Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals

Retail prescription drug expenditures were estimated to account for about 12 percent of total personal health care service spending in the United States in 2015, up from about 7 percent through the 1990s. Much of this growth was driven by use of expensive brand-name drugs, but price increases have been reported for some generic drugs as well. Prior GAO reports have identified multiple reasons for drug price increases, including limited competition. Experts have questioned whether consolidation among drug companies could reduce competition and R&D investment in new drugs.

GAO was asked to examine changes in the drug industry. This report describes: (1) how the financial performance and structure of the industry have changed over time, (2) how reported R&D spending and new drug approvals have changed, and (3) what is known about the potential effects of consolidation on drug prices and new drug development. GAO analyzed Bloomberg drug industry financial data for 2006 through 2015, and examined select publicly available estimates of company market shares for 2014 and market shares for certain therapeutic classes for 2016. GAO also analyzed estimates of company self-reported R&D spending and federal funding for biomedical R&D data, aggregate tax credit claims data, and drug approval data for the same approximate time period. All data were the most current available. In addition, GAO also reviewed published research and interviewed federal agency officials, economists, and representatives from industry and advocacy groups.

GAO's analysis of revenue, profit margin, and merger and acquisition deals within the worldwide drug industry from 2006 through 2015 identified key trends:

Estimated pharmaceutical and biotechnology sales revenue increased from $534 billion to $775 billion in 2015 dollars.

About 67 percent of all drug companies saw an increase in their annual average profit margins from 2006 to 2015. Among the largest 25 companies, annual average profit margin fluctuated between 15 and 20 percent. For comparison, the annual average profit margin across non-drug companies among the largest 500 globally fluctuated between 4 and 9 percent.

The number of reported mergers and acquisitions generally held steady during this period, but the median disclosed deal value increased.

The largest 10 companies had about 38 percent of the drug industry's sales revenue in 2014. However, concentration was higher for narrower markets, such as for certain drugs in the same therapeutic class. In addition, experts noted that market pressures such as rising research and development (R&D) costs, fewer drugs in development, and competition from generic drugs, have driven structural changes in the industry such as increased use of acquisition by large drug companies to obtain access to new research.

From 2008 through 2014, worldwide company-reported R&D spending, most of which went to drug development (rather than research), increased slightly from $82 billion to $89 billion in 2015 dollars. During the same period, federal spending, which funded a greater amount of basic research relative to industry, remained stable at around $28 billion. In addition to grants, several federal tax provisions provided incentives for industry R&D spending, including the orphan drug credit, available for companies developing drugs intended to treat rare diseases, which increased more than five-fold from 2005 through 2014. Pertaining to drug approvals, the total number of new drugs approved for marketing in the United States fluctuated between 2005 and 2016, ranging from 179 to 263 drug approvals annually. Novel drugs—innovative products that serve previously unmet medical need or help advance patient care—accounted for about 13 percent of all approvals each year. Biologics—drugs derived from living rather than chemical sources—and orphan drugs accounted for growing shares of drug approvals, reflecting market and policy incentives to invest in these areas, according to experts GAO interviewed.

Research GAO reviewed indicates that fewer competitors in the drug industry are associated with higher prices, particularly for generic drugs. Research also suggests that drug company mergers can have varied impacts on innovation as measured by R&D spending, patent approvals, and drug approvals. Certain merger retrospective studies have found a negative impact on innovation.

The Department of Health and Human Services, Federal Trade Commission, Internal Revenue Service, and National Science Foundation provided technical comments on a draft of this report, which we incorporated as appropriate.

In 2015, expenditures for prescription drugs sold through retail  pharmacies were estimated to account for nearly 12 percent of total  personal health care services spending in the United States, up from  approximately 7 percent of such spending through the 1990s. Use of  expensive brand-name drugs accounted for much of the growth in recent  years, but price increases have been reported for some generic drugs as  well. Recent concerns about drug prices have sparked interest in drug  company profitability and competition in the industry. Limited competition  for particular drugs due to market exclusivity—granted by law after the  Food and Drug Administration (FDA) approves certain drugs—is one  factor that often has been noted as influencing drug prices. Prior GAO  reports have identified multiple reasons for drug price increases, including  limited competition. Further, some drug companies have undergone  mergers and acquisitions, leading to concerns about reduced competition  and higher drug prices. Economists have expressed apprehension that  reduced competition may also decrease the amount of industry research  and development (R&D) invested into new drugs, which could result in  fewer drug choices for consumers and fewer treatment options for  providers.

Amid these questions, you asked us to provide an overview of the drug  industry and the potential effects of consolidation on drug prices and new  drug development. This report describes:  1.  how the financial performance and structure of the drug industry have  2.  how reported research and development spending and new drug  approvals have changed over time; and  3.  what is known about the potential effects of consolidation on drug  prices and new drug development.

To describe how the financial performance and structure of the drug  industry have changed over time, we: analyzed Bloomberg data on revenues, profit margins, and mergers  and acquisitions for drug companies and, for comparison, software  companies and the largest 500 companies by worldwide revenue from  2006 through 2015; and examined overall industry concentration using data from QuintilesIMS  from 2007 through 2014, and reports from EvaluatePharma to discuss  concentration across smaller markets. All data were the most current  available.

To describe how reported research and development spending and new  drug approvals have changed, we: analyzed data from the National Science Foundation’s (NSF) National  Center for Science and Engineering Statistics’ Business Research,  Development, and Innovation Survey on company-reported R&D  expenditures and sales data for drug companies for years 2008  through 2014 and, for comparison, select other industries for 2013  and 2014; analyzed data from NSF’s National Center for Science and  Engineering Statistics’ Federal Funds for Research Survey on federal  obligations for research in biomedical related fields made by agencies  identified as funding drug-related research from fiscal year 2008  through 2014; analyzed aggregate tax return data from the Internal Revenue Service  (IRS) for income tax credits and deductions for research investment  for relevant industries for years 2005 through 2014; and analyzed data from FDA on drugs approved by its Center for Drug  Evaluation and Research between 2005 and 2016. All data were the  most current available.

To describe what is known about the potential effects of consolidation on  drug prices and new drug development, we reviewed studies obtained  from a literature search of scholarly peer reviewed studies, government  reports, select working papers, and policy research organization  publications published from 2005 through August 2017 that examined the  impact of consolidation or competition on drug price and drug  development.

In addition, for all objectives, we interviewed industry experts, including  representatives from industry groups, advocacy organization, economists,  and federal agencies. For all of the data analyzed, we took steps to  assure their reliability, including interviewing knowledgeable officials,  conducting data checks, and comparing to published information when  available. After taking these steps, we determined that the data were  sufficiently reliable for the purposes of our reporting objectives. Appendix  I provides additional details on our scope and methodology, including  limitations of our analyses and steps we took to assure the reliability of  the data we analyzed.

We conducted this performance audit from April 2016 to November 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings based  on our audit objectives.

The drug industry encompasses a variety of companies involved in the  research, development, distribution, and payment for chemically  synthesized and biologic drugs. For the purpose of our review, the drug  industry includes pharmaceutical companies that traditionally concentrate  on developing or manufacturing drugs derived from chemicals and  biotechnology companies that develop or manufacture biologics—more  complex drugs derived from living cells.

The federal government plays a role in various aspects of the drug supply  chain as well. To market drugs in the United States, drug companies must  apply and receive approval from the FDA that their drugs are safe and  effective. The federal government also supports R&D for new drugs, such  as through grants by the National Institutes of Health (NIH), NSF, and  other agencies, and through tax incentives administered by the IRS. In  addition, mergers and acquisitions affecting the drug industry are subject  to review by the federal government to ensure compliance with applicable  antitrust laws.

Drug Research, Discovery, Development, and Approval Process

The process of bringing a new drug to the market is long and costly and  involves multiple public and private entities that fund and perform R&D.  (See fig. 1.) For a new drug, the entire drug discovery, development, and  review process can take up to 15 years, often accompanied by high  costs. The process consists of several main stages:

Basic research: This is research aimed at acquiring new knowledge  or understanding without immediate commercial application or use.  Basic research is often federally funded and conducted to better  understand the workings of disease, which increases the potential of  discovering and developing innovative drugs.

Drug discovery: This is undertaken by numerous researchers from  drug companies, academia, and government searching for and  identifying promising chemical entities, or chemical and biological  compounds, capable of curing or treating diseases.

Preclinical testing: During preclinical testing, compounds are tested  in laboratories and in animals to predict whether a drug is likely to be  safe and effective in humans. If the compound is found to be  promising, a drug company may decide to test it as a new drug on  humans and it proceeds to the clinical trials stage. Before doing so,  the company must submit to FDA and have in effect an investigational  new drug application that summarizes the data that have been  collected on the compound and outlines plans for the clinical trials.

Clinical trials: Clinical trials test potential drugs in human volunteers  to determine if they should be approved for wider use in the general  population. An investigational new drug typically goes through three  phases of clinical trials before it is submitted to FDA for marketing  approval. Clinical trials proceed through Phases I, II, and III, beginning  with testing in a small group of healthy volunteers and then moving on  to testing in larger groups of patients whom the drug is intended to  treat to assess the compound’s effectiveness, rate of adverse events,  and uses in combination with other drugs.

