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Research and Development (R&D) Definition, Types, and Importance

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What Is Research and Development (R&D)?

The term research and development (R&D) is used to describe a series of activities that companies undertake to innovate and introduce new products and services. R&D is often the first stage in the development process. Companies require knowledge, talent, and investment in order to further their R&D needs and goals. The purpose of research and development is generally to take new products and services to market and add to the company's bottom line .

Key Takeaways

  • Research and development represents the activities companies undertake to innovate and introduce new products and services or to improve their existing offerings.
  • R&D allows a company to stay ahead of its competition by catering to new wants or needs in the market.
  • Companies in different sectors and industries conduct R&D—pharmaceuticals, semiconductors, and technology companies generally spend the most.
  • R&D is often a broad approach to exploratory advancement, while applied research is more geared towards researching a more narrow scope.
  • The accounting for treatment for R&D costs can materially impact a company's income statement and balance sheet.

Understanding Research and Development (R&D)

The concept of research and development is widely linked to innovation both in the corporate and government sectors. R&D allows a company to stay ahead of its competition. Without an R&D program, a company may not survive on its own and may have to rely on other ways to innovate such as engaging in mergers and acquisitions (M&A) or partnerships. Through R&D, companies can design new products and improve their existing offerings.

R&D is distinct from most operational activities performed by a corporation. The research and/or development is typically not performed with the expectation of immediate profit. Instead, it is expected to contribute to the long-term profitability of a company. R&D may often allow companies to secure intellectual property, including patents , copyrights, and trademarks as discoveries are made and products created.

Companies that set up and employ departments dedicated entirely to R&D commit substantial capital to the effort. They must estimate the risk-adjusted return on their R&D expenditures, which inevitably involves risk of capital. That's because there is no immediate payoff, and the return on investment (ROI) is uncertain. As more money is invested in R&D, the level of capital risk increases. Other companies may choose to outsource their R&D for a variety of reasons including size and cost.

Companies across all sectors and industries undergo R&D activities. Corporations experience growth through these improvements and the development of new goods and services. Pharmaceuticals, semiconductors , and software/technology companies tend to spend the most on R&D. In Europe, R&D is known as research and technical or technological development.

Many small and mid-sized businesses may choose to outsource their R&D efforts because they don't have the right staff in-house to meet their needs.

Types of R&D

There are several different types of R&D that exist in the corporate world and within government. The type used depends entirely on the entity undertaking it and the results can differ.

Basic Research

There are business incubators and accelerators, where corporations invest in startups and provide funding assistance and guidance to entrepreneurs in the hope that innovations will result that they can use to their benefit.

M&As and partnerships are also forms of R&D as companies join forces to take advantage of other companies' institutional knowledge and talent.

Applied Research

One R&D model is a department staffed primarily by engineers who develop new products —a task that typically involves extensive research. There is no specific goal or application in mind with this model. Instead, the research is done for the sake of research.

Development Research

This model involves a department composed of industrial scientists or researchers, all of who are tasked with applied research in technical, scientific, or industrial fields. This model facilitates the development of future products or the improvement of current products and/or operating procedures.

$42.7 billion of research and development costs later, Amazon was granted 2,244 new patents in 2020. Their patents included advancements in artificial intelligence, machine learning, and cloud computing.

Advantages and Disadvantages of R&D

There are several key benefits to research and development. It facilitates innovation, allowing companies to improve existing products and services or by letting them develop new ones to bring to the market.

Because R&D also is a key component of innovation, it requires a greater degree of skill from employees who take part. This allows companies to expand their talent pool, which often comes with special skill sets.

The advantages go beyond corporations. Consumers stand to benefit from R&D because it gives them better, high-quality products and services as well as a wider range of options. Corporations can, therefore, rely on consumers to remain loyal to their brands. It also helps drive productivity and economic growth.

Disadvantages

One of the major drawbacks to R&D is the cost. First, there is the financial expense as it requires a significant investment of cash upfront. This can include setting up a separate R&D department, hiring talent, and product and service testing, among others.

Innovation doesn't happen overnight so there is also a time factor to consider. This means that it takes a lot of time to bring products and services to market from conception to production to delivery.

Because it does take time to go from concept to product, companies stand the risk of being at the mercy of changing market trends . So what they thought may be a great seller at one time may reach the market too late and not fly off the shelves once it's ready.

Facilitates innovation

Improved or new products and services

Expands knowledge and talent pool

Increased consumer choice and brand loyalty

Economic driver

Financial investment

Shifting market trends

R&D Accounting

R&D may be beneficial to a company's bottom line, but it is considered an expense . After all, companies spend substantial amounts on research and trying to develop new products and services. As such, these expenses are often reported for accounting purposes on the income statement and do not carry long-term value.

There are certain situations where R&D costs are capitalized and reported on the balance sheet. Some examples include but are not limited to:

  • Materials, fixed assets, or other assets have alternative future uses with an estimable value and useful life.
  • Software that can be converted or applied elsewhere in the company to have a useful life beyond a specific single R&D project.
  • Indirect costs or overhead expenses allocated between projects.
  • R&D purchased from a third party that is accompanied by intangible value. That intangible asset may be recorded as a separate balance sheet asset.

R&D Considerations

Before taking on the task of research and development, it's important for companies and governments to consider some of the key factors associated with it. Some of the most notable considerations are:

  • Objectives and Outcome: One of the most important factors to consider is the intended goals of the R&D project. Is it to innovate and fill a need for certain products that aren't being sold? Or is it to make improvements on existing ones? Whatever the reason, it's always important to note that there should be some flexibility as things can change over time.
  • Timing: R&D requires a lot of time. This involves reviewing the market to see where there may be a lack of certain products and services or finding ways to improve on those that are already on the shelves.
  • Cost: R&D costs a great deal of money, especially when it comes to the upfront costs. And there may be higher costs associated with the conception and production of new products rather than updating existing ones.
  • Risks: As with any venture, R&D does come with risks. R&D doesn't come with any guarantees, no matter the time and money that goes into it. This means that companies and governments may sacrifice their ROI if the end product isn't successful.

Research and Development vs. Applied Research

Basic research is aimed at a fuller, more complete understanding of the fundamental aspects of a concept or phenomenon. This understanding is generally the first step in R&D. These activities provide a basis of information without directed applications toward products, policies, or operational processes .

Applied research entails the activities used to gain knowledge with a specific goal in mind. The activities may be to determine and develop new products, policies, or operational processes. While basic research is time-consuming, applied research is painstaking and more costly because of its detailed and complex nature.

Who Spends the Most on R&D?

Companies spend billions of dollars on R&D to produce the newest, most sought-after products. According to public company filings, these companies incurred the highest research and development spending in 2020:

  • Amazon: $42.7 billion
  • Alphabet.: $27.6 billion
  • Huawei: $22.0 billion
  • Microsoft: $19.3 billion
  • Apple: $18.8 billion
  • Samsung: $18.8 billion
  • Facebook: $18.5 billion

What Types of Activities Can Be Found in Research and Development?

Research and development activities focus on the innovation of new products or services in a company. Among the primary purposes of R&D activities is for a company to remain competitive as it produces products that advance and elevate its current product line. Since R&D typically operates on a longer-term horizon, its activities are not anticipated to generate immediate returns. However, in time, R&D projects may lead to patents, trademarks, or breakthrough discoveries with lasting benefits to the company. 

What Is an Example of Research and Development?

Alphabet allocated over $16 billion annually to R&D in 2018. Under its R&D arm X, the moonshot factory, it has developed Waymo self-driving cars. Meanwhile, Amazon has spent even more on R&D projects, with key developments in cloud computing and its cashier-less store Amazon Go. At the same time, R&D can take the approach of a merger & acquisition, where a company will leverage the talent and intel of another company to create a competitive edge. The same can be said with company investment in accelerators and incubators, whose developments it could later leverage.

Why Is Research and Development Important?

Given the rapid rate of technological advancement, R&D is important for companies to stay competitive. Specifically, R&D allows companies to create products that are difficult for their competitors to replicate. Meanwhile, R&D efforts can lead to improved productivity that helps increase margins, further creating an edge in outpacing competitors. From a broader perspective, R&D can allow a company to stay ahead of the curve, anticipating customer demands or trends.

There are many things companies can do in order to advance in their industries and the overall market. Research and development is just one way they can set themselves apart from their competition. It opens up the potential for innovation and increasing sales. But it does come with some drawbacks—the most obvious being the financial cost and the time it takes to innovate.

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Building an R&D strategy for modern times

The global investment in research and development (R&D) is staggering. In 2019 alone, organizations around the world spent $2.3 trillion on R&D—the equivalent of roughly 2 percent of global GDP—about half of which came from industry and the remainder from governments and academic institutions. What’s more, that annual investment has been growing at approximately 4 percent per year over the past decade. 1 2.3 trillion on purchasing-power-parity basis; 2019 global R&D funding forecast , Supplement, R&D Magazine, March 2019, rdworldonline.com.

While the pharmaceutical sector garners much attention due to its high R&D spending as a percentage of revenues, a comparison based on industry profits shows that several industries, ranging from high tech to automotive to consumer, are putting more than 20 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) back into innovation research (Exhibit 1).

