Explaining Research – Drug Company Expenditures Part 1

I just came back from a conference in Cambridge where I got to hear a number of fascinating talks.  One of the best was given by Marcia Angell.  If you don’t know who she is, Dr. Angell was a past editor of the New England Journal of Medicine, and pretty much wrote the book on the inner workings of the pharmaceutical industry.  I mean that literally.  Go buy her book right now.  It changed my (professional) life.

Dr. Angell was, of course, talking about the pharmaceutical industry in the context of health care reform.  She updated some of the data in her book for the talk, and I’m going to present two important points.  The original work and methodology is explained in more detail in her book, but I’m going to give you updated information.

The first bit of data has to do with the amount of money the pharmaceutical industry spends on research.  You will often hear that the real reason that drugs cost so much is that companies need to spend so much on research.  Compelling argument.  After all, think of all the lifesaving drugs we get, right?  We have to fund that research.  But it’s just not that clear.

According to Fortune Magazine, the top ten pharmaceutical companies earned about $269 billion in sales in 2008.  That’s just the top ten.  You can also look up their public annual reports.  This is how they spent that enourmous sum:

UntitledHere’s what we’ve got.  Those companies spent a whopping $41 billion on research and development.  That’s a lot of money.  But it’s significantly less than the $49 billion in profit they made.  Just so you know, the average Fortune 500 company in 2008 made 0.9% of sales in profits.  So in a recession, pharma did very, very well.  See that blue wedge, though?  Those pharmaceutical companies spent $83 billion on marketing and administration. That’s more than twice as much as they spent on research and development.  That’s an insane amount.

So it’s a little disingenuous to claim that Americans must continue to spend so much to fund R&D when you could make cuts to either profits (which are big) or to marketing and administration (which is gargantuan).  R&D just isn’t that big a piece of the pie.  There’s plenty of fat to trim in there before research and development.

Why do they need to spend so much on marketing?  I’m glad you asked.  Let’s enjoy more of Dr. Angell’s investigative skills and turn to FDA approval data:

The pie represents all new drugs approved by the FDA from 2000-2007.  The first thing to note is the difference between New Molecular Entities (Blue wedges) and non-New Molecular Entities (Green wedges).  See, the FDA will classify a drug as a totally new molecule (NME) or a copy/tiny change from an old molecule (non-NME).  New molecular entities need more research and development.  It takes much less money and work to make a slight change to an already existing compound.

The FDA further classifies a drug by the type of review it necessitates:

Priority Review – Significant improvement compared to marketed products in the treatment, diagnosis, or prevention of a disease.

Standard Review – The drug appears to have therapeutic qualities similar to those of one or more already marketed drugs.

In other words, priority review drugs are much better than what we already have. Standard review drugs are similar to what we’ve got.

From 2000-2007, 667 new drugs were approved by the FDA.  Of those, only 75 (11%) were new molecules that were much better than what we already had.  In fact, over 80% of all drugs approved were no better than what we already had.  Those are “me-too” drugs.

Why do the pharmaceutical companies spend so much on marketing?  Because you have to really promote drugs that really have no benefit over others that already exist.  You have to convince people to buy those.

You know what needs no promotion?  Awesome new drugs that save lives.  When was the last time you saw a commercial for chemotherapy?  For epinephrine?  For steroids?  Those drugs need no promotion – doctors just know to use them.  But I bet all of you know about Nexium.  Or Cialis.

You only need to market drugs which aren’t obviously better.  If drug companies really committed to research and development of new molecular entities that were deserving of priority review, they could really reduce their marketing and administration budgets and cut the prices of drugs dramatically.  They need a better argument against charging less for drugs.

More on where research gets done (Part 2) tomorrow.

The Truth About the Drug Companies: How They Deceive Us and What to Do About It, by Marcia Angell.

Hidden information below


Email Address*