strategic-management

258 MERNOUSH BANTON
Merck & Co. Inc. spent more than $1.5 million in the second quarter of 2009 alone
lobbying on health-care reforms, vaccine funding, and government drug pricing. That was
up 30 percent from the $1.17 million that Merck spent lobbying in the year-ago period.
Merck lobbied on several health care reform issues, including supporting increasing coverage
for uninsured people and requiring research comparing the effectiveness of different
medical treatments. Merck also lobbied against allowing cheaper prescription drugs to be
imported back into the United States from countries that impose price controls and to
require that any such re-imported drugs, if allowed, be certified as safe. Merck also lobbies
against increasing the rebates drug companies pay the government under the Medicaid
drug program and against changing Medicare rules to impose government price controls
on prescription drugs. Merck also lobbies for ensuring that the Medicare program gives
“appropriate access to vaccines,” and for a boost to funding for the Centers for Disease
Control and Prevention’s immunization program for low-income children.
In 1997, the FDA relaxed its rules, allowing drug manufacturers to advertise on television.
The FDA Amendments Act of 2007 went into effect on March 25, 2008, mandating
that published DTC advertisements for prescription drugs must include this printed
message: “You are encouraged to report negative side effects of prescription drugs to the
FDA. Visit www.fda.gov/medwatch, or call 1-800-FDA-1088.”
Most often, drug companies have direct promotional expenses such as contractually
agreed expenses related to market research, detailing aids, agency fees, DTC advertising,
meetings and symposia, trade programs, launch meetings, special sales force incentive
programs, and product samples. A research study released by two York University
researchers estimates that the U.S. pharmaceutical industry spends almost twice as much
on promotion as it does on research and development. The research estimates that from
data collected directly from the industry and doctors during 2004, the U.S. pharmaceutical
industry spent 24.4 percent of its sales dollar on promotion versus 13.4 percent for
research and development, as a percentage of U.S. domestic sales of $235.4 billion.
Research and Development
In 2008, R&D spending in the drug industry reached a record level of $65.2 billion.
R&D investment per employee in the sector is eight times higher than other manufacturing
industries. The entire drug development may take many years, with only a small
percentage of candidate drugs surviving the testing and the FDA approval process. On
average, companies could be working on 100 to 150 new drugs, with the probability of
1 to 3 percent getting approved and reaching the market. The life span from discovering,
developing, clinical testing, and FDA approval for a new drug could take approximately
between 10 to 15 years, with a cost of $500 million to $750 million.
Drug companies face constant challenges as their competitors pioneer in getting
patent approval from the FDA. As stated earlier, drug discovery and development is a very
sophisticated process that can take many years. Because the success of a company is based
on the number of drugs in the market and the years of patent protection, the cost of R&D
plays a major role in the company’s financial position and analysis.
Companies in the pharmaceutical industry spend heavily on R&D to ensure they
have a number of patents in the pipeline. With R&D costs rising, drug makers mostly
focus on products for chronic rather than acute diseases, on the large patient population
with cancer, arthritis, and cardiovascular problems. The top drug categories are medications
for cancer, and ulcer, and treatments for high cholesterol and depression.
According to PhRMA, member companies invested a record $50.2 billion in 2009 in
research and development for new medicines.
Trend
Another factor impacting the industry is the world’s increasing elderly population. The
over-65 age group consumer uses three times more drugs than the younger population and
is expected to reach 690 million by 2025. In the 1990s, more than 150 products were
brought into the market for age-related conditions, and approximately 600 more are in the
development stage. The aging population also has increased the demand for low-cost