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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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January 6, 2008

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.

Comments (24) + TrackBacks (0) | Category: Business and Markets | Drug Prices | Why Everyone Loves Us


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.

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2. milkshake on January 7, 2008 2:07 PM writes...

One can make point about the pharma execs overspending on marketing their existing drugs rather then investing into discovering new one because their incentives are completely skewed towards the short-term actions.

If you were a CEO and owned 80 million worth of stock options, would you rather put the company's money into uncertain projects that may or may not pay off in eight year horizon - or would you rather try to stop the declining sales of a blockbuster drug and try to meet the expectation of the analysts on the next quarterly report?

Current pharma industry model is less rational than the Adam Smith affictionados are willing to admit. There is actually such a thing as the invisible hand of free market - and it is picking your pocket as we speak.

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3. Sili on January 7, 2008 2:43 PM writes...

It's nice to see such a sensible view of the issue. It goes well with today's Cectic.

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4. SNP on January 7, 2008 2:43 PM writes...

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.

Although if you look at the industry's collective pile, I'd imagine those ads are mostly shifting money from one company's portion to another. At which point you have an unprofitable arms race. My proposal continues to be some sort of negotiated mutual drawing-down of advertising, with lower prices and higher margins in return for protection from anti-trust action.

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5. Deepak on January 7, 2008 3:33 PM writes...

Wasn't it Peter Drucker who said "Marketing & Innovation make money. Everything else is a cost".

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6. MikeEast on January 7, 2008 3:41 PM writes...

I read this the other day and while I am naturally (or maybe nurturally) cynical, this article/editorial set off the alarm bells for me. Whether their analysis is factually correct doesn’t even matter to me. There was no perspective from any angle whatsoever. SNP’s comments illustrate this. The oft repeated comment: “…the use of sales representatives for illegal off-label promotion…” just drove home the the point that the authors believe corporation = evil and pharmacutical corporation = super-evil.

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7. fat old man on January 7, 2008 3:58 PM writes...

Clearly a bogus effort. What is a research dollar and what is a marketing dollar? They list Phase 4 studies as a marketing cost. Also packaging and distribution as marketing costs. They must have been educated at the Mark Twain School of Statistics.

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8. hibob on January 7, 2008 4:07 PM writes...

#4 SNP: "Although if you look at the industry's collective pile, I'd imagine those ads are mostly shifting money from one company's portion to another."

Even when the ad/marketing is for a drug with a direct competitor, it's not necessarily a zero sum game. I remember a study from a few years ago found that one of the biggest impacts of direct-to consumer-ads for prescription meds wasn't to get them to "ask their doctor about ...". The big effect was that it reminded people who already had prescriptions to keep refilling them. Imagine what it means to gross revenue when people refill their cholesterol or blood pressure prescriptions 12x a year as opposed to just 9 or 10x.
I'm pretty sure the (publicly accessible) study came out back in the '90s; pharma marketers probably came to the same conclusion decades before.

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9. Suicyte on January 7, 2008 5:15 PM writes...

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

Doesn't this apply to R&D as well? If R&D didn't help increasing the revenues, why bother? The only major difference here is that marketing is expected to increase short-term revenues, while R&D takes much longer. In my view, the comparison marketing vs. research is a valid one.

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10. Palo on January 7, 2008 6:08 PM writes...

I agree with Suicyte at #9, Derek.
And also, you open your post invoking a degree of dishonesty by the authors, when you say "they take the varying figures from the two major sources and decide to take the larger figure every time the two disagree.", which to me suggests that you dislike their finding of larger marketing expenditures than Pharma's accepts. Then you go on to claim that expending in marketing is in fact great, it brings more money and then you can do more "innovation". From your argument I would think that you want more and more investment in marketing... but you don't seem to like the finding that you actually DO spend more and more on marketing...
I'm confused.

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11. SNP on January 7, 2008 6:12 PM writes...

The oft repeated comment: "..the use of sales representatives for illegal off-label promotion" just drove home the the point that the authors believe corporation = evil and pharmacutical corporation = super-evil.

Yeah, as with the natural products story last week, I'm not at all hostile to attempts to improve the system (which I don't think any of us consider infallible). I just wish the alternatives weren't so often presented in such a shoddy, inflammatory, insulting way.

Even when the ad/marketing is for a drug with a direct competitor, it's not necessarily a zero sum game.

Sure, I said "mostly". But if there's a way to get the companies to spend less, it'll be on the zero sum part, not on market expansion. Just like it's easier to implement environmental measures that save money than ones that cost money.

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12. Polymer Bound on January 7, 2008 9:17 PM writes...

If I spend $1 on R&D, and $1 in advertising, what's the predicted return on each dollar? The ethics of marketing aside... I imagine with R&D costs rising, you'll get more money back with the ad.

