The Big Pharma Dilemma: Develop New Products or Promote Existing Ones
Nature Reviews Drug Discovery, 2009
Big Pharma should take a closer look at their dosage of R&D spending on new drugs versus marketing existing ones, according to new research by Professor Prasad Naik. Pharmaceutical companies face the dilemma of how much to invest in developing new drugs and promoting existing ones.
Since the 1970s publicly traded drug companies have decreased their manufacturing costs from 43% of sales to 23%, they have increased investment in marketing products already on the market from 32% to 39% and increased investment in R&D from 5% to 17%. The relative emphasis on innovation compared with marketing depends on how these activities affect the short-term profitability and the long-term value of the company.
Naik’s article, “The ‘Big Pharma’ Dilemma: Develop New Drugs or Promote Existing Ones?” was published in the June 2009 issue of Nature Reviews. He co-authored the paper with Professor Dan Weiss at the Leon Racanati Graduate School of Business Administration at Tel Aviv University, and Associate Professor Ram Weiss of the Department of Human Nutrition and Metabolism at the Braun School of Public Health in Jerusalem, Israel.
Their article explains that drug development is a lengthy and risky process that yields a small number of profitable products. So, it is no surprise that since the 1970s companies have chosen to boost short-term profits by spending more resources on marketing rather than R&D. Relying on valuation theory and linear regression, Naik et al. analyzed how investment in R&D or marketing already proven products affect companies’ long-term value in the market.
According to the authors, one indicator of long-term value is through stock investors’ expectations of future company performance. They discovered that increased spending in R&D had a positive impact on stock price values, increasing the long-term value of the company. On the other hand, investing more in marketing existing products had a negative effect on the long-term value of the company.
Naik et al. also found that yearly profits, or short-term gains, were positively affected by investment in both R&D and marketing. Their analysis indicates that investments in promoting existing products have opposing effects: they increase annual profits, but decrease long-term company value. Naik and his co-authors conclude: “Overall, we hope that this analysis might encourage further investment in R&D to address the decline in innovation, as it indicates that investments in R&D benefit not only patients’ health, but also investors’ wealth.”
Naik was quoted in a July 27, 2009, The New York Times article titled “Lawmakers Seek to Curb Drug Commercials.” Naik defended the call to empower the Food and Drug Administration to bar consumer advertisements for new drugs for an initial period after the F.D.A. approves them — until there has been more real-world experience with the medications. Because health problems with new pills sometimes emerge several years after the drugs go on the market, critics react more strongly to drug ads than to ads for products like cars or alcohol whose risks are known, Naik told the Times.