John Edwards and the drug spending myth

The presidential hopeful has joined a cabal of critics who wrongly blame soaring drug prices on the high costs of advertising, writes Fortune's John Simons.

By John Simons, Fortune writer

(Fortune) -- Some myths just never die. Democratic presidential candidate John Edwards helped to propagate a whopper at a stump speech in Laconia, New Hampshire on Sunday: That is, that drugmakers spend more on sales and advertising than on scientific research.

To most television viewers, that probably sounds about right. But it's far from the truth.

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John Edwards, the candidate for president, wants to impose new limits on drug advertising.

Edwards, while introducing components of a broader healthcare plan, proposed to ban direct-to-consumer advertising of new pharmaceuticals until after the drugs have been on the market for two years.

"You've seen these ads. You know who's paying for them, right? You are," Edwards reportedly told the gathering. He went on to claim that medicine makers spend "twice as much" on marketing and administration as they do on research.

But that's not true. U.S. drugmakers shelled out more than $55 billion on medical research in 2006, according to market research firm IMS Health. That compares to just $12 billion companies spent on sales, promotion to doctors, and ads targeting patients.

Drug companies, of course, are obvious targets. For a host of reasons, consumers are spending more on medication than ever before. At the same time, however, only 21 percent of Americans believe Big Pharma does a good job serving its customers, down from 60 percent a decade ago, according to a recent Harris Poll. The only industries that have fallen more in the public's esteem: Oil and airlines.

Then again, drug companies deserve some criticism. They spend the bulk of their marketing dollars meeting with doctors and advertising in medical journals, while consumer education is mostly limited to cursory 30-second television spots. That's a missed opportunity that leaves drugmakers vulnerable to claims of price gouging.

Still, Edwards' knock is unwarranted.

In arguing that Big Pharma spends more promoting itself than researching cures, Edwards' speechwriters conveniently lumped "marketing" and "administrative" costs together. That's grossly misleading.

In most Fortune 500 financial reports "administrative costs" or "general expenses" are often catchall categories for anything that isn't related to the direct costs of manufacturing or sales. It often includes, for example, office leases and accounting costs.

Unfortunately for them, many drug companies use a combined line item in their financial reports for sales and administrative costs, which is probably the source of the oft-repeated myth that high marketing costs are the primary culprit behind rising drug costs.

As for Edwards's idea of a two-year moratorium on advertising for newly introduced drugs? That might be wise for, say, medications with long lists of side effects. But it's hard to get policy wonks to pay attention to worthwhile proposals as long as politicians are chasing bigger headlines. Top of page