Thursday, July 23, 2009

Fascinating Look Inside Pharma's Finances

A paper by Weiss et al. (, subscription may be required) looks inside the books of the drug industry and paints a picture that is somewhat at odds with earlier glimpses available when HOOKED was published.

The authors, from Israel and UC-Davis and representing schools of business, management, and public health, looked at available data on pharmaceutical companies whose stocks are exchanged on the major US exchanges. Dividing costs into three categories: manufacturing, research and development, and marketing and administration, they discovered, as we have known for a long time, that over the last three decades, companies spent about 3 times as much on marketing/administration as R&D (36% vs. 12% of revenues). The news, however, is that recently, R&D spending has been increasing more rapidly than marketing-- since about 2000, R&D has gone up from about 10% to 17%, while marketing has been just about flat near 39%.

Weiss et al wanted to know what this meant for company profits and value. They used stock prices as a guesstimate of what investors thought of the company's long term value and profitability. They found that spending more on R&D was associated with higher stock prices and spending more on marketing with lower stock prices--and this held true for both small and large firms.

This explains why companies would increase their R&D spending, but not why they'd maintain such a high rate of marketing spending. Weiss et al. then analyzed companies' annual profits and found that increased spending on either R&D or marketing was associated with higher profits within the year. If a company CEO is being judged more on short- than on long-term performance, he'll want to spend more on marketing. In addition, if he wants more short term profits to have more revenues in turn to add to future R&D investment, he might also choose to spend more on marketing.

Weiss et al. conclude that the industry has discovered the fact that its long term financial interests lie with R&D more than with marketing, and that it is taking some steps at least to redress the current imbalance. If we want to see the industry actually discover useful and safe new drugs in the future, and not to merely put lipstick on the pigs of "me-too" drugs that are neither safer nor more effective than existing drugs, we can only hope they heed this advice.

A quick footnote on how to deal with reports of costs of "administration and marketing"--as I explain in HOOKED, when we can get (rarely) figures that actually break down marketing vs. administration costs, it appears that the administrative costs of a large drug firm run about 5%. Moreover, such costs would be expected to be largely stable over the years, so if we see the total fluctuating substantially, we can anticipate that it's the marketing component that is probably accounting for most of the change. So I am making the assumption that if the total of marketing plus administration is 39%, roughly 34% is due to marketing alone. There is virtually no way that one can manipulate these numbers and come up with the canard that industry flacks keep repeating--that they spend more on R&D than on marketing.

Weiss D, Naik P, Weiss R. The 'big pharma' dilemma: develop new drugs or promote existing ones? Nature Reviews/Drug Discovery 8:533-34, July 2009.

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