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How Much Does the Drug Industry Spend on Marketing?

Anyone who defends the pharmaceutical industry has to be ready to hear, over and over and over, about how much it spends on sales and marketing versus R&D. This is thought to be a telling point about where the priorities really are. I’ve addressed this one several times, and my best response is to point out that sales and marketing are actually supposed to bring in more money than you spend on them, and do so more reliably than R&D in the short term.
There’s now a very useful paper in Nature Reviews Drug Discovery looking at just this issue. The authors (from three universities in the US and Israel) are looking into the general question of which is the better use of money: put it into R&D for the long term, or promote existing products for the short term? I should make clear at the outset that those two options do line up in that way. R&D expenditures take years to pay off, if ever, given the amount of time that drug development takes. And marketing of a current product had better start paying off in a shorter time frame, because every patented drug is a wasting asset, constantly being eaten into by competition and by its time to patent expiration.
So which makes more financial sense? The authors numbers from the Wharton databases on publicly traded drug companies, looking at those with more than $50 million in sales. Using the company stock prices as a measure of value (J. Finance LVI(6), 2431–2456 (2001), I’m giving you references here), they found, in general, that R&D investments have a net positive effect, while increased promotion has a negative effect. (See also Rev. Account Stud. 7, 355–382 (2002), another journal I don’t reference much). Both effects are larger for smaller companies, as you might expect, but they held up across the industry. The effect also holds up if you factor out the compensation packages of the top five executives of each company (which is a nice control to run, I have to say). And yes, since you ask, there is a negative effect on stock price that correlates to higher executive compensation, and I’m willing to bet that this effect holds for more than just the drug industry.
Since we’re talking about stock prices, which are generally forward-looking, the way to interpret these results is probably that investors expect R&D expenditures to pay off in the long term, but actually expect sales and marketing expenditures to reduce long-term value. If that’s so, then why spend money on marketing? The reason the authors propose is just what I’d been talking about: short-term reliability. Drug discovery and development is inherently risky, and promotion of existing products is (at least comparatively) more of a sure thing. Companies engage in a mix of the two to try to even the cash flow out. (And as the authors note, if executive compensation is tied more to short-term performance, then there’s an incentive to go with the short-term gains).
NRDD graph
In general, though, you’d figure that companies should invest more in R&D. And here’s the real kicker: that’s exactly what’s been happening. As this graph from the paper shows, over the last thirty years expenditures in the Sales, General, and Administrative area have risen only slightly as a per cent of sales. The Cost of Goods Sold category (materials, physical plant, manufacturing facilities, etc.) has gone proportionally down, with an interesting excursion in the mid-1990s. (Note also that this used to be the leading category). And R&D expenditures (again, as a per cent of sales) rose in the 1980s, were flat in the 1990s, and have risen since then. Overall, since 1975, the proportion of money spent on R&D has more than tripled, from 5% to 17%.
This, I hardly need point out, does not fit the narrative of some of the e-mails and comments I get. Some perceptions of the drug industry have us, Back In the Old Days, as spending our money on R&D, only to slimily slide into becoming pure marketing businesses as time has passed, with our recent years being especially disgusting and rapacious. According to these figures, this is at the very least not accurate, and comes close to being the opposite of the truth. Comments are welcome – most welcome, indeed.

58 comments on “How Much Does the Drug Industry Spend on Marketing?”

  1. Greg Hlatky says:

    You spend more on marketing and sales than on R&D. All your ideas come from NIH-funded projects. Your mother was a hamster and your father smelt of elderberries!

  2. Lethe says:

    The choice as presented is between spending money on marketing or on R&D. There is, of course, is a third option, which is not spending the money at all, and instead, lowering the price of drugs. Crazy talk, I know. Much better to spend vast sums of money hiring former cheerleaders to bring doctors branded pens and stationary.

  3. Ed says:

    Drug companies are no longer allowed to bring doctors branded pens and stationary.

  4. imarx says:

    The absolute numbers are still pretty dramatic though – 40% sales & marketing vs. 15% R&D? That’s quite a sizable difference. Or does that 40% include other things besides marketing?

