Thursday, February 12, 2015

Pharma Profits are Driven More by Marketing Spend Than by R&D Spend

Data from Forbes for 2013 document that the profit margins of banks and pharmaceutical companies ranked the highest (see here). Both industries have outlying margins (around 20%) and also outlying settlements with governments for violating marketing and other business-related laws (see chart on left).

In November, 2014, BBC reported that in 2013, US giant Pfizer, the world's largest drug company by pharmaceutical revenue, made an "eye-watering 42% profit margin."

The BBC article also included a table showing the total revenue, R&D spend, Sales and marketing spend, Profit, and Profit margin of the top 10 pharma companies.

The evidence shows that many drug companies spend far more on marketing drugs - in some cases twice as much - than on developing them. It's deja vu all over again in the ongoing debate of R&D spending vs. promotional spending. See a critique of the numbers here.

In any case, I was more interested in seeing if there was a positive correlation between pharma profits and marketing and/or research and development spending. So I prepared the following chart from the data.

In this chart, the companies are arranged with the highest profits ($bn) on top and the lowest on the bottom.

I'm thinking there is a better correlation between marketing spend and profits than between R&D spend and profits. What do you think?


  1. Anonymous7:22 AM

    Of course there is. R&D spend's relation to profits is like a lottery. Marketing spend only occurs if there is a direct expectation of profitability.

  2. Anonymous8:49 AM

    This is a no brainer. The job of R&D is to help meet unmet medical needs. The job of marketing is to drive profitability for a company. The reason the profits are high in the pharma industry is because it is a very risky business. High risk = high reward. If pharma companies don't deliver on profit margins, they won't get any investment. It's that simple. Investors who invest in high risk areas expect high rewards.

  3. Anonymous11:09 AM

    i agree with the business model of big pharma's literally holding the reins of the black horse(capitalism, see "end times", irwin baxter), but when the pale horse of disease and death(other meaning) is encouraged to run, huffing at the heels of their prized, coveted lead horse, when "ol' paley" is propped up on hush-hush money for botched drugs, the gov't like a lapdog in their pocket(should now be: "we the pharma"). while we in the stands, clutch our bet stubs, desperately wondering if we'll survive for another race? if so, after pooling our last resources, milking the atm to the last drop, we stand in line shuffling in hopeful nervousness, push our last funds through the bars, to the mechanically indifferent clerks all covered in white. "40yrs ago i told 'em, these drugs are bad for business" maybe mr. corleone didn't factor in "the big pharma 5" makes "the five families of new york" look like preschoolers. "the don" may of been comforted knowing prostitution n' gambling are thriving in pharma. duncan r.m.


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