FDA Review and Approval: To market a drug in the United States,  drug companies submit their research in a new drug application  (NDA) or biologic license application (BLA) to FDA, which then  reviews and approves the drug for marketing if it is shown to be safe  and effective for its intended use. An NDA is an application to market  a new chemically synthesized drug—either an innovative drug or a  variation of a previously marketed drug. A BLA is an application for a  license to market a new biological product (complex drugs derived  from living organisms). Companies may also submit a supplement to  an already approved NDA or BLA—known as an efficacy  supplement—to propose changes to the way an approved drug is  marketed or used, such as adding or modifying an indication or claim,  revising the dose or dose regimen, providing a new route of  administration, or changing the marketing status from prescription to  over-the-counter use.

For the purposes of its review, FDA classifies certain NDAs as new  molecular entities—products that contain active chemical substances  that have not been approved by FDA previously—and certain BLAs as  new therapeutic biologics. FDA generally considers drugs approved  either as new molecular entities or new therapeutic biologics to be  “novel” drugs—products that are often innovative and serve previously  unmet medical needs or otherwise significantly help to advance  patient care and public health.

Post-approval: After FDA has approved a drug for marketing, the  drug company may begin marketing and large-scale manufacturing of  the drug. FDA also continuously monitors the safety of the drug which  includes, amongst other activities, oversight of postmarket clinical  studies that it can require or request companies to complete (known  as phase IV clinical trials). Drug companies may also undertake these  studies independently to identify modifications to the drug such as  new delivery mechanisms or additional indications for use. The  company may then submit a new application or supplement  application with new clinical data to FDA to market the modification as  a new drug, or market it for the new use.

Patent and Market Exclusivity and Other Incentives for Drug Development

Patents and market exclusivity periods are two ways brand-name drug  companies may recoup their R&D investments by limiting competition for  specified periods of time. Typically, early in the R&D process, companies  developing a new brand-name drug apply for a patent on the active  ingredient and may additionally apply for patents on other aspects of the  drug, such as the method of use, from the U.S. Patent and Trademark  Office. Once a patent is granted, other drug companies are excluded  from making, using, or selling the patented aspect of the drug during the  term of the patent, which generally expires after 20 years from filing. In  addition, federal law authorizes certain periods of exclusive marketing rights, or market exclusivity, for new FDA-approved drugs, during which  time FDA generally cannot approve a similar competing version of the  drug for marketing. These exclusivities are independent of the rights  granted under patent and can relate to chemical entities never approved  before by FDA (5 years of exclusivity); new biologics (12 years); approval  of a supplement for a new condition or use or other change to a  previously approved chemically synthesized drug based on new clinical  studies (3 years); and orphan drugs—drugs designated to treat rare  diseases or conditions (7 years); among others. Patent protection and  market exclusivity are independent of one another and can run  concurrently or not.

When brand-name drug products’ patents expire and exclusivity periods  end, similar versions of the drug product that have been approved by  FDA may enter the market. These are referred to as generics for  chemically synthesized drugs and biosimilars for biologics. The Drug  Price Competition and Patent Term Restoration Act of 1984—commonly  known as the Hatch-Waxman Amendments—facilitated earlier, and less  costly, market entry of generic drugs. A generic drug must generally be  demonstrated to be equivalent to the brand-name drug product in active  ingredient, dosage form, safety, strength, route of administration, quality,  performance characteristics, and intended use. For biologics, the  Biologics Price Competition and Innovation Act of 2009 provided an  abbreviated pathway for companies to obtain approval of “biosimilar” and  “interchangeable” biological products. A biosimilar must be demonstrated  to be highly similar to an already approved biological product and to have  no clinically meaningful differences in terms of safety and effectiveness  from the reference product. See table 1 for a description of drug  application types.

In addition to incentivizing drug development through patent and market  exclusivity, the federal government supports new drug research both  directly, through grants from—and intramural research by—agencies  such as NIH and indirectly through tax incentives for companies that  develop new drugs. Specifically, the Internal Revenue Code includes  incentives for research-related spending in three ways: through two  income tax credits—the credit for clinical testing expenses for certain  drugs for rare diseases (known as the orphan drug credit) and the credit  for increasing research activities (known as the research credit)—and  through special methods for treatment and reporting of research and  experimental expenditures, including current-year deduction to arrive at  net income. In general, the credit incentives are available to companies  with qualified research spending in the United States. Companies include  businesses organized as corporations or non-corporate businesses such  as partnerships. These provisions are described below:

Orphan drug credit: Companies may claim the orphan drug credit for  half the “qualified clinical testing expenses” for drugs intended to treat  rare diseases. Expenditures that give rise to the orphan drug credit  may include expenses related to testing outside the United States. A  company may claim foreign clinical testing expenses if there is an  insufficient testing population in the United States to test the safety  and efficacy of the drug. The orphan drug credit is nonrefundable;  that is, while the credit can be used to reduce a company’s income tax  liability generally, the credit cannot be used to generate a refund if the  business has no tax liability or fully used if the credit would reduce tax  liability below zero. The credit is also a component of and subject to  the limitations of the general business credit.

Research credit: Companies may claim a research credit for  qualified research expenditures they undertake in a given year that  exceed a threshold or base amount. This incremental design of the  credit is intended to create an incentive for companies to do more  research than they otherwise would. Qualified research expenses are  certain expenses for qualified research incurred by the taxpayer  during the taxable year in carrying on a trade or business. Qualified  research is research that is undertaken for the purpose of discovering  information that is technological in nature and the application of which  is intended to be useful in the development of a new or improved  business component of the taxpayer. In general, substantially all the  activities that constitute a process of experimentation relating to new  or improved functions, performance, or reliability or quality are  qualified research. The rate of credit can be 14 or 20 percent. Like the  orphan drug credit, the research credit is nonrefundable and is a  component of, and subject to, the limitations of the general business  credit.

Deductions of qualified research expenses: If elected, the tax code  allows businesses to currently deduct “research or experimental  expenditures” from gross income in the tax year they are incurred  rather than depreciate (or amortize) the assets the R&D created over  time. Research and experimental expenditures include all costs  incident to research, including research conducted outside the United  States. Since “qualified research expenses” and “qualified clinical  testing expenses” are a particular subset of research and  experimental expenditures, expenditures that can give rise to either  the research or orphan drug tax credits can be deducted in the year  that they occur. However, these deductions must be reduced by the  amount of tax credits claimed in order to prevent expenses from both  generating a tax credit and being deducted from income.

The distribution of, and payment for, prescription drugs involve  interactions and negotiated transactions among multiple commercial  entities along the supply chain from the drug manufacturer to the  consumer (see fig. 2). Brand-name and generic drug manufacturers  typically sell their drugs to drug wholesalers, who in turn sell the drugs to  retail pharmacies or to health care providers (such as hospitals, clinics,  and physicians). Pharmacies or providers dispense or administer  prescription drugs to consumers. Most consumers purchasing drugs pay  a portion of the drug’s price in the form of a copayment or coinsurance,  with the specifics of this cost sharing dictated by the consumers’  insurance plan. Insurance plans often use pharmacy benefit managers  (PBMs) to help them manage their prescription drug benefits, including  negotiating prices with manufacturers, processing claims, and negotiating  with retail pharmacies to assemble networks where the beneficiaries can  fill prescriptions. PBMs negotiate with manufacturers for rebates on behalf  of the insurance plan based on market share, volume, and formulary  placement. PBMs also contract with pharmacies; contract terms and  conditions may include specifics about negotiated reimbursement rates  (how much the pharmacy will be paid for dispensed drugs) and payment  terms. Health care providers may also negotiate with insurers for the  drugs they administer. The price that payers, PBMs, and ultimately  consumers pay for prescription drugs depends in part on the amount of  competition and the purchasers’ negotiating power. The negotiating  power is influenced by the ability to choose from competing drugs and the  volume of drug purchased.

According to economic experts, the usual mechanisms that enforce  market discipline may not work in the same way in the health care market  as they do in other markets. In most markets—automobiles, for  example—consumers are expected to be conscious of the price of goods.  If a company raises the price of its goods, consumers would likely  purchase fewer goods, causing the company’s revenues to decline.  However, in the health care market, the purchase of goods and services  is largely influenced by health care providers, who may not be well- informed about, or incentivized to consider, the prices involved. In the  case of drugs, some experts argue that marketing and advertising may  further distort provider decision making. In addition, if the patients’  medical bills are largely paid by insurance plans (other than copayment or  coinsurance costs), then patients’ demand may not be significantly  influenced by changes in price to the extent that it might be in other  markets where the consumers see and pay the bill themselves.

Certain payment policies may also limit the negotiating power of insurers.  For example, Medicare Part D is required to cover all drugs in six  protected classes, which some experts argue reduces the negotiating  power of its contractors (known as plan sponsors). In addition, some  brand-name drug companies are providing coupons to consumers to  mitigate patient drug costs when a company’s drugs are not covered by  payer formularies or require higher patient costs than preferred drugs.  Some research and experts we interviewed have noted that this practice  erodes the negotiating power of insurers and the cost management utility  of formularies, which may result in lower prices for the patient using the  coupon but higher prices overall. In addition, patients and providers in  many cases may not have clear information about the benefit relative to  cost of one drug over another drug or treatment.

Consolidation and the Antitrust Review Process

Experts have said that consolidation as a result of mergers and  acquisitions is one of multiple factors that could influence competition.  Fewer companies producing and marketing drugs can lead to greater  market dominance by certain companies and less competition.

