Pharmaceutical companies spend more than ever on research and developm

Question

Pharmaceutical companies spend more than ever on research and development; yet the number of new drugs patented each year has dropped since 1963. At the same time, profits—at constant 1963 dollars—for the industry as a whole have been steadily increasing.

Which of the following, if true, is the single factor most likely to explain, at least in part, the three trends mentioned above for money spent, drugs patented, and profits made?

A. Government regulations concerning testing requirements for novel drugs have become steadily more stringent.

B. Research competition among pharmaceutical companies has steadily intensified as a result of a general narrowing of research targets to drugs for which there is a large market.

C. Many pharmaceutical companies have entered into collaborative projects with leading universities, while others have hired faculty members away from universities by offering very generous salaries.

D. The number of cases in which one company's researchers duplicated work done by another company's researchers has steadily grown.

E. The advertising budgets of the major pharmaceutical companies have grown at a higher rate than their profits have.

CR47561.01

GMATIntensive · Accepted Answer

The Story     
 Pharmaceutical companies spend more than ever on research and development;  - Pharma companies spend on R&D more than they ever did.

yet the number of new drugs patented each year has dropped since 1963.  - ‘yet’ – a contrast word comes here. Even though these companies are spending more than ever, the number of new drugs patented has dropped since 1963. (It seems to have become more expensive to come up with a new drug)

At the same time, profits—at constant 1963 dollars—for the industry as a whole have been steadily increasing.  - First of all, let’s understand the meaning of “profits – at the constant 1963 dollars”. It means we are taking inflation into account. Because of inflation, $1 of 1963 is not equivalent to $1 today. Right? You could buy a lot more with $1 in 1963 than you can buy today. Let’s say that $1 of 1963 is equal to $2 today i.e. you can buy with $2 today what you could buy with $1 in 1963. Now, if a company makes a profit of $2 million this year and made a profit of $1 million in 1963, has its profit really grown? No, in terms of how much they can buy, it hasn’t.

So, when we say that profits – at constant 1963 dollars – have increased, it means that even after taking inflation into account and thus reducing the current profits by a factor (so that they can be compared with 1963 profits), the current profits are greater than the profits in 1963. So, let’s say we take the numbers discussed above. If the profits in 1963 were $1 million, the current profits are greater than $2 million.

Gist:  
Even though Pharma companies spend more than ever on R&D, the number of drugs patented has dropped. However, the profits of the companies together have steadily increased.

The Goal     
We are given three observations:

Higher spending 
 Fewer patents 
 Greater profits

The first doesn’t align with the second, and the second doesn’t align with the third. We have to find a factor that best explains, at least partially, the existence of these three things together.

One possible way we can explain these three things is that the effectiveness requirements for the patenting of drugs have increased considerably i.e. a drug now needs to be much more effective to get patented (can explain 1st and 2nd) and, as a result, significantly more people are willing to take the drugs that finally get the patents (bigger market can explain 3rd).

The Evaluation     
 A. Government regulations concerning testing requirements for novel drugs have become steadily more stringent. 
  Incorrect  . While this option can explain 1st and 2nd, it cannot, at all, explain the 3rd point. If more stringent requirements led to a bigger market, the option needs to state that explicitly. In such a case, this option would be correct. However, we cannot assume on our own that more stringent requirements lead to a bigger market.

B. Research competition among pharmaceutical companies has steadily intensified as a result of a general narrowing of research targets to drugs for which there is a large market. 
  Correct  . This option says that research competition among pharma companies has steadily increased. Why? Because all these companies are trying to develop selective drugs for which there is a large market. Given the increased competition and a narrower focus of research, it is expected that developing drugs that can get patented would be more expensive. Thus, 1st and 2nd points are explained. The 3rd point is explained by “for which there is a large market”. So, even though there are fewer drugs patented, since each drug has a large market, the overall profits are likely to be higher.

C. Many pharmaceutical companies have entered into collaborative projects with leading universities, while others have hired faculty members away from universities by offering very generous salaries. 
  Incorrect  . While the ‘very generous salaries’ part can explain 1st and 2nd points, the option says it’s the case with some pharma companies, not the whole pharma industry. Besides, the option doesn’t explain the 3rd point.

D. The number of cases in which one company's researchers duplicated work done by another company's researchers has steadily grown. 
  Incorrect  . This option can explain the 1st and the 2nd points. However, it cannot explain the 3rd point. There’s no reason why higher duplication of work across companies might cause profits for the industry to increase.

E. The advertising budgets of the major pharmaceutical companies have grown at a higher rate than their profits have. 
  Incorrect  . Clearly, this option cannot explain anything given in the passage.

