In 1997 the U.S. Food and Drug Administration relaxed its rules on broadcast advertising of prescription drugs. The new rules allowed pharmaceutical firms to ply their products to the general public without including the detailed information on side effects and other medical indications required in advertising aimed at doctors. As a result, expenditures on direct-to-consumer advertising (DTCA) rose from $800 million in 1996 to $4.9 billion in 2007—an annual growth rate of 18 percent that far exceeded that for the pharmaceutical industry’s total expenditures on promotion.
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Plainly, drug companies believe in the power of DTCA. But research to date has suggested it is less effective than physician-directed promotion in increasing market share for branded pharmaceuticals. However, that research has taken a rather superficial approach to the impact of DTC drug advertisements. Now a Kellogg School of Management researcher and his colleague have developed a model that digs deeper and takes a more optimistic view of DTCA’s effect. “[O]ur paper is one of the first to model the unique decision process in the prescription decision-making context, which involves both patients and physicians,” the pair state. “[T]his model structure also highlights the important difference between DCTA and physician- directed promotions.”
Lakshman Krishnamurthi, a professor of marketing at the Kellogg School, outlines the chief finding. “The main message is that direct-to-consumer advertising can increase the size of the pie—that is, raise awareness and increase the number of patient visits,” he says. “In addition, the DTCA category has a strong multi-period return on investment for pharmaceutical companies.” In other words, everyone involved—patients, doctors, and drug makers—benefits.
A Void in Understanding
In their study, Krishnamurthi and his colleague Ying Xie, an assistant professor at Washington University, St. Louis, aimed to fill a void in understanding DTCA’s effectiveness. Previous studies, they say, failed to address DTCA’s relative effectiveness in increasing patients’ awareness of drugs and influencing their doctors’ choices of drugs to prescribe. Nor did they explain how pharmaceutical firms should allocate their budgets among different types of advertising and what types of advertising the government should encourage to educate patients about treatments.
To start the project, Krishnamurthi recalls, “we separated out treatment incidence decisions—visiting the doctor—and brand choice decisions—the doctor’s decision to prescribe or not prescribe a specific drug—which had not been done before.” The pair also distinguished between two types of DTCA: category-specific and brand-specific.
Category-specific advertising promotes an entire therapeutic category. These “help-seeking ads” do not mention a brand name, but aim to alert consumers to an illness and its symptoms and to assure them that treatment is available. For example, a series of ads sponsored by Pfizer focus on cholesterol control, but do not mention the Lipitor brand. Brand-specific advertisements, in contrast, focus on particular drugs. They come in two varieties. “Reminder ads,” such as those Schering-Plough ran when allergy drug Claritin was prescription only, aim to build brand recognition for specific drugs without mentioning the diseases they treat or dosage information. Product claim ads, such as those for the prostate relief drug Flomax, meanwhile, mention both a drug’s name and its intended use. They try to persuade patients with a specific disease to ask their doctor about the advertised drug.
Testing the Model
To build their model, Krishnamurthi and Xie focused on two sequential events in the prescription process: the patient’s decision to seek treatment for a condition and the doctor’s choice of a drug to prescribe for the condition. The process resulted in an empirical model that they then tested in two real-life situations involving antidepressants and oral antidiabetic drugs. Why those two classes of medication? “First, these two categories represent chronic disease states, and therefore DTCA is more likely to have an impact on the treatment and choice decisions,” they state in their paper. “Second, these two disease states have rather high incidence rates in the U.S. market, and therefore firms tend to invest more in DTCA in these two categories.” In addition, Krishnamurthi notes, “data were available for the two categories.”
“Both category advertising and brand advertising have a positive effect on incidence—that is, in increasing the size of the pie.” — Krishnamurthi
Applying the model to the medications yielded two primary findings. First, DTCA did encourage patients to seek treatment. Here category DTCA proved more effective than brand DTCA in influencing patients to see their doctors. Second, while category DTCA had no impact on the choice of drug, brand DTCA significantly influenced the choice of oral antidiabetic medications.
Krishnamurthi summarizes the results. “Both category advertising and brand advertising have a positive effect on incidence—that is, in increasing the size of the pie,” he says. “But the effect of category advertising is much stronger than brand advertising, which is what we hypothesize.” The conclusion does not neglect the doctor’s part in choosing specific drugs. “Physician-directed promotions such as sales calls on doctors, medical journal advertising, physicians meetings and events, and drug symposia have a stronger effect on a physician’s choice of drug than DTCA, Krishnamurthi continues. “This indicates the important role of the doctor as a gatekeeper.”
The “Spillover Effect”
The research also reveals what Krishnamurthi and Xie call a “spillover effect.” Since category-specific advertising increases patients’ visits to their doctors for particular diseases, it benefits all firms that offer drugs for that disease. It also has obvious value for patients. “It raises awareness of the disease state, so could encourage patients to visit the doctor. This is a positive social welfare effect,” Krishnamurthi says. “Drug companies may want to rethink their DTCA spending and shift more of their money to category advertising. However, category advertising benefits the companies which do not advertise as well, which is why typically only the larger companies with larger brand market shares indulge in category advertising.”
The two researchers emphasize that their study represents the first step in a lengthy process of understanding DTCA for drugs. One possible area for future research is the shift of DTCA from broadcast and print advertising to nontraditional media such as the Internet. Another could focus on the role of patients’ requests for specific drugs (in response to DTCA) on their physicians’ prescribing behavior. An investigation like that, the pair writes, “would be of value for the FDA that sets guidelines.”
Related reading on Kellogg Insight
Xie, Ying, and Lakshman Krishnamurthi. 2009. “The Impact of Category and Brand Direct-to-Consumer Advertising on Treatment Incidence and Brand Choice.” Working paper, Kellogg School of Management.
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