Direct-to-Consumer Drug Advertising: Costs, Risks, and Reform

History of Drug Advertising

To understand the current trends in pharmaceutical advertising and their implications, it is important to appreciate the evolution of its history. The earliest formal structure governing the production and distribution of drugs was the 1906 Pure Food and Drug Act, which predated the existence of the FDA (Food and Drug Administration, established 1938). The 1906 Act was administered simultaneously by the Secretaries of the Treasury, Agriculture, and Commerce, and essentially defined adulterated and misbranded drugs as unlawful. Adulterated drugs referred to drugs that deviated from declared standards without clearly identifying those deviations on package labels. Misbranded drugs were drugs that imitated another named product, or from which contents had been removed or substituted. In addition, it was mandatory to state the quantity or proportion of narcotics contained within a drug, and it was prohibited to falsely claim a therapeutic or curative effect.

In 1938 the FDA was established. The basis for its establishment was the mandatory disclosure of information about product uses and risks by manufacturers, packers, and distributors. Specifically, the section of the United States Code (U.S.C.) establishing the FDA stated: "Advertisements must contain information in brief summary relating to side effects, contra-indications, and effectiveness" (21 U.S.C. 352(n)). Further, FDA regulations specify that drugs are deemed to be misbranded if their labeling or advertising is false or misleading in any particular way, or fails to reveal material facts (21 U.S.C. 352(a) and 321(n) and 202.1(e)).

The FDA formally became the primary governing body for regulating food and drug products in the U.S., but not until 1962. Prior to that, the jurisdiction for regulating advertisements and other prescription drugs fell under the Federal Trade Commission, which was responsible for regulating all domestic commodities in interstate commerce. The norm until the 1980s was for pharmaceutical companies to market their products directly to medical professionals—sometimes by offering incentives such as paid vacations and merchandise. After all, the formally educated medical practitioner has the expertise to recommend a treatment appropriate to a patient's affliction, and until that time the doctor was the only source of information between a patient and a prescription medicine. Doctors were, in effect, the incidental salespeople of pharmaceuticals.

During the late 1980s and early 1990s, the advent of alternative medicine hit the marketplace. Consumers were willing to spend out of pocket for goods and services not covered by insurance in the interest of obtaining higher quality or alternative treatments. The determination of quality was subjective; it could relate to how effective a product or treatment was, or it could be based on the product being derived from organic materials. It was sometimes preventative rather than reactive in nature—an area often not covered by insurers. Nonetheless, the pharmaceutical industry took notice of this wayward element of market share, estimated at 30% to 40% of consumers. (Loomis, Howard F. Subluxation-Based Nutrition: How to Compete for Recognition and Revenue in Today's Health Care Marketplace, Part I. The Chiropractic Journal, July 2002.)

A study was commissioned by the New England Journal of Medicine to examine this shift in consumerism. The results were reprinted in Oriental Medicine, Vol. 3, No. 2, in the fall of 1994. The study isolated areas of medicine in which consumers were turning their backs on traditional medical treatment, including back problems, digestive ailments, headaches, and allergies. Recognizing a shift in consumer patterns toward alternative medicine, the pharmaceutical industry reacted by adopting a consumer-oriented promotional strategy.

The FDA's requirement that all advertising list all side effects posed a challenge to this new strategy, however. In addition to dampening a product's appeal, the sheer length of side-effect lists was in some cases prohibitive to placing effective advertisements. After three years of lobbying and unverifiable millions of dollars in contributions, Congress enacted new legislation in 1997. The legislation relaxed the previous guidelines so that the FDA now granted pharmaceutical companies permission to advertise prescription drugs by using the names of products and specifying the condition each drug is designed to treat—dubbed "direct-to-consumer advertising."

The FDA set forth parameters for acceptable advertising standards under this new framework. The ads must indicate where consumers can get more information and must refer to physicians and pharmacists as information sources. Major side effects and risks—no longer all side effects—must be stated explicitly, although this requirement is often satisfied in small print or rapid speech. Specifically, the new regulations, formally referred to as Guidance for Industry: Consumer-Directed Broadcast Advertisements, require manufacturers to "provide an effective mechanism by which the majority of a potentially diverse audience can receive the advertised product's approved labeling."

The Guidance further states that ads utilizing broadcast media must contain the following elements: (1) a toll-free number, (2) a reference to DTC print advertisements, (3) an Internet web page address, and (4) a statement directing consumers to physicians and/or pharmacists for additional information. It is noteworthy that all of these requirements are predicated on the underlying assumption that the advertisements are truthful and depict an adequate notion of risks and effectiveness. Misleading implications—such as using a proprietary name to imply unique effectiveness, or comparing a drug's effectiveness to other products using outdated or incomplete data—are in direct violation of FDA standards. The ads are supposed to be, according to FDA guidelines, understandable to the general public. These broad guidelines apply to all audiences and all medications and are not delineated by target population or specialty.

