ANNUAL REPORT 2011

Analysis of Research and Development Expenditures

The Patent Act (Act) mandates the PMPRB to monitor and report on pharmaceutical research and development (R&D) spending (while giving the PMPRB no regulatory authority to consider the amount or type of patentees´ research spending in the context of its price regulation). This chapter provides key statistics on the current state of pharmaceutical research investment in Canada.

Data Sources

The statistical results presented below were entirely derived from data that patentees have submitted to the PMPRB.

The Act requires each patentee to report its total gross revenues from sales of all drugs for human or veterinary use (including revenues from sales of non-patented drug products and from licensing agreements) and R&D expenditures in Canada related to medicines (both patented and non-patented for human or veterinary use). Patentees transmit this information to the PMPRB by means of its Form 3 (Revenues and Research and Development Expenditures Provided Pursuant to subsection 88(1) of the Patent Act).

The Patented Medicines Regulations (Regulations) require that each submitted Form 3 be accompanied by a certificate stating the information it contains is “true and correct”. The Board does not audit Form 3 submissions, but it does review submitted data for anomalies and inconsistencies, seeking corrections or clarifications from patentees where necessary. To confirm that PMPRB staff has correctly interpreted the data submitted, each patentee is given the opportunity to review and confirm the accuracy of its own R&D-to-sales ratio before that ratio is published.

Failure to File

It is a patentee´s responsibility to ensure a complete and accurate Form 3 is filed within the time frame set out in the Regulations. Where a patentee fails to meet these filing requirements, the Board may issue an Order demanding compliance. There were no such Board Orders issued for the 2011 reporting period.

Coverage

Note that companies without sales of patented medicines need not report to the PMPRB on their R&D expenditures. This has two implications.

First, the statistical results reported below should not be taken to cover all pharmaceutical research conducted in Canada. For example, a company may sell only non-patented drug products but may still perform considerable research in Canada. Similarly, a company may conduct research and have no product sales at all.²² The results presented below will not reflect the R&D expenditures of firms in either situation.

Second, as new patented drug products come onto the Canadian market and existing patents expire, the number and identity of companies required to file R&D data may change from year to year. A total of 79 companies reported on their R&D activity in 2011. Of these, 33 were members of Canada´s Research-Based Pharmaceutical Companies (Rx&D).

Definition of Sales Revenues

For reporting purposes, sales revenues are defined as total gross revenues from sales in Canada of all drug products and from licensing agreements (e.g., royalties and fees accruing to the patentee related to sales in Canada by licensees).

Definition of R&D Expenditures

Pursuant to section 6 of the Regulations, patentees are required to report R&D expenditures that would have qualified for an investment tax credit in respect to scientific research and experimental development (SR&ED) under the provisions of the Income Tax Act that came into effect on December 1, 1987. By this definition, R&D expenditures may include current expenditures, capital equipment costs and allowable depreciation expenses. Market research, sales promotions, quality control or routine testing of materials, devices or products and routine data collection are not eligible for an investment tax credit and, therefore, are not to be included in the R&D expenditures reported by patentees.

Total Sales Revenues and R&D Expenditures

Table 16 provides an overview of reported sales revenues and R&D expenditures over the period 1988 through 2011.

Patentees reported total 2011 sales revenues (Table 16) of $17.8 billion, an increase of 4.7% from 2010. Sales revenues reported by Rx&D members were $13.5 billion, accounting for 75.5% of the total. (Less than 1% of reported sales revenues were generated by licensing agreements.)

Patentees reported R&D expenditures of $991.7 million in 2011, a decrease of 15.8% over 2010. Rx&D members reported R&D expenditures of $901.2 million in 2011, a decrease of 9.9% over last year. Rx&D members accounted for 90.9% of all reported R&D expenditures in 2011.

TABLE 16  Total R&D Expenditures and R&D-to-Sales Ratios of Reporting Companies, 1988–2011

^{Source: PMPRB}

R&D-to-Sales Ratios

Table 16 also provides ratios of R&D expenditures to sales revenues. It should be noted in this context that, with the adoption of the 1987 amendments to the Act, Rx&D made a public commitment to increase their annual R&D expenditures to 10% of sales revenues by 1996.²³ This level of R&D expenditure was obtained by 1993, in some years exceeding 10%. However, since 2003, R&D-to-sales ratios for all patentees and for Rx&D members have declined.

The ratio of R&D expenditures to sales revenues among all patentees was 5.6% in 2011, down from 6.9% in 2010. These values are close to figures last observed in 1988. The overall R&D-to-sales ratio has been less than 10% for the past 11 consecutive years.

The corresponding R&D-to-sales ratio for members of Rx&D was 6.7% in 2011, down from 8.2% in 2010.²⁴ These values are close to figures last observed in 1988. The Rx&D ratio has been less than 10% for the past nine consecutive years.

Table 21 in Appendix 3 provides details on the range of 2011 R&D-to-sales ratios. Of the 79 companies reporting in 2011, 84.8% had R&D-to-sales ratios below 10%.

New Developments

Rx&D and the Canadian Institutes for Health Research (CIHR) jointly funded a KPMG survey on R&D and other investments made by Rx&D member companies. KPMG´s report, entitled Summary of Pharmaceutical Survey Findings on R&D Spending and Investments by Rx&D Members – 2010, was posted on CIHR´s website in June 2011. Rx&D has indicated that it intends to conduct a similar survey for 2011.

