Scott Byrne & Rachel Weeks G400: Pharma Report 10/22/09 Direct to Consumer Advertising: The Affect on the Pharmaceutical Industry

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1 Scott Byrne & Rachel Weeks G400: Pharma Report 10/22/09 Direct to Consumer Advertising: The Affect on the Pharmaceutical Industry A Glance at the Pharmaceutical Industry The pharmaceutical industry is comprised of companies involved in the research, development, manufacturing, marketing, and selling of ethical drugs. In 2008, the global pharmaceuticals industry generated $615.1 billion in total revenues with the United States market generating $273.9 billion, or 44% of the global market. Pharmaceuticals also continue to experience positive growth, demonstrating a CAGR of 4.7% from (Appendix 1). While the industry generates healthy revenues, it is heavily concentrated within the top ten firms who accounted for more than half, $348.3 billion, of total global revenues in (Appendix 2) A trend within the pharmaceutical industry that has been developing over the past 10 years is an increase in advertising and promotional expenditures, which doubled the amount spent for R&D in the United States in As seen in Appendix 3, there are three main areas of promotional spending; however, there is one category that has seen a high growth rate in spending relative to the others since Direct to Consumer advertising (DTC) which grew 330% from $985 million in 1996 to $4,237 million in Although the DTC growth rate is relatively high compared to other promotional categories it only comprised 14% of promotional spending in Direct to Consumer Advertising DTC is one method of promotion in pharmaceuticals, but what types of advertising fall under the category of DTC? The two primary avenues are television and the Internet with the bulk of expenditures falling under television advertisements. The industry has seen a dramatic increase within this segment of promotion and many speculate that the growth was a direct result of the FDA relaxing regulations of 1 Wood, Laura. "Research and Markets: Global Top 10 Pharmaceutical Companies - Generated Total Revenues of $348.3 Billion During 2008 Reuters." Reuters.com - World News, Financial News, Breaking US & International News. Reuters, 24 July Web. 20 Oct < 2 Shaw, Amy. "Direct-to-Consumer Advertising of Pharmaceuticals, ProQuest Discovery Guides." CSA. Mar Web. 22 Oct < 3 Donohue, Julie M., Marissa Cevasco, and Meredith Rosenthal. "A Decade of Direct-to-Consumer Advertising of Prescription Drugs." The New England Journal of Medicine, 16 Aug Web. 21 Oct < 1

2 DTC advertising in Previously, pharmaceutical companies had to list the drug s brand name and the benefits on a television commercial along with the associated risks. This led to ineffective advertisements for companies; however, when this restriction was eliminated, companies could begin to run reminder ads. These ads advertise the brand name of the drug and offer a referral website or information phone number so consumers can get more information. These types of advertisements also are exempt from risk disclosure requirements. 2 DTC advertising is attractive to pharmaceutical companies because of its ability to easily reach millions of consumers and introduce them to the product with little regulation involved. Pros & Cons of DTC The increase in DTC advertising has had large effects on the industry and pharmaceutical consumers. While many call the increased spending detrimental to the U.S. health care system, the pharmaceutical industry is quick to point out the benefits of increased DTC spending. These benefits include: increased public awareness of potential health issues and methods of treatment, better dialog with a physician through increased patient power and making the condition seem less embarrassing, and the ability to make more informed decisions through DTC advertisements and websites. 2 On the other hand, doctors and many studies seem to be split on the beneficial effects of DTC advertising. FDA surveys conducted in 1999 and 2002 found 53% of physicians believed DTC advertisements resulted in better discussions with patients and 42% of physicians believed patients were made more aware of available treatments. 4 Studies of the effect of advertising on prescribing practices have shown such advertising increases sales, helps to prevent underuse of medicines to treat chronic conditions, and at the same time, leads to some overuse of prescription drugs. 3 Some groups, such as the American College of Physicians, are more starkly against DTC advertising contending it may upset the doctor-patient relationship 5 or create a demand for prescription drugs that may not be appropriate. 6 Critics also claim physicians are often forced to take time to explain why a treatment seen on TV is not appropriate or physicians may feel pressure to prescribe drugs to accommodate the patient's request. 7 This can be especially damaging in light of revelations regarding 4 Rados, C. (2004). "Truth in Advertising: Rx Drug Ads Come of Age." FDA consumer 38(4), pp Spake, D.F. and Mathew, J. (2007). Consumer opinion and effectiveness of direct-to-consumer advertising. Journal of Consumer Marketing 24(5), pp Huh, J., Langteau, R. (2007). Presumed influence of DTC prescription drug advertising: Do experts and novices think differently? Communication Research. 34(1) pp Metzl, Jonathan M. (2007). If Direct-to-Consumer Advertisements Come to Europe: Lessons from the USA. Lancet 369(9562), pp

