pharma industry essay

Emerging from disruption: The future of pharma operations strategy

In the past, many pharmaceutical companies (pharmacos) deprioritized operations strategy in the face of competing business pressures. This is now changing. Factors such as the COVID-19 pandemic, inflation, geopolitics, new therapeutic modalities, and new ways of working make it vital for pharmacos to carefully reconsider their long-term choices in sourcing, manufacturing, and supply chain.

Now is exactly the right time for this renewed emphasis on operations strategy, as pharmacos emerge from two years of intense firefighting. Succeeding in pharma under these new and challenging conditions will require succeeding in operations.

The focus for operational leaders may need to shift from the prevailing emphasis on continuous improvement—including cost savings, quality assurance, and constant readiness to deliver—to longer-term external challenges. These include high inflation and an increase in complexity and risk, as well as the compounding effects these forces have on each other.

Pharma operations leaders now have an opportunity to deliver even greater value to their organizations by achieving this shift in focus, but they must act quickly to keep abreast of the challenges confronting the industry. The effort will require enormous mobilization and thoughtful prioritization. This task will fall to leadership; only the CEO and head of operations are in the right positions to make it happen.

This article explores the challenges facing pharma leaders and the steps they can take to develop a more strategic, long-term, and integrated approach to operations strategy. It presents questions leaders can ask as they design the solutions needed to make sure operations can protect enterprise continuity while still delivering to patients.

A perfect storm of external challenges

The pharma industry is facing a multitude of challenging trends (Exhibit 1). Global demand is growing rapidly, and the unprecedented need for COVID-19 vaccines and therapeutics has put additional pressure on the industry. The industry’s ability to find innovative solutions to deliver COVID-19 vaccines while still meeting overall demand is a remarkable achievement, but rising global demand is still a significant challenge for the industry in the long term.

The product landscape also is changing swiftly. New modalities, such as cell and gene therapy and mRNA vaccine technology, have increased from 11 to 21 percent of the drug development pipeline—the fastest growth ever seen in the sector. This change is likely to bring more fragmentation of technology, new supply chains, and unique product life cycles.

In addition to these industry-specific trends, pharma has also been affected by broader global trends, such as supply chain pressures. While the pharma industry is considered somewhat protected by its high inventory levels and long-standing dual sourcing, over a given ten-year period, the likelihood of supply chain disruptions still represents a potential loss of 25 percent of EBITA . Inflation has risen in recent months to levels not seen for decades, leading to increasing costs for labor, raw materials, and transportation. This is over and above the persistent price pressures pharma is already facing, particularly in generics. Since pharma customers are not expected to fully absorb these cost increases, profit margins are under pressure.

Meanwhile, increased state interventions and protectionist trade policies are creating new pressures on manufacturing networks and could drive increased regionalization. This would be a capital-intensive exercise: to regionalize just 10 percent of current vaccine trade in one particular geographical region, governments would need to invest an estimated $100 million.

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The pharma industry is also facing talent shortages linked to wider labor market trends, including the 20 percent increase in demand for STEM-related roles across the life sciences industry in the United States. The current pool of pharma digital talent is at least 14 percent lower than demand, and many companies are finding it challenging to recruit technical talent. Compounding this challenge is the rise of remote working, which has increased employee expectations for flexibility. In response, nearly all pharmacos are experimenting with hybrid working models.

A few major trends point to an industry tailwind; one of them is the advancement of digital and analytics tools. Digital tools, robots, and sensors are becoming cheaper and easier to access, and they can be used to capture all manner of raw data. In addition, edge computing and cloud analytics are providing real-time optimization and transparency. Pharmacos are working to leverage the power of data to become more agile and resilient. However, to date, no pharmaco has emerged as a true global leader in this field.

The pharma industry is facing a multitude of industry-specific and global trends. But a few major trends point to an industry tailwind; one of them is the advancement of digital and analytics tools.

Each of these global trends represents significant challenges in and of itself, and the trends may be compounded and strengthened through their interactions. This compounding effect can add to the complexity of evaluating an effective strategic response.

Major implications for pharma

These global trends have six major implications for pharmacos: rising operational complexity, increasing risk, shifting capability requirements, higher capital expenditure requirements, variable-cost increases, and opportunities for savings (Exhibit 2).

Operations leaders may need to become comfortable navigating a more complex ecosystem as they respond to increased operational complexity. Risks may increase due to rising environmental, social, and governance (ESG) expectations and skills gaps, while new modalities and digital acceleration will also likely lead to a shift in capability requirements. This could necessitate reskilling and upskilling of staff, as well as a renewed focus on recruiting from outside of the pharma industry.

From a cost perspective, the pharma industry may see significantly increased capital expenditure requirements related to the construction of new sites and new digital infrastructure. Increases are also likely in variable costs in areas such as raw materials, transportation, and employee attrition, reskilling, and salaries.

Future of pharma operations

Pharma companies are experiencing a wave of innovations – from new treatment modalities, to smart machines, advanced analytics, and digital connectivity.

Although these implications are challenging, they may represent possible opportunities for savings in several areas. For example, ESG commitments on waste reduction could reduce costs, as could successful digital implementation. However, the challenge lies in monetizing these cost savings, given that the industry has long created value largely through revenue expansion rather than through cost savings.

Rising to the challenge: Actions to deliver value

To respond to these challenges, pharmaco leaders may now need to emphasize the importance of their operations strategy. They should consider taking a longer-term view and scaling activity across four key themes: network strategy and resilience, digital, operating model, and talent.

Expand focus on longer-term, transformative solutions

Operations leaders can address these challenges through several short-term and long-term responses. For example, problems associated with a more unpredictable supply chain could be addressed with a short-term approach of increasing inventory or a long-term initiative to establish an end-to-end supply chain digital nerve center.

Short-term levers can be an important part of the total response but are insufficient to fully mitigate the challenges facing the industry. To respond effectively, companies may need to accelerate new ways of working and embrace long-term thinking. This will require concrete action with a focus on making sure that strategies are put in place to weather the long-term headwinds the industry is facing.

Accelerate and scale responses across four strategic domains

To identify the actions that pharmacos could take, it may help to group these in terms of four strategic domains: network and resilience, digital strategy, operating model and ecosystem, and talent strategy (Exhibit 3). While these themes are likely to be familiar to any business leader, they now require a substantial shift in mindset. Acting on them also calls for a large investment of resources.

• Plan for and manage future resilience and reliability needs . Recent supply chain disruptions have pushed supply chain resilience up corporate agendas. Companies have been forced into reactive modes that employ short-term levers like building inventory. However, companies could better position themselves by solving multiple variables and building resilience into their operations strategy through longer-term actions like network design and dual sourcing.
• Scale end-to-end adoption of digital and automation . Digital has proven itself highly valuable to pharma operations. However, many companies struggle to move from targeted, single use cases to a fully scaled suite of solutions. And while the adoption of full-scale digital solutions can require heavy investment—around $50 million to $100 million per year for two to three years—the rewards can include significant cost savings, improved quality, and increased resilience, as well as greater employee effectiveness. Companies that truly scale and implement digital can better protect themselves from the pressures of the forces increasing costs for the industry. More and more companies are moving toward network-wide and end-to-end digitization; to date, the World Economic Forum has recognized 103 as “lighthouses,” based on their advanced application of digital technologies . Johnson & Johnson, for example, has successfully launched multiple Industry 4.0 lighthouses, including some focused on end-to-end patient connectivity and order fulfillment.
• Expand adoption of end-to-end partner ecosystems . Companies could also consider changing their operating model from a traditional hub configuration around originators to an end-to-end ecosystem of true strategic partners. More than 50 percent of companies already expect to intensify their collaboration models with other industry players through, for example, service agreements, joint ventures, or eco­systems. Some are already in motion; examples include Pfizer and BioNTech, which have already established a strategic partnership in mRNA technology discovery, and AstraZeneca and Huma, which are collaborating to scale innovation for digital health. These partnerships are indicative of increasing collaborations throughout the industry across functions.

Automation, centralization, and new job requirements may affect nearly 90 percent of today’s workforce, and to deal with this challenge, companies could adopt effective long-term strategies. Retaining talent is challenging in the present environment, with the share of workers planning to leave their jobs in the next three to six months standing at 40 percent since 2021 . 1 Aaron De Smet, Bonnie Dowling, Bryan Hancock, and Bill Schaninger, “ The Great Attrition is making hiring harder. Are you searching the right talent pool? ” July 13, 2022. Strategies for talent retention should therefore be broad and focus on more than just salary.

A viable long-term solution to talent shortages may need to involve more than increasing wages to attract people. To solve structural talent gaps, companies could ensure long-term reskilling and upskilling of the existing workforce. For example, Roche runs an operations rotational program to attract top talent with bachelor’s and master’s degrees, and early in the COVID-19 pandemic, Novartis launched a “choice with responsibility” policy to improve overall employee experience.

Successfully developing a robust operations strategy is complex and requires dedicated resources with the ability to focus on the medium to long term. This means the C-suite will need to prioritize efforts and provide adequate resourcing. Only the CEO and head of operations can set the appropriate direction for their organization, steer their company’s effort, gather the right skills and teams, and manage complex interdependencies and resource-intensive interventions.

Are companies doing enough?

As COOs look to emerge from the disruption of the past two years, reflecting on several questions could help them evaluate their organizations’ level of preparedness to respond to the trends affecting the industry. The process could provide foundational answers to inform a renewed operations strategy.

• Have you projected the impact of today’s current trends on your business?
• Do you have a focused, skilled, and scaled operations strategy team that identifies, prioritizes, and deploys initiatives across different horizons?
• Are your resilience measures proactive and dynamic, and are they being built on talent and digital capabilities to achieve greater agility and reliability?
• Have you experienced greater access to innovation and flexibility as a result of expanding your services and strategic partnerships?
• Has your digital strategy created benefits across your network and transformed your operation from digitally enabled to digitally driven?
• Have you achieved ESG improvements, and do you have a broad, long-term road map for ESG commitments (beyond net zero)?
• Has your operating model been agile enough to adapt to rapidly changing operations requirements, such as new modalities and potential disruptions?
• Have you successfully transformed your operations workforce and comprehensively improved the employee experience?
• Do you have an established governance process that incorporates past lessons into future strategy?

Although the pharma industry has performed a remarkable feat in delivering COVID-19 vaccines while also meeting growing demand, current trends create a challenging environment for pharma­ceutical companies. Companies face greater costs, complexity, and risk.

Now is the time to rethink operational strategy to respond to these trends and remain competitive. Such change may have associated challenges and will require bold and innovative leadership. But if companies successfully implement new strategies, they could position themselves to take advantage of the industry’s remarkable growth.

Hillary Dukart is an associate partner in McKinsey’s Denver office, Laurie Lanoue is a partner in the Montreal office, Mariel Rezende is a consultant in the Miami office, and Paul Rutten is a partner in the Amsterdam office.

The authors wish to thank Joe Hughes and Jean-Baptiste Pelletier for their contributions to this article.

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The Industry Handbook: Pharma Industry

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

The pharmaceutical industry, or pharma industry, is one of the fastest-growing economic sectors with worldwide sales of more than $1,228.45 billion in 2020. Approximately 46% of sales in 2020 from North America.

Pharma is a dynamic industry with rapid growth and the potential for high profits. Top-selling drugs have annual sales in the billions. However, a new drug requires millions of dollars invested in research and development (R&D) and testing before it can be brought to market. The majority of new projects never receive approval from the Food & Drug Administration (FDA), resulting in large amounts of capital burned just to get one profitable product.

Individual pharma stock investors face a difficult task in analysis due to the high level of technical expertise required to adequately evaluate the viability of potential new products, as well as the continued prospects for existing FDA-approved drugs. The most stable stocks are those of large- and mega-cap companies with multiple products and large R&D budgets. However, the greatest returns come from smaller companies that achieve scientific breakthroughs.

Porter’s Five Forces Analysis

One model for examining an industry and a company's strategic position within its industry is Porter's Five Forces analysis. The analysis looks at five competitive forces that influence an industry: threat of new entrants, power of suppliers, power of buyers, availability of substitutes, and competitive rivalry in the industry. How these five forces interact provides a good picture of the sector's dynamics and whether an individual company is properly positioned for survival in the sector.

Threat of New Entrants

The big payoffs available in the pharmaceutical industry lead to a steady flow of new companies being created. A team of researchers with a hot idea or newly granted patents can find venture capital funds eager to provide millions of dollars in startup funding. These smaller companies pose no serious threat to big pharma. In fact, one of a startup investor's main exit strategies is to sell out to a big pharma firm when new products are through the initial development phase.

Power of Suppliers

Suppliers have very little power in the pharmaceutical industry. The raw materials for manufacturing drugs are commodity products in the chemical industry, which are available from numerous sources. Most of the equipment used in manufacturing and research is available from multiple manufacturers. Suppliers usually offer multiple products to the manufacturer, which moderates pricing on rarer materials and unique equipment.

Power of Buyers

Pharma is unique among industries because the medical patient has an absolute lack of power regarding pricing. The prescriber of the drugs, the physician, ethically is not allowed to profit from the sale of drugs. The entity that pays for the drugs, the insurance company, only has a say in how much it will pay to the distributor of the drugs, meaning it has little power with the drug manufacturers. The insurer can refuse to pay for treatments it believes are overpriced.

The only entities with any negotiating power are the pharmacies and medical institutions that fulfill the medical patients’ prescriptions. Even these entities have little power over newer drugs under patent or drugs with only one manufacturer. Pharmacies focus on their profit margins and have little incentive to provide patients with the lowest possible pricing.

Availability of Substitutes

The effect of substitutes is dependent on the individual drug. A new FDA-approved blockbuster drug that has patent protection, treats a major health condition, and is first to market in its category has a license to print billions of dollars. The development of a new drug that cures a major disease could be worth tens of billions of dollars per year. However, the 30th drug to treat a common condition could take years to recoup the R&D costs.

Once a drug loses its patents, generic drug manufacturers start selling copycat versions at substantially lower prices. A drug that netted $100 million a year in profit could become one that earns only $1 million a year in profit overnight. Additionally, there is a major international problem with counterfeit drugs. The best of these counterfeits duplicate a real drug's formula and sell it at a lower price, which hurts corporate profits. The worst counterfeits are made with low-grade materials and can destroy the reputations of legitimate products.

Competitive Rivalry

With more than $1 trillion in global sales, the pharmaceutical business can be cutthroat. The huge importance of intellectual property results in strong competition for high-level workers and leading researchers. Even strong nondisclosure and non-compete clauses cannot prevent the leaking of competitive information.

Any potential new drug has its public information analyzed for the possibility of creating a similar drug to market as a substitute. The industry exhibits a pattern of firms merging and larger firms buying smaller firms that have promising research or new drugs.

The Business Research Company. " Pharmaceuticals Global Market Report 2021: COVID-19 Impact and Recovery to 2030 ," Summary.

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Research and development in the pharmaceutical industry.

At a Glance

This report examines research and development (R&D) by the pharmaceutical industry.

Spending on R&D and Its Results. Spending on R&D and the introduction of new drugs have both increased in the past two decades.

• In 2019, the pharmaceutical industry spent $83 billion dollars on R&D. Adjusted for inflation, that amount is about 10 times what the industry spent per year in the 1980s.
• Between 2010 and 2019, the number of new drugs approved for sale increased by 60 percent compared with the previous decade, with a peak of 59 new drugs approved in 2018.

Factors Influencing R&D Spending. The amount of money that drug companies devote to R&D is determined by the amount of revenue they expect to earn from a new drug, the expected cost of developing that drug, and policies that influence the supply of and demand for drugs.

• The expected lifetime global revenues of a new drug depends on the prices that companies expect to charge for the drug in different markets around the world, the volume of sales they anticipate at those prices, and the likelihood the drug-development effort will succeed.
• The expected cost to develop a new drug—including capital costs and expenditures on drugs that fail to reach the market—has been estimated to range from less than $1 billion to more than $2 billion.
• The federal government influences the amount of private spending on R&D through programs (such as Medicare) that increase the demand for prescription drugs, through policies (such as spending for basic research and regulations on what must be demonstrated in clinical trials) that affect the supply of new drugs, and through policies (such as recommendations for vaccines) that affect both supply and demand.

To remove the effects of inflation, the Congressional Budget Office adjusted dollar amounts with the gross domestic product price index from the Bureau of Economic Analysis. Amounts are expressed in 2019 dollars.

Every year, the U.S. pharmaceutical industry develops a variety of new drugs that provide valuable medical benefits. Many of those drugs are expensive and contribute to rising health care costs for the private sector and the federal government. Policymakers have considered policies that would lower drug prices and reduce federal drug expenditures. Such policies would probably reduce the industry’s incentive to develop new drugs.

In this report, the Congressional Budget Office assesses trends in spending for drug research and development (R&D) and the introduction of new drugs. CBO also examines factors that determine how much drug companies spend on R&D: expected global revenues from a new drug; cost to develop a new drug; and federal policies that affect the demand for drug therapies, the supply of new drugs, or both.

What Are Recent Trends in Pharmaceutical R&D and New Drug Approvals?

The pharmaceutical industry devoted $83 billion to R&D expenditures in 2019. Those expenditures covered a variety of activities, including discovering and testing new drugs, developing incremental innovations such as product extensions, and clinical testing for safety-monitoring or marketing purposes. That amount is about 10 times what the industry spent per year in the 1980s, after adjusting for the effects of inflation. The share of revenues that drug companies devote to R&D has also grown: On average, pharmaceutical companies spent about one-quarter of their revenues (net of expenses and buyer rebates) on R&D expenses in 2019, which is almost twice as large a share of revenues as they spent in 2000. That revenue share is larger than that for other knowledge-based industries, such as semiconductors, technology hardware, and software.

The number of new drugs approved each year has also grown over the past decade. On average, the Food and Drug Administration (FDA) approved 38 new drugs per year from 2010 through 2019 (with a peak of 59 in 2018), which is 60 percent more than the yearly average over the previous decade.

Many of the drugs that have been approved in recent years are “specialty drugs.” Specialty drugs generally treat chronic, complex, or rare conditions, and they may also require special handling or monitoring of patients. Many specialty drugs are biologics (large-molecule drugs based on living cell lines), which are costly to develop, hard to imitate, and frequently have high prices. Previously, most drugs were small-molecule drugs based on chemical compounds. Even while they were under patent, those drugs had lower prices than recent specialty drugs have. Information about the kinds of drugs in current clinical trials indicates that much of the industry’s innovative activity is focused on specialty drugs that would provide new cancer therapies and treatments for nervous-system disorders, such as Alzheimer’s disease and Parkinson’s disease.

What Factors Influence Spending for R&D?

Drug companies’ R&D spending decisions depend on three main factors:

• Anticipated lifetime global revenues from a new drug,
• Expected costs to develop a new drug, and
• Policies and programs that influence the supply of and demand for prescription drugs.

Various considerations inform companies’ expectations about a drug’s revenue stream, including the anticipated prices it could command in different markets around the world and the expected global sales volume at those prices (given the number of people who might use the drug). The prices and sales volumes of existing drugs provide information about consumers’ and insurance plans’ willingness to pay for drug treatments. Importantly, when drug companies set the prices of a new drug, they do so to maximize future revenues net of manufacturing and distribution costs. A drug’s sunk R&D costs—that is, the costs already incurred in developing that drug—do not influence its price.

Developing new drugs is a costly and uncertain process, and many potential drugs never make it to market. Only about 12 percent of drugs entering clinical trials are ultimately approved for introduction by the FDA. In recent studies, estimates of the average R&D cost per new drug range from less than $1 billion to more than $2 billion per drug. Those estimates include the costs of both laboratory research and clinical trials of successful new drugs as well as expenditures on drugs that do not make it past the laboratory-development stage, that enter clinical trials but fail in those trials or are withdrawn by the drugmaker for business reasons, or that are not approved by the FDA. Those estimates also include the company’s capital costs—the value of other forgone investments—incurred during the R&D process. Such costs can make up a substantial share of the average total cost of developing a new drug. The development process often takes a decade or more, and during that time the company does not receive a financial return on its investment in developing that drug.

The federal government affects R&D decisions in three ways. First, it increases demand for prescription drugs, which encourages new drug development, by fully or partially subsidizing the purchase of prescription drugs through a variety of federal programs (including Medicare and Medicaid) and by providing tax preferences for employment-based health insurance.

Second, the federal government increases the supply of new drugs. It funds basic biomedical research that provides a scientific foundation for the development of new drugs by private industry. Additionally, tax credits—both those available to all types of companies and those available to drug companies for developing treatments of uncommon diseases—provide incentives to invest in R&D. Similarly, deductions for R&D investment can be used to reduce tax liabilities immediately rather than over the life of that investment. Finally, the patent system and certain statutory provisions that delay FDA approval of generic drugs provide pharmaceutical companies with a period of market exclusivity, when competition is legally restricted. During that time, they can maintain higher prices on a patented product than they otherwise could, which makes new drugs more profitable and thereby increases drug companies’ incentives to invest in R&D.

Third, some federal policies affect the number of new drugs by influencing both demand and supply . For example, federal recommendations for specific vaccines increase the demand for those vaccines and provide an incentive for drug companies to develop new ones. Additionally, federal regulatory policies that influence returns on drug R&D can bring about increases or decreases in both the supply of and demand for new drugs.

Trends in R&D Spending and New Drug Development

Private spending on pharmaceutical R&D and the approval of new drugs have both increased markedly in recent years, resuming a decades-long trend that was interrupted in 2008 as generic versions of some top-selling drugs became available and as the 2007–2009 recession occurred. In particular, spending on drug R&D increased by nearly 50 percent between 2015 and 2019. Many of the drugs approved in recent years are high-priced specialty drugs for relatively small numbers of potential patients. By contrast, the top-selling drugs of the 1990s were lower-cost drugs with large patient populations.

