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MANAGERIAL AND DECISION ECONOMICS, VOL.

9, 1 9 7 - 2 0 3 (1988)

Pharmaceutical Innovation and R&D


Investment in the UK
ROGER A. PRENTIS and STUART R. WALKER
Centre for Medicines Research, Carshalton, Surrey, UK

and
DAVID D. HEARD and A. MARTIN TUCKER
ICI Pharmaceuticals, Macclesfleld, Cheshire, UK

Expenditure on research and development by the pharmaceutical industry in the UK has increasedflve-foldin real
terms since 1964, whilst the rate of introduction of novel medicines and their sales, allowing for inflation, have
remained approximately constant. One of the reasons the industry has heen ahle to afford the higher investment in
R&D is because its marketing has become far more international. In the UK the average effective patent life of
new products has decreased to less than 5 years at launch, making it difficult to see how development expenditure
for most products can be recouped before patent expiry without significant international sales.

INTRODUCTION
The discovery and development of novel medical
therapies requires a considerable financial investment
which has to be met from the income of products
already marketed. Innovation and the financial returns
from its success are therefore closely related.
Pharmaceutical innovation has been defined as any
development which is intended to produce a therapeutic advance (Wardell and DiRaddo, 1980) but a
more appropriate defmition refers to the testing of new
chemical entities (NCEs) in man (Prentis and Walker,
1986). An NCE is defined as a new chemical or
biological compound tested in man for therapeutic
purposes for the first time, and excludes new salts and
esters unless they confer some major therapeutic
advantage. The decision of a pharmaceutical company
to evaluate an NCE in man for the first time represents
a major commitment, and is therefore used as the
definition of innovation.
The past few decades have seen significant
advances in medical therapy resulting from a large
number of major innovations., for example in the areas
of coronary heart disease, asthma and infectious
diseases. Despite this, there are still diseases for which
satisfactory therapy does not exist (for example, senile
dementia, multiple sclerosis and schizophrenia) and
others where improvements would be welcomed. The
research into and development of novel medicines is,
however, costly, and protection of the innovator's
investment is required to enable his expenditure to be
recouped.
O143-657O/88/O3O197-O7$O5.OO
1988 by John Wiley & Sons, Ltd.

Such protection is afforded by a patent which is


given in exchange for disclosure of the novelty for the
advancement of scientific knowledge, and which is
intended to allow the innovator time to recoup R & D
investment by protection of his monopoly. Over the
past two decades regulatory requirements have
influenced development time, with the result that the
time from start of development to product licence
application in the UK has increased from around 3
years to some 12 years (Walker etal., 1986). As a
consequence, the effective patent life (the length of
patent remaining at the time of marketing) has been
steadily eroded, and in 1982 this was less than 5 years
(if the final 4-year period which is subject to the Licence
of Right Provision is excluded Walker and Prentis,
1985).
Most research-based pharmaceutical companies are
part of larger groups., and., as a result, the management
continually review the various investment options
open to them and will only continue to invest in
pharmaceutical R & D if they judge that this will
provide a return which is attractive relative to other
options. It is now even less certain that there will be
a significant contribution to R & D expenditure from
sales in many markets, including the UK, after the
patent has expired, and this, coupled with the erosion
of effective patent life referred to above, implies that
the investment prospects from pharmaceutical R & D
are becoming less attractive. This paper seeks to
evaluate the change in relationship between economic
input into and output from pharmaceutical R & D in
the UK market which has occurred during the past
20 years. To do so, it is necessary to obtain data on

198

ROGER A. PRENTiS, STUART R. WALKER, DAVID D. HEARD AND A. MARTIN TUCKER

R & D investment and the income obtained from the


sales of products resulting from that R & D . Ideally,
the latter should be after all expenses have been met,
but this has not been practicable, and in this paper
sales income is used instead.
Only one study appears to have been published that
presents the real costs involved in developing an NCE
to the stage of marketing (Hansen, 1979). Twenty-five
US firms were surveyed and cost data on a sample of
the NCEs tested in man during the period 1963-75
and marketed were obtained. Overall, allowing for the
failure of some investigational NCEs, the cost to bring
an NCE to the market was estimated to be US $54 m
{in 1976 US $), which is equivalent to 75 m in 1984
s sterling.
In the UK there has been no equivalent study of
the cost to develop an NCE, but several surveys have
given estimates of the total R & D expenditure of the
UK industry, one of which comprised data collected
directly from pharmaceutical companies (Prentis and
Walker, 1985).
The study presented here examines the changing
relationship between the aggregate sales in the UK
of NCEs introduced onto the UK market over the
period 1964-84 and the investment in research and
development incurred by the pharmaceutical industry
in the UK. Further work is underway which will
examine worldwide sales and R & D expenditure and
this will be reported later.

