The ups and downs of drug company research costs

The pharmaceutical industry has long argued that U.S. drug prices are high to help pay for the risky business of inventing and developing new medicines. A glance at research and development expenses for eight of the largest drug companies shows their research budgets depend on the sales of drugs — and drug companies aren't afraid to take a hatchet to R&D if sales disappoint.

The takeaway: Developing drugs is an expensive process that costs billions of dollars and frequently ends in failure. But after drugs get federal approval, their prices often far exceed R&D costs, taking almost all of the risk out of the process.

What we looked at: The research and development expenses for eight big pharmaceutical firms: Amgen, Eli Lilly, Gilead Sciences, GlaxoSmithKline, Merck, Novartis, Pfizer and Roche. A few trends popped out:

  • R&D expenses for most companies hovered at or below 20% of their revenue since 2010. That's consistent with the historical trend.
  • Pfizer and GlaxoSmithKline routinely had low R&D spending. Neither saw research costs tip above 17% of their revenue over the past seven years.
  • R&D expenses fell to 9.2% of Gilead's revenue in 2015, the same year the company's revenue exploded from its new hepatitis C drugs, Sovaldi and Harvoni.
  • It was common for net profits and marketing budgets to surpass drug company R&D spending.

R&D gray areas: How a company defines "research and development" also can be murky. For example, in 2012, Gilead counted more than $100 million of stock-based compensation toward its R&D expenses — not exactly the clinical trial or research lab work that comes to mind. That payout money was tied to its acquisition of Pharmasset, the company that actually developed the blockbuster hepatitis C drugs.