A closer look at the returns and risk of pharmaceutical R&D

This study assesses the profitability of researching and developing new chemical entities (NCEs). A 36 year investment horizon is projected, based on a survey of R&D costs and on extensive U.S. sales data. Analysis is after taxes. The average NCE produces a real internal rate of return of 6.1% and a net present value of $76 million in 1976 dollars. Break even with an opportunity investment in corporate bonds occurs on average after 12 years of sales. Risk is apparent in that after 24 years of sales some two-thirds of NCEs return no more than the bonds do. The median NCE, not recovering average R&D costs, produces a negative return. Alternative assumptions are tested. Results are highly sensitive to drug price increases and early replacement by generics.