Pfizer is one of the largest pharmaceutical companies in the world. Their enormous size and well-know products allow Pfizer to control much of the pharmaceutical industry. They base their company on research throughout the world in order to discover and expand new products. Pfizer’s products can increase the quality of life in living with a medical disorder or actually cure the sickness. The company believes it has the tools to lead the way into the next generation of the industry. Growth and pertinent resources will allow Pfizer to bring consumers the opportunity of better health and well-being. They influence health in over 150 countries and strive to enhance the health of humans in underdeveloped countries. Pfizer seeks to achieve these goals by specializing into four separate groups: Pharmaceuticals group, Consumer Healthcare, Global Research and Development and Animal Health Group. (www.pfizer.com)
Produce and market pharmaceutical products
Produce goods to meet consumer demands including both over-the-counter and generics
Scientists research and produce innovative drugs.
Develop and market drugs to help improve the health of animals
Pfizer’s Four Groups:
1. Pharmaceutical Group:
The Pfizer Pharmaceutical Group produces five of the world’s top-selling medicines, and nine are #1 in their therapeutic class in the U.S. market. Eight of the medicines will earn revenues of more than $1 billion globally this year. Pfizer has recently merged with Warner-Lambert making them the #1 pharmaceutical company. The “new” Pfizer has been extremely successful with its innovative products over the past few years. The company has one of the largest groups of scientists in the field and put the effort forward to continue the success. Their work has produced three of most successful new products launches in the industry. Lipitor, Viagra and Celebrex make-up the products that have created an instant impact on the industry. Pfizer medicines are produced to treat any of the following conditions: Cardiovascular/Lipid Lowering, Infectious Diseases, Central Nervous System Disorders, Arthritis, Erectile Dysfunction, Allergies, Diabetes, and Women’s Health Care. Pfizer helps to manage and treat the unfortunate stated conditions. (www.pfizer.com)
2. Consumer Healthcare Group:
Pfizer’s Consumer Healthcare program focuses on making the company the most trusted brand in the market. Pfizer has been producing innovative medicines for over a century and has evolved into a well-known and trusted brand name. Their products comprise some of the leading over-the-counter brands. They have 13 brands that are ranked #1 in the U.S. in their categories. “In 1999, combined revenues from the consumer group totaled $5.5 billion. With an aggressive growth strategy featuring new products, global expansion, and the promise of bringing a wide range of Pfizer prescription medicines "over-the-counter," the future of this dynamic group is highly promising.” (www.pfizer.com) The Consumer Healthcare group has adapted with the changing preferences of the consumer. More people today would rather buy an over-the-counter drug to treat a medical condition than have to go see a doctor and get a prescription filled. People prefer self-medication when they know what is wrong, and the condition is minor. Pfizer has realized the change in preference and are making a number of prescription drugs available over-the-counter.
Their consumer healthcare has products that treat illnesses ranging from upper respiratory tract sicknesses to eye care. They have many familiar names that most people would not associate with the company. To treat upper respiratory tract conditions Pfizer supplies Benadryl, the #1 over-the-counter antihistamine in the U.S., and Sudafed, the #1 over-the-counter sinus treatment in the U.S. For oral care Pfizer produces Listerine, the #1 therapeutic mouthwash in the world, and Efferdent, which is a major name for seniors who need dentures. The company supplies Zantac 75 and Rolaids to help with acid indigestion. For eye care they produce Visine, the #1 over-the-counter eye drops. Pfizer also provides a range of gum and candy including Certs, Bubblicious, Chiclets and Halls. This is just to name a few of the wide variety of products supplied by the Pfizer Consumer Healthcare group. They have many goods that people never thought were connected to the drug company.
3. Global R&D:
Pfizer’s Global Research and Development (R&D) is probably the group that the company takes the most pride in. Pfizer generates the largest pharmaceutical R&D organization. In 2002, they devoted $4.7 billion of their budget to research and development. The new world headquarters of Pfizer Global Research and Development (PGRD) is currently being built right here in New London, CT. “Pfizer’s scientists have produced breakthroughs in a wide range of research areas, including depression, erectile dysfunction, high cholesterol, HIV infection, hypertension, and systemic fungal infections. And today they are taking on some of the world's most intractable diseases, including cancer, arthritis, osteoporosis, and stroke.” (www.pfizer.com) The scientists search for treatments for more major disease groups than any other company. Since Pfizer is a well-developed and successful company, they have the resources to provide its labs with the most innovative resources and technology. The investments have paid off with Pfizer becoming the leader in creating new drugs. Pfizer does put the most revenue into R&D out of any other pharmaceutical company. However, is this a large amount when it is compared to total revenue? Do they devote too much money to other activities, such as advertising, and a minimal amount into R&D? If Pfizer and other companies were to devote more resources to R&D, there would probably be more new drugs on the market today. These issues and questions will be addressed by the end of the paper through examining Pfizer’s business practices.
