Does Government Funding Increase Public Sector Development of New Medicines?

Article by: Dimitrios Kourouklis and Isobel Firth

To answer this question, a paper published last week by Dimitrios Kourouklis (2021), Senior Economist at OHE, quantifies the effect of public subsidies for research and development (R&D) on public sector drug development. He estimates the impact across different stages of the pharmaceutical R&D process from basic research to Phase 1 (first safety trials in healthy humans) and to Phase 3 (large clinical trials in patients). He also looks at how the effect of public investment varies for rare diseases (so-called ‘orphan’ drugs) compared to non-rare diseases.

Pharmaceutical research and development (R&D) spending is increasing. In 2015, the total amount of money spent on R&D worldwide was 150 billion USD1 (IFPMA 2017). The amount of investment in R&D varies across disease areas, based on their profitability, their burden of disease, and how risky drug development is in that disease area.2,3 This variation means that incentives do not always encourage commercial investment in R&D for the diseases or technologies reflecting societal needs.4 For example, there is a lack of commercial incentive to invest in vaccines despite there being a great need for them worldwide.5

To compensate for the potential gaps in private research funding, governments directly invest in pharmaceutical R&D particularly supporting drug development outside pharmaceutical companies in public institutions. Although poorly complied with, since 2000 the European member states pledged under the Lisbon strategy to invest 3% of GDP on funding R&D. According to data from the World Bank in 2018, countries in the EU spent an average of 2.18% of GDP (€327 billion) on R&D.6 Given the huge sums of public money that are invested in R&D, we need to know: does it actually work in the context of public sector drug development?

This study finds that public funding does increase pharmaceutical R&D in public institutions. However, the effect varies depending on where in the R&D pipeline you look. A 1% increase in public subsidies causes an increase of 0.11% in Phase 1 clinical trials for publicly developed non-orphan drugs, and also stimulates basic research (by 1.41%), Phase 1 (by 0.04%) and Phase 2 (by 0.12%) clinical trials for publicly developed orphan drugs for rare diseases.

The results imply that public policies such as subsidizing R&D do have important effects on the number of drugs in development from universities and other public sector institutions. Also, these estimates are likely to be attributed to the fact that governments tend to finance R&D for basic research and early stages of innovation. Overall, the results suggest that public financing R&D increases the number of drugs moving through the R&D pipeline, particularly for rare diseases.

If you are interested in this topic, you can find OHE’s related publications on our research theme The Economics of Innovation listed below.


Kourouklis, D., 2021. Public subsidies for R&D and public sector pharmaceutical innovation. Applied Economics, pp.1–19. 10.1080/00036846.2021.1885614.

  1. IFPMA., 2017. The Pharmaceutical Industry and Global Health: Facts and Figures 2017. (downloaded from
  2. Barrenho, E. and Miraldo, M., 2018. R&D Success in Pharmaceutical Markets: A Duration Model Approach. In: Health Econometrics, Contributions to Economic Analysis. [online] Emerald Publishing Limited, pp.201–233. 10.1108/S0573-855520180000294010.
  3. Barrenho, E., Miraldo, M. and Smith, P.C., 2019. Does global drug innovation correspond to burden of disease? The neglected diseases in developed and developing countries. Health Economics, 28(1), pp.123–143.
  4. Danzon, P.M. and Towse, A., 2003. Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents. International Journal of Health Care Finance and Economics, 3(3), pp.183–205. 10.1023/A:1025384819575.
  5. Glennerster, R., M. Kremer, and H. Williams. 2006. “Creating Markets for Vaccines.” Innovations: Technology,  Governance, Globalization 1 (1): 67–79. doi:10.1162/ itgg.2006.1.1.67.
  6. World Bank. Research and Development expenditure (% GDP). Available from: [Accessed: March 3, 2021)

Related Research

Berdud, M., Drummond, M. and Towse, A., 2020. Establishing a reasonable price for an orphan drug. Cost Effectiveness and Resource Allocation, 18(1), p.31. 10.1186/s12962-020-00223-x.

Brassel, S. and Cookson, G., 2020. Delivering the 2.4 Percent: Unlocking UK Pharma R&D Investment through Evidence-Based Policies. [online] Available at: [Accessed 3 Mar. 2021].

Kourouklis, D., 2021. Public subsidies for R&D and public sector pharmaceutical innovation. Applied Economics, pp.1–19. 10.1080/00036846.2021.1885614.

Mestre-Ferrandiz, J., Sussex, J. and Towse, A., 2012. The R&D Cost of a New Medicine. [online] Office of Health Economics. Available at: [Accessed 27 Feb. 2021].

Towse, A. and Sharma, P., 2011. Incentives for R&D for New Antimicrobial Drugs. International Journal of the Economics of Business, 18(2), pp.331–350. 10.1080/13571516.2011.584434.

Posted in Drug Development/R&D, Innovation, Other Public Policy | Tagged External publications