  5. MTK says:

    First, I have not read the article, so I’m just going off of Derek’s comments.
    With that in mind, just because the authors found that spending money on marketing is a net negative on stock price doesn’t suggest that less money spent on marketing would be better, since that presumes that the increased SG&A costs led, directly or indirectly, to the lower stock price.
    An alternative could be that companies with less in the R&D pipeline would spend more on marketing to squeeze out as much as possible now. So spending more on marketing does not lead to lower stock prices, but is rather a response to lower, or future lower, stock prices due to lower R&D productivity.
    Lethe, as for your suggestion to spend nothing. Those are called generic companies. They discover no new drugs and they conduct only the most limited of clinical trials. They have a role, but so does Pharma. Unless of course you believe there is no room for improvement in the treatment of the human condition.

  6. Sili says:

    So why are executives rewarded in the short term, and how does one stop that?

  7. Hap says:

    While I have yet to figure why cutting R+D will magically create more drugs, I can see why drug company executives might wonder why they don’t seem to be producing more drugs with their increased R+D expenditures. It’s kind of like how I feel lately about taxes (and how I’m sure I will feel even more when they go up, shortly) – if you’re spending so much money, what exactly are you doing with it? I’m not buying that it’s been a five- or ten-year unlucky streak for drug companies – it seems sort of improbable, particularly since with that much money, R+D ought to be spread among fields likely to flower with different arrival times.
    On the other hand, well over twice as much money on marketing and sales as to R+D? It probably fits both what they want their revenue stream to be and what businesses spend (the R+D for drugs sounds a lot bigger, actually), but it doesn’t sound like a balance designed to get more drugs. If you have something useful, in most cases demonstrably so, why does it cost so much to get people to buy it (particularly when the cost of getting people to buy it drives up its costs and forces you to work harder to get people to buy it)?

  8. milkshake says:

    post-approval clinical research is often carefully designed with an eye on the marketing so the distinction becomes blurred, and the scientific integrity suffers – as we have seen most recently with Merck

  9. Ben says:

    This data is very interesting, Derek. Do you know if there have been any studies showing the ROI of investments in sales/marketing vs investments in R&D?
    In a purely rational setup, you would expect companies to spend on sales/marketing and R&D until the ROI of both was equivalent (and thus you get to that mystical “profit maximizing” point). I’m wondering how much of that is being done here — the only way I can rationalize your point with the “theoretical” view (which is not perfect, but still roughly what sort of decision is being made) is if there is a huge difference between actual and perceived payout for R&D and sales/marketing.
    Also to the rest of the peanut gallery, please remember that SG&A includes far more than sales/marketing. It includes things like HR, IT, support services, etc. So a percentage of the SG&A spend is also “relevant” (either on a medical level because it involves working with insurance companies and doctors or on a company level because it pays for work that needs to be done).

  10. MTK says:

    Yes, it dos include other things beyond marketing. Sales is the S. G and A is general and administration. Expenses that would be included are payroll and HR, taxes, rent, capital depreciation, maintenance, IT, etc.

  11. Hap says:

    #6: Because some (a lot) of the stockholders are holding stock for the short-term, and so execs that benefit in that term are likely to make them more money than those looking for long-term gains? Alternatively, long-term contracts (such as in baseball) are expensive, and if you’re looking for the long-term, you have to give excutives enough time to achieve the goals you want, which is expensive and uncertain. You also have to separate other types of market gains from your stock gains (you want to know what your CEO got you that you wouldn’t have gotten otherwise), and in the long term that’s probably hard. Maybe giving shareholders as a whole (rather than merely the preferred ones) more of a say would help.
    #2: Sure – because not spending money on R+D will get you more drugs, right? If companies knew they could get drugs from doing nothing, don’t you think they would be doing it already?
    The other issue is that when you have a patented drug, why would you lower the price? Unless you have competition, there isn’t any reason (and you wouldn’t have disclosed and patented and tested the drug in the first place if you could expect to make more money some other way) to lower the price of the drug (which in lots of cases, won’t help the end users, anyway, who you could more directly target – the gains will go to insurance companies, in most cases).
    Everyone wants to be able to make money from the products of their own work and mind, but wants at the same time the output of others’ minds and their work to be free or cheap. Good luck with that.

  12. Dylan says:

    The 40% number is for all SG&A (Selling, General and Administrative) expenses and includes more than just sales and marketing, pretty much everything that isn’t a direct input to R&D or production gets lumped in to SG&A.