4.Animal Health Group:
The last group that composes Pfizer is the Animal Health Group. Most people are probably unaware that this group exists. They produce anti-infectives, anti-parasitics, anti-inflammatories, vaccines and other medicines for more than 30 animal species. Pfizer has four plants that create animal products, making them the leader in every animal health market. The Animal Health Group protects livestock by providing vaccines and anti-parasites for cattle, swine and poultry. They promote pet health by supplying a product that protects dogs and cats from heartworm and fleas. Also, the group develops new therapies that give animals treatment for troublesome problems.
MONOPOLISTIC COMPETITIVE MARKET:
Pfizer exists in a monopolistically competitive situation. They are involved in many markets because of their great variety of products, and the majority of those markets are monopolistically competitive. This means that there is a market where many firms produce similar goods, but each maintains some independent control of its own price. Although Pfizer faces a monopolistically competitive environment, they still hold a great deal of market power. Market power refers to the ability to alter the market price of a product. The amount of market power can be described by the concentration ratio. The concentration ratio within the drug industry is relatively high, meaning that the combined market share of the top four or eight firms is very high for a monopolistically competitive situation. However, Pfizer is not quite in an oligopoly situation. The concentration ratio shows that individual firms are not powerless. The leading 8 companies accounted for 36% of total industry sales in 1992 out of a reported 640 companies. (Sherer, 1304) Obviously, this demonstrates that there is a certain monopoly aspect involved. If a perfectly competitive firm increases the price of its product, it will inherently lose all of its customers. The loose occurs because the firm faces a perfectly horizontal demand curve and takes the market price as it is. The monopolistically competitive firm, Pfizer, faces a downward sloping demand curve for its output. Hence, Pfizer has a certain amount of control over the price of their products. One thing to note is that Pfizer’s competitors are not completely affected by their changes. The market shares of rival firms are not necessarily altered by one firm’s price changes. (Perloff)
Another aspect of monopolistic competition is the relatively low barriers to entry that exist. This aspect can be seen best in Pfizer’s over the counter products and most of their pharmaceuticals and veterinary drugs. Many rival firms do not face high barriers to enter these markets. Disregarding patents for the moment, there does not exist many obstacles that make it difficult or impossible for would-be producers to enter a particular market. This aspect shows the competitive side of the monopolistic competition model.
The most distinguishable feature of monopolistically competitive behavior is product differentiation. Product differentiation is the idea that certain features make one product appear different from competing products in the same market. Each firm has a “brand image” or another distinct identity to its consumers. Brand loyalty plays a huge role for Pfizer. Pfizer is seen as a legitimate company and gives consumers a certain amount of trust with their products. Things that allow for the trust to occur are advertising campaigns and certain packaging and sales strategies. Pfizer, in particular, is known to be very clever with advertising and devotes a great deal of money to advertising. In a perfectly competitive market, it is assumed there are homogeneous products, and products are viewed by consumers as almost interchangeable. Firms would face a horizontal demand curve because of the close interchangeable substitutes. However, a monopolistically competitive firm confronts a downward sloping demand because of product differentiation. At first glance the demand curve in monopolistic competition seems to be very similar to that faced by a monopolist, however there is a profound difference. In a monopoly, there are no other firms. Pfizer does face this monopoly situation when it has a patent, and this will be discussed later. However, because Pfizer does compete against other firms when there are no patents, the assumption can be made that it is in monopolistic competition. Therefore, Pfizer has only its brand image, and still competes with other companies that offer close substitutes. The brand name image demonstrates that the extent of market power that Pfizer holds depends directly on how successfully it can differentiate its products from other firms. The greater the brand loyalty Pfizer can create, the more the demand curve facing them becomes less price-elastic. (Perloff)