The Federal Trade Commission (FTC) and the U.S. Department of  Justice (DOJ) enforce federal antitrust laws that prohibit activities, such  as price fixing and mergers and acquisitions where the effect may be  substantially to lessen competition or tend to create a monopoly. Drug  companies are subject to these antitrust laws. Companies are required to  notify FTC and DOJ of certain pending mergers, also known as the  premerger notification program. As part of its premerger review process,  these agencies can approve mergers contingent on company divestiture  of assets, including those related to products in development—a process  known as a negotiated merger remedy. These agreements are subject to  public notice and comment and result in an enforceable order. The goal of  a merger remedy is to preserve or restore competition in the relevant  markets. Although FTC and DOJ each have authority and  responsibilities under the antitrust laws, FTC typically examines proposed  drug industry mergers. In addition, FTC has authority to investigate and  take action against unfair methods of competition in or affecting  commerce, as well as mergers and acquisitions that may substantially  lessen competition or tend to create a monopoly, including in the drug  industry.

Drug Industry Profit Margins and Merger and Acquisition Deal Values Increased, and the Industry Underwent Structural Changes

Among the worldwide drug companies included in the data we reviewed,  reported pharmaceutical and biotechnology revenues and profit margins  for most companies grew from 2006 through 2015. The number of  mergers and acquisitions among companies in the industry generally held  steady from 2006 through 2015, but merger and acquisition deal values  increased. Market concentration varied by the specific market level  considered. Industry experts we interviewed noted that market pressures  have driven structural changes in the industry.

Company-Reported Revenues and Profit Margins Grew from 2006 through 2015

According to the data we reviewed, between 2006 and 2015 estimated  aggregate worldwide pharmaceutical and biotechnology sales revenue for  drug companies grew from $534 billion to $775 billion in real 2015 dollars  (about 45 percent), with most of the growth occurring between 2006 and  2011. The largest 25 of these companies (by 2015 pharmaceutical and  biotechnology revenue) saw their aggregate sales revenue increase from  $448 billion in 2006 to $569 billion in 2015, or about 27 percent.  Aggregate sales revenue for all other drug companies in our data grew  more sharply, from $86 billion in 2006 to $206 billion in 2015—an  increase of about 140 percent (see fig. 3).

Drug companies’ average profit margins also grew from 2006 to 2015,  though the trends differed for the largest 25 companies compared to the  remaining companies in our data. Overall, about 67 percent of  companies saw their profit margins increase between 2006 and 2015.  While there was some fluctuation over time, the average profit margin  was 17.1 percent in 2015 for all drug companies; profit margins were  higher for the largest 25 companies (20.1 percent in 2015) than for all  others (8.6 percent in 2015; see fig. 4).

To better place large drug companies’ profit margins into context, we  conducted a similar examination of profit margins for large companies in  other industries, specifically software companies and the largest 500  companies (by 2015 total worldwide revenue as reported in Bloomberg)  representing a wide range of industries. We included the software  industry separately because, like the drug industry, it has been cited as  having high R&D investment and low production and distribution costs,  though caution should be taken in making this comparison. Among the  largest 25 software companies (by 2015 software revenue), the average  profit margin began at 21.7 percent in 2006 and remained relatively stable  through 2014, before decreasing to 13.4 percent in 2015 (see fig. 5). As  a broader comparison, the average profit margin among the largest 500  companies was consistently lower than the average among the largest 25  drug companies and software companies. Among the largest 500  companies, the average profit margin decreased from 8.9 percent in 2006  to 6.7 percent in 2015.

The Number of Mergers and Acquisitions Generally Held Steady from 2006 through 2015, but the Values Fluctuated

The annual number of mergers and acquisitions involving drug  companies generally held steady between 2006 and 2015, with some  fluctuations in intervening years, based on our review of Bloomberg  data. Overall, the number of transactions generally held steady, with  312 in 2006 and 302 transactions in 2015 (see fig. 6). The number of  mergers and acquisitions involving one of the largest 25 companies (by  2015 pharmaceutical and biotechnology revenue) increased from 29  transactions in 2006 to 61 transactions in 2015. In contrast, the number  of transactions in our data for the smaller drug companies decreased  from 283 transactions in 2006 to 241 transactions in 2015. See appendix  II for additional information on merger and acquisition activity of 10 large  companies in the drug industry as of 2014.

While the number of transactions generally held steady between 2006  and 2015, the total value of transactions completed over this period  fluctuated considerably. These fluctuations were driven by a small  number of high value transactions, which tended to occur among the  largest 25 companies (see fig. 7). For example, in 2009, there were three  transactions each valued above $20 billion in real dollars, all of which  were conducted by companies in the largest 25:

Pfizer Inc. acquired Wyeth LLC for about $71 billion,

Merck & Co Inc. acquired Schering-Plough Corp. for about $56 billion,

Roche Holding AG acquired Genentech Inc. for about $48 billion.

In 2015, about half of the total merger and acquisition transaction value  came from five transactions each valued over $10 billion in real dollars,  including one very large transaction by Allergan for about $72 billion. The  other four transactions also involved companies among the largest 25.  Much as the total value of mergers and acquisitions fluctuated  considerably from year to year, median disclosed transaction values  generally increased between 2006 and 2015, with considerable  fluctuation among years.

Concentration in the Drug Industry Varied by the Level of the Industry Considered

For the overall drug industry, the share of total sales accounted for by the  10 largest companies—a measure of concentration—declined between  2007 and 2014, the years for which public data were available from  QuintilesIMS. The largest 10 companies (by 2014 pharmaceutical  revenue) had 48.9 percent of the drug industry’s sales revenue in 2007;  by 2014, their share of the industry sales revenue declined to 38.2  percent. Concentration, which can be measured by share of sales,  provides a basic indication of the competitiveness of companies in an  industry or specified market level within an industry. Competition in the  drug industry generally is examined at the level where products are  viewed as substitutes, according to FTC officials. Substitutes can be  products that are the same molecular entity or, in some cases, different  molecular entities that treat the same condition.

At levels narrower than the entire industry, such as drugs within the same  therapeutic class or of the same molecular entity (levels that are more  relevant to competition), concentration in shares of sales can be higher  than in the overall industry. For example, EvaluatePharma reported that  the three largest companies in the anti-diabetics market accounted for  67.5 percent of the sales in that market in 2014. Similarly, the three  largest companies in the anti-rheumatics market accounted for 56.8  percent of the sales in that market in 2014, and the three largest  companies in the anti-virals market accounted for 72.4 percent of the  sales in that market, with the leading anti-viral manufacturer accounting  for over half (52.8 percent) of worldwide anti-viral sales.

Concentration can also vary for drugs of the same molecular entity, as  some generic drugs may have different numbers of manufacturers than  others. For example, as of 2017, 14 companies have approved ANDAs  for lisinopril, a drug for hypertension—that is, 14 companies have generic  versions of the drug approved for manufacture. By comparison, only  one company has an approved ANDA for efavirenz, a drug used to treat  HIV infection. Greater numbers of generic manufacturers generally  reduce concentration, as generic manufacturers compete with one  another in addition to brand-name manufacturers. More broadly, one  recent study found that of the novel drugs approved in tablet or capsule  formulation since the 1984 Hatch-Waxman Act and eligible for generic  competition, more than one-third had three or fewer generic approvals.

Industry Experts Noted Market Pressures Have Driven Structural Changes in the Industry, Such as in the Types of Acquisitions and Increased Specialization in Therapeutic Areas

Experts we interviewed noted that market pressures such as rising R&D  costs, fewer drugs in the R&D pipeline, and the growth in sales of generic  drugs have driven various structural changes in the drug industry, such as  in the types of acquisitions being sought. Not all companies respond to  those pressures in identical ways. For example, some experts said that  some companies that traditionally manufactured brand-name drugs are  expanding into the manufacturing of generic drugs. These brand-name  companies may acquire a generics manufacturer to adjust the portfolio of  drugs they manufacture or gain access to a generics business. Similarly,  some traditionally generic manufacturers are expanding into brand-name  manufacturing to acquire product lines with more generous profit margins.  For both brand-name and generic manufacturers, expanding the size of  their drug portfolio may improve their bargaining position with PBMs,  according to two economists we interviewed. Experts also said that  traditionally large companies are increasingly relying on mergers and  acquisitions to obtain access to new research and are conducting less of  their own research in-house. In addition, experts told us that investment in  the development of traditional chemically synthesized drugs has  produced increasingly lower financial returns, resulting in some traditional  pharmaceutical companies turning to invest more in the development of  more complicated and costly biologics. Many experts highlighted the  proliferation of biotechnology companies as large pharmaceutical  companies seek to acquire promising new research developments.

Many experts told us that market pressures have also driven some drug  companies to move towards specialization in certain therapeutic areas,  including through mergers and acquisitions. As one example,  GlaxoSmithKline acquired most of Novartis’s vaccine business in 2015,  bolstering its own line of vaccines and helping to raise its share of sales  of the worldwide vaccine market. Simultaneously, Novartis acquired  GlaxoSmithKline’s oncology business, enabling both companies to shed  one line of business and focus on the newly acquired therapeutic areas.

Experts again noted that one reason companies may be specializing  through mergers and acquisitions is because of the increasing cost of  R&D—acquiring promising new or developed research or product lines  helps companies mitigate R&D investment risk. Acquiring existing lines of  business from competitors within a therapeutic area may also help a  company increase its presence in a particular therapeutic area.

