Home > Returns on R and D Investments > Time lines for returns on investment in R and D – The Wellcome Trust

Time lines for returns on investment in R and D – The Wellcome Trust

The Wellcome Trust report is at: http://www.wellcome.ac.uk/stellent/groups/corporatesite/@sitestudioobjects/documents/web_document/wtx052110.pdf

Executive Summary

Rationale and scope of the study
This report is the outcome of a one-year study commissioned by the Academy of Medical Sciences, the Medical Research Council and the Wellcome Trust to compare the economic benefits accruing to the UK from UK publicly and charitably funded medical research with the cost of that research. Understanding the nature, extent and processes involved in the return on investment in medical research has been largely neglected as an area of serious scientific study. Despite a growing international interest in this area there has been relatively little formal analysis of the returns to medical research, particularly in Europe. The study reported here represents an initial step towards rectifying that situation.

[There follows the remainder of the Executive Summary  from this very important report – long]

Past work in the USA and Australia – the ‘exceptional returns’ literature – has attracted publicity. But those analyses contain important flaws. While it is easy to identify the limitations of existing studies, it is less easy – but possible – to reduce these limitations. Our objective is to estimate the returns to UK public/charitable medical research in as transparent a manner as possible, in order to illustrate, to improve on and to explore these limitations and assumptions. This is not intended as a one-off exercise simply to produce a best estimate: rather it is offered as a contribution to an emergent understanding of the issues and as part of a process of establishing a research agenda which should contribute to the production of more robust estimates in future.
Economic returns to medical research comprise two, additive, elements:
• health gains net of the health care costs of delivering them
• GDP gains, that is to say the UK national income that results directly and indirectly from the medical
research and the further activity stimulated by it.
Both elements are important.
Our approach is mainly bottom-up, in contrast to the top-down approach taken in most of the ‘exceptional returns’ literature. Thus we have undertaken detailed analysis of the important research-based changes that have taken place in the treatment of particular disease areas. The returns to medical research as a whole would be the sum of the estimates for each disease area. We initially analysed the returns to public/charitable research from one well-reported therapeutic area, namely cardiovascular disease (CVD), and then tested the same methods in the more problematic area of mental health. We have addressed exclusively the question of what are the economic returns to the UK population and the UK economy from UK medical research. We recognise that UK health research benefits other countries, just as our analysis recognises that the UK benefits from research from the rest of the world. Indeed, some medical research is undertaken in the UK with the expectation that it will predominantly or exclusively benefit health care in other countries (for example most research on tropicaldiseases). However, benefits to countries other than the UK are outside the scope of this study.
The contribution our study makes We provide a clear demonstration of an approach which provides an improved theoretical basis for empirically estimating the two main elements of the economic returns from medical research – the value of health gains and the impact on GDP.
Our main original contributions are:
• A consistent time series of estimates of public/ charitable and private pharmaceutical industry expenditure on medical research in cardiovascular disease and mental health from 1975 to 1992, pieced together from a variety of sources. Given the expected lags between medical research and its impact, this is likely to be the most recent relevant period of research spending to investigate.
• A clear conceptual framework to underpin the concept of ‘spillovers’ from public and charitably funded medical research, based on an original broadly scoped literature review. The total social rate of return to an investment comprises the return to the organisation making the investment, the return to other organisations in the same sector (e.g. medical) and the return to all other parts of the economy. The last two are referred to in economic literature as ‘spillovers’, but that is not to imply that they are accidental. On the contrary, ‘spillovers’ are often an explicit objective of investment in research.
• Estimates of the magnitude of spillovers in the UK from public and charitable UK medical research, calculated in two different ways: (1) a two-step analysis of the relationship between public/charitable and private R&D and then of the relationship between private pharmaceutical R&D and GDP, and (2) based on the economic literature estimating the social rate of return to public R&D, whether medical or not.
• A ‘bottom-up’ approach to estimating the health gain from research. This is a significant improvement on earlier attempts to estimate the economic returns from research in that it is measured in terms of quality adjusted life years (QALYs) and is driven by evidence on the effects and costs of specific research-derived interventions, rather than by macro-level, temporal changes in mortality or morbidity.
• A successful test of this approach in two disease areas.
The analysis of the gains for cardiovascular disease (CVD) was built up from evidence on 46 different patient indication/treatment combinations, and that for mental health from evidence on six such combinations.
• Analyses of UK clinical guidelines in the areas of cardiovascular disease (five guidelines) and mental health (12 guidelines), to provide indicators to inform the important issues of the lag between researchexpenditure and health benefits and the attribution of benefits to UK, rather than worldwide, research.
• Computation of the internal rate of return (IRR) on past expenditures on research investment in the areas of CVD and mental health, allowing explicitly for the time lags involved and the level of attribution to UK research, with sensitivity analysis around key parameters. The IRR is a convenient way of representing the return to the original research investment, and has the pragmatic advantage that the published empirical literature on the GDP impact of research is expressed in terms of the IRR achieved by that investment. Expressing the return from health gains as an IRR allows it to be added to the IRR for GDP gains to provide an estimate of the total rate of return achieved by medical research. For example an IRR of 10% means that the return to an investment of £1 is equivalent to receiving thereafter an income stream of £0.10 per year in perpetuity.
• A comparison of the internal rates of return (IRRs) on research investment from the value of the QALYs gained in these two areas and with the new estimates of the rate of return in terms of GDP effect (which is not specific to individual disease areas).