  13. Tom King says:

    SGA includes operations ( finance, warehousing etc etc) to operate a pharma company you need to take orders and then deliver product. You need to employ scientists and lab space. SGA covers a wide swath of expenses. My company has about 80 reps and about 20 back office support. The reps cost about 150K a year ( salary, commission, car, expenses) the back office support staff cost about 120K a year. Thats about 14 million a year for the sales team and we sell about 300 million a year of our product. Fairly reasonable to me.

  14. Bny says:

    Here is a question.. would the G&A costs also include biz operations costs associated with R&D but not direct R&D inputs? For instance HR related costs associated with researchers, etc?

  15. Hap says:

    If sales and marketing include a whole bunch of costs that are not just for sales and marketing (HR, accounting, payroll – things that are used in common for lots of parts of the business), then isn’t comparing sales and marketing (and lots of other stuff) to R+D and the ROI incorrect, if not deceptive? I’m not a fan of sales spending, but lumping in fixed costs that don’t generate money for the company (ever) but are necessary to its operation to expenditures that may generate future revenue would seem to reduce the ROI of sales and marketing unfairly and make the comparison not so good. Maybe bad data is better than none, but this could be a large flaw if not addressed.

  16. Dana says:

    I have read that research and development as defined by the drug companies often includes market research. I wonder if this study took that into account?

  17. Big biotech says:

    NEJM suggested spending on mkting was $30 billion in 2005:
    Don’t forget the marketing adage, “I konw half my advertising works, I just don’t know what half”.

  18. RandDChemist says:

    Marketing isn’t inherently evil, neither is R&D inherently good.
    I’ve seen glimpses of the reality distortion field that exists within some marketing groups. I’ve certainly seen it within R&D. It comes down to asking the tough questions, challenging assumptions and asking for the data. In both areas.
    Part of the problem is that there exists a gap between the two areas. Finding a scientist who can work with marketing (understand, comprehend, etc.) or a marketer who can grasp the scientist is no mean feat.
    To me, the absolute numbers mean little. As ben points out in #9, what is the ROI for both?
    Do they account for lobbying expenditures?
    To me, it appears that more breakdown is needed.
    One thing that has impressed me about skilled marketing is managing a product’s lifecycle. Well done, it can sustain a company for years.
    One of the issues is that companies often have an imbalance of a certain group at the head of the table. A scientist running the show will fail if they do not surround themselves with people who compliment them and can sell the science. Likewise, no scientific input and just trying to make a sale will ruin the venture.
    A larger issue is that of pride and go once you are at the upper echelons of the company. I expect confidence, but it can blind you if it becomes arrogance.
    Thanks for challenging assumptions Derek!

  19. John Harrold says:

    milkshake mentioned:
    post-approval clinical research is often carefully designed with an eye on the marketing so the distinction becomes blurred, and the scientific integrity suffers – as we have seen most recently with Merck
    I’m not quite sure ‘post-approval’ research is really that relevant here. Most R&D expenditures are going to be coming from pre-approval research namely drug discovery, preclinical trials, and clinical trials.

  20. Cloud says:

    Very interesting post, Derek.
    @Dana- just from an operational standpoint, I’d guess that most of the market research done is included in SG&A, not R&D. The only way a company the size of a Pfizer is likely to report these sorts of numbers is by looking at expenses reported by business units. Any group doing market research is going to be housed in some sort of sales/marketing business unit, not in one of the R&D business units.
    Of course, the target selection process typically includes a look at predicted market size. You want to know if the a drug hitting the target would have sufficient payoff to justify the investment. At a small company, some of this sort of “market research” gets done in R&D, but it is usually limited to “what do published sources say about the potential market?” not “let’s call a bunch of doctors and ask them what they think.” I have no idea how targets actually get selected in big Pharma- I’ve never been high enough in one of those companies to have any insight into the process.
    Regardless, I would also guess that the cost of even a thorough market survey is absolutely dwarfed by what gets spent in the research labs.

  21. Sigivald says:

    Lethe: Beyond what hap said, there’s the pesky fiduciary duty* the board has to its shareholders (who, lest you forget, are probably* as likely to be retirement funds as individual investors).
    (* That might not be exactly the right term of art, but it’s close and I’m too busy not-being-a-lawyer to care.
    ** I don’t have specific data for ownership breakdown in Pharmaceutical stocks, but that’s typical of established industries in general, as far as I know.)

