Bankers, Buyouts & Billionaires: Why Big Herba’s Research Deficit Isn’t About The Money

It’s a scene from the blogosphere that’s become all too familiar.  A skeptic challenges a natural health product for the lack of an evidentiary base.  A proponent of that product responds that the skeptic has made a logical error – an absence of evidence is not evidence of absence, and in such a scenario it’s not unreasonable to rely on patient reporting and traditional uses as a guide. The skeptic chimes back with a dissertation on the limits of anecdotal evidence and arguments from antiquity — especially when the corresponding pharma products have a data trail supporting their safety and efficacy. The proponent responds that it’s unfair to hold natural health products to the same evidentiary standard, because only pharma has the money to fund proper research, and they only do so for products they can patent. You can’t patent nature, so no research into natural health products gets done.

OK, so maybe this isn’t a scene from an actual blog. The participants are way too civil, the arguments too coherent, and no one has been compared to Hitler.  But it’s not a straw man either (look herehere, and here for recent examples), merely a distillation of an argument I’ve seen made repeatedly – that the deck has been stacked by Big Pharma, which has set a research bar that the much poorer natural health industry can’t possibly meet given the costs and lack of financial upside.

In my observation, skeptics don’t often have a good response to this argument beyond their basic scientific disposition toward only making assertions based on positive evidence. Typically, that’s not a disposition shared by the proponent, and thus they simply agree to disagree (read: trade barbs until the thread peters out from fatigue). Yet this need not be a purely philosophical debate. After all, there’s a testable premise embedded in this disagreement – that the natural health industry isn’t rich enough to sustain proper research.  Is that true?

Natural health, by the numbers

On the surface, it certainly wouldn’t appear so. While the industry can be difficult to get a bead on – due both to differing definitions of what it includes (organic foods? natural toothpaste?), and the fact that many of the key players are private companies that don’t report revenues – by any measure it’s sizable. A survey by the University of Guelph  references KPMG estimates that the Natural Health Products sector in Canada grew from $1.24B in 2000 to $1.82B in 2006 – a growth rate that would bring the market to about $2.5B today.   Figures from the Nutrition Business Journal quoted in the same survey seem to agree, suggesting Canada is 3% of a global “supplements” (herbal, homeopathy, vitamins) market that was $68B globally in 2006 and growing at 5% a year – bringing it to perhaps $85B today. Figures from various sources quoted in a recent Health Canada report support these estimates.

While certainly not as big as the ($820B) pharmaceutical industry, $85B is still an awful lot of money, and it’s hard to imagine it not being enough to carve out a research budget from. Yet research isn’t done by entire industries, but by one tier of the value chain — the companies that manufacture and distribute the products.  If they’re not big enough to fund the type of research skeptics are looking for, it won’t be done, so let’s consider some of the bigger players before we make that call.

Boiron

French giant Boiron (EPA:BOI) is by far the largest distributor of natural health products in Canada – they’re responsible for nearly 4000 (15%) of the 26,000 products approved by Health Canada’s Natural Health Products Directorate. They’re also one of largest natural health products companies globally, with 2010 revenues of €520M ($700M CAD) – a size achieved not just through the success of killer products like Oscillococcinum, but also through acquisitions. In recent years, the company has acquired both its main French rival Dolisos (giving them 90% of the French homeopathy market) and the largest homeopathy company in Belgium, Unda.

So this is a big company that’s prepared to spend money to get even bigger. What about spending some of that money on research?  Well ostensibly it’s a priority: “Since 2005, we have devoted a growing level of resources to develop research,” they proclaim in the opening pages of their latest annual report, citing 70 in-progress research projects. Yet the numbers tell a different story – €4.2M in R&D expenditures in 2009, just 0.8% of revenues.

To put that in perspective, consider that in the same year, GlaxoSmithKline spent 14% of its revenues on R&D, Pfizer spent 15%, and Merck spent a whopping 21%.