Expenditure on medical research in the UK
Estimates of spending specifically on cardiovascular research are not readily available for either the public or private sectors and we provide here original estimates that have not previously been available. The construction of these estimates relies on data from a number of different sources and various assumptions regarding the split of medical research between different clinical areas. Despite some inevitable uncertainties, we have a time series for total public/charitable research expenditure on cardiovascular disease which represents the research investment that we are studying, and also a series for research expenditure by the pharmaceutical industry.
This feeds into our estimates of the indirect impact of public research on GDP. The private figures also make it clear that private sector R&D expenditure greatly exceeds public plus charitable expenditure. We estimated the expenditure on cardiovascular research from the Medical Research Council, Higher Education Funding Councils, Department of Health, British Heart Foundation and Wellcome Trust. Our estimates of total annual funding for cardiovascular research in the UK from these public and charitable sources show that it increased from £26 million in 1975 to £88m in 1992 in cash terms, representing an annual percentage increase of circa 7.5%. Expressed in 2005 prices, this equates to a decrease in annual spend from £144m in 1975 to £121m in 1992, with a total expenditure over the period of £2 billion.
Pharmaceutical industry spending on cardiovascular research in the UK grew rapidly in this period: our mid estimate shows a rise to £213m in cash terms in 1992 – 2.4 times the level of public plus charitable expenditure. On a similar basis, total annual public and not-for-profit funding for mental health research in the UK increased from £28m in 1975 to £93m in 1992, representing an annual percentage increase of around 7%. In real terms this equates to a decrease from £155m in 1975 to £129m in 1992. Private pharmaceutical industry expenditure on R&D in mental health was around three times this level in 1992.
The returns to public/charitable medical research
Our method To estimate the net value of health gains in the area of CVD we:
• reviewed the economic evaluation literature to obtain published figures for the QALYs gained per patient from specific patient group/intervention combinations for cardiovascular disease over the period 1985–2005
• multiplied these figures by estimates of the numbers of users of each intervention, adjusted for compliance rates, to give an estimate of the total QALYs gained from each intervention
• monetised the total QALYs gained by multiplying these estimates by published figures on the opportunity cost of a QALY within the current NHS budget – central estimate £25,000 per QALY, i.e. the mid-point of the National Institute for Health and Clinical Excellence (NICE) threshold range of £20,000–£30,000 per QALY
• from a review of the economic evaluation literature obtained estimates of the incremental health care costs associated with each intervention and multiplied these by the numbers of users to quantify the incremental health care costs of each intervention. Based on previous studies, we include interventions that are likely to have been important in terms of the health gains they have produced over the period 1985–2005.
We used essentially the same approach for mental health. We drew on the extensive economic literature examining the so-called ‘spillovers’ from public/charitable research between organisations and between sectors to estimate the impact of this research on the UK’s GDP. The literature is clear that the spillovers exist, but less clear about the relative importance of different transmission mechanisms. However the literature, especially that looking at the medical and biotechnology sectors,almost without exception takes the view that public research and private R&D are complements, not substitutes. Public research stimulates private, and vice versa. Both kinds of research lead to improved productivity and performance in the economy generally.
All our work emphasises to us that our estimates of the rates of return need to be treated with extreme caution. Most aspects of the methods unavoidably involve considerable uncertainties. Therefore all quantitative results are no more than rough approximations. We have generally tried to provide a best/central estimate, and when in doubt have erred on the side of being conservative. In addition we provide high and low estimates around the best/central estimates and undertake sensitivity analyses.
The estimated rates of return were very sensitive to the assumed lag between the years when the research expenditure occurs and the years when the ultimate health benefit arises, and to the proportion of the benefit attributable to UK research as opposed to world research as a whole. The issue of lags has often been ignored in the past, but from a policy point of view may be crucial, especially in the context of the current agenda for translational research.
Cardiovascular disease
Our best estimate of the total value of the QALYs gained from the specific CVD interventions included in our analysis over the whole period 1985–2005 is £69bn (2005 prices). The upper and lower estimates are £91bn and £55bn respectively. The best estimate of the total incremental health care costs relating to those gains over the same period is £16bn (2005 prices), with upper and lower estimates of £17bn and £11bn respectively. Based on our analysis of citations in UK clinical guidelines in CVD, combined with the findings of previous published studies, we assume that for CVD the proportion of UK health care benefit attributable to UK research lies in the range from 10% to 25% with a central estimate of 17%. Similarly, from our analysis of CVD guidelines and from previous studies, we assume a mean lag between research and impact for CVD treatments of between 10 and 25 years, with a central estimate of 17 years. Our best estimate suggests that for CVD the IRR from the value of UK net health gains alone (ignoring GDP impacts) is just over 9%. Most one-way sensitivity analyses place the IRR within the range of 5–15%.  The ‘optimistic scenario’ we examined produced an IRR of over 25%, but in our ‘pessimistic scenario’ the cost of the research investment exceeded the value of the net health gain.
We estimated that the GDP gains that result from increased public/charitable medical research deliver an additional rate of return in the range 20–67% (with a best estimate of 30%). These figures are obtained from a small empirical literature, much of it US-centred and only a proportion of it specific to medical research. Hence the application to the UK and to medical research is at best tentative. Nevertheless combining our estimates, the total health and GDP gains to public/charitable CVD research in the UK 1975–1992 give a total IRR of around 39%. In other words, a £1.00 investment in public/charitable CVD research produced a stream of benefits thereafter that is equivalent in value to earning £0.39 per year in perpetuity.
Mental health