Another idea of interest in the monopolistic competition model is the idea of nonprice competition. Firms within this type of situation compete for sales and profits. Perfectly competitive firms, generally compete on the basis of price. Competitive firms win by achieving a greater efficiency and offering their products at the lowest possible price. The firms focus on price because in perfect competition, firms face a horizontal demand curve and only compete on the basis of price. Firms in monopolistically competitive environments, such as Pfizer, do not compete in the same way. They compete uniquely because of differentiated products. Each firm has its own captive market, where consumers tend to prefer a particular brand over other competing brands. Therefore, price reductions by one firm will not cause a great number of consumers to switch brands. Therefore, price reductions are not the most effective way to increase sales or market share, which demonstrates the nonprice competition in which Pfizer engages in. Anyone who watches television reads newspapers, or listens to the radio will easily see this. The most effective and most prominent form of nonprice competition is advertising. How Pfizer is one of the leading companies in advertising will be discussed later. Their goals are to continually enhance their product image and to continually increase the size of its captive market. Any company with a successful advertising campaign will create a huge perceived value with buying their products. This value is shown by a stronger brand loyalty, and will eventually lead to greater demand for their products and an increasingly smaller price elasticity. For the most part, achieving this brand image can be used to help sell related products as well. As long as Pfizer can successfully advertise and achieve brand loyalty, the overall behavior of nonprice competition can be expected.
The problem that nonprice competition brings about is the problem of inefficiencies. In general, monopolistic competition tends to be far less efficient in the long run than a perfectly competitive industry. The differences exist in both production inefficiency and allocative inefficiency. Production inefficiency leads to above average minimum cost, and allocative inefficiency leads to the wrong mix of output. Generally, inefficiencies occur because firms do not compete on the basis of price and are not forced to be as efficient as they could be.
PFIZER AS A MONOPOLY:
As mentioned before, Pfizer and other firms in the pharmaceutical industry are not always competing in monopolistic competition because of the existence of patents. When a firm has a patent they are the sole producer of the product until the patent runs out. Therefore it is argued that the firm will act as a monopoly in the short run. When a firm is a monopoly, it has market power. Again, market power refers to the ability to alter the market price of a good. The natural goal for a monopolist is to maximize profits. Even though profit maximization is the goal of the monopolist, there are still limitations to their power. The firm must still compete with the market demand curve. The point at which the firm chooses to produce will depend on their own perceptions of effort, profit, and risk. The firm must also know this price elasticticity of the demand curve. The greater the price elasticity, the more a monopolist will be frustrated in its attempts to establish both high prices and high volume.
Although monopolies appear negative at times, there are certain views that they might somehow benefit society. Because of monopolies within the pharmaceutical industry, firms have a very high incentive to pursue research and development efforts to obtain patents. The pharmaceutical industry encourages companies to be both innovative and inventive, and is why patents exist within the industry. Among the 24 US industry groups, pharmaceuticals devoted the greatest fraction, 16.6%, of its total 1992 outlays to basic research. For all other industries, the comparable average was 5.3%. (Sherer, 1307) This fact demonstrates the incentives pharmaceutical companies have to get a patent and obtain monopoly power. Nevertheless, monopolies still have to worry about potential competition and will behave accordingly. They will not be a monopoly forever.
Pfizer has to take all of these factors into account when they produce their products and market them. They encourage research and development because there is great incentive to do so. They want to obtain a patent to reward their efforts. Pfizer also has to advertise to be successful in creating a brand image that consumers will trust. If they can advertise successfully, then more of their consumers will buy more of their products and there will be less price discrimination. Also, Pfizer must be producing efficiently in order not to waste existing resources. They must produce their products at low costs to help maintain their competitiveness.
The preceding paragraphs have displayed the general economic situation that Pfizer faces. Most of the time Pfizer functions in a monopolistically competitive environment and competes on the basis of nonprice competition. Pfizer has a heavy incentive to compete in these markets while at the same time commit resources to research and development practices. The incentive is to be inventive and obtain a patent that allows them to act as a monopoly for some time and to maximize profits. The following paragraphs will describe the specifics of the pharmaceutical industry.
PFIZER AND THE PHARMACEUTICAL INDUSTRY:
The pharmaceutical industry is a very unique industry in which Pfizer operates. This industry has many distinguishable characteristics, which make it different than other industries. This section will attempt to briefly explain some of these differences with the hope of better understanding Pfizer’s organization and how it operates.
