In 1997, the Food and Drug Administration relaxed its restrictions on direct-to-consumer marketing of pharmaceuticals. Prior to this ruling, drug manufacturers were prohibited from mentioning both the name of the drug and its indications in consumer-directed advertisements without also including a large amount of technical information about the drug, including all known side effects, contraindications, and dosage recommendations (Stevens, 1998).

In addition to interfering with the appeal of the advertisements, such requirements
rendered broadcast ads infeasible due to time constraints, and hindered ads in print
media due to cost and space availability. These requirements were abolished in the
1997 FDA policy changes, and pharmaceutical companies were permitted to market
drugs by name as treatments for specific conditions, with the minimal requirement
that ads give mention to major risks identified in clinical trials (Melillo, 2001). As a
result, manufacturer expenditures on direct-to-consumer advertising, which totaled
$791 million in 1996, rose to $2.6 billion for the year 2000 (Mitchell, 2001).
Television, radio, and print media became saturated with ads promoting treatments
for conditions ranging from depression to high cholesterol.

Names such as Zoloft, Claritin, and Lipitor, which were previously known mostly to
health professionals, quickly became part of the national vocabulary. Consequently,
spending on prescription drugs has increased significantly over the past several
years as consumers are enticed to seek advertised medications (HealthBizNews.com,
2001). This new face of drug marketing has sparked a raging debate about the
accompanying effects on the health of the American public: does direct to consumer
marketing benefit the public by providing education about available treatments, or
does it diminish the quality of healthcare by raising costs and causing unnecessary
treatment? Proponents of direct-to-consumer, or DTC, pharmaceutical advertising,
most prominently the drug companies themselves, argue that DTC marketing
results in improved public health by increasing consumer awareness. According to
this view, direct marketing to the consumer alerts the public of the availability of
treatment for a given condition, a fact of which it may not otherwise be aware. This
knowledge may prompt people to seek medical help rather than unnecessarily
accepting their ailments (Miller, 1998). Furthermore, supporters claim that ads raise
awareness of undiagnosed conditions by providing information about symptoms.

Since countless Americans suffer from undiagnosed disorders-only half of the
estimated 16 million Americans with diabetes know they have the disease-the
motivation to seek treatment provided by these ads is a valuable public benefit
(Health Matters, 1998). Similarly, by prompting people to visit a doctor, ads may
help identify conditions unrelated to the specific area of concern. For example,
according to Mike Magee, a medical adviser for Pfizer, a large proportion of
consumers seeking Viagra would not otherwise see a doctor, so visits seeking help
for erectile dysfunction often uncover conditions warranting medical attention, such
as diabetes (Shapiro and Schultz, 2000). Some doctors support DTC ads as well,
claiming that they make their jobs easier by resulting in better informed patients.
Many ads, particularly for diabetes, stress the importance of self-management of
disease, which may increase compliance with doctors orders and result in reduced
need for more extensive medical care (New York Times, 2001).

Doctors appreciate having patients who are already briefed about current drug
therapies, which saves time in a medical system that often requires doctors to see
as many as thirty patients per day (New York Times, 2001). Critics of direct-to-
consumer drug ads, including the American Medical Association, insurance
providers, and many physicians cite increasing healthcare costs, improper
prescriptions, and corrupted doctor-patient relations as this type of marketing’s
major resultant evils. Substantial evidence exists that the escalation of DTC
advertising has increased expenditure on pharmaceutical purchases. Prescription
drug spending increased 84% between 1993 and 1998, and it is estimated that
consumer-directed advertising increased drug expenditure by $13 billion in 1998
alone (Cassels, 2001).

The twenty-five most advertised drugs of 2000 accounted for forty-one percent of
expenditure on new prescriptions (Sherrid, 2000). Escalating prescription cost is of
particular concern to healthcare providers such as HMOs and large corporations,
which face a choice between curbing costs and cutting benefits (Cassels, 2001).
Additionally, those without prescription drug coverage must pay the increased rates
out-of-pocket (Shapiro and Schwarz, 2000). DTC proponents counter arguments
centered on rising costs by claiming that increased outlays on prescriptions save
money in the long run by preventing the need for more extensive medical care
(Moore, 2000). Critics, however, cite the fact that the largest portion of the drug
industry’s advertising budget goes toward drugs for non-critical ailments such as
heartburn, allergies, and hair loss (Moore, 2000).

Another argument presented by DTC opponents holds that these ads result in
incorrect prescriptions by creating consumer demand for products regardless of
actual need. Critics believe that consumers are sold the idea that a pill can instantly
provide them with good health (Health Matters, 1998). Often, however, the drugs to
which consumers are exposed are not even the most effective, but simply the ones
with the largest advertising budgets (Headden and Melton, 1998). According to
Shapiro and Schultz, patients, if refused specific prescriptions, will frequently visit
another physician, who may comply with the request (2000). In addition to
unnecessarily adding to healthcare costs, patient demand pressures doctors to give
patients the drugs they request for fear of losing business (Shapiro and Schultz,
2000). Specific drug requests, according to Dr. Angelo Agro, often cause physicians
to lose credibility in the eyes of the patient, who has been convinced by
advertisements that the drug a physician refuses to prescribe is nonetheless the
best option (Tanner, 2001).

