Everyone has an opinion on drug ads. From skits on Saturday Night Live, to the halls of Congress we hear critics mock DTC. Last week I criticized the 9/12 Ad Age story citing terror tactics used by drug marketers. The managing editor, Ken Wheaton, of Ad Age decided to write a follow up column telling pharmaceutical marketers to take a chill pill because he was surprised how they defended their ads in their “terror” story. Ad Age decided to double down in their criticism of drug marketers.
Mr. Wheaton says drug companies are jacking up ad prices to pay for the advertising. This is why these anecdotal stories are so off base. Mr. Wheaton has decided that it is obvious that DTC raises drug prices. Why? Because he says it must be so from his experience. He may be very knowledgeable about general advertising as his title would suggest. He is dead wrong that drug advertising causes high prices. The facts do not support his views. Drug marketers spent a bit over $5 billion on DTC in 2015. That is only about 1.5% of sales. Drug companies do not set their prices based on ad budgets. That might be true in advertising driven consumer brands where ad budgets make up 30% or higher of sales but not where multi billion dollar brands are spending a $50-100 million.
Mr. Wheaton makes some fair points that the drug industry has a reputation problem. He is certainly on point that drug makers must be aware of the negative impact high prices have on this industry image. They have not helped themselves with the recent EpiPen pricing hearings or Martin Shkreli smirking during his hearing day in Washington. Drug companies have the unenviable task of justifying higher prices in the United States versus price controlled developed countries. The American consumer does not like paying more but they also want drug innovation. While the media and political critics doubt the claim that cutting prices will reduce innovation, the economics of the drug business say otherwise. If drug prices were cut 30% to match Europe and Canada, that is coming right out of the bottom line. I challenge any business to reduce its profit in its biggest market by 30% and not affect R&D.
Advertising, however, is not the cause of the pricing issue. Drug companies have had this problem pre and post DTC advertising. Drug ads have become a convenient symbol for criticism of the entire industry. Drug companies do weigh the pros and cons of advertising in terms of causing criticism versus the projected sales increase. What is disturbing is Mr. Wheaton making the unsupported statement that only drug marketers and their marketing partners support their right to advertise. Where is his data that says that? Many consumers would be happy to see drug ads banned, and those folks may even be greater in number than those who want to see drug ads remain on air. Clearly it is not a unanimous view and I suspect many consumers against drug ads feel that way because they think that DTC ads raise their prices.
Mr. Wheaton recommends drug makers stop their ads. Does he feel the same about ads for other products often criticized? What about fast foods, violent video games, beer, explicit music, unproven health supplements, and many others often criticized for causing harm? Mr. Wheaton has taken drug marketers to task for lawfully trying to build awareness of their highly regulated products where every word in their ads is reviewed by FDA. There is no doubt that drug ads are meant to sell product. Drug makers are in the profit business. Profit leads to investment. Advertising allows new competitors to compete with the category leaders.
In a world of no DTC, drug makers will still price as high as the market will bear. That is the same strategy used by every business including what Ad Age charges their advertisers. Mr. Wheaton is very convinced in his anecdotal and observational argument. Ad Age’s Mr. Wheaton is wrong about the facts, however, and in his cynicism about the value of drug ads.