Another widely cited factor influencing structural changes in U.S.  industries—including the drug industry—involves tax-influenced mergers,  called corporate inversions. An inversion is a type of merger where a U.S.  corporation merges with or acquires a company located in a foreign  jurisdiction—often a lower-tax country—and reorganizes so the resulting  parent corporation is located in the foreign country. This can reduce a  corporation’s overall tax liability—often by reducing its U.S. tax liability.  While taxes are one of many factors that may influence trends in mergers  and acquisitions as discussed above, the incentive for drug companies to  reduce tax burdens through inversions can be significant. In 2016, the  Treasury Department issued new regulations to curb inversions.

Pharmaceutical Company-Reported Research and Development Spending Grew Slightly, while Biologics and Orphan Drugs Were a Greater Share of New Drug Approvals

Pharmaceutical company-reported R&D spending grew slightly from 2008  through 2014, while federally funded spending decreased slightly over the  period. Industry spending focused on drug development rather than  earlier-stage research, whereas direct federal spending, such as through  NIH grants, funded a greater amount of basic research. Claims for the  orphan drug credit, one of several federal tax incentives encouraging drug  development, increased sharply from 2005 through 2014. Biologics and  orphan drugs accounted for an increasing share of new drug approvals  from 2005 through 2016. Studies we reviewed and experts we  interviewed suggested that potential revenues, costs, and policy  incentives influenced brand-name drug company R&D investment  decisions.

Pharmaceutical Company- Reported Research and Development Spending Increased Slightly, While Federally Funded Spending Decreased Slightly, from 2008 through 2014

Our analysis of industry survey data from NSF indicate that worldwide  R&D spending by U.S.-owned pharmaceutical companies and U.S.-based  R&D by foreign companies increased slightly (8 percent) in real dollars  from $82 billion in 2008 to $89 billion in 2014, the years for which  comparable data were available (see fig. 8). According to NSF survey  data, the share of this spending that pharmaceutical companies paid  others to perform also increased over the period. Estimates of worldwide  R&D expenditures as a percentage share of total worldwide sales  averaged 13 percent and ranged from 11.5 to 14.2 percent over the  period 2008 to 2014. This amount, according to estimates from  QuintilesIMS, is larger than the 7.6 percent of total pharmaceutical sales  revenue that the industry spent on marketing and promotion in 2014;  however, due to differences in the different sources’ methodology and  data, publicly reported figures are not necessarily comparable.

The NSF Business Research, Development, and Innovation Survey data  indicated worldwide R&D spending for respondent biotechnology  companies was $9.2 billion in 2009, dropped to $2.7 billion in 2010, rose  to $6.7 billion in 2011, then decreased to $1.7 billion in 2013, the years  for which worldwide data were available. The percentage of  biotechnology company-reported R&D to worldwide biotechnology sales  ranged widely from 43 percent in 2011 to 7 percent in 2013.

Pharmaceutical companies reported spending a greater share of sales on  R&D than comparably large, R&D-intensive industries and all aggregated  manufacturing and non-manufacturing industries, according to  comparable Business Research, Development, and Innovation Survey  data (see table 2). For example, in 2014, self-reported R&D expenditures  as a percentage of total sales were higher for pharmaceutical companies  than for other comparably large, R&D-intensive sectors such as  semiconductor and other electronic components, software publishers, and  computer system design services.

Direct federal spending for biomedical research, primarily funded through  NIH, decreased 3.8 percent in real dollars from $27 billion in fiscal year  2008 to $26 billion in fiscal year 2014, after a peak of $32 billion in 2010,  according to our analysis of federal survey data from NSF. NIH was the  primary federal source for biomedical research and accounted for $26  billion of spending in 2008 and $25 billion in 2014. According to federal  officials we interviewed, other agencies that fund biomedical research that  could be relevant to drug R&D were the Department of Defense and the  NSF.

In addition, state and local governments, foundations, charities, and  venture capital also funded biomedical R&D, according to studies and  experts we interviewed. Estimates of this spending are much smaller than  those for industry and federal agencies. In 2015, National Health  Expenditure estimates show that state and local governments spent $6.7  billion on research and non-industry private funders spent $5.3 billion.

Pharmaceutical Company- Reported Spending Focused on Drug Development and Federal Spending Focused on Basic Research

Pharmaceutical company spending from 2008 through 2014 focused on  drug development, while federal spending focused on earlier-stage basic  research. For example, in 2014 pharmaceutical companies reported  allocating 13 percent of total reported domestic R&D spending on basic  research, 21 percent on applied research, and 66 percent on  development (see fig. 9).

By comparison, federal spending consistently funded a greater amount of  basic research, according to our analysis of data from NSF’s Survey of  Federal Funds for Research and Development. Studies show that basic  research often supplies the innovation upon which the industry develops  drugs. For example, as shown in figure 10 below, NIH obligated 54  percent, or $13.6 billion of its total $25 billion of drug related spending, for  basic research in fiscal year 2014. This is more than twice as much as the  $6.3 billion that NSF data show pharmaceutical companies reported  spending domestically for basic research that year. NIH also funded  applied research that includes more targeted research and activities  aimed at translating basic research into new treatments for patients. For  example, NIH supports clinical research through the National Center for  Advancing Translational Sciences and several other NIH Institutes and  Centers. This includes supporting pre-clinical and early-stage clinical  trials; promoting and initiating collaborations and partnerships among  industry, academia, and other stakeholder communities, such as patient  advocacy groups, to address research barriers; and facilitating data  sharing, according to agency officials. In accordance with the definition of  “development” provided by NSF for the Survey of Federal Funds for  Research and Development, NIH classifies R&D activities as “research.”  Therefore, NIH does not report any of its activities as strictly drug  development, according to agency officials.

Studies and experts we interviewed suggested that the relative roles of  R&D funders and performers are evolving. For example, some experts  noted that there is less distinction between public and private investment  in R&D than in the past because publicly funded research institutions,  such as universities, are frequently involved in financial relationships with  industry for commercial development. Some industry experts also noted  NIH’s role in fostering these collaborations. As previously noted, there  has been a proliferation of smaller, biotechnology-focused companies and  greater use of acquisition and licensing agreements by larger, traditional  pharmaceutical and biotechnology companies to build their earlier-stage  product pipelines rather than conducting early research in-house. Experts  suggested that this trend is a response to the increasing complexity and  cost of R&D concurrent with the advent of biotechnology and waves of  patent and exclusivity expirations for large companies.

In addition, traditional pharmaceutical companies also performed less  R&D internally than in the past, according to NSF data. Worldwide R&D  spending paid for and performed by pharmaceutical companies  decreased in real dollars from $61.7 billion in 2008 to $58.2 billion in 2014  and as a share of total worldwide R&D spending. Conversely, the share  of the worldwide pharmaceutical R&D spending that was paid for by the  company and performed by others, such as through purchased R&D  services, increased from 25 percent in 2008 to 35 percent in 2014.

Federal Tax Provisions Encourage Drug R&D, with Claims for the Orphan Drug Credit Increasing Sharply

Similar to the R&D spending trend identified above from the NSF data,  various IRS tax data consistently indicate that drug R&D activities did not  change significantly—with the exception of the orphan drug credit, which  over time increased sharply. Inflation-adjusted claims by all industries for  the orphan drug credit increased five-fold between 2005 and 2014, from  about $280 million to about $1.5 billion (see fig 11).

Claims for the other tax credit that incentivizes drug development—the  research credit—were more stable than the orphan drug credit between  2005 and 2014. As shown below in figure 12, IRS estimates of research  credit claims for pharmaceutical-related corporations reached a high of  $1.5 billion in 2007, but then fell to about $1.2 billion in 2014, a level close  to the beginning of the period. This may be due in part to the fact that we  were not able to obtain a specific estimate for the research credits  claimed by biotechnology companies. By comparison, research credit  claims grew for all industries over the period, particularly from 2012 to  2014.

According to IRS data, between 2005 and 2014 the pharmaceutical  manufacturing industry spent, on average, about $22.5 billion per year (in  real dollars) in qualified research spending that factored into the  calculation of the research credit (see fig. 13). Spending peaked in 2007  at $25.5 billion and then generally declined from 2007 to 2014. This  amount of spending—reported on tax returns as meeting the  requirements of qualified research spending as noted above—is less than  half of the research spending reported by NSF’s Business Research,  Development, and Innovation Survey data. These research spending  differences can reflect both differences in the definitions of research  spending in each data source and in the specific industry definitions used  in the different data sources.

The ability of companies to deduct research expenditures in the year they  are incurred simplifies tax accounting for research spending and reduces  the after-tax cost of research investments. The amount of research  spending deducted by large pharmaceutical corporations that submitted  an IRS form M-3 has been largely consistent between 2010 and 2013, the  years for which data were available (see table 3). Specifically, research  expenditure deductions in real dollars increased to $30.7 billion in 2013  after a low over the period of $24.9 billion in 2012. The table also shows  that the amounts shown as research expense on the financial statements  of the same corporations were slightly higher than the amount deducted  on tax returns in each year.

Novel Drugs Consistently Accounted for About Thirteen Percent of New Drugs Approved in the United States from 2005 through 2016, and Biologics and Orphan Drugs Each Grew as a Share of Approvals

The number of approvals for drugs FDA considered novel drugs  increased from 20 in 2005 to 45 in 2015 but declined to 22 approvals in  2016, according to FDA data and reports (see fig. 14). Novel drugs  accounted for between 8 and 18 percent of all drug approvals each year  and averaged 13 percent over the period. The remaining majority of  drug approvals each year included those not considered novel because  they had chemical substances that were previously approved by FDA or  were modifications to existing drugs.