The interpretation of what constitutes "fair balance of risk and benefit information" may vary by audience or specialty; hence a wide window of speculation exists in defining what constitutes adherence to the FDA's guidelines. The FDA does not presently have any authority to pre-screen advertising, so that any identification of non-compliance with these broad standards would occur after the fact. In essence, the FDA is relying on pharmaceutical companies to voluntarily comply with the standards set forth.

The first true direct-to-consumer advertising campaign occurred in 1981, when an ibuprofen producer ran an ad in a consumer-oriented magazine touting the virtues of the pain reliever, which at that time was available only by prescription. (Pines, WL. Direct-to-consumer promotion: An industry perspective. Clinical Therapeutics. 1998;20:96–99.) More ads surfaced mimicking the ibuprofen model until the FDA in 1983 requested that manufacturers voluntarily halt the practice until it could be sufficiently regulated. The moratorium remained in place until 1985, when, unable to directly prove that the advertising was endangering consumers, the practice was allowed to continue. As a safeguard against misleading claims, companies were either allowed to advertise a new therapy for a particular disease without stating the drug involved, or if the drug was named, the condition had to be omitted. The rules requiring full disclosure of side effects were still in effect, and print ads usually satisfied this requirement by reprinting the package insert within the advertisement itself. It was the 1997 Act by Congress, however, that opened advertising to broadcast media.

Broadcast media includes not only television and radio, but also the Internet, which is presently unregulated and falls outside the jurisdiction of U.S. law—a fact that alone poses concerns about the ethical fabric of advertising through that medium. In addition, the design of television and radio does not allow for the inclusion of the entire contents of packaging labels within a spoken or visual ad lasting a fraction of a minute. The relaxing of rules to require disclosure of only "major" side effects is equally disconcerting, because by definition this means that some potential side effects—although applicable to a minority of the population—will not be revealed.

The National Institute for Health Care Management, a nonprofit watchdog agency, estimated that expenditures in pharmaceutical advertising in the U.S. grew from an estimated $55 million in 1991 to $2.5 billion in 2001. While the numbers seem exponential, the Institute points out that the ads represented merely 16% of the entire budget for drug promotions in 2001. A historic perception perpetuated by the drug industry is that costs are driven by expenditures in research and development. This has been considered a valid argument, as advances in drug research are indeed beneficial to humanity. However, recent examination of the industry's expenditures indicates that marketing (34.4%), not R&D (13.7%), comprises the lion's share of operating expenditures.

Families USA, a nonprofit group that champions affordable health care, reported that based on information obtained from the Securities and Exchange Commission, the top nine drug makers spent twice as much to advertise drugs as to develop new ones. One such company, Merck, spent 15% of its $40 billion in 2001 sales on advertising, compared to 6% on R&D.

The DTC Advertising Phenomenon

During Congressional testimony, a professor of pharmaceutical economics named Stephen Schondelmeyer stated that advertising comprised approximately 30% of the price of a medicine in the United States, compared with 7% in Great Britain. Industry representatives countered by saying that half of the promotional expense had been attributable to free samples for patients. In addition, representatives disputed estimates of R&D expenses, claiming that the $500 million figure used as a baseline for developing a new drug was more likely between $675 million (Lehman Healthcare) and $880 million (Boston Consulting Group). Even so, when compared to outlays for advertising and promotion, the numbers speak for themselves.

In a study published by the Kaiser Family Foundation in November 2001 entitled "Prescription Drug Trends: A Chartbook Update," sampling—or the value of samples left at sales visits to office-based physicians by pharmaceutical sales representatives—comprised at least half of promotional expenditures. The samples are valued at retail, which is a misleading figure, since the cost of placing an ad in a newspaper or magazine does not come with a retail markup. The cost of this portion would therefore be significantly lower if adjusted to reflect the cost basis of the samples.

The following table shows the breakdown of promotional spending by category (as a percentage of total) from 1996 to 2000:

Promotional Spending by Category (% of Total), 1996–2000

Sampling: 53.5% (1996), 55.0% (1997), 52.9% (1998), 52.1% (1999), 50.6% (2000). Detailing: 32.8%, 30.6%, 32.5%, 31.2%, 30.6%. DTC Advertising: 8.6%, 9.7%, 10.6%, 13.3%, 15.7%. Professional Journals: 5.0%, 4.6%, 4.0%, 3.4%, 3.1%.

As the data illustrate, total promotional spending by pharmaceutical companies in the United States reached nearly $16 billion in the year 2000. "Detailing" is considered to consist of expenses for sales activity of pharmaceutical representatives directed to office-based and hospital-based physicians. According to Kaiser, approximately 83% of this spending is estimated to be for office-based sales visits. The remainder—approximately 17% of detailing costs—consists of unspecified promotional expenses. In dollar terms, between 1996 and 2000, $3.3 billion was spent in unspecified promotional expenses to doctors—the equivalent of the cost of producing 4.7 new drugs at an average cost of $700 million each.

