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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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May 23, 2013

Another Look At Marketing Vs. R&D In Pharma

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Posted by Derek

FiercePharma has some good figures to back up my posts the other day on R&D spending versus marketing. I mentioned how many people, when they argue that drug companies spend more on marketing than they do on research, are taking the entire SG&A number, and how companies tend to not even break out their marketing numbers at all.

Well, the folks at Fierce had a recent article on marketing budgets in the business, and they take Pfizer's numbers as a test case. That's actually a really good example: Pfizer is known as a mighty marketing machine, and for a long time they had what must have been the biggest sales force in the industry. They also have a lower R&D spend than many of their peers, as a percentage of sales. So if you're looking for the sort of skewed priorities that critics are always complaining about, here's where you'd look.

Pfizer spent $622 million on advertising last year. Man, that's a lot of money. It's so much that it's not even one-tenth of their R&D budget. Ah, you say, but ads are only part of the story, and so they are. But while we don't have a good estimate on that for Pfizer, we do have one for the industry as a whole:

DTC spending is only part of the overall sales-and-marketing budget, of course. Detailing to doctors costs a pretty penny, and that's where drugmakers spend much of their sales budget. Consumer advertising spending dropped by 11.5% in 2012 to $3.47 billion. Marketing to physicians, according to a Johns Hopkins Bloomberg School of Public Health study, amounted to $27.7 billion in 2010; that same year, DTC spending was just over $4 billion.

That's a total for 2010 of more than $31 billion, the best guess-timate we can come up with on short notice. According to FierceBiotech's 2010 R&D spending report, the industry shelled out $67 billion on research that year--more than twice our quick-and-dirty marketing estimate.

So let's try for a Pfizer estimate then. If they stayed at roughly that ratio, then they would have spent seven times as much marketing to physicians as they did on advertising per se. That gives a rough number of $4.3 billion, plus that $622 million, for a nice round five billion dollars of marketing. That's still less than their R&D budget of $7.9 billion, folks, no small sum. (And as for that figure from a couple of years ago about how it only costs $43 million to find a new drug, spare me. Spare everyone. Pfizer is not allocating $7.9 billion dollars for fun, nor are they planning on producing 184 new drugs with that money at $43 million per, more's the pity.)

So let me take a stronger line: Big Pharma does not spend more on marketing than it does on R&D. This is a canard; it's not supported by the data. And let me reiterate a point that's been made here several times: no matter what the amount spent on marketing, it's supposed to bring in more money than is spent. That's the whole point of marketing. Even if the marketing budget was the same as the R&D, even if it were more, it still wouldn't get rid of that point: the money that's being spent in the labs is money that came in because of marketing. Companies aren't just hosing away billions of dollars on marketing because they enjoy it; they're doing it to bring in a profit (you know, that more-money-than-you-spend thing), and if some marketing strategy doesn't look like it's performing, it gets ditched. The response-time loop over there is a lot tighter than it is in research.

There. Now the next time this comes up, I'll have a post to point to, with the numbers, and with the links. It will do no good at all.

Note: I am not saying that every kind of drug company marketing is therefore good. Nor am I saying that I do not cringe and roll my eyes at some of it. And yes indeed, companies can and do cross lines that shouldn't be crossed when they get to selling their products too hard. Direct-to-consumer advertising, although it has brought in the money, has surely damaged the industry from other directions. All this is true. But the popular picture of big drug companies as huge advertising shops with little vestigial labs stuck to them: that isn't.

Comments (29) + TrackBacks (0) | Category: Business and Markets | Why Everyone Loves Us


COMMENTS

1. dearieme on May 23, 2013 7:58 AM writes...

The complaint about marketing costs comes from people who are interested in politics, and whose hands are clean because everyone knows that political parties never ever spend a penny on marketing.

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2. Toad on May 23, 2013 8:13 AM writes...

Derek,

3rd paragraph. Just $622 on advertising?

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3. Alex W. on May 23, 2013 8:25 AM writes...

I think there's a heuristic at work here where people read about how very bad something is, and assume it must occur on a great scale as a consequence.

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4. Anon on May 23, 2013 8:43 AM writes...

Just because companies don't spend much on marketing does not mean marketing is not done on a large scale. I think a lot of people who criticize marketing by drug companies are talking about its sheer scale rather than just the amount spent on it.

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5. petros on May 23, 2013 8:54 AM writes...

On this score it might be worth putting up a chart of the cash flow of a development project that reaches the market. The post approval spend, mostly marketing(?), drastically increases the overall project spend!

