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Author Topic: Why prescription drugs cost so much
philnotfil
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The drug companies keep on reminding us that research and development is the reason why prescription drugs are so expensive. Tonight on the news (ABC) they had a clip about how much the drug companies are spending on advertising and how much they are spending on research and development.

The amount spent on advertising was significantly larger than the amount spent on research and development. I can't find the story on their website anywhere, but it was something like 30 billion spent on research and development and 50 billion spent on advertising.

Updated:
I found the actual study:
PLOS Medicine

Here is the press release:
quote:
The pharmaceutical industry spends almost twice as much on the marketing and promotion of drugs than on research and development, according to a new analysis in this week's PLoS Medicine.

In their analysis of data from two market research companies, IMS and CAM, Marc-Andr� Gagnon and Joel Lexchin (York University, Toronto, Canada) found that US drug companies spent US$57.5 billion on promotional activities in 2004, the latest year for which figures were available.

In comparison, the National Science Foundation reported that in 2004 the amount of industrial pharmaceutical research and development (including public funds for industrial research and development) was US$31.5 billion in the United States.

For the last 50 years, say the authors, there has been an ongoing debate as to which image of the drug industry is most accurate. The industry promotes a vision of itself, say the authors, as "research-driven, innovative, and life-saving," but the industry's critics contend that the drug industry is based on "market-driven profiteering."

The findings of their study, say Gagnon and Lexchin, "confirms the public image of a marketing-driven industry and provides an important argument to petition in favor of transforming the workings of the industry in the direction of more research and less promotion."

The types of promotion that were included in the US$57.5 billion figure included free samples, visits from drug reps ("detailers"), direct to consumer advertising of drugs, meetings with doctors to promote products, e-mail promotions, direct mail, and clinical trials designed to promote the prescription of new drugs rather than to generate scientific data (these are known as "seeding trials").

The authors believe that their figure of US$57.5 billion is likely to be an underestimate. "There are other avenues for promotion that would not be captured by either IMS or CAM,� they say. These avenues include the ghostwriting of articles in medical journals by drug company employees, or the off-label promotion of drugs.


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scifibum
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It makes sense that a profit oriented industry would spend money in ways which are calculated to maximize profits. The phrase "market-driven profiteering" is meant to sound damning but it's kind of a "duh" statement.

I think the government would almost have to eliminate private drug companies to turn this around. How can you (reasonably) mandate how private companies spend money? Providing restrictions on how federal research grants are spent is another thing, but I'd guess not enough to change the situation.

Those of us who want to help might simply refuse to buy drugs for which the market is driven almost entirely by marketing.

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philnotfil
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I think they can spend as much as they want on advertising, but then they should be honest and tell us that prescription drugs cost so much because of their advertising budget, not because of their R&D budget.
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LoneSnark
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They cost a lot because they have a monopoly and were not bullied into lowering their prices by the Government, as in Canada.

Of course, Canada is an odd place. Patent holders are brow beaten into relatively low prices while at the same time generic drug manufacturers are shielded from competition.

I read somewhere that Americans and Canadians spend about the same amount of money on drugs when generics are included in the calculation because thanks to unfettered competition Americans get cheap generics.

Now, I much prefer the American system. It incentivises 'new' drug development while using the free market to drive down the price of 'old' drugs as far as they can to maximize long-term consumer benefits.

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velcro
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Market forces are useful when they optimize the system.

By spending such a large portion of their funds on marketing and advertising, the drug companies are not helping patients or doctors.

If doctors are well trained, the advertising won't help them make good decisions. If they aren't, then having the drug companies doing the training will result in more drugs being sold than are necessary.

If the drug companies used the full $80B (current R&D + M&A) to make better drugs, and simply published the peer-reviewed results, the available resources would be much better spent.

It's like spending $30B to build a crappy car and $50B to market it, vs. spending $75B to build a car that sells like hotcakes because it is such a great improvement.

Which car would you want to buy? Which car company would you want to invest in for the long term?

The free market works with transparent information about products, not with biased advertising. Advertising can provide information as well as persuade. But with doctors trained to analyze the information, all the drug ads can do is persuade. And with the impact drugs have on our lives, and the limited resources, persuasion is a short-term money maker and a long term money waster.

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Daruma28
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It's really simplistic to look at overall expenditures and make a declarative statement like "...prescription drugs cost so much because of their advertising budget, not because of their R&D budget."

R and D for various drugs over years represents a huge block of sunk costs amortized over the lifetime of the R and D process.

For every useful and commercially successful drug that took years to develop, you have a bunch of other drugs that never make it to market...but R and D for all of those failed drugs costs just as much as the successful ones.

So when a company finally develops a drug that looks like it's going to be useful and successful on the market, they are going to pump all of their Marketing money into selling the few drugs that make it out of R and D so they can recover the costs of ALL the R and D as well as make a profit.

Pfizer spent millions marketing Viagra, but the return on investment covered the costs of a dozen other failed drugs that never made it past the R and D process, as well as the cost of marketing, and also turned a huge profit for them.