R&D Spending

R&D spending in the pharmaceutical industry covers a variety of activities, including the following:

• Invention , or research and discovery of new drugs;
• Development , or clinical testing, preparation and submission of applications for FDA approval, and design of production processes for new drugs;
• Incremental innovation , including the development of new dosages and delivery mechanisms for existing drugs and the testing of those drugs for additional indications;
• Product differentiation , or the clinical testing of a new drug against an existing rival drug to show that the new drug is superior; and
• Safety monitoring , or clinical trials (conducted after a drug has reached the market) that the FDA may require to detect side effects that may not have been observed in shorter trials when the drug was in development.

In real terms, private investment in drug R&D among member firms of the Pharmaceutical Research and Manufacturers of America (PhRMA), an industry trade association, was about $83 billion in 2019, up from about $5 billion in 1980 and $38 billion in 2000 . 1 Although those spending totals do not include spending by many smaller drug companies that do not belong to PhRMA, the trend is broadly representative of R&D spending by the industry as a whole. 2 A survey of all U.S. pharmaceutical R&D spending (including that of smaller firms) by the National Science Foundation (NSF) reveals similar trends. 3

Although total R&D spending by all drug companies has trended upward, small and large firms generally focus on different R&D activities. Small companies not in PhRMA devote a greater share of their research to developing and testing new drugs, many of which are ultimately sold to larger firms (see Box 1 ). By contrast, a greater portion of the R&D spending of larger drug companies (including those in PhRMA) is devoted to conducting clinical trials, developing incremental “line extension” improvements (such as new dosages or delivery systems, or new combinations of two or more existing drugs), and conducting postapproval testing for safety-monitoring or marketing purposes.

Large and Small Drug Companies and the “Make or Buy” Decision

Small drug companies (those with annual revenues of less than $500 million) now account for more than 70 percent of the nearly 3,000 drugs in phase III clinical trials. 1 They are also responsible for a growing share of drugs already on the market: Since 2009, about one-third of the new drugs approved by the Food and Drug Administration have been developed by pharmaceutical firms with annual revenues of less than $100 million. 2 Large drug companies (those with annual revenues of $1 billion or more) still account for more than half of new drugs approved since 2009 and an even greater share of revenues, but they have only initiated about 20 percent of drugs currently in phase III clinical trials. 3

For a large drug company, one option for increasing the number of drugs it expects to introduce is to acquire a smaller firm that is developing new drugs. Over the past three decades, about one-fifth of drugs in development—or the companies developing them—have been acquired by another pharmaceutical company. 4

When a large company acquires a small drug company or the rights to one of its drugs, it can use its specialized knowledge to increase the value of its acquisition or to diversify its risk of a decline in revenues (from a drug’s loss of patent protection, for instance). In making that acquisition, a large company might bring a drug to market more quickly than the small company could have or might distribute it more widely. With the rise of generic drugs, the loss in sales revenues that occurs when a drug’s patent expires can leave firms with excess capacity in production. Acquiring a smaller company can help quickly fill that capacity.

The acquisition of a small company by a larger one can create efficiencies that might increase the combined value of the firms by allowing drug companies of different sizes—in terms of the number of researchers, administrative employees, and financial and physical assets—to specialize in activities in which they have a comparative advantage. Small companies—with relatively fewer administrative staff, less expertise in conducting clinical trials, and less physical and financial capital to manage—can concentrate primarily on research. For their part, large drug companies are much better capitalized and can more easily finance and manage clinical trials. They also have readier access to markets through established drug distribution networks and relationships with buyers.

Researchers have found some evidence that such acquisitions by larger drug firms are sometimes motivated by large firms’ desire to limit competition. According to a recent study of acquisitions in the pharmaceutical industry, for example, a company was about 5 percent to 7 percent less likely to complete the development of drugs in its acquired company’s pipeline if those drugs would compete with the acquirer’s existing drugs than it would be otherwise. 5 In a 2017 study of competition and research and development (R&D), the Government Accountability Office cited several retrospective studies of mergers in the drug industry that found such transactions reduced R&D spending and patenting for several years. 6 The reverse was also true: Increases in pharmaceutical industry competition have been found to increase firms’ R&D spending. 7

1 . See IQVIA Institute for Human Data Science, The Changing Landscape of Research and Development (April 2019), p. 15, https://tinyurl.com/1cm3g2fs .

2 . See Ulrich Geilinger and Chandra Leo, HBM New Drug Approval Report (HBM Partners, January 2019), p. 16. https://tinyurl.com/yyzze476 , (PDF, 1.14 MB). HBM Partners is a Swiss health care investment company.

3 . The 30 largest companies have developed 53 percent of drugs approved since 2009, and in 2014, the 25 largest drug companies received more than 70 percent of industry revenues. See IQVIA Institute for Human Data Science, The Changing Landscape of Research and Development (April 2019), p. 16, https://tinyurl.com/y2kpxve8 ; and Government Accountability Office, Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals , GAO-18-40 (November 2017), p. 16, www.gao.gov/products/GAO-18-40 .

4 . See Colleen Cunningham, Florian Ederer, and Song Ma, “Killer Acquisitions,” Journal of Political Economy , vol. 129, no. 3 (March 2021), p. 670,  http://dx.doi.org/10. 1086/712506 .

5 . Ibid., pp. 649–702.

6 . See Government Accountability Office, Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals , GAO-18-40 (November 2017), p. 16, www.gao.gov/products/GAO-18-40 . For the individual studies, see Carmine Ornaghi, “Mergers and Innovation in Big Pharma,” International Journal of Industrial Organization , vol. 27, no. 1 (January 2009), pp. 70–79, https://doi.org/10.1016/j.ijindorg.2008.04.003 ; and Patricia M. Danzon, Andrew Epstein, and Sean Nicholson, “Mergers and Acquisitions in the Pharmaceutical and Biotech Industries,” Managerial and Decision Economics , vol. 28, no. 4/5 (June–August 2007), pp. 307–328, www.jstor.org/stable/25151520 .

7 . See Richard T. Thakor and Andrew W. Lo, “Competition and R&D Financing: Evidence From the Biopharmaceutical Industry,” Journal of Financial and Quantitative Analysis (forthcoming), http://dx.doi.org/10.2139/ssrn.3754494 .

CBO relied on the PhRMA data because before 2008, the NSF survey did not include domestic firms’ R&D spending outside of the United States. (Both the NSF and PhRMA estimates reflect worldwide R&D spending by pharmaceutical companies with operations in the United States.) NSF’s estimates of R&D spending since 2008 suggest that PhRMA members’ worldwide R&D spending constitutes about 75 percent to 85 percent of the industry total, depending on the year.

In recent years, the pharmaceutical industry’s R&D spending as a share of net revenues (sales less expenses and rebates) has increased: Consumer spending on brand-name prescription drugs has risen, but R&D spending has risen more quickly. In the early 2000s, when drug industry revenues were rising sharply, the industry’s R&D intensity—that is, its R&D spending as a share of net revenues—averaged about 13 percent each year. Over the decade from 2005 to 2014, the industry’s R&D intensity averaged 18 percent to 20 percent each year. That ratio has been trending upward since 2012, and it exceeded 25 percent in 2018 and 2019, the highest R&D intensities recorded by the pharmaceutical industry as a whole since at least 2000. Data are limited for earlier years, but among PhRMA member companies, annual R&D intensities averaged 18 percent from 1980 through 2010 and never exceeded 22 percent. 4 Since then, R&D intensity has increased among PhRMA firms just as it has for the industry as a whole, reaching 25 percent in 2017 before decreasing slightly in 2018. By comparison, average R&D intensity across all industries typically ranges between 2 percent and 3 percent. 5 R&D intensity in the software and semiconductor industries, which are generally comparable to the drug industry in their reliance on research and development, has remained below 18 percent (see Figure 1 ).

Average R&D Intensities for Publicly Traded U.S. Companies, by Industry

Pharmaceutical companies have devoted a growing share of their net revenues to R&D activities, averaging about 19 percent over the past two decades. By comparison, other research-intensive industries, like software and semiconductors, averaged about 15 percent.

Data source: Congressional Budget Office, using data from Bloomberg, limited to U.S. firms as identified by Aswath Damodaran, “Data: Breakdown” (accessed January 13, 2020), https://tinyurl.com/yd5hq4t6 . See www.cbo.gov/publication/57025#data .

R&D intensity is research and development spending as a share of net revenues (sales less expenses and rebates).

R&D = research and development; S&P = Standard and Poor’s.

There are several possible explanations for the increase in the industry’s R&D intensity over the past eight years. It could reflect the increased role of small drug companies, which have little revenue and, therefore, high ratios of R&D spending to net revenues. It could also indicate that the expected returns from investments in R&D have increased (if market conditions have changed) or that opportunities to develop new drugs have increased (if recent advances in science and technology have been particularly productive). Finally, it could reflect rising costs of R&D inputs, such as capital equipment and skilled labor. CBO has not evaluated the relative importance of those possibilities.

New Drug Development

Over the past decade, the pharmaceutical industry has introduced growing numbers of new drugs annually (see Figure 2 ). Between 2010 and 2019, 38 new drugs were approved each year, on average. That is about a 60 percent increase compared with the previous decade. Drug approvals reached a new peak in 2018, surpassing the record number of approvals of the late 1990s. (Counts of new drug approvals are a readily available but imperfect measure of output from the drug industry’s R&D spending. The measure does not reflect differences in the effectiveness of the new drugs relative to alternative treatments, or the number of people who might benefit from the new drugs.)

Average Annual Approvals of New Drugs by the FDA

Number of Drugs

From 2015 to 2019, the FDA approved about twice as many new drugs as it did a decade earlier. Biologic drugs make up a growing share of FDA approvals.

Data source: Congressional Budget Office, using data from the FDA’s Center for Drug Evaluation and Research and the FDA’s Center for Biologics Evaluation and Research. See www.cbo.gov/publication/57025#data .

Until the 1990s, the FDA did not count biologics as a separate category; they were counted with NMEs.

BLA = biologic license application; FDA = Food and Drug Administration; NME = new molecular entity.

Information about the kinds of new drugs the pharmaceutical industry has introduced can be inferred from changes in retail spending across different therapeutic classes of drugs. When ranked by retail spending, therapeutic classes in which many expensive specialty drugs have been introduced over the past decade top the ranking, whereas classes in which the best-selling drugs are now available in generic form rank lower now than they did a decade ago. 6 Information about the kinds of new drugs the pharmaceutical industry may introduce in the future can be inferred from clinical trials under way.

Approval of New Drugs. Over the past five years, both R&D spending and drug approvals have increased substantially. The relationship between them is complex and variable (see Figure 3 ). Because it can take a decade or more of R&D spending to develop a new drug and successfully shepherd it through clinical trials, drug approvals lag behind the underlying R&D spending. That lag makes it difficult to interpret the relationship between R&D spending and new drug approvals. For instance, drug approvals declined over the 2000s despite steadily rising R&D spending over the preceding years, provoking concerns about a decline in the industry’s R&D productivity. Those concerns proved temporary, however. Despite flat R&D spending from 2008 through 2014, drug approvals began to increase around 2012.

R&D Spending and New Drug Approvals

Sustained increases in pharmaceutical R&D spending do not necessarily lead to rising numbers of new drugs. R&D spending also reflects rising costs of labor (skilled researchers) and capital (laboratory technologies).

Data source: Congressional Budget Office, using data from the FDA’s Center for Drug Evaluation and Research and PhRMA annual reports (various years). See www.cbo.gov/publication/57025#data .

Data for 1980–1983 are not shown because the five-year moving average cannot be calculated for the first four years of data.

FDA = Food and Drug Administration; NME = new molecular entity; PhRMA = Pharmaceutical Research Manufacturers of America; R&D = research and development.

a. A five-year moving average replaces the value for each year in an annual data series with an average over five consecutive years. (Here the arithmetic mean of each annual value and the preceding four is used.) A moving average is smoother than the underlying data series and is useful for reducing year-to-year changes unrelated to overall trends in the data.

That increase in drug approvals does not, by itself, indicate the extent to which the new drugs are particularly innovative (for instance, targeting illnesses in new ways) as opposed to improving only incrementally upon existing drugs. Furthermore, the recent trend of sharply rising R&D spending does not necessarily portend a continued high rate of drug introductions. A decline in clinical trials success rates, for example, could slow the rate of new drug introductions even while R&D spending continued to increase. Additionally, not all R&D spending is directed toward development of new drugs. Drug companies devote some R&D resources to finding effective new combinations of existing drugs, as with newer HIV treatments and preventatives, or to new drug-delivery mechanisms, such as insulin pumps.

Finally, the rise in the industry’s R&D spending does not provide information about the kinds of drugs that may be introduced in coming years. To some degree, that information can be inferred from descriptions of clinical trials currently in progress. But it cannot be known with any certainty which of those drugs will eventually make it to market.

Trends in Recent Drug Spending by Therapeutic Class. New or improved specialty drugs for diabetes, various cancers, autoimmune disorders (such as rheumatoid arthritis or multiple sclerosis), and HIV have propelled large retail-spending increases in the therapeutic classes for those illnesses (see Figure 4 ). Many of the new specialty drugs are biologics, based on living cell lines rather than chemical active ingredients. For HIV, the new antiretroviral therapies have been combinations of specialty drugs that simplify treatment.

Total U.S. Retail Drug Spending by Therapeutic Class, 2009 and 2019

Billions of 2019 dollars

New drugs can lead to large increases in retail spending because they have higher prices, they are in high demand, or both. Spending decreases can result when patent protection expires on leading drugs and low-cost generic versions are introduced.

Data source: Congressional Budget Office, using data from IQVIA Institute for Human Data Science, Medicine Spending and Affordability in the United States: Understanding Patients’ Costs for Medicines (August 2020), Exhibit 24, https://tinyurl.com/5655tnoc ; IMS Institute for Healthcare Informatics, Medicines Use and Spending Shifts: A Review of the Use of Medicines in the U.S. in 2014 (April 2015), p. 40, https://tinyurl.com/3bk9oufn , and Medicine Use and Shifting Costs of Healthcare: A Review of the Use of Medicines in the United States in 2013 (April 2014), Appendix 8, https://go.usa.gov/xsaFR . See www.cbo.gov/publication/57025#data .

Therapeutic classes in the figure are ranked in order of 2019 spending. The figure excludes “other cardiovasculars” (ranked 12th in 2019, with total spending of $10.1 billion) because 2009 data for that class could not be found.

Retail spending overstates actual spending and revenues received by manufacturers, because it does not include rebates paid by those manufacturers.

ADHD = attention deficit hyperactivity disorder; GI = gastrointestinal.

a. Viral hepatitis entered the list of the top 20 therapeutic classes by retail spending in 2014; therefore, spending levels for that year have been substituted for 2009 levels.

Some of the therapeutic classes that have experienced large spending increases feature new drugs with relatively large populations of patients or new treatments for chronic conditions that can be therapeutically managed but require continued treatment. (As a result, drugs for chronic conditions typically sell in steady quantities.) Other such classes include new drugs with relatively small numbers of potential patients or shorter treatment durations but that have high prices per unit of treatment. High prices may reflect demand that is relatively insensitive to price because of the serious nature of the illness and coverage of those drugs by insurance plans. For example, prices for oncology drugs tend to be high.

In some cases, observed increases in retail spending overstate increases in net revenues to the manufacturer because they do not account for unobserved rebates. 7 Rebates tend to be higher for drugs for which several competing therapies are available. (Larger rebates correspond with lower net prices.) Thus, rebates on diabetes drugs tend to be considerably higher—as a percentage of the retail price—than they do for oncology drugs, which are not highly substitutable.

Several therapeutic classes that contain top-selling drugs developed in the 1990s experienced decreases in retail spending from 2009 to 2019 as they faced competition from generic versions. Those blockbuster small-molecule drugs include atypical antipsychotics, ACE inhibitors, and proton pump inhibitors. The therapeutic classes containing those drugs—mental health, antihypertensives, and gastrointestinal products, respectively—experienced large declines in retail spending. One therapeutic class, lipid regulators (the class that includes statins), experienced such a decrease that it no longer appears among the top 20, ranked by retail spending. Those declines reflect widespread use of the new generic versions of those drugs.

One therapeutic class has experienced a decline in retail spending for a different reason. Viral hepatitis only entered the top 20 in 2014, coinciding with the introduction of several highly effective—and high-priced—new treatments for hepatitis C. In contrast to the spending declines described above, the decline in retail spending on viral hepatitis drugs is attributable to a combination of factors. First, newer, lower-priced drugs have since been introduced, lowering the average price in that class as they have gained market share. Second, the number of prescriptions has declined: As the treatments have been administered, the number of potential patients has fallen. That is because the new drugs successfully treat about 95 percent of patients with chronic hepatitis C infection. 8 By contrast, older, less expensive therapies were successful in far fewer patients and had severe side effects in many cases.

Types of New Drugs in Development. Information about the kinds of drugs that may be approved in coming years can be gleaned from data on recent clinical trials. That information suggests that drug companies are emphasizing treatments for cancer and nervous system disorders like Alzheimer’s disease and Parkinson’s disease. Among human clinical trials in progress as of 2018, drugs in those two therapeutic classes accounted for more than twice as many trials as did drugs in the next three classes combined (vaccines; pain, including arthritis therapies; and dermatologics.) 9

The 2020–2021 coronavirus pandemic has spurred the development of vaccines to halt the spread of COVID-19, the disease caused by the coronavirus. In addition to R&D spending by the private sector, the federal government has provided support to the private sector to develop vaccines to address the pandemic (see Box 2 ).

Federal Funding to Support the Development of a COVID-19 Vaccine

The federal government can directly support private vaccine development in two primary ways, either by covering the costs of research and development (R&D), or by committing in advance to purchasing a successful vaccine contingent upon a firm achieving specified development goals. Under the first method, the government would supply R&D funding that would ordinarily come from the pharmaceutical firms themselves, from venture capital investments, or from other sources outside the firm. That method might be better suited to cases in which the R&D effort had a relatively high risk of failure and an expected return that would be too low to attract private investment. The rationale for government funding in such cases would depend on whether the expected value to society—rather than to private investors—exceeded the cost of the funding. However, a drawback of such funding is that the outside funder—including the government, in this case—cannot observe the innovator’s private costs and may pay more than necessary for developing the vaccine.

Under the second method—that is, agreeing to a future purchase of a specified number of vaccine doses at a specific price—the government would become the source of demand that ordinarily comes from the market. Such an advance-purchase agreement might be preferable in cases in which the government planned to purchase the new product in large quantities regardless of the amount of financial support it provided for R&D. It might also be preferable in cases in which a variety of approaches to developing the product are available, but with much uncertainty about which approach is best. An advance-purchase agreement would also ensure the developer a certain amount of revenues in cases in which the government was supporting the development of multiple, competing products simultaneously. By offering advance purchase contracts to vaccine manufacturers—the promise of future payment conditional on a successful vaccine being developed—the government can provide greater certainty to pharmaceutical firms undertaking risky investments in R&D for vaccines.

In May 2020, the Department of Health and Human Services initiated “Operation Warp Speed,” a collaborative effort involving the Centers for Disease Control and Prevention, the Food and Drug Administration (FDA), the National Institutes of Health, and the Department of Defense, with funding provided through the Biomedical Advanced Research and Development Authority (BARDA). Through Operation Warp Speed, the federal government has provided more than $19 billion in assistance to seven private pharmaceutical manufacturers to develop and produce a vaccine or treatment for COVID-19, the disease caused by the coronavirus (see the table below). 1 As of March 2, 2021, five of those seven companies accepted up-front funding for research and clinical trials. Five of the seven companies accepted advance funding aimed at helping manufacturers ramp up their production capabilities while their potential vaccines were still in development; a sixth accepted funding to develop the capacity to manufacture another firm’s vaccine after it received emergency use authorization. Finally, six of the seven manufacturers signed advance-purchase agreements. Two of the companies with vaccines that have received emergency use authorizations have received additional funding for selling more doses than were guaranteed by advance-purchase agreements.

The parallel execution of several stages of development that would usually be conducted in sequence, such as combining phase I and phase II clinical trials or building manufacturing capacity while the trials are still under way, has allowed pharmaceutical manufacturers to advance much more quickly through the development process than is typical for vaccines. 2 One year after the first case of COVID-19 was diagnosed in the United States, three of the vaccines supported by BARDA funding had received emergency use authorizations from the FDA, and two other vaccines were in phase III clinical trials. (It ordinarily takes several years of research and testing before a candidate vaccine enters phase III clinical trials. 3 Seasonal influenza vaccines take much less time to develop and approve because their technologies, and the regulatory and licensing procedures for those vaccines, have been used before.) According to the World Health Organization, more than 200 candidate COVID-19 vaccines were in development in February 2021. 4

1 . Most of the manufacturers have also received research support from or signed advance-purchase agreements with the European Union, several national governments, and two global partnerships supported by foundations and other donors (Coalition for Epidemic Preparedness Innovations and Gavi, the Vaccine Alliance). See, for example, Christopher M. Snyder and others, “Designing Pull Funding for a COVID-19 Vaccine,” Health Affairs , vol. 39, no. 9 (September 2020), pp. 1633–1642, https://doi.org/10.1377/hlthaff.2020.00646 .

2 . See Nicole Lurie and others, “Developing Covid-19 Vaccines at Pandemic Speed,” New England Journal of Medicine, vol. 382 (May 21, 2020), pp. 1969-1973, https://doi.org/10.1056/NEJMp2005630 .

3 . See Wellcome Trust, “The 5 Stages of Vaccine Development” (accessed January 15, 2021), https://tinyurl.com/y6rxbbuf .

