Differing views on pharmaceutical costs

We discussed in class today the relative costs of research & development vs. marketing in pharmaceutical companies. Happily, views ranged dramatically -- from asserting the importance of protecting pharmaceutical patents as a long term industry necessity to the urgency of epidemics facing millions in thedeveloping world today.

With regard to the specific issue of costs, I had heard reports that marketing comprised a substantially higher portion of costs, but the evidence is mixed. One scholar puts R& D costs at roughly the equal of marketing costs, while the industry claims R&D is much greater and critics say marketing is much greater. Undoubtedly, I heard information (through major media) taken from the "critics", and you may have reasons to discount this information accordingly. See this PBS Frontline report on the industry for more.

The most relevant section follows (though you might also look to the surrounding information on profitability and comparisons of international prices, if you are interested):

What percentage of industry revenue is spent on R&D? How much is spent on marketing and advertising?

Uwe Reinhardt, an economist who studies the U.S. health system, says that R&D accounts for about 13 percent of pharmaceutical companies' revenue. Twenty-eight percent, he says, is spent on manufacturing, packaging and quality control, and 13 to 15 percent on administration and marketing.

Since companies are not compelled to make public a breakdown of their marketing and advertising costs (almost all companies combine administration and marketing costs), it's hard to pinpoint a figure for marketing expenditures. Industry spokesperson Marjorie Powell estimates that drug companies spent twice as much on R&D as on ads and marketing -- roughly $15 billion in 2002 on advertising and marketing, and about $30 billion on R&D.

However, industry critic Marcia Angell reverses that ratio, estimating that the industry spends about twice as much on marketing as they do on research. She tells FRONTLINE, "by their own figures, over a third of their employees are in marketing. Not marketing administration, but marketing. So I think it's safe to conclude that somewhere on the order of 30 percent -- over twice the R&D costs -- are marketing."

The widely divergent views of the costs in R&D vs. marketing almost certainly depend on how costs are defined and parsed out. For what it's worth, I will show my own bias and say that I am inclined to take the study by Uwe Reinhart as the most even-handed assessment. (Not least because we all liked the guy in graduate school.)