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But Don’t Drug Companies Spend More on Marketing?

So drug companies may spend a lot on R&D, but they spend even more on marketing, right? I see the comments are already coming in to that effect on this morning’s post on R&D expenditures as a percentage of revenues. Let’s take a look at those other numbers, then.
We’re talking SG&A, “sales, general, and administrative”. That’s the accounting category where all advertising, promotion and marketing ends up. Executive salaries go there, too, in case you’re wondering. Interestingly, R&D expenses technically go there as well, but companies almost always break that out as a separate subcategory, with the rest as “Other SG&A”. What most companies don’t do is break out the S part separately: just how much they spend on marketing (and how, and where) is considering more information than they’re willing to share with the world, and with their competition.
That means that when you see people talking about how Big Pharma spends X zillion dollars on marketing, you’re almost certainly seeing an argument based on the whole SG&A number. Anything past that is a guess – and would turn out to be a lower number than the SG&A, anyway, which has some other stuff rolled into it. Most of the people who talk about Pharma’s marketing expenditures are not interested in lower numbers, anyway, from what I can see.
So we’ll use SG&A, because that’s what we’ve got. Now, one of the things you find out quickly when you look at such figures is that they vary a lot, from industry to industry, and from company to company inside any given group. This is fertile ground for consultants, who go around telling companies that if they’ll just hire them, they can tell them how to get their expenses down to what some of their competition can, which is an appealing prospect.
Here you see an illustration of that, taken from the web site of this consulting firm. Unfortunately, this sample doesn’t include the “Pharmaceuticals” category, but “Biotechnology” is there, and you can see that SG&A as a percent of revenues run from about 20% to about 35%. That’s definitely not one of the low SG&A industries (look at the airlines, for example), but there are a lot of other companies, in a lot of other industries, in that same range.
So, what do the SG&A expenditures look like for some big drug companies? By looking at 2012 financials, we find that Merck’s are at 27% of revenues, Pfizer is at 33%, AstraZeneca is just over 31%, Bristol-Myers Squibb is at 28%, and Novartis is at 34% high enough that they’re making special efforts to talk about bringing it down. Biogen’s SG&A expenditures are 23% of revenues, Vertex’s are 29%, Celgene’s are 27%, and so on. I think that’s a reasonable sample, and it’s right in line with that chart’s depiction of biotech.
What about other high-tech companies? I spent some time in the earlier post talking about their R&D spending, so here are some SG&A figures. Microsoft spends 25%, Google just under 20%, and IBM spends 21.5%. Amazon’s expenditures are about 23%, and have been climbing. But many other tech companies come in lower: Hewlett-Packard’s SG&A layouts are 11% of revenues, Intel’s are 15%, Broadcom’s are 9%, and Apple’s are only 6.5%.
Now that’s more like it, I can hear some people saying. “Why can’t the drug companies get their marketing and administrative costs down? And besides, they spend more on that than they do on research!” If I had a dollar for every time that last phrase pops up, I could take the rest of the year off. So let’s get down to what people are really interested in: sales/administrative costs versus R&D. Here comes a list (and note that some of the figures may be slightly off this morning’s post – different financial sites break things down slightly differently):
Merck: SG&A 27%, R&D 17.3%
Pfizer: SG&A 33%, R&D 14.2%
AstraZeneca: SG&A 31.4%, R&D 15.1%
BMS: SG&A 28%, R$D 22%
Biogen: SG&A 23%, R&D 24%
Johnson & Johnson: SG&A 31%, R&D 12.5%
Well, now, isn’t that enough? As you go to smaller companies, it looks better (and in fact, the categories flip around) but when you get too small, there aren’t any revenues to measure against. But jut look at these people – almost all of them are spending more on sales and administration than they are on research, sometimes even a bit more than twice as much! Could any research-based company hold its head up with such figures to show?
Sure they could. Sit back and enjoy these numbers, by comparison:
Hewlett-Packard: SG&A 11%, R&D 2.6%.
IBM: SG&A 21.5%, R&D 5.7%.
Microsoft: SG&A 25%, R&D 13.3%.
3M: SG&A 20.4%, R&D 5.5%
Apple: SG&A 6.5%, R&D 2.2%.
GE: SG&A 25%, R&D 3.2%
Note that these companies, all of whom appear regularly on “Most Innovative” lists, spend anywhere from two to eight times their R&D budgets on sales and administration. I have yet to hear complaints about how this makes all their research into some sort of lie, or about how much more they could be doing if they weren’t spending all that money on those non-reseach activities. You cannot find a drug company with a split between SG&A and research spending like there is for IBM, or GE, or 3M. I’ve tried. No research-driven drug company could survive if it tried to spend five or six times its R&D on things like sales and administration. It can’t be done. So enough, already.
Note: the semiconductor companies, which were the only ones I could find with comparable R&D spending percentages to the drug industry, are also outliers in SG&A spending. Even Intel, the big dog of the sector, manages to spend slightly less on that category than it does on R&D, which is quite an accomplishment. The chipmakers really are off on their own planet, financially. But the closest things to them are the biopharma companies, in both departments.

