Pharmaceutical Companies and the High Price of Research

Everyone knows that it costs pharmaceutical companies four cents to make a pill.  The problem is that the first pill can cost them four billion dollars.

Sean Williams recently published an article in The Motley Fool titled, “The Pharmaceutical Industry’s 10 Biggest R&D Budgets,” in which he discusses which firms are spending the most on development.

Williams argues that while exclusive patents are given to pharmaceutical companies for periods of 20 years, that period begins when the Food and Drug Administration first approves of a drugs use in clinical styles.  This process, the author writes, can take anywhere from 8-10 years, cutting the time period of profit-turning in half, and instead requiring firms to spend a decade in development.

In other words, Williams writes, the research process is vital.  So vital, in fact, that some firms are spending just shy of 10 billion a year on research and development.

So who are the biggest spenders?  Among the top three are Roche, Pfizer, and Merck, each of which spend well over 8 billion a year testing and developing new drugs.  Johnson and Johnson wasn’t far behind with 7.7 billion in annual R&D spending, the article said.

Williams notes that a comparison between the most recent studies (which examine 2012 and 2009 spending), also reveals some interesting insights.  For example, according to the article, Merck increased its R&D spending by over 50% in just three years.  The drastic increase comes from 35 experimental drugs currently in some stage of the trial process and eight more being reviewed by the FDA.  Among them: a sleep maintenance drug called suvorexant and a drug targeting osteoarthritis.

Despite maintaining a spot in the top five “big spenders,” Novartis was the only organization on the top ten list who saw a decline in R&D spending from 2009-2012.  Why the drop off?  Williams said there are several, technical reasons for the reallocated funds from R&D, but proponents of the company shouldn’t worry.  Their historic success in the market is not like to disappear overnight, he writes.

Overall, the incredulous R&D spending tells us that pharmaceutical companies need innovation to stay alive.  Williams concludes by saying the key to success in the industry is a strong pipeline to replace existing treatments.  A pipeline, it seems, that has nearly created a 100 billion dollar industry.

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