4 . See World Health Organization, “COVID-19 Vaccines” (accessed March 24, 2021), https://tinyurl.com/fpdcc777 .

Factors That Influence R&D Spending

Pharmaceutical companies invest in R&D in anticipation of future profits. For each drug that a company considers pursuing, anticipated returns depend on three main factors: the expected lifetime global revenue from the drug (minus its manufacturing and marketing costs), the new drug’s likely R&D costs, and policies that affect the supply of and demand for prescription drugs. When the anticipation of future profits is higher, companies invest more in R&D and produce more new drugs, CBO estimates. Similarly, if expectations about prices and profits were lower, companies would invest in less R&D, and fewer drugs would be developed (see Box 3 ).

Effects of Changes in Expected Profitability on the Introduction of New Drugs

If expected profitability of new drugs declined—because of a change in federal policy, a shift in demand or supply, a revision in the balance of power between drug companies and drug buyers, or for any other reason—the expected returns on drug R&D would decline as well. Lower expected returns would probably mean fewer new drugs, because there would be less incentive for companies to spend on R&D. (If expected profitability were to rise, the opposite effects would occur.) Expectations about returns on R&D partly depend on expectations of prices that future drugs could command—which, in turn, partly depend on current drug prices and influences on those prices.

The Congressional Budget Office’s analysis of H.R. 3 in the 116th Congress illustrates those effects. That bill would have required the Secretary of Health and Human Services to negotiate prices for drugs—primarily those for which spending was highest—and to subject manufacturers who did not participate in negotiations to an excise tax. In that analysis, CBO concluded that the bill would reduce drug companies’ expectations about future revenues because of the new negotiating leverage of the Secretary. The prospect of such lower revenues would make investments in R&D less attractive to pharmaceutical companies. CBO estimated that under the bill, approximately 8 fewer drugs would be introduced to the U.S. market over the 2020–2029 period and about 30 fewer drugs over the subsequent 10 years. 1 Those estimates were in the middle of the distribution of possible outcomes, in CBO’s assessment, and were uncertain. CBO’s analysis is in line with a broader literature that has found a positive relationship between drug prices and R&D efforts. 2

1 . See Congressional Budget Office, letter to the Honorable Frank Pallone Jr. regarding the budgetary effects of H.R. 3, the Elijah Cummings Lower Drug Costs Now Act (December 10, 2019), www.cbo.gov/publication/55936 .

2 . See Margaret E. Blume-Kohout and Neeraj Sood, “Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development,” Journal of Public Economics, vol. 97 (January 2013), pp. 327–336, https://doi.org/10.1016/j.jpubeco.2012.10.003 ; Daron Acemoglu and Joshua Linn, “Market Size in Innovation: Theory and Evidence From the Pharmaceutical Industry,” Quarterly Journal of Economics, vol. 119, no. 3 (August 2004), pp. 1049–1090, https://doi.org/10.1162/0033553041502144 ; and Pierre Dubois and others, “Market Size and Pharmaceutical Innovation,” RAND Journal of Economics, vol. 46, no. 4 (Winter 2015), pp. 844–871, https://doi.org/10.1111/1756-2171.12113 .

Anticipated Revenues

A company’s expectations about the revenues it could earn from a drug depend on the prices that the company anticipates the drug could command in various markets around the world and the quantities that the company anticipates might be purchased at those prices. Those expectations are informed by the prices and sales volumes observed for existing drugs in various markets. For established drug companies, current revenue streams from existing products also provide an important source of financing for their R&D projects.

How Revenue Expectations are Formulated. A company develops its expectations about a potential drug’s lifetime future revenues based on the drug’s potential market size, which depends on the prices it might command in sales to different patient groups and in negotiations with payers, domestically and abroad. In that sense, the prices of existing drugs—including variations in prices to different patient populations—help determine R&D spending on future drugs. (The converse is not true: In CBO’s assessment, current R&D spending does not influence the future prices of the drugs that result from that spending.)

Revenues generated by existing drugs provide information about the potential market size for new drugs by indicating consumers’ and insurance plans’ willingness to pay for drug treatments. The number of prescriptions for those drugs support inferences about the number of potential patients, their propensity to use drug therapies at the observed prices, and the popularity of competing therapies.

Sales revenues from other unrelated drugs also help companies form expectations about market size. They reveal information about the magnitude of drug-treatment costs that the market currently tolerates, both in general and for various conditions that will have more or less in common—with regard to duration, severity, or effects on quality or length of life—with the conditions the new drug would treat.

Expected revenues also depend on anticipated unit sales in different markets around the world. Those quantities are determined by the number of potential patients for the drug in those markets, the shares of those populations that might buy the drug at the prices the manufacturer envisions for those markets (taking into account any substitute drugs that might be available), and the number of prescriptions a course of treatment would require.

Once a new drug has been approved, CBO expects that its developer would set its price in a forward-looking fashion, meaning the price is set to maximize the net revenues from the drug without regard to how much it cost to develop.

Real (inflation-adjusted) pharmaceutical revenues increased sharply from the mid-1990s until around the mid-2000s, when patents on a number of blockbuster drugs expired and lower-cost generic equivalents were introduced. Revenues then declined slightly from the mid-2000s through the mid-2010s, a result of those patent expirations and the 2007–2009 recession. Revenue growth returned with the introduction of some expensive new drugs (see Figure 5 ).

Worldwide and Domestic Revenues of PhRMA Member Firms

Billions of 2019 Dollars

Revenues from drug sales have grown substantially since 1980, although that growth was interrupted by patent expirations of some widely used drugs and by the 2007–2009 recession. Revenue growth has since resumed, in part due to expensive new drugs.

Data source: Congressional Budget Office, using data from PhRMA, 2019 PhRMA Annual Membership Survey , Table 4 (PhRMA, 2019), https://tinyurl.com/ycvneve7 (PDF, 2.15 MB). See www.cbo.gov/publication/57025#data .

PhRMA revenue data reflect payments received by manufacturers, excluding cash discounts, Medicaid rebates, returns, and allowances for marketing expenses.

PhRMA = Pharmaceutical Research and Manufacturers of America.

Revenues as Source of Funding for R&D. In the pharmaceutical industry, revenues have traditionally been an important source of R&D financing for established companies with brand-name drugs to sell. Brand-name drugs can generate large volumes of cash because their manufacturing and distribution costs are typically very low relative to their sales revenues. Established companies appear to prefer to finance their R&D with current revenues whenever possible rather than to rely on outside funding sources such as venture capital. 10 Outside financing involves transactions costs as well as other implicit costs, such as compensation for risks borne by outside investors who cannot perfectly monitor a firm’s efforts and skills. 11

The share of R&D funded directly by revenues has declined in recent years because an increasing amount of R&D is now conducted by research-oriented drug companies with few or no products on the market. Over the past decade, small or emerging drug companies have developed a rising share of new drugs. Those companies have relatively little revenue (some have none at all), and most of them must seek outside financing, such as venture capital, and collaborative agreements with larger drug companies. Although venture capital still only finances a small share of the drug industry’s R&D spending in total, it supports a much larger share of the R&D spending of smaller firms than of large established companies.

Drug development also occurs in university research labs. In addition to grants funded by the National Institutes of Health (NIH) that many universities receive for performing basic biomedical research, universities may collaborate with (and be funded by) private drug companies to perform applied research toward the development of new drugs. 12 The funding for that R&D may come predominantly from revenues, as the collaborations typically involve established pharmaceutical companies. 13

R&D Costs of a New Drug

R&D spending is also influenced by the expected costs of developing a new drug, including those incurred in the preclinical research phase and in clinical trials. In addition to those out-of-pocket expenses, drug companies incur capital costs that result from tying up funds in the drug-development process for years before they generate earnings from those investments. Those capital costs reflect the returns that the funds could have earned if they had been invested in other ways.

Development of a drug that will eventually reach the market often entails a decade or more of R&D expenditures. Each successive phase of clinical trials requires increasing amounts of spending. Drug developers can reassess their commitment at each stage, and a drug’s expected value may change as more is learned in clinical trials or as market conditions change—that is, there is an option value to continuing. Companies will not necessarily cancel a drug project even if its likely future costs exceed its likely value when that assessment is made, because the expected value might rise with additional information about the drug or its market.

Pharmaceutical research is inherently risky and canceled or failed projects are a normal part of any drug development program. Companies initiate drug projects knowing that most of them will not yield a marketable drug. Some drugs developed in the preclinical phase never enter clinical trials, and of those that do, only about 12 percent reach the market (recent estimates range from 10 percent to 14 percent). 14

Estimates, from multiple sources, of average R&D expenditures per new drug range from less than $1 billion to more than $2 billion. Those estimates all include capital costs as well as expenditures on drugs that did not make it to market. The different estimates are averages over different samples of companies and drugs—that is, they depend on analytical and sampling choices made by the researchers producing those estimates and are best interpreted as illustrative of the general conclusion that developing new drugs is expensive and subject to high rates of failure.

Preclinical Phase. Although drugs spend much less time in preclinical development than they do in clinical trials, a company’s total preclinical R&D expenditures typically constitute a considerable share of its total R&D spending. That is because companies typically develop many potential drugs in the preclinical phase that never enter or complete clinical trials. According to one estimate using data provided by large pharmaceutical firms, preclinical development accounted for an average of 31 percent of a company’s total expenditures on drug R&D, or $474 million per approved new drug. 15

When capital costs were taken into account, the share of R&D spending in the preclinical phase rose to 43 percent. Any return on R&D spending on early, preclinical drug development must await successful completion of both the preclinical phase and the clinical trials that follow. As a result, the lag between investment and return is longer for R&D spending that occurs in the preclinical phase than for spending in clinical trials. (For drugs that do not reach the market, no return is realized, although lessons learned from those efforts may aid the development of other drugs.) According to one study, the preclinical phase takes an average of about 31 months, followed by around 95 months, on average, for clinical trials—or about 10.5 years from start to finish. 16 Other estimates differ; in a sample of 10 cancer drugs, for example, one study found that the median time from discovery to approval was 7.3 years. 17 Those numbers are measures of central tendency: Some drugs are brought to market in less time. 18

Clinical-Trials Phase. The costs to conduct clinical trials on a drug are higher than those to conduct the preclinical phase because trials involve the contributions of many more people for a longer time. Clinical trials occur in several phases:

• Phase I trials (also known as human-safety trials) test a potential new drug at different dosage levels, generally in a small group of healthy volunteers in order to assess its safety in humans. For drugs with high levels of expected toxicity, phase I trial subjects are people with the targeted illness.
• Phase II trials are larger and include only people with the medical condition the drug is intended to treat. Phase II trials assess the drug’s biological activity and identify and characterize any side effects.
• Phase III trials are larger still and assess a drug’s clinical effectiveness. They can take years to complete. The smaller a drug’s expected therapeutic effect relative to a placebo, the larger the number of patients that are needed in the drug’s phase III trials so that the drug’s true effect (if any) can be distinguished from random variation in patient outcomes.
• Phase IV trials (also known as pharmacovigilance trials) may be conducted after a new drug has reached the market. They look for side effects not seen in earlier trials and measure a drug’s efficacy over longer periods of use than were studied in earlier trials.

Generally, only drugs that have successfully navigated the first three phases can be considered for FDA approval, although regulators sometimes approve new drugs without a phase III trial. (Of the 59 drugs approved in 2018, 7 did not undergo phase III trials before approval.) 19 In some cases the FDA may require a phase IV trial after the drug is approved to detect adverse reactions that might not be observed until a drug is in wider use. Drug companies also might choose to conduct phase IV trials to show (for marketing purposes) the superiority of their product over other available drug therapies.

Few of the drugs that enter clinical trials are ultimately approved; some fail in clinical trials, and others are set aside when a company decides to focus on more promising drugs. In a few cases, drugs submitted for approval are rejected by the FDA. In one sample of drugs in clinical trials, researchers found that for every 100 drugs entering phase I trials, around 60 advanced to phase II trials, just over 20 entered phase III trials, and only about 12 gained FDA approval. 20 Such winnowing is reflected in the average R&D cost per approved drug, which includes all of the R&D spending on drugs that do not reach the market.

Costs tend to rise in each successive phase of development. In the sample just described, companies spent an average of about $1,065 million in clinical trials per approved new drug (more than twice the amount spent in the preclinical research phase). Spending averaged $28 million in phase I, $65 million in phase II, and $282 million in phase III. 21 For each drug that completed the first three phases of clinical trials, the average total cost of those trials was about $375 million. The remaining $690 million (of the $1,065 million in average total spending on clinical trials) reflects companies’ contemporaneous spending on drugs that failed in clinical trials or were otherwise set aside.

Capital Costs of R&D. In addition to the cost of preclinical research and clinical trials, drug companies incur costs by forgoing other opportunities for investment with money spent on clinical trials. Because drug companies’ R&D spending on a drug occurs over many years, those capital costs are substantial and can approach the value of actual R&D expenditures to develop a new drug.

Estimates of Total R&D Costs. Three recent studies have estimated the average R&D cost per new drug. They all measure R&D costs the same way: They add up all of the R&D spending by each company in their sample—not only its spending on the sampled new drug but the company’s spending on other drugs that were being developed at the same time but that did not reach the market. The studies also all apply a cost-of-capital adjustment to each company’s R&D spending to reflect the lag between investment and return on investment. 22 Despite their methodological similarities, the studies’ estimates range from $0.8 billion to $2.3 billion of R&D spending per new drug.

Differences in sample selection and data sources appear to be important sources of variation in those estimates. The largest estimate, $2.3 billion (from a 2016 study, expressed here in 2019 dollars), includes around $900 million in preclinical research spending and $1.4 billion for clinical trials. 23 Those estimates are based on a sample of 106 randomly selected drugs from 10 large pharmaceutical firms, 5 of which are ranked among the industry’s top 10 by sales revenues, with an additional 3 ranked in the top 50 but outside the top 25. 24 That widely cited study is the latest in a series of similar studies the authors have published over the past three decades. Because the R&D expenditures reported by the sampled firms are not publicly available, it is difficult to evaluate the extent to which the results of those studies are affected by the selection of the sample and other aspects of the method of collecting data. 25 An independent effort to replicate an earlier iteration of the study found similar results, however. 26

The second study, which was conducted in part to provide an alternative to those 2016 estimates, found an average R&D cost of $1.2 billion (expressed here in 2019 dollars), with expenditures for individual drugs ranging from $137 million to $5.8 billion. 27 That upper bound, based on one outlier drug accounting for $2.2 billion in actual R&D outlays and $3.6 billion in capital costs, skews the average estimate upward. The median R&D cost, unaffected by the outlier, is $0.9 billion.

The sample in that study consisted of 63 drugs (developed by 47 different companies) out of the 355 drugs that the FDA approved between 2009 and 2018. R&D expenditure data for those 63 drugs are publicly available (unlike the data used in the 2016 study). The sample skews toward smaller firms—although the same is now true of drug development generally—and the authors caution that their sample may overrepresent drugs approved between 2014 and 2018 and those in certain therapeutic areas, first-in-class drugs, orphan drugs, and therapeutic agents that received accelerated approval. The R&D data include the companies’ spending on drugs that did not reach the market.

In the third study, researchers limited their sample to new cancer drugs from companies with no previously approved products. They found an average cost of $0.9 billion per approved drug (expressed here in 2019 dollars). 28 Notably, that study excluded R&D spending by firms that had not developed any approved drugs, and thus the study underestimates R&D spending on failed drugs and, by extension, expected costs per new drug. Median observed R&D costs in that sample were about $0.8 billion per new drug, with estimates for individual drugs ranging from about $212 million to $2.7 billion including capital costs. Those estimates include the developers’ total R&D spending while the approved drugs were under development, including that on failed drugs.

Trends in R&D Costs . R&D costs have increased by about 8.5 percent per year over roughly the past decade. 29 The increase in average R&D costs might reflect changes in the kinds of drugs being developed or in the number of drugs in costly clinical trials. If success rates for new biologic drugs were lower than for traditional, small-molecule drugs, or if R&D spending on failed drugs was higher for biologics, that would also contribute to higher average R&D costs.

Some evidence suggests that average success rates may indeed have declined. The 2016 study found that fewer than 12 percent of the drugs entering phase I clinical trials ultimately reached the market, but it reported success rates in excess of 20 percent for drugs developed in the 1980s and 1990s. 30 However, other evidence suggests that the overall success rate of clinical trials has not declined. 31

Another possible factor in rising R&D costs is that it has become harder to recruit candidate patients into some kinds of clinical trials. 32 For example, prospective patients might be less interested in taking a chance on untested treatments in clinical trials when approved treatment options are relatively effective already. And, in some therapeutic classes, it has become more difficult to demonstrate that a new drug would improve on the existing standard of care. For example, advances in oncology treatments have extended cancer patients’ expected lifespans. As a result, clinical trials on potential cancer drugs have had to be expanded or extended so that the treatment effect on the lifespans of patients can be estimated with suitable precision. That is, because oncology treatments have become more effective, it now takes longer, on average, to observe a given number of deaths in a clinical trial. 33

Public Policy

Federal policy influences pharmaceutical companies’ R&D spending, both in magnitude and direction. (Policies in other countries and at other levels of government can also affect such spending. Those policies are outside the scope of this report.)

Policies around federal health care programs and subsidies most directly affect the demand for new drugs. Other policies affect the supply of new drugs (federal support for basic research, tax treatment of R&D spending, and those policies that affect market exclusivity). Still other areas of federal policymaking affect both supply and demand (vaccine policies and regulatory policies).

Changes in policy that increased the demand for pharmaceuticals or encouraged their supply would tend to make R&D activity a more attractive investment. Policy changes in the opposite direction could make it a less appealing one.

Federal Health Care Programs and Subsidies . A variety of federal health care programs and subsidies increase demand for health care services and products, including prescription drugs. Such initiatives indirectly stimulate spending on drug R&D. In particular, the federal government—through Medicare, Medicaid, TRICARE, the Veterans Health Administration, the Children’s Health Insurance Program, and health insurance marketplaces established by the Affordable Care Act—purchases or subsidizes the purchase of a substantial number of prescription drugs on behalf of retirees, veterans, persons with disabilities, and low-income households. Taken together, federal and state expenditures on prescription drugs accounted for about 40 percent of total U.S. retail expenditures on prescription drugs in 2019. 34

Changes to those programs would influence R&D spending. For instance, when Medicare Part D (Medicare’s prescription drug benefit) was implemented in 2006, sales of prescription drugs to enrollees increased considerably. In addition, for Medicare enrollees with full Medicaid benefits, coverage of prescription drugs shifted from Medicaid to Medicare Part D, increasing the average prices paid for those enrollees’ brand-name drugs. Those increases in current and anticipated revenues encouraged the industry to develop new drugs for the Medicare population. Between 2003 and 2010, the number of drugs entering phase I clinical trials increased by roughly 50 percent in therapeutic classes with relatively high sales to Medicare enrollees. That increased development activity eventually led to increases in the number of drugs in those classes. 35

The federal government also increases demand for prescription drugs by subsidizing employment-based health insurance: An employer’s contribution toward the cost of that coverage is excluded from an employee’s taxable income, effectively reducing its price to the employee. As a result, many people select more generous health insurance coverage than they otherwise would, which increases their spending on health care (including prescription drugs) and indirectly stimulates pharmaceutical R&D. That stimulus would disappear if the tax subsidy on employment-based health insurance was eliminated. The size of the effect that would have on R&D spending would depend on how the elimination of the subsidy would affect individuals’ choices of health insurance coverage. 36

Support for Basic Research. The federal government is the primary funder of basic research in biomedical sciences. That research ultimately increases the supply of new drugs because drug companies rely on the findings from that research—for example, the identification of disease targets toward which new drug therapies can be aimed. That basic research creates knowledge that, in effect, reduces private companies’ R&D costs and stimulates private investment in R&D, because it expands the set of potentially profitable drug development opportunities. In particular, increases in basic health-related research at the NIH or other federal research agencies have been found to increase private drug R&D in therapeutic classes related to that basic research. 37

The rationale for public investment in basic biomedical research is that private firms’ incentives to invest in it are muted. Basic research generates knowledge (such as the identification of a disease target) that is not readily embodied in a marketable product (such as a drug). The more of that information a company could keep to itself, the greater its value to the company—and the stronger the company’s incentive would be to invest in that research. But because information can be communicated at low cost, it can be difficult to contain within a firm. Private companies tend to be reluctant to conduct basic research such as identifying a new disease target, because it would be difficult to keep much of the value of that discovery for themselves. For example, once a disease target is known, multiple companies (not just the company that identified it) might be able to develop drugs aimed at that target. That weakens private incentives to invest in basic research and, as a result, private firms do too little of it from the perspective of society as a whole (meaning that the social benefit if they performed additional basic research would be greater than the cost).

The Role of NIH-Funded Research. In the past two decades, federal funding for NIH has totaled over $700 billion. 38 Much of that funding has supported basic research (in genomics, molecular biology, and other life sciences) that has identified new disease mechanisms. Federal support for NIH nearly doubled between 1995 and 2003, rising from $18 billion to about $37 billion (see Figure 6 ). Federal funding for NIH declined (in inflation-adjusted dollars) each year from 2003 to 2015, when that funding was about $33 billion. With real annual increases over the subsequent five years, funding for NIH reached $41 billion in 2020.

Federal Funding for the National Institutes of Health, Fiscal Years 1995 to 2020

Large increases in funding for NIH—the locus of much of the federal government’s basic biomedical research support—in the late 1990s and early 2000s preceded a decade of declining funding. Since 2016, NIH funding has increased annually.

Data source: Congressional Budget Office, using data from National Institutes of Health, Office of Budget. See www.cbo.gov/publication/57025#data .