But if Boiron’s not spending like pharma on research, there’s one line item where they do go toe to toe: Marketing. The company spent €114M – a full 21% of revenues on marketing in 2009. By contrast, GSK, Pfizer and Merck reported 33%, 29%, and 30% of revenues respectively on their “Selling, General, and Administrative” (SG&A) line – which includes not just sales & marketing expenses, but also executive salaries, support staff, legal, rent, utilities, and other overhead costs. Once those are subtracted out, it’s likely that Boiron spends at least as much of its revenues on marketing as Big Pharma.

To sum up: Boiron is an industry giant. They’re not afraid to spend on acquisitions. They’re not afraid to spend on marketing.  But research gets short shrift.

Atrium Innovations

The story at Montreal-based Atrium Innovations (TSE:ATB) isn’t much different. Though a bit smaller than Boiron (2010 revenues of $320M), they’ve taken an even more M&A focused approach to growth. Most recent was their $110M acquisition of Seroyal on December 31st, giving them the #3 spot in the NHPD database, with over 1100 approved products. Over the prior 3 years, the company spent another $130M to acquire seven more companies all over the world – Minami (Belgium), Trophic (Canada), Garden of Life (US), Nutri-Health Supplements (US), EAB (Germany), Orthos (Netherlands), and Multicare (Netherlands).

All those acquisitions require cash, which is why it’s fortunate that their executive team is so connected in the financial community. CEO Pierre Fitzgibbon was Vice Chairman of National Bank, where he underwrote Atrium’s IPO prior to joining the company in 2007. Additionally, Atrium’s VP Legal and VP Mergers & Acquisitions both hail from SGF, the investment arm of the Quebec government, which was an early investor in Atrium.  Clearly a strong management team for the type of acquisition-driven business Atrium does.

But the similarities with Boiron don’t end there, unfortunately. R&D expenditures in 2009 amounted to $2.3M – just 0.7% of revenues. SG&A paced Big Pharma at 30% of revenues.  Another successful business clearly able to spend on research, but choosing not to.

Heel

We’ve covered several of Heel’s products here on Skeptic North, including Traumeel, Nervoheel N, Neurexan, and the melodius Vomitusheel. The company boasts over 150 products in the NHPD database, so it’s no surprise a few have caught our eye.

Based in Germany, Heel is owned by Delton Group, the holding company of Stefan Quandt, a billionaire entrepreneur with the good fortune of being born into a 17% ownership of BMW.   Heel was also part of his birthright, and while the Delton group is private, its annual report does provide sufficient detail to determine whether any of Quandt’s billions are going into research.

In a word: no.  For the year 2008, a mere €3.3M of Heel’s €180M in revenues went into R&D. Granted, at 1.8%, that’s more than double either Boiron or Atrium – but still pales in comparison to pharma.

Hyland’s, Nature’s Sunshine, and Waleda

Hyland’s is a division of Standard Homeopathic, which claims to be the “largest full-service homeopathic firm in the United States in terms of sales and operating results.” The company is private, however, and doesn’t provide any financial information, so it’s hard to verify that claim. I’ve seen some revenue estimates online of $50-100M which, if true, would make it significantly smaller than its compatriot, Nature’s Sunshine (NASDAQ:NATR).   Hopefully it spends more on research than they do – with $343M in 2009 revenues, Nature’s Sunshine spent only $2M on R&D — less than half a percent.

That may or may not be better than Switzerland’s Weleda, whose annual report itemizes 399M swiss francs ($420M CAD) in revenues but fails to break out R&D expenditures.   Selling expenses are broken out however, and eat up 19% of revenues.

Schwabe

With €575M in revenues, Schwabe is the largest natural health products company in our survey.  Known in Canada through the 135 Nature’s Way and Alive Vitamin branded products in the NHPD database, Schwabe is an international powerhouse with 27 subsidiaries operating in 17 countries. And here’s the kicker – they actually do a decent amount of research, racking up €29M in R&D expenditures in 2009, about 5% of revenues. Granted, it’s still less than a third of what the typical pharma company spends, but at least it shows that it is indeed possible for natural health product companies to step up to the plate.  After looking at their competitors, I was beginning to have my doubts.

