As pharma industry leaders continue to feel a pressuring demand from all parts to justify the price of their innovative products, there is one trap everyone seems to be happily falling into – the cost of Research and Development. I have to say it is very tempting. Remember that first time you understood how to apply a rule of three – or cross-multiplication depending on where you went to school – in arithmetics? It worked like magic. Personally, I wanted to apply it to everything around me. So let’s say over the past 10 years we have roughly spent a in R&D on b different projects of which only c made it to the market that must mean that each of them has cost us at least x. It’s called the “fully loaded, attrition-adjusted R&D cost”. Tempting but misleading and dangerous. Here is why I think so:
- The venture capitalist view
See each element in your pipeline as a start-up. At some point in time, your organization had to make choices and decide which of these promising enterprises it would invest its money on. If it turns out those choices were poor and led to a sky-high attrition rate, why would the society have to support the cost of that?
- The microeconomist view
Loading the cost of your R&D organization onto the products that have actually cleared all the hurdles to access the market is, in fact, a measure of the cost-effectiveness of your R&D. If you decide to share that measurement with your customers, stakeholders, the media etc, it means that you are 100% confident that you have taken all measures to make your R&D machine the most efficient machine on earth – proof-of-concept light studies to kill projects early, extensive use of best-in-class analytics, relentless at asking yourself the buy? build? partner? question.
- The macroeconomist view
R&D activities have a cost but they also represent a formidable opportunity for the local communities hosting them – direct creation of highly qualified jobs, indirect effect on suppliers and the promise of a long-term commitment among many pros. Governments and policymakers have understood this many years ago offering a series of tax credits, subsidies and other perks to those who invest in R&D. These incentives work and if anything there should be more of them. Great. On the flip side, when your product hits the market, chances are that the government official sitting across the table for your price hearing will tell you that you and the society are even.
Most importantly, whether you believe in utilitarian ethics or not, there is only one thing that truly matters when you bring a new product to the market – what is the value it will bring to the society. The true value.