PHARMA: The debate on R & D spending, with UPDATE

Following the revival of the “taxpayer pays for the drugs twice” line by Marcia Angell, there’s an excellent article and series of comments in Derek Lowe’s In the Pipeline blog on the subject of paying for R&D. Derek has somewhat talked down the role of the NIH–and was kind enough to mention my comment on that aspect of the subject in a subsequent post. He was further taken to task for it by the (new to me) Bedside Manners blog. All posts well worth reading.

And there is no doubt that we are on the edge of much more spending and much more great results from all this medical research (do the words genome or nanotechnology ring a bell). But right now, that’s not the point. What is the point is the relationship between who’s spending what on what and the political result out of it.

Broadly, with the NIH (i.e. the taxpayer) doing mostly big basic R and some D and the for-profit sector doing mostly applied R & D, here’s the spending score.

NIH $27 billion on Research in 2004 (corrected to $23 billion in 2003 in update below)
$33 billion on R&D in 2003 (according to PhRMA’s numbers)

Both these numbers have been going up rapidly, and there are lots of arguments about what’s in it, but the overall issue is that they are pretty much the same. No one cares about the distinction between R &D; people only care about what’s spent to get the drug onto the market, and you need basic R, applied R and D to get that done. But that total is around $60 billion and we spend more than that marketing the drugs. The government’s report on the pharma industry from which I pinch this chart shows the real issue, and that issue is mostly a political and business issue.

And of course the political issue is how to deal with the fallout of these three numbers — the 13% of revenues spent on R&D, the 20% going to profit and the 31% going to sales and marketing. So long as the public gets to see that industry’s R&D spending only just exceeds the taxpayers’, yet they have to pay more in profit (i.e. higher prices) than big Pharma is paying in R&D, and that nearly three times what is spent developing the drug is being used to market it, this problem is not going away for pharma. Of course it might help their cause if they stopped being at war with their best customers.

UPDATE: Contributor Joe Crea informs me that:

The $27 billion dollars on research by the NIH is a very common misconception. That figure + or – a $billion is the OPERATING BUDGET or BUDGET AUTHORITY for the NIH; and, not all research at, by, or for the NIH is pharmaceutical-related.

I have attached OMB breakdowns of the budget for the NIH as well (Ed note: shows total Gov spending on Health R&D at $23bn in 2003) as a report that breaks down how that research budget is spent. Remember, the NIH has multiple institutes, centers, as well as the Library of Medicine. As can be seen from the report, about 10% of R&D is done by the NIH (intramural) — the rest is “farmed out” in the way of grants and Cooperative Research and Development Agreements (CRADAs).

Here is an explanation of this system by PhRMA. Take it for what it is worth (it was a readily available summary), but likewise, is the report by The American Association for the Advancement of Science (not exactly a bunch o’ FReepers). Just keepin’ things in perspective!

Joe may well be right, much of the money allegedly spent on research by NIH may not get to the lab bench, but on the other hand my colleague Bob Leitman tells a story of his visit to an R&D facility owned by very big pharma company. When he commented on the acres of marble in the halls and the restrooms, his host told him “Well we’ve got to hide the money somewhere!” So I think it’s fair to say that the big numbers on both private and public side have a fair bit of bureaucracy tucked away in there. It’s also fair to say that the NIH farms out much of its research, but that’s irrelevant. The point is how much gets spent by whom on what and not who gets it.

My point is that there is a lot of money spent, and both types of spending on research is necessary to create drugs, but the political issue is simple. The pharma industry makes more on profit than it spends on R&D, and spends nearly 3 times on marketing than it spends on R&D and gets some large level of help for its R&D from the taxpayer. And it prices drugs at a level that makes its consumers very angry. So big pharma can either continue its present course of trying to tough this out (which I believe has a significant long term risk of vicious price controls or regulation) or try to figure out a middle way. I’ve put my proposals for that middle way here, but I believe that they have to take a small hit now or a huge hit later.

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