What do organizations expect to get in return? At the core, they hope their R&D investments yield the critical technology from which they can develop new products, services, and business models. But for R&D to deliver genuine value, its role must be woven centrally into the organization’s mission. R&D should help to both deliver and shape corporate strategy, so that it develops differentiated offerings for the company’s priority markets and reveals strategic options, highlighting promising ways to reposition the business through new platforms and disruptive breakthroughs.

Yet many enterprises lack an R&D strategy that has the necessary clarity, agility, and conviction to realize the organization’s aspirations. Instead of serving as the company’s innovation engine, R&D ends up isolated from corporate priorities, disconnected from market developments, and out of sync with the speed of business. Amid a growing gap in performance  between those that innovate successfully and those that do not, companies wishing to get ahead and stay ahead of competitors need a robust R&D strategy that makes the most of their innovation investments. Building such a strategy takes three steps: understanding the challenges that often work as barriers to R&D success, choosing the right ingredients for your strategy, and then pressure testing it before enacting it.

Overcoming the barriers to successful R&D

The first step to building an R&D strategy is to understand the four main challenges that modern R&D organizations face:

Innovation cycles are accelerating. The growing reliance on software and the availability of simulation and automation technologies have caused the cost of experimentation to plummet while raising R&D throughput. The pace of corporate innovation is further spurred by the increasing emergence of broadly applicable technologies, such as digital and biotech, from outside the walls of leading industry players.

But incumbent corporations are only one part of the equation. The trillion dollars a year that companies spend on R&D is matched by the public sector. Well-funded start-ups, meanwhile, are developing and rapidly scaling innovations that often threaten to upset established business models or steer industry growth into new areas. Add increasing investor scrutiny of research spending, and the result is rising pressure on R&D leaders to quickly show results for their efforts.

R&D lacks connection to the customer. The R&D group tends to be isolated from the rest of the organization. The complexity of its activities and its specialized lexicon make it difficult for others to understand what the R&D function really does. That sense of working inside a “black box” often exists even within the R&D organization. During a meeting of one large company’s R&D leaders, a significant portion of the discussion focused on simply getting everyone up to speed on what the various divisions were doing, let alone connecting those efforts to the company’s broader goals.

Given the challenges R&D faces in collaborating with other functions, going one step further and connecting with customers becomes all the more difficult. While many organizations pay lip service to customer-centric development, their R&D groups rarely get the opportunity to test products directly with end users. This frequently results in market-back product development that relies on a game of telephone via many intermediaries about what the customers want and need.

Projects have few accountability metrics. R&D groups in most sectors lack effective mechanisms to measure and communicate progress; the pharmaceutical industry, with its standard pipeline for new therapeutics that provides well-understood metrics of progress and valuation implications, is the exception, not the rule. When failure is explained away as experimentation and success is described in terms of patents, rather than profits, corporate leaders find it hard to quantify R&D’s contribution.

Yet proven metrics exist  to effectively measure progress and outcomes. A common challenge we observe at R&D organizations, ranging from automotive to chemical companies, is how to value the contribution of a single component that is a building block of multiple products. One specialty-chemicals company faced this challenge in determining the value of an ingredient it used in its complex formulations. It created categorizations to help develop initial business cases and enable long-term tracking. This allowed pragmatic investment decisions at the start of projects and helped determine the value created after their completion.

Even with outcomes clearly measured, the often-lengthy period between initial investment and finished product can obscure the R&D organization’s performance. Yet, this too can be effectively managed by tracking the overall value and development progress of the pipeline so that the organization can react and, potentially, promptly reorient both the portfolio and individual projects within it.

Incremental projects get priority. Our research indicates that incremental projects account for more than half of an average company’s R&D investment, even though bold bets and aggressive reallocation  of the innovation portfolio deliver higher rates of success. Organizations tend to favor “safe” projects with near-term returns—such as those emerging out of customer requests—that in many cases do little more than maintain existing market share. One consumer-goods company, for example, divided the R&D budget among its business units, whose leaders then used the money to meet their short-term targets rather than the company’s longer-term differentiation and growth objectives.

Focusing innovation solely around the core business may enable a company to coast for a while—until the industry suddenly passes it by. A mindset that views risk as something to be avoided rather than managed can be unwittingly reinforced by how the business case is measured. Transformational projects at one company faced a higher internal-rate-of-return hurdle than incremental R&D, even after the probability of success had been factored into their valuation, reducing their chances of securing funding and tilting the pipeline toward initiatives close to the core.

As organizations mature, innovation-driven growth becomes increasingly important, as their traditional means of organic growth, such as geographic expansion and entry into untapped market segments, diminish. To succeed, they need to develop R&D strategies equipped for the modern era that treat R&D not as a cost center but as the growth engine it can become.

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Choosing the ingredients of a winning r&d strategy.

Given R&D’s role as the innovation driver that advances the corporate agenda, its guiding strategy needs to link board-level priorities with the technologies that are the organization’s focus (Exhibit 2). The R&D strategy must provide clarity and commitment to three central elements: what we want to deliver, what we need to deliver it, and how we will deliver it.

What we want to deliver. To understand what a company wants to and can deliver, the R&D, commercial, and corporate-strategy functions need to collaborate closely, with commercial and corporate-strategy teams anchoring the R&D team on the company’s priorities and the R&D team revealing what is possible. The R&D strategy and the corporate strategy must be in sync while answering questions such as the following: At the highest level, what are the company’s goals? Which of these will require R&D in order to be realized? In short, what is the R&D organization’s purpose?

Bringing the two strategies into alignment is not as easy as it may seem. In some companies, what passes for corporate strategy is merely a five-year business plan. In others, the corporate strategy is detailed but covers only three to five years—too short a time horizon to guide R&D, especially in industries such as pharma or semiconductors where the product-development cycle is much longer than that. To get this first step right, corporate-strategy leaders should actively engage with R&D. That means providing clarity where it is lacking and incorporating R&D feedback that may illuminate opportunities, such as new technologies that unlock growth adjacencies for the company or enable completely new business models.

Secondly, the R&D and commercial functions need to align on core battlegrounds and solutions. Chief technology officers want to be close to and shape the market by delivering innovative solutions that define new levels of customer expectations. Aligning R&D strategy provides a powerful forum for identifying those opportunities by forcing conversations about customer needs and possible solutions that, in many companies, occur only rarely. Just as with the corporate strategy alignment, the commercial and R&D teams need to clearly articulate their aspirations by asking questions such as the following: Which markets will make or break us as a company? What does a winning product or service look like for customers?

When defining these essential battlegrounds, companies should not feel bound by conventional market definitions based on product groups, geographies, or customer segments. One agricultural player instead defined its markets by the challenges customers faced that its solutions could address. For example, drought resistance was a key battleground no matter where in the world it occurred. That framing clarified the R&D–commercial strategy link: if an R&D project could improve drought resistance, it was aligned to the strategy.

The dialogue between the R&D, commercial, and strategy functions cannot stop once the R&D strategy is set. Over time, leaders of all three groups should reexamine the strategic direction and continuously refine target product profiles as customer needs and the competitive landscape evolve.

What we need to deliver it. This part of the R&D strategy determines what capabilities and technologies the R&D organization must have in place to bring the desired solutions to market. The distinction between the two is subtle but important. Simply put, R&D capabilities are the technical abilities to discover, develop, or scale marketable solutions. Capabilities are unlocked by a combination of technologies and assets, and focus on the outcomes. Technologies, however, focus on the inputs—for example, CRISPR is a technology that enables the genome-editing capability.

This delineation protects against the common pitfall of the R&D organization fixating on components of a capability instead of the capability itself—potentially missing the fact that the capability itself has evolved. Consider the dawn of the digital age: in many engineering fields, a historical reliance on talent (human number crunchers) was suddenly replaced by the need for assets (computers). Those who focused on hiring the fastest mathematicians were soon overtaken by rivals who recognized the capability provided by emerging technologies.

The simplest way to identify the needed capabilities is to go through the development processes of priority solutions step by step—what will it take to produce a new product or feature? Being exhaustive is not the point; the goal is to identify high-priority capabilities, not to log standard operating procedures.

Prioritizing capabilities is a critical but often contentious aspect of developing an R&D strategy. For some capabilities, being good is sufficient. For others, being best in class is vital because it enables a faster path to market or the development of a better product than those of competitors. Take computer-aided design (CAD), which is used to design and prototype engineering components in numerous industries, such as aerospace or automotive. While companies in those sectors need that capability, it is unlikely that being the best at it will deliver a meaningful advantage. Furthermore, organizations should strive to anticipate which capabilities will be most important in the future, not what has mattered most to the business historically.

