Marketing And R&D, Again

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Includes: PFE
by: Derek Lowe

Summary

The BBC has an article posted with the title "Pharmaceutical Industry Gets High on Fat Profits", so at least you know where that one's going.

R&D expenses and SG&A expenses are high in the entire health care sector.

If Pfizer had done no marketing whatsoever, they would, presumably, have brought in substantially less revenue.

The BBC has an article posted with the title "Pharmaceutical Industry Gets High on Fat Profits", so at least you know where that one's going. And it reads just as you'd expect- if you haven't had enough pharma-bashing recently, that'll provide you with all you need.

It contains a chart of marketing expenses, per company, provided by a firm called Global Research. First, the numbers. In this post, I noted that Pfizer spent $7.9 billion on R&D in 2012, and estimated (based on a more solid number of $0.6 billion on direct-to-consumer ad spending) that they'd spent around $5 billion on marketing. For 2013, Pfizer's R&D expenses were down to $6.5 billion (ugh), but Global Research has their marketing as $11 billion instead. I note from their earnings statement that Pfizer's entire "Selling, Informational, and Administrative" expense number was $14.2 billion, so Global Research has 77% of that as the marketing budget. That statement doesn't jibe with, say, Pharmaceutical Executive's annual "Industry Audit", which claims that marketing expenses are a "relatively low" portion of those sorts of overhead figures. No doubt the Global Research people have their own ways of calculating things, and I'd be glad to get more details.

But both R&D expenses and SG&A expenses are high in the entire health care sector. If you look at the ratio of total overhead (those two together) to sales, Pfizer last year comes out to overhead as about 40% of sales. And that's right at the median for the entire health care sector - that last link shows vividly that the ratios for the health care, financial, and IT sectors are way higher than other industries. (That's also addressed in this post).

But let me go from arguing the numbers to another point, one that I've made many, many times, and that is not addressed in the BBC piece at all. Let's just stick with Pfizer: they had $51.6 billion dollars of revenue last year. Even if they did spend $11 billion on marketing, the reason that they did so was the this marketing was supposed to bring in more than $11 billion dollars of revenue. Marketing is supposed to make money. If Pfizer had done no marketing whatsoever, they would, presumably, have brought in substantially less revenue.

And what would that have done to the R&D budget? The R&D/sales ratio is called "R&D intensity". Pfizer's ratio last year was 12.6% of sales. Apple's R&D/sales ratio, on the other hand, is a bit below 3% (which is, to be fair, surprisingly small). Google's ratio is 13.3%, and Microsoft's is 13.1%. IBM is 6.2%, and 3M is 5.6%, to give you some other big-tech comparisons.

So if Pfizer's marketing department pulled its weight, which it had better have done, then they brought in more than 11 billion dollars of that 51.6 figure. Let's assume that they only brought in 12 billion, and be really conservative about it. Without that, Pfizer's revenues are 39.6 billion. Are they still going to have an R&D budget of 6.5 billion with those sales, for an R&D/sales ratio of 16.4%? They are not. Hardly anyone can sustain that kind of R&D spending. Even if they stuck with the same ratio they have now, that would take Pfizer's R&D spend down to $5 billion, an 11% cut, which would be pretty unkind.

My point is that you can't just point at marketing expenses and start crying foul unless you understand what marketing expenses are, and what they're for. This point, though, seems largely ungraspable to the wider journalistic world.