METHODS
New Chemical Entities marketed in the UK from 1
January 1964 to 31 December 1984 were identified
from various published sources (for example, British
National Formulary and the Monthly Index of Medical
Specialities). Using a specially designed questionnaire,
comprehensive data were requested from the pharmaceutical company originating or marketing the NCE
which covered all aspects of the development process,
including dates of first synthesis, clinical testing,
regulatory applications, marketing, UK patent filing
and expiry and, where relevant, the date of and reason
for withdrawal from the UK market (Walker et ai,
1986).
The NCEs marketed in the UK were grouped by
UK marketing date, and data on the sales to chemists
in the UK of each NCE at basic NHS prices were
tabulated on a yearly basis until 1984 (IMS). Thus,
for each NCE marketed in 1964 and still on the market
at the end of 1984, a full 21 years' sales data were
available, 20 years for those marketed in 1965, and so
on until those marketed in 1984, for which there were
only one year's data.
Minor products (those not reaching 20000 sales in
any year marketed) were excluded, as their contribution to the overall sales was insignificant. Any line
extensions to the NCEs (for example, combination

.00
+ R&D expenditure from government
and industry surveys
350-

^
y

^ ^ Best fit curve

300-

E
u

250-

CO

iture (

O)

1
X

v
Q

200-

150-

100-

50

n
1964

1966

1968

1970

1972

1974
Year

1976

1978

1980

F i g u r e 1 . P h a r m a c e u t i c a l R & D i n v e s t m e n t in t h e U K .

1982

1984

199

PHARACEUTICAL INNOVATION AND R&D INVESTMENT IN THE UK

products, new formulations and new dosage forms)


were identified and data collated using the same
criteria.
Sales to hospitals were also excluded from the study,
as data on individual products were not available.
However, the proportion of the total represented by
hospital sales is reported to have remained fairly
constant at about 20% (ABPI, 1982). The exclusion of
hospital sales, therefore, does not affect the trend in
the relationship between research and development
expenditure and sales income.
As no data on the cost of research and development
for NCEs in the UK are available, the only way to
examine changes was to collect information from
various reports on the total R & D expenditure of the
UK pharmaceutical industry over the period 1964-84.
These included surveys carried out both by the
government and industry, which were found to have
different inclusion criteria and definitions, causing
variation between data for a given year. The data were
deflated to 1984 s and the curve of best fit plotted
through the points (Fig. 1),

RESULTS AND DISCUSSION


During the period 1964-84 a total of 441 NCEs was
marketed in the UK by some 70 pharmaceutical
companies (those responsible for the marketing of the
NCEs during this period) and 282 (64%) met the

inclusion criteria for the present study. The remaining


159 were excluded because of low sales (40 NCEs9%^)
or because they were mainly used in hospitals (120
NCEs27%). The division between the classes can
be seen in Fig. 2.
A plot of the mean deflated sales per NCE (1984
s) for each year since launch for all NCEs included
in the study shows a plateau at between 11 and 14
years (Fig. 3). It must be emphasized that this is the
average for all, and may differ widely for various
groups of NCEs (for example, within a particular
therapeutic class) and that the distribution is skewed
(see later). It should also be noted that the number of
products contributing to the mean for each year's sales
varies, as all NCEs in the study have one year's data,
those marketed in 1983 have two. those in 1982. three
and so on. until those marketed in 1964, where a full
2! years' data are available.
Ideally, in order to compare trends in average
income with trends in expenditure on research and
development it would be necessary to compare the
plateau level of sales from each yearly cohort. This
would mean that only the trend over the period
1964-73 could be examined, as subsequent cohorts
have fewer than 11 years" data. However, examination
of the cohorts up to 1973 showed that year 5 sales
were a roughly constant proportion of plateau sales
(approximately 70"o), and could therefore be used to
examine the trend in sales income: this is shown in
Fig. 4. The most striking feature of this graph is that
the average sales income for the fifth year, expressed

NCEs with significant Family


Practitioner Service sales

35 n

NCEs wilh minor sales


NCEs wilh sales mainly
or only in hospitals

30-

1964

1966

1968

1970

1972 1974 1976


Year marketed

1978

1980

Figure 2. Number of NCEs marketed in the UK.