First, the nature of demand within the health sector is far different than many other industries. Most pharmaceutical drugs require prescriptions, which means that the decisions about drugs are largely made by physicians and not the actual consumers of the drugs. Physicians, therefore, serve as agents to the consumer, which leads to a general information problem for patients, who leave most of the decision making to the physician. These prescription drugs require a physician to prescribe, however, over-the-counter drugs (OTC) do not. Patients now can select certain medications by themselves in various retail outlets.
A second distinguishable characteristic of demand is the existence of insurance. Purchases of drugs are often reimbursed in some manner by insurance. The reimbursement definitely plays a factor in influencing the demand for various prescription drugs. “In the US, the share of outpatient drug costs paid for out-of-pocket by consumers fell from 82.4% in 1970 to 33.9% in 1995, largely as a result of expanded private health insurance coverage.”(Scherer, 1301) With or without insurance, most consumers in industrialized nations are willing to pay a rather high price to help fight a painful or debilitating infection or problem. Therefore, the demand for many drug products is fairly inelastic up to the point where income effects begin to occur.
The existence of patents limits the supply of alternative drugs for a certain time period, and there will be a rather high price for well-established pharmaceutical products. To highlight this fact, in 1987, among all manufacturing industries in the US, pharmaceuticals had the 6th highest price/cost margin at 61.4%; the average for all other manufacturing industries was 30.5%. (Scherer, 1302) This price/cost margin has led the government to intervene into areas of price-setting and other aspects of pharmaceutical marketing. However, the government has to be careful not to take away incentives to research and develop new drugs, and allow pharmaceutical companies to gain some profit to cover for their investments in research. Research and development is a huge part of the industry. The intensity with which research and development has been pursued has been rising over time. “In 1975, companies with membership in the Pharmaceutical Research and Manufacturers of America association had a weighted average R&D/sales ratio of 11.6% in their ethical drug divisions; by 1995, the comparable average was 19.4%.” (Sherer, 1302) This fact shows the heavy emphasis on R&D in the industry, and indeed has allowed companies to supply a steady stream of new and improved drugs to the market.
A pharmaceutical company, then, has to determine how much of its resources to devote to R&D. Within the last decade, there has been an enormous shift in company spending; advertising has increased dramatically. Advertising within the industry is a rather new phenomenon, especially for prescription drugs. Previously most of the advertising had been devoted almost entirely to OTC drugs. “In 1977, OTC sellers in the US devoted 20.2% of their sales receipts to media advertising…the corresponding media advertising figure for prescription drug vendors was 4.0%.” (Sherer, 1303) Although there existed a rather high total for OTC drugs, it is easily seen that prescription drugs were not a big focus in advertising. However, in recent years, the amount of prescription drug advertising has risen. Total prescription drug advertising and promotion outlays in the US market during 1997 were estimated to be $12 billion, or 18% of ethical drug sales. (Sherer, 1303) Obviously, there must be something that drives companies to advertise in these great numbers.
Although there is a high percentage of advertising in the industry, there is very little advertising or field sales promotion with generics. Patents do not last forever, and once they expire, new forms of competition develop. Generic drugs with similar chemical ingredients eventually flood the market. Although the pioneer drug still has its branded image, there is a definite price impact that occurs. However the price effects vary greatly depending on the situation and depending on the nation. One common practice of pharmaceutical companies is to capture both ends of the market by producing the branded version along with another generic version. This practice allows a company to sell one drug for a relatively high price, which consumers who buy into the branded image are willing to pay. The practice also allows the company to sell a generic for a very low price, which grabs the demand at the lower end of the market. It is smart for a company to do, however, the practice may not seem fair in the competitive side of the industry. There is no doubt that generic drugs save consumers money. US consumers (or their insurers) saved an estimated $8-10 billion in 1994. Also the share of generic sales rose from 18.6% in 1984 to 44.3% in 1998. (Sherer, 1322) These numbers demonstrate the relatively new move toward the consumption of generic drugs. The change may be why companies are advertising so heavily now, to create a brand image and capture more of the market. Nevertheless, business practices are evermore being watched closely. The relatively large companies have recently been questioned about their spending practices. Consumers want money being invested into R&D to create new and improved drugs, and do not want the money spent on advertising and other areas. In general, there have been many arguments about the pricing schemes of companies and their general business practices.