3 drug safety. Clinical trials required for drug approval are usually not designed to detect rare but significant adverse effects. This was seen in the case of Vioxx (rofecoxib), a drug heavily promoted to consumers that was later found to increase the risk of heart attacks. 3 In addition to potential detrimental effects of DTC advertising on doctors and patients it may also increase the monetary burden of the U.S. health care system. A Kaiser Foundation study found every $1 the pharmaceutical industry spent on DTC advertising in that year yielded an additional $4.20 in drug sales. In 2000, DTC advertising was responsible for 12% of the increase in prescription drugs sales, or an additional $2.6 billion. 8 Often times newer and more heavily advertised drugs tend to be more expensive than generic drugs or older versions of a given medication. One example of this is Avandia and Actos that treat Type 2 Diabetes and were found to be no more safe or effective than older drugs, but are much more expensive. 9 Another study found that compared with newer drugs such as Zyprexa, Seroquel, and Risperdal, older medication was found to be just as effective and up to $600 cheaper per month. 10 Along with an increase in DTC spending there has been an increase in the time it takes the FDA to issue regulatory letters asking the drug company to take specific actions in regards to DTC complaints. From the FDA letters cited advertisements for either minimizing risks, exaggerating effectiveness or both. In 2006, the Government Accountability Office criticized the FDA on behalf of U.S. Senators after the time it took to issue a regulatory letter rose from an average of two weeks from 1997 to 2001 to an average of four months from 2002 to 2005 (Appendix 4). In addition, the number of regulatory letters dropped from 142 in 1997 to 21 in One reason for this decline is the small number of staff members who review advertisements while DTC advertising continues to grow substantially. 3 This understaffing poses an issue since drug companies are not required to submit their ads before mass distribution, even though they are required to submit their final set of advertisements to the FDA. 2 The gap of time between catching errors in misleading advertisements that have been widely distributed can lead to a costly fix for pharmaceutical companies which is passed on to consumers. 8 "Impact of Direct-to-Consumer Advertising on Prescription Drug Spending - Kaiser Family Foundation." The Henry J. Kaiser Family Foundation - Health Policy, Media Resources, Public Health Education & South Africa - Kaiser Family Foundation. Web. 25 Oct < 9 CR Report. (2007). 10 Vedantam, S. (2006, Dec 1). Cost Benefits of New Schizophrenia Drugs Doubted; Older Medication, Considered Equally Effective, Can Be as Much as $600 a Month Cheaper, Study Finds. The Washington Post, pp. A.9. 3

4 Motivation for Increased DTC Spending Despite continued criticism of DTC advertising, pharmaceutical companies continue to increase the number of advertisements. If negative sentiments and complaints are surrounding DTC advertising, what are the motivating factors for drug companies to continually plaster screens with advertisements? The answer lies in increasing sales revenue, looming patent expiration dates for many large company s cash cow drugs, and the threat of generic drugs. A key motivating factor, which is linked to a company s revenue, is the approaching patent expiration dates for key drugs and the dramatic price cut that will inevitably follow due to generics entering the market. For example, a year after Zantac s patent expired prices had dropped to 15% of the pre-patent amount and to 10% the following year due to generic entry into the market. 11 Generics are a growing concern for large pharmaceutical companies who center their strategies on high revenues generated by branded, patent protected drugs. After the passing of the Drug Price Competition and Patent Term Restoration Act in 1984, generics took a larger share of the market jumping from 18.6% to 54% in Drugs losing their patent protection in 2000 resulted in an annual revenue reduction of $6.5 billion along with future cumulative losses. 11 The threat of generics and the end of patent exclusivity is a strong motivator for large pharmaceutical industries to increase promotional efforts. While companies still enjoy patent protection, they want to increase revenues from a drug by generating interest in the initial years of the drug s release. Also, by creating a brand identity with consumers through DTC advertising, companies are hoping branding will reduce losses that will occur once generics enter the market and drive down prices. This trend in the industry results in an increase in DTC advertising and promotions as a whole, despite continued criticism and increasing costs for pharmaceutical companies. Conclusion Healthcare costs continue to rise and pharmaceutical companies continue to increase their costs that ultimately get passed down to consumers. Currently, large pharmaceutical companies would lose market share and revenues if they cut back advertising. From a game theory standpoint the increases in advertising may be compared to a prisoner s dilemma. Rival companies are spending more money on a 11 Berndt, Ernst R. "The U.S. Pharmaceutical Industry: Why Major Growth In Times Of Cost Containment? -- Berndt 20 (2): Health Affairs." Health Affairs: The Policy Journal of the Health Sphere. Web. 22 Oct < 4

5 relatively stable population to gain market share. Conversely it may be beneficial for all large Pharma companies to decrease DTC advertising in order to maintain the current level of competition while reducing cost. When Congress banned cigarette advertising in 1970 earnings at the major cigarette producers were up 30% in 1971 as compared to 1970 by eliminating the advertising rivalry which did not greatly affect sales. In an industry with increasing political controversy, decreasing healthcare costs for consumers will be a priority for large pharmaceutical companies who wish to remain competitive within a changing industry. 5

6 Appendix 1: Global Pharmaceuticals Market Value: $ Billion Datamonitor, Global Pharmaceutical Industry Appendix 2: Pharmaceutical Industry s Concentration Top Ten Firms Revenue Rank Company Country Total revenues ($bn) 1 Pfizer U.S. $ Johnson & Johnson U.S. $ GlaxoSmithKline United Kingdom $ Bayer Germany $ Hoffmann-La Roche Switzerland $ Sanofi-Aventis France $ Novartis Switzerland $ AstraZeneca UK/Sweden $ Abbott Laboratories U.S. $ Merck & Co. U.S. $ Total Revenues $ Source: Top 50 Pharmaceutical Companies Charts & Lists, Med Ad News, September

7 Appendix 3: Direct-to-Consumer Advertising and Promotion to Health Professionals, Source: Donohue, Julie M., Marissa Cevasco, and Meredith Rosenthal. "A Decade of Direct-to-Consumer Advertising of Prescription Drugs." The New England Journal of Medicine, 16 Aug Web. 21 Oct < Appendix 4: Complaints and Regulatory Letters Written Concerning DTC Advertising Source: Donohue, Julie M., Marissa Cevasco, and Meredith Rosenthal. "A Decade of Direct-to-Consumer Advertising of Prescription Drugs." The New England Journal of Medicine, 16 Aug Web. 21 Oct < 7