How much does the pharma industry spend on R&D anyway? Probably more than you thought

For years, incomplete data and misconceptions have clouded the question of pharmaceutical how much it costs to bring therapies to market. The lack of clarity has led to debates over drug pricing, industry profits, and healthcare policies that are not always rooted in reality. For instance, a common belief persists that drug developers spend more on sales and marketing than on research and development — a narrative that influences public opinion and legislative discussions. According to a recent survey by the Kaiser Family Foundation (KFF), 82% of Americans believe that prescription drug costs are unreasonable, and over 80% across all political parties view pharma company profits as a “major factor” in driving high drug prices.

Yet this perception fails to account for the substantial R&D investments made by the industry.  A recent comprehensive analysis by Amitabh Chandra, a professor at Harvard Business School and Harvard Kennedy School, along with a cross-organizational research team, sheds new light on the true scale of R&D investment in the pharmaceutical sector. Published in August in Nature Reviews Drug Discovery, the study found that global biopharma R&D investment hit $276 billion in 2021 — more than double the commonly cited estimates. The figure was higher, in part, as Chandra explained in a recent webinar, because previous estimates tended to measure R&D among the largest public companies only.

“We have this enormous ecosystem that does R&D in the biopharmaceutical industry. How much R&D does it [spend]? That’s the question we’re out to answer in this paper,” Chandra explained during the October 25 webinar hosted by No Patient Left Behind (NPLB), a nonprofit founded in 2020 by Peter Kolchinsky, a biotech investor and scientist.

An ecosystem cost of more than $5 billion per drug

The findings reveal that while individual successful drugs cost about $2.3 billion to develop, according to Deloitte’s 2022 analysis of major pharmaceutical companies, the total ecosystem investment per successful drug approval is more than $5 billion. “Drug discovery and development are even more expensive than anybody thought,” Chandra explained.

“If we spend $276 billion as an ecosystem in a year, and in a typical year we get somewhere between 40 to 50 drugs approved, that leaves you with over $5 billion of spending that needs to be undertaken by investors to get those 50 drugs,” Chandra explained. This suggests that the actual cost per approved drug, considering the entire ecosystem, is significantly higher than previously estimated. The study also found that development-stage companies alone contributed $73 billion to total R&D spending.

Industry organizations like PhRMA report that their member companies spend around $100 billion annually on R&D, but these figures represent only a portion of the total investment. In 2023, the figure was roughly $96 billion, and it was $102.3 billion in 2021. Deloitte noted in 2023 that the largest 20 Big Pharmas spent $139 billion collectively on R&D. Yet, these amounts constitute a tiny sliver of the total investment compared to the $276 billion identified in Chandra’s study and align with a proprietary model from Evaluate Pharma, which estimated $238 billion of 2021 global R&D.

Silas Martin, Director at Johnson & Johnson and one of the study’s co-authors, highlighted the limitations of focusing solely on major companies in the NPLB webinar: “If you just stick to 10 or 20 companies, that’s one thing. But if you add the other over 4,000, you get a different number.”

Debunking the claim that the industry spends more on marketing than R&D

The Nature study reveals that pharmaceutical R&D investment is distributed across a much broader ecosystem than typically recognized. While the top 20 companies by revenue contribute about half of R&D investment, development-stage companies invest $73 billion annually — over a quarter of total R&D spending. This finding challenges the common view that drug development is essentially a Big Pharma affair. Yes, large companies lead, but biopharma R&D takes a village.

Additionally, the analysis debunks the persistent claim that the industry spends more on sales and marketing than research. Global R&D investment of $276 billion in 2021 was nearly triple the $96 billion spent on sales and marketing. “This is a common talking point that we should probably just retire,” Chandra noted during the webinar.

Regional differences in R&D intensity — the percentage of revenue reinvested in research — tell another important story. U.S.-headquartered companies invested 34% of revenue back into R&D, significantly higher than European (22%) and Asia/Pacific firms (20%).

While many in the U.S. public believe that pharmaceutical company profits are a major factor driving high prescription drug prices — a sentiment 82% of Americans echoed in a Kaiser Family Foundation (KFF) survey — the reality is more nuanced. Chandra highlighted this misconception during the webinar, stating, “This is not some super-profitable industry,” pointing out that net income margins are around 15%, comparable to public utilities.

Heidi Floyd, a patient advocate and two-time breast cancer survivor, illustrated the disconnect between public perception and the complex reality of pharma R&D costs during the NPLB webinar. “There are falsehoods out there flying around rapidly in the patient community,” she shared, recalling a recent media moment that exemplified the problem: “Someone held up a pill and said, ‘This medicine costs five cents,'” she said. “It cost over a billion dollars to make that pill, and some genius had to figure out what the requirements were.”

Floyd also offered a personal perspective on the human impact of R&D investment. Her oncologist had explained how one of her chemotherapy drugs was originally discovered in soil samples near an Italian castle. “Are you kidding me? Somebody dug up dirt and made a chemotherapeutic out of it?” she recalled thinking. “Realizing that generations later, I would be alive because that brilliant person decided to say, ‘Let’s try this. Let’s give that a whirl.'”

This reflection underscores the long arc of pharma innovation. Floyd emphasized that patients are eager to understand and contribute to the R&D process: “We also never get a chance to say thank you… We should be included. There’s so much still to do. There are so many unmet needs; we need better treatments. We need cures, if at all possible.”

Waking up a decade from now and asking: ‘Where did all the small molecules go?’

Another disruptive force in the pharma landscape is the Inflation Reduction Act (IRA). Tess Cameron, Principal at RA Capital Management, expressed concerns about the disincentives the policy creates, especially for small-molecule drug development. Notably, the IRA mandates that Medicare can negotiate prices for small-molecule drugs starting nine years after FDA approval, while biologics have a more extended 13-year period before price negotiations begin. “What is happening as a result of the Inflation Reduction Act is investors are not planting the seeds for small-molecule innovation,” Cameron explained. “It’s something that is incredibly harmful to society if we wake up in 10 years and say, ‘Shoot, where did all those small molecules go?'”

Cameron emphasized that the IRA’s pricing provisions could significantly reduce potential drugs’ net present value (NPV), making early-stage investments less attractive. “Investors aren’t incentivized to plant these seeds in new small-molecule drugs targeted towards Medicare patient populations,” she said, highlighting a potential future gap in treatment options for conditions commonly affecting older adults.

Chandra underscored the interconnectedness of the biopharmaceutical ecosystem and how policy changes can have cascading effects. “That whole thing is connected,” he noted. “When we talk about policy affecting one part of the ecosystem, you have to recognize it’s all connected. There’s not a real good way to separate that out.”

He also addressed the notion of adopting international drug pricing models: “We could get the Greek price or the Portuguese price, but then we wouldn’t get the drug because, at that price, the incentives to make the drug would be nonexistent. If each drug had a single international price, then U.S. prices would fall by half, but every other country’s price would increase by over 300% if you wanted to maintain R&D incentives.”

“At the end of the day, the point of all of this is not to just spend more on R&D — that’s not the point,” Chandra said. “The point is we want great medicines. The only way we get the great medicines is by doing the R&D, but let’s not lose sight of the fact that the goal is not R&D; the goal is the great medicines.”