R&D v. Marketing: Where Should Drug Companies Spend?

By Derek Lowe

Just how much does the drug industry spend on R&D? And how does that compare to what it spends on sales and marketing? These are argument-inducing questions, but we now have some more data to argue about.


The latest issue of Nature Reviews: Drug Discovery has a paper from three academic researchers on this very topic. Looking over the past thirty years of drug company annual reports (and stock prices), they find that the "sales, general, and administrative" category went up slightly (as a per cent of total sales) in the 1975-2006 period, from 32% to 39%. Interestingly, manufacturing and general cost-of-goods was the leading expenditure in 1975 (43%), but this has gone down pretty steadily to about 23%. And even more interestingly, the percent spent on R&D has more than tripled over the same period, from 5% to 17%. Putting it mildly, this does not fit many of the narratives about drug company spending over this period, and I'm going to be very interested to see what reactions these numbers get.

The authors go on to look at the effect of R&D spending versus SG&A on stock prices and profits. There seems to be a pretty clear net positive effect for research and development spending, and an equally clear negative effect on the stock prices for spending on sales and marketing. So why do companies allocate money to the latter? It comes down to risk and cash flow. R&D is chancy, slower, and only pays off intermittently. Promotion of existing compounds brings in more immediate cash, in a generally more predictable manner. You also can't rule out perverse short-term incentives, although the same trends held up even when the authors factored out high-level executive compensation. (And yes, big compensation packages also had a negative effect on overall stock prices).

As in many things, there are opposing errors to be made. If you spend all your money just on the drugs you have now, you'll eventually have no more to sell, since patented drugs are wasting assets. On the other hand, if you go totally to spending on the R&D side, you may well run out of money before you ever find anything else to sell. . .

This article available online at:

http://www.theatlantic.com/business/archive/2009/07/r-d-v-marketing-where-should-drug-companies-spend/20846/