Responding to such concerns, the AMA, at its July 2001 meeting, debated a
proposal for the organization to encourage the federal government to ban all DTC
prescription drug advertising (Tanner, 2001). While I agree that public exposure
through advertising of the latest treatments for common conditions raises public
awareness and prompts people to visit physicians, I nonetheless believe that direct-
to-consumer pharmaceutical advertising does not adequately justify its social costs.
In the case of overt maladies, such as allergies or depression, for which a large
share of advertised drugs are indicated, a condition affecting a person’s life to the
point of warranting medication would certainly cause him or her to notice it and
presumably to seek treatment. While many other products, such as cholesterol
lowering drugs, are used to treat conditions of which an individual may not be
aware and that may eventually adversely impact health, these conditions would, in
nearly all cases, be uncovered during a routine examination. In both cases, the
central benefit accomplished by these ads is getting people through the doors of
doctors’ offices, an end that can easily be achieved more cheaply without the use of
DTC advertising. For example, less expensive public service campaigns encouraging
people to have routine checkups and informing the public of warning signs of
common conditions would achieve the same results without affecting the cost of
healthcare. As the situation now stands, the benefits that do result from DTC
advertising are purchased at the price of reduced healthcare quality for some.

As drug advertising drives up the cost of treatment, healthcare providers will be
forced to cut costs in other areas and may find it necessary to compromise coverage
by denying certain procedures or raising premiums. Increased premiums may drive
people who fund their own health insurance out of the system by making personal
insurance unaffordable. Additionally higher premiums may discourage large
employers, which often independently provide their employees with health
coverage, from continuing this practice. General Motors spent $900 million covering
prescription drugs in 2000, a 19% increase over the previous year (Cassels, 2001).
Escalating costs may render those without prescription coverage unable to afford
necessary medications. Furthermore, the production of a drug is only possible when
the disease it treats becomes understood through years of basic research, most of
which is conducted by publicly funded academic investigators. Since public money
lays the groundwork for pharmaceutical production, drug companies have a
responsibility to the taxpayers not to engage in practices that will result in a
reduction in the quality of healthcare.

The major problems underlying this situation is that, under our current insurance
structure, the costs of increasing drug prices do not accrue to the consumer and
thus do not decrease demand as they should in a free market system. As a result,
the pharmaceutical companies are not given proper incentive to control prices.
Insurance providers, rather than transferring rising costs to consumers through
reduced care, need to restore the incentive to curb drug prices and hold the
pharmaceutical companies responsible for their exorbitant budgets.

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Pharma is the powerful subsector, and medical devices/technology its smaller sibling within the huge healthcare industry. They are different enough that the two subsectors often move in opposing directions, enabling investors to stay diversified within the booming healthcare by shifting in and out of the two subsectors at appropriate times.

In a number of treatment areas, one sector can take away market share from the other. Take the huge heart disease market. While surgical interventions have become increasingly minimally invasive, pharmacological interventions, including thrombolytics, fibrinolytics, beta blockers, statins and anti-platelet treatments are covering a wider spectrum of acute coronary syndromes, sometimes eliminating the need for surgery.

In evaluating the potential of the two sectors, it must be said that there is nothing quite like getting in early on a blockbuster drug and riding it to new highs. In the meantime, smart pharma investors stay on the lookout for news about clinical trials that result in new indications for a drug, or that show a reduction in mortality, side effects, etc. Modifications in a drug that expand target populations are also good. Often these kinds of developments show up on TV commercials. Currently, through a spate of commercials you can witness the battle unfold over new indications for insomnia treatments, as drug companies address the huge and growing problem of sleeplessness in America.

But on the whole, right now Pharma is in a bit of a funk, hoping for new blockbusters, while medical devices/technology is more exciting, especially minimally invasive technologies. Substantial acceleration in FDA approval timelines since the passage of the 1997 Modernization Act, has helped the medical device industry.

As the competition among broad-based medical technical companies, like Medtech, Boston Scientific J&J and others has grown more intense, they are increasingly looking to acquire small companies with promising technologies. This has spurred a great deal of entrepreneurial growth.
Is there such a thing as a blockbuster medical device? Except for drug-eluting stents, probably not, when you compare devices to top pharmaceutical winners. But medical technology is addressing some huge markets, with big profit potential.

Take back pain. It’s the scourge of millions with a market of over $60 billion annually. Artificial disc technology is rapidly coming up with advances to treat chronic back cases. Carotid stenting, which was approved last year, is less invasive than surgery and sales of carotid stents are anticipated to grow to $1 billion within the decade-from less than $100 million today. And the annual growth rate of computer aided surgery rate is expected to increase from 10% in 2005 to more than 20% in 2009.

Aging baby boomers will aid the medical device boom. Age-related ailments combined with medicare eligibility will expand the use of pacemakers, defibrillators, stents, orthopedic implants and cochlear implants.

Medical devices/technology and pharmaceuticals provide a good way to diversify within healthcare, though you must stay current on developments in both fields. Of course, if you’re really looking for growth you might turn to an even smaller healthcare/biotech sibling- diagnostics. With approval power over payments, healthcare providers, in essence, control the money, and thus wield enormous influence over which treatments grow share. Increasingly, healthcare providers are looking at preventative measures to stave off the huge expense of treating full-blown diseases. And how do you prevent diseases? Early diagnosis. But more on that in another article.

Leon Altman is the founder of http://www.InvestingIN.com, a website that explores opportunities in sectors and themes, such as healthcare. The website offers free newsletters. To sign up for free newsletters to http://www.investingin.com/SectorLetterFind.htm

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