Once capabilities are prioritized, the R&D organization needs to define what being “good” and “the best” at them will mean over the course of the strategy. The bar rises rapidly in many fields. Between 2009 and 2019, the cost of sequencing a genome dropped 150-fold, for example. 2 Kris A. Wetterstrand, “DNA sequencing costs: Data,” NHGRI Genome Sequencing Program (GSP), August 25, 2020, genome.gov. Next, the organization needs to determine how to develop, acquire, or access the needed capabilities. The decision of whether to look internally or externally is crucial. An automatic “we can build it better” mindset diminishes the benefits of specialization and dilutes focus. Additionally, the bias to building everything in-house can cut off or delay access to the best the world has to offer—something that may be essential for high-priority capabilities. At Procter & Gamble, it famously took the clearly articulated aspiration of former CEO A. G. Lafley to break the company’s focus on in-house R&D and set targets for sourcing innovation externally. As R&D organizations increasingly source capabilities externally, finding partners and collaborating with them effectively is becoming a critical capability in its own right.

How we will do it. The choices of operating model and organizational design will ultimately determine how well the R&D strategy is executed. During the strategy’s development, however, the focus should be on enablers that represent cross-cutting skills and ways of working. A strategy for attracting, developing, and retaining talent is one common example.

Another is digital enablement, which today touches nearly every aspect of what the R&D function does. Artificial intelligence can be used at the discovery phase to identify emerging market needs or new uses of existing technology. Automation and advanced analytics approaches to experimentation can enable high throughput screening at a small scale and distinguish the signal from the noise. Digital (“in silico”) simulations are particularly valuable when physical experiments are expensive or dangerous. Collaboration tools are addressing the connectivity challenges common among geographically dispersed project teams. They have become indispensable in bringing together existing collaborators, but the next horizon is to generate the serendipity of chance encounters that are the hallmark of so many innovations.

Testing your R&D strategy

Developing a strategy for the R&D organization entails some unique challenges that other functions do not face. For one, scientists and engineers have to weigh considerations beyond their core expertise, such as customer, market, and economic factors. Stakeholders outside R&D labs, meanwhile, need to understand complex technologies and development processes and think along much longer time horizons than those to which they are accustomed.

For an R&D strategy to be robust and comprehensive enough to serve as a blueprint to guide the organization, it needs to involve stakeholders both inside and outside the R&D group, from leading scientists to chief commercial officers. What’s more, its definition of capabilities, technologies, talent, and assets should become progressively more granular as the strategy is brought to life at deeper levels of the R&D organization. So how can an organization tell if its new strategy passes muster? In our experience, McKinsey’s ten timeless tests of strategy  apply just as well to R&D strategy as to corporate and business-unit strategies. The following two tests are the most important in the R&D context:

  • Does the organization’s strategy tap the true source of advantage? Too often, R&D organizations conflate technical necessity (what is needed to develop a solution) with strategic importance (distinctive capabilities that allow an organization to develop a meaningfully better solution than those of their competitors). It is also vital for organizations to regularly review their answers to this question, as capabilities that once provided differentiation can become commoditized and no longer serve as sources of advantage.
  • Does the organization’s strategy balance commitment-rich choices with flexibility and learning? R&D strategies may have relatively long time horizons but that does not mean they should be insulated from changes in the outside world and never revisited. Companies should establish technical, regulatory, or other milestones that serve as clear decision points for shifting resources to or away from certain research areas. Such milestones can also help mark progress and gauge whether strategy execution is on track.

Additionally, the R&D strategy should be simply and clearly communicated to other functions within the company and to external stakeholders. To boost its clarity, organizations might try this exercise: distill the strategy into a set of fill-in-the-blank components that define, first, how the world will evolve and how the company plans to refocus accordingly (for example, industry trends that may lead the organization to pursue new target markets or segments); next, the choices the R&D function will make in order to support the company’s new focus (which capabilities will be prioritized and which de-emphasized); and finally, how the R&D team will execute the strategy in terms of concrete actions and milestones. If a company cannot fit the exercise on a single page, it has not sufficiently synthesized the strategy—as the famed physicist Richard Feynman observed, the ultimate test of comprehension is the ability to convey something to others in a simple manner.

Cascading the strategy down through the R&D organization will further reinforce its impact. For example, asking managers to communicate the strategy to their subordinates will deepen their own understanding. A useful corollary is that those hearing the strategy for the first time are introduced to it by their immediate supervisors rather than more distant R&D leaders. One R&D group demonstrated the broad benefits of this communication model: involving employees in developing and communicating the R&D strategy helped it double its Organizational Health Index  strategic clarity score, which measures one of the four “power practices”  highly connected to organizational performance.

R&D represents a massive innovation investment, but as companies confront globalized competition, rapidly changing customer needs, and technological shifts coming from an ever-wider range of fields, they are struggling to deliver on R&D’s full potential. A clearly articulated R&D strategy that supports and informs the corporate strategy is necessary to maximize the innovation investment and long-term company value.

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Research and development enable small businesses to launch new products, carve out market niches, and compete effectively against bigger companies. Technology, manufacturing and health care are among the industry sectors that benefit from research and development investments. The purpose of research and development reports is to provide funding organizations with regular updates on ongoing research projects and plans for future research.

Research and development reports are prepared by organizations or departments engaged in investigating new approaches to solving existing problems, such as start-up technology companies and research department of large corporations . The consumers of these reports include government funding agencies and venture capital organizations, which may use the information to determine future funding decisions. Companies prepare these reports to meet regular reporting requirements or to generate interest among the scientific and investment communities.

The main sections of a research and development report should list the project objectives, describe the progress since the last report, identify risk factors that could affect the project schedule, list areas of future research, and outline changes in key project personnel. Reports usually come with a cover letter, table of contents and appendices. Companies that wish to publicize the content can issue a press release highlighting the main points. Some might post the reports online, as well as archived versions of related senior management audio and video presentations.

Preparation

Research and development reports should first list the original project objectives. For example, the objectives of a start-up biotechnology company's research project might be to determine the effects of a novel compound on lab animals and its possible efficacy in humans. The next few sections should describe the baseline, milestones, and the progress of the research projects up to the date of the report. Baseline is the state of the technology at the start of the project, or since the last report. Milestones refer to specific tasks and objectives that must be completed by certain dates. Continuing with the example of a biotechnology company, the milestones may include the completion of specific laboratory tests and the publication of results in peer-reviewed journals. The next section should describe the progress since the last report, outline cost and schedule variances, and indicate the management steps necessary to bring the project back on track, if applicable.

Considerations

Research and development reports and presentations should not contain promotional material or marketing hype. Fact-based documents do not require flashy packaging or spin because facts stand on their own merits. Companies with global research and development operations or partnerships should integrate the information from all of its research projects into one concise report instead of submitting several reports.

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Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.

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R&D

Executive Summary

Key takeaways:

  • Academic institutions in the United States have long been responsible for performing about half of all U.S. basic research and about 10% to 15% of total U.S. research and development (R&D). In 2019, they performed $83.7 billion in R&D. Nearly two of every three academic R&D dollars supported basic research. Applied research and experimental development received smaller but growing shares.
  • The federal government was the largest funder of academic R&D, providing more than half of total funds in 2019. Six departments or agencies provided more than 90% of federal support for academic R&D. Institutional funds have grown as a percentage of total funding: in 2019, they constituted more than a quarter of university R&D, up from less than a fifth in 2010.
  • The very high research activity doctoral universities performed three-quarters of all academic R&D. These institutions also enrolled or employed more than 80% of science and engineering (S&E) doctoral students and postdocs.
  • In 2018, out of 44 countries, the United States ranked highest in overall higher education expenditure on R&D but ranked 23rd in higher education R&D expenditure as a percentage of gross domestic product (GDP).
  • Two fields—biological and biomedical sciences and engineering—have primarily driven the continual increases in academic S&E research space. These two fields accounted for 60% of total research space growth from 2007 to 2019. Research equipment expenditures have fluctuated over the last 15 years but stand at levels similar to those a decade ago.
  • Salaries, wages, and fringe benefits made up the largest component of academic R&D direct costs (57% in 2019). Investments in the education and training of students and postdocs made by the federal government, academic institutions, and other funders related closely to their investments in academic R&D.

Academic institutions in the United States have a dual mission. They educate and train the next generation of citizens and workers and, at the same time, perform a significant portion of all U.S. basic research. The outputs of academic R&D (e.g., S&E professionals, scientific publications) differ from outputs produced by R&D in other sectors, like the business sector. Thus, academic institutions fill a unique niche in the U.S. S&E enterprise.

Most academic R&D is funded by a few sources. The federal government has long been the largest funder and provided more than half (53%, or around $45 billion) of total funds in 2019. Six agencies—the Department of Health and Human Services (HHS), the Department of Defense (DOD), the National Science Foundation (NSF), the Department of Energy (DOE), the National Aeronautics and Space Administration (NASA), and the Department of Agriculture (USDA)—provided more than 90% of federal support for academic R&D.

The increasing share of academic R&D funds from institutions themselves reflects both increased institutional contributions to R&D and improved measurement of those contributions over time. Additional academic R&D funders included nonprofit organizations, businesses (industry), and state and local governments.

U.S. academic R&D performance was concentrated in a small percentage of higher education institutions. Doctoral universities with very high research activity, as defined by the Carnegie classification, performed more than three-quarters of academic R&D. The concentration of R&D in a few institutions was greater among private universities than public universities.