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6. Derek Lowe on May 23, 2013 9:07 AM writes...

#2 - fixed! Thanks. That would tend to undermine the argument, wouldn't it?

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7. anon on May 23, 2013 9:10 AM writes...

Sure, if marketing doesn't pay then it gets ditched. Only I thought drug companies were not marketing firms. It seems they are confused about what business they're when you see R&D budget being cut left and right, must be that research doesn't pay. Why not just become an investment bank or lobbying firm.

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8. MDA Student on May 23, 2013 9:10 AM writes...

At what point does physician education become marketing?
This is a genuine question of mine. Is it in when you leave out competitor's data? Negative data on your product?

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9. FMC on May 23, 2013 9:14 AM writes...

So actually the marketing issue within the Drug Industry is a rather hot topic.
I we think about it thoroughly though, it would be interesting to confront the marketing dollars spent - let's say for the sake of argument an average per product per year for pfizer versus a consumer industry example lets say Coca Cola (obvioulsy employing the same units - being scientists and all that). I bet we would get a really interesting result, which in turn would bring us to an entirely new question: If the dollars spends on the marketing of a drug are equivalent to the dollars spent on a consumer product, what does that say about the industry and what does that mean for the consumer?
Well as I said now that would be interesting...

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10. FMC on May 23, 2013 9:15 AM writes...

So actually the marketing issue within the Drug Industry is a rather hot topic.
I we think about it thoroughly though, it would be interesting to confront the marketing dollars spent - let's say for the sake of argument an average per product per year for pfizer versus a consumer industry example lets say Coca Cola (obvioulsy employing the same units - being scientists and all that). I bet we would get a really interesting result, which in turn would bring us to an entirely new question: If the dollars spends on the marketing of a drug are equivalent to the dollars spent on a consumer product, what does that say about the industry and what does that mean for the consumer?
Well as I said now that would be interesting...

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11. SteveM on May 23, 2013 9:17 AM writes...

I think for the people that pay attention and connect the dots, it's not just the marketing spend, it's the entire end-to-end cost of marketing AND the utilization of the associated drugs that may provide little or no more effective clinical value than the alternatives.

For example, the ad spend for a Nexium or Lovaza may be a small fraction of an R&D budget, but their real cost relative to OTC Omeprazole and fish oil caps is ginormous.

The bigger picture about drug marketing in its totality, is that it is often economically perverse apart from any ethical shenanigans the drug companies may engage in.

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12. DrugA on May 23, 2013 9:43 AM writes...

I don't dispute the overall argument here, but think that to come up with an estimated marketing total, you'd need to include DTC, medical journal advertising, detailing (staff costs, plus expenses, cars, dinners, lunches for doctors), CME, samples, exhibit booths, support for disease groups and physician associations, spending through company foundations that goes largely to groups who use the company's products, coupons, support of co-pay foundations, etc. etc.

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13. NoDrugsNoJobs on May 23, 2013 10:12 AM writes...

As a practical reality, Docs are busy and the basic information they get from the sales folks (which is highly regulated, more than any industry perhaps) is how they learn the basics about new drugs. Yes its advertising and its advertising dollars but yes too, we generally benefit from it. It is not in-your-face advertising but less intrusive and serves a higher purpose as well. Marketing is not primarily the problem for industry today - as time goes on, it will be less and less an issue as prescribing descriptions are increasingly made by insurance companies and government agencies who have their own money-saving agendas. This hidden beaurocracy that increasingly controls your choices as a patient gets little attention but is fast becoming the real issue in your choices in health care.

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14. Electrochemist on May 23, 2013 10:27 AM writes...

To add on to the points #13 is making, it is important to mention that the marketing figures reported by various groups also include the cost of physician samples (limited number of dosages packaged to give to patients for trial purposes).

I won't argue that these should not be counted as marketing spend, but it is undeniable that the public benefits directly and substantially from this type of marketing. Few other industries provide free samples to insure their product works before a customer makes a purchase.

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15. Sigivald on May 23, 2013 11:47 AM writes...

FMC asked: If the dollars spends on the marketing of a drug are equivalent to the dollars spent on a consumer product, what does that say about the industry and what does that mean for the consumer?

Replies, off the top of my head:

A) Nothing. It tells us nothing at all, and means nothing in and of itself.

(What could it tell us about "the industry"?

Other than that "it thinks marketing increases sales enough to pay for the marketing, to an extent that the marketing it's willing to produce is 'equivalent' to that of some other industry"?