NIH = National Institutes of Health.

Between 2010 and 2016, every drug approved by the FDA was in some way based on biomedical research funded by NIH. 39 In many cases, new drugs targeted a disease mechanism that had been identified by advances in basic science resulting from that funding. Indeed, most of the important new drugs introduced by the pharmaceutical industry over the past 60 years were developed with the aid of research conducted in the public sector. 40 Publicly funded basic science thus provided the foundation upon which complementary work on the applied science of drug development could be undertaken by the private sector.

How NIH-Funded Research Affects Private R&D. Empirical studies find that public-sector research tends to increase private R&D rather than to decrease it—that is, they are complements, not substitutes. 41 Several recent studies have associated increases in NIH-funded basic research with increased private R&D efforts. 42 One study found that in the decade following an increase in NIH funding, private R&D spending grew by about eight times as much as the increase in that funding. 43 Another study found that for every two NIH research grants, about one new private-sector patent was awarded. 44

The complementary relationship between public and private R&D spending arises mainly because NIH funding focuses on basic research that leads to the discovery of new drugs, whereas private spending focuses on applications of such research. Private R&D spending on clinical testing, incremental innovation, product differentiation, and safety all follows from basic research.

That relationship is complicated by two factors. First, the distinction between basic and applied research is not well defined, and the likelihood that federal research spending crowds out private R&D spending varies by type of research. The risk of crowding out is greater when the government funds research whose potential commercial applications are obvious and valuable, as was the case when federal and private research labs raced to map the human genome. Second, federal research spending can also indirectly crowd out private spending by increasing the demand for skilled researchers. That could cause an increase in research labor costs in the private sector as well as in the public sector. 45

Tax Treatment of R&D Spending. The tax code increases the supply of new drugs in two ways: First, it provides tax credits for certain R&D expenditures (including credits available to all types of companies and credits specifically for developing drug treatments for uncommon diseases). Second, it allows all types of companies to deduct expenditures that are not eligible for the credits as business expenses in the year they are made. Both incentives encourage R&D spending by reducing its cost to the company.

Tax Incentives. The research and experimentation tax credit, available to all types of companies for certain qualifying R&D expenditures, directly reduces the amount of income tax a company owes. 46 That tax credit has been modified over time and was made permanent by the Consolidated Appropriations Act, 2016 (Public Law 114-113). 47 Some of the increase in R&D spending by pharmaceutical industries over the past several decades might have been a response to changes in that credit. In addition, the Orphan Drug Act (P.L. 97-414), enacted in 1983, created a tax credit to encourage the development of drugs to treat relatively uncommon diseases. Companies can also choose to deduct the cost of R&D investments immediately rather than over the life of the investment. Many companies use both tax credits and the ability to accelerate their deductions for investments in R&D, although only one tax preference may be used for any particular investment expense.

Effects of the 2017 Tax Act. The net effect of P.L. 115-97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report) on R&D investment is uncertain. Investment in R&D is encouraged by the reduction in the top corporate tax rate from 35 percent to 21 percent because earnings on new drugs would be taxed at a lower rate.

Investment is discouraged by changes in how deductions for R&D expenditures can be taken. The act is expected to reduce the value of tax deductions for R&D when they take effect. Beginning in 2022, companies will deduct their annual R&D costs over a five-year period rather than receiving the full tax deduction in the year the expenses are incurred. That discourages investment in R&D because the value of that deduction will decline. The reduction in the top corporate tax rate will further reduce the value of the tax deduction.

The 2017 tax act also reduced the tax credit created by the Orphan Drug Act from 50 percent to 25 percent of the cost of clinical trials. 48 When combined with the lower tax rate, that change will reduce the first-year tax benefits for R&D spending on orphan drugs by about 40 percent. (Costs applied to the tax credit for orphan drugs cannot also be applied to the research and experimentation credit, nor can they be deducted as expenses.) That change will also discourage investment in drug R&D.

Policies Affecting Market Exclusivity. The federal government has adopted a variety of policies that grant periods of market exclusivity to manufacturers in order to increase the supply of new drugs. During those periods, the average prices for those new drugs are higher than they will be later, once lower-priced, generic versions are allowed to enter the market. The return on R&D spending provided by those higher prices encourages companies to develop new drugs. That incentive is not unlimited: A manufacturer only receives market exclusivity over its own drug. There may be competing drugs in the same therapeutic market, and companies may introduce other new drugs into that market, providing they do not infringe the existing drugs’ patents.

The primary way that the federal government grants innovators temporary market exclusivity is through the U.S. patent system. Most patents expire 20 years after the date on which the patent application was filed, but pharmaceutical companies can receive several additional years of patent protection in recognition that patented drugs cannot be sold until they complete clinical trials. (Drug patent applications are often filed before the drug enters clinical trials, because disclosures from those trials could be considered “prior art” that might invalidate a patent if its application were filed after those disclosures occurred.) In recognition that a drug might spend several years of its market exclusivity in clinical trials, earning no revenue, the Hatch-Waxman Act (P.L. 98-417) allows pharmaceutical companies to seek up to five years of additional patent protection.

Pharmaceutical companies can also receive additional exclusivity—distinct from that afforded by patents—for drugs that treat relatively uncommon diseases. The Orphan Drug Act, enacted in 1983, offers seven years of market exclusivity (for the designated orphan use, irrespective of remaining patent life) for drugs that either treat conditions affecting fewer than 200,000 persons in the United States or that, in the FDA’s judgment, face market conditions making it unlikely that an innovator could recover its R&D costs. The Orphan Drug Act appears to have led to an increase in the number of new drugs for rare diseases. 49

Policies Affecting Generic Drugs. In addition to extending the period of market exclusivity on brand-name drugs, the Hatch-Waxman Act (enacted in 1984) also supports the development of generic drugs. It extends drug patents by up to five years but encourages competition from generic drugs once the patents on a pioneering drug have expired.

The legislation allows the FDA to approve most generic drugs without clinical trials. Instead, a manufacturer must show that its drug is pharmaceutically equivalent to the brand-name drug it copies, with the same active ingredients and no significant differences in the rate and extent of absorption at the site of drug action in the body.

The legislation also allows the FDA to extend by three years a brand-name drug’s market exclusivity for incremental changes, such as new indications, dosing regimens, or patient populations. (The FDA only grants that additional exclusivity when the manufacturer has conducted clinical trials that the agency judges were essential.) 50

Thus, the act strengthened incentives to develop new drugs by extending drug patent life, and it made it easier for lower-cost generic versions to be introduced when the drugs enter the public domain by allowing the FDA to approve most generics based on pharmaceutical equivalence rather than clinical trials.

Policies Affecting Biosimilar Drugs. Congress has sought to provide inducement to the development of biosimilar drugs—the analog, for biologic drugs, of the generic copies of small-molecule drugs. The Patient Protection and Affordable Care Act (P.L. 111-148) created an abbreviated pathway for FDA approval of biosimilar drugs. The manufacturer of a proposed biosimilar drug must demonstrate that the drug is “highly similar to and has no clinically meaningful differences from” the pioneering biologic drug. 51 In addition, biosimilar manufacturers do not need to conduct as many clinical trials as were conducted for the pioneering drug because they can cite the FDA’s safety and effectiveness determinations for the original biologic drug.

So far, that legislation has resulted in relatively few approved biosimilar drugs compared to the effect that the Hatch-Waxman Act had on the development of generic drugs. As of December 2020, the FDA had approved only 29 biosimilar drugs, and not all of them have been introduced. 52 Of the $125 billion in reported domestic retail spending on biologic drugs in 2017 (expressed here in 2019 dollars), $11 billion was spent on biologics for which biosimilar versions are available, and only $0.9 billion was spent on those biosimilars. 53

The relative lack of competition for pioneering biologic drugs might contribute to the shift in new-drug development toward biologic drugs instead of small-molecule drugs. In part, that shift might simply reflect advances in the underlying science. But biologic drugs are also attractive targets of research because they are harder to copy. The patent system does not require the original innovator to share the original cell line. Manufacturers seeking to make a biosimilar drug must develop their own living cell line to use as the basis for the new drug. By contrast, the primary challenge in making a generic copy of a small-molecule drug is to replicate the original drug’s active molecule, which is publicly disclosed in the patent. In addition, even under the abbreviated pathway specified by the FDA, biosimilar drugs must still be put through some clinical trials; unlike generic drugs, biosimilar drugs cannot avoid them altogether. 54

Biologic drugs may face less competition than small- molecule drugs. Independent of (but concurrent with) patent protection, the FDA grants pioneering biologic drugs 12 years of guaranteed exclusivity in contrast to 5 years of exclusivity for small-molecule drugs. 55 In addition, where biologic drugs are concerned, consumers may not as readily accept a biosimilar substitute as they do a generic drug, because a biosimilar is not identical to the drug it imitates. 56 Consumer acceptance may be increasing with greater availability and familiarity with biosimilars. However, certain federal payment policies and private contractual agreements may discourage the use of biosimilars. 57 With the possibility of facing less competition even beyond the period of market exclusivity, makers of biologic drugs would anticipate greater lifetime sales of those drugs as well.

Vaccine Policies . Several federal policies increase the demand for vaccines and therefore R&D spending to develop them. The federal Vaccines for Children program provides vaccines at no cost to children who might otherwise go unvaccinated because of their family’s inability to pay. Additionally, the Centers for Disease Control and Prevention publishes a schedule of recommended childhood and adult vaccinations, including specific recommendations for various groups, such as health care providers, travelers, expectant mothers, racial and ethnic populations, and people with certain underlying health conditions. Those recommendations induce individuals to have themselves and their children vaccinated, and federal subsidies lower the costs to consumers of those vaccinations. A study that analyzed the effects of such policies found that the recommendation in 1991 that infants be vaccinated against hepatitis B and the expansion of Medicare coverage to include the cost of influenza vaccination in 1993 were both associated with subsequent increases in the development of new vaccines. 58 Those findings suggest that manufacturers expected demand for vaccines to increase as a result of the new recommendations.

Federal policies also affect the supply of vaccines. The same study considered the federal Vaccine Injury Compensation Fund, which was established in 1986 to encourage manufacturers to develop and supply new vaccines by indemnifying the manufacturers against lawsuits arising from adverse reactions to childhood vaccines. The study found that the fund’s introduction was associated with increased development of new vaccines.

In 2020, the federal government invested directly in the development of vaccines by providing more than $19 billion in funding to support the private development of vaccines to prevent COVID-19 through its Biomedical Advanced Research and Development Authority (see Box 2 ).

Regulatory Policies . Federal regulatory policies that affect either drug supply or drug demand can influence drug companies’ returns on R&D spending, which would in turn affect the amount they were willing to spend on R&D. Proposed regulation of some drug prices would affect the sales volumes of existing drugs and, as a result, expected returns on R&D on future drugs; in turn, lower expected returns would result in fewer new drugs. Changes to regulation of clinical trials would also affect the supply of new drugs.

Drug Prices. U.S. markets are subject to less price regulation than are the markets in many other countries. Drug companies can mostly set their own prices, although some federal agencies purchase drugs at prices subject to a statutory cap, impose statutory limits on how quickly a manufacturer can raise its prices, or receive rebates from manufacturers that are specified in statute. 59

In 2019, the House of Representatives passed H.R. 3, which would have required the Secretary of Health and Human Services to negotiate with drug manufacturers over the domestic prices of certain high-priced, single-source drugs to ensure that they were no more than 20 percent higher than the average prices for those drugs in specific other countries. Under H.R. 3, drug manufacturers that did not agree to participate in negotiations or that failed to agree to a negotiated price would have been subject to an excise tax. The combination of income taxes and excise taxes on a drug’s sales might have caused the manufacturer to lose money if the drug were sold in the United States. Those taxes would have had the same effect as if the drug had not been approved for sale or as if there were a formulary—that is, a national list of drugs that insurers could cover—from which the drug was excluded. Therefore, the potential use of the excise tax would have served as a source of pressure on drug manufacturers in negotiations and would have lowered drug prices and federal spending, CBO estimated. 60 (For a discussion of the effects of lower prices on the introduction of new drugs, see Box 3 .)

More generally, state laws mandating or encouraging substitution of generic drugs for their brand-name equivalents help lower drug prices. 61 In addition, most Medicare Part D plans encourage the substitution of generic drugs for their brand-name equivalents. 62 And although the existence of generic drugs is enabled by the patent system’s disclosure requirement (compelling drugmakers to disclose the molecular structure of a drug’s active ingredient), several federal regulatory decisions hasten the introduction of those drugs. 63 Under the Hatch-Waxman Act, generic drugs shown to contain the same active ingredient as the pioneering drug do not need to be tested in clinical trials, as described above. The act also provides legal protections from claims of patent infringement to manufacturers who try to develop generic versions of a pioneering drug before its patents have expired and from liability for adverse events not listed on the label of the pioneering drug. 64

That competition from generic drugs—which can also reduce the demand for new drugs entering those markets—has tended to discourage investment in drug R&D. 65 Several studies have found that a real 10 percent decrease in the growth of drug prices would be associated with about a 6 percent decrease in pharmaceutical R&D spending as a share of net revenues. 66

Clinical Trials. A substantial R&D expense that can account for more than half of R&D spending (excluding capital costs), clinical trials are conducted in accordance with federal requirements. As a result, changes to federal policy regarding clinical trials can meaningfully affect private R&D spending. In particular, policymakers have made several changes to federal regulations governing clinical trials in an effort to reduce the time they take and therefore lower their cost.

For example, FDA’s guidance, described above, on how drug companies can establish bioequivalence between a biosimilar drug and the pioneering biologic drug is intended to minimize the expenses of clinical trials associated with developing biosimilar drugs. 67 The Prescription Drug User Fee Act, enacted in 1992, provided the FDA with additional resources to hasten the drug approval process, which reduced both the time to market and the capital costs of new-drug development.

More recently, federal policymakers have allowed the use of “surrogate endpoints” in drug trials for certain illnesses, including HIV infection and some cancers, to shorten some clinical trials. Surrogate endpoints include indirect, predictive indicators (such as blood pressure, cholesterol level, tumor size, T-cell counts, or other physical signs of disease), along with other test results and laboratory measures. 68 The FDA can approve certain kinds of drug for sale in the U.S. based on clinical-trials results that rely on such surrogate measures rather than on direct measures of a drug’s clinical benefit.

The use of surrogate endpoints has helped neutralize a tendency in privately funded research to emphasize treatments that can be commercialized more quickly, which can result in too little investment in clinically valuable treatments that would take longer to develop. 69 Speedier clinical trials can also benefit patients by hastening the introduction of life-extending therapies like the HIV antiretroviral treatments developed in the 1990s. 70 However, relying on surrogate endpoints means that consumers might spend money on some drugs that would turn out to have little clinically meaningful effect. 71

1 . See Pharmaceutical Research and Manufacturers of America, 2020 PhRMA Annual Membership Survey (PhRMA, 2020), https://tinyurl.com/ydh6p64t , and 2019 PhRMA Annual Membership Survey (PhRMA, 2019), https://tinyurl.com/ycvneve7 (PDF, 2.15 MB).

2 . The total includes only research funded by PhRMA member firms, including any contract research funded by those firms and performed on their behalf by universities or other contract-research laboratories. In particular, the PhRMA total does not include expenditures to acquire the R&D assets (such as drugs in development) of another firm.

3 . See National Science Foundation, “Business Enterprise Research and Development Survey” (accessed February 25, 2021), www.nsf.gov/statistics/srvyberd/ .

4 . See Pharmaceutical Research and Manufacturers of America, 2019 PhRMA Annual Membership Survey (PhRMA, 2019), Table 2, https://tinyurl.com/ycvneve7 (PDF, 2.15 MB) .

5 . That range applies to average R&D intensity for the approximately 4,000 firms in the Standard & Poor’s (S&P) Total Market Index, a combination of the S&P 500 Index and the S&P Completion Index (an index of the total U.S. stock market, excluding firms in the S&P 500). CBO chose the Total Market Index as a basis of comparison because of its breadth.

6 . See Congressional Budget Office, Prices for and Spending on Specialty Drugs in Medicare Part D and Medicaid (March 2019), www.cbo.gov/publication/54964 .

7 . Unobserved rebates are paid by manufacturers to insurers or buyers and are considered proprietary information.

8 . See Department of Veterans Affairs, “Hepatitis C Medications: An Overview for Patients” (accessed March 16, 2021), https://go.usa.gov/xs7qe .

9 . See IQVIA Institute for Human Data Science, Medicine Use and Spending in the U.S. (April 2018), p. 37, https://tinyurl.com/yd5cnvrl .

10 . See Qi Sun and Mindy Z. Xiaolan, “Financing Intangible Capital,” Journal of Financial Economics, vol. 133, no. 3 (September 2019), pp. 564-588, https://doi.org/10.1016/j.jfineco.2019.04.003 ; Bronwyn Hall and Josh Lerner, “ The Financing of R&D and Innovation ,” in Bronwyn H. Hall and Nathan Rosenberg, eds., Handbook of the Economics of Innovation , vol. 1 (North Holland, 2010), pp. 609–639; and Thomas W. Bates, Kathleen M. Kahle, and René M. Stulz, “Why Do U.S. Firms Hold So Much More Cash Than They Used To?” The Journal of Finance, vol. 64, no. 5 (October 2009), pp. 1985–2021, https://doi.org/10.1111/j.1540-6261.2009.01492.x .

11 . See R. Glenn Hubbard, “Capital-Market Imperfections and Investment,” Journal of Economic Literature, vol. 36, no. 1 (March 1998), pp. 193–225, www.jstor.org/stable/2564955 .

12 . See Government Accountability Office, Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals , GAO-18-40 (November 2017), p. 36, www.gao.gov/products/GAO-18-40 .

13 . Ibid., p. 37.

14 . A company can, within limits, influence its own success rate because that rate depends on the kinds of drugs the company chooses to pursue and to advance into clinical trials and on how the company manages its research process. For estimated success rates, see Chi Heem Wong, Kien Wei Siah, Andrew W Lo, “Estimation of clinical trial success rates and related parameters,” Biostatistics , vol. 20, no. 2 (April 2019), pp. 273–286, https://doi.org/ 10.1093/biostatistics/kxx069 ; David Thomas and others, Clinical Development Success Rates 2006–2015  (Biotechnology Innovation Organization, Amplion, and Biomedtracker, 2016), https://tinyurl.com/y2n8rnzb (PDF, 4.02 MB); and Michael Hay and others, “Clinical Development Success Rates for Investigational Drugs,” Nature Biotechnology , vol. 32, no. 1 (2014), pp. 40–51, https://doi.org/10.1038/nbt.2786 .

15 . See Joseph A. DiMasi, Henry G. Grabowski, and Ronald W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics, vol. 47 (May 2016), p. 25, https://doi.org/10.1016/j.jhealeco.2016.01.012 . The estimate reported in that study is $430 million in 2013 dollars.

16 . Ibid., p. 23.

17 . See Vinay Prasad and Sham Mailankody, “Research and Development Spending to Bring a Single Cancer Drug to Market and Revenues After Approval,” JAMA Internal Medicine, vol. 177, no. 11 (November 2017), pp. 1569–1575, https://doi.org/10.1001/jamainternmed.2017.3601 .

18 . See Barbara Bolten, “Fastest Drug Developers and Their Practices,” The CenterWatch Monthly, vol. 24, no. 8 (August 1, 2017), www.centerwatch.com/articles/13284%20 .

19 . See IQVIA Institute for Human Data Science, The Changing Landscape of Research and Development (April 2019), p. 7, https://tinyurl.com/y2kpxve8 .

20 . See Joseph A. DiMasi, Henry G. Grabowski, and Ronald W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics , vol. 47 (May 2016), pp. 23–24, https://doi.org/10.1016/j.jhealeco.2016.01.012 .

21 . Ibid., pp. 24–25. The corresponding values in the study, reported in millions of 2013 dollars, are $965, $25.3, $58.6, and $255.4, respectively.

22 . The values reported here all use a 7 percent cost of capital, as each study includes calculations that use that rate. (In its analysis of the budgetary effects of H.R. 3 for the 116 th Congress, CBO used an 8.1 percent cost of capital for drug R&D because that is CBO’s assessment of the cost; using a higher rate tends to slightly increase estimates of R&D costs.) See Congressional Budget Office, letter to the Honorable Frank Pallone Jr. regarding the budgetary effects of H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act (December 10, 2019), www.cbo.gov/publication/55936 . CBO has converted the values reported here to 2019 dollars.

23 . See Joseph A. DiMasi, Henry G. Grabowski, and Ronald W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics , vol. 47 (May 2016), p. 26–27, https://doi.org/10.1016/j.jhealeco.2016.01.012 . The values reported in the 2016 DiMasi study, in millions of 2013 dollars and using their central discount rate value of 10.5 percent, are $2,558, $1,098, and $1,460, respectively.

24 . Ibid., p. 20.

25 . For a critical review of the 2016 study by DiMasi and others, see Sammy Almashat, “Pharmaceutical Research Costs: The Myth of the $2.6 Billion Pill” (Public Citizen, September 2017), https://tinyurl.com/y4kb4xoq .

26 . See Christopher P. Adams and Van V. Brantner, “Estimating the Cost of New Drug Development: Is It Really $802 Million?” Health Affairs , vol. 25, no. 2 (March/April 2006), pp. 420–428, https://doi.org/10.1377/hlthaff.25.2.420 .

27 . See Olivier J. Wouters, Martin McKee, and Jeroen Luyten, “Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009–2018,” Journal of the American Medical Association, vol. 323, no. 9 (2020), pp. 844–853, https://doi.org/10.1001/jama.2020.1166 . The study’s central published values differ from those reported above: they are expressed in 2018 dollars and use a 10.5 percent cost of capital. The authors also estimated R&D costs using a 7 percent discount rate.

