and share buybacks than on R&D over the past two decades, selling, general, and administrative expenses (as a share of revenue) dropped from 35% to 27% over this period while R&D spending increased from 16% to 21% (fig 2). This is consistent with data for the 10 drug companies with the largest R&D budgets between 2005 and 2015.21

<FIGURE OMITTED>

We also know that drug companies engage in mergers and acquisitions to access promising new products.22 Alongside evidence that large pharmaceutical companies are not involved in the discovery of most new drugs,23 this suggests a shift of strategy from early stage research and discovery to late stage acquisition and development.

Most new drugs provide little or no added clinical value

While manufacturers, regulators, payers, clinicians, and patients may differ in their views of what constitutes pharmaceutical innovation, Light and Lexchin argued that the “real innovation crisis” in pharmaceutical R&D does not relate to the absolute number of new drugs approved but the proportion representing therapeutic advances.24

In the 1970s and the 1980s, around 1 in 6 (16%) new drugs approved by the FDA offered important therapeutic gains, based on FDA assigned scores.25 Another study covering products approved from the mid-1970s to mid-1980s found that only around 1 in 10 (11%) new drugs globally were therapeutically and pharmacologically innovative.26 These figures are consistent with several other recent studies (table 1).272829303132 Analyses of drug evaluation reports put out by health technology assessment bodies in France and Germany in the 2010s suggest that most new drugs offer little or no added clinical value, with only a fraction offering important or major improvements.3334353637 A 2022 study from the Belgian Healthcare Knowledge Centre found considerable uncertainty about the benefits of many new cancer drugs in terms of overall survival and quality of life, despite an increase in their prices.38