Understanding the financial ecosystem surrounding the development of medicines

To enable governments to make more informed policy decisions that optimise value for their citizens, while at the same time appropriately reimbursing innovators, researchers explored the evidence base on how medicines R&D is financed and how this may evolve in the future.

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What is the issue?

Governments recognise the importance of the biopharmaceutical industry to address major population health needs as well as to bring economic growth and employment opportunities. Understanding the financing of medicines R&D can help support innovation as well as efforts to ensure affordable and equitable access to the benefits of healthcare innovation by healthcare systems and populations globally.

While there are numerous publications on the phases of medicines R&D and on overall levels of investment, detailed analysis of financial value creation and decision-making around investments are scarce. Understanding how R&D is financed across the value chain and what influences investment decisions and financial transactions can enable governments to make more informed policy decisions that optimise value for their citizens.

How did we help?

RAND Europe collaborated with Strategies in Regulated Markets (SiRM) and LEK Consulting on a study which aimed to establish a more detailed and nuanced understanding of how medicines R&D is financed, where investments and transactions occur and between whom and how value is created. This international project was commissioned by the Dutch Ministry of Health, Welfare and Sport.

The research team conducted a review of the literature, analysis of proprietary databases providing financial information, interviews and a future-focused scenario workshop with a range of stakeholders (e.g. public, private and not-for-profit investors, medicines developers, academics, regulators and policymakers). The outputs from this project can be useful for future scientific research and contribute to an objective basis for further dialogue on the functioning of the financial ecosystem surrounding the development of medicines.

Key Findings

The financing of medicines R&D plays an important role in determining whether the medicines that patients need are developed. Approximately USD300 billion is invested into medicines R&D annually.
The public and not for profit sectors account for more than a quarter of this investment and provide essential scientific advances that enable more downstream medicines R&D by the private sector.
Big biopharma represents almost two thirds of total R&D investment and venture capital approximately a tenth.
Average out-of-pocket R&D costs to develop one drug are USD 280-380 million to the company executing R&D and USD 1.2-1.7 billion to the overall system, taking into account the cost of failure and out-of-pocket costs. Adding the cost of capital, this figure increases to USD 2.4-3.2 billion to the system. Expected returns on investment are a key driver of private sector decisions about investing in medicines R&D. Therefore, societal willingness to pay for new drugs considerably influences the supply of novel drugs and their distribution across therapeutic areas.
Although expected returns play a large role in investment decisions, various other factors also influence the supply of novel drugs, which areas are invested in, timeframes, R&D costs and how R&D is conducted.
The pace and nature of scientific advances is important for feeding R&D pipelines and for the private sector's willingness to invest in higher-risk therapeutic areas.
Medicines R&D is highly collaborative process, and the ability to partner across geographics and between public and private sectors also matters for decisions about R&D investments and for how R&D unfolds.
The ability to leverage data and digital-technology advances can impact on the nature, pace and costs of R&D. These advances can create opportunities for designing smarter and potentially less costly clinical trials, and to more efficiently identify novel drug targets or candidate compounds.
Regulatory developments can also impact R&D costs and investor appetite, for example by supporting smarter clinical trial designs. Efforts to tackle fragmented regulation can also affect a region's attractiveness to investors.
There is a need for innovative pricing and payment approaches and evaluating how they work. Pricing and affordability are influenced by how unique a product is in terms of healthcare improvement value, the unmet need it responds to and competition in the market. Therefore, actions which impact R&D costs, efficiency and effectiveness won't necessarily fix challenges to affordability.
There are various areas of action for decisionmakers to consider in efforts to optimise the financial ecosystem of medicines R&D (as discussed in Annex C of our report, available as a PDF via tweedekamer.nl). Efforts to make the system more sustainable will need to navigate the inherent tensions between affordability of medicines and the need to reward innovation and encourage investment, within a system with clearly articulated priorities and demand signalling.