Institutions with medical schools also performed a large amount of academic R&D, a function of the large proportion of academic R&D devoted to life sciences. The life sciences have long accounted for more than half of total academic R&D, with engineering second at around 16% in 2019. The federal government provided the majority of funding for academic R&D in all broad S&E fields except social sciences. The six main departments or agencies that sponsored academic R&D funded portfolios consistent with their missions. In almost all broad S&E fields, institutions themselves contributed half or more of nonfederal academic R&D.

When comparing nations, the United States in 2018 ranked highest of 44 countries in overall higher education expenditure on R&D. However, it ranked 23rd out of 44 in higher education expenditure as a percentage of GDP. The relative contributions of different sectors to higher education R&D differed greatly between countries.

Physical infrastructure underlies the ability of academic institutions to perform R&D. Academic institutions added 39 million net assignable square feet (NASF) of S&E research space between 2007 and 2019, led by the addition of 14 million NASF in biological and biomedical sciences. Research space in all S&E fields increased over the past decade, except for space devoted to computer and information science research, which declined slightly. Despite some fluctuations, 2019 research equipment expenditures at academic institutions, when compared in constant dollars, were at their highest levels in the past six years. In 2014, the federal share of funding for research equipment fell below 50% for the first time since data were initially collected in 1981 and remained below ever since.

Graduate students and postdocs are essential to U.S. academic R&D. Sources of financial support for S&E graduate students depended on level of study. Master’s students largely supported themselves, whereas doctoral students were primarily funded by academic institutions and the federal government. Teaching assistantships (TAs) and fellowships were mainly institutionally funded, whereas nearly half of research assistantships (RAs) were funded through federal academic research grants. Patterns of support varied by field, type of institution attended, and students’ demographic characteristics.

The federal government funded around half of S&E postdocs, mainly through research grants. Institutions themselves funded around a quarter of postdocs. S&E postdoctoral appointments were concentrated in the biological and biomedical sciences and health sciences, with earth and physical sciences and engineering making up most of the remainder.

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Mode 2 knowledge production (Mode 2) ; Mode 2 knowledge production ; Research and development and innovations (R&D&I)

Research and development (R&D) is a broad category describing the entity of basic research, applied research, and development activities. In general research and development means systematic activities in order to increase knowledge and use of this knowledge when developing new products, processes, or services. Nowadays innovation activities are strongly tight into the concept of research and development. In the broadest meaning, research and development consists of every activity from the basic research to the (successful) marketing of a product or (effective) launching of a new process (R&D&I).

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Home » Research Report – Example, Writing Guide and Types

Research Report – Example, Writing Guide and Types

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Research Report

Research Report

Definition:

Research Report is a written document that presents the results of a research project or study, including the research question, methodology, results, and conclusions, in a clear and objective manner.

The purpose of a research report is to communicate the findings of the research to the intended audience, which could be other researchers, stakeholders, or the general public.

Components of Research Report

Components of Research Report are as follows:

Introduction

The introduction sets the stage for the research report and provides a brief overview of the research question or problem being investigated. It should include a clear statement of the purpose of the study and its significance or relevance to the field of research. It may also provide background information or a literature review to help contextualize the research.

Literature Review

The literature review provides a critical analysis and synthesis of the existing research and scholarship relevant to the research question or problem. It should identify the gaps, inconsistencies, and contradictions in the literature and show how the current study addresses these issues. The literature review also establishes the theoretical framework or conceptual model that guides the research.

Methodology

The methodology section describes the research design, methods, and procedures used to collect and analyze data. It should include information on the sample or participants, data collection instruments, data collection procedures, and data analysis techniques. The methodology should be clear and detailed enough to allow other researchers to replicate the study.

The results section presents the findings of the study in a clear and objective manner. It should provide a detailed description of the data and statistics used to answer the research question or test the hypothesis. Tables, graphs, and figures may be included to help visualize the data and illustrate the key findings.

The discussion section interprets the results of the study and explains their significance or relevance to the research question or problem. It should also compare the current findings with those of previous studies and identify the implications for future research or practice. The discussion should be based on the results presented in the previous section and should avoid speculation or unfounded conclusions.

The conclusion summarizes the key findings of the study and restates the main argument or thesis presented in the introduction. It should also provide a brief overview of the contributions of the study to the field of research and the implications for practice or policy.

The references section lists all the sources cited in the research report, following a specific citation style, such as APA or MLA.

The appendices section includes any additional material, such as data tables, figures, or instruments used in the study, that could not be included in the main text due to space limitations.

Types of Research Report

Types of Research Report are as follows:

Thesis is a type of research report. A thesis is a long-form research document that presents the findings and conclusions of an original research study conducted by a student as part of a graduate or postgraduate program. It is typically written by a student pursuing a higher degree, such as a Master’s or Doctoral degree, although it can also be written by researchers or scholars in other fields.

Research Paper

Research paper is a type of research report. A research paper is a document that presents the results of a research study or investigation. Research papers can be written in a variety of fields, including science, social science, humanities, and business. They typically follow a standard format that includes an introduction, literature review, methodology, results, discussion, and conclusion sections.

Technical Report

A technical report is a detailed report that provides information about a specific technical or scientific problem or project. Technical reports are often used in engineering, science, and other technical fields to document research and development work.

Progress Report

A progress report provides an update on the progress of a research project or program over a specific period of time. Progress reports are typically used to communicate the status of a project to stakeholders, funders, or project managers.

Feasibility Report

A feasibility report assesses the feasibility of a proposed project or plan, providing an analysis of the potential risks, benefits, and costs associated with the project. Feasibility reports are often used in business, engineering, and other fields to determine the viability of a project before it is undertaken.

Field Report

A field report documents observations and findings from fieldwork, which is research conducted in the natural environment or setting. Field reports are often used in anthropology, ecology, and other social and natural sciences.

Experimental Report

An experimental report documents the results of a scientific experiment, including the hypothesis, methods, results, and conclusions. Experimental reports are often used in biology, chemistry, and other sciences to communicate the results of laboratory experiments.

Case Study Report

A case study report provides an in-depth analysis of a specific case or situation, often used in psychology, social work, and other fields to document and understand complex cases or phenomena.

Literature Review Report

A literature review report synthesizes and summarizes existing research on a specific topic, providing an overview of the current state of knowledge on the subject. Literature review reports are often used in social sciences, education, and other fields to identify gaps in the literature and guide future research.

Research Report Example

Following is a Research Report Example sample for Students:

Title: The Impact of Social Media on Academic Performance among High School Students

This study aims to investigate the relationship between social media use and academic performance among high school students. The study utilized a quantitative research design, which involved a survey questionnaire administered to a sample of 200 high school students. The findings indicate that there is a negative correlation between social media use and academic performance, suggesting that excessive social media use can lead to poor academic performance among high school students. The results of this study have important implications for educators, parents, and policymakers, as they highlight the need for strategies that can help students balance their social media use and academic responsibilities.

Introduction:

Social media has become an integral part of the lives of high school students. With the widespread use of social media platforms such as Facebook, Twitter, Instagram, and Snapchat, students can connect with friends, share photos and videos, and engage in discussions on a range of topics. While social media offers many benefits, concerns have been raised about its impact on academic performance. Many studies have found a negative correlation between social media use and academic performance among high school students (Kirschner & Karpinski, 2010; Paul, Baker, & Cochran, 2012).

Given the growing importance of social media in the lives of high school students, it is important to investigate its impact on academic performance. This study aims to address this gap by examining the relationship between social media use and academic performance among high school students.

Methodology:

The study utilized a quantitative research design, which involved a survey questionnaire administered to a sample of 200 high school students. The questionnaire was developed based on previous studies and was designed to measure the frequency and duration of social media use, as well as academic performance.

The participants were selected using a convenience sampling technique, and the survey questionnaire was distributed in the classroom during regular school hours. The data collected were analyzed using descriptive statistics and correlation analysis.

The findings indicate that the majority of high school students use social media platforms on a daily basis, with Facebook being the most popular platform. The results also show a negative correlation between social media use and academic performance, suggesting that excessive social media use can lead to poor academic performance among high school students.

Discussion:

The results of this study have important implications for educators, parents, and policymakers. The negative correlation between social media use and academic performance suggests that strategies should be put in place to help students balance their social media use and academic responsibilities. For example, educators could incorporate social media into their teaching strategies to engage students and enhance learning. Parents could limit their children’s social media use and encourage them to prioritize their academic responsibilities. Policymakers could develop guidelines and policies to regulate social media use among high school students.

Conclusion:

In conclusion, this study provides evidence of the negative impact of social media on academic performance among high school students. The findings highlight the need for strategies that can help students balance their social media use and academic responsibilities. Further research is needed to explore the specific mechanisms by which social media use affects academic performance and to develop effective strategies for addressing this issue.

Limitations:

One limitation of this study is the use of convenience sampling, which limits the generalizability of the findings to other populations. Future studies should use random sampling techniques to increase the representativeness of the sample. Another limitation is the use of self-reported measures, which may be subject to social desirability bias. Future studies could use objective measures of social media use and academic performance, such as tracking software and school records.