28 comments on “But Don’t Drug Companies Spend More on Marketing?”

  1. Nekekami says:

    OK, maybe this would have been a better place to post my comment from the other thread..
    Anyway, what I think you’ll find pushing down the average SG&A so that it looks relatively small for the semiconductor industry are the companies who run foundries(or FAB in Intel lingo). Those facilities are really costly(Intel’s top of the line facility, Fab 42 in Arizona, cost 5+ billion dollars to build) and are in constant upgrade/built from scratch cycles(And incidentally, this is also where a significant chunk of the R&D costs of the industry as a whole goes).
    That’s also another factor in the discrepancy between various R&D outlays in the list of the semi-conductor industry from the earlier post. AMD for example is fabless(And, due to management in late 2011 and through most of 2012, almost R&D-less…..), as is nVidia. That means that they can allocate larger chunks of total revenue to R&D, since their facility costs are less. If Intel spun off their foundries for whatever reason, they would after a while be able to increase their R&D budget by a fair amount.

  2. Anon says:

    Fair enough. But it’s also important to realize that we are comparing apples and oranges here so there’s no reason for drug companies to feel smug and holy. On one hand is an industry like the semiconductor industry where product design is so highly standardized and predictable that you in fact don’t need to spend as much on R&D as you do in drug companies. On the other hand, since drug research is inherently an R&D driven industry, you could continue to criticize them for not spending even more on R&D and your complaint would still be valid. So no, even after looking at these figures it’s still not easy to counter the outrage that drug companies need to cut down on marketing and spend more on R&D.

  3. Nekekami says:

    You’re wrong about the semiconductor industry not NEEDING to spend much on R&D. On the contrary, a noticeable chunk in semiconductor R&D funding is now alloted to fundamental research, to get around the limits of physics. For example, transistor gate widths are so small that signal bleed is a major problem, and plenty of research go into that. The length of pathways limit signal propagation, which requires research to get around, which has also increased interests in asynchrous designs(Which is a mindboggling concept in itself..)
    As to the point of big pharma being able to cut some fat and increase R&D budgets? I don’t doubt that there’s some fat that can be cut.

  4. cynic says:

    Using other industries to evaluate Pharma’s R&D expenditures may be a worthwhile exercise, but to do so for marketing exemplifies why people dislike/distrust the industry.
    If all the bicycle manufacturers aggressively market their bicycles, perhaps more people will spend more money on bicycles of all sorts, and all of the bicycle manufacturers will get increased revenue for their marketing efforts.
    But if all the diabetes medication manufacturers aggressively market their drugs, the only way the pie will increase is if they successfully convince people to overmedicate. Or convince otherwise healthy people to get diabetes.
    Marketing cannot ethically increase the size of the revenue pie in Pharma, as it can in other industries. The only way to increase the pie in Pharma is by introducing better treatments (i.e., R&D).