If this is what it takes to keep the lights on in my research lab, I'm all for it, until the FDA/FTC says we can't.

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13. MTK on January 7, 2008 9:17 PM writes...

Suicyte,

Your right about R&D and marketing both being about return. The point is not one or the other, but the proper level of each. You cannot have one without the other. Without R&D, there's nothing to market and without marketing, no one is going to find out about your R&D efforts.

My problem with this study is that it's completely without context. I'd like to see some historical perspective regarding the relative levels of marketing vs. R&D spending over the last few decades and see if there is any correlation between the number of NDA's filed or other productivity measures. Without that or at least some recommendations based on some historical precendents or trends this study is nothing more than "Gotcha". And a somewhat dubious "gotcha" at that.

Given the surprisingly small % of marketing costs due to DTC advertising, I wouldn't be surprised to see that the overall marketing:R&D budget ratio hasn't actually decreased over the last decade, if one uses the same methodology throughout. (I wouldn't be surprised if it was greater also, BTW, I simply don't know.) What would the authors of this study say then?

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14. tgibbs on January 7, 2008 9:33 PM writes...

Doesn't this apply to R&D as well? If R&D didn't help increasing the revenues, why bother? The only major difference here is that marketing is expected to increase short-term revenues, while R&D takes much longer. In my view, the comparison marketing vs. research is a valid one.

This doesn't really matter much, because it is an ongoing endeavor. It doesn't matter that much whether the money coming in today is from an investment made 10 years ago or last year, because if you still plan to be in business in 10 years from now, you have to be making both kinds of investments, so the question becomes, what is the optimum mix?

So yes, long-term investments in research are expected to pay for themselves just as advertising is, but it does not follow that a company will make more money over the long term if they plow all of their money into research, because some of that money comes from current sales, and cutting advertising cuts those sales, and reduces the money available to plow into research. Since a company's long-term fortunes depend on the amount of research they are able to do, the steady-state profit-maximizing mix of investment between research and advertising is also going to be the research-maximizing mix. So cutting advertising doesn't mean that there will be more money for available for research; it means that research will also have to be cut back due to lack of current income to support it.

This is fairly obvious. So the only valid criticism that could be made is that they might be incorrectly estimating the profit & research maximizing amount of advertising. But for established companies with many years of experience, this is a hard case to make, and a comparison of research to advertising dollars sheds zero light on the issue.

The idea that some sort of "negotiated cutback" on advertising might be beneficial to all concerned is more reasonable, and I've even heard similar sentiments expressed by pharm company executives. But it would be tricky to negotiate, because the company with a new drug needs advertising more than the company with an established drug. And an outright ban of pharm advertising would doubtless be ruled unconstitutional by the courts.

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15. SNP on January 7, 2008 10:42 PM writes...

From your argument I would think that you want more and more investment in marketing... but you don't seem to like the finding that you actually DO spend more and more on marketing...

You could make the same point about my objection that the expenses for samples are wildly exaggerated and that the benefits from them aren't addressed. I don't think it's a fair complaint (neither of us is saying the industry needs to spend more on ads or drugs to better serve humanity) but even if it were, it's hardly a defense of the paper itself if we're accusing them of making bad arguments badly!

This isn't some teenage DailyKos commenter raving about pharmas; it's two professors in a peer-reviewed journal article!

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16. Eraser on January 8, 2008 3:14 AM writes...

A bit of topic.
Irrespective of the amount of money being used on research today and 10 and 20 years ago. The industry is clearly at a low point getting new drugs approved.

To what degree is this a result of the over emphasis on combinatorial chemistry in 90ties ?

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17. processchemist on January 8, 2008 4:46 AM writes...

#16

In my humble opinion the emphasis on combichem in the 90ties has been the attempt of obtain the impossible: new APIs from a largely mechanized research process (the M mode in the good, old "Godel, Escher, Bach" by Hofstadter). An impossible dream , where reasearch , like production, would have a predictable output.

About marketing expenses the only thing I know is that where I live marketing people have 2 time the salary of a scientist.

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18. Hap on January 8, 2008 1:29 PM writes...

1) There's probably some jealousy, because of the point in #17 (they make more money than we do, and we don't think they deserve it). Much of the animus (at least mine) derives from a reputation for dishonesty, much like that of Dilbertese management. If marketing is making promises that R+D can't keep, than present sales are being generated at the cost of future sales (overselling yourself + high costs is an easy way to gain the "respect" that the chemical and nuclear industries have garnered in the past half-century).

The expansion of sales beyond those for whom the benefits exceed the costs (and the difficulty of laymen and even doctors in figuring out where that barrier lies, so that individuals have a hard time getting beyond marketing claims) is also generating future costs (litigation, loss of reputation). These costs don't seem to be paid by marketing, but by R+D, as evidenced by the mass layoffs and outsourcing (to smaller companies or other places).

