# Benchmarks that matter: R&D spend, margins, and success rates by the numbers
A biotech founder pitches you a drug that will "hit the market in three years with 80% margins." Should you believe them? With five reference numbers in your head, you can sanity-check that claim in under a minute. That is what this lesson gives you: the benchmarks professionals carry around so they can smell nonsense fast.
These are ballpark figures, not precise truths. Treat them as the industry's rules of thumb, useful for calibration, not as audited data for a specific company.
Here is the core set. Anchor everything else to these.
| Benchmark | Typical range | What it tells you |
|---|---|---|
| R&D as % of sales (pharma) | ~15-25%, often cited ~20% | How research-intensive the business is |
| Gross marginGross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition →, branded drugs | ~70-90% | Cheap to make, expensive to invent |
| Gross marginGross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition →, medical devices | ~60-70% | Physical manufacturing eats margin |
| Clinical-phase success rate (Phase 1 to approval) | ~10% | Most drug candidates fail |
| Time to develop a new drug | ~10-15 years | Why patents and cash matter so much |
A quick vocabulary reset before we go deeper:
Big pharma reinvests roughly a fifth of sales into R&D. Compare that to a consumer goods company at 2-3% and you understand the whole industry: value comes from discovery, not distribution.
Companies like Roche, Merck, and Novartis routinely report R&D-to-sales in the high teens to mid-twenties percent. Early-stage biotech is off the chart: a pre-revenue company spends 100%+ of its (tiny or zero) sales on R&D because it has no product yet. That is normal, not a red flag.
Sanity check in action: if a self-described "innovative pharma" company spends only 4% of sales on R&D, it is probably a generics or manufacturing business wearing an innovation costume. Generics makers (like Teva) legitimately run low R&D because they copy off-patent drugs rather than invent new ones.
The margin gap between drugs and devices is one of the most useful mental models in the sector.
A branded small-molecule pill can cost cents to manufacture and sell for dollars. That is where 70-90% gross margins come from. The expensive part already happened: the decade of R&D and trials, now sunk.
Medical devices are physical objects: a hip implant, an insulin pump, a surgical robot. They carry real bills of materials, factories, and service costs. Gross margins of 60-70% are strong performance here. Medtech leaders like Medtronic and Stryker operate in roughly this band.
Why this matters for you: never compare a device company's 65% margin unfavorably to a pharma's 85%. They are different physics. Judge each against its own peer group.
A device startup projects $50M in revenue with a bill of materials of $18M and asks whether its margins are "biotech-grade."
Gross marginGross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition → = (50, 18) / 50 = 32 / 50 = 64%.
That is a healthy, normal medtech margin. If their pitch deck claimed 85% "like a pharma company," the numbers would not support it unless they had a radically different (likely software-heavy) model. This one calculation catches the mismatch.
Across the full journey from Phase 1 to approval, only about 1 in 10 drug candidates makes it. This is the single number that reframes how you read any drug pipelinepipelineAll active sales opportunities across the stages of the sales process, together with their combined potential value and probability of closing.View full definition →.
Success is not evenly distributed across phases. Rough industry estimates:
Success rates also vary hugely by disease. Oncology (cancer) has historically lower success rates than, say, some infectious disease or hematology programs. The BIO/Informa "Clinical Development Success Rates" reports are a well-known free source for these breakdowns; always check the specific therapeutic area rather than using one blanket number.
Sanity check: a company with three Phase 2 assets should not be valued as if all three will reachreachThe number of unique people exposed to your message in a given period. Unlike impressions, reach counts each person once, no matter how often they see it.View full definition → market. Apply attrition. If each has, say, a ~30% chance from Phase 2 onward, the expectation is closer to one product than three.
🎬 [VIDEO: "How does a drug get approved by the FDA?" - youtube.com - a short, clear walkthrough of the clinical trial phases and regulatory review]
Keep these as order-of-magnitude anchors (estimates, figures as commonly cited around 2024-2025, expect gradual growth into 2026):
Growth rates for both sectors are typically mid-single digits annually, faster in specific hot areas like GLP-1 metabolic drugs, oncology, and AI-enabled diagnostics.
Do not over-index on any single figure. The useful skill is knowing the US is the biggest and richest market, Europe is large but more price-controlled, and devices are a smaller pie than drugs.
Knowledge check
1. A founder claims their new drug will reach the market in three years. Based on industry benchmarks, why should this claim raise suspicion?
2. Why do branded drugs typically show higher gross margins (~70-90%) than medical devices (~60-70%)?
3. Pharma reinvests roughly 20% of sales in R&D versus 2-3% for a consumer goods company. What does this contrast primarily reveal?
4. Select ALL correct answers about how these benchmarks should be used.
Select all the correct answers.
5. Select ALL correct answers about the ~10% clinical-phase success rate (Phase 1 to approval).
Select all the correct answers.
Knowing that a device took the 510(kkThe average number of new users each existing user generates through referrals. Above 1.0, growth compounds on itself and becomes exponential.View full definition →) route versus PMA instantly tells you something about its risk class and how much clinical evidence stood behind it.
When you assess a biotech or medtech company, run these practical checks:
1. Match R&D intensity to the story. Innovator claims should come with double-digit R&D-to-sales. Low R&D means a generics or manufacturing model.
2. Judge margins against the right peer group. 65% is great for devices, mediocre for branded drugs.
3. Apply attrition to the pipeline. Discount Phase 2 assets heavily. Ask which therapeutic area, since cancer odds differ from others.
4. Check the patent cliff. When do the key patents expire? A blockbuster drug losing exclusivity can lose most of its revenue to generics within a year or two. Ask: what replaces that revenue?
5. Confirm the regulatory pathway and status. Is it FDA-approved, EMA-approved, 510(kkThe average number of new users each existing user generates through referrals. Above 1.0, growth compounds on itself and becomes exponential.View full definition →)-cleared, CE-marked? "In discussions with regulators" is not approval.
6. Follow the cash. Pre-revenue biotech burns cash for years. How many months of runway remain before the next raise?
None of this is investment advice. It is the fluency that lets you ask the right question in the room.