Drug Costs

Addressing Common Myths about Private Sector R&D

March 7, 2019 10:20 am

There are no fewer than five hearings on Capitol Hill this week on healthcare costs, three of which are exclusively devoted to drug prices. As they have in hearings over the last six weeks, lawmakers likely will ask questions about research and development (R&D) – how much is funded by the private sector, by taxpayers or by colleges and universities, and how drug company R&D compares to earnings.


In a U.S. Senate Finance Committee hearing on Feb. 26, AbbVie Inc. CEO Robert Gonzalez tackled that last question, explaining his company spent $5.2 billion on R&D and that figure was “almost equivalent to” the company’s earnings. His ratio is representative. A few days later, Axios’ Mike Allen looked at spending by the country’s largest manufacturers and found “the biggest drug companies generally spend more money on research than they keep in profits.”


According to a 2017 report, pharmaceutical companies spent $71.4 billion on R&D that year, a record amount. BioPharma DIVE explained, “R&D spending was up in not only absolute terms as total spending, but also in relative terms as percentage of total sales. Proportionally, companies spent 21.4 percent of total sales on R&D.” In a June 2018 Forbes column, PureTech Ventures Senior Partner John LaMattina noted internal pharmaceutical company R&D investment historically “has been relatively high … higher than any other industry,” running about “15 percent of top line revenues.”


In a more recent Forbes column, LaMattina addressed the argument – heard more frequently on Capitol Hill these days – that taxpayers fund the most difficult parts of the R&D process.


LaMattina compared early stage National Institutes of Health (NIH) research to a marathon. With taxpayer money in hand, the NIH runs the first (very important) mile, but “you still have 25.2 miles to go and each mile gets more difficult.” In other words, without significant additional private sector investment, cures never would make it to market. LaMattina explains, for example, that the rheumatoid arthritis medication Xeljanz was the result of “an important observation made at the NIH,” but also needed $1 billion more private sector investment and “19 years of hard work” to make it into patients’ hands.  


Another common myth is that college and universities fund a large bulk of research. Again, while discoveries made by scientists working on campuses are incredibly important, lawmakers and editorialists overlook the fact that biopharmaceutical firms provided more than $2.5 billion in research funding to U.S. universities in 2017 alone – about 60 percent of all industry funding of research.


Any way you slice the data, the bottom line is that drug company investments in R&D are important – and significant.