What meaning are we supposed to be able to winkle out of that economic statement of basic principles?)

B) What does "equivalent" mean? In dollar amount? Dollar amount relative to size of the industry? Dollar amount per expected/potential customer?

Those are all different things, and to the extent that we think A) doesn't apply and that we Might Be Able To Learn Something About Something from the "equivalence", we need to know which one we mean.

I think the entire premise is, sadly, faulty.

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16. alig on May 23, 2013 1:12 PM writes...

I think the most interesting comparison would be between over-the-counter medicines like Advil & Tamiflu versus prescription drugs. What portion of OTC drug revenue is spent on marketing? Is that more or less than prescription drugs? What about the years when almost equivalent drugs were available both OTC & prescription. OTC Prilosec versus prescription Nexium; OTC Claritin versus prescription Zyrtec. How did those marketing budgets compare?

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17. David Borhani on May 23, 2013 2:16 PM writes...

Advil Advertising Budget:
"More than $80 million was spent to market Advil in 2009, with $52.1 million of that devoted to brand Advil and $28.5 million on Advil PM, according to Kantar Media data. That's down from the $103 million spent on Advil in total U.S. measured media in 2008."

Worldwide Advil Sales: about $700 million.

Sales:Ad budget ratio: ~8.8:1

This is probably a higher (~2x) ratio than for Rx drugs, as Pfizer reported ~$59 billion sales in 2012 but only ~$3 billion as "Advertising".

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18. Big Fish on May 23, 2013 2:19 PM writes...

A mediocre product with a great marketing strategy/budget/team
vs.
A great product with a mediocre marketing/strategy/budget/team

I'll take "A mediocre product with a great marketing strategy/budget/team" each and every time. I strongly believe that this is true in every industry, including our own.

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19. Big Fish on May 23, 2013 2:43 PM writes...

A mediocre product with a great marketing strategy/budget/team
vs.
A great product with a mediocre marketing/strategy/budget/team

I'll take "A mediocre product with a great marketing strategy/budget/team" each and every time. I strongly believe that this is true in every industry, including our own.

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20. anon on May 23, 2013 3:01 PM writes...

A mediocre product that does not promote better health, is a drain on industrial/society resources, and by it's presence negate research in other more productive/cutting edge areas.
Yea, let's get more of those!

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21. Big Fish on May 23, 2013 3:21 PM writes...

Again, I'll take Valeant as an example. So far, their strategy rewards shareholders handsomely, which in turn fuels more acquisitions with their high-flying stocks. Scientist-side of me doesn't like what they are doing (gutting all R's), but businessman-side of me really likes the strategy - minimize uncertainty/risk and maximize reward. Drug discovery is highly risky. But turning an approved Rx product into boat-load of cash with a great marketing operation is much less risky.

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22. anon on May 23, 2013 4:11 PM writes...

I generally agree with most of your points, but how does one judge if marketing brings in more money than its spends? its a true general point, but its impossible to get a good number...

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23. cynic on May 23, 2013 5:15 PM writes...

@1: You're right, the main concern about marketing is a political one. Companies with large captive customer bases draw a lot of political attention. Much of the industrialized world deems health care as an inalienable right, and the U.S. is rapidly moving that direction. I have some conflicting feelings about that, as do many others in this forum, I'm sure, but that doesn't change the fact.

As an industry, Pharma has a customer base with a largely fixed demand. Causing them to consume significantly more (or less) drugs than what's appropriate for their disease is widely regarded as unethical. In a situation like that, the only purposes of marketing are to shift which company supplies the biggest share of the demand, or to convince the customer base that higher prices are appropriate. Neither of these benefit the customers in any way/shape/form.

When said customers see large blocs of money they spent being used to squeeze more money out of them or for companies to fight against each other, trying to console the customers by telling them "hey, we don't spend as much on marketing as sporting goods stores or restaurants do" or even "hey, we don't spend as much on marketing as we do on actually delivering you new drugs" is not going to work.

And when said consumers are also voters who feel that healthcare (including drugs) is a human right, and who see that free-market capitalism (or whatever passes for capitalism in the drug industry) is driving a large share of money to be spent on marketing rather than delivering new drugs, they may decide to apply a political solution, much the same way that each consumer is now served by one (and only one) power company which spends very little on marketing.

I'm not saying that's a good idea, and others have made some good points about the value of free samples, etc. from marketing, but overall this is the direction things are going, and as long as Pharma keeps using industries with non-captive audiences as their benchmark, the closer to that political cliff they're going to march.

