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Developing new drugs is an expensive process. As a result the pharmaceutical industry spends a lot on R&D (15% of turnover is not unusual and is higher than most other major industries: see report from the EFPIA). But the industries critics point out that they also spend a lot on marketing their products.

In Pharmageddon, for example, David Healey (a leading critic of the modern pharmaceutical industry) alleges the following:

Where the research and development budgets of large pharmaceutical companies like Lilly and Pfizer were once much greater than their marketing budgets, the reverse is now true. The pharmaceutical industry, for example, now spends $30 billion annually on marketing in the United States alone.

Is this true for most firms? How much do the big world-wide pharma firms spend on marketing compared to R&D?

Update

One of the issues with the claim has been that public disclosure of the amounts spent on marketing and R&D are somewhat opaque. But this article in the Washington Post reproduces an analysis by León Markovitz that claims to unpick the numbers. His (not very good dataviz) chart is shown below:

dadaviz graphic sourced from Washington post

Unfortunately the links to the original analysis no longer seem to work. So we have an analysis that seems to reinforce the claim, but is it reliable or reproducible?

matt_black
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  • @sancho much as you have removed repetition and simplified the question, you have also removed useful context and rendered the question *dull*. In this case some of the things you removed were stylistic and unlikely to impede the clarity of the question being asked. I'm not going to roll back, yet, but I might reinsert some. – matt_black May 31 '13 at 21:43
  • The claim and the question are simple. I didn't think the context helped to clarify, expand, or narrow the scope of the question. But it's your question, so insert back what you think is necessary. –  May 31 '13 at 21:50
  • This might be a tough question to answer or very easy one depending upon how good the financial disclosures for the publicly traded companies are. – rjzii May 31 '13 at 22:53
  • Something to consider that I found while reading through the [Novartis 2012 Annual Report](http://www.novartis.com/downloads/investors/reports/novartis-annual-report-2012-en.pdf) - from a pharmacuitical company standpoint "marketing" can apparently also mean the money that is spent for [marketing authorization](http://en.wikipedia.org/wiki/Marketing_authorization) which is [known to be expensive](http://www.manhattan-institute.org/html/fda_05.htm). If the clinical trials are being rolled into the "Marketing and Sales" costs then the number could be inflated. – rjzii Jun 03 '13 at 15:52
  • @RobZ Not sure whether this depends on tax rules in different countries, but the phase 3 trials would *normally* count as R&D not marketing (and there are tax advantages for this in some countries). – matt_black Jun 03 '13 at 20:27
  • In the US there can be phase 4 trials that might not be part of R&D, plus the lawyers and other work associated shouldn't be counted as part of the R&D when it comes time for the actual [NDA](http://en.wikipedia.org/wiki/New_Drug_Application). This is that area of corporate accounting though where it can become really hard to find a generic answer. – rjzii Jun 03 '13 at 20:33
  • A related question could be whether they pay [more to their shareholders](http://annualreport.medtronic.com/year-end-highlights/index.htm) than they do on R&D :) – Benjol Jun 05 '13 at 07:51
  • @Benjol Not quite the same question, though. Shareholders don't get paid to make the business operationally successful, they get paid part of the surplus *after* the business has been successful. My question was trying to focus on the *sources* of success (and the balance of investment required in different operational areas). – matt_black Jun 05 '13 at 09:20

1 Answers1

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In my opinion, the inconsistant use of the term "marketing" and the broad categories under which marketing activities are reported by pharmaceutical companies makes it difficult to conclude whether or not they spend more on marketing than on R&D.

The closest I have found to a certain answer is the case of Novartis, who spends more on marketing and sales than on R&D.

Financial statements

Pfizer

Pfizer spent $7,870 million on R&D in 2012. (Pfizer's 2012 financial statement, p. 25, 29)

Pfizer spent $16,616 million on "Selling, Informational, and Administrative" expenses in 2012. (Id. p. 29)

Pfizer says, "Among other things, these expenses include the internal and external costs of marketing, advertising, shipping and handling, information technology and legal defense. Advertising expenses totaled approximately $2.9 billion in 2012..." (Id. p. 61)

If you only count "advertising" as marketing, Pfizer is not spending more on marketing than R&D. If you allow other expenses to count as marketing, it is possible that the amount exceeds the amount spent on R&D. Given how this is reported by Pfizer, you can't answer this question by looking at the financial report.

