In the late 1950s, the late Democratic Senator Estes Kefauver, Chairman of the United States Senate's Anti-Trust and Monopoly Subcommittee, put together the first extensive indictment against the business workings of the pharmaceutical industry.
He laid three charges at the door of the industry: (1) Patents sustained predatory prices and excessive margins; (2) Costs and prices were extravagantly increased by large expenditures in marketing; and (3) Most of the industry's new products were no more effective than established drugs on the market [1].
Kefauver's indictment against a marketing-driven industry created a representation of the pharmaceutical industry far different than the one offered by the industry itself. As Froud and colleagues put it, the image of life-saving “researchers in white coats” was now contested by the one of greedy “reps in cars” [2]. The outcome of the struggle over the image of the industry is crucial because of its potential to influence the regulatory environment in which the industry operates.
Fifty years later, the debate still continues between these two depictions of the industry. The absence of reliable data on the industry's cost structures allows partisans on both sides of the debate to cite figures favorable to their own positions.
The amount of money spent by pharmaceutical companies on promotion compared to the amount spent on research and development is at the heart of the debate, especially in the United States. A reliable estimate of the former is needed to bridge the divide between the industry's vision of research-driven, innovative, and life-saving pharmaceutical companies and the critics' portrayal of an industry based on marketing-driven profiteering.
IMS, a firm specializing in pharmaceutical market intelligence, is usually considered to be the authority for assessing pharmaceutical promotion expenditures. The US General Accounting Office, for example, refers to IMS numbers in concluding that “pharmaceutical companies spend more on research and development initiatives than on all drug promotional activities” [3]. Based on the data provided by IMS [4], the Pharmaceutical Research and Manufacturers of America (PhRMA), an American industrial lobby group for research-based pharmaceutical companies, also contends that pharmaceutical firms spend more on research and development (R&D) than on marketing: US$29.6 billion on R&D in 2004 in the US [5] as compared to US$27.7 billion for all promotional activities.[4]
In this paper, we make the case for the need for a new estimate of promotional expenditures. We then explain how we used proprietary databases to construct a revised estimate and finally, we compare our results with those from other data sources to argue in favor of changing the priorities of the industry.
There are many concerns about the accuracy of the IMS data. First, IMS compiles its information through surveys of firms, creating the possibility that companies may systematically underestimate some of their promotional costs to enhance their public image. Second, IMS does not include the cost of meetings and talks sponsored by pharmaceutical companies featuring either doctors or sales representatives as speakers. The number of promotional meetings has increased dramatically in recent years, going from 120,000 in 1998 to 371,000 in 2004 [6]. In 2000, the top ten pharmaceutical companies were spending just under US$1.9 billion on 314,000 such events [7]. Third, IMS does not include the amount spent on phase IV “seeding” trials, trials designed to promote the prescription of new drugs rather than to generate scientific data. In 2004, 13.2% (US$4.9 billion) of R&D expenditures by American pharmaceutical firms was spent on phase IV trials [5]. Almost 75% of these trials are managed solely by the commercial, as opposed to the clinical, division of biopharmaceutical companies, strongly suggesting that the vast majority of these trials are done just for their promotional value [8].
Finally, IMS data seem inconsistent with estimates based on the information in the annual reports of pharmaceutical companies. For example, 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 [9].
Annual reports, however, have their own limitations…