Since Pfizer operates in a monopolistic competitive market and is a major player, they can charge high prices on prescription drugs. Many people, especially seniors, feel that these prices are too high and cannot afford to buy some of the brand name drugs. Pfizer argues that these high prices are necessary in order to continue to put large portions of revenue in research and development. They need to increase revenue in order to provide consumers with the newest and best quality drugs. Pfizer claims that if they cut prices then the costs will primarily affect the R&D budget. Pfizer will limit resources devoted to the R&D department in order to make-up for the loss in revenue.
People outside the pharmaceutical industry question Pfizer’s justification of high prices. Every year Pfizer must release data to the public that states their sales and how they allocate revenues to different areas. This data is called the SEC 10-K report and can be found using the Internet. They must make the report available because they are a publicly owned company. The stockowners of Pfizer have the right to learn about the development of their company. This information also helps the public to observe where Pfizer and other public companies distribute their returns. A chart of the SEC filings can be found on the next page. Pfizer’s net sales totaled (in millions) $32,259 in 2001, $29,355 in 2000 and $27,166 in 1999. Revenues increased 10% in 2001 and 8% in 1999. “The pharmaceutical industry has been the most profitable industry in America for each of the past 10 years, and in 2001, was five-and-one-half times more profitable than the average for the Fortune 500 companies.” (www.usafamlies.org) Pfizer is extremely wealthy and also pays its management enormous salaries. Pfizer’s justification of high prices now appears to be debatable. The company yields such high revenues that a cut in price should not be deducted from R&D but rather from other areas, like profit.
Research and development expenses added up to 15.0% of the revenues in 2001, 15.1% in 2000 and 14.9% in 1999. In 2001 they totaled (in millions) $4,847, in 2000 $4,435 and in 1999 $4,036. The SEC report shows that 15% of the revenue is minute when compared to the other categories. Pfizer preaches how it sets so much money into R&D yet it is one of the smallest percentages of revenue. Pfizer increased revenues by 10% in 2001 but R&D expenses only increased by 9%. Many would think that they would increase
ANALYSIS OF THE CONSOLIDATED STATEMENT OF
(millions of dollars) 2001 2000 1999 01/00 00/99
--------------------- -------- -------- -------- ----- -----
Revenues $32,259 $29,355 $27,166 10 8
Cost of sales 5,034 5,007 5,576 1 (10)
% of revenues 15.6% 17.1% 20.5%
expenses 11,299 11,223 10,600 1 6
% of revenues 35.0% 38.2% 39.0%
R&D expenses 4,847 4,435 4,036 9 10
% of revenues 15.0% 15.1% 14.9%
Merger-related costs 839 3,257 33 (74) M+
% of revenues 2.6% 11.1% --
Other income -- net (89) (348) (24) (74) M+
------ ------ ------
before taxes $10,329 $ 5,781 $ 6,945 79 (17)
% of revenues 32.0% 19.7% 25.6%
Provision for taxes
on income $ 2,561 $ 2,049 $ 1,968 25 4
Effective tax rate 24.8% 35.4% 28.3%
continuing operations $ 7,752 $ 3,718 $ 4,972 108 (25)
% of revenues 24.0% 12.7% 18.3%
operations -- net of
tax 36 8 (20) 337 *
------ ------ ------
Net income $ 7,788 $ 3,726 $ 4,952 109 (25)
% of revenues 24.1% 12.7% 18.2%
------ ------ ------
R&D by even more as revenues enlarged. Pfizer does devote a large amount of resources to the department but the number is deceiving. Pfizer is so profitable that it has the ability to put millions into R&D but that is small when compared to the amount devoted to other areas.
Most pharmaceutical companies are able to record profits at the end of the year due to the composition of the market. Profits for Pfizer, which are labeled Net Income on the SEC report, make-up more of the revenues than R&D. 15% of revenue is allocated to R&D and 24% to profit. This allocation may show that Pfizer in more concerned with being rich then developing new drugs, which is their job. Also (not shown on the report) they have some of the highest paid management in the industry. The Chairman and CEO, Henry McKinnell, makes $56.5 million a year. McKinnell, being paid that much, should be able to find a way to cut prices without hurting R&D, and probably equal out the profits and R&D.
