For years, the pharmaceutical industry has maintained that high prices charged for many medicines in the US are needed to fund R&D, since so many other countries use various means to cap pricing.

Now, though, a new analysis suggests that the additional sales that drug companies generate in the US, compared with four other well-to-do countries, greatly exceeds what they have spent on their global research and development.

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  • I have a different take. One way to interpret the data is that in the US the drug companies had to actually spend one dollar in R&D to squeeze out an additional 63 cents in revenue, basically the R&D was 63% of the additional sales. Considering that the overall average R&D spend is about 15% of sales what we see here is a perfect example of the Law of Diminishing Returns. Historically we in pharma we have enjoyed as an ROI of 7-10 X R&D costs. Those days are gone, not because of declining revenues but because drug shops have been forced to ramp up R&D spend (which does indeed flow through to higher prices) in order to go after the more elusive diseases.

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