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July 02, 2007

Your World in Charts: Pharma Edition

From the paper Pharmaceutical Marketing and Research Spending:

Pharma Spending Chart

Andrew Sullivan is right: Cut their profits by even a penny, and they'll have no choice but to deeply reduce research and development spending.

Sigh.

July 2, 2007 in Charts | Permalink

Comments

again- read the business journals- they spend much of their time talking about finding blockbuster drugs with multiple applications rather than multiple drugs for multiple diseases

Posted by: akaison | Jul 2, 2007 12:11:54 PM

And look at those taxes! How in god's name can they get anything done with the government all over their backs like that? What an anti-growth, revenue-killing burden!

Posted by: jhupp | Jul 2, 2007 12:23:33 PM

I'm reminded of an interview I conducted with Soviet dissident and Solzhenitsyn associate Alexander Ginzberg years ago. He placed a large portion of the blame for the sorry state of the Soviet State Economy on their vast expeditures on propaganda.

I wonder if their spending for this ever topped 30%?

Posted by: W.B. Reeves | Jul 2, 2007 12:50:22 PM

I'll say it again - some of the most vapid people I've ever encountered were the pharma sales reps that came to our offices, and these people were clearly being paid a fortune to look glamorous and stroke egos. God only knows what their bosses took home.

Posted by: sprocket | Jul 2, 2007 12:52:14 PM

sprocket--my best bud spends his night-turn job conducting phone interviews, to fill pharma sale rep jobs. I don't know how he does it; I'd have slit my throat a long time ago.

Posted by: Captain Goto | Jul 2, 2007 1:08:10 PM

I admit it. I'm lost. Is this sarcasm? (I just gave the chart a quick scan since I'm at work)

Posted by: Phil | Jul 2, 2007 1:08:20 PM

What percentage of spending is on actual marketing? This lumps admin and marketing together. I looked further and they break the number of resources focused on marketing, but they still don't segment spend.

Posted by: DM | Jul 2, 2007 1:13:19 PM

Actually nevermind. I 'm dumb I just looked at it again

Posted by: Phil | Jul 2, 2007 1:16:41 PM

What percentage of spending is on actual marketing? This lumps admin and marketing together. I looked further and they break the number of resources focused on marketing, but they still don't segment spend.

I noticed this too. Interesting.

Posted by: W.B. Reeves | Jul 2, 2007 1:18:37 PM

It irks me to no end that BigPharm points to advertising costs as one of the main reasons that costs are so high.

The advertising of a product that you cannot purchase yourself--absent a Doctor's prescription--should NOT be allowed. But they keep spending hundreds of millions of dollars on spiffy advertising--the brunt of which are for commercials during the Big Three evening newscasts, and charge out the wazoo for their products.

Something has to be done about this. If I can't buy it by myself (i.e., without a Dr.'s note), Big Pharm shouldn't be able to advertise it.

Posted by: terraformer | Jul 2, 2007 1:21:36 PM

Jeez, 16% profit is nice.

Posted by: Stephen | Jul 2, 2007 1:23:43 PM

You lost me on this one. If you reduce potential profits from an activity, you will reduce the amount of effort that goes into that activity. Specifically, if you reduce profits available from developing new drugs, you will reduce the amount of R&D that goes into developing new drugs. You will also reduce advertizing costs related to those drugs, but what does that have to with R&D?

Posted by: ostap | Jul 2, 2007 1:28:23 PM

Sigh.

First of all, "advertising" is not the same thing as "marketing", and certainly not the same thing as "SG&A" (Sales, General, and Administrative expenses), which is what that 31% refers to. That includes everything from IT to accounting to the office cleaners. Even of the much smaller "marketing" number, figures generally indicate that over half of that is free samples given away to patients.

Second of all, the argument is not that if you cut profits at all, they won't have any money to fund research. The argument is that cutting profits to the level that Europe allows--roughly "cost plus 5-10%", will eliminate all the money spent on R&D and profit and marketing, since that 31% is not, as consumer advocates repeatedly assure gullible progressives, a pure marketing expense that can easily be eliminated by switching to monopsony government purchase.

The argument about the problems with more moderate profit-cutting is that pharmaceutical companies need to raise capital. And without that capital, pharmaceutical companies do not have the cash balances to fund research programmes that cost hundreds of millions of dollars to bring a single drug to market. And because finding a drug is a very risky business, pharmaceutical companies need fat profit margins to attract capital. I know it looks like they're all just coining money, but there's enormous sample bias here; the companies that lose money rapidly drop out of the sample as they go broke, or are merged with bigger companies.

Posted by: Jane Galt | Jul 2, 2007 1:33:40 PM

Even of the much smaller "marketing" number, figures generally indicate that over half of that is free samples given away to patients.

Just to echo and expand upon this point.

Overall marketing costs are typically 20%, with around half of that being the retail value of drug samples. So actual marketing spend, in terms of how most are thinking here, is around 10%.

Posted by: wisewon | Jul 2, 2007 1:38:35 PM

I know it looks like they're all just coining money, but there's enormous sample bias here; the companies that lose money rapidly drop out of the sample as they go broke, or are merged with bigger companies.