Biologics and orphan drugs each represented an increasing share of all  drug approvals from 2005 through 2016. As shown in figure 15, biologics  grew from 8 percent of all drug approvals in 2005 to 17 percent in 2016.

Biologics also represented an increasing share of the subset of all  approvals that were considered novel drugs—from 10 percent of novel  drugs approved in 2005 to 32 percent in 2016.

Orphan-designated drugs as a share of all drug approvals grew even  more dramatically from 5 percent of all drug approvals in 2005 to 21  percent in 2016 (see fig.15). Orphan drugs as a share of novel drug  approvals ranged from 22 percent in 2007 to 42 percent in 2015.

We also examined drug approval trends by product category. The product  categories that led the largest number of drug approvals fluctuated over  time, but oncology drugs were among the most frequently approved in all  but 2 years from 2005 through 2016. Of the 263 drugs approved by FDA  in 2016, the most common product categories were oncology (55  approvals) and metabolism and endocrinology (38 approvals). For the 22  novel drug approvals in 2016, the most common product categories were  oncology (5 approvals) and neurology (4 approvals).

Studies and Experts Suggest Potential Revenues, Costs, and Policy Incentives Influenced Drug Industry Research and Development Investment Decisions

Studies and industry experts we interviewed, including economists and  industry association officials, suggested several drivers for drug company  R&D investment decisions. These investment choices were influenced by  revenue, cost, and regulatory and other policy incentives:

Potential revenues: High revenue potential, typically associated with  a large potential number of patients or the potential for high drug  prices, is an important incentive for R&D investment, according to  experts and some research. Studies show that potential market size,  measured by revenue, is a determinant of R&D investment and  market entry for both brand-name and generic drug companies.  Companies also seek to maximize potential revenues by investing in  the development of drugs that can command high prices, and drugs  that address unmet medical needs or differentiate them from  competitors. This includes investment in drugs for niche markets that  may have limited competition, such as orphan drugs. Experts also  noted that some companies invest to extend patent protection or  exclusivity periods for existing drugs as a means to extend revenue  generation by delaying or limiting the effect of generic competition— sometimes referred to as “evergreening” or “patent hopping.”

Cost reduction: Drug development costs, particularly for novel drugs,  are increasing and companies have sought various ways to reduce  their costs or limit risk. Experts we interviewed suggested that drug  companies have attempted to reduce costs by focusing on drugs for  which clinical trials are perceived to be less costly, drugs perceived as  more likely to receive FDA approval, modifications to existing drugs  rather than the development of novel drugs, outsourcing of clinical  trials, and acquisition of R&D projects already underway.

Policy incentives: Often regulatory and other policy incentives  influence potential revenues and risks and, in turn, R&D investment,  according to experts. For example, exclusivity periods and patent  protection, expedited review programs, and tax incentives were cited  as influencing R&D investment. The supply of new science from  federally funded research may also influence company investment  decisions. Expectations about payer reimbursement could also  influence potential pricing and investment decisions, according to  some experts. For example, one expert noted that payers typically do  not resist high prices for oncology drugs.

These drivers may also explain the observed brand-name drug approval  trends for biologics, orphan drugs, and drugs for certain disease areas.  For example:

Biologics: Some experts noted that recent technological advances  have spurred opportunity and investment in new biologics. The longer  period of FDA market exclusivity for biologics relative to traditional  chemically synthesized drugs may also be attractive to drug  developers. In addition, there are currently few biosimilar drugs  available to compete for market share once BLA exclusivity expires.  Though FDA had approved seven biosimilars for marketing between  2010—the year the approval pathway for biosimilar biological  products was established—and September 2017, and was reviewing  additional applications, some experts suggest that the added cost and  difficulty in developing biosimilars may hinder entry of biologics’  competitors relative to the entry seen for traditional generics.

Orphan drugs: In addition to the exclusivity and orphan drug credit  incentives to develop orphan drugs, an industry expert we interviewed  also suggested that it is easier to get FDA approval for orphan drugs,  and another suggested that it is less costly to develop them. In  addition, orphan drugs can often garner high prices compared to non- orphan drugs, according to an industry report.

Disease areas: Certain drug classes or disease areas, such as drugs  for oncology or multiple sclerosis drugs, can garner higher prices and,  in turn, more R&D investment because they often have fewer  competitors, are often administered by providers who are insensitive  to price, or are perceived as particularly life-saving, according to some  experts we interviewed. In addition, some experts suggested that NIH  investment in oncology research and gains in personalized medicine  have resulted in many more research opportunities in which  companies can invest. For example, many new oncology drugs are  approved for treatment of tumors with specific genetic markers, and  research suggests these drugs are more likely to succeed in clinical  trials and face a less-elastic demand curve that, in turn, can facilitate  higher pricing.

According to several experts we interviewed, a company’s R&D focus on  fewer therapeutic areas of more profitable drugs or niche markets may  come at the expense of drug development in less lucrative disease  areas—those that affect many patients but in which drugs are more costly  to bring to market or have existing generic competition—for example,  cardiovascular disease. According to a study of drug development  pipeline data, the number of new drugs in all phases of clinical  development to treat cardiovascular disease, a leading cause of death in  the United States, declined from 1990 to 2012, whereas the number of  new cancer drugs increased over the period.

Research Suggests Market Concentration Affects Drug Prices, and Mergers May Affect Drug Company Innovation

Research we examined in our literature review suggests that the level of  competition in a relevant market influences drug prices. Competition also  matters for innovation. Certain empirical economic studies suggest that  mergers among brand-name drug companies can negatively impact  companies’ innovation post-merger.

Research Finds High Market Concentration Is Associated with Higher Drug Prices

The relationship between competition and drug price is well documented  in the drug industry, and industry experts and available research point out  that competition dynamics differ for brand-name and generic drugs. Brand  name companies producing drugs under patent or exclusivity protection  have monopoly pricing power unless alternative drugs that treat the same  condition are available. For brand-name products that face competition  from such therapeutic alternatives, companies compete on price,  differentiation from competitors, or both. We and others have reported  that brand-name drug companies consider the availability and price of  therapeutic alternatives along with potential market size, the perceived  value of the drug relative to competitors, and other factors when  determining the price for a new drug. Conversely, generic drugs  compete on price with the brand-name or other generic manufacturers of  the same drug. As we have reported, and as experts we have interviewed  agreed, generic drug companies compete primarily on price.

Based on our literature review, we did not identify any empirical studies  that examined the impact of drug industry concentration changes from  mergers and acquisitions on drug prices post-merger. However, empirical  studies we reviewed suggest that less competition—that is, a more highly  concentrated market—is associated with higher drug prices, particularly  for generic drugs. The following summarizes studies we reviewed on the  effect of generic and brand-name competition:

Generic competition: Most notably, once brand-name drugs lose  patent and marketing exclusivity and generic versions of drugs enter  the market, drug prices fall and continue to decline as additional  generic manufacturers enter. The price moderating effect of generic  competition is well documented by FDA, FTC, the IMS Institute for  Healthcare Information, and other research. FDA found that for drugs  sold from 1999 through 2004, the first generic competitor reduced the  drug price only slightly lower than the brand-name on average, but the  second generic competitor reduced the drug price by nearly half. For  drugs that attracted nine or more generic manufacturers, the average  generic price fell 80 percent or more. The IMS Institute for Healthcare  Information reported similar findings in 2016 based on its review of  generics that entered the market between 2002 and 2014. The  introduction of generics reduced the price of those drugs by 51  percent in the first year and 57 percent in the second year with price  reductions driven, in part, by the increasing number of competitors. In  addition, a 2017 study of 1,120 drugs available as generics between  2008 and 2013 determined that drugs with less market competition,  measured by higher concentration, had higher price increases over  the period compared to drugs in the cohort with the lowest  concentration.

Brand-name competition: For brand-name drugs, studies show that  the presence of therapeutic alternatives in the market reduces the  launch price—the price the company sets for a new drug. For  example, an often-cited 1998 study of launch prices for 130 new  molecular entities showed that a greater number of brand-name  therapeutic alternatives was associated with substantially lower  launch prices for new brand-name drugs compared to their  predecessors. More recently, there are examples of therapeutic  alternatives creating market pressure on, and thus reducing prices of,  brand-name drugs, such as multiple brand-name hepatitis C therapies  that became available between 2013 and 2014.

Research has also found that some brand-name drug companies are able  to maintain or even raise prices for their drugs—despite competition from  therapeutic or generic alternatives—for various reasons, such as product  differentiation or brand loyalty stemming from marketing or prescribing  patterns. For example, brand-name companies may actually increase  prices for some of their drugs to capture the price-insensitive segment of  the market. Research also suggests that the extent of price reductions  resulting from the entry of generic drugs into a market can differ by the  characteristics of the drug and may be less dramatic for biosimilar drugs  than traditional generic drugs. For example, the 2016 IMS report noted  that price reductions under these circumstances occurred faster for oral  drugs than for injectable drugs, which often attract fewer generic  competitors. Another 2017 study examining the state of generic  competition found that injectables and drugs with other formulations, such  as topical or inhaled drugs, were more likely than oral drugs to have only  one or two manufacturers. Certain literature we reviewed and experts we interviewed suggested that biosimilars will moderate prices for biologic  drugs, but not to the same extent as traditional generics do because they  are more costly to manufacture and may be less consistently substituted  for the brand-name drug; however, more time and research will be  needed to understand the effects given the small number of biosimilars  on the market.

