Perceptions that the pace of new-drug development has slowed and that the pharmaceutical industry is highly profitable have sparked concerns that significant problems loom for future drug development. This Congressional Budget Office (CBO) study -- prepared at the request of the Senate Majority Leader -- reviews basic facts about the drug industry's recent spending on research and development (R&D) and its output of new drugs. The study also examines issues relating to the costs of R&D, the federal government's role in pharmaceutical research, the performance of the pharmaceutical industry in developing innovative drugs, and the role of expected profits in private firms' decisions about investing in drug R&D.