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Rx R&D Myths: The Case Against the Drug Industry’s R&D “Scare Card”

Click Here for PDF Versions of the Report, Appendix A and Appendix C

Executive Summary

This new Public Citizen report reveals how major U.S. drug companies and their Washington, D.C. lobby group, the Pharmaceutical Research and Manufacturers of America (PhRMA), have carried out a misleading campaign to scare policy makers and the public. PhRMA’s central claim is that the industry needs extraordinary profits to fund expensive, risky and innovative research and development (R&D) for new drugs. If anything is done to moderate prices or profits, R&D will suffer, and, as PhRMA’s president recently claimed, “it’s going to harm millions of Americans who have life-threatening conditions.” But this R&D scare card – or canard – is built on myths, falsehoods and misunderstandings, all of which are made possible by the drug industry’s staunch refusal to open its R&D records to congressional investigators or other independent auditors.

Using government studies, company filings with the U.S. Securities and Exchange Commission and documents obtained via the Freedom of Information Act, Public Citizen’s report exposes the industry’s R&D claims:

  • The drug industry’s claim that R&D costs total $500 million for each new drug (including failures) is highly misleading. Extrapolated from an often-misunderstood 1991 study by economist Joseph DiMasi, the $500 million figure includes significant expenses that are tax deductible and unrealistic scenarios of risks.
  • The actual after-tax cash outlay – or what drug companies really spend on R&D – for each new drug (including failures) according to the DiMasi study is approximately $110 million. (That’s in year 2000 dollars, based on data provided by drug companies.) (See Section I)
  • A simpler measure – also derived from data provided by the industry – suggests that after-tax R&D costs ranged from $57 million to $71 million for the average new drug brought to market in the 1990s, including failures. (See Section II)
  • Industry R&D risks and costs are often significantly reduced by taxpayer-funded research, which has helped launch the most medically important drugs in recent years and many of the best-selling drugs, including all of the top five sellers in one recent year surveyed (1995).
  • An internal National Institutes of Health (NIH) document, obtained by Public Citizen through the Freedom of Information Act, shows how crucial taxpayer-funded research is to top-selling drugs. According to the NIH, taxpayer-funded scientists conducted 55 percent of the research projects that led to the discovery and development of the top five selling drugs in 1995. (See Section III)
  • The industry fought, and won, a nine-year legal battle to keep congressional investigators from the General Accounting Office from seeing the industry’s complete R&D records. (See Section IV) Congress can subpoena the records but has failed to do so. That might owe to the fact that in 1999-2000 the drug industry spent $262 million on federal lobbying, campaign contributions and ads for candidates thinly disguised as “issue” ads. (See accompanying report, “The Other Drug War: Big Pharma’s 625 Washington Lobbyists”)
  • Drug industry R&D does not appear to be as risky as companies claim. In every year since 1982, the drug industry has been the most profitable in the United States, according to Fortune magazine’s rankings. During this time, the drug industry’s returns on revenue (profit as a percent of sales) have averaged about three times the average for all other industries represented in the Fortune 500. It defies logic that R&D investments are highly risky if the industry is consistently so profitable and returns on investments are so high. (See Section V)
  • Drug industry R&D is made less risky by the fact that only about 22 percent of the new drugs brought to market in the last two decades were innovative drugs that represented important therapeutic gains over existing drugs. Most were “me-too” drugs, which often replicate existing successful drugs. (See Section VI)
  • In addition to receiving research subsidies, the drug industry is lightly taxed, thanks to tax credits. The drug industry’s effective tax rate is about 40 percent less than the average for all other industries. (See Section VII)
  • Drug companies also receive a huge financial incentive for testing the effects of drugs on children. This incentive called pediatric exclusivity, which Congress may reauthorize this year, amounts to $600 million in additional profits per year for the drug industry – and that’s just to get companies to test the safety of several hundred drugs for children. It is estimated that the cost of such tests is less than $100 million a year. (See Section VIII)
  • The drug industry’s top priority increasingly is advertising and marketing, more than R&D. Increases in drug industry advertising budgets have averaged almost 40 percent a year since the government relaxed rules on direct-to-consumer advertising in 1997. Moreover, the Fortune 500 drug companies dedicated 30 percent of their revenues to marketing and administration in the year 2000, and just 12 percent to R&D. (See Section X)

    Click here for the full report