Summary

Big Herba is clearly big business, and on a purely financial level, it’s hard not to be impressed by what they’ve achieved.  But that success — $2.5B in revenues concentrated in the seven companies above — makes it equally difficult to give them a pass on their research deficit.  Simply put, the leading natural health products companies have the coin for research, they just choose to spend it on marketing products and buying their competitors instead.  The result: while pharma typically spends upwards of 15-20% of revenues on research, Big Herba contributes less than a tenth of that.

To the question of why, I’d like to propose simply that they don’t need to.  The products are clearly selling well already, and without the regulatory approvals pharmaceuticals require, spending money on research presents more risk than reward.  After all, if you don’t conduct research, you can’t find out that your product doesn’t work.

In other words, Big Herba is behaving exactly as Big Pharma might if it had no government oversight.  And if that doesn’t give you reason for pause before you pop that next Ginko tablet, I don’t know what will.

Photos courtesy of epSos.de, netzerling, and Laura Iniesta – via Twitter under Creative Commons.

16 Responses to “Bankers, Buyouts & Billionaires: Why Big Herba’s Research Deficit Isn’t About The Money”

  1. With a better understanding of the products you are calling out, you would see it more clearly.

    Since there are no symptoms of research deficit, overdosing on research is going to have no effect.

    Also, quantum mechanidoodles tell us that research budgets that are highly diluted by marketing and promotion budgets are more effective the more dilute they are.

    Try it for yourself before you knock it – the less research you do, the happier you’ll be.

    Wait a minute – ignorance must be bliss.

  2. Iain says:

    Note that “Research & Development” includes research on new manufacturing processes for your sugar pills, fancy dispensing vials to put the pills in, etc. Boiron, for one, obviously puts a lot of effort into this. I would bet that a small portion of these R&D budgets are actually going to genuine medical research. Now I’m sure that Big Pharma also spends a chunk of its R&D budget on determining whether blue pills or red pills are preferred, but this is certainly a far smaller portion than with Big Herba.

    Good work digging for all of these numbers, Erik!

  3. Lorne says:

    Maybe the less research Big Herba does the more effective it is.

  4. Composer99 says:

    What about NCCAM? Isn’t that agency’s raison d’être researching such things as purportedly un-patentable natural cures?

  5. Erik Davis says:

    Yes, absolutely. This article was dealing with the *perception* that there’s no CAM research being done, but of course there is quite a lot of it. NCCAM is a big funding source, though the results have largely been dismal: http://nccam.nih.gov/research/results/spotlight/

    No sense in letting the facts get in the way of a bias-reinforcing narrative though…

  6. Andrew Galley says:

    These results are pretty interesting, but I’m not sure they address the “pro-herba” argument very well. I think “Herba doesn’t do R&D because it can’t afford to” is an oversimplification.

    Pharmaceutical companies don’t do research because it’s in the public interest, but because there will be a return on their investment. Going through the clinical research process is onerous but it grants you market privileges in the form of patents, which allows you to charge as much as you like for your clinically-researched drug (assuming the market will bear it). Thereby you recoup the costs, plus profit.

    But let’s imagine for a moment that, say, dandelion extract can help with urinary tract irritation (*shrug*). I, as a conscientious corporate producer, invest in top-quality clinical studies to investigate this claim, and it turns out to be true. This investment makes no difference to the amount I can charge for dandelion; I can’t patent it, and in fact I’m now behind my competitors who can make the same claims about dandelion and aren’t down the cost of research. So it’s more sensible, from a profit-directed mindset to invest in marketing the product to the sort of people who might buy it anyway.