Lots of chemists work outside the pharmaceutical industry, but if you remove the higher-paying jobs from the science job market, some of the impetus for students to become chemists and biologists disappear, increasing the future costs of research.

2) How much of the money that marketing generates as profit ends up in R+D? If marketing generates profits which are all rolled back into marketing, then you haven't improved R+D much (although you may have prevented cuts in R+D which might have occurred otherwise).

A comparison between fields of the relative amounts of R+D and marketing (and perhaps, estimates of their returns) would have been helpful.

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19. qetzal on January 8, 2008 1:43 PM writes...

Authors' biases aside (and they clearly ARE biased against pharma*), they make an important point that hasn't been addressed in these comments.

Pharma itself has been trying to play down its spending on marketing and play up its spending on research. So yes, the authors' estimate is probably a "gotcha" and a dubious one at that. But it's partly one of pharma's own making.

Rather than saying, "Oh, we don't really spend very much on marketing," pharma should probably be saying some version of what's been said above. Marketing helps increase the amount of money available for research.

Of course, that would increase the accusations that pharma pushes drugs on people unnecessarily. Which is probably true to some extent. Whether that's really any worse than Apple pushing unnecessary iPhones on people is another matter.


*Do they really think pharma has an accounting code for 'illegal off-label promotions' or something? Geez!

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20. MTK on January 8, 2008 3:33 PM writes...

Hap, I concur.

I don't think there's any doubt of some jealousy here. IMO, we as scientists completely over-estimate our own importance. For example, post #16 regarding combichem as the source of pharma's woes. (BTW, we've beaten that horse plenty around here, no need to repeat that one.) No offense, Eraser, but you gotta be kidding me.

Chemistry is just one component of R&D. An important component, but when one considers the regulatory, clinical, and business aspects that all go into the industry, it takes some chutzpah to think chemistry, and specifically combichem, is the proximate cause. That's just self-indulgent. In the same way thinking that if we just spent less on marketing and more on R&D, all would be well again.

As George Costanza would say, "Where do you get the ego?"

(Derek, I have a comment that you may have to approve.)

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21. TFox on January 8, 2008 5:48 PM writes...

The biggest point here is that sample cost is *not* a cash cost. DTC ads cost real money, so do scientists, but those free samples were produced for pennies on the dollar by the very same company that is giving them away. (It's the flip side of a large profit margin.) Even if you imagine that you've convinced PharmaX to stop giving out $100M in free samples and spend the money on research, you only save ~$1M in actual raw material costs with which you can pay for scientists, clinical trials, etc. Maybe it's a dumb way to do the accounting, and leads to the perception that pharmas care more about marketing than research, but the pharmas don't write the accounting rules.

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22. srp on January 9, 2008 9:08 PM writes...

Derek's analysis is basically correct--comparing marketing with R&D is nonsensical if intended as some sort of measure of "merit." If you're an expected NPV maximizer, you invest until the expected marginal payoff is zero on every margin. Probably, expenditures on sales and on R&D are complements rather than substitutes, so that the incremental payoff to one is increasing in the other, but you don't even need that to be true to make the argument.

Pharmaceutical sales effort, like all sales effort, is "socially" good to the extent that it gets people to do things that make them happier and healthier or makes them feel happier and healthier when they do the same things (mediagenic placebo effects should not be ignored). It is bad to the extent that it is misleading or annoying. Any "critique" of sales effort fails if it doesn't address the balance of these effects--simply counting up dollars proves nothing.

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23. Morten on January 10, 2008 7:36 AM writes...

I still think DTC advertising should be banned - and if the increased sales really are from people remembering to fill their prescription then maybe the ad should be saying: Please, patients! Go fill your prescription for XYZ.

But I agree that there is jealousy (same pay with half the brain and a third of the education?) but also indignation. I've met several people who have worked for pharmaceuticals as liaisons to doctors and some were serious and hardworking and others just used as much money as possible... And all of them just did as they were told by colleagues and supervisors (they were all young).

But as I understand it the article was about marketing expenses in the US and research expenses in the US? I can imagine that some pharmas with a weak research presence in the US would skew the results towards more money used on marketing?

Permalink to Comment

24. Eraser on January 10, 2008 11:21 AM writes...

MTK

If you reread my post you will notice that I asked a QUESTION. I did not state or imply anything about its importance.

Yes after reading your comment I did do a search and found the discussion from the 19th of September and the one at Org Prep Daily.
However none of these actually discuss the overall impact. They were more focused on the utility or lack of same.

Finally, I suggest relating to questions from new posters in a more positive manner. We don't all read this blog everyday (although I try), nor have we necessarily followed it from the beginning of times.

Cheers


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