Implications:

The findings of this study have important implications for educators, parents, and policymakers. Educators could incorporate social media into their teaching strategies to engage students and enhance learning. For example, teachers could use social media platforms to share relevant educational resources and facilitate online discussions. Parents could limit their children’s social media use and encourage them to prioritize their academic responsibilities. They could also engage in open communication with their children to understand their social media use and its impact on their academic performance. Policymakers could develop guidelines and policies to regulate social media use among high school students. For example, schools could implement social media policies that restrict access during class time and encourage responsible use.

References:

  • Kirschner, P. A., & Karpinski, A. C. (2010). Facebook® and academic performance. Computers in Human Behavior, 26(6), 1237-1245.
  • Paul, J. A., Baker, H. M., & Cochran, J. D. (2012). Effect of online social networking on student academic performance. Journal of the Research Center for Educational Technology, 8(1), 1-19.
  • Pantic, I. (2014). Online social networking and mental health. Cyberpsychology, Behavior, and Social Networking, 17(10), 652-657.
  • Rosen, L. D., Carrier, L. M., & Cheever, N. A. (2013). Facebook and texting made me do it: Media-induced task-switching while studying. Computers in Human Behavior, 29(3), 948-958.

Note*: Above mention, Example is just a sample for the students’ guide. Do not directly copy and paste as your College or University assignment. Kindly do some research and Write your own.

Applications of Research Report

Research reports have many applications, including:

  • Communicating research findings: The primary application of a research report is to communicate the results of a study to other researchers, stakeholders, or the general public. The report serves as a way to share new knowledge, insights, and discoveries with others in the field.
  • Informing policy and practice : Research reports can inform policy and practice by providing evidence-based recommendations for decision-makers. For example, a research report on the effectiveness of a new drug could inform regulatory agencies in their decision-making process.
  • Supporting further research: Research reports can provide a foundation for further research in a particular area. Other researchers may use the findings and methodology of a report to develop new research questions or to build on existing research.
  • Evaluating programs and interventions : Research reports can be used to evaluate the effectiveness of programs and interventions in achieving their intended outcomes. For example, a research report on a new educational program could provide evidence of its impact on student performance.
  • Demonstrating impact : Research reports can be used to demonstrate the impact of research funding or to evaluate the success of research projects. By presenting the findings and outcomes of a study, research reports can show the value of research to funders and stakeholders.
  • Enhancing professional development : Research reports can be used to enhance professional development by providing a source of information and learning for researchers and practitioners in a particular field. For example, a research report on a new teaching methodology could provide insights and ideas for educators to incorporate into their own practice.

How to write Research Report

Here are some steps you can follow to write a research report:

  • Identify the research question: The first step in writing a research report is to identify your research question. This will help you focus your research and organize your findings.
  • Conduct research : Once you have identified your research question, you will need to conduct research to gather relevant data and information. This can involve conducting experiments, reviewing literature, or analyzing data.
  • Organize your findings: Once you have gathered all of your data, you will need to organize your findings in a way that is clear and understandable. This can involve creating tables, graphs, or charts to illustrate your results.
  • Write the report: Once you have organized your findings, you can begin writing the report. Start with an introduction that provides background information and explains the purpose of your research. Next, provide a detailed description of your research methods and findings. Finally, summarize your results and draw conclusions based on your findings.
  • Proofread and edit: After you have written your report, be sure to proofread and edit it carefully. Check for grammar and spelling errors, and make sure that your report is well-organized and easy to read.
  • Include a reference list: Be sure to include a list of references that you used in your research. This will give credit to your sources and allow readers to further explore the topic if they choose.
  • Format your report: Finally, format your report according to the guidelines provided by your instructor or organization. This may include formatting requirements for headings, margins, fonts, and spacing.

Purpose of Research Report

The purpose of a research report is to communicate the results of a research study to a specific audience, such as peers in the same field, stakeholders, or the general public. The report provides a detailed description of the research methods, findings, and conclusions.

Some common purposes of a research report include:

  • Sharing knowledge: A research report allows researchers to share their findings and knowledge with others in their field. This helps to advance the field and improve the understanding of a particular topic.
  • Identifying trends: A research report can identify trends and patterns in data, which can help guide future research and inform decision-making.
  • Addressing problems: A research report can provide insights into problems or issues and suggest solutions or recommendations for addressing them.
  • Evaluating programs or interventions : A research report can evaluate the effectiveness of programs or interventions, which can inform decision-making about whether to continue, modify, or discontinue them.
  • Meeting regulatory requirements: In some fields, research reports are required to meet regulatory requirements, such as in the case of drug trials or environmental impact studies.

When to Write Research Report

A research report should be written after completing the research study. This includes collecting data, analyzing the results, and drawing conclusions based on the findings. Once the research is complete, the report should be written in a timely manner while the information is still fresh in the researcher’s mind.

In academic settings, research reports are often required as part of coursework or as part of a thesis or dissertation. In this case, the report should be written according to the guidelines provided by the instructor or institution.

In other settings, such as in industry or government, research reports may be required to inform decision-making or to comply with regulatory requirements. In these cases, the report should be written as soon as possible after the research is completed in order to inform decision-making in a timely manner.

Overall, the timing of when to write a research report depends on the purpose of the research, the expectations of the audience, and any regulatory requirements that need to be met. However, it is important to complete the report in a timely manner while the information is still fresh in the researcher’s mind.

Characteristics of Research Report

There are several characteristics of a research report that distinguish it from other types of writing. These characteristics include:

  • Objective: A research report should be written in an objective and unbiased manner. It should present the facts and findings of the research study without any personal opinions or biases.
  • Systematic: A research report should be written in a systematic manner. It should follow a clear and logical structure, and the information should be presented in a way that is easy to understand and follow.
  • Detailed: A research report should be detailed and comprehensive. It should provide a thorough description of the research methods, results, and conclusions.
  • Accurate : A research report should be accurate and based on sound research methods. The findings and conclusions should be supported by data and evidence.
  • Organized: A research report should be well-organized. It should include headings and subheadings to help the reader navigate the report and understand the main points.
  • Clear and concise: A research report should be written in clear and concise language. The information should be presented in a way that is easy to understand, and unnecessary jargon should be avoided.
  • Citations and references: A research report should include citations and references to support the findings and conclusions. This helps to give credit to other researchers and to provide readers with the opportunity to further explore the topic.

Advantages of Research Report

Research reports have several advantages, including:

  • Communicating research findings: Research reports allow researchers to communicate their findings to a wider audience, including other researchers, stakeholders, and the general public. This helps to disseminate knowledge and advance the understanding of a particular topic.
  • Providing evidence for decision-making : Research reports can provide evidence to inform decision-making, such as in the case of policy-making, program planning, or product development. The findings and conclusions can help guide decisions and improve outcomes.
  • Supporting further research: Research reports can provide a foundation for further research on a particular topic. Other researchers can build on the findings and conclusions of the report, which can lead to further discoveries and advancements in the field.
  • Demonstrating expertise: Research reports can demonstrate the expertise of the researchers and their ability to conduct rigorous and high-quality research. This can be important for securing funding, promotions, and other professional opportunities.
  • Meeting regulatory requirements: In some fields, research reports are required to meet regulatory requirements, such as in the case of drug trials or environmental impact studies. Producing a high-quality research report can help ensure compliance with these requirements.

Limitations of Research Report

Despite their advantages, research reports also have some limitations, including:

  • Time-consuming: Conducting research and writing a report can be a time-consuming process, particularly for large-scale studies. This can limit the frequency and speed of producing research reports.
  • Expensive: Conducting research and producing a report can be expensive, particularly for studies that require specialized equipment, personnel, or data. This can limit the scope and feasibility of some research studies.
  • Limited generalizability: Research studies often focus on a specific population or context, which can limit the generalizability of the findings to other populations or contexts.
  • Potential bias : Researchers may have biases or conflicts of interest that can influence the findings and conclusions of the research study. Additionally, participants may also have biases or may not be representative of the larger population, which can limit the validity and reliability of the findings.
  • Accessibility: Research reports may be written in technical or academic language, which can limit their accessibility to a wider audience. Additionally, some research may be behind paywalls or require specialized access, which can limit the ability of others to read and use the findings.

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Start » strategy, what is research and development .

Research and development provides businesses with the information they need to successfully bring their products or services to market.

 A work team is standing before a large paper diagram taped to a glass wall. Attached to the diagram are various Post-It notes.

In any industry, even the most revolutionary products and services are rarely fully conceptualized on day 1. Most often, success in the market stems from extensive, effective research and development (R&D). This is especially true for small businesses, which contribute a significantly higher percentage of sales to R&D work than larger businesses.

Here’s everything you need to know about R&D and why it’s well worth the investment.

What is research and development?

R&D refers to the various activities businesses conduct to prepare new products or services for the marketplace. Businesses of all sizes and sectors can partake in R&D activities, though the amount of investment can vary. For example, technology and health care companies tend to have higher R&D expenses , as do enterprises with larger budgets.

Typically the first step in the development process, R&D is not expected to yield immediate profits. Rather, it focuses on innovation and setting up a company for long-term profitability. During this process, businesses may secure patents, copyrights, and other intellectual property associated with their products and services.

At larger companies, R&D activities are often handled in-house by a designated R&D department. However, some smaller companies may opt to outsource R&D to a third-party research firm, a specialist, or an educational institution.

