How much of a drug company's spending is allocated to research and development on average?

Pharmaceutical companies spend, on average, about 17% of revenues on research and development (R&D), making the pharmaceutical industry one of the biggest spenders in this area. Outside of the semiconductor industry, no other industry spends more on R&D.

The pharmaceutical industry's lifeblood is R&D. The success of major drug companies is almost wholly dependent upon the discovery and development of new medicines, and their allocation of capital expenditures reflects that fact. On average, pharmaceutical companies dedicate approximately 17% of their budget to R&D, and some companies within the industry spend substantially more than that.

As of 2013, many of the largest pharmaceutical firms spend nearly 20% on R&D. Of the 20 largest R&D spending industrial companies in the world, pharmaceutical companies make up nearly half the list. Eli Lilly is currently spending roughly 23% on R&D. Biogen is right behind, at approximately 22%. Both Roche and Merck are spending just under 20%. Pfizer and AstraZeneca are closer to the 15% level, along with GlaxoSmithKline. Abbott Laboratories is on the lower end of the spectrum, dedicating about 12% of revenues to R&D spending.

Many smaller pharma companies have lower revenue totals to work with, so they spend significantly higher percentages of their budget on R&D – up to 50% for some firms.

A quick survey of other industries clearly shows how much most of them are outspent in R&D by pharmaceutical companies. The overall average spending on R&D by industrial firms engaged in developing new products is a mere 1.3% of sales revenues. The chemicals sector, one of the larger R&D sectors, spends an average of 2 to 3%. Aerospace and defense firms, although they do a great deal of research and development work, still only dedicate about 4 to 5% of revenues to R&D spending.

Internet companies are closer to pharmaceutical firms in R&D spending, with both Microsoft and Google spending approximately 12% of sales revenues on R&D. However, other technology sector companies don't typically approach that level of spending. Even a company known for technological innovation, such as Apple, spends less than 3% of revenues on R&D, and IBM just a little more than that.

The semiconductor industry is the only industry that regularly outpaces pharmaceutical companies in R&D spending as a percentage of sales revenues. The major semiconductor firms, such as Broadcom, regularly spend approximately 25 to 28% of revenues on R&D.

The high level of R&D expenditures in the pharmaceutical industry is easy to understand given the cost of developing a new drug and bringing it to market. The average R&D to marketplace cost for a new medicine is nearly $4 billion, and can sometimes exceed $10 billion.