The report also shows that the revenue allocated to advertisement, which is disguised as selling, informational and administrative expenses, was (in millions) $11,299 in 2001, $11,223 in 2000 and $10,600 in 1999. The allocation for advertisment made-up 35.0%, 38.2% and 39.0% of the revenue in 2001, 2000, and 1999 respectively. Those expenditures are not proportional for just one area of the company. The percentage of revenue allocated to advertisement is almost the opposite of the problem with R&D. “Eight of the nine companies-Merck, Pfizer, Bristol-Myers Squibb, Abbot, Wyeth, Pharmacia, Schering-Plough and Allergan-spent more than twice as much on marketing, advertising and administration as they did on R&D.” (www.familiesusa.org) Pfizer spent 35% on advertising and a mere 15% on R&D.
The findings in the SEC report make Pfizer seem as though they are not giving the real reason why prices are high. Increased cannot be because they need the revenue to support growth in research and development. They do not allocate enough resources to this area to justify high prices. R&D is the last place Pfizer should go if they want to cut prices. The area is already one of the lowest receivers of revenues in the company. Pfizer should look at other areas, especially advertisement, to reduce revenue allocated. The SEC report shows that Pfizer and other pharmaceutical companies are more market driven and do not devote a worthy proportional amount to R&D.
POWER AND INFLUENCE:
Even disregarding the figures above, there is a general concern within the pharmaceutical industry. There is a feeling that consumers are getting pushed around by certain “powerful companies.” Consumers, insurance companies, and physicians all feel that these companies are so big and profitable that their power is becoming scary. Companies like Pfizer, hold an amazing amount of market power. Pfizer has the ability to influence political groups by donating money and resources to them to influence political action/support. Political influence is an extremely powerful tool. Along with this, Pfizer has such a big profit margin that it can afford to spend money on advertising and in other influential areas without decreasing their expenditure on R&D. By doing this, Pfizer can capture a great deal of the pharmaceutical market. It does so, not only by advertising its prescription drugs and OTC’s, but also by giving money to pharmacy-benefit managers (PBM’s), who serve to influence physicians on what drugs to prescribe to their patients. Furthermore, Pfizer has the ability to keep its prices so high, that seniors and other poor yet needy consumers (including foreigners) cannot afford their drugs without some sort of insurance or aid. Not everyone can afford their products, so some people cannot even get the proper care they need, especially when there is a patent present. In general, all of these concerns revolve around Pfizer’s sheer power and profit.
There is no stronger body in the United States than the government. When large companies or industries can successfully influence political figures or groups, then the company/industry will be better off. Pfizer provides a large amount of money to political groups to ensure protection and to influence decision-making. The contribution makes sense from Pfizer’s standpoint, but is it really fair? In some cases, Pfizer will supply some support for both parties to ensure protection. When Pfizer has the political support, it can threaten political groups to stop funding them, therefore having a great deal of influence in getting what they want. Voters obviously view this as an unfair practice, and therefore argue that these large pharmaceutical companies are too powerful and have too much influence. (Goozner, 12-13)
Examples of political influence can be seen nationwide. To focus on a local issue, in Connecticut, millions of seniors were dropped from Medicaid insurance that covered a lot of prescription drugs. The pharmaceutical industry proposed a plan that would make separate prescription drug insurance available to seniors. Clearly, seniors would favor this, because they currently are left without coverage. However, this plan is highly unrealistic. The insurance industry would almost surely not let the separate drug coverage to be available because the plan would not work. Still, the pharmaceutical industry offers fake support for separate insurance. Consequently they back the political figures that push this idea, and attempt to gather the support of senior voters in the area. The fake support would convey the idea that the industry is attempting to sincerely help seniors, when in actuality, this is not the case. They know once in office, the politicians will never pass the bill, and only then will the seniors realize this scheme. (Castellblanch)
Another area of debate is seen in the recent increases in advertising expenditures. Instead of Pfizer devoting more of its resources to R&D, it has decided to devote a greater amount of its expenditures to advertising. The purpose of patents is to allow companies to incur profit with the intention of most of that profit going back into R&D. The idea is to refund their investments for future gains. Obviously, companies like Pfizer are using the profit to create more of a brand image to capture more of the market. This effect can been seen when patients ask their doctors for highly advertised brand named drugs instead of generics. This obviously affects insurance companies, who do not want to cover the extra money of the brand named drug, when similar generics are available. So, insurers complain that the increased demand for brand names are inflated their pharmaceutical budgets. Some physicians argue that the advertising artificially increase the demand for the most expensive treatments and drugs. The artificial demand is seen as a waste of time for both patients and doctors. “Consumer advertising for prescription drugs rose to $100 dollars a month this year (1998), almost 5 times the total from a year ago.” (Freudenheim, 91) There is no doubt that Pfizer’s advertising is effective and large, which displayed by these figures. “Some health care economists contend that the advertising is fueling a renewed upswing in drug costs which rose 12-15% this year (1998).” (Freudenheim, 91) Again, this demonstrates a problem with prices. Uninformed consumers prefer brand names to generics and therefore raise the costs incurred by insurance companies and even themselves. The general information problem that exists, subjects consumers to buying what they know; and what they know are ads on TV’s and in the newspapers and radio. Certainly there is a strong feeling within the pharmaceutical industry that advertising can be excessive at times. People often argue that there is too much advertising because it induces consumers to buy goods that they do not need. Consumers buy the advertised goods, because they too often do not know about other competing substitutes that are not as highly advertised.