Total Promotional Spending ($ Millions), 1996–2000

Sampling: $4,904 (1996), $6,047 (1997), $6,602 (1998), $7,230 (1999), $7,954 (2000). Detailing: $3,010, $3,365, $4,057, $4,320, $4,803. DTC Advertising: $791, $1,069, $1,317, $1,848, $2,467. Professional Journals: $459, $510, $498, $470, $484. Total: $9,164, $10,991, $12,474, $13,868, $15,708. Source: IMS Health, Inc., Integrated Promotion Service, and Competitive Media Reporting, 1996–2001.

A further examination of the data reveals the change in spending for each category over this period. While sampling (12.8% average annual growth) and detailing (12.4%) increased at a steady pace, and journal spending increased only slightly (1.4%), direct-to-consumer advertising increased at an average annual rate of 32.9%—more than threefold relative to the other categories. The shift in the industry's promotional strategy indicates a strong lean toward direct-to-consumer advertising.

This shift from marketing directly to medical professionals to targeting consumers is largely taking place on television. The Kaiser report shows that by the year 2000, $1.5 billion of the $2.5 billion spent on DTC advertising was for television placement, up from just $36 million in 1994. Since 1994, television ads increased at an average annual rate of 87.9%, while print ads increased at an average of 25.4%. (Source: Sonderegger Research Center analysis, based on data from IMS Health, Inc., Integrated Promotion Service, and Competitive Media Reporting, 1994–2001.)

It is true that in America, the demand for medical cures is prevalent among consumers. The Federal Trade Commission estimates that 75% of the population complain of physical problems. (Greenan, James P. Report of the Presiding Officer on Proposed Trade Regulation Rule: Concerning the Advertising of Over-the-Counter Antacids. Washington, D.C.: Federal Trade Commission, 1979.) Ailments range from general fatigue, the common cold or flu, and aches and pains to much more serious illnesses. In a society marked by convenience, it is a common impulse to resolve any discomfort by taking a pill. Such societal norms are often reinforced by television and the media—a culture largely spawned by the abundance of advertisements for miracle products and the images they portray, from immediate relief to increased vitality and even youthful or attractive appearance.

The pharmaceutical industry is no different from any other industry in its use of media and advertising strategy to capture a larger share of the market. In a report entitled "Top 10 Developments on the Pharmaceutical Landscape," published in Motion Magazine on July 26, 2001, it was estimated that 40% of the $2.5 billion spent on advertising was to promote a total of ten products—new, expensive drugs earmarked for long-term use by a wide audience. (Mintzes, Barbara. The Centre for Health Services and Policy Research, Vancouver, British Columbia, Canada. Motion Magazine, July 26, 2001.)

Creating Demand

It is becoming increasingly evident that direct-to-consumer advertising is creating demand for specific drugs—drugs that may not be appropriate or necessary. According to a 1998 study reported in Prevention and Metro Doctors magazines, direct-to-consumer advertising "encouraged a projected 21.2 million consumers to talk to their doctor about a medical condition or illness they had never talked with their doctor about before seeing the advertising." While consumers may resort to newspapers and periodicals to investigate a drug, a study published in the New England Journal of Medicine in June 2000 found that news articles often contain little or no substantive information, particularly with regard to cost or risk. Researchers reviewed 207 articles and found that only 47% mentioned risks and only 30% mentioned costs. In addition, 170 stories cited an expert or a scientific study, and 50% of those experts and studies were financially tied to the drug manufacturer.

According to Scott-Levin, a drug marketing research firm in Newtown, PA, while all office visits to doctors rose 2% during the first nine months of 1998, visits for conditions targeted by ad campaigns rose exponentially. Patient visits for smoking cessation rose 263%, visits to treat impotence jumped 113%, hair loss rose 30%, osteoporosis 22%, high cholesterol 19%, and allergies 11%. (Maguire, Phyllis. How Direct-To-Consumer Advertising Is Putting The Squeeze On Physicians. ACP-ASIM Observer, March 1999.)

Increases in total drug spending are concentrated in a relatively small number of therapeutic categories. Four drug categories account for 30.8% of the total $42.7 billion increase in drug spending between 1993 and 1998: antihistamines, antidepressants, cholesterol-lowering agents, and anti-ulcerant drugs. (Barents Group for the National Institute for Health Care Management, 1999.)

