Monday, February 15, 2010

Pharmaceutical Marketing

“Drug manufacturers are paid way too much money, just look at all those ads talking about erectile dysfunction, urination issues, or heartburn. We should just cap what they’re paid, and then maybe these ads would stop.”

I’ve heard statements like this many times before, and it definitely brings up issues worth discussing. I myself find the underlying issues concerning but think the solution offered is misguided.

Ever wonder how doctors learned about the newest drugs and what they did? Perhaps you thought they learned it through scientific trade journals, so they update themselves on which one works best. Maybe that is true to a certain extent, but there are far too many drugs nowadays to learn about them all. Doctors are also busier than ever, so it isn’t possible to spend 20 hours a week just to read trade journals about potential new drugs. On the contrary, the real way most learn about new drugs happens with a pharmaceutical representatives visit. The representatives conduct tutorials and luncheons to educate the physician about the drug and all its potential uses. This was the earliest form of pharmaceutical marketing before pharmaceutical companies found out that “direct-to-consumer” (DTC) advertising could help control the sales channel as well.

With this background in mind, let’s break down the statement above to read between the lines.

Statement: “Drug manufacturers are paid way too much money.”
Underlying issue: Healthcare costs too much
Proposed solution: “We should cap what [drug manufacturers are] paid”

Statement: “Look at all those ads talking about erectile dysfunction, urination issues, or heartburn”
Underlying issue: Uncomfortable subjects combined with frequency of media
Proposed solution: “Maybe these ads would stop [if they had less money]”

Look at the two underlying issues – healthcare costs too much and annoying advertisements.

Well in the last post titled, “Technology and Innovation,” I tried to explain why I think (branded) pharmaceuticals costs a lot – ie. theoretically to make up for the R&D that is spent. So changing the costs of a branded pharmaceutical drug involves a change in the law. One proposed change is a cap on the drug costs (perhaps as a fixed % of the actual manufacturing cost or some other method). One perceived benefit would be the reduced advertisement budgets that the pharmaceutical manufacturers would have – killing 2 birds with 1 stone right? Well unfortunately, the pharma manufacturers have figured out that to maximize their long-term profits, an incremental dollar spent on advertising is actually more valuable than an incremental dollar spent on R&D. What this means is that any reductions in the price would result in direct cuts to R&D spending. Now Henry Waxman fans would cry foul here – the whole point of the patent protections is to encourage R&D investment, not profits and excessive SG&A expenses. As often is the case, I’m not going to take a political stance here, I just want to point out what would be the real effects of price caps on drugs.

So what would I recommend? I think the more appropriate way to cut out all of these direct-to-consumer advertisements would be to place restrictions on the advertisements themselves. There is precedent with the tobacco industry. Such restrictions would 1) save consumers from bombardment of annoying advertisements, 2) save doctors from having to answer frivoulous requests for unnecessary medications, 3) reduce utilization of drugs, and 4) effectively reduce the expenditures made by the pharmaceutical manufacturers. I’m perfectly comfortable with doctors remaining the gatekeepers of healthcare – the way they were meant to practice medicine.

Sources: Normally, I’d try to cite here that “an incremental dollar spent on advertising is actually more valuable than an incremental dollar spent on R&D” was based on a McKinsey study done in the early ‘90s, but I haven’t been able to find it anywhere, so my apologies on the lack of a primary source.

1 comment:

  1. Just a comment I'd like to add;
    When I was interning at a small-mid sized pharma company doing research, the company prided itself on investing at least 25% of its profits on R&D. 25% may seem like a reasonable amount for R&D but it actually is on the higher spectrum of companies reinvesting in R&D. It's surprising how much little money gets spent in developing new drugs compared to advertising and the business aspect of pharma, especially in an industry that is driven by innovation.