A version of this story first appeared in D.C. Diagnosis, STAT’s weekly newsletter about the politics and policy of health and medicine. Sign up here to receive it in your inbox.
WASHINGTON — A coalition of the drug industry’s fiercest foes is accusing the world’s top drug makers of hiding behind research and development “as an excuse for price-gouging American patients.” And they’re pointing to a new study that finds drug makers spent about 22% of their revenues on research and development in 2017 to prove their point.
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You may want to check your numbers, Nick.
A link to the cited report would be helpful. It is a common mistake in reports on such spending to count the entire SG&A line (which usually comes in ~ 33% of revenues and would be consistent with what is being reported here for AstraZeneca) as “marketing and advertising” when, in fact, marketing and advertising account for only a fraction of that entire line item. SG&A spending also includes things like salaries, utilities, and rental of facilities, all of which actually support R&D and should arguably be counted there – any idea how much electricity it takes to run a walk-in -20˚ freezers the size of an average apartment?
https://www.investopedia.com/terms/s/sga.asp
When handled properly, expenditures on R&D are actually more than what is reported in the R&D line of financial statements and spending on advertising and marketing, when extracted from the SG&A line, tends to be closer to 7%. For instance, check out page 20 of Pfizer’s 2018 financial report where total revenues are reported as ~ $53 billion. R&D expenditures are reported as $8 billion (14.9% of revenues) and SG&A as $14.5 billion (26.9%). However, on page 84 it is reported that only $3.1 billion (5.8%) was spent on advertising.
Drugs have limited profitability life-spans due to patents. Pharma companies simply must spend more on R&D than any other businesses. Everyone knows that outrageous drug pricing for R&D support is a very old, much-abused excuse for ridiculously rich executive pay and totempole waxing. Medications are not just any business, they are everyone’s business. Therefore this industry needs to become much more regulated and transparent, with spending on overblown perks and advertising (eventually supporting more perks) curbed.
22% seems like quite a lot to me. When I was in Big Pharma, my company spent about 20%. Our CEO said it was too much and we should target 16%. I would also note that it is among the highest in any industry, comparable to computers and electronics, far more than chemicals or energy, for example.
It should be considered also what actual Development stands for. I have kind of a feeling that a lot, if not most of it, has little to do with actually “developing” a drug.
And the Research part, the one that actually should account for the innovation claims, is an even a smaller fraction of the all R&D budget