1982

1984

200

ROGER A. PRENTIS, STUART R. WALKER, DAVID D. HEARD AND A. MARTIN TUCKER

3.5 n

. 0 _ - Average sales per NCE


Curve of best fit

3.0-

2.5-

2.0-

1.5-

1.0-

0.5-

9
11
13
Years after marketing

15

17

19

21

Figure 3. Life curve for an average NCE.

35 n

0 Individual NCEs
Mean of cohort

30-

25-

20H

10-

5-

1964

1968

1972
Year marketed

1976

Figure 4. Sales in the UK of each NCE 5 years from


launch.

1980

PHARACEUTICAL INNOVATION AND R&D INVESTMENT IN THE UK

in constant currency, has not increased at all during


the period examined (1964-80). In addition, it can be
seen that within the group of NCEs in each year only
one or two are major commercial successes, and that
most products achieve only relatively low levels of
sales. This wide distribution of sales is emphasized in
Fig. 5, in which yearly sales for the top 10% of
compounds (by sales), the second 10% and the median
are plotted. It is clear that the former reaches a peak
almost four times greater than for the second and
twenty times that of the median.
Such a distribution has been cited as confirmation
of the high risks involved in the search for novel
medicines, i.e. not only is the process of discovering a
new product inherently unpredictable but there is, in
addition, a very considerable commercial risk even if
the product reaches the market. For the viability of
the industry, however, an even more important point
emerges, namely that over the past 20 years there has
been apparently no increase in the average level of
sales (in real terms) achieved by an NCE. It has been
suggested that the lack of commercial success
experienced by some NCEs could be explained by
their lack of therapeutic benefit or the small targetmarket size. However, there is no objective measure
of therapeutic benefit and, indeed, attempts to assess
this can only realistically be made after marketing,
since it is only then that there is sufficient clinical
experience of the use of the medicine. In an attempt

22-

to accelerate the regulatory process in the United


States for NCEs considered to be therapeutically
valuable, the Food and Drug Administration (FDA)
utilizes a value-coding system for medicines seeking
marketing approval. Despite the questionable value
of such a system, the data presented here were analysed
with respect to the 'value code' assigned by the FDA.
The graph of fifth-year sales (in 1984 s) for each NCE
indicates that the sales distribution for each of the
FDA classes (la, Ib and Icimportant, modest and
little or no therapeutic gain, respectively) are equally
skewed, and that the median sales for the groups do
not differ significantly (Fig. 6). There appears to be no
relationship between FDA code and market performance (indeed some of the 'minor products', i.e. those
not reaching 20 (XX) in any one year, were 'fast track'
la drugs).
Finally, the total of the fifth year of sales for each
yearly cohort of products examined (see Fig. 4), the
annual R & D expenditure and the number of NCEs
marketed per year are plotted in Fig. 7. Whereas the
R & D expenditure is seen to have risen five-fold over
the past two decades to 274 m (1984 s) in 1982, 80%
of which was dedicated to NCEs (Prentis and Walker,
1985), the number of NCEs launched per year and
total fifth-year sales have remained fairly constant at
around 20 and 35 m, respectively.
It should be noted that some of the compounds may
have been discovered outside the UK, and most

Average sales ol
products:

20-

/"^XT^"*^

^ ^ ^ Top 10% by sales

D 2nd 10% by sales


18-

....A Median

16-

Sales (1984 Cm)

1412108642-

1,*******--**--**...^.. ^ ,
1

'

1
4

'

1
8

201

1 1 1
12
Years after marketing

1 " " ^ |-f|i^-1


16
20

Figure 5. Life curvessales in the UK.

202

ROGER A. PRENTIS, STUART R. WALKER, DAVID D. HEARD AND A. MARTIN TUCKER

35-

0 Individual NCEs

-(- Mean
30-

^ Median

Sales <[1984 Em)

25-

200

15-

0
0
0

10-

5-

T
Major

Modest
FDA rating ot therapeutic gain

Little or no

Figure 6. Sales of each NCE in the UK. 5 years from


launch (by FDA rating).

400-1

r80

Q NCEs marketed
+ R&D expenditLjre survey data

350-

Best fit curve

-70

A
S 300-

^ + ^ 5th year sales in 1984 Cm

7 %

-60

(0

-50

eted

yea

? 250-

S 200am

-40 I
LU

-30

S 150

^-

| 1 O O -

[j

-20

<

50

-^'

1964

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984
Year
Figure 7. Return of R & D investment (U.K.).

