Breaking down the pharmaceutical R&D expenditure structure

By Avishek Majumder on February 4, 2019

As mentioned in the previous article, increased R&D investments improve the sales and production of existing and new drugs of a company. Pharmaceutical R&D expenditures comprise

drug filing,
improved quality control,
drug clinical tests,
packaging,
export charges and,
inspection costs (Li & Hall, 2016).

According to a report by STATISTA, (2017), pharmaceutical R&D expenditures was valued at USD 159 billion globally in 2016.

Pharmaceutical R&D expenditures by 25 leading Indian pharmaceutical companies manufacturing both allopathic and AYUSH based products have gone up significantly by 28.8% in 2015 from 2014 valuing USD 5 billion (Banerji & Suri, 2017). Furthermore, out of USD 159 billion, the USA pharmaceutical companies contributed 58% to the total global expenditure (The Association of the British Pharmaceutical Industry, 2018). This has helped the USA to become one of the largest patent applicants globally and the leading revenue generators from sales of pharmaceutical products.

Types of pharmaceutical R&D expenditure

The pharmaceutical industry is dependent on R&D for:

discovery and development of new medicines,
improving sales and revenues and,
allocation of capital expenditures (PhRMA, 2017).

According to the report by PhRMA, (2017), on an average pharmaceutical company, dedicate about 17% of their yearly budget to R&D. The following image indicates the complete breakdown of different forms of expenditures made only for R&D of new pharmaceutical products.

Breakdown of pharmaceutical R&D expenditure (PhRMA, 2017)

Pharmaceutical R&D expenditure for R&D infrastructure

R&D infrastructure is a broad term for all human capital and technological infrastructure available or needed for the development of new drugs (PhRMA, 2017). Human capital comprises researchers and scientists, whereas technological infrastructure comprises technologies and scientific instruments needed for research. R&D infrastructure forms the most important component for indicating the R&D capabilities of any pharma company (Ebhota, 2014).

Novartis contributed USD 6.9 million in equipment and infrastructure upgrade to increase production flexibility and capacity of its antibody R&D facility situated in France in the year 2016 (Novartis, 2017). The same facility is now the largest producer of antibody and cellular pharmaceutical products globally. It is estimated that the facility by Novartis contributes 40% of the total global sales of monoclonal antibodies (Novartis, 2017). It is also reported that a human monoclonal antibody, Anti-interleukin-1 beta, has helped Novartis generate over USD 500 million since 2016. Therefore, it can be implicated that pharmaceutical R&D expenditure for R&D infrastructure improves the sales and production of pharmaceutical products.

Pharmaceutical R&D expenditures for pre-clinical tests

Pre-clinical studies in pharmaceutical industries involve testing for efficacy, pharmacokinetics, toxicity, pharmacodynamics and ethical information of existing pharmaceutical compounds (Begley & Ellis, 2012). Companies mainly perform in-silico profiling of drugs using bioinformatics, computer models and virtual simulations. Therefore, the pre-clinical stage is the most important part of the complete pharmaceutical compound development procedure. Furthermore, it is important that new technologies remain invested in improving the efficiency of pre-clinical tests to improve the efficiency of pharmaceutical researches.

However, only 2% of pre-clinical pharma research projects advance to phase I of clinical trials in India (Differding, 2017). Sometimes, the preclinical tests take longer than a year for researching and advancing to phase I. Globally, around 7493 pre-clinical trial projects were conducted in the year 2017 (Informa UK, 2017). Out of which 2064 pharma compounds advanced to phase I of drug development. Therefore, it is important that pharma companies efficiently expedite the expenditures for pre-clinical tests. PhRMA, (2017) also indicated that all pharmaceutical industries spend the second-highest amount of R&D expenditures (approx. 30%) in the pre-clinical phase.

Breaking down the expenditures for pre-clinical tests (PhRMA, 2017)

Breaking down the pharmaceutical R&D expenditure for phase I-III clinical trials

Different phases (I-III) for pharmaceutical product development (PhRMA, 2017)

The above image indicates the three main phases of drug experimentation in R&D and the development of new drugs. Clinical testing of newly developed drugs is also an important task in R&D. These tests, thereby, help explore the efficacy and effectivity of the drugs. According to FDI, (2017) approximately 70% of the drugs get approved to phase II, 33% to phase III, and 25-30% to phase IV of clinical trials. It is estimated that drugs that do not pass on to next phase (I to II, II to III and III to IV), incurs losses on an average of USD 300 million (Informa UK, 2017). In addition, these clinical trials incur 40% of the total R&D expenditures.

Pharmaceutical R&D expenditure for approvals, patents, and registrations

The last phase of drug development comprises of expenditures for approvals from drug regulatory bodies, presenting the results of tests and patenting changes. They, however, comprise a very minute percentage of R&D expenditure. These expenditures comprise less than 10% of the total R&D expenditures. These processes take place before phase IV of clinical tests (Informa UK, 2017). Furthermore, the total expenditure values USD 5000-1000 on an average for any pharma company globally with respect to approvals, patents, and registrations (Banerji & Suri, 2017). Therefore, it helps the pharma companies to remain competitive in the field of innovations and sales.

Pharmaceutical R&D expenditure for phase IV clinical trials

The phase IV clinical trials are basically post-market safety monitoring after registrations and approvals for commercial productions. Phase IV is also responsible to check the safety and efficacy of the drugs marketed at different regions and different environmental conditions (FDI, 2017). However, these expenditures comprise 10-15% of the total expenditures capitalized for R&D.

Phase IV clinical trials come under the pharmacovigilance and are under the constant radar of the regulatory organizations as well as competitors. In this phase, the pharma companies spend on marketing strategies and reaching out to healthcare centres for the promotion of their newly launched products. Therefore, phase IV plays an important part in improving the revenues and profitability of the pharma companies to continue its pursuit in research and development of new drugs.

The flow of pharmaceutical R&D expenditure capitalization for development of new drugs — The flow of pharmaceutical R&D expenditure capitalization for the development of new drugs

References

Banerji, A., & Suri, F. K. (2017). Patents, R&D Expenditure, Regulatory Filings and Exports in Indian Pharmaceutical Industry. Journal of Intellectual Property Rights. 22, 136-145.
Begley, C. G., & Ellis, L. M. (2012). Drug development: Raise standards for preclinical cancer research. Nature, 483(7391), 531.
Differding, E. (2017). The Drug Discovery and Development Industry in India—Two Decades of Proprietary Small‐Molecule R&D. ChemMedChem, 12(11), 786-818.
Ebhota, W. S. (2014). Engineering Research And Development (R&D) Infrastructure For Developing Economy. International Journal of Scientific & Technology Research. 3(4), 186-192.
FDI. (2017). Step 3: Clinical Research. Available at: https://www.fda.gov/ForPatients/Approvals/Drugs/ucm405622.htm, (accessed on 2-2-2019).
Informa UK Ltd. (2017). Pharma R&D Annual Review 2017. Available at: https://pharmaintelligence.informa.com/~/media/Informa-Shop-Window/Pharma/Files/PDFs/whitepapers/RD-Review-2017.pdf.
Li, W. C., & Hall, B. H. (2016). Depreciation of business R&D capital (No. w22473). National Bureau of Economic Research.
Novartis. (2017). Annual reports 2017. Available at: https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2017-en.pdf.
STATISTA. (2017). Total global pharmaceutical research and development (R&D) spending from 2008 to 2022 (in billion U.S. dollars). Available at: https://www.statista.com/statistics/309466/global-r-and-d-expenditure-for-pharmaceuticals/ (accessed on 2-2-2019).