Studies Find Competition Matters for Innovation, and Some Suggest a Negative Impact of Mergers on Drug Company Innovation

Competition is also relevant to innovation, according to economic studies  we examined. As noted, brand-name drug companies compete to  develop new products and differentiate their products from therapeutic  alternatives. The analysis of how competition affects innovation is a fact- specific process. There is empirical evidence suggesting that, in certain  circumstances the incentive to invest in R&D could be enhanced with  more competitors. For example, a 2014 study examining multiple  manufacturing and non-manufacturing industries demonstrated a positive  relationship between competition and innovation (measured by patents),  productivity, and R&D expenditures. While drug innovation comes from  multiple sources and increasingly from smaller innovative biotechnology  companies, the industry relies on large drug companies to invest in the  expensive clinical trials needed to develop and bring new innovations to  market.

We also identified several merger retrospective studies. These studies  suggest that there are varied impacts of drug company merger and  acquisition on innovation, including both inputs (e.g., R&D spending) and  outputs (e.g., patents and new drug approvals).

A 2009 study of 27 large, brand-name drug company mergers found that the mergers had a statistically significant negative impact on company R&D spending and patent issuance in the third year post- merger compared to non-merging companies. The authors concluded that the findings contradict the idea that mergers deliver advances in innovation that could outweigh possible anticompetitive risks.

A 2007 study of 165 large mergers between 1988 and 2000 suggested that large companies sought to merge in response to patent expiration or product pipeline gaps, and small companies sought to merge as a response to financial trouble. When controlling for companies’ propensity to merge, small merging companies— defined as companies valued less than $1 billion—grew more slowly in R&D spending, sales, and R&D employees post-merger compared to similar non-merging companies. However, the study did not find these effects to last beyond one year and did not find differences in these growth rates between large merging companies and non- merging companies. Overall, the authors concluded that while merger in the drug industry is a response to being in trouble for both large and small companies, there is no evidence that it is a solution.

Another 2009 study examined the number of approvals for new molecular entities—innovative drugs—as a means to examine outputs rather than only R&D spending. The study suggests that while mergers and acquisitions may help small companies, they are not an effective way for larger companies to increase output of new molecular entities. For example, for a sample of 30 mergers and acquisitions with 10 years of data before and after the merger, the study found that for large companies the number of new molecular entities did not increase and may actually have declined slightly following merger or acquisition. Smaller companies, however, experienced an increase in new molecular entities after merger or  acquisition.

Other studies suggest mergers and acquisitions may have a positive impact on innovation using certain measures. For example, a 2006 study of 160 acquisitions involving drug companies between 1994 and 2001 estimated that companies with declining R&D pipeline and sales were more likely to engage in acquisition and that outsourcing R&D through acquisitions was a successful strategy to stabilize declines in drug R&D pipelines. This study estimated that 71 percent of acquiring companies either maintained or improved the health of their research pipelines after merger.

We provided a draft of this report to the Department of Health and Human  Services, FTC, IRS, and NSF for review. These agencies provided  technical comments, which we incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, relevant agencies, and other interested  parties.

In addition, the report will be available at no charge on the GAO website  at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  John E. Dicken at (202) 512-7114 or DickenJ@gao.gov or Oliver Richard  at (202) 512-8424 or RichardO@gao.gov. Contact points for our Office of  Congressional Relations and Office of Public Affairs can be found on the  last page of this report. Other major contributors to this report are listed in  appendix III.

This appendix provides further details on our scope and methodology in  addressing each of our three reporting objectives, which are to describe:  (1) how the financial performance and structure of the drug industry have  changed over time; and (2) how reported research and development  spending and new drug approvals have changed; and (3) what is known  about the potential effects of consolidation on drug prices and new drug  development. In addition, the appendix describes how we selected  officials to interview and the steps we took to assure the reliability of the  data we analyzed.

How the Financial Performance and Structure of the Drug Industry Have Changed Over Time

Analysis of Sales Revenue and Profit Margins

To describe reported pharmaceutical and biotechnology sales revenue  and profit margins, we used the Bloomberg Terminal to identify  pharmaceutical and biotechnology companies that were still active as of  the time of our review. Bloomberg uses a proprietary hierarchical  classification system (the Bloomberg Industry Classification System) to  categorize companies into different primary industries. We used the  Bloomberg Terminal’s company classification browser to obtain an initial  set of companies that currently have reported pharmaceutical or  biotechnology revenue. We restricted the drug companies in our review to  those that were categorized under the “Pharmaceutical & Biotechnology”  Bloomberg Industry Classification System (BICS) level 2 category, which  indicated that Bloomberg characterizes the company as being primarily a  pharmaceutical or biotechnology company. Using this list, we downloaded  each company’s reported pharmaceutical and biotechnology sales  revenue, total sales revenue, profit margin, return on assets, and return  on equity for each company’s fiscal years 2006 through 2015, which were  the most current data available. To provide a comparison, we followed the  same procedure to obtain data for software companies over the same  period. We selected software companies as a comparison because they  have high research and development (R&D) and low manufacturing costs  similar to drug companies. Sales revenues were adjusted to reflect real  2015 U.S. dollars using the gross domestic product price index.

When examining sales revenues, profit margins, return on assets, and  return on equity, analyses were limited to the subset of companies with  complete data over the 10-year period for the variables included in the  analysis. We did not have a count of how many companies might have  existed throughout the review period, but which had no data available on  any of the variables we examined. Profit margin, return on assets, and  return on equity were each weighted by the company’s industry-specific  sales revenue (pharmaceutical and biotechnology or software) prior to  averages being computed. To identify the “largest 25” companies for  analyses, we first restricted data to companies that had data for the  variables being examined for 2006 through 2015, then identified the 25  drug companies with the largest pharmaceutical and biotechnology  revenue in 2015. This provided a consistent cohort of large companies to  examine longitudinally for each analysis.

We also examined profit margins for the largest 500 companies by total  worldwide 2015 sales revenue. We obtained a list of the largest 500  companies in 2015 from the Bloomberg Terminal that were still active  during our review. Using this list, we downloaded each company’s BICS  level 2 category; total sales revenue; pharmaceutical, biotechnology, and  software revenues; and profit margins for each company for fiscal years  2006 through 2015. We removed any companies primarily classified by  Bloomberg under one of those industries since we had analyzed these  separately. For the remaining companies in our largest 500, we  subtracted any reported pharmaceutical, biotechnology, and software  revenues from their total sales revenues since some companies may  have reported such revenues despite not being classified primarily as one  of these types of companies. We then weighted each of the remaining  companies’ profit margins by their remaining total sales revenue prior to  calculating an average. This weighting differed slightly from the industry- specific sales weighting used in the earlier analyses of drug and software  companies’ profit margins. For the software industry, the Congressional  Budget Office only indicated that it had high R&D and low manufacturing  costs similar to drug industry; it did not suggest the same for other lines of  business that software companies might additionally be involved in.  Because we had no reason to isolate industry-specific revenues for our  remaining largest 500 companies, we weighted their profit margins by  their total sales revenues. As with the prior profit margin analyses,  analysis of the largest 500 sales weighted profit margins were limited to  companies with data available for each of company fiscal years 2006  through 2015.

For analyses of mergers and acquisitions, we again relied on data from  the Bloomberg Terminal. We restricted our search to mergers and  acquisitions that were completed from January 1, 2006, to December 31,  2015, and which featured a drug company on both sides of the  transaction (e.g., as the acquirer and as the acquired company in the  case of acquisition of a full company). The “largest 25” companies were  determined by their 2015 pharmaceutical and biotechnology sales  revenue only—because not every company could be expected to have a  merger or acquisition transaction in every year, we did not make this a  requirement to be included in the merger and acquisition analyses. We  used what Bloomberg reported to be the completed transaction values in  our analyses, and we adjusted the values to consistently reflect real 2015  dollars.

Many companies were not included in analyses due to incomplete data,  therefore the results of our analyses of these data do not reflect the entire  industry. Bloomberg obtains much of its information from public filings,  which provide companies considerable leeway in deciding what to report  and how. For mergers and acquisitions, approximately 40 to 50 percent of  the completed transactions in Bloomberg’s data between 2006 and 2015  did not have disclosed transaction values. Bloomberg officials told us that  transaction values are often missing for private companies.

To examine overall industry concentration we used pharmaceutical  industry and company-specific sales data from QuintilesIMS from 2007  through 2014, the years for which data were publicly available. We also examined publicly available industry reports and generic drug approvals  data for discussion of concentration across different therapeutic areas.  Our findings on industry concentration and the variation of concentration  across therapeutic classes is limited to these examples.

