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Report links high drug prices to marketing costs, executive payouts and profits

A new report by a US consumer health organisation has challenged drug industry claims that high drug prices are necessary for research and development.

A NEW report by the consumer health organisation Families USA refutes the pharmaceutical industry’s claim that high and increasing drug prices are needed to sustain research and development. The report, Off the Charts: Pay, Profits and Spending by Drug Companies, documents that drug companies are spending more than twice as much on marketing, advertising, and administration than they do on research and development; that drug company profits, which are higher than all other industries’, exceed research and development expenditures; and that drug companies provide lavish compensation packages for their top executives.

The report comes on the heels of a recent Families USA analysis that found prices rose by more than twice the rate of inflation last year for the 50 most-prescribed drugs to seniors.

Among the nine pharmaceutical companies examined in the report - Merck, Pfizer, Bristol-Myers Squibb, Pharmacia, Abbott Laboratories, American Home Products, Eli Lilly, Schering-Plough, and Allergan - all but one (Eli Lilly) spent more than twice as much on marketing, advertising and administration than they did on research and development, and Eli Lilly spent more than one-and-one-half times as much. Six out of the nine companies made more money in net profits than they spent on research and development last year. [See Chart 1.]

Chart 1: 2000 Financials for US Corporations Marketing Top 50 Drugs for Seniors

Company

Revenue

(Net Sales in millions of dollars)

Percent of Revenue Allocated to:

Profit

(Net Income)

Marketing/

Advertising/

Administration

R & D

Merck and Co. Inc

40,363

17%

15%

6%

Pfizer Inc

29,574

13%

39%

15%

Bristol Myers Squibb Co.

18,216

26%

30%

11%

Pharmacia Corp.

18,144

4%

37%

15%

Abbott Laboratories

13,746

20%

21%

10%

American Home Products Corp.

13,263

-18%

38%

13%

Eli Lilly and Co.

10,862

28%

30%

19%

Schering-Plough Corp.

9,815

25%

36%

14%

Allergan Inc.

1,563

14%

42%

13%

 

The report also documents profligate spending on compensation packages for top pharmaceutical executives. The executive with the highest compensation package in the year 2000, exclusive of unexercised stock options, was William C Steere, Jr, Pfizer’s Chairman, who made $40.2 million. The executive with the highest amount of unexercised stock options was C A Heimbold, Jr, Bristol-Myers Squibb’s Chairman and CEO, who held $227.9 million in unexercised stock options. [See Charts 2 and 3.]

The Five Highest-Paid Drug Company Executives

Chart 2: 2000 Annual Compensation Exclusive of Unexercised Stock Options

Executive

Company

Compensation

William C. Steere, Jr
Chairman

Pfizer Inc.

$40,191,845

John R. Stafford
Chairman and CEO

American Home Products Corporation

$27,008,927

Edward M. Scolnick
Executive VP

Merck and Co., Inc

$26,454,600

Richard Jay Kogan
Chairman and CEO

Schering-Plough Corporation

$21,444,020

David W. Anstice
President, the Americas

Merck and Co., Inc

$19,600,975

 

 

Chart 3: The Five Drug Company Executives with the Largest Unexercised Stock Options in 2000

Executive

Company

Compensation

C.A.Heimbold, Jr
Chairman and CEO

Bristol-Myers Squibb Company

$227,869,513

Raymond V. Gilmartin
Chairman, Pres. and CEO

Merck and Co, Inc

$181,252,976

William C. Steere, Jr
Chairman

Pfizer Inc.

$130,944,439

K.E. Weg
Vice Chairman

Bristol-Myers Squibb Company

$84,282,547

John R. Stafford
Chairman and CEO

American Home Products Corporation

$81,847,569

 

‘Sugarcoating the pain’

‘Pharmaceutical companies charging skyrocketing drug prices like to sugarcoat the pain by saying those prices are needed for research and development,’ said Ron Pollack, Families USA’s executive director. ‘The truth is high prices are much more associated with record-breaking profits and enormous compensation for top drug company executives.’

Pollack added, ‘Drug companies’ commitments to research and development are dwarfed by those companies’ expenditures for marketing, advertising, and administration.’

In 2000, the pharmaceutical industry was, once again, the most profitable US industry, and profit margins in the industry were nearly four times the average of Fortune 500 companies. According to the Families USA report, three companies - Merck, Bristol-Myers Squibb, and Abbott Laboratories - received at least twice as much in net profits than they spent on research and development. Three other companies - Eli Lilly, Schering-Plough, and Allergan - received more money in net profits than they spent on research and development.

‘Extraordinarily misleading’

‘The pharmaceutical industry’s repetitious cry that research and development would be curtailed if drug prices are moderated is extraordinarily misleading,’ said Pollack. ‘If meaningful steps are taken to ameliorate fast-growing drug prices, it is corporate profits, expenditures on marketing, and high executive compensation that are more likely to be affected, not research and development.’

The Families USA report is based exclusively on the annual reports submitted by the pharmaceutical companies to the Securities and Exchange Commission (SEC). Since Families USA periodically reports on price changes for the 50 drugs most frequently prescribed for seniors, the report focused on the SEC filings for fiscal year 2000 of the nine pharmaceutical companies that market, or are the  parent corporations of the companies that market, these 50 drugs. Mylan Laboratories, a much smaller company than the nine companies analysed, could not be examined since it had not filed its annual proxy statement with the SEC at the time the report went to press. - Families USA                                           

The full report is available on the Families USA website, www.familiesusa.org.

Families USA is the national organisation for health care consumers. It is a non-profit and non-partisan advocate for affordable and high-quality health and long-term care for all Americans.

 


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