28 . See Vinay Prasad and Sham Mailankody, “Research and Development Spending to Bring a Single Cancer Drug to Market and Revenues After Approval,” JAMA Internal Medicine, vol. 177, no. 11 (November 2017), pp. 1569–1575, https://doi.org/10.1001/jamainternmed.2017.3601 . The estimates reported in the study are in 2017 dollars.

29 . See Joseph A. DiMasi, Henry G. Grabowski, and Ronald W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics , vol. 47 (May 2016), p. 20, https://doi.org/10.1016/j.jhealeco.2016.01.012 . The estimate is based on the authors’ comparison of their 2016 findings with an estimate they published in 2007 ($1.2 billion, in 2005 dollars) using the same methods. See Joseph A. DiMasi and Henry G. Grabowski, “The Cost of Biopharmaceutical R&D: Is Biotech Different?” Managerial and Decision Economics , vol. 28, no. 4-5 (June–August 2007), pp. 469–479, https://doi.org/10.1002/mde.1360 .

30 . See Joseph A. DiMasi, Henry G. Grabowski, and Ronald W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics , vol. 47 (May 2016), Table 1, https://doi.org/10.1016/j.jhealeco.2016.01.012 .

31 . See Chi Heem Wong, Kien Wei Siah, and Andrew W. Lo, “Estimation of Clinical Trial Success Rates and Related Parameters,” Biostatistics , vol. 20, no. 2 (April 2019), pp. 273–286. https://doi.org/10.1093/biostatistics/kxx069 ; and Jorge Mestre-Ferrandiz, Jon Sussex, and Adrian Towse, The R&D Cost of a New Medicine (Office of Health Economics, United Kingdom, 2012).

32 . See Anup Malani and Tomas J. Philipson, Can Medical Progress Be Sustained? Implications of the Link Between Development and Output Markets , Working Paper 17011 (National Bureau of Economic Research, September 2012), www.nber.org/papers/w17011 .

33 . See Darius N. Lakdawalla, “Economics of the Pharmaceutical Industry,” Journal of Economic Literature, vol. 56, no. 2 (June 2018), p. 401, https://doi.org/10.1257/jel.20161327 .

34 . See Centers for Medicare & Medicaid Services, National Health Expenditures Data, “NHE Tables” (accessed December 16, 2020), Table 16, https://go.usa.gov/xASdV . In the table, the sum of expenditures by Medicare, Medicaid, and “Other Health Insurance Programs” (primarily the Veterans Health Administration, TRICARE, and the Children’s Health Insurance Program) accounts for 40 percent of total retail expenditures on prescription drugs in 2019.

35 . See Margaret E. Blume-Kohout and Neeraj Sood, “Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development,” Journal of Public Economics, vol. 97 (January 2013), pp. 327–336, https://doi.org/10.1016/j.jpubeco.2012.10.003 ; and David Dranove, Craig Garthwaite, and Manuel I. Harmosilla, Expected Profits and the Scientific Novelty of Innovation , Working Paper 27093 (National Bureau of Economic Research, May 2020), www.nber.org/papers/w27093 .

36 . For an analysis of likely effects of such a policy change on individuals’ decisions about health insurance and consumption of health-care services in general, see Congressional Budget Office, Options for Reducing the Deficit: 2019 to 2028  (December 2018), pp. 235–236, www.cbo.gov/publication/54667 .

37 . See Margaret E. Blume-Kohout, “Does Targeted, Disease-Specific Public Research Funding Influence Pharmaceutical Innovation?” Journal of Policy Analysis and Management , vol. 31, no. 3 (Summer 2012), pp. 641–660, https://doi.org/10.1002/pam.21640 ; and Michael R. Ward and David Dranove, “The Vertical Chain of Research and Development in the Pharmaceutical Industry,” Economic Inquiry, vol. 33, no. 1 (January 1995), pp. 70–87, https://tinyurl.com/z7huxuxv .

38 . See Kavya Sekar, National Institutes of Health (NIH) Funding, FY1995–FY2021,  Report R43341, version 39 (Congressional Research Service, May 12, 2020), https://go.usa.gov/xshZu . Nominal funding levels have been adjusted for inflation by CBO using the gross domestic price index.

39 . Ekaterina Galkina Cleary and others, “Contribution of NIH Funding to New Drug Approvals 2010–2016,” Proceedings of the National Academy of Sciences , vol. 115, no. 10 (March 6, 2018), pp. 2329–2334. https://doi.org/10.1073/pnas.1715368115 .

40 . Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, Report to Congress: Prescription Drug Pricing (May 20, 2020), https://go.usa.gov/xAVns (PDF, 2.04 MB).

41 . See Paul A. David, Bronwyn H. Hall, and Andrew A. Toole, “Is Public R&D a Complement or Substitute for Private R&D? A Review of the Econometric Evidence,” Research Policy , vol. 29, no. 4–5 (April 2000), pp. 497–529, https://doi.org/10.1016/S0048-7333(99)00087-6 ; and Bettina Becker, “Public R&D Policies and Private R&D Investment: A Survey of the Empirical Evidence,” Journal of Economic Surveys , vol. 29, no. 5 (December 2015), pp. 917–942, https:// doi.org/10.1111/joes.12074 .

42 . For additional information, see Wendy H. Schacht, Federal R&D, Drug Discovery, and Pricing: Insights From the NIH-University-Industry Relationship , Report RL32324 (Congressional Research Service, November 30, 2012).

43 . See Andrew A. Toole, “Does Public Scientific Research Complement Private Investment in R&D in the Pharma-ceutical Industry?” Journal of Law & Economics , vol. 50, no. 1 (February 2007), pp. 81–104, https://doi.org/10.1086/508314 .

44 . See Pierre Azoulay and others, “Public R&D Investments and Private-Sector Patenting: Evidence From NIH Funding Rules,” Review of Economic Studies , vol. 86, no. 1 (January 2019), pp. 117–15, https://doi.org/10.1093/restud/rdy034 .

45 . See Austan Goolsbee, “Does Government R&D Policy Mainly Benefit Scientists and Engineers?” American Economic Review , vol. 88, no. 2 (May 1998), pp. 298–302, www.jstor.org/stable/116937 .

46 . For example, only spending on research deemed to be “technological in nature” qualifies for the credit. See Congressional Budget Office, How Taxes Affect the Incentive to Invest in New Intangible Assets (November 2018), www.cbo.gov/publication/54648 .

47 . For a history and description of the credit, see Gary Guenther, Research Tax Credit: Current Law and Policy Issues for the 114th Congress, Report RL31181, version 70 (Congressional Research Service, June 18, 2016), https://go.usa.gov/xshBx .

48 . See Congressional Budget Office, How Taxes Affect the Incentive to Invest in New Intangible Assets (November 2018), www.cbo.gov/publication/54648.

49 . Wesley Yin, “Market Incentives and Pharmaceutical Innovation,” Journal of Health Economics, vol. 27, no. 4 (2008), pp. 1060–1077. https://doi.org/10.1016/j.jhealeco.2008.01.002 .

50 . See New Drug Product Exclusivity, 21 C.F.R. § 314.108 (2020).

51 . See Food and Drug Administration, “Biosimilar Development, Review, and Approval” (October 20, 2017), https://go.usa.gov/xASPs .

52 . See Food and Drug Administration, “Biosimilar Product Information” (December 17, 2020), https://go.usa.gov/xAVna .

53 . See IQVIA Institute for Human Data Science, Medicine Use and Spending in the U.S.: A Review of 2017 and Outlook to 2022  (April 2018), p. 11. https://tinyurl.com/y36l4bqt .

54 . See Food and Drug Administration, “Generic Drugs Undergo Rigorous FDA Scrutiny” (October 8, 2014), https://go.usa.gov/xAVRg , and “Biosimilar Development, Review, and Approval” (October 20, 2017), https://go.usa.gov/xAVR4 .

55 . For biologics, see 42 U.S.C. § 262(k)(7)(A) (2018); for orphan drugs, see 21 U.S.C. § 360cc (2018); for small-molecule drugs, see § 355(j)(5)(F)(ii) (2018). Companies can receive an additional six months of exclusivity (beyond its patent exclusivity) if a drug—in any of its formulations, dosages, or approved indications—is designed for pediatric patients. See Food and Drug Administration, “Qualifying for Pediatric Exclusivity Under Section 505A of the Federal Food, Drug, and Cosmetic Act: Frequently Asked Questions on Pediatric Exclusivity” (November 30, 2016), https://go.usa.gov/xAVRP .

56 . See Darius N. Lakdawalla, “Economics of the Pharmaceutical Industry,” Journal of Economic Literature, vol. 56, no. 2 (June 2018), pp. 403–404, https://doi.org/10.1257/jel.20161327 .

57 . See Revisions to Payment Policies under the Physician Fee Schedule and Other Revisions to Part B for CY 2018, 82 Fed. Reg. 52976, 53181 (November 15, 2017), www.govinfo.gov/app/details/FR-2017-11-15 ; and Tony Hagen, “Remove the Disincentives and Biosimilars Will Flourish,” The Center for Biosimilars (July 7, 2020), https://tinyurl.com/acq5f5t3 .

58 . See Amy Finkelstein, “Static and Dynamic Effects of Health Policy: Evidence From the Vaccine Industry,” Quarterly Journal of Economics, vol. 119, no. 2 (May 2004), pp. 527–564, https://doi.org/10.1162/0033553041382166 .

59 . See Congressional Budget Office, A Comparison of Brand-Name Drug Prices Among Selected Federal Programs (February 2021), www.cbo.gov/publication/56978 .

60 . See Congressional Budget Office, letter to the Honorable Frank Pallone Jr. regarding the budgetary effects of H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act (December 10, 2019), www.cbo.gov/publication/55936 ; Christopher Adams and Evan Herrnstadt, CBO’s Model of Drug Price Negotiations Under the Elijah E. Cummings Lower Drug Costs Now Act , Working Paper 2021-01 (Congressional Budget Office, February 2021), www.cbo.gov/publication/56905 .

61 . See Yan Song and Douglas Barthold, “The Effects of State-Level Pharmacist Regulations on Generic Substitution of Prescription Drugs,” Health Ecoomics, vol. 27, no. 11 (November 2018), pp. 1717-1737. https://doi.org/10.1002/hec.3796 .

62 . See Stacie B. Dusetzina and others, “Medicare Part D Plans Rarely Cover Brand-Name Drugs When Generics Are Available,” Health Affairs, vol. 39, no. 8 (August 2020), pp. 1326–1333, https://doi.org/10.1377/hlthaff.2019.01694 .

63 . The patent system enables imitation of innovation (such as generic copies of pioneering drugs) by requiring the innovator, in exchange for a patent on a pioneering drug, to disclose sufficient details about the invention to allow “a person having ordinary skill in the art” to replicate it when the patent expires. See 35 U.S.C. § 103 (2018).

64 . For legal protection against adverse-event liability, see Aaron S. Kesselheim, Jerry Avorn, and Jeremy A. Greene, “Risk, Responsibility, and Generic Drugs,” New England Journal of Medicine, vol. 367, no. 18 (November 1, 2012), pp. 1679–1681, https://doi.org/10.1056/NEJMp1208781 . In the Hatch-Waxman Act, those provisions are balanced by the provision of stronger patent protections to drug innovators, including extension of the statutory period of patent protection by a portion of the time the drug is under FDA review, and five years of ensured market exclusivity before the FDA may approve the first generic copy of a pioneering drug.

65 . See Joseph P. Cook, Graeme Hunter, and John A. Vernon, Generic Utilization Rates, Real Pharmaceutical Prices, and Research and Development Expenditures , Working Paper 15723 (National Bureau of Economic Research, February 2010), www.nber.org/papers/w15723 .

66 . See Carmelo Giaccotto, Rexford E. Santerre, and John A. Vernon, “Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry,” Journal of Law and Economics , vol. 48, no. 1 (April 2005), pp. 194–214, https://doi.org/10.1086/426882 ; and F. M. Scherer, Industry Structure, Strategy, and Public Policy (Harper Collins, 1996).

67 . See Food and Drug Administration, “Bioavailability and Bioequivalence Studies Submitted in NDAs or INDs—General Considerations” (March 2014), https://go.usa.gov/xAV5f .

68 . For a comprehensive list of surrogate endpoints used, see Food and Drug Administration, “Table of Surrogate Endpoints That Were the Basis of Drug Approval or Licensure” (March 30, 2021), https://go.usa.gov/xASyF .

69 . See Eric Budish, Benjamin N. Roin, and Heidi Williams, “Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials,” American Economic Review, vol. 105, no. 7 (July 2015), pp. 2044–2085. https://doi.org/10.1257/aer.20131176 .

70 . See Mark G. Duggan and William N. Evans, “Estimating the Impact of Medical Innovation: A Case Study of HIV Antiretroviral Treatments,” Forum for Health Economics and Policy, vol. 11, no. 2 (January 2008), pp. 1–37, https://doi.org/10.2202/1558-9544.1102 .

71 . See Bishal Gyawali, Spencer Phillips Hey, and Aaron S. Kesselheim, “Assessment of the Clinical Benefit of Cancer Drugs Receiving Accelerated Approval,” JAMA Internal Medicine, vol. 179, no. 7 (May 28, 2019), pp. 906–913, https://doi.org/10.1001/jamainternmed.2019.0462 .

About This Document

This Congressional Budget Office report was prepared at the request of the Chairman of the Senate Committee on Finance. In accordance with CBO’s mandate to provide objective, impartial analysis, the report makes no recommendations.

David Austin and Tamara Hayford prepared the report with guidance from Joseph Kile, Lyle Nelson, and Julie Topoleski. Christopher Adams, Pranav Bhandarkar, and David Wylie (formerly of CBO) contributed to the analysis. Anna Anderson-Cook (formerly of CBO), Colin Baker, Paul Burnham, Julia Christensen, Michael Falkenheim, Sebastien Gay, Ryan Greenfield, Stuart Hammond, Evan Herrnstadt, Leo Lex, Paul Masi, John McClelland, Lara Robillard, Ellen Werble, Chapin White, and Katherine Young provided useful comments.

Pierre Azoulay of the Sloan School of Management at the Massachusetts Institute of Technology, Peter Bach of the Memorial Sloan Kettering Cancer Center, and Craig Garthwaite of the Kellogg School of Management at Northwestern University provided helpful comments on the draft. (The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO.)

Jeffrey Kling reviewed the report. The editor was Caitlin Verboon, and R. L. Rebach was the graphics editor and cover illustrator. The report is available on CBO’s website ( www.cbo.gov/publication/ 57025 ).

CBO continually seeks feedback to make its work as useful as possible. Please send any comments to [email protected] .

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Facts and Figures 2022: The Pharmaceutical Industry and Global Health

This compendium of facts and figures relating to the biopharmaceutical industry and global health aims to provide a snapshot of the work this industry undertakes today.

This publication examines the most recent available data on biopharmaceutical innovation and global health, access to medicines and healthcare systems, as well as the economic footprint of the innovative biopharmaceutical industry. This includes key insights on the COVID-19 vaccines and treatments that were developed at record speed and manufactured in historic quantities by the innovative biopharmaceutical industry.

This publication underlines the ongoing commitment of the research-based biopharmaceutical industry to improving the quality of life for all people worldwide.

We hope that sharing some of the most recent and relevant facts and figures relating to our work can add value to evidence-based policymaking in the global health arena and foster further consideration for investments in resilient healthcare systems and enabling ecosystems in which further innovation can thrive.

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Artificial Intelligence (AI) in Pharmacy: An Overview of Innovations

Muhammad ahmer raza.

1 Department of Pharmacy Practice, The University of Lahore, Punjab, Pakistan

2 Faculty of Pharmacy, The University of Faisalabad, Punjab, Pakistan

Shireen Aziz

3 School of Pharmacy, Zhengzhou University, Henan, China

4 Faculty of Pharmacy, University of Sargodha, Punjab, Pakistan

Misbah Noreen

5 School of Pharmacy, University of Agriculture, Faisalabad, Punjab, Pakistan

6 Department of Pharmacy Administration and Clinical Pharmacy, School of Pharmacy, Xi’an Jiaotong University, Xi’an, China

7 Center for Drug Safety and Policy Research, Xi’an Jiaotong University, Xi’an, China

Irfan Anjum

8 Faculty of Pharmacy, The University of Lahore, Pakistan

9 Faculty of Pharmacy, Hacettepe University, Ankara, Turkey

Mudassar Ahmed

Shahid masood raza.

10 School of Pharmacy, Tongji Medical College, Huazhong University of Science and Technology, Hubei, China

Artificial Intelligence (AI) emerged as an intervention for data and number-related problems. This breakthrough has led to several technological advancements in virtually all fields from engineering to architecture, education, accounting, business, health, and so on. AI has come a long way in healthcare, having played significant roles in data and information storage and management – such as patient medical histories, medicine stocks, sale records, and so on; automated machines; software and computer applications like diagnostic tools such as MRI radiation technology, CT diagnosis and many more have all been created to aid and simplify healthcare measures. Inarguably, AI has revolutionized healthcare to be more effective and efficient and the pharmacy sector is not left out. During the past few years, a considerable amount of increasing interest in the uses of AI technology has been identified for analyzing as well as interpreting some important fields of pharmacy like drug discovery, dosage form designing, polypharmacology, and hospital pharmacy. Given the growing importance of AI, we wanted to create a comprehensive report which helps every practicing pharmacist understand the biggest breakthroughs which are assisted by the deployment of this field.

Introduction

AI is a stream of science related to intelligent machine learning, mainly intelligent computer programs, which provides results in a similar way to the human attention process [ 1 ] . This process generally comprises obtaining data, developing efficient systems for the uses of obtained data, illustrating definite or approximate conclusions, self-corrections, and adjustments [ 2 ] . In general, AI is used for analyzing machine learning to imitate the cognitive tasks of individuals [ 2 , 3 ] . AI technology is exercised to perform more accurate analyses as well as to attain useful interpretation [ 3 ] . In this perspective, various useful statistical models, as well as computational intelligence, are combined in AI technology.

Recently, AI technology becomes a very fundamental part of the industry for useful applications in many technical and research fields. Reflecting on the past 25 years, pharmacy has done a great job of addressing the growing demand for prescriptions, even when faced with pharmacist shortages, growing operating costs, and lower reimbursements. Pharmacy has also done a great job of leveraging enabling technology automation to improve workflow efficiency and lower operating costs while promoting safety, accuracy, and efficiency in every pharmacy setting. Automated dispensing gives pharmacists more time to engage with a greater volume of patients while also enhancing their health outcomes [ 4 ] .

The first application of a computer in a pharmacy presumably dates back to the 1980s and since then, computers have been utilized in everything from data collection, retail pharmacy management, clinical research, drug storage, pharmacy education, clinical pharmacy, and lots more, and with the emergence of artificial intelligence, there is no telling just how much the Pharmacy sector will evolve in the long run. There have been several expert systems developed in medicine to assist physicians with medical diagnosis [ 5 ] . Recently, several programs focusing on drug therapy have been described [ 6 ] . They guide drug interactions, drug therapy monitoring, and drug formulary selection. There are many aspects of pharmacy that AI can have an impact on and the pharmacists to consider these possibilities because they may someday become a reality in pharmacy practice.

The purpose of this article was to review topics related to AI. The topics include AI general overview and classification, AI uses in hospitals, the pharmaceutical industry, and retail pharmacies and to create awareness for AI as a component of pharmacy practice in the future, to encourage pharmacists to embrace this advancement, and as much as possible put in the effort to acquire the relevant skills, which will enable pharmacists to contribute towards the much-envisaged development.

AI general overview

The term AI (also known as machine intelligence) is very commonly confused and used interchangeably with robotics and automation. While robotics is simply the creation of machines that can carry out difficult repetitive tasks, AI refers to the exhibition of human-like behaviors or intelligence by any computer or machine [ 7 ] . Traditionally, robots were not built to possess these “intelligent capabilities” even though they may be able to move or carry objects independently using a designed program and surface sensors in a process known as automation. AI, in essence, is the field of computer science that specializes in the creation of intelligent machines, developed with the ability to perform tasks that will ordinarily be associated with a human being [ 8 ] .

AI is frequently applied to the development of digital computers or computer-controlled robots with the capacity to autonomously execute intellectual and cognitive human-like processes. Such intellectual and cognitive processes include learning, reasoning, problem-solving, perception, and language. The form of AI currently in use today is referred to as narrow AI or weak AI because it is only designed to perform narrow tasks like internet search, facial and voice recognition, controlling and driving cars, and so on. However, the long-term goal of the AI community is to have machines that can autonomously outperform humans’ at all cognitive tasks. The AI that involves creating machines that can perform all human cognitive tasks will be the general AI or Strong AI (ADI) [ 9 ] .

In simple terms, AI refers to the ability of machines and computers to think, act, behave and function as human beings. Familiar examples of AI-controlled systems include Apple’s SIRI (in iPhone) [ 10 ] , Amazon’s Alexa [ 11 ] , and the self-driving cars of Google, Mercedes, BMW, and Tesla to name a few [ 12 ] . The core of AI can be Knowledge Engineering, in which machines are assembled with access to abundant data and information relating to the human world, which enables them to be able to mimic human behavior. Machine Learning is another type of AI, which involves the use of algorithms and statistical models to improve the accuracy of software applications in predicting outcomes without being distinctly programmed. It was established based on the idea that machines can learn from data, identify problems and make decisions with minimum human help or intervention. Applications of machine learning include self-driven Google cars, fraud detection, and online recommendation offers like those on Amazon and Netflix [ 13 ] . Machine perception is another aspect of AI and it involves designing and building machines with the ability to use sensory inputs to deduce information about the different aspects of the world. Computer vision is the ability of machines to process visual inputs such as facial information, objects, and gestures [ 14 ] .