How Reported Research and Development Spending and New Drug Approvals Have Changed

Analysis of Research and Development Spending

To examine how reported R&D spending changed over time, we analyzed  data from the Business Research, Development and Innovation Survey  maintained by the National Science Foundation’s (NSF) National Center  for Science and Engineering Statistics for years 2008 through 2014, the  most recent years for which data were consistently available. The  Business Research, Development and Innovation Survey data are  collected annually from a probability sample of for-profit companies with a  U.S. presence, which are classified in select manufacturing and  nonmanufacturing industries based on their North American Industry  Classification System (NAICS) code. We analyzed aggregate company- reported worldwide R&D expenditures and worldwide sales for  respondent companies designated with NAICS code 3254 for  pharmaceuticals and medicines. We also examined pharmaceutical company-reported domestic R&D expenditures by character of work— basic research, applied research, or development—as defined by NSF as  well worldwide and domestic R&D expenditure by performer (whether  R&D was paid for and performed by the company, or paid for by the  company to be performed by others). We also examined worldwide  expenditures and sales for companies designated as biotechnology  research and development companies (NAICS 541711); however  estimates were not available for 2008 or 2014 and were less reliable in  the years between. We therefore reported biotechnology expenditures  and sales separately from pharmaceutical companies and limited the  majority of our analysis to pharmaceutical companies. For comparison,  we also examined worldwide R&D expenditure and sales for comparably  large industries with high R&D intensity as well as all manufacturing and  all non-manufacturing industries. All spending and sales data were  adjusted to real 2015 U.S. dollars using the gross domestic product price  index. We also examined the Business Research, Development and  Innovation Survey sample selection and sampling error information for  each year of the survey. Finally, we compared worldwide and domestic  R&D expenditure and sales trends to spending and sales reported by  Pharmaceutical Research and Manufacturers of America (PhRMA)—a  national trade association.

To examine federal spending trends, we analyzed publicly available data  from NSF’s National Center for Science and Engineering Statistics’  Survey of Federal Funds for Research and Development on obligations  for research in biomedical related fields made by federal agencies  identified as funding drug-related research between fiscal years 2008 and  2014, years consistent with available industry data from NSF’s Business  Research, Development, and Innovation Survey. Data represent federal  agency obligations for basic and applied research in the fields of  biological sciences, medical sciences, and other life sciences as reported  by federal agencies. Obligations were adjusted to real fiscal year 2015 U.S. dollars using the gross domestic product price index. We identified  agencies that fund drug-related research based on interviews with  officials from the National Institutes of Health (NIH), NSF, and other  industry experts. The Survey of Federal Funds for Research and  Development is a census of federal agencies that conduct R&D, and  provides data on obligations by agency and field of science rather than by  specific industry or use. Our estimates of federal spending may be  imprecise because the data preclude us from pinpointing spending  specific to drug R&D projects, and because the type of research that  federal agencies typically fund often has an impact on many different  research areas that may not be specific to drugs. We also reviewed  budget documents from NIH and reviewed select studies for spending  estimates by non-federal or industry sources.

In addition, we obtained estimates of R&D spending by state and local  governments and non-industry private funders for 2015 from National  Health Expenditure account estimates. These estimates include spending  for all biomedical research by these categories and thus also likely  overestimate spending specific to drug development.

To identify tax provisions that provide incentives for drug research and  development, we reviewed reports by the Joint Committee on Taxation  and the Congressional Research Service. We obtained and analyzed  aggregate tax return data from the Internal Revenue Service (IRS)  Statistics of Income division for the orphan drug credit and research credit  claimed by relevant industries and all returns (all industries) for years  2005 to 2014, the latest ten years for which data were available.  Specifically, we analyzed claims from companies with IRS Principle  Business Activity codes for pharmaceutical manufacturing, drug  wholesalers, and scientific research. IRS’s industry codes are based on  NAICS definitions, and corporations are instructed to report the industry  code for which it derives the highest percentage of its total receipts.  These data are reviewed by Statistics of Income division staff for  accuracy. The scientific research industry category includes corporations  conducting biotechnology research and development, but also includes  firms conducting research in nanotechnology and physical, engineering,  and life sciences. As a result, we chose not to report research credits  claimed by corporations in the broader scientific research industry  category as being related to drug development, but we do report orphan  drug credits claimed by corporations in this industry category. We also  obtained and examined reported qualified research expenses for  pharmaceutical manufacturing companies for years 2005 to 2014. IRS’  Statistics of Income division produces estimates based on a  representative stratified sample of corporate returns. IRS provided  additional information on the corporations that reported claiming the  orphan drug and research credits; in both cases a high percentage of the  claims came from large corporations that are included in the stratified  sample with certainty. As a result, we concluded that the estimated credit  totals are reliable given that the estimates are largely based on returns  that were certain to be included in the sample. The amount of research  and orphan drug credits claimed represents claims rather than amounts  utilized due to limitations of the general business credit. Reported  estimates therefore may reflect the upper bounds of what was utilized  from claimed amounts. IRS also provided additional data on total  deductions claimed for qualified research expenditures and amounts  reported on financial statements from Form M-3, for 2010 to 2013. These  data were limited to large corporations that filed form M-3, which is  required for corporations with $10 million or more of assets. All claims  were adjusted to 2015 U.S. dollars using the gross domestic product price  index.

To examine trends in new drug approvals, we obtained and analyzed  data from the Food and Drug Administration (FDA) for new drug  applications (NDA) and biologic license applications (BLA) and NDA- and  BLA-efficacy supplements approved by the FDA’s Center for Drug  Evaluation and Research between 2005 and 2016, the most recent ten  years of available data at the time of our review. We determined which  drugs FDA considered novel drugs by reviewing publicly available reports  and resolving any discrepancies with agency officials. We analyzed  these data to determine the type of drugs FDA approved, such as the  product category and whether the drug was designated an orphan drug.

Finally, we interviewed agency and industry experts and reviewed  relevant academic, government, and industry literature on R&D  investment trends and reasons for such trends.

What Is Known about the Potential Effects of Consolidation on Drug Prices and New Drug Development

Literature Search on Consolidation Impacts

To determine what is known about the impact of drug industry  consolidation on drug price and drug development, we reviewed studies  obtained from a literature search. To identify relevant publications, we  used a number of bibliographic databases, including ProQuest, Scopus,  PubMed, National Technical Information Service, Lexis, Social Science  Research Network, and the National Bureau of Economic Research. We  reviewed the following document types: scholarly peer reviewed material,  government reports, working papers, and policy research organization  publications published by a U.S. publication from 2005 forward. We  concluded our searches in August 2017. To the resulting list of  publications, we added articles identified in our own background research  and articles suggested by industry experts, including certain heavily cited  papers published prior to 2005. From the revised list, we selected  publications that empirically evaluated the effect of drug industry  consolidation (mergers and acquisitions) on drug price or innovation (new  drug development or R&D spending). We also selected publications that  included empirical analyses of drug industry or subindustry concentration  or competition and drug price or drug development. Finally, we reviewed  the data sources and methodology used to support the assertions of each  publication and included those that met our methodological criteria. See  the bibliography at the end of this report for the 22 publications included  in our review.

To inform our understanding of the drug industry for all three objectives  including structural changes that have taken place, reasons for  consolidation trends, drivers of drug company R&D investment trends,  and any impacts of consolidation on drug price or innovation, we  interviewed drug industry experts including three drug trade associations,  four advocacy organizations, two financial ratings agencies, and officials  from the FDA, IRS, NSF, Federal Trade Commission (FTC), and NIH.  We selected these experts to obtain a variety of industry perspectives.  We also interviewed seven academic economic experts about economic  factors influencing consolidation and other structural changes, R&D  investments, and potential consolidation impacts. We selected these  economic experts based on citations in our literature review and  suggestions from FDA and FTC officials.

To ensure that the data used to produce this report were sufficiently  reliable, we took several steps. We performed data reliability checks on  the data we obtained from the Bloomberg Terminal, such as comparing  select companies’ financial data to company annual reports, checking for  outliers, and discussing reliability issues with Bloomberg representatives.  We did not independently verify the accuracy or completeness of the  information reported by the companies. We verified the reliability of NSF’s  Business Research, Development and Innovation Survey data used in  this report by reviewing relevant documentation, including relative  standard errors for specific measures, and by interviewing agency  officials who were knowledgeable with the data. We also interviewed  knowledgeable NSF officials regarding the reliability of reported Federal  Funds for Research and Development survey data and compared  reported obligations to NIH budget documents. To verify the reliability of  aggregate tax return information, we reviewed relative standard errors for  reported measures and interviewed knowledgeable agency officials. We  verified the reliability of FDA-provided information by cross-referencing it  against other published FDA sources and by interviewing knowledgeable  agency officials. After taking these steps, we determined the data were  sufficiently reliable for the purposes of our reporting objectives.

We conducted this performance audit from April 2016 to November 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings based  on our audit objectives.

Appendix II: Mergers and Acquisitions of Ten Large Drug Companies from 2006 through 2015

The following table reflects mergers and acquisition transactions from  2006 through 2015 for 10 large drug companies, as measured by their  2014 pharmaceutical and biotechnology revenue. Transactions reflect  those reported in Bloomberg that were completed from January 1, 2006,  through December 31, 2015, and had values of at least $500 million in  real 2015 dollars.

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Robert Copeland, Assistant  Director; Yesook Merrill, Assistant Director; Rebecca Abela, Analyst-in- Charge; Reed Meyer; Brandon Nakawaki; Edward Nannenhorn; Laurie  Pachter; and Matthew Rabe made key contributions to this report. Also  contributing were George Bogart, Muriel Brown, Sandra George, Sarah  Gilliland, and Giselle Hicks.

Bibliography of Research Articles Used in GAO Literature Review

We reviewed literature to identify what is known about the impact of drug  industry consolidation on drug price and drug development. We included  publications that empirically evaluated the effect of drug industry  consolidation (mergers and acquisitions) on drug price, of which we did  not identify any publications. We also reviewed publications that included  empirical analyses of the impact of concentration or competition on drug  price.