Even before the Clinton Administration liberalized the pharmaceutical advertising restrictions, R and D was still a significant sunk cost to develop new drugs. The advent of legal marketing the way it is now simply made it easier for Pharma companies to push the successful drugs.

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RickyB
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Daruma, I don't think that the figure being discussed is "advertising costs more than R&D for drugs that succeed and sell". It's total. All the R&D, for drugs that didn't work and for viagra and everything in between, is half or less than all advertising costs. At least that's how I understand it.
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LoneSnark
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quote:
It's like spending $30B to build a crappy car and $50B to market it, vs. spending $75B to build a car that sells like hotcakes because it is such a great improvement.
But car makers do spend billions on advertising, should they too abandon their advertising budget on your say-so?

Companies do not advertise because they feel like they should. They are spending their own money; every dollar spent is a dollar out of their own pocket, so if they spend it who are we to say it was not necessary? Why do you believe you would know about drug making more than the drug makers?

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philnotfil
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quote:

quote:
It's like spending $30B to build a crappy car and $50B to market it, vs. spending $75B to build a car that sells like hotcakes because it is such a great improvement.
But car makers do spend billions on advertising, should they too abandon their advertising budget on your say-so?
The big difference, for me, is that the car companies aren't going around claiming that their products are so expensive because they spend so much money trying to bring us better cars.
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G2
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quote:
Originally posted by velcro:
If doctors are well trained, the advertising won't help them make good decisions. If they aren't, then having the drug companies doing the training will result in more drugs being sold than are necessary.

I don't think this is necessarily true. The more information pushed to doctors and their patients the better.

As for the R&D costs, Pharmacy Times in 2005 reported:
quote:
In March 2004, the FDA reported that it can cost as much as $1.7 billion to bring a new drug to market—a 50% jump over a 5-year period
If that trend continued to today (nearly 4 years later), we could expect it to cost well over $2 billion dollars to being a new drug to market. They also report that only 1 in 10 attempts to develop a drug succeed so a lot of dry holes are drilled with an associated expense there that will never be recovered except through the sale of the 1 drug that made it. Consequently, a pharmaceutical company need to generate several billion dollars in revenue before it breaks even on just one new drug.

One of the big reasons for high R&D:
quote:
A regulatory requirement that prevents companies from enhancing a manufacturing process after FDA approval is a key factor in the rising drug-development costs.
Once the process is approved by the FDA, that's it. If the company wants to change anything, no matter how minor, it has to go through the FDA approval and that costs a lot of money and time.

I'm not so sure about that advertising money either, from the article:
quote:
... in an accounting study based on the annual reports of ten of the largest global pharmaceutical firms, Lauzon and Hasbani showed that between 1996 and 2005, these firms globally spent a total of US$739 billion on “marketing and administration.” In comparison, these same firms spent US$699 billion in manufacturing costs, US$288 billion in R&D, and had a net investment in property and equipment of US$43 billion, while receiving US$558 billion in profits
One thing I took from that is the manufacturing costs - there are billions involved there, nearly 2.5 times the cost of R&D.

Reading the PLoS report, it seems there is a mix in terminology and that it's pretty damn hard to pin down just what costs what.

Running the numbers of the accounting study, drug companies spend about 40% of their money on advertising. What do other international industries spend? Is 40% a lot?

Based on those number, the drug companies have about a 31% profit margin. How's that compared with other similar companies?

[ January 07, 2008, 12:30 PM: Message edited by: G2 ]

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The Drake
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I think it would probably be interesting to see a breakdown by class of drugs.

For instance, ED and cholesterol drugs might be dominated by advertising dollars - but AIDS cocktails are unlikely to receive any ad dollars. There are probably some marketing incentives direct to doctors, however.

I also wonder how many doctors find out about new therapies due to the efforts of the pharma companies, as opposed to journal articles.

If you look at the P&L reports for pharma companies, I doubt you'll find a 31% margin.

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The Drake
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FYI,

Pfizer has a profit margin of 14.5%, and this is about twice that of most Major Drug companies.

Pfizer's Financial report for 2006 indicates that ad expenses totalled 2.6 billion, while R&D was 7.6 billion.

This is much smaller than the reported numbers, maybe Pfzier is atypical.

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philnotfil
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The advertising figure in the study included more than just ads, it also included
quote:
free samples, visits from drug reps ("detailers"), direct to consumer advertising of drugs, meetings with doctors to promote products, e-mail promotions, direct mail, and clinical trials designed to promote the prescription of new drugs rather than to generate scientific data (these are known as "seeding trials").

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Boy Logic
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I'd also be interested to see how much money goes to lobbying. I read an article recently about a German company that spent millions lobbying to try and take pseudoephedrine hydrochloride off the market, making their drug the only option for treatment.

It would be nice to see the TV advertisements for drugs taken off the market; should patients be pushing their doctors to prescribe drugs the doctor doesn’t think they need?

I think the doctor’s visits and free samples can help a lot when it comes to both educating doctors on new treatments, as well as helping some patients get the treatment they need without the ‘cost’. As much as we expect our doctors to remain current on new treatments, drugs, and therapies, it would be impossible for them to keep up with it all without the help of pharmaceutical companies.

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