  5. PharmaHeretic says:

    If pharma really spent so much of their profits on research, the pathetic output of new and innovative drugs over the last decade suggest that they are shockingly incompetent. Maybe paying more ivy-league trained “scientists” to work in bigger and newer labs was a really bad idea.
    There is also the possibility that most of what is classified is research is not actually ‘research’ and goes to people that are not involved in research. Maybe employing ivy-league trained sociopaths.. I mean MBAs and Lawyers.. who use ‘clever’ accountants is the problem.
    So what is it- Incompetence or Malice? or both?

  6. SteveM says:

    Re: Semi-conductor R&D. Well that R&D pretty much stays at the bench level until they want to actually produce a new component. I.e., no Stage 3 clinical trials.
    But macht nichts. Pharma companies are not in business to make drugs. They are in business to make money. And they allocate resources across business functions based on that primary objective.
    One could argue about the business model and quality of the strategy associated with Pharma portfolio allocations, but outside of rationalizing to the public, payers and politicians as a marketing exercise, apologizing for or defending how allocation decisions are made is pointless.

  7. Anon says:

    #3: What I meant is that designing a chip for the next generation Celeron processor is much easier and cheaper than designing the next diabetes drug.

  8. DLIB says:

    I’ve spent most of my career in the Semi industry and the RnD that goes into the newest products from companies like ASML are at the cutting edge of physics. Their EUV tool is not just a new and improved version of the previous generation, the light bulb is very different amongst other advances. The light ( 13nm ) comes from the plasma generated by vaporizing molten tin drops at 50,000 drops per second…now how do you keep that tin from mucking up the optics??? At 13nm everything becomes crazy. Particles on masks…forget about it -> so no precipitation in the chemistry to develop the masks -> and the chain goes on down the line.

  9. qezal says:


    On the other hand, since drug research is inherently an R&D driven industry, you could continue to criticize them for not spending even more on R&D and your complaint would still be valid.

    No it wouldn’t. Not unless you could show that spending more on R&D would lead to higher profits (over whatever term you think matters).
    Or, because you think that the pharma industry shouldn’t be primarily about profits. IMO, this is really the major source of all the complaints. Many (most?) people are very uncomfortable with the idea that developing and selling drugs for profit might be fundamentally equivalent to developing and selling smart phones or bicycles.
    The diabetes pie may be a fixed size (ignoring population growth and other demographic trends), but that doesn’t mean that a given pharmaco’s size of that pie can’t go up or down based on marketing.
    Yeah, it must be shocking incompetence! Too bad no one’s ever managed to put together a drug company staffed & run by even modestly competent people. If they had, said company would have a monopoly on the business, given the shocking incompetence of existing pharmacos.
    Maybe you could be the one to change all that. Are you less than shockingly incompetent?

  10. cynic says:

    Re #9:
    Marketing can’t (hopefully) affect population growth or marketing trends. And it can strongly affect the size of an individual company’s slice of a basically static pie.
    But looking at the industry as a whole, we see a massive amount of money being spent fighting over slices of a static pie. Just as much diabetes medication will be needed whether the industry spends 30% of its revenue on marketing or 0% of its revenue on marketing. And if it was 0%, those medications could be 30% cheaper.
    Pretending that Pharma is the same as any other consumer industry is fantasy. The closest other industry, functionally, would be Utilities (electrical, water, sewer, etc.). We may think that Pharma is very heavily regulated already because of the regulations on its products, but if it stays on its current business trajectory, the regulations on its business model are going to be staggering.