    I have to say, I think there are different kinds of “sniff tests” being conflated on this issue. The problems, historical and current, with the herbal supplement industry stem chiefly from shoddy production standards and oversight of claims about content and quality. If I say “this is white willow-bark tea, it can help soothe your headache”, there’s two “sniff tests” you should apply. The first is wether it’s plausible that that claim reflects a true property or relation — can white willow-bark tea sooth headaches? This one should pass a reasonable common-sense standard: white willow-bark is the natural source of salycylic acid, which we are familiar with as aspirin, so assuming the tea contains significant amounts of salycylic acid and no toxic compounds, the claim is not scoff-worthy on the surface.

    The second sniff-test, of course, is about wether what I’m giving you is actually high-quality white willow-bark tea that is going to deliver a dose of active ingredient. And that’s the part where the NHPD (where I worked for several years) is attempting to extend proper oversight over the industry.

    The research that’s done that applies to plant medicines tends to be on compounds and tends to be, where it is done, done in public venues due to the lack of RoI, ie, it’s public-interest research. After all, even if we “crack down” on herbal medicine sales it doesn’t stop anyone stripping some slippery-elm silk or willow bark and doing it themselves, and we still have an interest in the observable effects (and dangers) of that practice.

    But I think it’s misguided to assume corporations will conduct research in the pure public interest (or to reassure skeptic non-customers), and the alternative — allowing the patenting of unmodified plants — seems intensely problematic as well. Canada’s still-young regulatory framework is an attempt to balance these problems.

    • Erik Davis says:

      Hi Andrew,

      Thanks for your thoughts. I was attempting to address a very narrow claim I’ve seen repeatedly made, but you’re right on the broader issues here. Just a couple points I’d reframe, the first being the notion that Big Pharma’s research is wholly a result of profit motive and patentability. While I agree with you it’s not altruistic, I’d argue that the regulatory approvals process is the primary reason so much research is done at the quality standard it’s done at. They could spend a lot less coming up with patentable formulas if the standards were lower, and I’m thankful Health Canada and the FDA play such a strong consumer protection role in the Pharma industry, because without it we’d be at great peril.

      As for the NHPD, I’ll agree it’s a well meaning attempt, but in practice it’s a mess. The evidentiary standard is so low it’s laughable, recognizing homeopathic pharmacopeia or the opinions of tribal elders as evidence of efficacy. The result is a politically correct waffle that does little to protect consumers. Personally, I think they’d do Canadians a great service by sticking to ensuring products are “safe and of high quality” (and really doing that well), while removing “effective” from their mandate entirely. That way they could promote consumer choice and consumer protection, while not actively misleading consumers, which they’re doing today.

      As far as I can tell, the NHPD regime makes Health Canada the single largest violator of both the Competition Act and the Canadian Code of Advertising Standards. Every time they put a number on a bogus product and tell Canadians that number means it’s effective, it’s another violation.

      • Andrew Galley says:

        I admit I haven’t paid all that much attention to NHPD since I left, so I’m totally unqualified to argue with you there.

        I think that there are a lot of pitfalls with the idea of “long history of use”, but I think you should avoid racializing the concept as a way of cutting short the discussion of how we can, and to what extent, evaluate “long history of use” claims as evidence — keeping in mind that, practically-speaking, we’re sometimes dealing with a legal, rather than a scientific, meaning of the word evidence… ie “I saw Joe shoot Steve last night” is evidence — that doesn’t mean it is above question or should be taken at face-value.

        In the same way, ethnographic evidence shouldn’t be regarded as adequate proof of the efficacy of a drug, but if it’s confirmable (the testimony is broadly repeated and consistent) it’s useful knowledge that contributes to an understanding of plant medicines.

      • Erik Davis says:

        >>you should avoid racializing the concept as a way of cutting short the discussion

        Agreed, and that wasn’t my intent. The legalistic definition by Health Canada in its published evidentiary standards is actually what I’m taking issue with — they’ve redefined the word “effective” beyond recognition by the average Canadian. Saying Oscillococcinum is effective with an asterisk that says, “By effective we mean homeopaths say it’s effective in a book that predates germ theory” is just a travesty of consumer protection.

