Drug companies want us to believe that soaring prices for prescription drugs are necessary to cover their research and development (R&D) costs – a claim that implies that they spend most of their money on R&D, and that after they pay for it, they have only modest profits left over. Curtailing prices, they say, would choke off R&D and stifle innovation. But the real story is very different.
Big drug companies actually spend relatively little on R&D – far less than they spend on marketing and administration and even less than what they have left over in profits. In 2002, for example, the top ten American drug companies had sales of $217 billion. According to their own figures, they spent 14% of sales revenues on R&D. But they spent over twice as much, a whopping 31%, on marketing and administration. And they had 17% left over as profits.
Most drug companies lump marketing and administration together in their annual reports, but one reported that 85% of the total went to marketing. Assuming that the figure is roughly the same for the other big companies – and there’s reason to think that it is – then they spent nearly twice as much on marketing alone as they did on R&D.
In its public pronouncements, the industry denies this by counting just four specific activities as marketing – sales visits to doctors, the value of free samples, direct-to-consumer advertisements, and advertisements in medical journals. But, in fact, marketing budgets cover a lot more than this, most importantly the “education” of doctors (which teaches them to prescribe more drugs).