Over the past three decades, the world's largest pharmaceutical companies have undergone a significant transformation in how they allocate their spending. A look at the financial statements of industry giants like Bristol Myers Squibb, Eli Lilly, Merck, and Pfizer reveals two major trends - a steep decline in selling, general and administrative (SG&A) costs, and a surge in research and development (R&D) expenditures.

The Drop in SG&A Costs

Thirty years ago, these four pharma leaders were spending over twice as much on SG&A expenses compared to R&D. However, SG&A costs as a percentage of revenue have plummeted by around 50% on average since then.

There are a few key factors driving this decline in sales and marketing spending:

Shift towards Specialty Medicines: In the early 1990s, the biggest revenue drivers for companies like Bristol Myers Squibb and Pfizer were primary care medicines for conditions like hypertension and high cholesterol. Top products included Capoten, Pravachol, Procardia XL, and Norvasc. These were widely prescribed by general practitioners and family doctors, requiring large salesforces to market to individual physician offices.

Today, the product portfolios have pivoted towards specialty therapeutic areas like oncology. For Bristol Myers Squibb, two of their top three drugs are the cancer treatments Opdivo and Orencia. Merck's top seller is the anti-PD-1 therapy Keytruda. These specialty medicines are more commonly prescribed by oncologists at large medical centers rather than primary care offices, reducing the sales footprint required.

Reduced Consumer Marketing: Many oncology and specialty drugs do not rely as heavily on direct-to-consumer advertising compared to primary care medicines of the past. This has helped curb marketing expenses.

Provider Consolidation: There has been a large amount of consolidation in provider markets over the past 30 years, with over 2,000 hospital/health system mergers between 1998-2023. As medical practices consolidate, procurement becomes more centralized, lowering the need for pharma sales reps to call on every individual practice.

The Soaring Cost of R&D

While sales and marketing costs have declined, R&D expenditures have soared, nearly doubling as a percentage of revenue for these pharma giants. The average cost to develop a new drug has skyrocketed from an estimated 403 million in 2003 to around 2.3 billion in 2022/2023.

There are multiple factors contributing to this rapid increase in R&D costs:

• Low Trial Success Rates: Only about 13% of drug candidates that enter Phase 1 trials eventually gain approval. The high failure rate means more spending is required to get a single product to market.
• Challenging Regulatory Landscape: Pharmaceutical companies must navigate an increasingly complex web of regulations, manufacturing standards, and rigorous approval processes from bodies like the FDA. Meeting these requirements drives up R&D costs.
• Rising Out-of-Pocket Costs: A 2013 study by DiMasi et al. found that the main drivers of increased R&D costs were "increases in the real out-of-pocket costs of development for individual drugs and by much higher failure rates for drugs tested in human subjects."

While companies have found efficiencies in sales and marketing over the decades, improving R&D productivity remains the grand challenge for big pharma. Despite spending over $1.5 trillion on drug discovery from 2001-2020, the 16 largest pharmaceutical firms averaged just 0.78 new drug approvals per year during that period.

As the industry looks ahead, the ability to sustain innovation through more efficient and successful R&D will be critical, not just for financial performance, but for delivering breakthrough treatments that improve patient outcomes. While reducing SG&A costs provides some financial flexibility, the real key to long-term success lies in enhancing R&D productivity.