In October 2011, the Expert Panel leading the Review of Federal Support to R&D submitted its final report to the Minister of State for Science and Technology. The “Jenkins Report” made a series of recommendations that called for a simplified and more focused approach to the R&D funding provided by the federal government every year.

Budget 2012 proposed reductions to the Scientific Research and Experimental Development (SR&ED) tax credit and new restrictions on deductions. It also introduced new measures to support innovation and R&D.

Current Expenditures by Type of Research

Table 17 and Figure 19 (as well as Figure 21 in Appendix 3) provide information on the allocation of 2011 current R&D expenditures²⁵ among basic and applied research and other qualifying R&D.²⁶ Patentees reported spending $164.9 million on basic research in 2011, representing 17.3% of current R&D expenditures and a decline of 30.1% over the previous year. Patentees reported spending $525.1 million on applied research, representing 55.0% of current R&D expenditures. Clinical trials accounted for 75.2% of applied research expenditures.

TABLE 17  Current R&D Expenditures by Type of Research, 2011 and 2010

^{* Values in this column may not add to 100.0 due to rounding.
Source: PMPRB}

Current R&D Expenditures by Performer

Patentees report expenditures on research they conduct themselves (intramural) and research performed by other establishments, such as universities, hospitals and other manufacturers (extramural). Table 18 shows that 51.9% of 2011 current research expenditures were intramural. Research performed by other companies on behalf of patentees was 20.6% of current expenditures, while research conducted in universities and hospitals accounted for 15.9%.

TABLE 18  Current R&D Expenditures by R&D Performer, 2011 and 2010

^{*  Values in this column may not add to 100.0 due to rounding.
Source: PMPRB}

Current R&D Expenditures by Source of Funds

Table 19 provides information on the sources of funds used by patentees to finance their R&D activity. Internal company funds remained by far the single largest source of funding in 2011, accounting for 88.6% of current expenditures. Funds received from government amounted to 2.9% of current expenditures.

TABLE 19  Total R&D Expenditures by Source of Funds, 2011 and 2010

^{* Values in this column may not add to 100.0 due to rounding.
Source: PMPRB}

Current R&D Expenditures by Region

Table 20 (as well as Table 23 and Table 24 in Appendix 3) show current R&D expenditures by region. As in previous years, current expenditures were heavily concentrated in Ontario and Quebec in 2011, with these provinces accounting for 85.3% of total expenditures. While current R&D expenditures decreased at a year-over-year rate of 12.9% in Western Canada, they also declined in Ontario by 19.4% and in Quebec by 10.7%.

TABLE 20  Current R&D Expenditures by Region, 2011 and 2010

^{* Values in this column may not add to 100.0 due to rounding.
Source: PMPRB}

The Global Context

Figure 20 compares Canadian pharmaceutical R&D-to-sales ratios for the years 2000 and 2009 to those in the PMPRB´s seven comparator countries.²⁷ Canada´s ratio stood at 10.1% in 2000. Only Italy, at 6.2%, had a lower ratio in that year, while Switzerland had the highest ratio at 102.5%.

A similar pattern emerges in the ratios for 2009. Italy remained at the bottom of the range at 6.6%, with Canada second lowest at 7.5%. Ratios in all other comparator countries remained well above Canada´s ratio. The ratio obtained by aggregating R&D spending and sales across all seven comparator countries was 20.1%, two and a half times the value obtained for Canada.

The R&D-to-sales ratios represented in Figure 20 may be compared to the average bilateral price ratios reported in Table 11 (see Comparison of Canadian Prices to Foreign Prices section). Several comparator countries, which have patented drug prices that are, on average, substantially less than prices in Canada, have achieved R&D-to-sales ratios well above those in Canada.

^{22  This is likely the situation for much of Canada´s biotechnology sector. Note, however, that if a patentee commissions research from another company specializing in biotechnology research, the patentee should normally include this among the research expenditures that it reports to the PMPRB.}

^{23  As published in the Regulatory Impact Assessment Statement (RIAS) of the Patented Medicines Regulations, 1988, published in the Canada Gazette, Part II, Vol. 122, No. 20 – SOR/DORS/88-474.}

^{24  The R&D-to-sales ratios presented in Table 16 include research expenditures funded by government grants. If the government-funded component is excluded, the ratios for all patentees and for the members of Rx&D in 2011 are 5.4% and 6.5%, respectively.}

^{25  Current R&D expenditures consist of non-capital expenses directly related to research, including (a) wages and salaries; (b) direct material; (c) contractors and sub-contractors; (d) other direct costs such as factory overhead; (e) payments to designated institutions; (f) payments to granting councils; and (g) payments to other organizations. These elements are described in more detail in Form 3 (“Revenues and Research and Development Expenditures”) available from the PMPRB website under the heading Legislation, Regulations and Guidelines/Patentee´s Guide to Reporting. Current R&D expenditures accounted for 96.3% of total R&D expenditure in 2011, while capital equipment costs and allowable depreciation expenses made up 2.1% and 1.6%, respectively.}

^{26  “Basic research” is defined as work that advances scientific knowledge without a specific application in mind. “Applied research” is directed toward a specific practical application, comprising research intended to improve manufacturing processes, pre-clinical trials and clinical trials. “Other qualifying research” includes drug regulation submissions, bioavailability studies and Phase IV clinical trials.}

^{27  Sales in Figure 20 represent domestic sales and do not include exports.}

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