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

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(Bloomberg) — Talking drug prices with President Barack Obama was just the start. Merck & Co.’s chief executive officer says he’s on a campaign to change a perception most Americans have: that pharmaceutical companies charge too much for their drugs.

Ken Frazier has been roaming the halls of Washington, a short trip from Merck (NYSE:MRK) headquarters in New Jersey, to make the case that the drug industry relies on a few precious years of high prices to fund research before its medications lose their patents.

“What’s really important with this industry is we’re seeing unprecedented advances, which in turn is providing us with unbelievable advances in patient care,” Frazier said in an interview.

Frazier, 60, has sought to cut costs and sold the consumer division to fund more research since taking the reins in 2011. He has been at the company since 1992, starting out as vice president and general counsel and working his way up. He became chairman this year of Pharmaceutical Research and Manufacturers of America (PhRMA), the industry’s lobbying group in Washington, and, along with other executives, met with Obama earlier this month to discuss the Trans Pacific Partnership Agreement.

Drugmakers have raised concerns about the trade pact’s limits on protection of data on biologic medications. Frazier said he explained to the president that protections for intellectual property and prices are related.

An August poll by the Kaiser Family Foundation found that 72 percent of Americans think the cost of drugs is unreasonable, and a majority preferred measures to contain prices, such as letting Medicare negotiate with drugmakers and requiring companies to disclose information on how they set prices.

Clinton’s tweet

The issue of rising drug prices has been hanging over the industry for more than a month, since Democratic presidential candidate Hillary Clinton sent drug stocks plunging in September with a tweet about “price gouging.” She was responding to a decision by Turing Pharmaceuticals AG, which raised the price of a decades-old medicine used by HIV patients from $13.50 to $750 a pill, but her comments sent waves throughout the industry.

See also: Big pharma lobby group forswears drugmaker targeted by Clinton

Big drugmakers like Merck raise prices on older drugs too, to a much lesser extent. Frazier said that on a net basis, meaning after the discounts pharmaceutical companies offer to the insurers who pay for their drugs, price growth has slowed “tremendously” over the past few years.

This year, Merck has raised the net price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more, according to research by UBS.

The industry has also come under fire from doctors, insurers and patient advocates for charging five and even six figures for lifesaving treatments for diseases like hepatitis C and cancer. Merck’s Keytruda, an immune-system-based oncology drug, cost $12,500 a month, or $150,000 a year, when it was introduced last year for melanoma patients.

Weighing in

There needs to be a discussion about what society can afford to pay for these drugs, Dr. Leonard Saltz, a gastrointestinal oncologist at Memorial Sloan-Kettering Cancer Center, said in a speech earlier this year.

“Because we’re not having the conversation, only the people selling the drugs are weighing in on what they should cost,” he said, pointing to the cost of treatments that combine immuno-therapies and cost more than $200,000 for a year.

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.

See also: View: Lower health care spending doesn’t fix everything

“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.