Improving How Medicines R&D Is Financed Could Support Innovation and Benefits for Patients


(The RAND Blog)

Holograms of capsule; charts and DNA helix on scientific backdrop, photo by ClaudioVentrella/Getty Images

Photo by ClaudioVentrella/Getty Images

by Sarah Parkinson and Sonja Marjanovic

August 25, 2022

Tackling chronic and infectious diseases depends to a large extent on the ability to develop innovative and affordable medicines that are available to patients in need. The ability to achieve this hinges partly on how the financial ecosystem governing medicines research and development (R&D) functions.

The factors influencing medicines R&D financing are complex. Money matters, of course, but so do issues of supply—those influencing the attractiveness of investing in a particular area of R&D—and demand—those influencing the markets for pharmaceuticals.

A new study, conducted by RAND Europe, SiRM, and LEK Consulting for the Dutch Ministry of Health, Welfare, and Sport, examined the diverse types of interventions that can help optimise the financing of medicines R&D on both the supply and demand side. Here, we reflect on some of the findings.

Supply-side policy interventions that influence risk, costs, durations, and expected returns on R&D can impact on areas of investment.

Approximately US$300 billion a year is invested in medicines R&D globally, with the LEK analysis showing that nearly two-thirds of investment comes from big biopharma, around a quarter from the public sector and not-for-profit, and approximately a tenth from venture capital. Although public and not-for-profit investment is essential in feeding scientific advances for R&D further down the line, decisions made by the private sector play a major role in determining which medicines are developed.

Private-sector decisionmaking is often related to the ability to generate returns and value for shareholders. However, RAND Europe analysis highlights other factors that play a role in decisionmaking. For example, whether an R&D area is attractive for private investors will in part be determined by the pace and nature of scientific discovery, which often builds on publicly-funded research and support for clinical trials infrastructure.

Decisions made by the private sector play a major role in determining which medicines are developed.

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Medicines R&D is a highly collaborative process, and the ability to partner across countries and between public and private sectors can also influence how R&D is conducted. Supply-side incentives can make it easier to pursue collaboration and help manage increasing global competition for investment and research talent. Examples include investments in building bioscience clusters and tax incentives to attract companies to a region where collaboration prospects can be maximised.

Medicines R&D is also an expensive process. LEK analysis suggests average out-of-pocket R&D costs to develop a drug are US$280–380 million for the company executing R&D and US$1.2–1.7 billion for the global financial ecosystem. Taking into account the cost of failure and cost of capital, this figure increases to a cost of US$2.4–3.2 billion to the system. Policy interventions that can influence R&D costs and failure rates can therefore also impact the attractiveness of investment opportunities.

For example, the ability to use diverse types of data and digital technology can impact the nature, pace, and costs of R&D. Using data and digital advances create opportunities for designing smarter and potentially less-costly clinical trials and more efficiently identifying drug targets and novel candidate drug compounds. Policy interventions that support safe and secure data use and reuse, as well as appropriate safeguards and public trust, are key in ensuring that data and digital technology can be used to their full potential.

Regulatory developments can also affect the costs and timescales of R&D and investor appetite. Regulatory innovation can support smarter clinical trial designs at scale. Rapid or expedited reviews or reduced regulatory fees can also act as “nudge” incentives for innovators. Efforts to tackle fragmented regulation in some regions of the world, for example around approvals for medicines and drug-repurposing, data use, and intellectual property, can also influence the attractiveness of a region to investors.

While supply-side factors loom large over discussions around the financial ecosystem for medicines R&D, demand-side factors such as pricing and reimbursement models are also essential to ensuring medicines reach patients.

If investors are not confident that payers will be willing to pay sufficiently high prices for medicines, and at sufficient sales volumes for them to realise a return, they may decide to not invest in particular R&D areas. RAND Europe analysis flags that policymakers and payers can influence R&D pipelines by clearly signalling areas of demand and prioritising areas where they are willing to pay for innovation. Prioritisation efforts need to focus on health improvements over time, chronic and orphan therapeutic areas, diverse patient populations, prevention-oriented care, and benefits that can be realised through drug repurposing.

Significant global effort is looking at innovative pricing and reimbursement models to help tackle affordability challenges. Examples include outcome-based payments, price-volume agreements, conditional reimbursement, deferred payments, advanced market commitments, and subscription-based models in which companies receive monthly fees to do R&D. These monthly fees are in return for a guaranteed supply of a product if successfully developed at a specific volume and price.

However, there is a lack of robust evidence on the effectiveness of these models and a need to learn from the evaluation of existing efforts to arrive at solutions that are sustainable and scalable. There may also be scope to use more-diverse types of health care data in value assessments, which can inform pre- and post-market health technology assessments and pricing discussions. Considerations related to pull incentives, such as market exclusivity and IP protection, also play a role in overall reimbursement.

Policymakers will need to tackle challenges within medicines R&D from multiple angles to avoid reducing barriers in one area at the expense of exacerbating challenges in another.

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For patient benefit, a balance needs to be struck between policy interventions that support affordability and reward innovation on the demand side with supply-side interventions that encourage investment and efficient R&D.

Policymakers will need to tackle challenges within medicines R&D from multiple angles (supply and demand, financial and nonfinancial) to avoid reducing barriers in one area at the expense of exacerbating challenges in another.

More joined-up policy approaches between research and innovation, industry, and health could help support efforts to implement incentives in a way that better aligns industrial competitiveness with aims for improving population health and access to affordable new medicines. Tensions between the priorities of these policy domains undoubtedly exist, but there are opportunities for more-coordinated decisionmaking.

Sarah Parkinson is a senior analyst in health and well-being and Sonja Marjanovic is director of health care innovation, industry, and policy at RAND Europe. For the full study which informed this blog and was conducted by partners at SiRM, LEK, and RAND Europe, see: “The Financial Ecosystem of Pharmaceutical R&D: An Evidence Base to Inform Further Dialogue”.

Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.