  11. Nekekami says:

    @6 SteveM:
    That’s not really true. Plenty of R&D projects go into small production runs, not only to test a new core, but also to test a new method for manufacturing etc, which is also part of the R&D. It’s also done to perform large scale EMI/power efficiency/thermal efficiency, all things that can’t be effectively simulated. So you effectively have stages of trials.
    @7 Anon:
    That’s not how most CPU R&D+manufacturing works nowadays. What’s done is that first, you work on a general architecture for a core(Sandy Bridge or Ivy Bridge or Haswell for Intel, Bulldozer, Piledriver etc for AMD, just as examples), and this is a quite resource intensive part, a cycle that can take years, and can still be hit and miss(Prescott, Bulldozer are proofs of that. AMD’s still in a bad state due to Bulldozer having been a bit of a fiasco, not entirely due to their own making though, to be fair). When the core architecture design is finished(Also, the architecture is designed for a specific Process Node), you start working on a specific processor type, laying out the cores, cache, memory controller etc. During production, batches are tested according to specifications for that “branch” of processor(say, i3): chips that pass all tests are binned as the top of that branch. Another chip may not be able to pass the top clock frequency specification, but runs stable at a lower grade, it’s binned as a lower model number. On a third, some of the cache memory can be non-functioning, which leads that to be lasered off, and can be binned as a Pentium or Celeron brand chip
    @8 DLIB:
    You work with 14nm Process Node? Are you in Arizona or Oregon? :p

  12. MTK says:

    Gotta agree with SteveM #6.
    Why even argue the point?
    These are for-profit companies after all.

  13. Hap says:

    Marketing is something that everyone sees. When the incessant marketing is combined with the safety problems that have come up (in part because of excessive marketing), direct problems with excessive marketing, pay-to-delay and other such deals, and the costs of drugs, it doesn’t seem hard to imagine how (even with such useful products), pharma is not looked at well. Marketing is not an insignificant part of that.
    The financial aspects of “to market or not to market” are beyond (most people’s) knowledge, and it is the business of pharma to do what they need to do to make money. In this case, it seems like the costs of marketing this way are more than financial, and impinge upon the ability of pharma to achieve its primary mission. If they wish to sell their reputations, it’s their right, but it seems like they may not have anything else to sell if they continue to do so.

  14. Rock says:

    Derek, it seems you are in the mood to vent against the Pharma bashers. I used to frequently do this too, writing letters to the editor, speaking with pharma-hating politicians, and through community outreach in nursing homes etc. However, I realized it is a futile exercise. Very few people can be convinced their opinion is incorrect because of 1) ignorance, 2) political expediency, and 3) financial gain (from selling books etc). The same can be said for many other hot-button topics such as gun control. It still bothers me, but I have learned to accept it as human nature.

  15. Me says:

    Several problems with this analysis: Doctors should be prescribing medicine based on symptoms – not the patient. When drug companies were prohibited from marketing to patients, their percentage for sales and marketing was much lower, or so I remember.

  16. Me says:

    Several problems with this analysis: Doctors should be prescribing medicine based on symptoms – not the patient. When drug companies were prohibited from marketing to patients, their percentage for sales and marketing was much lower, or so I remember.

  17. Tom Womack says:

    You can and do get the equivalent of phase-2 trials for chips; send off a polygon list and a million dollars to TSMC by the fifteenth of the month, get a thousand chips six months later, and that lets you do a fair amount of playing around that was impractical using simulation methods.
    A nice feature of semiconductors is that the logic design (basically programmes) and the physical design (what shape are your transistors?) can be reasonably decoupled; you can design fast transistors, spend three months testing them on small circuits that you got back in June having submitted to the January run, and be reasonably confident that they’ll still be as fast when there are a hundred million of them on the chip you’ve submitted to the September run.
    And a Mentor Graphics Veloce emulator (cost low two digits of millions) simulates RTL behaviour unimaginably better than any in-vitro assay simulates a mouse.

  18. Matthew Herper says:

    You know, it occurs to me that profits, not sales, are the right comparator to be using here. We often use sales as a measure of how big a company is, but we’d expect a company with really low margins to spend a lot less R&D as a percentage of sales because most of their revenue doesn’t actually end up in the bank. Merck spent $8.2 billion on R&D last year, and had GAAP net income of $6.2 billion and non-GAAP net Income of $11 billion.