Lilly

Lilly spent $5,278 million on R&D in 2012. (Lilly's 2012 financial statement, p. 40)

Lilly spent $7,513 million on "Marketing, Selling, and Administrative" in 2012. (Id)

In my opinion, the ambiguity within the "Marketing, Selling and Administrative" category leaves it unknown if Lilly spends more on marketing than on R&D.

Bristol-Myers-Squibb

BMS spent $3,904 million on R&D in 2012. (BMS 2012 Annual Report, p. 14)

BMS spent $794 million on "Advertising and Product Promotion" in 2012. (Id.)

BMS spent $4,220 million on "Marketing, Selling, and Administrative" in 2012. (Id.)

In my opinion, the ambiguity in the "Marketing, Selling, and Administrative" category leaves it unknown if Bristol-Myers-Squibb spends more on marketing than on R&D.

Novartis

Novartis spent $9,332 million on R&D in 2012. (Novartis 2012 Annual Report, p. 184)

Novartis spent $14,353 million on "Marketing and Sales" in 2012. (Id.)

Novartis spends more on marketing and sales than on R&D.

Bayer

Bayer spends €2,932 million on R&D. (Bayer's 2012 Annual Report, p. 166)

Bayer spends €8,958 million on "Selling Expenses". (Id.)

Selling expenses is Bayer's category that includes "all expenses incurred in the reporting period for the sale, storage and transportation of saleable products, advertising, the provision of advice to customers, and market research". (Id., p. 213)

They break this down: €4,600 million in internal and external sales force, €2,273 million in advertising and customer advice, €1,322 million in warehousing and distribution, €680 million in commission and licencing expenses, and €1,112 on other selling expenses. (Id., p. 213)

In 2012, Bayer employed 12,992 people (full-time equivalents) classified as R&D, and 42,590 classified as "Marketing and distribution". (Id., p. 217)

In my opinion, this still results in ambiguity in the "Selling expenses" category, leaving it unknown if Bayer spends more on marketing than on R&D.

Johnson & Johnson

Johnson & Johnson spent $7,665 million on R&D in 2012. (Johnson & Johnson 2012 Annual Report. p. 21)

Johnson & Johnson spent $20,869 million on "Selling, marketing, and administrative" in 2012. (Id.)

Johnson & Johnson's "Selling, marketing, and administrative" category includes $1,051 million in shipping and handling and $2.3 billion in advertising.

In my opinion, this still results in ambiguity in the "Selling, marketing, and administrative" category, leaving it unknown if Johnson & Johnson spends more on marketing than on R&D.

Third party claims

Sufrin, Carolyn B. MD, MA *; Ross, Joseph S. MD, MHS. Pharmaceutical Industry Marketing: Understanding Its Impact on Women’s Health. Obstetrical & Gynecological Survey. 63(9):585-596, September 2008.

Pfizer, Merck, and Bristol-Myers-Squibb all spent a greater proportion of their total sales on marketing than they did on research and development.

Brezis, M. Big Pharma and Health Care: Unsolvable Conflict of Interests between Private Enterprise and Public Health. Isr J Psychiatry Relat Sci Vol 45 No. 2 (2008) 83–94

Budget for marketing is by far greater than for research.

The proportion of the budget spent on marketing is estimated at 36%, by far higher than the 11% devoted to research.

Analysis of the third party claims

Sufrin and Ross supported their statement by reference to the financial statements of Pfizer, Merck, and Bristol-Myers-Squibb from 2006.

