So drug companies may spend a lot on R&D;, but they spend even more on marketing, right? I see the comments are already coming in to that effect on this morning’s post on R&D; expenditures as a percentage of revenues. Let’s take a look at those other numbers, then.
We’re talking SG&A;, “sales, general, and administrative”. That’s the accounting category where all advertising, promotion and marketing ends up. Executive salaries go there, too, in case you’re wondering. Interestingly, R&D; expenses technically go there as well, but companies almost always break that out as a separate subcategory, with the rest as “Other SG&A;”. What most companies don’t do is break out the S part separately: just how much they spend on marketing (and how, and where) is considering more information than they’re willing to share with the world, and with their competition.
That means that when you see people talking about how Big Pharma spends X zillion dollars on marketing, you’re almost certainly seeing an argument based on the whole SG&A; number. Anything past that is a guess – and would turn out to be a lower number than the SG&A;, anyway, which has some other stuff rolled into it. Most of the people who talk about Pharma’s marketing expenditures are not interested in lower numbers, anyway, from what I can see.
So we’ll use SG&A;, because that’s what we’ve got. Now, one of the things you find out quickly when you look at such figures is that they vary a lot, from industry to industry, and from company to company inside any given group. This is fertile ground for consultants, who go around telling companies that if they’ll just hire them, they can tell them how to get their expenses down to what some of their competition can, which is an appealing prospect.
Here you see an illustration of that, taken from the web site of this consulting firm. Unfortunately, this sample doesn’t include the “Pharmaceuticals” category, but “Biotechnology” is there, and you can see that SG&A; as a percent of revenues run from about 20% to about 35%. That’s definitely not one of the low SG&A; industries (look at the airlines, for example), but there are a lot of other companies, in a lot of other industries, in that same range.
So, what do the SG&A; expenditures look like for some big drug companies? By looking at 2012 financials, we find that Merck’s are at 27% of revenues, Pfizer is at 33%, AstraZeneca is just over 31%, Bristol-Myers Squibb is at 28%, and Novartis is at 34% high enough that they’re making special efforts to talk about bringing it down. Biogen’s SG&A; expenditures are 23% of revenues, Vertex’s are 29%, Celgene’s are 27%, and so on. I think that’s a reasonable sample, and it’s right in line with that chart’s depiction of biotech.
What about other high-tech companies? I spent some time in the earlier post talking about their R&D; spending, so here are some SG&A; figures. Microsoft spends 25%, Google just under 20%, and IBM spends 21.5%. Amazon’s expenditures are about 23%, and have been climbing. But many other tech companies come in lower: Hewlett-Packard’s SG&A; layouts are 11% of revenues, Intel’s are 15%, Broadcom’s are 9%, and Apple’s are only 6.5%.
Now that’s more like it, I can hear some people saying. “Why can’t the drug companies get their marketing and administrative costs down? And besides, they spend more on that than they do on research!” If I had a dollar for every time that last phrase pops up, I could take the rest of the year off. So let’s get down to what people are really interested in: sales/administrative costs versus R&D.; Here comes a list (and note that some of the figures may be slightly off this morning’s post – different financial sites break things down slightly differently):
Merck: SG&A; 27%, R&D; 17.3%
Pfizer: SG&A; 33%, R&D; 14.2%
AstraZeneca: SG&A; 31.4%, R&D; 15.1%
BMS: SG&A; 28%, R$D 22%
Biogen: SG&A; 23%, R&D; 24%
Johnson & Johnson: SG&A; 31%, R&D; 12.5%
Well, now, isn’t that enough? As you go to smaller companies, it looks better (and in fact, the categories flip around) but when you get too small, there aren’t any revenues to measure against. But jut look at these people – almost all of them are spending more on sales and administration than they are on research, sometimes even a bit more than twice as much! Could any research-based company hold its head up with such figures to show?
Sure they could. Sit back and enjoy these numbers, by comparison:
Hewlett-Packard: SG&A; 11%, R&D; 2.6%.
IBM: SG&A; 21.5%, R&D; 5.7%.
Microsoft: SG&A; 25%, R&D; 13.3%.
3M: SG&A; 20.4%, R&D; 5.5%
Apple: SG&A; 6.5%, R&D; 2.2%.
GE: SG&A; 25%, R&D; 3.2%
Note that these companies, all of whom appear regularly on “Most Innovative” lists, spend anywhere from two to eight times their R&D; budgets on sales and administration. I have yet to hear complaints about how this makes all their research into some sort of lie, or about how much more they could be doing if they weren’t spending all that money on those non-reseach activities. You cannot find a drug company with a split between SG&A; and research spending like there is for IBM, or GE, or 3M. I’ve tried. No research-driven drug company could survive if it tried to spend five or six times its R&D; on things like sales and administration. It can’t be done. So enough, already.
Note: the semiconductor companies, which were the only ones I could find with comparable R&D; spending percentages to the drug industry, are also outliers in SG&A; spending. Even Intel, the big dog of the sector, manages to spend slightly less on that category than it does on R&D;, which is quite an accomplishment. The chipmakers really are off on their own planet, financially. But the closest things to them are the biopharma companies, in both departments.