The Impact of Expenses on Revenues

At the beginning of an R&D project there are only expenses. At product launch the company may be able to attain revenues for the new drug created by the R&D project. As the revenues grow cash flow grows from negative to positive, Figure 1. Ideally each drug should be developed at minimal expense and achieve maximal revenue.  In reality, of course, the entire spend on R&D must be paid by the revenues of the drug on the market.  Figure 1 shows an ideal timeline for expense vs. revenue in terms of cash flow.

Ideal Timeline for Expense vs Revenue 2

Figure 1, Ideal Timeline for Expense vs. Revenue

One would hope that the amortized expenses for drug discovery and development would pale in comparison to the revenues gained from its sale.   Historically only the pressure from loss of patent exclusivity would reduce revenues and drug companies developed strategies for prolonging patent exclusivity.  The companies that managed to create the multi-billion dollar blockbuster drugs could readily afford a large project portfolio with its attendant high attrition and cost.

In recent times, this idealized scenario has become less achievable due to added pressures of a) litigation from generic companies, b) the increasing cost of conducting Phase IV trials to expand the set of indications for a marketed drug, and c) the added Phase III trials needed to satisfy the increasing demands of regulatory agencies, Figure 2.

Added Pressures on the Ideal Timeline for Expense vs. Revenue

Figure 2, Added Pressures on the Ideal Timeline for Expense vs. Revenue

It is no wonder that the bio/pharmaceutical industry is intensely engaged in a reconsideration of how it develops drugs.  It is our position that many of the lessons learned from the way drugs have been developed will always apply to Bio/pharmaceutical R&D no matter what organizational model is adopted by a drug company.  This website intends to enumerate these lessons and provide them to the community as guidelines to success regardless of the particular style of management organization.