The Median Cost of Bringing a Drug to Market is...

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ksupoke

We don't need no, thot kuntrol
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Feb 16, 2011
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#41
Here’s another fun fact, Pharma doesn’t spend more on marketing than R&D. Studies that claim that mis-categorize SG&A costs while also assigning the cost of give-away drugs as marketing costs instead of production costs.

It always helps when study preparers spend the time to actually read and comprehend financial statements and SEC disclosures.


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Big pharma marketing costs do in fact exceed r&d costs at least they did as of 16-17. Now can you characterize / account for certain expenditures using legal accounting practices and mischaracterize those expenditures, absolutely it’s done in every industry every day, it’s why a good cfo is worth their weight in gold, allowing for this and allowing that a decent amount of r&d is subsidized it’s actually not all that close. If you want to use ‘reported’ figures it’s still questionable if r&d outpaces marketing in terms of dollars spent.
 

ksupoke

We don't need no, thot kuntrol
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Feb 16, 2011
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#42
So, are we in the U.S. just being chumps for paying many times the price for the same pill as a patient in Vancouver? Maybe, but before we get any further into that, we need to look at the other part of the bargain. The pharmaceutical companies tell us that they turn these high prices into research toward new cures for diseases. It’s true, we in the U.S. seem to be picking up most of the research tab for the rest of the world, but if we’re curing diseases, maybe it’s worth it.

In other words, let’s see if the pharmaceutical companies are really delivering on their side of the bargain, and then we’ll go back and decide how much we should be paying them.

So next we’ll examine the research question: does pharmaceutical research really cost so much that, even with the prices they charge, they barely have any money left over at the end of each year? A good way to find out is to look at their annual financial statements. Each year every publicly traded company has to file an annual financial report with the SEC which lists annual revenues, itemizes costs, profits, etc…

I examined the annual financial reports of 13 major pharmaceutical companies over 8 years (2011-2018). These were among the world’s largest pharmaceutical companies and were responsible for a combined total of nearly half of all of the world’s pharmaceutical sales from those years.

I uploaded each of the reports I examined here and listed the pages that contained all the information I used next to each link. I also prepared a four to five page summary of what I thought were my most important findings about each company. I linked these summaries to the name of each pharmaceutical company on the webpage.

We’ll start by looking at one of these reports. A good example is the 2011 annual report for Pfizer. The report itself is 117 pages long but, not to worry, much of what we need to know can be found on page 17, which I show below. (PDF document page).
PfizerFinancialReview2011
Table 2: Pfizer’s 2011 financial review.

On page 17 you’ll find the above table which is an analysis of the consolidated statements of income for Pfizer. You can see from the first line that Pfizer reported just over $67 billion in revenue in 2011. A few lines down you can see that they spent just over $9 billion on research and development that same year. OK, $9 billion is a lot of money. It was nearly 14% of their total revenue.

But what’s really interesting is that you can see that Pfizer spent more than twice as much on Marketing (selling, informational and administrative expenses) as they spent on research; over $19 billion! And look at their profit for that year. They made just over $10 billion in net income (after taxes) which, by the way, is more than they spent on their research for that year.

So the cost of research wasn’t exactly eating all of Pfizer’s income pie in 2011. But that’s one pharmaceutical company’s financial statement for one year. How about the rest of them?

As I said before, I went over seven years of financial reports for 13 major pharmaceutical companies and here is some of what I found:

-The combined total revenue for all 13 companies over 8 years was about $3.78 Trillion.

-The Combined total profits for these companies was about $744 Billion.

-All 13 pharmaceutical companies spent a total of $643 Billion on research.

-The total amount they spent on marketing was about 60% more than what they spent on research: $1.04 Trillion.

Here’s the same information in two graphs:

Figure 2: Total combined profits earned by all 13 major pharmaceutical companies from 2011-2018 compared to amount spent on marketing and research over the same time period. Proportion of total revenue allocated for each is below (figure 3).