There have been various skepticism, criticism, and myths towards AI mostly concerning safety and the dangers that may be potentiated by the creation of machines that could match human cognitive capabilities. One of the five predictions made by Forbes for AI in 2019 [ 15 ] is that it may become an issue of national politics. Aside from concerns that AIs may be used as weapons for war and mass destruction, certain people have expressed concerns that the creation of AI systems that are smarter than humans, through general AI could be more fatal and be the end of the human race itself. They believe we may not be able to predict how AI systems that are more intelligent than us will behave and that humans may end up being controlled by these super-intelligent machines. Scientists believe most of the safety concerns about future super-intelligent AI systems may be resolved if the “goals” of these machines can be made to align with our own goals [ 15 ] .

AI classification

AI can be classified in two different ways [ 16 , 17 ]

• a) according to caliber

Classification of AI

Based on their caliber, AI system is classified as follows:

• Weak intelligence or Artificial narrow intelligence (ANI) : This system is designed and trained to perform a narrow task, such as facial recognition, driving a car, playing chess, and traffic signaling. E.g.: Apple SIRI virtual personal assistance, tagging in social media.
• Artificial General Intelligence (AGI) or Strong AI : It is also called Human-Level AI. It can simplify human intellectual abilities. Due to this, when it is exposed to an unfamiliar task, it can find the solution. AGI can perform all the things as humans.
• Artificial Super Intelligence (ASI): It is brainpower, which is more active than smart humans in drawing, mathematics, space, etc; in every field from science to art. It ranges from the computer just little than the human to a trillion times smarter than humans.

Arend Hintze [ 18 ] , an AI scientist classified the AI technology based on its presence and not yet present. They are as follows:

• Type 1: This type of AI system is called a Reactive machine. E.g. Deep Blue, the IBM chess program which hit the chess champion, Garry Kasparov, in the 1990s. It can identify checkers on the chessboard and can make predictions; it does not have the memory to use past experiences. It was designed for narrow purposes use and is not useful in other situations. Another example is Google’s AlphaGo.
• Type 2: This type of AI system is called a Limited memory system. This system can use past experiences for present and future problems. In autonomous vehicles, some of the decision-making functions are designed by this method only. The recorded observations are used to record the actions happening in the future, such as changing the lanes by car. The observations are not in the memory permanently.
• Type 3: This type of AI system is called as “theory of mind”. It means that all humans have their thinking, intentions, and desires which impact the decisions they make. This is a non-exist AI.
• Type 4: These are called self-awareness. The AI systems have a sense of self and consciousness. If the machine has self-awareness, it understands the condition and uses the ideas present in others’ brains. This is a non-existing AI.

Applications of AI

Ai in diagnosis and targeted genomic treatments.

There are several applications of AI in hospital-based health care systems [ 19 , 20 ] in organizing dosage forms for individualized patients and selecting suitable or available administration routes or treatment policies.

• Maintaining of medical records: Maintenance of the medical records of patients is a complicated task. The collection, storage normalizing, and tracing of data are made easy by implementing the AI system. Google Deep Mind health project [ 21 ] (developed by Google) assists to excavate the medical records in a short period. Hence, this project is a useful one for better and faster health care. The Moor fields Eye hospital NHS is assisted by this project for the improvement of eye treatment.
• Treatment plan designing: The designing of effective treatment plans is possible with the help of AI technology. When any critical condition of a patient arises and the selection of a suitable treatment plan becomes difficult, then the AI system is necessary to control the situation. All the previous data and reports, clinical expertise, etc., are considered in the designing of the treatment plan as suggested by this technology. IBM Watson for Oncology [ 22 ] , the software as a service, is a cognitive computing decision support system that analyzes patient data against thousands of historical cases and insights gleaned from working thousands of hours with Memorial Sloan Kettering Cancer Center physicians and provides treatment options to help oncology clinicians make informed decisions. These treatment options are supported by literature curated by Memorial Sloan Kettering, and over 300 medical journals and 200 textbooks, resulting in almost 15 million pages of text [ 22 ] .
• Assisting in repetitive tasks: AI technology also assists in some repetitive tasks, such as examining the X-ray imaging, radiology, ECHO, ECG, etc., for the detection and identification of diseases or disorders. Medical Sieve [ 23 ] (an algorithm launched by IBM) is a “cognitive assistant” having good analytical and reasoning abilities. A medical start-up is necessary for the improvement of the patient’s condition by combining deep learning with medical data. A specialized computer program is available for each body part and used in specific disease conditions. Deep learning can be employed for almost all types of imaging analyses, such as X-ray, CT scan, ECHO, ECG, etc.
• Health support and medication assistance: In recent years, the uses of AI technology are recognized as efficient in health support services and also, for medication assistance. Molly [ 24 ] (a start-up-designed virtual nurse) receives a pleasant voice along with a cordial face. Its aim of it is for helping patients to guide the treatment of patients as well as support them with their chronic conditions during doctor’s visits. Ai Cure [ 25 ] is an app existing in a Smartphone webcam, which monitors patients and assists them to control their conditions. This app is useful to patients with severe medication situations and for patients who participate in clinical trials.
• Accuracy of medicine: AI shows a good impact on genomics and genetic development. Deep Genomics [ 26 ] , an AI system is useful for observing patterns in the genetic information and medical records to identify the mutations and linkages to diseases. This system informs doctors about the events happening within a cell when DNA is altered by genetic variation. An algorithm is designed by the father of the human genome project, Craig Venter [ 27 ] that gives information on patients’ physical characteristics based on their DNA. “Human Longevity” AI technology is useful to identify the exact location of cancer and vascular diseases in their early stage.
• Drug creation: The development or creation of pharmaceuticals takes more than a decade and consumes billions of rupees. “Atomwise” [ 28 ] , an AI technology that uses supercomputers, is useful to find out the therapies from the database of molecular structure. It hurled a virtual search program for safe and effective therapy for the Ebola virus with the existing drugs. The technology identified two drugs that caused Ebola infection. This analysis was completed within one day compared to months to years with manual analysis. A Biopharma company in Boston developed big data for the management of patients. It reserves data to find the reasons why some patients survive diseases. They used patients’ biological data and AI technology to find out the difference between healthy and disease-friendly atmospheric conditions. It helps in the discovery and design of drugs, healthcare, and problem-solving applications.
• AI helps people in the health care system: The “open AI ecosystem” [ 29 ] was one of the top 10 promising technologies in 2016. It is useful to collect and compare the data from social awareness algorithms. In the healthcare system, vast information is recorded which includes patient medical history and treatment data from childhood to that age. This enormous data can be analyzed by the ecosystems and gives suggestions about the lifestyle and habits of the patient.
• Healthcare system analysis : In the healthcare system, if all the data is computerized then retrieval of data is easy. Netherland maintains 97% of invoices in digital format [ 30 ] , which contain treatment data, physician names, and hospital names. Hence, these can be retrieved easily. Zorgprisma Publiek, a local company analyses the invoices with the help of IBM Watson cloud technology. If any mishap occurs, it recognizes it immediately and takes the correct action. Because of this, it improves and avoids patient hospitalization.

AI and development of pharmaceuticals [ 31 - 37 ]

Top pharmaceutical companies are collaborating with AI vendors and leveraging AI technology in their manufacturing processes for research and development and overall drug discovery. Reports show nearly 62 percent of healthcare organizations are thinking of investing in AI shortly, and 72 percent of companies believe AI will be crucial to how they do business in the future. To get a better sense of the future of AI in the sector, Pharma News Intelligence [ 38 ] dives into current AI use cases, the best uses for the technology, and the future of AI and machine learning. The McKinsey Global Institute estimates that AI and machine learning in the pharmaceutical industry could generate nearly $100B annually across the US healthcare system. According to researchers, the use of these technologies improves decision-making, optimizes innovation, improves the efficiency of research/clinical trials, and creates beneficial new tools for physicians, consumers, insurers, and regulators. Top pharmaceutical companies, including Roche, Pfizer, Merck, AstraZeneca, GSK, Sanofi, AbbVie, Bristol-Myers Squibb, and Johnson & Johnson have already collaborated with or acquired AI technologies. In 2018, the Massachusetts Institute of Technology (MIT) partnered with Novartis and Pfizer to transform the process of drug design and manufacturing with its Machine Learning for Pharmaceutical Discovery and Synthesis Consortium [ 38 ] .

Research works are carried out daily to find new active principles for the currently incurable diseases and conditions; increase the safety profile of already existing drugs; combat drug resistance and minimize therapeutic failure. Hence, there is an increase in the size and variety of biomedical data sets involved in drug design and discovery. This factor and many more contributed to the advancement of AI in the pharmaceutical industry. Today, some companies offer software with much relevance in drug design and data processing, as well as in predicting treatment outcomes.

GNS healthcare [ 39 ] uses AI machine software known as Reverse Engineering and Forward Simulation (REFS). REFS determines the cause and effect relationships between various types of data, that are unforeseen ordinarily by direct data evaluation. GNS claims that REFS can transfer millions of data points ranging from clinical to genetics, laboratory, imaging, drug, consumer, geographic, pharmacy, mobile, proteomic, and so on. In drug design, a company known as Atomwise developed the first deep learning neural network for structure-based drug design and discovery that they called AtomNet [ 40 ] . AtomNet makes use of a statistical approach to extract information from millions of experimental affinity measurements and thousands of protein structures to predict the binding properties of small molecules with proteins. By presenting 3-dimensional images of the protein and ligand pair showing channels for carbon, oxygen, nitrogen, and other types of atoms, AtomNet technology enables the pharmaceutical chemists to perform core processes of drug discovery and design like hit discovery, lead optimization, and prediction of toxicity with high precision and accuracy in weeks as against years.

Insilico Medicine [ 41 , 42 ] announced an AI project by the company called Pharm AI. Insilico Medicine claims they applied Generative Adversarial Networks (GAN) and reinforcement learning algorithms. The GAN is a type of generative model that can generate samples and also learn from training samples. They are made up of two neural networks, the generator, and the discriminator. The relationship between the generator and the discriminator is referred to as “adversarial”. The generator tries to create and learns to create new samples and sends them to the discriminator, which classifies the sample as real or fake where real denotes the examples that belong to the data set, and the examples generated by the generator are denoted “fake”. Through continuous training, the generator begins to create samples that are similar to the real ones while the discriminator gets better at the identification process. With Pharm AI, through GAN and reinforcement learning, Insilico Medicine claims that it can generate new molecular structures and ideate the biological origin of a disease.

AI in pharmacy practice in hospital and community pharmacies

Machine learning models allow e-mails to be personalized at a speed and accuracy greater than that of any human being. Chatbots [ 43 ] can be used to increase the efficiency of service delivery. Chatbots are capable of mimicking interactions between customers and customer care of sale staffs. Chatbots are capable of automatically resolving customer complaints and queries and the difficult questions are transferred to human staff. In retail pharmacy, this principle can be applied. The chatbots can be programmed to mimic pharmacist-patient interaction.

Walgreen [ 44 ] made a partnership with Medline, a telehealth firm to create an avenue to help patients interact with healthcare professionals through video chat. AI can also be useful in inventory management. As a retail pharmacist, imagine being able to predict what your patients will need in the nearest future, stocking them, and using personalized software to deliver e-mails to remind the patient of drug needs. With the use of AI-powered data analytics, a patient’s future drug purchase can be predicted. Predicting the patient’s drug purchase through AI will help the pharmacist to make proper stock procurement decisions.

Although, there are existing inventory management software and application that are used in retail pharmacy stock management like Mckessons; Liberty; Winpharm; PrimeRx; and WinRx, not all of them utilize AI or machine learning. For example, an AI company, Blue Yonder developed software for Otto group [ 45 ] , a German online and catalog retailer. This software can predict with 90% accuracy what will be sold by Otto in 30 days. This reduced the delivery schedule for purchased products from one week or more to one of two days by enabling direct delivery of the product from the supplier to the consumer without having to pass through the warehouse.

Intending to improve the safety of patients, the University of California San Francisco (UCSF) Medical Center uses robotic technology for the preparation and tracking of medications. According to them, the technology has prepared 3, 50, 000 medication doses without any error. The robot has proved to be far better than humans both in size as well as its ability to deliver accurate medications. The abilities of the robotic technology include the preparation of oral as well as injectable medicines which include toxic chemotherapy drugs. This has given the freedom to the pharmacists and nurses of UCSF so that they can utilize their expertise by focusing on direct patient care and working with the physicians. Within the automated system of the pharmacy, the computers first receive medication orders electronically from the physicians and pharmacists of UCSF. After this, individual doses of pills are picked, packaged, and dispensed by the robotics. This is followed by machines assembling the doses onto a bar-coded plastic ring. The thin plastic ring contains all medications that have to take by a patient within a period of 12h. Adding to the capabilities of the automated system is their ability to prepare sterile preparations that are meant for chemotherapy along with filling intravascular syringes with the right medications [ 46 ] .

The primary aim of health-related AI applications is to analyze relationships between prevention or treatment techniques and patient outcomes. AI programs have been developed and applied to practices such as diagnosis processes, treatment protocol development [ 47 ] , drug development [ 1 ] , personalized medicine [ 48 ] , and patient monitoring and care [ 49 ] , among others. As the quality of care offered for patients continues to grow in prominence, here are some ways pharmacies can leverage the continued technology explosion to impact value-based outcomes. As the most accessible and affordable healthcare stakeholder, pharmacies can become health management centers instead of only medication fulfillment locations. Technology can help provide more personalized healthcare offerings including advice, guidance, and an expanded suite of services (e.g., immunizations, screenings, MTM, disease state management). Health trackers and wearable will be able to provide real-time capture of data that can enable pharmacy to follow up with at-risk patients on their conditions and monitor their quality of improvement [ 50 ] .

AI can be of real help in analyzing data and presenting results that would support decision making, saving human effort, time, and money, and thus helps save lives. Medical and technological advancements that have helped the healthcare-related development of AI include the overall evolution of computers, resulting in faster data collection and more powerful data processing, Growth in the availability of health-related data from personal and healthcare-related devices and records, and the development of pharmacogenomics and gene databases, Expansion and industry adoption of electronic health records and natural language processing and other advancements in computing that have enabled machines to replicate human certain processes [ 51 ] .

In the physician space, AI from technology companies like Microsoft is breaking into the healthcare industry by assisting doctors in finding the right treatments among the many options for cancer. Capturing data from various databases relating to the condition, AI is helping physicians identify and choose the right drugs for the right patients [ 52 , 53 ] . In the pharma space, AI is working with researchers to support the decision-making processes for existing drugs and expanded treatments for other conditions, as well as expediting the clinical trials process by finding the right patients from several data sources [ 1 , 54 , 55] . Pharma is even working to predict with certain accuracy when and where epidemic outbreaks might occur, using AI learning based on a history of previous outbreaks and other media sources.

In the hospital space, AI is being used to prevent medical errors and reduce hospital readmissions. By analyzing patient data from medical and medication errors, readmission root causes, and other internal and external databases, AI will one day identify and prevent high-risk patients from developing complications, and provide prospective care guidance, and diagnostic support, among many other clinical applications. Additionally, AI will be useful in workflow optimization and efficiency, helping eliminate redundancy in cost from duplicate or unnecessary procedures [ 56 , 57 ] .

In pharmacy today, we already have an early form of AI in place. It’s called our pharmacy management system, housing patient utilization, and drug data, as well as potentially identifying drug-related problems through clinical decision support screening. The next generation in pharmacy technology is the introduction of a technology-based information expert system to identify timely drug-related problems based on patient data captured from the pharmacy system and other external data systems. Consistent with workflow robotics, this would leave less of the work on the pharmacist to shoulder the responsibility of identifying serious drug-related problems [ 58 , 59 ] .

Implications for pharmacists and their practice

AI can strongly influence and shift pharmacists’ focus from the dispensing of medications toward providing a broader range of patient-care services. The pharmacist can leverage AI to help people get the most from their medicines and keep them healthier. Most importantly, AI provides pharmacy an opportunity for more collaboration across many different entities serving the same patient. For the patient, in addition to potentially better healthcare services offered by their professionals, AI may be a useful tool for providing guidance on how and where to obtain the most cost-effective healthcare and how best to communicate with healthcare professionals; optimizing the value of data from wearable; providing everyday lifestyle guidance; integrating diet and exercise; and supporting treatment compliance and adherence.

Concluding comments

AI involves the combination of human knowledge and resources with Artificial Intelligence. As research into AI continues, with many interesting applications of it in progress, one may consider it a necessary evil even for those that see it as an enemy. Therefore, it is strongly recommended that pharmacists should acquire the relevant hard skills that promote AI augmentation. Education about and exposure to AI is necessary throughout all domains of pharmacy practice. Pharmacy students should be introduced to the essentials of data science and fundamentals of AI through a health informatics curriculum during their PharmD education. Pharmacists must also be allowed to develop an understanding of AI through continuing education. Data science courses or pharmacy residencies with a focus on AI topics should be made available for pharmacists seeking more hands-on involvement in AI development, governance, and use. As these technologies rapidly evolve, the pharmacy education system must remain agile to ensure our profession is equipped to steward these transformations of care.

The opinions expressed in this paper are those of the authors.

Ethics approval and consent to participate: Not applicable.

Consent for publication: All authors approved the manuscript.

Availability of data and materials: Not applicable

Competing interests: All authors declare no competing interests

Funding: None

Author contributions: All authors listed have made a substantial and intellectual contribution to the work and approved it for publication.

Authors’ information:

Muhammad Ahmer Raza, PharmD (The University of Faisalabad, Pakistan), MS Clinical Pharmacy (Shandong University, Jinan, China) is a registered pharmacist (RPh) in Pakistan and an academic pharmacist and pharmacy practice researcher. Shireen Aziz, PharmD (Pakistan) MS (Zhengzhou University, China), is a registered pharmacist (RPh) in Pakistan and completed her MS in Pharmacology from Zhengzhou University, China. Misbah Noreen, PharmD, MPhil (Pakistan) is a community pharmacist in the chain pharmacy setup of Pakistan (Care Pharmacy). Irfan Anjum, PharmD (Pakistan), MS, PhD (Turkey) is an Assistant Professor at The University of Lahore (UOL) Pakistan. Shahid Masood Raza, BPharm (Hons), M.Phil is a lecturer at The University of Faisalabad, Pakistan. He is currently pursuing a PhD from Huazhong University of Science and Technology, Wuhan, Hubei, China. Both are experienced in qualitative and quantitative research methods and content analysis.

List of abbreviations:

MRI Magnetic resonance imaging

CT Computerized tomography

ECHO Echocardiogram

ECG Electrocardiogram

DNA Deoxyribonucleic acid

NHS National health services

GSK GlaxoSmithKline

GNS Gene network sciences

MTM Medication therapy management

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Next in pharma: How can pharmaceutical companies drive value growth?

When great science isn’t enough, how can pharmaceutical companies drive value growth.

The pharmaceutical industry has plenty to celebrate. In the last decade, major therapeutic advances, such as immunotherapy and cell and gene therapy, have given new hope to patients. COVID-19 vaccines were developed in record time to help save the world during a historic pandemic.

But during that same period of groundbreaking innovation, pharmaceutical companies failed to keep pace with the capital markets. In fact, returns from pharmaceutical companies lagged the S&P 500 by about one-third, and biotech fared even worse.

Looking at the stock performance of the top 50 pharmaceutical companies, the divide between the leaders and laggards has been widening. In 2021, the five-year total shareholder return (TSR) for drugmakers in the top quintile was up by 29%, compared with a decline of 11% in the bottom quintile, according to a PwC analysis (figure 2). As performance pressures mount, investors are taking a closer look at which pharma companies are positioned to win and allocating their investments accordingly.

Overcoming the performance challenge

Market headwinds are well documented. Drugmakers are grappling with extended drug development timelines, pricing scrutiny, high costs of regulation and litigation, and increasing competition in nearly every category. Another wave of patent expirations is just around the corner, meaning more therapeutic areas will have generic or biosimilar alternatives. Gross margins for some novel treatments, such as chimeric antigen receptor T-cell (CAR-T) therapy, are well below historical averages and the increasing personalization of medicine means manufacturers need to generate returns on smaller populations of patients. All of these forces need to be overcome in pursuit of higher shareholder returns.

First, as leaders set the path ahead, they should incorporate a sharper lens on shareholder value creation into everyday decision-making. Connecting product-market decisions (e.g., portfolio choices, launch investments, production expansions) to shareholder value creation across the enterprise is essential to help translate great science into great returns. 

Similarly, another overarching imperative will be delivering on the promise of digital innovation. PwC  research shows results to date have been disappointing. Looking ahead, the pharmaceutical industry can learn a lot from leading tech companies in areas like developing digital products, personalizing customer engagement, harnessing new types of data, deploying intelligent automation and working in a more agile fashion.

With a foundation set on those goals, pharma leaders can gain competitive advantage by focusing on five key actions:

Build differentiated capabilities to outperform competition:

Key industry capabilities (e.g., decentralized trials, machine learning at scale) will help drive the business forward in a differentiated manner. Companies that execute flawlessly on these capabilities will have a competitive advantage.

Retain talent, prioritize culture:

 In the age of “The Great Resignation” and the ”war for talent,” having a differentiated culture to attract and retain the right staff will be critical. Employees want to find purpose and know that what they are doing can drive change in the world. For employees at pharmaceutical companies, work means saving lives. Doubling down on this mission, while building a unique culture that matches your strategic imperatives is critical. Communicating and executing on those values daily will help drive the most sustained loyalty from your personnel.