The increase in advertising can be seen in a few different areas. The traditional way of advertising was to focus on OTC’s where they needed a competitive edge to convince consumers into buying a branded product. Also, advertising used to be focused mainly in medical journals, but has recently shifted to advertising to the general public. A big focus now is on advertising new prescription drugs, which can be generally sold at higher prices. The purpose is to get patients to demand these prescription drugs at the doctor’s office, where insurance companies end up picking up the bill.
Another way Pfizer and other pharmaceutical companies serve to influence their sales is through pharmacy benefit managers. PBM’s influence doctors’ decisions on what drugs to prescribe. In the past, they have saved employers and health plans billions of dollars because they have focused on promoting generic drugs to doctors. Pfizer and other companies have realized this influence and have begun to target the PBM’s into promoting their more expensive brand named drugs. Here is one example to highlight this new tactic. An arthritis patient who was taking a generic medication that cost him approximately 20 cents a day, ultimately switched to a Pfizer medication, which was 10 times as expensive. The reason for the switch of medications was due to the PBM’s advice to the physician. A publication was sent claiming that the generic could cause stomach problems, and suggested that the patient switch over to the brand name. At the bottom of the publication read, “Pharmacia and Pfizer provided financial support for this publication.” (Martinez) Later a study found that the brand named drug was no less likely to cause stomach problems. Obviously Pfizer has begun to target PBM’s with the hope that more demand will be created for their drugs. Although PBM’s claim to be a solution for high-priced drugs, it is clear that they are now being influenced by large donations from big pharmaceutical companies such as Pfizer. To illustrate this point, in 1995 100% of all PBM’s profits came directly from their normal sales and business practices. However, in 2001, the majority of their profits were coming from services to pharmaceutical companies. (Martinez) This shows a definitive shift in the behavior of PBM’s.
Overall this paper has demonstrated the general behaviors of competing companies within the pharmaceutical industry, using Pfizer as our main example. It has illustrated the type of economic situation in which the firms compete, and noted how their behavior has changed in recent years. Our findings displayed some general areas of concern, and showed examples of these problems. In particular, political influence and advertising have been major issues. Economically, most of their behavior can be justified, but socially their business practices have to be questioned. There is no doubt that Pfizer has been successful in creating a legitimate brand image that has captured a great deal of the market. In turn, the brand name image has influenced a large portion of the pharmaceutical industry by affecting prices and making competition scarce. Pfizer is certainly not the only company like this. Others with the same type of market power practice similar business. Hence, this behavior is a concern that must be dealt with.
Carletant, Perloff “Industrial Organization”
Castellblanch, Ramon “Selling Out Seniors to Protect Drug
Industry Profits” The Hartford Courant.
Freudenheim, Milt “Influencing Doctor’s Orders” New York
Kaiser Family “Federal Policies Affecting the cost and
Availability of New Pharmaceuticals”
Krueger, Alan “Economic Scene” The New York Times.
Martinez, Barbara “Firms Paid to Trim Drug Costs Also Toil
For Drug Makers” The Wall Street Journal.
Scherer, F.M. Handbook of Health Economics. Ch.25