  22. Bill says:

    Why haven’t specific marketing companies filled this niche so that small biotechs or even bigger companies for that matter can focus on R & D and cut out sales. Basically another type of outsourcing, for the marketing and sales portion, in the end the competition of many marketing companies should ultimately drive down the cost and maybe even drug prices. Just a thought.

  23. Cellbio says:

    Bill, basically, pharma is best suited to handle registration, distribution and marketing, and these all fit well in one shop. With limits on what sales reps can do or say, companies also employ Medical Liasons, who discuss the “science” of the product, but are not formally part of the sales force. Sales and marketing are also, and best if nearly soley, supported by timely and truthful sicentific publications. All this, if done well, is part of a long strategy of life cycle management that requires mutliple disciplines, including research. I believe a larger % of R in the R&D of big companies will serve this role, and it is an important role, both for marketing and the accuracy of clinical claims, while more of the discovery part of R will occur in small companies.
    Research innovation does not scale well, IMO.

  24. Dave says:

    Why is that no seems to understand that drugs are priced just like everything else in the world that takes big money to develop? Balpoint pens were more than $25 each when they first hit the market, calculators cost hundreds, and the first microwaves were priced out of almost everyones budjet. A new drug costs hundreds of millions of dollars to develop and the initial branded price reflects that. Once a drug has been around long enough to become a generic it becomes cheaper because all the initial development costs have been long repaid…just like that calculator sitting on you desk.
    Oh yeah, and all those profits? They are being poured back into developing the next drug that may help keep you or your children alive and healthy.

  25. Cloud says:

    @Dave, while I understand (and largely agree with) your point, I think your comparisons are unlikely to matter to most people who complain about drug costs. No one needed the ballpoint pen or a microwave oven to survive. The reason discussions about drug pricing get so emotional is that these products are often about life and death, and that is an inherently emotional topic.
    You don’t, for instance, see people getting upset about how much Viagra costs, except as a comparator- e.g., “why is Viagra so cheap when the drug I need to control my life-threatening condition is so expensive?”
    The discussion also gets all tangled up in access to care issues. The people who care most about the cost of drugs are the ones for whom the cost is prohibitive- people without adequate health insurance and without the means to pay the costs out of pocket. They complain vocally, and a cute little kid who needs asthma medication that his parents can’t afford is always going to be more sympathetic than a large pharma company.
    Like it or not, our industry has to find a way to address these concerns, because the end user doesn’t really care about repaying the cost of development or ensuring that there is money to fund future research. He cares about his own health and his own financial viability, and it is completely understandable that he lashes out and looks for someone to blame when it seems that he can’t have one without wrecking the other.

  26. Dave says:

    Cloud, my point is that as long as the FDA and patent laws force us to be competitive businesses by allowing generic competition so early in the marketing life cycle, the current price structure is the only way we can remain in business and viable. Prices would be lower and would be stable for much longer if the innovator of a drug product were given lifetime exclusivity in exchange for a reduced pricing structure. The governemnt has forced this “perceived” captialistic greed game and only they can change it.

  27. RickCain says:

    Why do drug companies market at to the public at all? Doctors prescribe drugs, and they are already under enough pressure from companies who promote drugs to them and don’t need their patients badgering them to prescribe the latest thing just because Wilford Brimley says so.

  28. Anon says:

    I personally wonder what percentage of the R&D budget is basic research and development and what percentage is the skyrocketing costs of clinical trials. It is entirely possible to envision a situation where the total R&D budget increases (due to the disproportionate costs of clinical trials) while the funds for basic development (discovery) of new drugs (which would include funding for chemists/biologists/etc) are decreasing. If this hypothetical situation were true, it would explain the apparent decrease of basic research as compared to marketing (which has not changed markedly).

  29. TFox says:

    I once read that the large majority of pharma marketing expenditures consisted of free samples, and the accountants require these to be priced at full retail value, rather than the marginal cost of making an additional pill. Not sure if that’s true, or taken into account in these studies, but it risks making marketing seem far more expensive than it really is.

  30. alig says:

    Derek, you are going to need to institute one of those “report abuse” buttons the way these drug spammers are taking a liking to your site (ie 29. Michael Pain).