Figure 3

As you can see, the pharmaceutical companies do spend a lot on research but their research budgets are dwarfed by their marketing budgets. They also made more in profits each year, on average, than they spent on research.

So let’s do some estimates. Just as an example, we’ll take that dose of Xarelto that we get for $14.37 and the Canadians for about $3. The pill most likely costs just a few cents to manufacture (we know that from the cost of the generics), so the $14.37 is mostly profit. But they charge (us in the U.S.) $14.37, they say, to cover the cost of discovering it.

Yet from their own statements, only about $2.44 of the $14.37 (17%) goes into research. Another $2.73 is pure, after-tax profit, and a whopping 27%, or about $3.88 of that $14.37 pill goes, not to the scientists at the pharmaceutical companies, but toward buying all of those medication ads you love so much. So most of what we “buy,” when we pay the highest drug prices in the world, is high corporate profits and lots of television commercials of middle-aged men with very pretty wives.

What Does It Mean When They say “Research”?
But we can’t stop just yet. By their own reports, the pharmaceutical companies put about 17% of high drug costs back into research. Let’s see if that money is really going where we think it’s going. And while we’re looking, we’ll get some insight into another question about pharmaceutical research, which is: “Why do a lot of new drugs end up doing no better than the old ones, and why are so many recalled for safety problems?”

When we think of research, we might think of scientists in white coats skillfully synthesizing new compounds and conscientiously measuring their effects. This does happen in the design and testing of new drugs, and of course the money spent on that comes out of the research budget. But research money also goes to a lot of places you might not expect.

First, research buys drug studies. That’s what the pharmaceutical companies do when the drug’s already developed and they want to see if it really treats the disease it’s supposed to treat. There’s usually a pretty high standard for success in these studies and it’s pretty hard on a company when one fails.

So what happens if it looks like the drug almost works? First, it means the drug probably doesn’t add very much to medical therapy. But all too often a pharmaceutical company will just repeat a study. These repeat studies give blind chance another opportunity to make the drug look useful. So some of the “research” money is really used in making mediocre products appear better than they really are.

It also buys “in-process” research, which is what the company pays to take over another company, hoping that the new company might have some valuable drugs in its pipeline. In other words, this part of the research budget can be used essentially for corporate takeovers.

But here’s where the idea of pharmaceutical “research” really gets stood on its head: Pharmaceutical research is sometimes virtually indistinguishable from marketing.

At the best of times the line between “research” and “marketing” is pretty fuzzy. After all, what really is research and what exactly is marketing? The answers to these questions aren’t as obvious as you might think. Much of what defines research vs. marketing costs is a decision left to the pharmaceutical companies and they can be rather creative in how they assign these costs.

In their 2007 financial report, Roche reassigned nearly 800 million Swiss Francs from their marketing budget in the 2006 report to the research budget (PDF page 138). This shows how even the pharmaceutical companies have trouble making up their minds about the definition of “research”. Also, Bristol-Myers Squibb recently had separate listings for marketing and advertising. This means that, for some reason, Bristol-Myers Squibb didn’t consider advertising to be a component of marketing prior to 2014.

Why such confusion? First, a lot of research has to happen outside the lab, and in medicine you obviously have to go to doctors and see how well the new drugs work on sick patients. But doctors are also your main customers—they’re the ones who decide whether to prescribe your drugs. And they’re your main advocates—they’re the ones people trust to say whether a drug is worth using.

So hiring practicing physicians to evaluate new drugs creates a potential conflict of interest for these doctors, blurring the research vs. marketing line further. Consider this: many of the very same doctors who will eventually prescribe these new drugs to their patients are first hired by the pharmaceutical companies to evaluate the drugs. And it is their evaluation which is presented to the FDA as part of the decision whether the drug is worth approving for patient use.

read more:
https://truecostofhealthcare.org/the_pharmaceutical_industry/
 
Sep 29, 2011
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#43
Here’s another fun fact, Pharma doesn’t spend more on marketing than R&D. Studies that claim that mis-categorize SG&A costs while also assigning the cost of give-away drugs as marketing costs instead of production costs.

