Merck CEO says drug-price debate doesn’t account for R&D risks

Merck has been conservative on prices, Frazier said. Keytruda had four times the effectiveness and "substantially less" toxicity than the then-standard treatment, Bristol-Myers Squibb Co.'s Yervoy. Yet Merck decided to set its price in line with the established drug, rather than much higher, Frazier said. A Bristol-Myers spokeswoman said Yervoy was around $120,000 for a four-dose regimen when it was introduced.

"You're getting much better efficacy, much better tolerability for the same price," he said. "It's an attempt on our part to balance patient access with the kind of return that we need in order for R&D to be sustainable."

Generic pressure

About 85 percent of drugs prescribed in the U.S. are generic, keeping pressure on drugmakers after their treatments go off patent. Frazier said that's why drugs haven't grown much as a percentage of overall health care spending, staying at about 10 percent to 11 percent.

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"We only have a limited window to make a return on these drugs because they go off patent and after they go off patent, the price plummets," he said.

Even before the patent window closes, a drugmaker with an innovative new product can be matched in a matter of months by a competitor with a similar treatment, putting pressure on prices. Gilead Sciences Inc.'s blockbuster drug Sovaldi started out an $84,000 treatment, but the company had to discount the price of its product heavily after competitor AbbVie Inc. launched a rival product. Merck will probably introduce its own hepatitis C treatment next year.

"If you didn't have a system that created an incentive for people like AbbVie or Merck to come in with follow-on products, you wouldn't have the competition that drives down the price," Frazier said.

Transparency bills

There have been legislative efforts at the state level this year to demand transparency from drugmakers on drug pricing, such as a California bill that would require manufacturers to explain the production expenses behind any drugs that cost $10,000 or more a year. But that doesn't take into account the money spent on potential drugs that don't pan out into blockbuster therapies, Frazier said.

"When you finally get the success, you finally get the winners, people say, 'Look at the profits that accrued to that' without regard to all the failures," he said.

Along with Pfizer CEO Ian Read, Frazier has maintained that the U.S. tax system, which requires companies to pay tax on overseas profits, puts American drugmakers at a disadvantage to their international rivals, diverting money that could go to research. Pfizer is now exploring a deal to acquire Allergan PLC, which has its tax domicile in Dublin, making it possible for the largest U.S. drugmaker to reduce its taxes through a maneuver known as an inversion.

"I would hope that rational policymakers would see that because of the latest headlines that there's an urgent need to provide this tax reform," Frazier said.

Frazier said he's not interested in pursuing a deal solely for tax purposes, preferring smaller transactions to help the company build its drug-development pipeline.

"But to remain competitive, we have to look at ways to try to ensure that while complying with all the current tax regulations, we can lobby for and support tax reform in the U.S.," he said.