For mental health research by the public and charitable sectors in the UK we found the IRR from the net health gains to the UK population for mental health of 7% to be somewhat lower than for CVD (around 9%). Most oneway sensitivity analyses place the rate of return within the range from a situation where the investment exceeded the net benefits to a positive rate of return of just over 11%. Our ‘optimistic scenario’ gave an IRR of over 15%. Available evidence did not permit us to estimate different GDP returns according to the therapeutic area of research. Thus for mental health, as for CVD, our best estimate of the additional rate of return to the public/charitable research investment from GDP gains is 30%. This gives a total rate of return of 37% for mental health research. These figures cannot be meaningfully compared with the estimates from most other studies, particularly the research from Australia, which not only uses different methods to estimate the returns but uses an unhelpful measure of return on investment.
Implications for the future research agenda
The limitations of available data, the questions around methodology, and the issues raised by our analysis lead us to identify some key elements for the future research agenda in this area, most prominently:
• research funders need to develop and use a standardised (and mapped) way of classifying research funding
• further research needs to be undertaken to understand the time lag between researchexpenditure and health gain
• the ‘spillover’ effects of public and charitable research expenditure on the national economy need further, UK-focused, empirical investigation
• a deeper understanding of the international flows of knowledge and influence would be valuable
• the importance of local research in terms of absorptive capacity: further research to test this would be very valuable, particularly to the health care system and the National Institute for Health Research
• we need to understand additionally, what are the global health benefits from UK medical research.

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