Promotional Spending for Prescription Drugs

December 3, 2009

Pharmaceutical companies' efforts to promote prescription drugs have attracted the attention of policymakers because such activities may affect the rate at which different drugs are prescribed and consumed, the total amount spent on health care, and, ultimately, health outcomes.Yesterday CBO released a brief highlighting trends in promotional spending for prescription drugs and market characteristics that influence promotional strategies. CBO examined data on promotional strategies from 1989 to 2008 for drugs in the classes of medication that include most outpatient drugs that were produced in tablets or capsules and were among the top-selling drugs in 2003. Of the more than 2,000 drugs in CBO's data set, 700 to 800 have some promotional spending reported in any given year.

The way that pharmaceutical manufacturers promote prescription drugs has changed significantly in the past decade. Until the late 1990s, pharmaceutical manufacturers confined their marketing efforts largely to physicians and other health care providers. In the late 1990s, the Food and Drug Administration changed its advertising guidelines and drugmakers began marketing directly to consumersa practice known as direct-to-consumer (DTC) advertising. Since then, the manufacturers of many prescription drugs have increased their purchases of air time on television and of advertising space in newspapers and magazines.

Recognizing that both consumers and physicians take part in the decision to purchase a drug, pharmaceutical manufacturers spent at least $20.5 billion on promotional activities aimed at those groups in 2008. For a practice called detailing, which involves sales representatives meeting with physicians, nurse practitioners, and physicians' assistants, pharmaceutical companies spent $12 billion, accounting for more than half of that promotional spending. Companies spent another $3.4 billion sponsoring professional meetings and events and about $0.4 billion placing advertisements in professional journals. Pharmaceutical manufacturers spent the rest of their promotional budgets, $4.7 billion in 2008, on DTC advertising. To place those figures in context, in 2008, promotional expenditures equaled 10.8 percent of the U.S. sales reported by the Pharmaceutical Research and Manufacturers of America, in line with most years since the early 1990s, during which time that share has remained between 10 percent and 12 percent.

Though pharmaceutical manufacturers use DTC advertising for only a small set of drugs, they spend heavily on DTC advertising for those drugs. Among the drugs in CBO's dataset, the 10 with the highest DTC expenditures in 2008 accounted for 30 percent of expenditures for DTC advertising industry-wide. That concentration is nearly twice what was observed for detailing, where the drugs with the highest expenditures totaled 16 percent of the industry's detailing expenditures. Drugs promoted using DTC advertising are, on average, newer to the market than drugs promoted through detailing, but the difference in the average expenditures for DTC advertising and detailing seems largely a result of the distribution of the two types of spending.

According to CBO's analysis, when pharmaceutical manufacturers promoted drugs to consumers, they also spent more, on average, promoting those drugs to physicians. For those drugs in CBO's dataset with reported spending on DTC advertising, their manufacturers spent an average of $40.5 million per drug in 2008 on promotional activities directed to physicians14 times the average amount they spent when promoting drugs exclusively to physicians. That difference may indicate that manufacturers use promotional activities directed to physicians and DTC advertising to reinforce each other.

A pharmaceutical manufacturer's decision to use DTC advertising or other types of marketing tools depends on the potential size of the market for a given prescription drug, the current competition in that market, and the amount of time that has elapsed since the drug received FDA approval. If a drug has both a large potential market and is approved to treat chronic or long-term conditions, its manufacturer may be even more likely to embrace DTC advertising. DTC advertising is less common for drugs (such as antibiotics) that address acute conditions (such as an infection)perhaps because individuals are more likely to seek care for an acute condition without being prompted by an advertisement or because such drugs are typically prescribed only for a short time. Further, the data analyzed by CBO show that average spending per drug on DTC advertising declines as the number of competitors in the same class increases.

This issue brief was prepared by Sheila Campbell of CBO's Microeconomic Studies Division.