Additional Notes     
This is a unique question in that it is an extension of the paradox questions. In a paradox question, we are asked to explain the coexistence of two seemingly contradictory situations. In this question, there were three such situations. The correct option needed to explain the existence of all three together, as was clearly mentioned in the question stem. While Option A and D could explain two of the situations, they were wrong since they couldn’t simultaneously explain the third situation. The way to solve these non-standard questions is to read the question stem very carefully.

SC Notes: 
“Pharmaceutical companies spend more than ever on research and development” – In this, we use the simple present tense to illustrate an ongoing trend and not present continuous.

If you have any doubts regarding any part of this solution, please feel free to ask.

gmatt1476 · Answer

Official Explanation

Argument Construction

Of the five factors indicated in the answer choices, which one most helps to explain all three of the trends?

The information provided about the pharmaceutical industry indicates three long-term trends since 1963: increased research spending, increased profits, and reduction in the number of patents granted.

Note that in a case where the pharmaceutical industry produced fewer—yet more lucrative—new drugs as a result of its increased research investment, its profits might increase even if fewer new patents were granted.

A. Although the stringency of government regulations could help explain increased research spending and the granting of fewer patents, it fails to explain why profits would increase in the long term.

B. Correct. This helps explain all three factors. It suggests that each company has had to boost its research spending, but with a narrowing of focus to produce mass-market drugs with enormous potential for profit. This narrowing of focus could explain why fewer drugs are being patented.

C. Collaboration between pharmaceutical companies and leading universities would not help explain all three trends. It could indicate that the pharmaceutical companies have reduced their investment in their in-house research infrastructure. That is, perhaps these companies find it less expensive to farm out research to universities where a powerful research infrastructure already exists. Even if this could help explain increased research spending, nothing indicates that it would help explain the trends in profits or patents.

D. Companies doing similar or duplicative research could indicate certain inefficiencies in research spending, which could help explain the research-spending trend and the trend regarding patents. Nevertheless, it still fails to explain the trend of increasing profits.

E. This does not explain the trend regarding research spending or the trend regarding patents.

The correct answer is B.

egmat · Answer

The correct answer - option B.

Given:

1. Pharma companies are spending more on R&D BUT
2. Number of new drugs patented is coming down AND
3. Also, profits for the industry as a whole are increasing

What can explain the above three trends?

What if pharma companies, rather than develop many new drugs, are investing their R&D into developing fewer drugs, but the drugs developed are high demand (needed in the market)?

In such a case, the R&D investment will result in fewer new drugs, but those few drugs will earn profits for these companies, and the industry as a whole.

Lets look at the options.

A. Government regulations concerning testing requirements for novel drugs have become steadily more stringent.

This can explain the first 2 trends - despite more money in R&D, fewer drugs are being patented as testing requirements are more stringent. But this cannot explain the third trend - increase in profits.

B. Research competition among pharmaceutical companies has steadily intensified as a result of a general narrowing of research targets to drugs for which there is a large market.

Correct - as per our pre-thinking. This option means that the R&D investment (increasing) is used to create only those drugs which have a large market (demand). As this large market gets served, the industry overall will see profits. All 3 trends are explained by option B.

C. Many pharmaceutical companies have entered into collaborative projects with leading universities, while others have hired faculty members away from universities by offering very generous salaries.
Generous salaries can explain the use of R&D money, it may even indicate that rather than develop new drugs, a lot of money got eaten up in salaries (thought this is not necessarily true). But we still cannot explain the profit trend. Incorrect.

D. The number of cases in which one company's researchers duplicated work done by another company's researchers has steadily grown.
Yet again, this only explains the first and second trends (more R&D invested into copying work for existing drugs, which means fewer new drugs). But yet again, this cannot explain the profits.

E. The advertising budgets of the major pharmaceutical companies have grown at a higher rate than their profits have.
Advertising budgets completely irrelevant to this passage.

Hope this helps.