Berndt, Ernst R., and Murray L. Aitken, Brand Loyalty, Generic Entry and  Price Competition in Pharmaceuticals in the Quarter Century after the  1984 Waxman-Hatch Legislation, National Bureau of Economic Research  Working Paper 16431 (October 2010).

Berndt, Ernst R., and Rena M. Conti, Specialty Drug Prices and Utilization  After Loss of U.S. Patent Exclusivity, 2001-2007, National Bureau of  Economic Research Working Paper 20016 (March 2014).

Berndt, Ernst R., Rena M. Conti, and Stephen J. Murphy, The Landscape  of US Generic Prescription Drug Markets, 2004-2016, National Bureau of  Economic Research Working Paper 23640 (July 2017).

Dave, Chintan V., Aaron S. Kesselheim, Erin R. Fox, Peihua Qiu, and  Abraham Hartzema. “High Generic Drug Prices and Market Competition:  A Retrospective Cohort Study.” Annals of Internal Medicine, vol. 167, no.  3 (2017): 145-151.

Department of Health and Human Services. U.S. Food and Drug  Administration. “Generic Competition and Drug Prices.” 2015. Accessed  July 31, 2017.  https://www.fda.gov/AboutFDA/CentersOffices/OfficeofMedicalProductsa ndTobacco/CDER/ucm129385.htm  Grabowski, Henry G., David B. Ridley, and Kevin A. Schulman. “Entry  and Competition in Generic Biologics.” Managerial and Decision  Economics, vol. 28, no. 4/5 (2007): 439-451.

Iacocca, Kathleen, James Sawhill, and Yao Zhao. “Why Brand Drugs  Priced Higher Than Generic Equivalents.” International Journal of  Pharmaceutical and Healthcare Marketing, vol. 9, no. 1 (2015): 3-19.

IMS Institute for Healthcare Informatics. Price Declines After Branded  Medicines Lose Exclusivity in the U.S. (Parsippany, N.J.: IMS Institute for  Healthcare Informatics, 2016).

Lu, Z. John, and William S. Comanor. “Strategic Pricing of New  Pharmaceuticals.” The Review of Economics and Statistics, vol. 80, no. 1  (1998): 108-118.

Olson, Luke M., and Brett W. Wendling, Working Paper No. 317: The  Effect of Generic Drug Competition on Generic Drug Prices During the  Hatch-Waxman 180-Day Exclusivity Period, Bureau of Economics,  Federal Trade Commission (Washington, D.C.: April 2013).

Regan, Tracy L. “Generic Entry, Price Competition, and Market  Segmentation in the Prescription Drug Market.” International Journal of  Industrial Organization, vol. 26, no. 4 (2008): 930-948.

Richard, Oliver, and Larry Van Horn. “Persistence in Prescriptions of  Branded Drugs.” International Journal of Industrial Organization, vol. 22,  no. 4 (2004): 523-540.

Tenn, Steven, and Brett W. Wendling. “Entry Threats and Pricing in the  Generic Drug Industry.” The Review of Economics and Statistics, vol. 96,  no. 2 (2014): 214-228.

We also reviewed publications that empirically evaluated the effect of  drug industry consolidation on innovation—including new drug  development or R&D spending—as well as publications on the impact of  concentration or competition on innovation.

Banerjee, Tannista, and Arnab Nayak. “Comparing Domestic and Cross- Border Mergers and Acquisitions in the Pharmaceutical Industry.” Atlantic  Economic Journal, vol. 43, no. 4 (2015): 489-499.

Comanor, William S., and F.M. Scherer. “Mergers and Innovation in the  Pharmaceutical Industry.” Journal of Health Economics, vol. 32 (2013):  106– 113.

Danzon, Patricia M., Andrew Epstein, and Sean Nicholson. “Mergers and  Acquisitions in the Pharmaceutical and Biotech Industries.” Managerial  and Decision Economics, vol. 28, no. 4/5 (2007): 307-328.

Higgins, Matthew J., and Daniel Rodriguez. “The Outsourcing of R&D  Through Acquisitions in the Pharmaceutical Industry.” Journal of Financial  Economics, vol. 80 (2006): 351-383.

Getz, Kenneth A., Rachael Zuckerman, Joseph A. DiMasi, and Kenneth I.  Kaitin. “Drug Development Portfolio and Spending Practices After  Mergers and Acquisitions.” Drug Information Journal, vol. 43, no. 4  (2009): 493-500.

Grabowski, Henry, and Margaret Kyle. “Mergers and Alliances in  Pharmaceuticals: Effects on Innovation and R&D Productivity,” in The  Economics of Corporate Governance and Mergers. Northampton, M.A.:  Edward Elgar Publishing, Inc., 2008.

Munos, Bernard. “Lessons from 60 Years of Pharmaceutical Innovation.”  Nature Reviews Drug Discovery, vol. 8 (2009): 959-968.

Ornaghi, Carmine. “Mergers and Innovation in Big Pharma.” International  Journal of Industrial Organization, vol. 27, no. 1 (2009): 70-79.

Thakor, Richard T., and Andrew W. Lo. Competition and R&D Financing  Decisions: Theory and Evidence from the Biopharmaceutical Industry,  National Bureau of Economic Research Working Paper 20903  (September 2015).

Investigational New Drugs: FDA Has Taken Steps to Improve the  Expanded Access Program but Should Further Clarify How Adverse  Events Data Are Used. GAO-17-564. Washington, D.C.: July 11, 2017.

Generic Drug User Fees: Application Review Times Declined, but FDA  Should Develop a Plan for Administering Its Unobligated User Fees.  GAO-17-452. Washington, D.C.: May 25, 2017.

Physician-Administered Drugs: Comparison of Payer Payment  Methodologies. GAO-16-780R. Washington, D.C.: August 1, 2016.

Generic Drugs Under Medicare: Part D Generic Drug Prices Declined  Overall, but Some Had Extraordinary Price Increases. GAO-16-706.  Washington, D.C.: August 12, 2016.

Medicare Part B: Data on Coupon Discounts Needed to Evaluate  Methodology for Setting Drug Payment Rates. GAO-16-643. Washington,  D.C.: July 27, 2016.

Drug Shortages: Certain Factors Are Strongly Associated with This  Persistent Public Health Challenge. GAO-16-595. Washington, D.C.: July  7, 2016.

Medicare Part B: CMS Should Take Additional Steps to Verify Accuracy  of Data Used to Set Payment Rates for Drugs. GAO-16-594. Washington,  D.C.: July 1, 2016.

Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax  but Effective Tax Rates Differed Significantly from the Statutory Rate.  GAO-16-363. Washington, D.C.: March 17, 2016.

Drug Safety: FDA Expedites Many Applications, But Data for  Postapproval Oversight Need Improvement. GAO-16-192. Washington,  D.C.: December 15, 2015.

Medicare Part B: Expenditures for New Drugs Concentrated among a  Few Drugs, and Most Were Costly for Beneficiaries. GAO-16-12.  Washington, D.C.: October 23, 2015.

Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D  Retail Reimbursement Prices. GAO-14-578. Washington, D.C.: June 30,  2014.

Drug Shortages: Public Health Threat Continues, Despite Efforts to Help  Ensure Product Availability. GAO-14-194. Washington, D.C.: February  10, 2014.

Corporate Tax Expenditures: Evaluations of Tax Deferrals and Graduated  Tax Rates. GAO-13-789. Washington, D.C.: September 16, 2013.

Prescription Drugs: Comparison of DOD and VA Direct Purchase Prices.  GAO-13-358. Washington, D.C.: April 19, 2013.

Medicare Part D Coverage Gap: Discount Program Effects and Brand- Name Drug Price Trends. GAO-12-914. Washington, D.C.: September  28, 2012.

International Taxation: Information on Foreign-Owned but Essentially  U.S.-Based Corporate Groups Is Limited. GAO-12-794. Washington,  D.C.: July 16, 2012.

Prescription Drugs: FDA Has Met Performance Goals for Reviewing  Applications. GAO-12-500. Washington, D.C.: March 30, 2012.

Drug Pricing: Research on Savings from Generic Drug Use.  GAO-12-371R. Washington, D.C.: January 31, 2012.

Prescription Drugs: Trends in Usual and Customary Prices for Commonly  Used Drugs. GAO-11-306R. Washington, D.C.: February 10, 2011.

Brand-Name Prescription Drug Pricing: Lack of Therapeutically  Equivalent Drugs and Limited Competition May Contribute to  Extraordinary Price Increases. GAO-10-201. Washington, D.C.:  December 22, 2009.

Tax Policy: The Research Tax Credit’s Design and Administration Can Be  Improved. GAO-10-136. Washington, D.C.: November 6, 2009.

Prescription Drugs: Improvements Needed in FDA’s Oversight of Direct- to-Consumer Advertising. GAO-07-54. Washington, D.C.: November 16,  2006.

New Drug Development: Science, Business, Regulatory, and Intellectual  Property Issues Cited as Hampering Drug Development Efforts.  GAO-07-49. Washington, D.C.: November 17, 2006.

The amount of money people spend on prescription drugs has nearly doubled since the 1990s. Much of this increase is due to expensive brand-name drugs, but the prices of some generics have also gone up.

We looked into changes in the drug industry and found that pharmaceutical and biotechnology sales revenue increased from $534 billion to $775 billion between 2006 and 2015. Additionally, 67% of drug companies increased their annual profit margins during the same period—with margins up to 20 percent for some companies in certain years. Drug industry spending for research and development increased from $82 billion in 2008 to $89 billion in 2014.