Pharma Manufacturing Industry Ranks Second in R&D Intensity

Despite investing a much larger share of its revenue in research and development (R&D), the pharmaceutical industry retains a smaller share of total spending on its products than other research-intensive industries, according to a study from Oxford Economics.

Specifically, the pharmaceutical manufacturing industry ranks second in terms of R&D intensity at 14 percent. It also has the second lowest producers’ share of total spending (55 percent).

Additionally, a large share (85 percent) of its output is sold to consumers.

“The pharmaceutical industry is unique in that it devotes a much larger share of its revenue to R&D, despite retaining considerably smaller share of total spending,” researchers said in the study.

Oxford researchers used industry-level trade and transport margins published by the Bureau of Economics Analysis (BEA) to estimate the share of spending that pertains to pharmaceutical manufacturers versus other supply chain players.

US pharmaceutical prices are dispersed among various entities in the supply chain, including manufacturers, wholesalers, retailers, government, insurers, and hospitals.

In 2012, pharmaceutical spending for prescription and over-the-counter products totaled $413 billion, according to the BEA.

Fifty-two percent of the spending went to the pharmaceutical companies that produced medicine. Twenty-one percent went to transport and wholesale margins and 26 percent went to retail margins.

The pharmaceutical industry is unusual in the sense of manufacturer rebates and discounts made to payers, patients, and players in the pharmaceutical supply chain.

For example, an administrative fee to a pharmacy benefit manager paid by a biopharmaceutical manufacturer would be included as part of the producer’s share.

But researchers explained that if a similar fee were paid by a pharmacy, its value would be part of a retail margin.

The pharmaceutical industry is also unique in that it also faces outsized risks.

For example, the biopharmaceutical industry invested $102 billion in 2018, even though it can take nearly 10 to 15 years to develop one new medicine, and only 12 percent of new potential products that enter clinical trials actually receive FDA approval.

“The high R&D costs that are a defining feature of the pharmaceutical industry must be borne out of the relatively small share of spending that accrues to pharmaceutical producers,” researchers explained.

“These two factors, the high R&D costs, the high distribution costs (trade and transport margins) that accrue to supply-chain entities rather than to manufacturers, provide important context for understanding the costs Americans pay for pharmaceutical products.”

During the pharmaceutical manufacturing process, drugs are evaluated for safety, efficacy, and manufacturing quality as a condition of market access.

Drug prices also are regulated in most countries with national health insurance systems.But the pharmaceutical supply chain greatly affects drug costs. Consumers face higher out-of-pocket expenses and health plans deal with higher drug spend.

A report from the Pharmaceutical Research and Manufacturers of America (PhRMA) found that the complexity and number of players involved in the drug supply chain may one of the main reasons prescription drug costs are making headlines.

Prescription drugs greatly depend on several negotiations between wholesalers, pharmacies, pharmacy benefit managers, and insurers, according to the report. The authors noted that rebates have increased over the past few years, but out-of-pocket costs for patients are soaring.

A National Community Pharmacists Association (NCPA) study said that high generic drug prices have had an adverse effect on almost everyone in the pharmaceutical supply chain.

Consumers face higher co-pays and prices and health plans are dealing with higher drug spending. Physicians are also finding the need to prescribe alternative drug therapies, and sometimes, consumers are declining their medications due to increased prices.