I don't know how they came to this conclusion because neither Pfizer, Merck, nor Bristol-Myers-Squibb report "marketing" expenses. Pfizer reports "Selling, Informational, and Administrative" (Pfizer's 2006 Financial Report p. 37, 42). Merck reports "Marketing and Administrative" (Merck's 2008 Form 10-K p. 86, 142). Bristol-Myers-Squibb reports "Marketing, Selling, and Administrative" (Bristol-Myers-Squibb's 2006 Annual Report p. 53). Bristol-Myers-Squibb also report a separate expense category called "Advertising and Product Promotion" (Id. p. 25, 26, 53).

The statements I quoted from Brezis's paper were not supported by any references.

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    "Marketing, selling, and administrative" seems pretty broad, do they break things down more than that anywhere in the reports? – rjzii Jun 01 '13 at 00:34
  • @RobZ Not other than that one paragraph from Pfizer's report that specifically separated advertising. The MS&A or SI&A category is a very broad category, but that is as detailed they break it down in those reports. –  Jun 01 '13 at 01:09
  • and mind that "administrative" includes lawyers, the single biggest expense for any large company, even before taxes. – jwenting Jun 01 '13 at 11:37
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    @jwenting: "the single biggest expense for any large company" [citation needed] – Oddthinking Jun 03 '13 at 02:57
  • Reading through the NVS papers, I'm wondering if the term "marking" might be getting overloaded in some cases. In some places NVS is using "marketing" to also mean regulatory review required for marketing approval. If the costs of that is rolled into "Marketing and Sales" then it is going to look extremely high in some cases. – rjzii Jun 03 '13 at 15:46
  • @RobZ expenses incurred by NIBR are included in Novartis's annual report by allocating those costs to the Alcon and Pharmaceutical divisions. (p. 152) –  Jun 03 '13 at 16:00
  • @RobZ, About the overloading of the term "marketing": agreed. –  Jun 03 '13 at 16:01
  • Yup, caught that about NIBR reading through the report. – rjzii Jun 03 '13 at 16:08
  • I don't think it is productive to debate the minor distinctions between marketing and sales. The underlying intent is whether the balance of effort in pharma is tipped towards *pushing* the product or *inventing* the product. Pharma spends *a lot* on advertising (especially in the US where, almost uniquely in civilised countries, allows advertising of prescription drugs to consumers). But it spends even more on sales reps who visit doctors. And it spends a lot on conferences and meetings to promote products. – matt_black Jun 03 '13 at 20:35
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    @matt_black About marketing vs sales, I agree. Hence, I thought it was okay to highlight the conclusion about Novartis's spending. However for all the other companies, it's more complicated than just marketing vs sales. The categories that include marketing also include legal fees, distribution and warehousing, administrative salaries, etc. and these vary from company to company. –  Jun 03 '13 at 20:57
  • @matt_black "Pharma spends a lot on advertising (especially in the US where, almost uniquely in civilised countries, allows advertising of prescription drugs to consumers). But it spends even more on sales reps who visit doctors." Is this a suggested addition to the answer? I couldn't support this conclusion with any of the data I found. –  Jun 03 '13 at 21:11
  • @sancho I don't want to complicate the answer or the question, just to point out that there are many ways where pharma firms are known to spend money in ways where the primary purpose is to sell more product. It doesn't much help to make fine distinctions among all those methods. The question is about the totality of the effort versus R&D, not the detail. – matt_black Jun 03 '13 at 21:43
  • @matt_black don't forget pushes to health departments to have diagnostic criteria for such diseases as diabetes changed to include ever larger parts of the population as patients... – jwenting Jun 04 '13 at 05:38
  • Everyone, this discussion is now definitely not about improving my answer. Please move it to chat if it continues. –  Jun 04 '13 at 05:55
  • Coming back to this answer I now see a couple of new points in the data. Bayer seems to break out the proportion of its marketing and sales expenses that go on the salesforce (a little over half). If this ratio is applied to other firms' totals then most will *clearly* spend more on product promotion than on R&D (the cost of logistics is much lower than the cost of *promotion* of the product). Of course the opacity of most firms accounts may be deliberate to avoid precisely this question. – matt_black Mar 25 '16 at 13:59