At last week’s “DTC in the Era of Consumer Choice” conference hosted by DTC Perspectives magazine, Hugh O’Neil, VP and Head of Market Access at Sanofi-Aventis, gave the audience a bit of a preview of PhRMA’s new Guidelines for Direct-to-Consumer (DTC) Advertising.
It appears that PhRMA’s members are likely to agree on a DTC advertising moratorium for newly approved drugs. O’Neil said there was a debate about the exact length of the moratorium — whether it should be 6 months, one year, or longer. Bob Erhlich, chairperson, commented that most DTC campaigns do not begin until 6 months after launch anyway and a 6-month moratorium, therefore, would not be a change from current practices. Most people, therefore, expect PhRMA to recommend a 1-year moratorium.
What is often missing in the debate about DTC advertising and whether it should be banned or delayed 1 or more years is the contribution that DTC advertising makes to the overall Rx drug sales number and the drug industry’s bottom line.
I got to thinking about about this when another presenter — Dan Jaffe, Executive VP of Governmental Relations at the Association of National Advertisers — said that a DTC moratorium could result in billions of lost sales. But would a moratorium hurt profits?
First, let’s just get an idea of what the size of the US Rx drug market is in terms of annual sales.
According to the IMS Global Pharmaceutical and Therapy Forecast™ released last week by IMS Health, the U.S. pharmaceutical market, the world’s largest, is forecast to grow 1 – 2 percent to $287 – $297 billion, down from the 2 – 3 percent rate expected earlier this year. Contributing to the slower growth is less-than-expected demand for recently introduced products, as well as the economic climate, which appears to be having an impact on doctor visits and pharmaceutical sales.
From these numbers I calculate that currently the drug industry enjoys about $284 billion in sales of Rx drugs in the US per year. I recently saw from a chart in an oil industry PSA that the drug industry profit margin is about 20% (compared to 8% for the oil industry). Therefore, I calculate that the drug industry makes a profit of $57 billion on $284 billion in sales.
Against that, consider that the drug industry spends about $5 billion in DTC advertising. Assuming that the ROI for this spend is around 2.0, that means that DTC advertising drives about $10 billion in sales. That’s 3.5% of the total sales in the US.
In other words, if DTC advertising were banned, US Rx sales would decrease to $274 billion. Using the the same 20% profit margin estimate, these sales would yield about $55 billion — a loss of $2 billion in profit.
But the $5 billion saved by eliminating DTC could be added to the bottom line and more than offset this loss!
In light of this, it hardly seems worth all the bad publicity for the industry to save DTC. Pharma’s bottom line would not be affected and could actually be higher if the $5 billion were spent on more effective types of promotion (via the Internet, for example).
What I propose is an experiment. Let’s eliminate TV broadcast DTC advertising altogether for one year, but keep print and Internet-based DTC advertising. That is, no broadcast DTC for ANY drug, new or old.
Drug companies could pocket the money saved or spend it on print and Web promotions, which are not a target of DTC critics in Congress and elsewhere.
What do you think would happen?
Sure, TV networks that run DTC ads and agencies that produce the ads would lose money. But drug companies can do what they do in other parts of the world: produce disease awareness, non-branded TV ads. That would help keep TV and agency people employed.
Eventually, drug companies will have to shift spending away from TV anyway. According to Bob Erhlich, this is already happening, but at a snail’s pace. Erhlich estimates that TV accounts for about 60% of the industry’s DTC budget, down from 66% a few years ago. At that rate the industry won’t reach 0% spending on TV DTC until 2040!
What the industry needs now is real change it can believe in!
Point of clarification: Tracy Staton of FiercePharma reported: “John Mack at the Pharma Market Blog puts a pencil to paper and finds that cutting DTC ads off television would save pharma $5 billion–and that savings would offset the resulting $2 billion hit to the industry’s bottom line.” (See “Do TV ads cost more than they’re worth?“).
Just to clarify: cutting all broadcast TV DTC advertising would save about $3 billion, not $5 billion. That’s because TV represents about 60% of the average DTC budget (60% of $5 billion, which is the total ad spend on DTC per year for ALL brands, equals $3 billion; QED). Still, $3 billion added to the bottom line is enough to offset the $2 billion loss in profit if there were no TV ads. Actually, since there would still be DTC print and Internet advertising, the profit loss would be less than $2 billion.
Another way to do the analysis: If you cut $3 billion in TV spending from the DTC budget, sales might drop by $6 billion to $278 billion. That’s a drop of $1.2 billion in profit (20% of $6 billion). The $3 billion in savings would more than make up for that loss.