A Holiday Gift From Merck’s Ken Frazier
These are quotes that a pharmaceutical R&D supporter like myself loves:
“The most sustainable strategy is innovation.”
“Science and translating science into medically important products has always been at the core of how (we) define ourselves in the world.”
“Science and innovation are in the DNA of the company.”
These sentiments don’t come from the head of a biotech company or a scientist who is the CEO of a pharmaceutical company like John Lechleiter at Lilly. Rather, they come from Ken Frazier, Merck’s first-year CEO, a lawyer by training. As reported by Christopher Weaver, Frazier defended his commitment at a recent breakfast hosted by The Wall Street Journal. Frazier’s views, unfortunately, aren’t embraced by Wall Street. Merck’s stock has stagnated in Frazier’s first year whereas that of Pfizer has increased by about 25%, partially as a result of the latter’s commitment to slash its R&D budget.
Frazier has not been rash in crafting Merck’s research budget. In fact, the combined R&D budget for Merck and its acquired company, Schering-Plough, was $8.6 billion in 2009. If Merck not only kept this budget but rather increased it by 5% annually, it would project out to be almost $10 billion in 2012. Instead, Frazier is planning on a spending about $8 billion on R&D in 2012 – still a hefty amount but meeting that goal requires cuts to the new combined R&D organization. Nevertheless, Frazier is finding himself defending this spending to Wall Street critics. His response?
“What we are really trying to do is run the company to create sustainable long-term value for our shareholders… The problem with R&D is that it’s not always consistent. It’s not like engineering where you can incrementally innovate and make another version of the iPhone… If you look in the past, there have been other fallow periods for R&D, but over the long-term, science has always made progress.”
There are tremendous medical needs now facing people around the globe. Alzheimer’s Disease (AD) is a problem that is getting worse as the population ages. The societal costs are enormous. There are a number of compounds that are in clinical development that are hoped to slow or even reverse AD. The problem is that these clinical trials are long and expensive to run. The same can be said for the clinical trials needed to discover and develop new treatments for many other diseases such as obesity, diabetes, heart disease and osteoporosis. Gone are the days when one can simply show that a compound stops bone loss in an osteopenic woman. Instead, long-term studies are needed to show that such a drug reduces fractures in this population. Physicians, payers and regulatory agencies are requiring these types of studies before justifying prescribing such new medicines to patients.
Big pharmaceutical companies are the only organizations with the resources and talent to do this. But substantial R&D budgets are required to capitalize on the exciting new opportunities being uncovered by genomics. One can argue that the Mercks of the world are serving the national interest by making these large investments because, if they don’t do these studies, no one else will. So kudos to Ken Frazier for having the courage to stand up to the R&D naysayers. Perhaps his commitment to R&D will return Merck to the status of the World’s Most Admired company, a title they owned in the late 1980s.