  31. beentheredonethat says:

    It’s funny how so few, that work in pharma research, understand what the companies they work for, actually do. Big pharma DEVELOPS and MARKETS!! They buy good ideas from small nimble companies that RESEARCH, and turn them into products that they can SELL! Therefore they spend a lot of money on marketing and selling what they DEVELOPED. The people at the top know full well that it’s almost impossible to foster the kind of environment required for research in a large corporate environment. They have a token research effort to give the air of prestige and an understanding of fundamental discovery science.

  32. Hap says:

    It’s the same spammer/moron (but I repeat myself) as always, or at least the same website the spammers are trying to push traffic to. I wonder if it’s the same IP or class of IPs (whether we have one or many).
    I’m still trying to decide whether the drug spammer is simply evil and should be terminated with extreme prejudice or whether he is helping other morons to find their inner Darwin Award winners (because if you buy narcotics from a spammer, you might be lucky if drug trafficking/possession charges are the only consequences). I’m having a hard time deciding.

  33. Hap says:

    Lifetime exclusivity is unlikely to end well – this discussion has been around the block. If the government has control of pricing with drug companies, it will likely be abused, either by the gov’t (appealing to voters to get cheap drugs) or by the companies themselves (to generate larger profits).
    If the government doesn’t have a role in pricing, then lifetime exclusivity is likely to give lots of similar, nonexchangeable drugs with large price tags – it probably won’t help R+D (because, though the potential benefits of a drug are higher under such a system, the costs will still be high or higher to get the drug – it doesn’t make drug company R+D cheaper than acquiring it from other companies, and because companies don’t want to spend on R+D once they have a secure revenue stream, though they might spend to get there). Drugs will probably not get cheaper (because everyone wants as much money as they can get – they will charge what they can get, knowing that there is no alternative). There might or might not be more drugs – it might depend on whether the revenue stream from initial drugs allows the winners enhanced access to others’ R+D. It might be better to start the patent/sales exclusivity clock when the drug is approved, but I don’t know what holes that plan would have.

  34. Cellbio says:

    Are you guys sure #29 is a spammer, looks like gibberish, and coupled with..”for example I take hydrocodone, vicodin which is medicine…” makes me think maybe entering his piece is just a nice way for him to pass 2 or 3 hours until the next “dose”. Maybe he has MJS….Michael Jackson Syndrome. And us regular folks are limited to being just addicts, life is so unfair.

  35. Hap says:

    If it’s gibberish, why does he always mention pharmaceuticals (usually narcotics) and always makes sure to include the website he finds his drugs on? The style and text of the comments are consistent (occasional use of caps, complaints about his/her pain), and the topic of the spam is generally completely disconnected from the topic of the posts on which the comments appear.
    It’s relatively well-made spam (the lack of context and the location forces people to look at the comments and digest them for a second before they realize that it’s spam) but it’s still spam.

  36. Sebastian says:

    “The absolute numbers are still pretty dramatic though – 40% sales & marketing vs. 15% R&D? That’s quite a sizable difference. Or does that 40% include other things besides marketing?”
    It includes a lot of other things besides marketing. It includes the cost of the finance department, the legal department, non-manufacturing operations, human resources, secretaries, and nearly all of the other things that corporations need to run other than production and research.

  37. Fred Drinkwater says:

    Another data point: In the 80’s I worked in Silicon Valley developing minicomputers and telephone switches, for a very successful, growing company. We spent 13-15% on R&D and that was considered high by industry standards.

  38. hibob says:

    @#27 RickCain: Why do DTC (direct to consumer advertising)? One study found that it reminded people to refill their prescriptions more often.

  39. CMCguy says:

    Excellent summary Derek of some of the fundamental contradictions in Pharma expenditures. Sales Profits bring in the income to live (and grow) on today while R&D (which cost much at great uncertainty) provides the incomes of the future. Part of the issue of R&D vs Marketing expenditure balance is the perceptions in ways this is portrayed by critics, the media and even companies/PhMRA. It usually is argued in the context of why “drugs cost so much” with critics focusing overly on Marketing numbers (suggest spend less there can lower prices) and pharma emphasizing the R&D component (need to charge high prices to recoup those high costs/reward risk). In reality neither view is totally sound (or completely unreasonable considerations) because of vast complexities and indirect correlations/causation of these elements to a drug’s price.
    I agree with #18 RandDChemist as both groups need to coexist and work together and is rarely easy/done correctly (was better in the past IMO). Both are subject to “abusive practices” or contain unethical actors (and believe are rare in both). Just like differences above Marketing “badness” usually is highly visible and stains entire industry. R&D miscreants are generally more subtle and take longer to become apparent/spawn negative impacts.

