Pharmaceutical research and development (R&D) is funded from a complex mix of private and public sources. Governments mainly support basic and early-stage research through direct budget allocations, research grants, publicly owned research institutions and higher education institutions. The pharmaceutical industry is active across all phases of R&D but makes the largest contribution to translating and applying knowledge to develop products. Clinical trials required to gain market approval are largely funded by industry. However, industry also receives direct R&D subsidies or tax credits in many countries.
In 2016, governments of 31 OECD countries from which data are available collectively budgeted about USD 53 billion for health-related R&D (a broader category than pharmaceuticals). This figure understates total government support because it excludes most tax incentives and funding for higher education and publicly-owned corporations. Meanwhile, the pharmaceutical industry spent approximately USD 101 billion on R&D across OECD countries.
Most pharmaceutical industry R&D expenditure comes from OECD countries but the share from non-OECD countries is increasing (EFPIA, 2018[1]). Growth has been particularly rapid in China, where the industry spent USD 14 billion on R&D in 2016 (0.07% of GDP) – a more than 2.5-fold increase since 2010 (in real terms) (OECD, 2019[2]). Nearly two-thirds of the spending in OECD countries (Figure 10.12) occurs in the United States, where the industry spent about USD 65 billion (0.35% of GDP), and government budgets on health-related R&D were USD 36 billion (0.19% of GDP). The industry spent USD 20 billion (0.1% of GDP) and governments budgeted USD 11 billion (0.06% of GDP) in Europe; the figures were USD 13 billion (0.25% of GDP) and USD 1.4 billion (0.03% of GDP) respectively in Japan. As a share of GDP, industry spending is highest in Switzerland (0.85%), Denmark (0.46%) and Slovenia (0.45%), smaller countries with relatively large pharmaceutical sectors.
The pharmaceutical industry is highly R&D intensive. On average across OECD countries, the industry spent nearly 12% of its gross value added on R&D. This is almost as high as in the electronics and optical and air and spacecraft industries, and considerably higher than across manufacturing as a whole (Figure 10.13).
Expenditure on R&D in the pharmaceutical industry in OECD countries grew by 14% in real terms between 2010 and 2016. The number of new drug approvals has also increased since 2010, following a decline after the 1980s. In the United States, for example, the annual number of approvals is now back to a similar level to that seen in the 1980s (Figure 10.14). However, given the increase in R&D expenditure, the number of approvals per inflation-adjusted R&D spending has declined steadily.
This pattern of decreasing productivity despite advances in technology is driven by a complex combination of factors. These include growing requirements to obtain market approval, which have increased clinical trial costs, and an ever-increasing base of effective drugs that has shifted efforts to drugs for more complex conditions. Rising R&D costs can be both a cause and a result of higher drug prices, as the acceptance of higher prices by payers can make increasingly expensive R&D and acquisitions of R&D projects financially viable. Increasing R&D and acquisition costs can, in turn, drive up prices.
