Pharmaceutical R&D global spending trends in 2019

Pharmaceutical R&D global spending trends in 2019

By Amandeep Singh

The pharmaceutical industry’s activities have significant socio-economic impacts on society in the form of investments in R&D and manufacturing. Of note, R&D is the “backbone” for success in any drug discovery program. Thus, the extent of pharmaceutical R&D spending serves as an important metric to show a company’s commitment to finding new drugs. At present, the global pharmaceutical industry has the second highest R&D intensity (expenditure as a share of sales) measures of any sector.

Pharma’s big budget gets bigger:

The EvaluatePharma 2018 report suggests an increase in worldwide pharmaceutical R&D spending. Compared to 2016, global R&D spending in 2017 surged by 3.9% to $165 USD billion. As a percentage of total prescription sales, average R&D spending moderately increased to 20.9%. The top 20 pharma companies spent a total of $97.2 USD billion, with Roche maintaining its position as top spender on R&D at $9.2 USD billion in 2017. Importantly, R&D intensity remains consistently highest in the United States, with more than half the global R&D expenditure spent by US pharma giants. To put it in perspective, the NIH-funded academic research budget totaled $33.1 USD billion in FY 2017.

The report also indicates that overall R&D spending is expected to grow by 3% each year, reaching roughly $203.9 USD billion by 2024. The fruits of this capital-intensive process are visible in terms of an increasing number of new FDA approvals, rebounding from 27 new molecular entities in 2016 to 55 and 59 in 2017 and 2018, respectively. The dynamics of spending along the drug development pipeline continue to affect the statistics. A high number of drugs in late-stage development and approval last year contributed to an increased average cost of drug development, as Phase 3 trials remain the costliest step.

Looking into 2024: Taking cautious steps forward

Roche is poised to remain the top spender in 2024, likely driven by its historically intense R&D operations and expanding oncology business. The pharma titan Novartis, after being overtaken by Johnson & Johnson, has dropped from second to third biggest spender, an outlook expected to continue into 2024. Also, Celgene is expected to intensify R&D efforts and will continue to have the highest growth into 2024 among the top 20 pharma. Regeneron and Novo Nordisk are also predicted to grow their R&D expenditures at a compound annual growth rate (CAGR) of 5-6% through 2024.

Nevertheless, the growth in pharmaceutical and healthcare R&D is slowing down overall. The EvaluatePharma report forecasts a CAGR of 3.1% for R&D spending into 2024, which is lower compared to the CAGR of 3.6% between 2010 and 2017. Likewise, the average R&D intensity is likely to fall to 16.9% in 2024 as compared to the average 19.5% observed between 2010 and 2017. According to a recent PwC report, many pharma giants including Roche, Novartis, and Pfizer marginally reduced their R&D expenditures in 2018 from that in 2017. Against this trend, several smaller firms are aggressively increasing their R&D intensity, likely due to high returns and successes in releasing high-value products. Nonetheless, the R&D budgets of the pharma giants still dwarf those of the smaller firms.

The slowdown among pharma giants signals either that the companies are planning to improve their R&D efficiency, or perhaps less revenue will be directed towards replenishing pipelines. We should also note that return on investment (ROI) has been declining dramatically in the pharma industry. Deloitte’s 2018 report suggests that the top 12 pharma companies observed the lowest level of ROI in 9 years, at 1.9%, down from 10.1% in 2010. Relatively speaking, smaller firms outperform the giants and have an average of about 9.3% R&D returns. The cost of bringing a new drug to the market has almost doubled to around $2.1 USD billion as compared to $1.1 USD billion in 2010. Therefore, the companies must pump more money in to get reasonable profits. As a result, they are increasingly looking into new ways to improve ROI for R&D spending.

Staying in-line with global pharmaceutical R&D spending trends:

The biopharmaceutical industry is at a tipping point in terms of recalibration. Companies are increasingly looking to use big data and predictive analysis to improve R&D productivity. Artificial intelligence (AI) is being employed to improve efficiency in various facets of the drug discovery process, such as drug repurposing, clinical trial design, and safety prediction. Within the United States, the AI spend in pharma and healthcare increased by 76.6% to reach $301 USD million and will continue to grow at a high CAGR of 26.9%. The division between startups and giants will become increasingly blurred as pharma companies build on partnerships and collaborations to fuel innovation. For all our sakes, it is imperative that efficiencies in the pharmaceutical industry increase at a healthy rate and that R&D investments grow in the foreseeable future.

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