      • Andrew Galley says:

        Yeah, that’s pretty… not good. :/

  7. Dianne Sousa says:

    Andrew,

    If any individuals testimony isn’t valuable as evidence for efficacy, then how would any series of individual testimonials be any better? You make a comparison to eyewitness testimony in a legal sense. Multiple eyewitnesses might seem to tell you more than if there were one, but this is not the case. If you have 10 people say they saw Joe shoot Steve last night – the only thing you can be sure of is that there are 10 people making this claim. The evidence here is circumstatial. But, if you have direct physical evidence, then you can be more confident that the 10 people did see what they claim. You can’t, however, be sure of it. Testimonials and eyewitness testimony don’t tell you much of value at all.

    In the same way ethnographic evidence does not add as much value as it seems. Repetition and consistency of accounts does not guarantee that the usefulness of a natural product will be confirmed scientifically. I don’t think that it increases the chances of scientific confirmation either. This is why the evidentiary standards that the NHPD uses are so problematic.

    • Andrew Galley says:

      Circumstantial evidence is an important part of building a case. If independent witnesses repeatedly confirm a long traditional use of a plant medicine, this is not adequate evidence of its effectiveness but it’s not reducible to “anecdote”, either. We’re not talking about people saying “well, I used this and it helped me”, but “we’ve been using this for X purpose for generations”.

      Now naturally, just because a bunch of people have been doing something for a long time doesn’t guarantee that it’s effective, but a whole lot of our pharmacopeial knowledge originates in this kind of inquiry, and a goodly proportion of drugs are “descended” from plants that people made use of. Science is a formalized system of something that everyone does all the time: make predictions based on experiment and observation. Oral traditions represent an enormous database of observational, empirical knowledge, albeit a generally untheorized one and one without the benefit of contemporary “peer review”.

      To say some form of data is not *sufficient*, or that it’s prone to certain shortcomings, is not to say that it isn’t *valuable*.

      • Dianne Sousa says:

        “We’re not talking about people saying “well, I used this and it helped me”, but “we’ve been using this for X purpose for generations”.

        I’m not sure there is a practical difference here because the data for x being used for generations is composed of people saying “I used this and is helped me”.

        Although circumstantial evidence is often used to build a case for a claim, when people consider it they tend to give it more weight than it deserves. Let’s say that plant x has been used for generations as a pain reliever. Later it’s scientifically confirmed that this plant does contain compounds that relieve pain. So what? Traditional uses are built from poorly controlled experimentation and observation. You should expect some traditional claims to be right simply by chance, and not hastily conclude their methods had any validity.

        Ultimately you to quantify how valuable ethnographic evidence is and not state simply that its vaguely valuable. A penny has value but I can’t buy a car with it.

        Bringing this back to the point of the article, companies that market natural health products on the basis of tradtitional use can test their claims. They have adequate resources. They don’t in part because the regulatory framework doesn’t require it, and in part because their sales aren’t affected by lack of adequate proof. People are easily convinced that since x has been used for thousands of years, there MUST be something to it.

  8. Mike F says:

    Excellent article and replies. The name Dr. Victor Montori comes to mind speaking of the end of evidence-based medicine. If anyone has the time, check out a talk of his at http://videos.med.wisc.edu/videos/1291

    I like to think of evidence-based medicine as a tool, an important tool, in the array of tools that health care practitioners use to treat patients. But it isn’t an all encompassing theory of patient care. What happens when there is a rare disease and there aren’t enough patients for a randomized controlled trial to test the efficacy of a treatment?

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  • Erik Davis

    Erik is a technology professional based in Toronto, focused on the intersection of the internet and the traditional media and telecommunications sectors. A reluctant blogger, he was inspired by the great work Skeptic North has done to combat misinformation and shoddy science reporting in the Canadian media, and in the public at large. Erik has a particular interest in critical reasoning, and in understanding why there’s so little of it in the public discourse. You can follow Erik's occasional 140 character musings @erikjdavis