So I agree with #1 dearieme, it is about politics, and that should worry us much, much more than it currently does.

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24. Yancey Ward on May 23, 2013 6:46 PM writes...

A mediocre product that does not promote better health, is a drain on industrial/society resources, and by it's presence negate research in other more productive/cutting edge areas. Yea, let's get more of those!

Every single industry on the planet has mediocre products made by mediocre manufacturers. Should we ban their marketing budgets, too?

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25. simpl on May 24, 2013 2:41 AM writes...

Re mediocre products: I remember 20 years go a clear case of a YOBP (yet another blood pressure) drug doing really well in one small country. The situation remedied itself, as the marketing team head was promoted to an international marketing function working on new launches.

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26. FMC on May 24, 2013 4:43 AM writes...

@15 "Sigivald":
Unfortunately I cannot agree with your statement. My argument basically revolves around the following argument: If you have to market something, you want to basically create demand, which is fine if we are talking about consumer products, like cars, beverages, etc.
Doing the same thing for drugs, i.e. creating demand by marketing, I personally (please note) find questionable for two reasons:
a) if you need to create demand, it might imply that there has not been a real medical need for the drug you are marketing
b) if you market a drug like a consumer product (in terms of dollars spent on the marketing), then, as a corollary, the consumer might assume that the drug itself is not that different from the everyday products he/she purchases - which is clearly not the case.
While these arguments, at first sight might seem to be rather "made up" or constructed, I am of the opinion that they are worth thinking about, also in order aide the industry to regain a little trust from patients and not consumers.

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27. David Formerly Known as a Chemist on May 24, 2013 9:07 AM writes...

Derek, you've done a nice job of shedding light on this issue. Maybe you're right and pharma companies do spend far less on sales & marketing than on R&D. But there's a strong negative public perception that pharma spends more on sales & marketing than R&D, which is a negative for the companies. Why don't the companies get out in front of this issue and simply report how much of their SG&A line corresponds to sales & marketing activities (in the "notes to financial statements" section of their SEC reports)? Why not kill the issue? Is the data really that sensitive? Pharma has a real image problem and they should do what they can to clean it up. This would be an easy step, if in fact your analysis is correct.

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28. Not_black_and_white on May 24, 2013 2:13 PM writes...

Marketing in pharma is not inherently a problem. The assumptions in #15 are simplistic (although they do say 'might'). You are assuming that anyone with a disease will immediately know about a possible treatment coming and demand it. In some cases there are vocal patient advocacy groups, especially for some diseases with no existing treatments but I don't think you can use that example to say everyone will be as aware. By figuring out how to connect people with a therapy you are providing value to the patient and value to the company.

Creating a market for an ineffective drug by praying on peoples' fear and emotions is just as clearly wrong. I believe the homeopathy folks do that, even to themselves. In the regulated pharma world it is much harder to do that but maybe Ranbaxy figured out how to?

The omeprazole case is interesting and a harder one to judge. Nexxium seems to have some additional benefit, I don't know if it is worth the difference but I could believe that for some people it is.

I think that example says more about our collective low tolerance for risk than issues of marketing.

We want the best, never mind the cost! But what if we can't pay? Oh, right, someone else will. If life worked that way we would all drive Ferraris.

Combining compassion for the sick that can't afford treatment with a willingness to not always have the best is the conversation this country needs to have. You can politicize it by calling that a 'death panel' but you won't change the fact that the pot of cash is not bottomless.

By ignoring this problem we are certainly not 'forming a more perfect union, establishing justice, ensuring tranquility, promoting the general welfare or securing the blessings of liberty for our posterity'. Are we even doing a bang up job of providing for the common defense if the incoming cadre of recruits are of poorer health?

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29. Chem_Policy on May 25, 2013 3:53 PM writes...

@27 "David Formerly Known as a Chemist":

Actually, yes, the data is that sensitive! Given disclosures required by law (SEC filings, patent applications, civil and criminal proceedings), there are good reasons not to disclose marketing numbers any more than necessary!

Much in terms of corporate policy and strategy may be gleaned from detailed marketing budgets. As such, it is not by accident that the sort of analysis conducted by Derek is necessary for outsiders. If you know that competitors have access to much data that you are forced to release, why produce a nice marketing report with breakdowns by product area and quarter? This is the same reasoning behind 200,000 page patent filings with many candidates in a general area!

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