[Read more: 7 Ways to Find Small Business Grant Opportunities ]

Types of research and development

R&D activities typically fall into one of three main categories:

  • Basic research: Basic research, sometimes called fundamental research, aims to provide theoretical insight into specific problems or phenomena. For example, a company looking to develop a new toy for children might conduct basic research into child play development.
  • Applied research: This type of research is practical and conducted with a specific goal in mind, most often discovering new solutions for existing problems. The children’s toy company from the previous example might conduct applied research into developing a toy that facilitates play development in a new or improved way.
  • Development research: In development research, researchers focus exclusively on applied research to develop new products and improve existing ones. For example, a team of development researchers may test the hypothetical company’s new toy or implement feedback obtained from customers.

Small businesses have limited resources. They don’t have that endless budget that the Fortune 500 company has, which means the small business will have to get creative to conduct worthwhile research and development.

Becca Hoeft, CEO and Founder of Morris Hoeft Group

Why invest in research and development?

While R&D can require a significant investment, it also yields several advantages. Below are four specific areas where your business can benefit by conducting R&D.

New products

R&D supports businesses in developing new offerings or improving existing ones based on market demand. By conducting research and applying your findings to your final product, companies are more likely to develop something that meets customers’ needs and performs well in the marketplace.

R&D can help businesses understand their place in the market as well as identify inefficiencies in their workflows. Insights from R&D activities can illuminate ways to improve operations as well as where to most effectively allocate resources, increasing overall efficiency.

Cost reductions

While developing a well-researched product or service that performs well is likely to maximize profit, R&D aimed at improving internal processes and technologies can reduce the cost of bringing products and services to market.

Businesses that invest in R&D may be eligible for specific tax incentives. For one, the federal R&D tax credit offers a dollar-for-dollar reduction in tax liability for businesses that partake in various research-based activities. Eligible companies can apply for this credit by submitting Form 6765 with their business taxes.

[Read more: How to Seek Funding for Your Invention ]

Overcoming the challenges of small business R&D

According to Becca Hoeft, CEO and Founder of Morris Hoeft Group , small businesses may face numerous challenges related to R&D that their larger counterparts might not experience.

“Small businesses have limited resources,” said Hoeft. “They don’t have that endless budget that the Fortune 500 company has, which means the small business will have to get creative to conduct worthwhile research and development.”

While R&D funding is available through various government grants, university programs, and research institutions, Hoeft noted that it may take some time and strategic planning to obtain it. She recommended that small business owners start talking publicly about what kind of research they are doing and what they need to conduct it.

“Don’t hide under a rock and expect money to magically appear,” Hoeft told CO—. “Get on a stage at a relevant conference [or] start a blog series about your idea.”

Keep in mind that once you start sharing your ideas and what you want to research, “it’s out there in the universe,” said Hoeft. Therefore, protecting your intellectual property before you begin and during the research process is extremely important.

“Ensure your trademarks, patents, and copyrights are in place to protect you and your small business,” Hoeft added.

[Read more: How to Qualify for and Claim the R&D Tax Credit ]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here .

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Research and development is generally referred to as R&D. It refers to innovative activities performed by companies or governments to create new products or services, or to improve existing services or products. Research and development allow small firms to announce new goods, carve out niches on the market, and remain competitive against larger businesses. The intent of a research and development report is to provide regular updates to funding organizations on ongoing research projects and future research plans.

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  • Research and Development (R&D) | Overview & Process

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Companies often spend resources on certain investigative undertakings in an effort to make discoveries that can help develop new products or way of doing things or work towards enhancing pre-existing products or processes. These activities come under the Research and Development (R&D) umbrella.

R&D is an important means for achieving future growth and maintaining a relevant product in the market . There is a misconception that R&D is the domain of high tech technology firms or the big pharmaceutical companies. In fact, most established consumer goods companies dedicate a significant part of their resources towards developing new versions of products or improving existing designs . However, where most other firms may only spend less than 5 percent of their revenue on research, industries such as pharmaceutical, software or high technology products need to spend significantly given the nature of their products.

Research and Development (R&D) | Overview & Process

© Shutterstock.com | Alexander Raths

In this article, we look at 1) types of R&D , 2) understanding similar terminology , 3) making the R&D decision , 4) basic R&D process , 5) creating an effective R&D process , 6) advantages of R&D , and 7) R&D challenges .

TYPES OF R&D

A US government agency, the National Science Foundation defines three types of R&D .

Basic Research

When research aims to understand a subject matter more completely and build on the body of knowledge relating to it, then it falls in the basic research category. This research does not have much practical or commercial application. The findings of such research may often be of potential interest to a company

Applied Research

Applied research has more specific and directed objectives. This type of research aims to determine methods to address a specific customer/industry need or requirement. These investigations are all focused on specific commercial objectives regarding products or processes.

Development

Development is when findings of a research are utilized for the production of specific products including materials, systems and methods. Design and development of prototypes and processes are also part of this area. A vital differentiation at this point is between development and engineering or manufacturing. Development is research that generates requisite knowledge and designs for production and converts these into prototypes. Engineering is utilization of these plans and research to produce commercial products.

UNDERSTANDING SIMILAR TERMINOLOGY

There are a number of terms that are often used interchangeably. Thought there is often overlap in all of these processes, there still remains a considerable difference in what they represent. This is why it is important to understand these differences.

The creation of new body of knowledge about existing products or processes, or the creation of an entirely new product is called R&D. This is systematic creative work, and the resulting new knowledge is then used to formulate new materials or entire new products as well as to alter and improve existing ones

Innovation includes either of two events or a combination of both of them. These are either the exploitation of a new market opportunity or the development and subsequent marketing of a technical invention. A technical invention with no demand will not be an innovation.

New Product Development

This is a management or business term where there is some change in the appearance, materials or marketing of a product but no new invention. It is basically the conversion of a market need or opportunity into a new product or a product upgrade

When an idea is turned into information which can lead to a new product then it is called design. This term is interpreted differently from country to country and varies between analytical marketing approaches to a more creative process.

Product Design

Misleadingly thought of as the superficial appearance of a product, product design actually encompasses a lot more. It is a cross functional process that includes market research, technical research, design of a concept, prototype creation, final product creation and launch . Usually, this is the refinement of an existing product rather than a new product.

MAKING THE R&D DECISION

Investment in R&D can be extensive and a long term commitment. Often, the required knowledge already exists and can be acquired for a price. Before committing to investment in R&D, a company needs to analyze whether it makes more sense to produce their own knowledge base or acquire existing work. The influence of the following factors can help make this decision.

Proprietariness

If the nature of the research is such that it can be protected through patents or non-disclosure agreements , then this research becomes the sole property of the company undertaking it and becomes much more valuable. Patents can allow a company several years of a head start to maximize profits and cement its position in the market. This sort of situation justifies the cost of the R&D process. On the other hand, if the research cannot be protected, then it may be easily copied by a competitor with little or no monetary expense. In this case, it may be a good idea to acquire research.

Setting up a R&D wing only makes sense if the market growth rate is slow or relatively moderate. In a fast paced environment, competitors may rush ahead before research has been completed, making the entire process useless.

Because of its nature, R&D is not always a guaranteed success commercially. In this regard, it may be desirable to acquire the required research to convert it into necessary marketable products. There is significantly less risk in acquisition as there may be an opportunity to test the technology out before formally purchasing anything.

Considering the long term potential success of a product, acquiring technology is less risky but more costly than generating own research. This is because license fees or royalties may need to be paid and there may even be an arrangement that requires payments tied to sales figures and may continue for as long as the license period. There is also the danger of geographical limitations or other restrictive caveats. In addition, if the technology changes mid license, all the investment will become a sunk cost. Setting up R&D has its own costs associated with it. There needs to be massive initial investment that leads to negative cash flow for a long time. But it does protect the company from the rest of the limitations of acquiring research.

All these aspects need to be carefully assessed and a pros vs. cons assessment needs to be conducted before the make or buy decision is finalized.

BASIC R&D PROCESS

R&D flow

Foster Ideas

At this point the research team may sit down to brainstorm. The discussion may start with an understanding and itemization of the issues faced in their particular industry and then narrowed down to important or core areas of opportunity or concern.

Focus Ideas

The initial pool of ideas is vast and may be generic. The team will then sift through these and locate ideas with potential or those that do not have insurmountable limitations. At this point the team may look into existing products and assess how original a new idea is and how well it can be developed.

Develop Ideas

Once an idea has been thoroughly researched, it may be combined with a market survey to assess market readiness. Ideas with true potential are once again narrowed down and the process of turning research into a marketable commodity begins.

Prototypes and Trials

Researchers may work closely with product developers to understand and agree on how an idea may be turned into a practical product. As the process iterates, the prototype complexity may start to increase and issues such as mass production and sales tactics may begin to enter the process.

Regulatory, Marketing & Product Development Activities

As the product takes shape, the process that began with R&D divides into relevant areas necessary to bring the research product to the market. Regulatory aspects are assessed and work begins to meet all the criteria for approvals and launch. The marketing function begins developing strategies and preparing their materials while sales, pricing and distribution are also planned for.