  40. CC says:

    How much contribute the D in the R&D for this raise? A lot, I would suggest and this is mainly driven by marketing, part FDA, part not distinctive enough drug – which again links back to marketing.
    Another point is that if the sales decrease, but you have to maintain your (R)&D you will have to put the same amount of money in, which in turn increases the %.
    This kind of data presentation can be very fishy. Especially if your CEO starts to be proud of/or complain about the raising (R)&D expenditure.

  41. Dominik says:

    This numbers become really interesting if you start looking at the R&D output: how many new products (ideally blockbusters) hit the market. This number declines. So cost go up and output falls – this is what I call the “R&D productivity challenge”. Today big pharma has no concept to face this challenge. From my pov this will lead to further concentration (M&A) in the market. Only very big companies will have the ability to develop a well balanced portfolio. The source of innovation (research) may well come from a large network of small companies, biotechs, universities etc…

  42. Morten G says:

    I would have preferred to have seen that graph broken down by company. Or at the very least some standard deviations.
    Also I worry that altered accounting practices is the real reason for the increase in R&D expenditures. It worked for Enron.

  43. Kim Slocum says:

    Has anyone read Dr. Meredith Rosenthal’s excellent paper on pharmaceutical marketing costs published in the NEJM on August 16, 2007? She showed that marketing expenses (as opposed to the cruder measure of SG&A) as a percentage of industry sales had risen steadily over the period 1996-2005. This was undoubtedly driven by the run up in rep counts and secondarily by the expansion of DTC following the Washington Legal Foundation decision.
    What’s changed recently is that “troop movement” sales and marketing (very expensive to conduct) no longer works particularly well, but the industry hasn’t yet figured out what will replace it. Over the long term, a blend of clinical health care information technology applications, evidence-based medicine, and comparative effectiveness reviews are likely to be a major part of the answer, but in the short term, most every firm is stuck in neutral trying to figure out what to do in the next quarter. When this gets layered on top of the dramatic slowing of revenue growth that industry has seen year on year throughout this decade, it gets very difficult for senior executives to manage their businesses.

  44. imarx says:

    Since there are many other things in the SG&A category, how can we say for sure how much marketing has increased or decreased? Perhaps marketing increased while other expenses decreased due to computers, automation, increased productivity, etc. Or perhaps it decreased while everything else increased due to mergers, consolidations, etc. Just throwing some possibilities out there, but with so much lumped together how can we draw any conclusions?

  45. TW Andrews says:

    What bucket do clinical trials fall into?

  46. James says:

    The question is not whether Pharma spends too much or too little money on R&D, or even on whether Pharma is good at R&D. The real question is whether Pharma is better at the R part of R&D than gov’t funded research. The answer is no, and THAT is why Pharma is failing to find new products.
    Pharma is great at D, not R. The great medical breakthroughs (insulin, penicillin, etc.) have not come from Pharma, they have come from gov’t-funded research. Why? Because breakthroughs by their nature are not predictable. If they were, they would be incremental improvements — which is something that Pharma IS good at. Most Pharma patents are based on incremental improvements; a better NSAID, not something completely new.
    Academics are actually good at coming up with new things, perhaps precisely because they are not tied to the real world of profit & loss. In the old days (pre-1984), government-funded research was ineligible for patenting, on the theory that the general public that pays for a patented invention (whether via insurance company premiums for medication, or higher consumer prices for a better mousetrap, or whatever) had funded that invention in the first place.
    In my view, that is the better way because Pharma is simply not suited to basic Research, only to Development. Until we return to a system based on non-profit research, Pharma’s pipeline will continue to dry up until it is empty.