Less than 10 biotech companies make up more than 80% of cumulative revenues-- with thousands in existence or no longer in business.

We shouldn't be looking at a select 6 companies as Ezra has done here-- we should be looking at industry wide economics, the numbers are not surprisingly less attractive.

Posted by: wisewon | Jul 2, 2007 1:42:37 PM

The pharmaceutical industry was the single most profitable industry in the country between 1980 and 2003 energy costs have since elevated oil companies into number one). I cry no tears for them.

As for the points on marketing -- I agree! I'd outlaw a vast amount of the advertising and influence-peddling currently deployed by Pharma. This would indeed reduce their profits -- but also their spending. And then, because we're now in an awesome government-run system where I can do this, I'd channel that money into publicly-funded research and prizes.

Posted by: Ezra | Jul 2, 2007 1:54:51 PM

So actual marketing spend, in terms of how most are thinking here, is around 10%.

Which is just about what they spend on research. Meaning they could afford to transfer some of those costs to research.

Posted by: Col Bat Guano | Jul 2, 2007 2:42:06 PM

you know- I see the right's point- i mean my friend - a drug rep- was just flown for a trip with doctors to Spain for a conference. I don't see any waste there at all.

Posted by: akaison | Jul 2, 2007 2:52:19 PM

'...with around half of that being the retail value of drug samples.'

Maybe drug companies shouldn't give so much product away.

Posted by: Smith | Jul 2, 2007 3:33:31 PM

Ezra, again, those profit figures you're quoting are after you throw out the companies that don't make any profits. The r&d costs mean that dying pharmas don't linger for years at break-even; either they make a ton of money, or they disappear from the sample, because they can't raise funds for the next round of research.

In general, your analysis suffers from treating this as a budget problem rather than an investment problem. If the problem is to allocate a fixed amount of money, then yes, we could simply cut out profits and marketing, and shave about 25% off the price of our drugs.

The problem with this is that to get the new drugs, we need people to invest in R&D. Which they won't do if there are no profits. Cutting marketing spend also reduces the profits, by reducing the market size of the drug; hence, fewer drugs.

Of course, the government could start producing all the drugs we need . . . except that the government could do that now, and doesn't, neither in America nor in Europe nor anywhere else in the world. This suggests it might be harder than it looks to have the government make all our high-tech new inventions.

Posted by: Jane Galt | Jul 2, 2007 3:36:34 PM

Ezra,

The pharmaceutical industry was the single most profitable industry in the country between 1980 and 2003 energy costs have since elevated oil companies into number one). I cry no tears for them.

That statement refers to the traditional definition of the pharma industry. But this data doesn't take into account the biotech industry. Both develop drugs, from a macro-level perspective, they should be viewed as one industry-- the distinction is not really meaningful.

On a different note, Ezra. Your comment based on looking at industry-wide, historical data comparing to other industries-- this is the relevant comparison. The selection of a handful of companies that have very likely fared better-- your initial post-- may seem like good fun, but its poor data to be trotting out, relatively speaking.

Posted by: wisewon | Jul 2, 2007 3:44:09 PM

You cannot stop a man with a study!

Posted by: Nicholas Beaudrot | Jul 2, 2007 4:21:56 PM

Strange categories in that pie-chart. What does it mean to say that 16% of spending is "profits"? Surely that's not the annual value of shareholder dividends. The linked version of the paper doesn't explain the methodology, so it's hard to assess.

Pfizer, one of the companies whose numbers went into that graph, is known for purchasing smaller companies with advanced clinical candidates, which they then guide through FDA approval and bring to market. This should really be counted as an R&D expense, as they have purchased someone else's R&D. However, I wonder if such acquisitions went into the R&D category in the chart, or if they were treated as some flavor of "administrative" costs.

Ezra, as someone who has an issue with high pharma profits, are you aware of any studies that compare investment risk premium in pharma as a whole (and, as others point out, you have to look industry-wide, not merely at big pharma) vs investment risk premium in industries with less government intervention?

In my mind, such data is needed to answer the question of whether drugmakers are ripping off the public through the patent system, or that it is merely a high-risk/high-profit industry.

Posted by: Mike S. | Jul 2, 2007 4:25:47 PM

To clarify, 16% annual return on investment makes sense, but I don't see how it makes sense to call that "spending" unless it goes outside the firm.

Posted by: Mike S. | Jul 2, 2007 4:27:54 PM

This isn't the same Mike S. as above, for the record.

This post taps into the general discontinuity in progressive thought that I just don't understand. Ezra posts a chart which seems to suggest to him that, I don't know, either profits from drug companies are unconscienceably high, or there's a lot of waste, or both. He appears to think that this is because (rich) people who control drug companies are, in this area at least, amoral and interested solely in their own profit.

Fine, that's a reasonable thing to think.

But then, if we cut their per-unit price, somehow their entire mentality changes. "Oh! We've seen the light! We will cut our profits and/or eliminate waste instead of sacrificing potential future benefits to all of mankind. Our research budget will go untouched!" Doesn't that seem kind of out of character for our stipulated amoral self-interested types?

Posted by: Michael B Sullivan | Jul 2, 2007 6:01:42 PM

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