The product that started as a research question will now be ready for its biggest test, the introduction to the market. The evaluation of the product continues at this stage and beyond, eventually leading to possible re-designs if needed. At any point in this process the idea may be abandoned. Its feasibility may be questioned or the research may not reveal what the business hoped for. It is therefore important to analyze each idea critically at every stage and not become emotionally invested in anything.

CREATING AN EFFECTIVE R&D PROCESS

A formal R&D function adds great value to any organization. It can significantly contribute towards organizational growth and sustained market share. However, all business may not have the necessary resources to set up such a function. In such cases, or in organizations where a formal R&D function is not really required, it is a good idea to foster an R&D mindset . When all employees are encouraged to think creatively and with a research oriented thought process, they all feel invested in the business and there will be the possibility of innovation and unique ideas and solutions. This mindset can be slowly inculcated within the company by following the steps mentioned below.

Assess Customer Needs

It is a good idea to regularly scan and assess the market and identify whether the company’s offering is doing well or if it is in trouble. If it is successful, encourage employees to identify reasons for success so that these can then be used as benchmarks or best practices. If the product is not doing well, then encourage teams to research reasons why. Perhaps a competitor is offering a better solution or perhaps the product cannot meet the customer’s needs effectively.

Identify Objectives

Allow your employees to see clearly what the business objectives are. The end goal for a commercial enterprise is to enhance profits. If this is the case, then all research the employees engage in should focus on reaching this goal while fulfilling a customer need.

Define and Design Processes

A definite project management process helps keep formal and informal research programs on schedule. Realistic goals and targets help focus the process and ensures that relevant and realistic timelines are decided upon.

Create a Team

A team may need to be created if a specific project is on the agenda. This team should be cross functional and will be able to work towards a specific goal in a systematic manner. If the surrounding organizational environment also has a research mindset then they will be better prepared and suited to assist the core team when ever needed.

Whenever needed, it may be a good idea to outsource research projects. Universities and specific research organizations can help achieve research objectives that may not be manageable within a limited organizational budget.

ADVANTAGES OF R&D

Though setting up an R&D function is not an easy task by any means, it has its unique advantages for the organization. These include the following.

Research and Development expenses are often tax deductible. This depends on the country of operations of course but a significant write-off can be a great way to offset large initial investments. But it is important to understand what kind of research activities are deductible and which ones are not. Generally, things like market research or an assessment of historical information are not deductible.

A company can use research to identify leaner and more cost effective means of manufacturing. This reduction in cost can either help provide a more reasonably priced product to the customer or increase the profit margin.

When an investor sets out to put their resources into any company, they tend to prefer those who can become market leaders and innovate constantly. An effective R&D function goes a long way in helping to achieve these objectives for a company. Investors see this as a proactive approach to business and they may end up financing the costs associated with maintaining this R&D function.

Recruitment

Top talent is also attracted to innovative companies doing exciting things. With a successful Research and Development function, qualified candidates will be excited to join the company.

Through R&D based developments, companies can acquire patents for their products. These can help them gain market advantage and cement their position in the industry. This one time product development can lead to long term profits.

R&D CHALLENGES

R&D also has many challenges associated with it. These may include the following.

Initial setup costs as well as continued investment are necessary to keep research work cutting edge and relevant. Not all companies may find it feasible to continue this expenditure.

Increased Timescales

Once a commitment to R&D is made, it may take many years for the actual product to reach the market and a number of years will be filled with no return on continued heavy investment.

Uncertain Results

Not all research that is undertaken yields results. Many ideas and solutions are scrapped midway and work has to start from the beginning.

Market Conditions

There is always the danger that a significant new invention or innovation will render years of research obsolete and create setbacks in the industry with competitors becoming front runners for the customer’s business.

It is important for any business to understand the advantages and disadvantages of engaging in Research and Development activities. Once these are studied, then the step can be taken towards becoming and R&D organization.

In the meanwhile, it is good practice to inculcate a research mind set and research oriented thinking within all employees, no matter what their functional area of expertise. This will help bring about new ideas, new solutions and an innovative way of approaching all business problems, whether small or large.

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Research and development in the pharmaceutical industry.

research and development report

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

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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

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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

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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

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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

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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

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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

research and development report

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] .

research and development report

Phillip L. Swagel

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  • Annual Report 2020
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Merck Annual Report 2020

Tag overview.

  • # Employee satisfaction
  • # Digitalization
  • # Access to health
  • # Good business practice
  • # Innovation
  • # Climate action
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  • To Our Shareholders
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Research and Development

  • Healthcare*
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  • (1) Company information
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  • (5) Changes in the scope of consolidation
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  • (10) Cost of sales
  • (11) Marketing and selling expenses
  • (12) Research and development costs
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  • (15) Income tax
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  • Business Development 2016 – 2020
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Science is at the heart of everything we do. We conduct research and development (R&D) worldwide in order to develop new products and services to improve the quality of life of patients and satisfy the needs of our customers. Further optimizing the relevance and efficiency of our research and development activities – either on our own or in cooperation with third parties – is one of our top priorities.

In 2020, approximately 7,900 employees worked for Merck, researching innovations to address long-term health and technology trends in both established and growth markets (2019: approximately 7,800).

Expenditures for R&D amounted to € 2.3 billion in 2020 (2019: € 2.3 billion ). In our R&D activities, we focus on both in-house research and external collaborations that enable us to increase the productivity of our research while simultaneously reducing financial outlay. The organizational setup of our R&D activities reflects our structure with three business sectors. With our Healthcare business sector’s research pipeline, we aspire with our research pipeline to make a positive difference for patients – always with the goal to help create, improve, and prolong life. Our main research areas include oncology, immuno-oncology, and immunology including multiple sclerosis. In the Life Science business sector, our research activities focus on technologies for laboratory and life science applications as well as the support of new developments. We continue to focus on digitized and automated labware, DNA purification for downstream applications and emerging chemical synthesis, as well as software for our BioContinuum™ Platform to accelerate Biopharma 4.0. We remain dedicated to delivering on our core competencies, such as filtration, pure lab water, and diagnostic solutions. The main focus of our Performance Materials business sector’s research is on the development of innovative materials and technologies required for the latest generations of memory chips and processors. In addition, Performance Materials develops materials for OLED and LC displays as well as new effect pigments for use in the automotive, cosmetics and printing industries.

The ratio of research expenditure to Group sales was 13.0% (2019: 14.0%). The decline is due to the positive sales development.

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Lebanon Country Climate and Development Report

Lebanon Country Climate and Development Report (CCDR)

Download the report in:  English

The Lebanon Country Climate and Development Report (CCDR) aligns the country’s short-term recovery needs with resilient, low-carbon, long-term development to study the effects of climate change on Lebanon’s recovery and development objectives. It builds on quantitative modeling-based analytics, existing research and country diagnostics, and extensive stakeholder consultations.

The CCDR examines four key sectors – Energy, Water, Transport and Solid Waste – as key pillars of a climate-responsive recovery. Two macroeconomic baseline scenarios – a business-as-usual “muddling through” scenario and a broad reforms-based recovery scenario – underline the report’s findings. The first assumes continuation of inaction on reforms, absence of fiscal space, and a banking sector that is incapable of providing financing to the private sector. The recovery scenario assumes that macro-fiscal reforms will be adopted that will gradually ease financing constraints and increase fiscal space.

VIDEO: Advancing Climate Action in Lebanon

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  • Human Development Report 2023-24
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Towards 2023 HDR

The 2021/22 HDR revealed a startling reality: for the first time ever, the global HDI declined two years in a row, driven by a new “uncertainty complex,” of which the Covid-19 pandemic is emblematic. Apart from widely differing rates of access to vaccines, trust and social polarization influenced its course. Covid-19 is but one example of the failure of collective action, including to provide a global public good - pandemic preparedness and control - layered on top of troublingly low levels of trust within polarizing societies. The challenge going forward is that as societies become more linked in multiple ways, addressing shared challenges and the provision of global public goods will become ever more important. Collective action on challenges ranging from climate change mitigation to peace and security, is frustratingly slow. Lack of trust and polarization, both associated with perceptions of insecurity, exacerbates the gridlock. 

The 2023 HDR aims at understanding this gridlock and explore how to enhance collective action. It opens a trilogy of reports framed by the three layers of the uncertainty complex identified in the 2021/22 HDR: widespread, intensifying societal polarization, delaying collective action (2023 HDR); rapid technological change, particularly digital technologies, impacting on prospects for human development (2024 HDR); the intertwined planetary pressures and inequalities of the Anthropocene shaping opportunities for human development well into the future (2025 HDR).

Timeline of global consultations

The 2023 HDR Advisory Board

The 2023 HDR Advisory Board is co-chaired by  Tharman Shanmugaratnam , Senior Minister, Singapore; and  Joseph E. Stiglitz , University Professor, Columbia University (see the complete list of members below)

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Tharman Shanmugaratnam

President of singapore (co-chair).

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Joseph E. Stiglitz

University professor, columbia university (co-chair).

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Olu Ajakaiye

Executive chairman, african centre for shared development capacity building, nigeria.

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Scott Barrett

Lenfest-earth institute professor of natural resource economics in the school of international and public affairs at columbia university.