  47. Mike G says:

    Kim, I think the profound cuts we’ve seen to SG&A over the past few years is mostly to the salesforce, specifically, primary care reps. The new commercial models you refer to are slowly taking root.
    #28 — you’re right, clinical costs have far outpaced basic research in growth. REMS, larger populations to power trials, stricter regulatory requirements, PIV requirements, larger safety databases are all pushing up clinical trial costs.
    I didn’t get the impression that the authors of the Nature Reviews article knew enough about pharmaceutical R&D to confidently correlate it with company value. Any correlation of R&D investments with company value would have to allow for the c.10 year lag between R&D investment and (potential) return. Also, the value of R&D investments rise and fall along that risk-adjusted 10 year timeline. That is, R&D events impact share price or company value, not investments per se. Positive proof of concept, positive PIII results — these kinds of events go straight to company value, not some abstract aggregate of R&D spend as a % of sales.
    The authors believe that greater investment in R&D will “address the decline in innovation.” (I think they’re confusing innovation with productivity, but let that pass.) This, despite their own numbers showing rising investments in R&D, but other measures showing steep declines in R&D productivity.

  48. alig says:

    It’s interesting when you look at the graph that overall costs have stayed about the same(may have actually decreased a little). Meaning the pharma companies have been able to maintain the same profit margin. It seems that they’ve been putting the savings from reduced COGS into more R&D and a little more SG&A. My thoughts on why pharma seems to be cutting R&D (& SG&A) over the past couple years is that the executives are expecting an actual decrease in sales over the next few years and they want to get costs in line with expected sales so they can maintain the same prfoit margin. Hopefully the downward trend in sales will be temporary or pharmaceutical research will dry up as money shifts to web and iphone apps.

  49. Scott says:

    It’s hard for me to rationalize the comparison of the cost of R&D with that of Sales & Marketing. I might as well ponder why I spend so much more on electricity for my home than I do for gas and water combined. The simple fact is that some things cost more than others. I could try spending the same on both, but then I would either end up with not enough electricity, or too much gas/water usage. It’s an equation that just doesn’t work. The investment in each area, and corresponding ROI, deserves proper analysis, indeed. But I initially view these analyses as mutually exclusive explorations. Both are important investments, and both have their related costs and benefits. My perspective may seem to some as an oversimplification, but I welcome any sound rebuttal.

  50. Allen Templeton says:

    At Merck, we believe in putting patients first in all we do. And we recognize that our employees are our single greatest asset in achieving this mission.
    Top 5 reasons our people are committed to working at Merck:
    * Quality of co-workers
    * Ethical standards and values
    * Merck’s mission
    * Compensation and benefits
    * Work environment

  51. Allen Templeton says:

    At Merck, we believe in putting patients first in all we do. And we recognize that our employees are our single greatest asset in achieving this mission.
    Top 5 reasons our people are committed to working at Merck:
    * Quality of co-workers
    * Ethical standards and values
    * Merck’s mission
    * Compensation and benefits
    * Work environment

  52. Allen Templeton says:

    Enjoy Wheaties: The Breakfast of Champions!

  53. Prabir Basu says:

    We at Purdue University published a similar paper in 2008 titles “Analysis of Manufacturing Costs in Pharmaceutical Comapnies” in the J. Pharm Innovation (2008) 3:30-40.

  54. For some industries, 17% would be a lot to spend on R&D, but for the drug industry, it doesn’t sound high at all.
    If you want to see crazy-high R&D spending, look at the software industry.

  55. Scott (comment 49): The opportunity cost of spending more on marketing is that less is immediately available for other things, including R&D, and going the other way, if you increase R&D to 25% of your budget instead of 17%, something else has to decrease to make up that 8%. So you do have to take one into account when deciding what to spend on the other. You can only spend 100% of the budget. (Well, in the short term you can go into the red for a bit, but ultimately that’s not sustainable.)
    Both advertising and R&D are things you spend money on because you believe they’ll pay for themselves in the future (albeit, on different timescales). But until that money comes in, you still have to divide the money that you have among the things you’re going to spend it on. If marketing and research both pay off by creating greater revenue, then they may be able to both increase over time in absolute numbers, but that does NOT mean they can both increase over time as a percentage of the total budget.

  56. CMCguy says:

    A post in bnet provides what looks like some direct ROI for Sales (Merck and S-P) and gives a figure of about $3 back for every $1 spent. Difficult to know if this data is representative of Pharma in general but I think every company generates such data as “metrics” for Sales and Marketing and thus are acutely aware of immediate potential to get a payback. I believe R&D is much less quantifiable both in terms of specific expenditures (investment) and then ultimate financial rewards (returns).

  57. concerned citizen says:

    Here’s another stat to research. Drug Companies actually have higher net profit percentages to sales than R & D expenditures. Why is all that profit necessary. Certainly some of those BILLIONS could help reduce drug costs.

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