-10

PHARACEUTICAL INNOVATION AND R&D INVESTMENT IN THE UK

expenditure within the UK for these will be associated


with clinical evaluation and registration. Conversely,
some expenditure in the UK will also be incurred on
NCEs sold elsewhere, and in the present study only
R & D expenditure and sales in the UK are examined.
Also it should be noted that some R & D costs include
expenditure on the support of pre-1964 products and
the development of line extensions.
These factors complicate the analysis of trends in
R & D costs and the return on this investment, and
the resolution of this problem is outside the scope of
this paper. Nevertheless, it is clear from our calculations that the average R & D expenditure per NCE
marketed in the UK has risen sharply without a
commensurate increase in UK sales. This has contributed to the decline in the industry's return on capital,
which has fallen from 27.2% in 1967 to 14.6% in 1983
(DHSS. as reported in The Pharmaceutical Industry
and the Nation's Health, published by the ABPI). That
this decline is not more pronounced is primarily due to
the UK companies now operating to a much more
international extent than 20 years ago and thus being
able to market their products worldwide, whereas
formerly they had to share the profits with their
iicencees.
Data on fifth-year sales are only available until 1980,
but there is no reason to suppose any alteration in
the trends for more recent years. There has been no
increase in the numbers of NCEs launched per year
and etTective patent life has declined from around 6
years in 1980 to less than 5 in 1984( Walker and Prentis,
1985). Similarly, there is every reason to believe that
expenditure on R & D has continued to increase.
It might, of course, be argued that the main reason
why R & D costs have risen more rapidly than UK
revenue is simply because the UK pharmaceutical
industry has been unsuccessful at R & D. There is,
however, no evidence to support this, and indeed the
facts demonstrate the converse. For example, no fewer
than three of the leading five pharmaceuticals in the
world (by value) have been discovered and developed
in the UK and several non-UK pharmaceutical

203

companies have established research units in the UK


in recent years.

CONCLUSIONS
R & D investment by the UK. industry in the UK has
increased five-fold over the past two decades, while
the total fifth-year sales and number of NCEs
marketed each year have remained constant. That the
industry has been relatively successful in maintaining
its profitability and investment is due to the fact that
products are marketed far more internationally than
20 years ago. Clearly, there is also a lag between the
date of investment in the R & D process and the return
on that investment: this lag is illustrated by the
development time of the NCEs (the time between first
synthesisalthough the R & D process begins before
thisand the time of UK marketing, where sales
income may be expected).
The scope for further internationalization within the
industry seems hmited, whilst the trends of increasing
cost, accompanied by increasing risk, do not seem to
show any signs of abating. This brings the ability
to continue investment into the discovery of new,
improved therapies and particularly the continued
search for and development of those for serious, but
less common, diseases into question. This will undoubtedly be to the detriment of some patients'
well-being. The research and development of new
medicines for tomorrow is based on the profits derived
from sales of medicines today. To ensure the future
flow of new medicines needed in so many areas, these
problems must be addressed and current trends
reversed.

Acknowledgements
We would like to thank Mr John Fish for compiling the sales data,
Mr Nicholas Wells (Office of Health Economics) and the anonymous
MDE referees for their comments and suggestions.

REFERENCES
ABPI (1982), The Pharmaceutical Industry and the Nation's
Health. Association of the British Pharmaceutical Industry,
London.
R. W. Hansen (1979), The pharmaceutical development process;
estimates of development costs and times and the effects of
proposed regulatory changes. In R. I, Chien (ed,), Issues in
Pharmaceutical Economics, Levington, Massachusetts.
IMS. Sales to Retail ChemistsBritish Pharmaceutical Index,
Intercontinental Medical Statistics Ltd.
R. A, Prentis and S. R. Walker (1985). Pharmaceutical research
and development expenditure in the UK. Pharmaceutical

Journal 235, 676-678,


R. A. Prentis and S. R.Walker (1 986), Trends in the development
of new medicines by UK-owned pharmaceutical companies
(1964-1980). British Journal of Cfinicaf Pharmacofogy 2 1 ,
437-43.
S. R. Walker and R, A, Prentis (1985). Drug research and
pharmaceutical patents. Pharmaceutical Journal 2ZA. 11-14.
S. R. Walker, R. A. Prentis and M. K, Ravenscroft (1986). Pharmaceutical innovation in the UK (1960-1983). Pharmacy
International June. 135-7.

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