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Kaushik Basu

Professor of international studies, cornell university.

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Laura Chinchilla

Former president of costa rica.

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Diane Coyle

Bennett professor of public policy, co-director of the bennett institute for public policy, university of cambridge.

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Oeindrila Dube

Philip k. pearson professor at the university of chicago, harris school of public policy.

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Chief Expert of National Think Tank, Chinese Academy of Social Sciences

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Marc Fleurbaey

Marc fleurbaey, research director, cnrs and professor, paris school of economics; associate professor, ecole normale supérieure, paris.

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Ravi Kanbur

Professor, cornell university.

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Judith Kelley

Dean, duke sanford school of public policy at duke university.

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Melissa Leach

Director, institute of development studies.

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Harini Nagendra

Director research centre, professor and lead, centre for climate change and sustainability, professor of sustainability, azim premji university.

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Abebe Shimeles

Honorary professor at university of cape town, outgoing executive director, african economic research consortium.

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Belinda Reyers

Professor of sustainability science, university of pretoria, south africa and affiliated researcher at the beijer institute of ecological economics at the swedish royal academy of sciences.

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Ilona Szabó de Carvalho

Co-founder and president, igarapé institute, brazil.

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Krushil Watene (Ngāti Manu, Te Hikutu, Ngāti Whātua o Orākei, Tonga)

Peter kraus associate professor in philosophy, university of auckland waipapa taumata rau, new zealand.

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Indian women in the ladies compartment of a train on their way to work in Mumbai, India

No equality for working women in any country in the world, study reveals

Global gender gap is far bigger than previously thought, as annual World Bank report takes childcare and safety issues into account for first time

No country in the world affords women the same opportunities as men in the workforce, according to a new report from the World Bank, which found the global gender gap was far wider than previously thought.

Closing the gap could raise global gross domestic product by more than 20%, said the report.

For the first time, the bank investigated the impact of childcare and safety policies on women’s participation in the labour market in 190 countries. It found that when these two factors were taken into account, women on average enjoyed just 64% of the legal protections men do, down from the previous estimate of 77%.

Report author Tea Trumbic said childcare and safety issues particularly affected women’s ability to work. Violence could physically prevent them from going to work, and childcare costs could make it prohibitive.

The 10th edition of the women, business and the law report , published on Monday, also for the first time assessed the gap between laws and the policies put in place to implement them. It found countries had, on average, established less than 40% of the systems needed for full implementation.

While 95 countries enacted laws on equal pay, only 35 had measures in place to ensure the pay gap was addressed. Globally, women earned just 77 cents of each dollar earned by a man.

Many sub-Saharan African countries had seen rapid progress in the reform of laws in recent years, said the study, but had the largest gap between legislation and implementation.

Togo had the highest number of laws in sub-Saharan Africa, giving women 77% of the legal rights of men, but had structures in place to implement just a quarter of them.

“We’ve seen a consistent reform effort from several African countries … this year the report really highlights Togo and Sierra Leone that had really big shifts in the last three to four years,” said Trumbic. “But the supportive frameworks are largely lacking. So that’s why the implementation gap is even larger in countries that reformed recently because they’ve raised the standard in their laws, but they don’t have the supportive mechanisms to implement them.”

Addressing the childcare gap would immediately lead to a 1% increase in women’s participation in the labour force. The report said less than half the countries had financial support or tax relief for parents of young children and less than a third had quality standards in place for childcare that could assure parents of their children’s safety.

In 81 countries, a woman’s pension benefits do not account for periods of work absences related to childcare.

The report said that while 151 countries had laws against sexual harassment in the workplace, only 40 had laws that covered abuse in public areas or on public transport, meaning women were not protected on their way to work.

“All over the world, discriminatory laws and practices prevent women from working or starting businesses on an equal footing with men,” said Indermit Gill, chief economist of the World Bank Group. “Closing this gap could raise global gross domestic product by more than 20% – essentially doubling the global growth rate over the next decade – but reforms have slowed to a crawl.”

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  • 06 March 2024

Landmark study links microplastics to serious health problems

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Plastics are just about everywhere — food packaging , tyres, clothes, water pipes. And they shed microscopic particles that end up in the environment and can be ingested or inhaled by people.

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Marfella, R. et al. N. Engl. J. Med. 390 , 900–910 (2024).

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Faith McKie / Abbey Donaldson Headquarters, Washington 202-358-1600 [email protected] / [email protected]

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Clinical Trials Regulation

On 31 January 2022, the Regulation repealed the  Clinical Trials Directive (EC) No. 2001/20/EC  and national implementing legislation in the EU Member States, which regulated clinical trials in the EU until the Regulation's entry into application.

A transition period applies to clinical trial submission under the Regulation.

Consult the Regulation:

  • Clinical Trials Regulation (Regulation (EU) No 536/2014)

Also on this topic

  • Clinical Trials Information System

Aims and benefits

The  Clinical Trials Regulation harmonises the processes for  assessment and supervision of clinical trials throughout the EU. 

The evaluation, authorisation and supervision of clinical trials are the responsibilities of EU Member States and European Economic Area (EEA) countries. 

Prior to the Regulation, clinical trial sponsors had to submit clinical trial applications   separately to national competent authorities and ethics committees in each country to gain regulatory approval to run a clinical trial.

The Regulation enables sponsors to submit one online application via a single online platform known as the  Clinical Trials Information System  (CTIS) for approval to run a clinical trial in several European countries, making it more efficient to carry out such multinational trials. 

The Regulation also makes it more efficient for EU Member States to evaluate and authorise such applications together, via the  Clinical Trials Information System .

The purpose is to foster innovation and research in the EU, facilitating the conduct of larger clinical trials in multiple EU Member States/EEA countries. 

Other key benefits of the Regulation include:

  • improving information-sharing and collective decision-making on clinical trials;
  • increasing transparency of information on clinical trials;
  • ensuring high standards of safety for all participants in EU clinical trials.

Under the Regulation, clinical trial sponsors must submit all new clinical trial applications in the  Clinical Trials Information System  (CTIS) from 31 January 2023. National regulators in the EU Member States and EU/EEA countries also use CTIS. 

The system:

  • enables sponsors to apply for clinical trial authorisation in up to 30 European countries with a single online application;
  • allows national regulators to collaboratively process clinical trial applications in more than one country, request further information, authorise or refuse a trial and oversee an authorised trial;
  • facilitates the expansion of trials to other EEA countries;
  • enables transparency and access to information for any party interested in clinical trials conducted in the EEA through a searchable public website.

CTIS went live on 31 January 2022 together with the public Clinical Trials website . For more information, see: 

  • Development of the Clinical Trials Information System
  • Clinical Trials website

Transition period for clinical trial sponsors

Clinical trials information system - banner deadline 31 January 2023

Under the Clinical Trials Regulation, EU Member States and EEA countries use the Clinical Trials Information System (CTIS) to carry out their legal responsibilities to assess and oversee clinical trials from 31 January 2022:

  • for the first year of implementation and until 30 January 2023, clinical trial sponsors could choose whether to apply to start a clinical trial via the Clinical Trials Information System or under the Clinical Trials Directive;
  • from 31 January 2023 onwards, clinical trial sponsors need to apply to start a clinical trial via the Clinical Trials Information System;
  • from 31 January 2025, any trials approved under the Clinical Trials Directive that continue running will need to comply with the Clinical Trials Regulation and their sponsors must have recorded information on them in CTIS.

EMA encourages sponsors to use the transition period to ensure their information on clinical trials is recorded in CTIS in a timely manner. 

Guidance is available from the European medicines regulatory network on the CTIS website to support sponsors with transitioning their ongoing trials to CTIS:

  • Clinical Trials Information System: Guidance and Q&As: Transitioning trials

Questions and answers about CTIS and the Clinical Trials Regulation

EMA's Query Management Working Group prepared a document to address the main questions received from sponsor associations about CTIS and the Clinical Trials Regulation.

EMA published this document in February 2023.

Questions and answers by the Query Management Working Group on CTIS and the CTR

Progress on implementation of the Regulation

Under the  Accelerating Clinical Trials EU (ACT EU) initiative , the European medicines regulatory network publishes statistics on the authorisation of clinical trials in the European Union (EU) and European Economic Area (EEA) every month. This information provides an insight into how the Clinical Trials Regulation is transforming the clinical-trial environment in the EU / EEA.

The reports include information on the number of clinical trial applications submitted, as well as the number of clinical trials authorised and not authorised by national regulatory authorities.

The reports are available on the ACT EU website at the link below:

  • ACT EU: Documents: Implementation of the Clinical Trial Regulation

External links

  • European Union clinical trials register

Related content

  • Clinical Trials Information System: training and support  
  • Clinical Trials Information System (CTIS): online modular training programme
  • Clinical trials in human medicines  
  • Data submission on investigational medicines: guidance for clinical trial sponsors

Related EU legislation

  • Clinical Trials Regulation EU No. 536/2014
  • Clinical Trials Directive (EC) No. 2001/20/EC  (repealed by the Clinical Trials Regulation on 31 January 2022)
  • Clinical trials
  • Regulatory and procedural guidance
  • Research and development

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