Pharmaceutical marketing costs

So I didn't want to mix this in with my book review, but I was blown away by one sidebar in the Know Your Bones book I read this weekend. It dealt with how much pharmaceutical companies spend on advertising and marketing.

Taking her data from an IMS Health Special Report as seen in Pharmaceutical Executive magazine in 09/01, she noted that in the year 2000 the pharmaceutical industry spent $16 Billion dollars on promotion, $2.5 Billion of which was direct-to-consumer. (Which means, if you do the math, that they spent over $13 Billion dollars marketing drugs to the medical industry...you know the people who are supposed to prescribe the best drug for what ails you.) The same report indicated that the industry employed 81% more people in marketing than in research.

This blows my mind. Read on for more...I even did a little independent research!

So, that little stat on marketing vs. research kinda blows the whole argument that drug companies are just poor, altruistic people who spend so much developing the drugs to help you that they need to charge what they charge.

Um. No.

They spend a lot to advertise to you, the consumer. "Ask your doctor about _____." And have you noticed how such ads don't even say what ____is for? Must be some regulations about that.

And they spend money to get doctors to prescribe their drugs...convention in Hawaii anyone?

And they spend money lobbying Congress too I'm sure.

And donating to candidates.

So, let's take a specific example in the book: In the year 2000, Merck spent $590 Million marketing Vioxx.

Looking at their annual report for 2000 I discovered these interesting facts:
-They had total sales of $40 Billion, of which Vioxx's category comprised $2.3 Billion. That category is only their third biggest selling category.

-They had total costs and expenses of $30 Billion, of which $6 Billion was marketing and administrative costs. R&D was only $2.3 Billion.

-So Marketing reflects 20% of their expenses and R&D only ~7% (not quite like a high tech company, huh?) Of course the biggest expense load is in product manufacturing...materials and labor.

-Despite such massive expenses, their net income rose in double digits for both 1999 and 2000 to a whopping $6.8 Billion dollars or 16% of sales.

-Oh, last interesting tidbit: they paid $3 Billion in taxes on nearly $10 Billion in pre-tax Income, making their total tax bracket...that's total...all the tax they paid...30%. Certainly a higher percentage than some companies get away with (Merck must not have one of those off-shore HQs.)

So, let me ask you: what conclusions do you draw from such numbers? Perhaps I'll give you mine tomorrow :)

Comments

[Stephanie]

Read Marcia Angell's "The Truth About the Drug Companies: How They Deceive Us and What to Do About It", and "Critical Condition : How Health Care in America Became Big Business--and Bad Medicine" by Donald L. Barlett, James B. Steele.

Lots of other eye-openers about the Golden Rulers (you know, the ones with the gold who get to make up the rules.)

[Elisa Camahort]

Thanks for the recommendations! I fear it will be very depressing.

[Bob]

Marketing expenses are not just a major cost factor to drug companies, it impacts virtually every industry. Even the USPS (a virtual monopoly) advertises heavily in print, on the radio & TV.

As for the drug companies, some of what they do is self preservation. With managed care came PBM's (pharmacy benefit managers) to negotiate lower payments for certain drugs (under a formulary) and shift the scripting away from new, higher priced meds in favor of lower cost alternatives. The Rx companies had to combat somehow and came up with the brilliant (from purely a marketing standpoint) of marketing direct to consumer.

Face it, those ads in LHJ, Redbook, etc worked. And who would have thought ED would be an open topic discussed by folks such as (NASCAR driver) Mark Martin in his "Viagra blue" racing car? Not being a NASCAR fan I prefer the Levitra babe, but that is another story . . .

Consumer direct marketing is a proven strategy for generating demand. It has had at least a partial impact in raising total insured claim payments for Rx from less than 10% to around 17%. Out of every $100 paid by a carrier for medical claims, $17 (sometimes more) is for meds.

But you can't lay the blame totally at the Rx companies feet. Much of the increased demand (and increased claims) is a direct result of low copay plans that encourage all participants (docs and pts) to ignore the REAL cost of medicine. It's just as easy for a doc to script a $200 med as it is a $40 med that may be just as effective when neither the doc nor the pt are paying the full cost of filling the script.

[Elisa Camahort]

As I implied in my posts, those marketing expenses are vastly different as a percentage of expenses and a percentage of sales than any tech company, even consumer-oriented ones. That marketing comprises almost 3 times the expense that R&D does is the shocking part to me.

[Bob]

If the Rx companies were not getting results for their marketing expenses, they would not continue their spending patterns. Marketing, labor, rent . . . it all goes in the mix and must be accounted for in one way or another.

And stockholders must be appeased as the true owners of the companies. Pure speculation here, but if advertising dollars were cut in half resulting in lost revenues and profits, I doubt the owners of the companies would be pleased.

In contrast, doubling R&D just to please a few bean counters would have a negative impact on revenues, profits and stockholders willingness to fund the continued growth of the company.

[Elisa Camahort]

Oh, you just love the straw man argument sometimes Bob. Who suggested "doubling R&D to please bean counters"?

My point is that the Rx companies justify their high prices because they are engaging in "years of research" to develop these healing remedies.

No, their high prices are more due to marketing.

And that just has a different ring to it, doesn't it? That's all.

[Not to mention that their profits, which benefit that relatively small number of shareholders are doing very very well indeed and have grown in double digits even when the rest of the market heading downward.]

[Bob]

Frankly, I consider your concern over accounting practices to be a non-issue in the overall cost of meds.

Yes, Rx costs as a percent of total claims has increased over the last 10 years or so, but that has little to do with the associated marketing costs. Much of that shift is caused by the move to treat more illness on an outpatient basis combined with over-utilization of some of the newer meds.

Add to that the aforementioned tendancy to treat Rx coverage under an insured health plan as a blank check. Both providers and patients alike illustrate a similar attitude toward the cost of meds.

I find it odd that, when a patient has no Rx coverage, or has a limited benefit plan, there is a shift in what med is prescribed. Docs who are aware there is a budget issue will hand out sample meds, will prescribe lower cost meds such as generics, or will encourage the use of OTC remedies.

[Elisa Camahort]

No. No. No. I am not concerned about accounting.

What I am actually far more interested in, as a marketing person by trade, is how these companies position themselves, mostly for political and PR purposes.

[Bruce Winter]

Direct to Consumer Advertising is theoretically illegal in Canada. However Canadian consumers are inundated with DTA from American broadcasters. DTA has created top of mind awareness of advertised therapies to the point that patients are requesting them. General Practitioners then face decision of serving patient, giving them what they ask for, or not serving them by suggesting alternative therapies.

Create awareness and influence the key decision maker, DTA is pretty effective strategy. Bombard the public with a notion that there is solution to a problem. Supply the influencer with accurate but limited statistical data to support the claim. Only one strategic problem the product is flawed.

[Elisa Camahort]

Thanks for the comment Bruce. I'm going to start following your blog. I like your focus on natural care amongst all the medical indsutry blogs I track :)