Protect the enterprise:

Given the aforementioned challenges in the industry, it will be critical to minimize any downside risk around cybersecurity, regulatory challenges and legal matters in order to preserve value.

Drive more returns from large IT and cloud investments:

Companies have made massive investments in enterprise resource planning (ERP) systems, artificial intelligence (AI), automation and cloud. Now is the time to capitalize on these investments, driving them to the front-end patient experience to improve customer satisfaction, while also improving the efficiency of operations.

Think broadly about portfolio and transactions:

The industry spends a lot of effort and focus on determining where best to drive the business strategically (e.g., geography, therapeutic categories, scientific modalities). There is no doubt that making the right strategic choices can provide a lot of headroom, however, we see returns accelerated by better execution of divestitures as well as in building out the best-in-class partnership ecosystem to drive leading science, technologies and talent to the business.

Download Next in pharma report

Build differentiated capabilities to outperform competition.

Assets, such as patents and products, have always been important to value growth in the pharmaceuticals sector. But assets come and go. Capabilities are enduring and can create a lasting competitive advantage. As pharmaceutical companies look to outperform in the future marketplace, six capabilities are expected to be critical to success:

Putting the patient at the center with decentralized trials

Adopting human-machine technologies at scale, capitalizing on digital innovation in the value proposition, taking real-world evidence to the next level, reimagining customer engagement with analytics and technology, taking a new approach to budgeting with value-based planning.

Patient-centric trial design is a hot topic today and is expected to be a defining capability for the future. The COVID-19 pandemic drove the industry to rethink the traditional paradigm for clinical trials, accelerating the development and use of decentralized design. The ability to design, execute and oversee clinical trials that run in the home, near the home in retail pharmacies and health clinics  and virtually is a must-have. Decentralized settings reduce the burdens on participants, such as the need to travel to a major academic medical center, and therefore increase the number of individuals willing to participate in a study. More convenient and less burdensome trials also increase the odds of retaining participants throughout a study. Furthermore, decentralized trials hold great promise for reaching underrepresented communities, resulting in more relevant research in which the study population looks like the disease population in the real world.

While the potential impact for patients (less burden, more access to trials) and for sponsors (faster trial enrollments, reduced dropout rates, more competitive trial design) is significant, creating a winning capability in decentralized trials means adopting significant changes. R&D leaders should evaluate their portfolios to assess which trials are best suited for a decentralized design, change processes related to trial enablement, update the vendor ecosystem to include suppliers that specialize in decentralized trials and upgrade the use of data and analytics to support the trial life cycle. All of this will need to occur while balancing the ability to execute and oversee traditional randomized clinical trial activities. Those who get it right will be living the industry’s “patient at the center” mantra, while increasing their own odds of success in the competition to recruit and retain patients.

Most pharmaceutical companies have explored opportunities to apply robotic process automation (RPA) and have developed use cases that leverage artificial intelligence and other emerging technologies. But many pharma leaders see scaling these advanced technology plays beyond a handful of pilots as a challenge. Tackling a few high-value use cases in drug discovery or customer engagement helps, but the real opportunity is to reimagine the pharmaceutical company of the future, powered by intelligent technologies across the enterprise. The result will be an organization that can handle more sophisticated decisions with better outcomes and shorter time frames.

Leaders in tackling the human-machine possibilities will start with a clear, top-down vision of what they are trying to achieve. This might include vaporizing millions of hours worth of routine work across the enterprise, increasing speed on cross-functional processes or improving effectiveness. Enterprise-wide change requires a clear vision and specific goals. It also requires upskilling the business to have a stronger sense of what’s possible with predictive analytics and intelligent automation. Individuals should be well-equipped to generate and engage on ideas, and should have incentives to think differently. These technologies are powered by large data sets, so fit-for-purpose data strategies that are linked to the digital products and services they support can better enable scaling.

The drumbeat on value will continue into the future, meaning drugmakers need to enhance their value proposition. While advances in traditional measures of product efficacy and safety are still critical, digital innovations create new possibilities for helping physicians and patients achieve improved outcomes. Tracking digital biomarkers, offering digital therapeutics and innovative clinical decision support tools and creating connected treatment ecosystems offer new opportunities to predict disease progression, engage patients more deeply in their treatment and support their path to success.

Discovering, developing and commercializing these next-generation solutions is a different type of capability. Borrowing lessons learned from the tech industry, leaders in the pharmaceutical sector will have a deep understanding of human-centered design, device/solution regulatory pathways and ecosystem partners that can accelerate the journey. They will redefine operating models to incorporate digital solutions as part of product development and commercialization, starting early in the process. Beyond the direct value generated by these solutions, another important element of the value equation is the information that can be generated by these digital products. Winners in this domain will have great solutions, but they will also be world-class in envisioning what data will be valuable and putting the capabilities in place to take full advantage of it.

Real-world evidence (RWE) is undergoing rapid evolution as its impact deepens in clinical development and expands across the product development life cycle. As pharmaceutical companies look to convert major investments in RWE into real returns for patients and shareholders, the trustworthiness and fit-for-purpose nature of the data sources, the approaches used to convert observations to evidence and the need to upgrade organizational decision-making are important elements in determining the capabilities of RWE in the future.

Real-world data (RWD) and the evidence derived from it (RWE) have become progressively more sophisticated as the patient journey has become ever more digital—from structured data in insurance claims 20 years ago, to the widespread adoption of electronic medical records (EMRs) over the last decade and now to sources of near-real-time data directly from the point of care or from patients’ homes and phones. But more data has not always translated into better evidence, a fact that’s acutely understood by regulators and payers. To ensure this proliferation of data is of high quality and reliable, leaders will be out in front to define standards of trustworthiness for RWD and RWE.

Going forward, pharmaceutical companies have an opportunity to expand their collection of RWD and create the analytical capabilities needed to turn these new sources of data into compelling evidence. Beyond data and analytics, changing the organization’s mindset about evidence is a challenge. In the past, product and portfolio decisions often have been weighted toward experimental data from clinical trials and advice from key opinion leaders. RWD provides an additional view, and leaders should ensure this new class of evidence is incorporated into their company’s decision-making processes.

The early adopters of RWE are starting to reap the benefits of their investment, as regulators and payers increasingly recognize its benefits and learn to deploy it effectively. The rest of the pack is looking to leapfrog with vendors and partners that have already learned what didn’t work. Landing as a disruptor, and not as one of the disrupted, means having a leading capability in RWE.

With pricing scrutiny expected to persist, winning and retaining customers to drive volume will be essential to growth. And customers today expect a more digital experience. According to Wunderman Thompson’s research , more than three-quarters (76%) of global consumers say their everyday lives depend on technology, and this figure is even higher for Generation Z and millennials, at 79% and 80%, respectively. Eighty-one percent of global consumers say they “switch on” to unwind, and over half say they are physically (55%) and mentally (56%) healthier, thanks to technology.

As these trends and others like them continue, pharma’s commercial leaders have an opportunity to harness digital technologies to design the differentiated customer experience of the future.

Imagine a deeply immersive virtual reality environment where physicians can experience content (not just access it), interact with peers, ask questions of pharma staff and activate a range of support services. In contrast with a two- to three-minute detail by a sales specialist, this is an environment where a physician could spend a much more meaningful period of time. Predictive analytics would customize the environment for this physician, and orchestrate the right follow-ups based on the experience. Similar environments would be accessible to patients.

The next generation of experiences is just around the corner, and commercial leaders should ensure they are ready. This means strengthening human-centered design skills, shaping partnerships with new types of vendors such as metaverse players, creating branding concepts that are intriguing and unconventional to resonate in a digital-first environment and using the power of predictive analytics to identify and activate customers most effectively.

The coronavirus pandemic upended the traditional engagement model. Companies were forced to adapt in response to the crisis. Going forward, innovating the customer experience will be a source of competitive advantage.

If the pharmaceuticals sector is to outperform in the capital markets, it needs to boost the outlook for future profits and ensure plans are in place to deliver. How resources are allocated across the company is a big driver of both growth and returns. Are costs, capital and people allocated to their highest and best use, as measured by alignment to the strategy and ability to create shareholder value? In most large, complex global enterprises there are organizational realities that work against optimal resource allocation, such as fuzzy priorities, prior-year-budget inertia, “squeaky wheels” and gut-instinct planning.

The ability to align resources with their most valuable use year after year is a strategic capability that can convey a lasting advantage. But it is not easy. Value-based planning requires an objective understanding of where and how value is created in the enterprise (e.g.,products, markets, customers) and how resources are consumed by each of the units. Operational drivers of work (for example, speaker events, customer visits and scientific publications) should be connected to their true cost and tested for alignment to both strategy and value (realizing some activities cannot or should not be measured strictly by return on investment). Productivity should be analyzed through new lenses. For example, you could borrow the working-to-non-working spend ratio used in consumer products businesses to spark ongoing questions about how best to reallocate resources from lower-value to higher-value activities.

Traditional budgeting is not getting the job done, as seen in the sector’s lagging shareholder returns. Value-based planning offers CEOs and their teams a better capability for managing resources and ensuring all of the great work underway within the company translates into stronger results in both the product and capital markets.

Drive more returns from large IT and cloud investments

The six essential capabilities can only be delivered at scale with the power of the cloud . Companies should create the data, analytics and technology environments to power the modern pharma and life sciences enterprise and support new capabilities, such as leveraging cloud native services to extract key information from documents and cost-effectively managing large volumes of near-real-time data.

Cloud platforms are typically leveraged by pharmaceutical companies for either infrastructure (migration to cloud for compute power and storage) or for their innovative tools (services) such as natural language processing, speech-to-text conversion and machine learning.

Pharma companies are currently in various stages of migration to the cloud infrastructure, a transition that promises improved efficiencies, expanded service offerings and lower costs for operations. Moving legacy applications to the cloud could cut the cost, but in order to realize these savings, companies must make substantial investments in modernizing their IT infrastructure to take advantage of cloud-native architectures for their aging legacy systems.

A more rapid path to cloud benefits is acceleration of innovation through cloud-native services. For example, voice-to-text conversion services along with natural language processing services can detect safety events and product issues through call center operations, improving quality and reducing review effort and time. Machine learning can be used to automate product complaints and adverse events processing, reducing effort and duration. These examples are real and just a taste of the benefits to be had leveraging cloud-native services.

In a 2021 PwC survey of health industry leaders, 42% of respondents said that improving the experience for patients was the main goal behind investing in cloud technology. Among other patient-friendly offerings, cloud computing supports the planning of decentralized trials, identifying aspects of trial design that will or will not work at remote sites, helping to minimize burdens and boosting the likelihood of success. 

In the next five years we expect all of the top 20 pharma companies will adopt a comprehensive cloud strategy—encompassing migration to cloud infrastructure and cloud-native services to drive innovation.

Retain talent, prioritize culture

Over the past decade, PwC’s annual global culture survey has consistently shown that organizations with a distinct culture deliver higher growth and profitability than their industry peers. Culture can either accelerate or hinder the types of transformational changes that will define the drugmaker of the future. So there’s no getting around the role of culture in driving an uplift to pharmaceutical sector performance. 

While every company will make its own choices on the behaviors to emphasize in their unique culture, two themes will be important in the cultural underpinnings of tomorrow’s pharma company:

“Next-generation transformation at scale means every part of the enterprise will need to innovate.”

Trust comes first, owning ESG

The first is trust. Trust is a precious commodity, especially for a sector that asks individuals to participate in scientific experiments, share personal data and pay significant amounts of money for the promise of improved health. Organizational behaviors aligned to building trust with external stakeholders such as customers, partners and regulators are critical to living the industry’s purpose, and also to realizing the value that can be created in areas such as digital engagement, real-world evidence and decentralized trials. In particular, behaviors to build trust in underserved and underrepresented populations will be increasingly important to both improving societal outcomes and accessing new patients. 

Ensuring a culture of trust internally is similarly important. About half of the employees who participated in PwC’s 2021 Global Culture Survey reported not feeling listened to, seen or included at work. CEOs’ responses to the same survey revealed a much rosier outlook (figure 4). This disconnect tells us that managers might pay lip service to inclusion, but that employees aren’t feeling real effects from all the talk.

In an industry that relies on highly skilled knowledge workers, trust is essential for attracting and retaining talent, as well as bringing employees along in the transformation journey. Employees should believe that:

• The company is “doing the right thing”, living its purpose and owning its  environmental, social and governance (ESG) responsibilities to society.
• They can be their authentic selves at work.
• They have the autonomy to integrate work and life, including more empowerment and flexibility in how they carry out their responsibilities.

The leaders of the future should nurture a deep sense of belonging and create a bond of trust with their people . Being bold and bringing back the feeling of pride to the industry will be critical to not only maintaining current employees, but becoming the employer of choice.

Take risks to innovate

The second key cultural theme is innovation. Of course pharma is innovative, right? Concerns about taking risks and going outside of traditional comfort zones can put a damper on new ideas, especially in large-scale, established companies. Next-generation transformation at scale means every part of the enterprise will need to innovate.

Emphasizing behaviors related to reimagination, creative destruction, lifelong learning and new types of multidisciplinary teaming will help to counteract institutional forces that can squash innovation. No corporate center is powerful enough or all-knowing enough to drive change exclusively from the top. Along with significant business-led investments, innovation will come from digitally upskilled employees who are close to the work, committed to the mission and feel empowered to pursue new ideas.This type of citizen-led innovation has the potential to become a self-reinforcing system of innovation and value creation. Encouraging these behaviors is a must for drugmakers who expect to be on the cutting edge of both science and business.

A culture deeply rooted in trust and innovation will be an accelerator in the journey ahead. The leader’s work is to ensure these themes are infused into everyday organizational behaviors in a way that creates a lasting advantage for the company.

Think broadly about portfolio and transactions

Transactions have always been the fabric of the pharma industry, and deal activity will accelerate as companies look to inorganic activities to achieve their growth plans. Transactions for products as well as capabilities are on the agenda for all CEOs. With the continued scrutiny of the US Federal Trade Commission (FTC) on larger deals in pharma, most companies will need to drive a higher number of transactions to get the same outcomes.

While every company has structures and funding to maximize a variety of transaction types—from early stage investments to large-scale deals—given the competitive landscape, companies are going to need to revamp their business development process to drive more outcomes from their transactions.

So where are there opportunities for enhancement?

• Revisit and rethink
• Define a clear objective
• Reimagine the structure
• Commit to a long-term plan

Revisit and rethink your overall buy/build/partner strategy and decision trees.

In this dynamic and unstable business climate, having a clear yet agile approach to evaluating all of your options will be key. Companies should continue to push harder on asking themselves whether products and services need to be made in-house. Focusing on differentiated capabilities that will really be the critical value drivers for the business can provide the strategic path towards helping to clarify what is often muddied.

Define a clear objective of being the partner of choice and drive that mindset within the business.

Brand perception in the market will become more important as the business world moves forward. Internally competing views can lead to challenges, and so aligning company culture with the external market perception is critical. A real partner of choice can bring value in a manner that will make the decision obvious.

Reimagine the optimal structure to drive the external-facing market and opportunities.

Having a clear strategy on therapeutic areas and technologies at times can be the simpler part of the equation. Driving this systematically to the external markets in a holistic manner can be challenging. Due to lack of clarity on prioritization (internal versus external projects, or both) and conflicting agendas (investment thresholds, rewards and personal objectives), disconnects can occur. Teaming will be critical to make sure everyone is swimming in the same direction. Companies that will succeed in the long term will find a way to have the right combination of “not made here” and “made here.” Finding the balance of free-spirited innovators combined with disciplined investors will be the key to efficient returns.

Commit to a long-term plan to build an ecosystem, but one with the agility to move with the changing business world.

Setting up the right structure, focus and operations is likely not enough. Ensuring that the ecosystem can be agile to adjust to where the markets are moving and to business needs will be critical. Annual refreshes to the plan will be key, as well as good communication throughout and the ability to navigate in a fluid manner when necessary.  Ensuring the partnership enablers that are market-facing are aligned and working together in an efficient manner with the organization can drive the best outcomes.

Protect the enterprise

While creating capabilities to enhance competitive advantage and value for your business is critical, you must also ensure the business is protected from factors that can destroy value, such as cyberattacks, quality and compliance problems, legal matters and other ethical challenges. Driving technology-enabled digital change can be the most efficient path forward. Companies that have appropriately focused on the people and process side of the equation and are now addressing technology will be better equipped to manage threats.

Cybercrime continues to be a major focus of pharmaceutical company boards and executives as cyberattacks increase in sophistication. PwC’s 2022 Global Economic Crime and Fraud Survey (GECS) found that, among the 19 types of economic crime, cybercrime stood out as the most widespread—and most disruptive—event experienced over the past two years globally and domestically. Hackers are becoming increasingly sophisticated and are targeting large pharmaceutical companies, putting clinical discovery trial data, patient health information and other pharmaceutical trade secrets in jeopardy. For example, a 2020 cyberattack on the European Medicines Agency exposed data for a leading coronavirus vaccine.

We assess that the overall cyber risk to the pharmaceutical industry remains high due to the continued threat of ransomware. There has been a significant increase in ransomware attacks along with the solidification of ransomware-as-a-service groups as a preeminent threat. There is also a concurrent escalation of geopolitical tensions with a nation-state actor currently at odds with the US, which could significantly disrupt supply chain operations. Overall, nation-state actors continue to be a formidable threat, with many demonstrating interest in pharmaceutical development.

Given the broader labor changes, supply shortages and constantly changing supply chain strategies and operations, the focus on quality can be challenging to sustain, and the downside can have massive impacts on the business, including the potential inability to manufacture products.

Having high standards of ethics is not enough anymore. Given the challenging labor market and the need to drive better ESG results, ensuring that a company's core values and purpose are front and center and that employees feel the meaning and purpose of their work will be critical. Being bold and bringing back a feeling of pride to the industry will be critical not only to retaining current employees, but to becoming the employer of choice.

The winners in the industry will be able to optimize the human-technology interface by leveraging data across the enterprise to derive insights. For example, by using analytics to automate the batch release process, not just to mitigate risks, but to improve the manufacturing process and yields. Some companies are leveraging quality to improve clinical outcomes and accelerate the completion of clinical trials.

“Having high standards of ethics is not enough anymore.”

Tax strategy paves way for long-term success

Given the global nature of the industry and the impact of tax on many aspects of the business, we see taxes continuing to be an area of value retention and creation. With potentially changing supply chains from geopolitical instability, tax structuring and planning will be critical to prevent leakage.

Although pharmaceutical companies got a reprieve in the US this March with  changes to the corporate tax regime , global tax reform is still on the near horizon. Countries want their fair share of tax contributions from pharma companies and are applying pressure for more transparency and increasing the number of audits from government agencies. A two-pillar tax plan at the Organisation for Economic Co-operation and Development (OECD) is complete and is set to take effect in 2023. Maintaining a clear and defendable tax strategy that is agile given the environment will be key to long-term success. The winners will have tech-enabled, real-time scenario planning on tax built into broader investment decisions to ensure operational decisions have tax efficiencies embedded in the outcomes.

The path forward

The pharmaceutical industry mission is more important than ever—vaccines are helping the world climb out of the COVID-19 pandemic, innovative medicines are healing our loved ones and clinical trials are providing hope for so many.

It is a privilege to serve this mission. Demands to do it well are rising, with discerning investors looking to back the winners. In this environment, executives should be asking themselves:

• Do we have a vision and roadmap for change?
• Are we developing capabilities for the future that are truly differentiated? 
• Are we making fast enough progress at scale?
• How strong are our enterprise protections?
• Are we positioned to get the most out of M&A activities and new ecosystem partnerships?

If you answered no to any of these questions, the time to act is now. Executive teams should ensure they have a game plan for transformation while also protecting the enterprise, in order to create the value patients and shareholders expect.

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Glenn Hunzinger

US Pharma and Life Sciences Leader, PwC US

Laura Robinette

Global Engagement Partner, Health Industries Trust Solutions Leader, PwC US

Principal, PwC US

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Pharmaceutical Industry Essay Examples

Have no time? Stuck with ideas? We have collected a lot of interesting and useful Pharmaceutical industry essay topics for you in one place to help you quickly and accurately complete your college assignment! Check out our essay examples on Pharmaceutical industry and you will surely find something to your liking!