  19. Anonymous says:

    “Marketing can’t (hopefully) affect population growth or marketing trends”
    Marketing has affected population growth. There was a big push for zero population growth in the late 1960s in the US.
    Now there is an opposite push in the US. Lobbyists claim (wrongly) that there is a shortage of STEM workers in the US, and push for more visas to be granted. This in turn raises the population in the US market. As the US market is one of the most profitable, this bides well for pharma companies.

  20. Anonymous says:

    This raises the question what the minimum and maximum level of R&D spend is for every industry. There is a “don’t even bother” level below which you can’t maintain a capable enough organization, as well as a “luxury” level at which you are likely to be wasting money. For pharma, the lowest number of 12.5% is below the reasonable minimum (but J&J is only 1/3 a pharma company) and 15% seems to amount to financial mismanagement and troubled futures as well, looking at the fates of AZ and Pfizer…

  21. RDist says:

    1) Research in the Software/Electronics Industry is less regulated and less expensive than in the over-regulated drug industry. Electronic product lifecycles are shorter than those of drugs.
    2) Electronics has to be advertised for everybody, while pharma-ads (and bribes) usually are for health professionals, rather than for the general public, which makes marketing campaigns less costly.
    This may explain the gap between the two industries.

  22. GradStudent says:

    In line with comments 15(16), the historical percentages for R&D might be more interesting with or without adjustment to current revenues and research related inflation. Especially considering that the patent cliff came a decade + after the patent peak… And the endless wonder of how this would look without direct to consumer advertising.

  23. jedonnel says:

    @cynic (#10) – you appear to want to look at the industry as a whole and just think that absent marketing all players will split the pie equally and be happy with that. However, a static pie seems to indicate a greater need for marketing and differentiation, as for-profit corporations are never going to sit back and hope they get an equal share.
    Also, the utilities example seems far off as many people have no choice over the utilities they get, whereas there is usually several choices of drugs available (at least to the physician).

  24. Brad says:

    Thanks for the post. I did not realize that statements of marketing costs really referred to SG&A.

  25. John Thacker says:

    Of course, Apple’s R&D and marketing numbers are both so small as a proportion of revenue simply because their profit margins are so enormous.
    RDist: Do you have any good evidence of how much of marketing and advertising spending by pharmaceuticals are health professional directed versus consumer directed? There’s no particular shortage of TV ads for drugs in the USA, particularly for the sort of “lifestyle” conditions that someone might choose to live with, particularly if they didn’t know about effective treatments.
    cynic: Similar to the above, I think it’s incorrect to say that the size of the pie is fixed, particularly for the drugs that are advertised on TV to ordinary consumers. People really might not know that there’s a drug available for certain conditions, and may not tell their doctor. Even with advertising to physicians, it’s quite possible that for some conditions advertising ends up increasing the size of the whole pie (relative to alternatives like surgery or just living with a condition.)

  26. BicCherry says:

    Perhaps to make the study a better one, the production costs of products should be revealed, likewise the legal cost pertaining to patents etc.
    Of course, this would NOT change the result significantly since companies on the cutting edge of science better be seen to spend more on research rather than a cornflake company where most cost would be into raw materials/ hygenie inspection/ production, shipment/ packaging since the profit margins for such ought to be thin.

  27. Anonymous says:

    Also, there are a lot of SG&A expenses in pharmaceutical companies that the public (or FDA) wants the companies to continue. Things like safety monitoring of approved drugs, clinical studies on approved drugs, etc., are SG&A expenses.
    No one seriously wants companies to stop monitoring and studying a drug once the R&D is completed and the drug is brought to market.

  28. Sam D says:

    Where would licensing costs go? Much of Pharma’s R&D is bought in from public universities who have done the initial research.

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