Is all this advertising paying off? Statistics indicate that it is. Prescription drug spending is the most rapidly growing segment of all healthcare spending. In the year 2000, an estimated $116.9 billion in spending can be attributed to prescriptions—almost double the amount spent in 1995. Conversely, expenditures for physicians and clinical services increased approximately 30%, whereas expenditures for hospital care increased 20%. Between 1997 and 2000, the Kaiser group cites the factors contributing to rising prescription drug expenditures as: 24% due to manufacturing price increases, 28% due to the type of prescriptions used, and 48% due to increased utilization (i.e., the number of prescriptions dispensed). The average annual percent change per year during the same period was 3.9% for price, 7.1% for utilization, and 4.2% for the types of prescriptions used. The study measured the same parameters for the period 1993–1997; the average annual percent changes for those years were 1.9% for price, 4.6% for utilization, and 3.2% for the type of prescription. Price and utilization had increased the most between the two periods.

The Kaiser Group notes that the "top 10 drugs ranked by DTC advertising spending accounted for about 38% of all DTC spending in 2000. Six of the top 10 DTC spending products also were among the top 20 drugs ranked by number of prescriptions dispensed."

Prescription Drugs With the Most Direct-to-Consumer Advertising, 2000

1. Vioxx (Anti-inflammatory): $160.8M DTC spend, ranked 20th by prescriptions dispensed. 2. Prilosec (Anti-ulcerant/PPI): $107.9M, ranked 5th. 3. Claritin (Antihistamine): $100.3M, ranked 9th. 4. Paxil (Anti-depressant/SSRI): $92.1M, ranked 14th. 5. Zocor (Cholesterol-lowering): $91.2M, ranked 17th. 6. Viagra (Erectile Dysfunction): $89.8M, ranked 45th. 7. Celebrex (Anti-inflammatory): $78.8M, ranked 11th. 8. Flonase (Asthma): $78.1M, ranked 50th. 9. Allegra (Antihistamine): $67.0M, ranked 31st. 10. Meridia (Weight-loss): $65.0M, not ranked. Total DTC spend for top 10: $931M out of $2,467.1M total, or 38%. Source: DTC advertising amounts from Competitive Media Reporting, Stradegy Report, March 2001. Top 200 rankings from IMS Health, Inc., National Prescription Audit Plus, published in Pharmacy Times, April 2001.

The number of prescriptions dispensed increased from 1.87 billion in 1992 to 2.98 billion in 2000, according to the Sonderegger Research Center. Fifteen of the top twenty drugs ranked by dispensed prescriptions are brand-name drugs. Of those brand-name drugs, the earliest date marketed is 1986, whereas the generic drugs in the list were marketed as far back as 1963. The numbers verify that newer, brand-name drugs are dominating the market for dispensed prescriptions.

For brand-name pharmaceutical manufacturers, the cost of actually producing the product (cost of sales) was 24.9%, compared to 13.7% for research and development and 34.4% for marketing, general, and administrative expenses. Hence, the cost for marketing (34.4%) more than doubled the cost for R&D (13.7%). In addition, net profit (23.6%) was significantly higher than R&D costs. By comparison, generic drug manufacturers show a cost of sales of 50.4%, marketing expenses of 21.4%, R&D of 6.0%, and net profit of 17.2%.

It is common knowledge that newer drugs are more costly than older and generic drugs. This is due to the up-front costs of getting a new drug to market—the research, testing, and approval process; the advertising and promotion cost; and the distribution cost. Once these costs have been absorbed and the drug is accepted into the marketplace, the cost of production decreases over time as advertising becomes less necessary, R&D costs disappear, and economies of scale can be achieved in production.

In comparing expenditures between brand-name and generic pharmaceutical manufacturers, the differences are as follows: the overall cost of sales is 50.6% higher for generics; marketing expense is 60.7% lower for generics; research and development is 128.3% less for generics; and the profit margin is 37.2% lower for generics.

Since 1996, generic drugs have comprised about 42% of the share of total prescriptions dispensed. The share of annual retail prescription sales for generic drugs declined from 20.5% in 1996 to 17.8% in 2000, consistent with the growth in retail prices for brand-name drugs during the same period.

When compared to the overall economy, the average retail price of a prescription tripled the rate of increase of general inflation. Information from IMS Health, Inc. reveals that the average retail price for a prescription was $45.79 in 2000, as opposed to $22.06 in 1990. Moreover, the average retail price for a brand-name prescription was $65.29 in 2000—more than triple the average price for a generic in the same year ($22.06). When viewed from the perspective of sales dollars, brand-name drugs stand out even further, since generic drugs are typically associated with a lower cost basis.

The numbers reveal two important trends: the advertising is, in fact, creating demand for the products it promotes, and those products are generally newer and higher in price. Newer products have less history in terms of their effectiveness, safety, and reliability. Moreover, newer products are not necessarily new inventions—they are often variations of existing medications that already have a track record. Is this trend, then, in the best interest of the consumer? Are these additional medicines creating a healthier and more informed generation, or simply generating a secondary market, such as one to treat the adverse side effects caused by newer drugs?