Motivating high performance in pharmaceutical sales teams is a growing issue in the pharmaceutical industry. The challenges facing the pharmaceutical industry in motivating sales teams are compounded by a variety of factors that many other industries do not face including: government regulation of sales practices, non-direct tracking of sales results, and the impact of managed […]

The pharmaceutical industry holds significant importance in modern economies, including India’s. Despite having humble beginnings in the country, its growth was prioritized by the government after gaining independence, along with that of manufacturing and steel industries. To safeguard the market from competition, smaller firms were given incentives while license-raj was imposed for an extended duration. […]

Threat of new entrants is relatively high. Companies forming alliances are potential rivals. Even if earlier such company was not considered to be a threat, after merging with some research and development company or forming alliance with another pharmaceutical company it would become a rival to Eli Lilly. The threat is however weakened by significant […]

Supply Chain Management at Nicholas Piramal India Case Study Noemie Bisserbie, ET Intelligence Group, Oct-Nov 2006 Supply chain management (SCM) is one of the leading cost saving and revenue enhancement strategies in use today. Pharmaceutical companies are increasingly using this technique to improve the entire functional process. SCM has also helped companies enhance their efficiency […]

EXTERAL ANALYSIS Macroenvironmental Analysis: Economic: Globalization of the pharmaceutical industry is an exciting opportunity to have research and development done at cheaper prices in other countries. However, this could be a double edged sword for companies because it is easy for other countries, such as India, to produce generic versions of the drug in bulk. […]

After 4 years hard working, 30 million dollars in acquiring Angiomax, further R&D, and initiate marketing test, in order to successfully market the first flagship drug Angiomax, the Medicines Company now have a couple of decisions to make in terms of initial pricing, segmentation, marketing strategies, etc (see exhibit 1). Decision I: At what initial […]

Executive summary The retailing arena in India has historically been dominated by traditional formats and only 2% of retail flows through organized sector vis a- vis USA where 85% retail sales come from Organized sector like Super markets. However, In recent years, a large number of business houses have invested in setting up stores/ malls […]

The success of Eli Lilly and Company’s top-tier alliance management strategies has resulted in benefits such as economies of scale, easy access to knowledge and markets, reduced costs and risks, leading to increased industry influence and innovation. The company’s focus on growth by innovation involves expanding internal capabilities through external partnerships. The Office of Alliance […]

The case consists of two major pharmaceutical companies that joint to collaborate their research and pharmaceutical technologies to start a joint venture in India. Both have valuable resources that have benefited both companies during the joint venture. Now both are questioning if there is still any value in maintaining the joint venture in India and […]

Merck & Company (Merck) was a pharmaceutical researcher and manufacturer while Medco Cost Containment Services, Inc. (Medco) was a pharmacy benefit manager (PBM). On November 18, 1993, Merck purchased Medco for $6.6 billion. Immediately after the merger, Medco operated as a subsidiary of Merck. In 1994, Merck-Medco was formed.2 Grant states that corporate strategy involves […]

When it comes to buying medication, there are different players involved. Patients may contribute a share of the expense, while hospitals, healthcare providers, and insurers can also provide coverage for some or all of the cost. The prices of drugs are impacted by these various parties. Insurance companies covered $77.6 billion for drugs in 2002, […]

Globally pharmaceuticals sector has a good market and at present this sector has a good impact on the economy of different countries in their Gaps. Proper nurturing, monitoring and development of this sector are important for the improvement of this growing sector (Groggier, 2006). Although the market is growing at certain level but the expected […]

In recent old ages investing in pharmaceutical research has more than doubled when compared to the old decennary but the figure of drugs approved has non reflected this increased investing in R & A ; D. Harmonizing to the pharmaceutical industry ‘s trade association, Pharmaceutical Research and Manufacturers of America ( PhRMA ) , reported […]

What are the prospects for the industry going forward? 1. Though the average level of profitability in the pharmaceutical industry has been declining over time (In 2002, the average ROIC in the industry was 21. 6%; by 2006, it had fallen to 14. 5%), historically, the pharmaceutical industry has been a profitable one. Because- Name […]

Weight loss supplements like diet pills have grown in popularity, but they also pose several questions: Are they safe? Do they deliver what they promise? Are the outcomes lasting? Robyn Melamed, in her piece “Health Controversy Surrounds Diet Pills,” aptly uses logos by providing hard facts, builds ethos with citations from reliable references, and engages […]

1.Was the country wrong? Why India? No, the country was not wrong. India had a large number of populations. There were 800 million people in India and about 200 million to 300 million of them were middle class. It implied that India had a huge market. Lilly could expand the potential opportunities and got profits […]

NPD Trends and Practices  The story of Eli Lilly’s open innovation journey—how one company developed a mature model Kevin Schwartz Bret Huff Kevin Schwartz, Director, PrTM, and Bret huff, VP of Chemical Products r&D, Eli Lilly and Company. Over the last decade, the giant pharmaceutical companies have moved away from their reliance on “blockbuster” drugs […]

 In this abstract, I will explain the specifics of my research and a detailed outline of my paper. Understanding the topic of medical fraud and off labeling is important, especially for consumers who participate in the use of prescription drugs. It is imperative to understand what your doctor is prescribing and knowing the specific uses […]

Johnson & Johnson, a prominent pharmaceutical company, has utilized different tactics to become the industry leader. Through mergers and acquisitions, they have positioned themselves as the foremost consumer healthcare company worldwide, as well as the dominant player in medical devices and diagnostics. As a holding company, Johnson & Johnson supervises a network of more than […]

There are many types of administrations all over the universe at the clip being. They were developed during the history of world as a necessity of endurance at the really first and recently as a start up of a net income. In the minute of speech production administrations are so extremely involved in the mundane […]

Impact of Shifting from Process Patent to Merchandise Patent on the Indian Pharma Industry This Seminar Paper explores the consequences of transitioning from process patent to merchandise patent in the Indian Pharma industry. It provides an overview of the current state of the Indian Pharma market, discusses patent laws and their relevance to the industry, […]

This study discusses a figure of cognition direction models and techniques which are more relevant for CellTech ‘s concern and operations. We begin with analysing the cognition environment in CellTech instance survey over assorted phases of the organisational alteration and function that cognition toward the KM theoretical accounts and models to understand the practical usage […]

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Practices in the Pharmaceutical Industry Essay

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Several controversies have been hitting the pharmaceutical industry in the last few years. The larger percentage of the controversies ranges from Medicare fraud to high-priced medications that are marketed by these firms. From the researcher’s point of view, big pharmaceutical corporations are putting huge profits on top of patients, spiraling shammed public relations campaigns and more. Before the recent changes, Medicare CEOs and these companies had been reported to have involved in frauds worth billions of shillings.

The indications are that the costs of the drugs are rising more rapidly than any other thing a patient can pay for. It has been found that medications are the most rapidly increasing part of the patient health care bill. It is argued that most of the patient’s expenditure on drugs has also risen.

The reason is that the quantities of drugs that are being prescribed have increased. Moreover, the practitioners are prescribing new ineffective drugs that are more expensive than the old effective less costly drugs.

More appalling is the fact that the prices of these consistently prescribed drugs are in a great deal jacked up, in most cases a number of times a year. The discounts as well as other incentives the medical practitioners such as the oncologists are receiving are used as a reason for hiking the prices. The government as well as other researchers has found that these benefits are unwarranted.

The most shocking thing about these drug price controversies is that the trusted health care providers have an ulterior motive behind these prescriptions. Researchers found out that there is a correlation between the methods through which cancer doctors are being paid to the choice of drugs they use in a particular treatment of cancer such as chemotherapy (Abelson par.9).

Once the oncologists have decided on the type of treatment, the mode of payment influences the type of drug prescription. As opposed to the expectations those who are fairly paid are likely to prescribe more expensive drugs.

Reports indicate that most of the pharmaceutical firms’ representatives provide hand-outs to influence medical practitioners to recommend the drugs they represent. Going by analytic reviews of the articles on the diabetes drugs Avandia, it is true that drug manufacturers are paying medical experts to make positive conclusions about their drugs safety and effectiveness. In fact, Avandia case is one out of many (Bakalar par.1).

There are several cases where the medical expert opinions are influenced by the financial handouts. It is agreed among the medical professionals that the interaction between the pharmaceutical companies and the health providers are not in the best interest of the patient. Moreover, most of the doctors agree that solicitation of drugs directly from these companies compromises the ethical standards and impractical, most can be influenced by free gifts and hand outs from these companies.

Some sections of the medical profession argue that their treatment decisions are for the best interest of the patients (Abelson par.7). The argument is that doctors only prescribe drugs that are clinically recommended. Moreover, quality health care must be more costly. However, in the case of cancer therapy, there is no any evidence that one type of chemotherapy drugs are working better than the others.

In this case, the medical practitioners have the wide array of manufacturers or the pharmaceutical agents to choose from. Therefore, regardless of their persistence that their therapy decisions are based on what they feel is best for the patient; medical practitioners are influenced by other factors such as payment policies as well as other financial influences coming from the drug manufacturers.

Works Cited

Abelson, Reed. Pay Method Said to Sway Drug Choices of Oncologists . 2006. Web.

Bakalar, Nicholas. Study Sees a Slant in Articles on Drug . 2010. Web.

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21 mind-blowing facts about the pharmaceutical industry

Posted: December 18, 2023 | Last updated: December 18, 2023

The Rx symbol on your drug prescription may have ancient origins

Have you ever wondered what “Rx” stands for on prescriptions? Many believe this everyday pharmaceutical symbol could trace its origins back to Ancient Rome!

Rx is the symbol for a medical prescription, but most sources state that it comes from the Latin word “recipe,” which means “take.”

Mass-produced drugs are relatively recent

Up until the 1950s, most prescription medications in America were made by pharmacists . According to History.com, “each medication was custom-made from raw ingredients to suit an individual patient’s needs” during this period.

It wasn’t until the mid-20th century that “pharmacists filled most prescriptions with mass-produced products from drug companies.” Despite this massive shift in how drugs are developed, the image of the traditional mortar and pestle remains a symbol of the pharmaceutical industry today.

Making one drug can cost the pharmaceutical industry at least one billion dollars

The phrase “time is money” might sound like a cliché, but it’s especially true in the pharmaceutical industry. Over the years, the cost of developing one new drug has been estimated to be almost US$3 billion.

However, research published in the Journal of the American Medical Association (JAMA) in 2020 contradicted this figure, finding that pharmaceutical companies in the U.S. spent around US$1 billion on each new drug between 2009 and 2018.

The pharmaceutical industry isn’t just composed of big names

Most of us are aware of large pharma companies, like Pfizer, Johnson & Johnson, Merck and AstraZeneca. However, the pharmaceutical industry doesn’t just consist of household names.

Smaller outsourcing firms, known as contract research organizations (CROs), can also be involved in the development of drugs. These organizations are hired by bigger pharma companies to provide biology or chemistry expertise, to recruit for clinical trials or to assist with marketing efforts.

Developing a successful drug may take over a decade

To make it to market, a potential drug must go through five stages : early drug discovery; preclinical research; investigational new drug application; clinical research; and regulatory review, approval and post-marketing safety surveillance.

On average, it can take around 12 years to research and develop a drug that can make it through each stage–a long and arduous journey.

However, AI and machine learning could help speed up the process, according to an article from the World Economic Forum. In addition, a 2021 paper in NPJ Vaccines highlighted ways governments can help vaccines be developed faster.

Thousands of chemicals need to be tested to make one drug

When creating a new drug, researchers may need to examine 10,000 compounds to find one that will work against a specific condition or disease. Researchers select these thousands of compounds by considering which ones may act on a “target,” which is a “gene or protein instrumental to the disease process that a new treatment could interfere with,” according to The Pharmaceutical Journal.

With further research and testing, the number of compounds is then narrowed down to 10 or 20. These promising compounds then undergo further testing.

Coca-Cola was once a drug and was invented by a pharmacist

Before becoming one of the most famous soft drinks in the world, Coca-Cola was used for a very different purpose. The beverage was first created by John Pemberton , a pharmacist from Atlanta who wanted a formula that didn’t contain opium to treat pain caused by wounds he suffered during the American Civil War.

Although Coca-Cola originally contained alcohol and cocaine , both ingredients were removed by the 1930s.

Several drugs have been discovered by accident

Drug development often involves years of painstaking work, but some of the most famous drugs in history were actually discovered by accident.

In 1928, Alexander Fleming (pictured) discovered penicillin by chance when a speck of dust contaminated one of his petri dishes when he was investigating influenza. Two other scientists, Howard Walter Florey and Ernst Boris Chain, conducted further research on penicillin, which went on to become the world’s first antibiotic .

Fleming, Florey and Chain earned the Nobel Prize in Physiology or Medicine in recognition of their achievement in 1945.

Other drugs discovered accidentally include the birth control pill and Viagra.

Cancer treatments are the most expensive for pharma to develop

According to analysis published in JAMA in 2020, oncology and immuno-modulatory drugs were the most expensive treatments to develop between 2009 and 2018, with a median of US$2.8 billion and a mean of US$4.5 billion.

The most expensive drug in the U.S. was approved in 2020

Zokinvy , which was approved by the FDA in November 2020, can cost up to US$86,040 per month. At present, it is the only drug that is approved to reduce the risk of death from Hutchinson-Gilford progeria syndrome , a rare genetic disease that causes premature aging.

Pharmacists have also created non-pharmaceutical products

Believe it or not, your go-to eye makeup might owe its existence to a young Chicago pharmacist! Mascara was invented in the 1910s by Thomas Williams, who made it for his sister Maybel using carbon dust and Vaseline. Maybel later conquered her future husband while wearing the mascara.

Thomas created a company called Maybelline in his sister’s honour (and the petroleum jelly), which became one of the biggest cosmetics companies in the world.

Large pharmaceutical companies emit more greenhouse gases than you might expect

The pharmaceutical industry isn’t the first sector we think of when we think of carbon emissions.

However, a study from McMaster University found that the total global emissions of the pharma sector amounted to about 52 megatonnes of CO2e in 2015 , more than the 46.4 megatonnes of CO2e generated by the automotive industry in the same year.

Pharmaceutical patents last for 20 years

Generally, pharmaceutical companies will patent any molecule that seems promising during the drug development process. A patent protects the intellectual property of a drug and prevents other companies from copying, manufacturing or formulating it for 20 years.

However, once the 20-year period has expired, generic versions of the drug can be marketed.

The U.S. is the biggest pharmaceutical market in the world

Despite the globalized nature of the pharmaceutical industry, almost half of its sales take place in the United States. In 2019, the U.S. generated around 45% of total revenues for the pharmaceutical industry worldwide. The second-largest market that year was China, with a sales share of 8.5%.

Some prescription drugs earn the pharmaceutical industry billions each year

Yes, the pharmaceutical industry has a bestsellers list! In 2020, the top-selling drug in the world was Humira , an injectable immunosuppressive for arthritis, psoriasis, Crohn’s disease and other conditions . Made by AbbVie, the drug hit US$19.83 billion in global sales that year.

mRNA vaccines are new to us, but not to the pharmaceutical industry

The first mRNA vaccines to be approved for any disease were the COVID-19 vaccines produced by Moderna and Pfizer BioNTech. However, mRNA vaccines have been studied by researchers for decades , particularly in relation to how they could be used against illnesses like flu, rabies and Zika.

As mRNA vaccines can be made in labs with readily available materials, experts believe developing them may be easier and faster than traditional kinds of vaccines. According to the CDC, future mRNA technology may even allow one vaccine to provide protection for multiple diseases!

Most countries don’t permit pharmaceutical companies to create direct-to-consumer ads

If you live in the United States, you probably see commercials for prescription drugs pretty regularly. However, most countries ban pharmaceutical companies from advertising directly to consumers —only the U.S. and New Zealand allow them to do so.

This market restriction doesn’t stop pharmaceutical companies from spending billions of U.S. dollars on ads, however. In 2020, total pharma advertising reached US$6.58 billion, the bulk of which was spent on TV ads. But companies are also increasingly advertising on social media, with Pfizer topping other pharma giants by spending US$55 million that year.

Pharma is one of America’s least popular industries

In 2020, the pharmaceutical industry was ranked as the second-least popular industry in a Gallup survey of adults in the United States.

In 2019, it had an even worse reputation in Gallup’s ranking of U.S. industries and institutions. At the time, it was one of the few industries that Americans disliked more than the oil and gas industry and the U.S. federal government.

Pharmaceutical companies have paid billions of U.S. dollars in fines

If the pharmaceutical industry is worried about its reputation, it certainly doesn’t help that it has been forced to pay exorbitant fines in numerous civil and criminal cases.

The biggest payout so far occurred in 2012, when British pharma giant GlaxoSmithKline was fined US$3 billion in criminal and civil fines for misconduct, which included bribing doctors and marketing some of its drugs for uses that were not approved by the U.S. Food and Drug Administration (FDA).

Some Americans skip doses of their medication because of drug prices

In a 2020 poll of 1,000 U.S. adults, 44% of respondents said that they did not buy at least one necessary prescription medication in the past year to save money.

The same poll found that around 20% said they pay over US$100 for their monthly prescriptions, while 40% said their insurer refused to cover the cost of a prescription at least once in the past year.

Pharmaceutical companies have been penalized for astronomical price increases

Some pharmaceutical companies have also been punished for decisions to massively increase the prices of some of their drugs. In July 2021, Auden Mckenzie and Actavis UK, now known as Accord-UK, were given a fine of £260 million (around US$360 million) after they increased the price of their life-saving hydrocortisone tablets by 10,000%.

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The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery

This essay about the significance of CNPR certification in pharmaceutical sales and marketing. It explores how this certification, endorsed by the National Association of Pharmaceutical Sales Representatives (NAPSRx), validates essential skills and knowledge required in the industry. CNPR certification enhances professional credibility, offers a structured curriculum covering key topics, and emphasizes lifelong learning and ethical conduct. Ultimately, it serves as a transformative pathway for professionals seeking to distinguish themselves and excel in the dynamic landscape of pharmaceutical commerce.

How it works

In today’s labyrinthine pharmaceutical landscape, aspiring professionals grapple with the complexities of carving out a niche in a fiercely competitive industry. The quest for relevance and distinction amidst evolving technologies and stringent regulatory frameworks necessitates a strategic approach to career advancement. Enter the Certified National Pharmaceutical Representative (CNPR) certification, a beacon of validation and proficiency, illuminating the path toward professional ascendancy in pharmaceutical sales and marketing.

Crafted by the esteemed custodians of pharmaceutical expertise, the National Association of Pharmaceutical Sales Representatives (NAPSRx), the CNPR certification stands as a testament to an individual’s unwavering commitment to mastering the intricacies of pharmaceutical sales.

Far beyond a mere credential, it embodies a journey of enlightenment and empowerment, equipping aspirants with the requisite skills and acumen to navigate the dynamic terrain of pharmaceutical commerce.

The allure of CNPR certification lies not only in its validation by industry stalwarts but also in its resonance with discerning employers. In a milieu where competence is currency, possessing CNPR certification confers a distinct advantage, signaling to employers a candidate’s dedication to excellence and continuous learning. The imprimatur of NAPSRx serves as a seal of approval, endowing CNPR-certified professionals with a cachet that transcends the bounds of conventional credentials.

Central to the CNPR certification’s appeal is its comprehensive curriculum, meticulously curated to encompass the multifaceted facets of pharmaceutical sales and marketing. From mastering the nuances of medical terminology to deciphering the labyrinthine landscape of regulatory compliance, the certification program offers a holistic immersion into the realm of pharmaceutical commerce. Armed with a formidable arsenal of knowledge and skills, CNPR-certified professionals emerge as adept navigators of the intricate web of pharmaceutical intricacies.

Yet, beyond its pedagogical prowess, CNPR certification embodies a philosophy of lifelong learning and professional evolution. Mandating the completion of continuing education credits, it underscores a commitment to staying abreast of industry trends and innovations. In an era defined by perpetual flux, this commitment to perpetual self-improvement serves as a bulwark against obsolescence, ensuring that CNPR-certified professionals remain at the vanguard of pharmaceutical excellence.

In the crucible of pharmaceutical sales, success is predicated not merely on aptitude but also on integrity and ethical fortitude. Herein lies the distinguishing hallmark of CNPR certification – its unwavering emphasis on ethical conduct and professional integrity. By instilling a code of ethics deeply entrenched in honesty, transparency, and integrity, the certification program fosters a cadre of ethical stewards who serve as custodians of pharmaceutical integrity.

In summation, the CNPR certification stands as a lodestar guiding aspirants toward mastery and distinction in the dynamic realm of pharmaceutical sales and marketing. Through its rigorous curriculum, industry recognition, and commitment to ethical excellence, it offers a transformative pathway to professional ascendancy. Aspiring professionals who embark on this odyssey emerge not merely as certified representatives but as torchbearers illuminating the path toward pharmaceutical excellence.

Cite this page

The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery. (2024, May 28). Retrieved from https://papersowl.com/examples/the-distinctive-edge-cnpr-certification-in-pharmaceutical-sales-mastery/

"The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery." PapersOwl.com , 28 May 2024, https://papersowl.com/examples/the-distinctive-edge-cnpr-certification-in-pharmaceutical-sales-mastery/

PapersOwl.com. (2024). The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery . [Online]. Available at: https://papersowl.com/examples/the-distinctive-edge-cnpr-certification-in-pharmaceutical-sales-mastery/ [Accessed: 1 Jun. 2024]

"The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery." PapersOwl.com, May 28, 2024. Accessed June 1, 2024. https://papersowl.com/examples/the-distinctive-edge-cnpr-certification-in-pharmaceutical-sales-mastery/

"The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery," PapersOwl.com , 28-May-2024. [Online]. Available: https://papersowl.com/examples/the-distinctive-edge-cnpr-certification-in-pharmaceutical-sales-mastery/. [Accessed: 1-Jun-2024]

PapersOwl.com. (2024). The Distinctive Edge: CNPR Certification in Pharmaceutical Sales Mastery . [Online]. Available at: https://papersowl.com/examples/the-distinctive-edge-cnpr-certification-in-pharmaceutical-sales-mastery/ [Accessed: 1-Jun-2024]

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Pharmaceutical Executive cited Darius Lakdawalla in its coverage of the Financial Times US Pharma and Biotech Summit 2024. “It'll take probably five or 10 years to play out on the negotiation side,” Darius said, “which is really more price setting than it is negotiation. There is a lot of question about what CMS is going to do to set prices. And they've been pretty vague about how they're going to do that in order to preserve flexibility and discretion. In fact, I think it's clear that the guidance that they issued for this year's price saying they're not going to hold themselves to in future years. So even if you look at if you look at what happens in the fall, you're not going to get a lot of insight into what's going to happen in the following years. So that's part of the uncertainty. Then there's also a market level uncertainty, which is because of the inflation boundaries that, in some ways, probably pose the most pivotal risk for the industry. The question is, how is that going to be handled? So now there's asymmetric risk when you set your launch prices. If you set your launch price too low, there's not really a way out.” The PROVEN Platform is where Darius and the team have been working out how the value of medicine is being understood and misunderstood through these changes. Please let us know if you would like to see PROVEN yourself. Read the full article here: https://lnkd.in/gh67kFbu

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