Pharmaceutical companies spend, on average, 17% of revenues on research and development (R&D), making it one of the biggest spenders in this area. Outside of the semiconductor industry, no other industry spends more on R&D.

Key Takeaways

  • On average, pharmaceutical companies spend 17% of revenues on research and development (R&D).
  • Pharmaceutical companies are heavily reliant on research and development as their success is contingent on the development of new drugs.
  • Out of the top 20 largest R&D spenders, pharmaceutical companies account for nearly half.

R&D Spending in the Pharmaceutical Industry

The pharmaceutical industry's lifeblood is R&D. The success of major drug companies is almost wholly dependent upon the discovery and development of new medicines, and their allocation of capital expenditures reflects that fact. Although the average spending is 17% of revenues, some companies spend substantially more.

As of 2019, many of the largest pharmaceutical firms spend nearly 20% on R&D. Of the 20 largest R&D spending industries in the world, the pharmaceutical industry makes up nearly half the list. As of June 30, 2019, AstraZeneca (AZN) blazed the path by spending 25.63% of revenues on research and development. Holding strong, Eli Lilly (LLY) spent 22.38% of its revenues on R&D as of March 31, 2019. Roche Holding AG (RHHBY) wasn't far behind with 21.29% spent on R&D as of June 30, 2019. Falling just below 20%, multinational biotechnology companies Biogen (BIIB) and Merck spent 15.41% as of June 30, 2019, and 19.70% as of March 31, 2019, respectively. Pfizer (PFE) and GlaxoSmithKline (GSK) are closer to the 15% level. On the lower end of the spectrum, Abbott Laboratories (ABT) dedicates about 7% of revenues to R&D spending as of June 30, 2019.

Many smaller pharma companies have lower revenue totals; so, they often spend significantly higher percentages of their budget on R&D – up to 50% for some firms.

Average Industrial Research and Development Spending

A quick survey of other industries clearly shows how much most of them are outspent in R&D by pharmaceutical companies. The overall average spending on R&D by industries engaged in developing new products is a mere 1.3% of sales revenues. The chemicals sector, one of the larger R&D sectors, spends an average of 2 to 3%. Aerospace and defense firms, although they do a great deal of research and development work, only dedicate about 4 to 5% of revenues to R&D spending.

Internet companies are closer to pharmaceutical firms in R&D spending, with both Microsoft and Google spending approximately 12% of sales revenues on R&D. However, other technology sector companies don't typically approach that level of spending. Even a company known for technological innovation, such as Apple, spends less than 3% of revenues on R&D; IBM spends a little more than that.

The semiconductor industry is the only industry that regularly outpaces pharmaceutical companies in R&D spending as a percentage of sales revenues. The major semiconductor firms, such as Broadcom, regularly spend approximately 25 to 28% of revenues on R&D.

The high level of R&D expenditures in the pharmaceutical industry is easy to understand given the cost of developing a new drug and bringing it to market. The average R&D to marketplace cost for a new medicine is nearly $4 billion, and can sometimes exceed $10 billion.