KarishmaB · Answer

R&D spending is increasing. No of patents is reducing. Profits (even after adjusting for inflation to make them comparable) are increasing. So pharma sector is spending more on R&D - in which case you would expect more patents - but there are fewer patents - in which case you would expect less profit - but there is more profit. What explains these three trends? A. Government regulations concerning testing requirements for novel drugs have become steadily more stringent. Since Govt regulations have become more stringent, it will lead to more money invested in R&D and perhaps fewer patents. But there is no explanation for increased profits. With fewer patents, one would expect less profit. B. Research competition among pharmaceutical companies has steadily intensified as a result of a general narrowing of research targets to drugs for which there is a large market. Competition among pharma companies has intensified (leading to more money pumped into R&D to get best researchers, equipment, faster tech etc). Research targets have become fewer so higher competition and fewer patents. But these drugs have a large market (high demand) leading to big bucks once the patent is obtained. This explains all three trends. So say there are only 10 research targets and 4 pharma companies are vying for these drugs. They invest more money in R&D to get these drugs out quickly. So one company is able to get 3 patents, another 2 patents, yet another 2 patents and the fourth gets 3 patents. Once they get their patents, each drug has a large market (many people suffering from these ailments) so they make a lot of profit. C. Many pharmaceutical companies have entered into collaborative projects with leading universities, while others have hired faculty members away from universities by offering very generous salaries. May explain higher R&D cost but nothing else. D. The number of cases in which one company's researchers duplicated work done by another company's researchers has steadily grown. Explains higher R&D cost while getting fewer patents but doesn't explain large profits. E. The advertising budgets of the major pharmaceutical companies have grown at a higher rate than their profits have. Irrelevant Answer (B) This video discusses Explain the Paradox questions: https://youtu.be/7mckzPg-xjo

IN2MBB2PE · Answer

I have a question about the wording of this question and that is something that made me pick the wrong answer choice A. The question asks -

"Which of the following, if true, is the single factor most likely to explain, at least in part, the three trends mentioned above for money spent, drugs patented, and profits made?"

I thought by including "at least in part" the question is asking to pick a choice that explains two of the three factors and thus, I picked A.

Now I am not sure what's the significance and true meaning of this ask? I am a non-native and maybe that is part of the reason why I am not getting this wording.

Maybe any of you folks can please explain this? AndrewN (My go to Mentor over last several asks) or the Great GMATNinja (I think this question needs to pick your brain

), hope you folks had a good Easter break!

AndrewN · Answer

Hello,  IN2MBB2PE . I am happy to help, and I would be willing to bet that I get fewer requests than  GMATNinja , so here are my thoughts. You are on to something in bringing  at least in part  to light. This is an atypical phrasing for a GMAT™ question, since there is apparently more room to justify a reasonable answer choice, one that draws from the information presented in the passage. However, you may have overemphasized that part and glossed over a more patent question phrasing that proves crucial here:  most   . We see this in  most strengthens ,  would most weaken ,  would best resolve , and so on. Watch those superlatives. They are telling you that one answer choice stands above the rest, in keeping with the logic of the passage, so close enough is not good enough. In short, the question is little different from a more ordinary question—it just looks different at first, and the details are slightly different (e.g., we need to track three key pieces of information instead of two).

I think  GMATIntensive  has done an excellent job above explaining how the correct answer is the only one that, without too much stretching, touches on all three trends. If you have further questions, though, feel free to ask.

Thank you for bringing me into the dialogue.

- Andrew

jabhatta2 · Answer

Hi  KarishmaB  - I didnt think (D) explained bullet 1 (Higher  R&D  costs) what so ever

Just because there is more ' duplication ' going on as per (d) -- why should any company's  R&D  go up ?

If anything -  R & D  should  come down ... Why ? Well here is the sequence of events

(1)  Company X  spends a LOT on  R&D 
(2)  Company Y  duplicate the products of Company X 
(3)  Company X  wont spend MORE on  R&D  -- if anything,  Company X  will start spending LESS on  R&D . Why ? Well, because  Company X  will say  "hmmm there is HIGHER chance that our products WILL BE COPIED / Duplicated BY comapny Y"  Why then should I ( Company X ) -- spend so much money on  R&D  when  Company X  might  copy  my product

Same thing with (c) also -- how does (c) cause Higher  R&D  exactly ?

Paying salaries of new hires comes from a different  budget  all-together vs the  budget  for R&D, no ?

I thought (C) didnt  touch  on  ANY  of the 3 points (Higher R&D, Fewer patented drugs, Higher profits)

KarishmaB · Answer

Option (D) explains 'higher costs while getting fewer patents.'
The companies are investing money in new research and putting in more and more money but are getting fewer patents because their research turns out to be a duplication of something that already exists. Someone else is already holding a patent for the research and hence they don't get a patent for it.

Option (C) says that companies have hired faculties at very generous salaries. Hence it explains in part why their costs are high.
The three trends are - high amount of money spent, fewer patents, and increasing profits

kpop1234567890 · Answer

Hi,
Which question category does this fall into? Paradox?

Bunuel · Answer

Yes, it's a Resolve a Paradox type of question.

pearrrrrrr · Answer

GMATIntensive

How can the ‘very generous salaries’ part can explain 2nd points?

Thank you for clarification

Posted from my mobile device

VerbalBot · Answer

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