Dollar, Drugs, and Advertising
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Posted by Derek
Well, it's the first full working week of the year, so let's dive right into some controversy. There's an article on PloS Medicine on the amount that the drug industry spends on marketing. They at least try to avoid the problem of mixed administrative and marketing expenses, but the authors come up higher than the other estimates that have been arrived at. That's because they take the varying figures from the two major sources and decide to take the larger figure every time the two disagree.
The final tally? About $57.5 billion spent in 2004. Most of that is in detailing to physicians and the cost of free samples. Direct-to-consumer ads, although they get a lot of attention and collect a lot of flak, account for only 7% of the total. The authors lose no opportunity to point out that this figure is not only larger than the industry's own statements, but is just shy of twice the estimated industrial R&D expenditures for that year. And, of course:
". . .These numbers clearly show how promotion predominates over R&D in the pharmaceutical industry, contrary to the industry's claim. . .it confirms the public image of a marketing-driven industry and provides an important argument to petition in favor of transforming the workings of the industry in the direction of more research and less promotion."
Well, we do spend a lot on marketing, that's for sure. US pharmaceutical sales in 2004 were about $235 billion. If these latest figures are correct, then promotion was about 24% of sales. I don't know how that compares to other industries, but it wouldn't surprise me if it ran high. Several things lead to that - the drug industry is quite fragmented, for one thing, with even the largest companies having a fairly small market share. And patent terms mean that the bulk of the profits on new drugs have to be earned back relatively quickly before they go generic. The distribution channels in the prescription drug business lead to a concentration on the gatekeepers (physicians) as well.
But the authors of this paper have missed an important concept. As I've pointed out here before, the idea of spending money on marketing is that it brings in more money in return. If it didn't, why bother? Marketing campaigns are supposed to pay for themselves, and more besides. That doesn't always work, of course - Prizer sure didn't make back the money spent promoting Exubera - but the failures are made up for by the successes, or at least they'd better be.
So it's not like we have this huge pile of money (X) and choose to divide it up so that we spend 0.65X buying ads and 0.35X on research. Those ads are responsible for the size of the pile in the first place. If they didn't exist, X would be smaller. If the advertising is working, that whole 0.65X is being paid for by increased sales: why on earth would you spend more on advertising than you make in return for it, year after year? And some of that 0.35X comes from those increased sales, too: why on earth would you spend that huge amount on advertising and get only that same amount back in revenues, year after year?
No, as far as I can see, most of the "why don't you spend some of that money on research" question is founded on a misconception. It breaks down when you look at where "that money" comes from. I freely admit that it's not an aesthetically pleasing state of affairs. And maybe that's the root of the problem.
My industry would apparently prefer not to put it in such crude terms, but drug research involves money, and plenty of it. Advertising brings in more money, which is why it exists. The nature of our industry probably allows a higher profitable level of advertising, which is why we do so much of it. My industry may, in the long run, be doing itself no favors by avoiding this topic and encouraging the saintly-white-coated-researcher picture instead. We do help sick people, and we are glad of that (and I do have a white lab coat hanging in my lab across the hall). But helping sick people by discovering new drugs takes big piles of cash. That's how the world is.
pipeline.corante.com
COMMENTS
1. SNP on January 7, 2008 10:58 AM writes...
"There were two major differences between the two sets of figures: the amounts spent on detailing and the amounts spent on samples. IMS estimated the amount spent on detailing at US$7.3 billion [4] versus US$20.4 billion for CAM [10], and while IMS gave a retail value of US$15.9 billion for samples [14], CAM estimated a wholesale value of US$6.3 billion [10].
Using the IMS figure of US$15.9 billion for the retail value of samples, and adding the CAM figures for detailing and other marketing expenses after correcting for the 30% estimate of unaccounted promotion, we arrived at US$57.5 billion for the total amount spent in the US in 2004, more than twice what IMS reported (see Table 1)."
Whoa! Hold on a second! I'm not sure what the relevant number to use for samples are, but whatever is chosen, it needs to be thought through a lot better.
If you use retail costs, the company is only out all of that money to the degree that it represents a 100% loss of sales. That seems unlikely, but to whatever degree sales are lost, that's a donation into the US health care system that should surely be taken into account! Using manufacturing cost ignores the cost to the company in lost sales, using wholesale cost makes no sense at all, and neither takes into account the benefit to the population.
OK, looking down, they explain this...
Using the wholesale value for samples, the CAM figure would be appropriate if we were arguing that the money spent on samples should go to another activity such as R&D.
1) They're not arguing that? If not, what are they arguing? 2) That logic makes no sense and demonstrates their obliviousness to Derek's point that money has to come in before it can go out. (And wholesale wouldn't be the right number anyway.)
I'd say the correct number is the manufacturing cost plus some fraction of reduced sales, and it should be characterized separately from the budget for TV commercials and sandwiches as it goes directly to lowering costs for the rest of the system.
Given the proportion of sample costs in their total figure, and given that they're supposedly experts in this and I spent 30 seconds reading the paper and thinking it through, they really could have handled the question a bit more responsibly. |