It always helps when study preparers spend the time to actually read and comprehend financial statements and SEC disclosures.


Sent from my iPhone using Tapatalk
Big pharma marketing costs do in fact exceed r&d costs at least they did as of 16-17. Now can you characterize / account for certain expenditures using legal accounting practices and mischaracterize those expenditures, absolutely it’s done in every industry every day, it’s why a good cfo is worth their weight in gold, allowing for this and allowing that a decent amount of r&d is subsidized it’s actually not all that close. If you want to use ‘reported’ figures it’s still questionable if r&d outpaces marketing in terms of dollars spent.
A good cfo follows GAAP accounting. And in GAAP accounting Marketing costs are usually classified as SG&A costs, but SG&A costs also include salaries, rent, audit, pension, IT, travel, office supplies, communication, certain legal fees, and many others. The study preparers apparently just used the reported SG&A as a proxy for marketing costs - thus overstating marketing costs by a huge amount.


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ksupoke

We don't need no, thot kuntrol
A/V Subscriber
Feb 16, 2011
12,327
16,571
743
dark sarcasm in the classroom
#44
A good cfo follows GAAP accounting. And in GAAP accounting Marketing costs are usually classified as SG&A costs, but SG&A costs also include salaries, rent, audit, pension, IT, travel, office supplies, communication, certain legal fees, and many others. The study preparers apparently just used the reported SG&A as a proxy for marketing costs - thus overstating marketing costs by a huge amount.


Sent from my iPhone using Tapatalk
A good cfo does what you say, a great, read valuable, cfo uses all legal means necessary to allow the numbers to tell the story the street wants to hear and can back the numbers up, or they create the cover story for the c suite when the numbers miss, those are the ones who punch well above their weight.

It’s not a study it’s an analysis of publicly reported numbers, restatements, and industry practices consisting of multiple years, multiple pharma co’s and how & where costs and expenditures are accounted for and it doesn’t appear you read it.

I’m not particularly bright but I do have areas where I know just a little, this, not pharma science, but financials and how and why they are reported the way they are, while not right down the poopy chute is at least on the outside corner of my strike zone.
 
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Sep 29, 2011
982
199
593
60
Breckenridge, CO
#45
A good cfo follows GAAP accounting. And in GAAP accounting Marketing costs are usually classified as SG&A costs, but SG&A costs also include salaries, rent, audit, pension, IT, travel, office supplies, communication, certain legal fees, and many others. The study preparers apparently just used the reported SG&A as a proxy for marketing costs - thus overstating marketing costs by a huge amount.


Sent from my iPhone using Tapatalk
A good cfo does what you say, a great, read valuable, cfo uses all legal means necessary to allow the numbers to tell the story the street wants to hear and can back the numbers up, those are the ones who punch well above their weight.

It’s not a study it’s an analysis of publicly reported numbers, restatements, and industry practices consisting of multiple years, multiple pharma co’s and how & where costs and expenditures are accounted for and it doesn’t appear you read it.

I’m not particularly bright but I do have areas where I know just a little, this, not pharma science, but financials and how and why they are reported the way they are, while not right down the poopy chute is at least on the outside corner of my strike zone.
Okay, an analysis of publicly avail data - by a doctor that probably doesn’t know how to read or interpret SEC disclosures and certainly doesn’t understand accounting practices as it relates to the recognition and amortization of historically capitalized R&D costs, and quite clearly doesn’t understand SG&A costs.

I perused the report and basically dismissed it when the author tried to draw economic conclusions from a summary of selected data for 8 years. The average development time for a single drug is 12 years. Who knows what kind of inaccurate conclusions (about how much, if any, pharma is overcharging - which is what this thread is about) can be drawn from an 8 yr snapshot taken by a non- professional.


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