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raymond gilmartin
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Raymond Gilmartin is president, chairman and CEO of Merck. In this interview he talks about the riskiness of drug development, the benefits of direct-to-consumer advertising, the issue of "me too" drugs, Oregon and Maine's differing approaches on cutting drug costs and the future of the pharmaceutical industry. This interview was conducted Jan. 9, 2003.

How much does this industry spend on R&D, compared with other industries?

The industry in total spends roughly about $30 billion. A company like ours spends in the vicinity about $3 billion a year on drug discovery.

How does that compare with other industries?

When you measure it … both in absolute amounts, plus as a percentage of our revenues, those are very high percentages of revenues, and those are very significant amounts of R&D investment.

The U.S. is one of the few places where the marketplace sets prices. The U.S. therefore ... has the leading position in the world, in terms of research, discovery, new medicines.

This industry has been very profitable. Why isn't it as easy money as it looks from the outside?

Drug discovery is a high-risk business. It's an industry that's characterized by, for all of us, a situation where, although you may have been successful in the past in discovering drugs, that these drugs eventually go off patent.

For example, in Merck's case, between the years 2001 and 2002, we had about close to 38 percent or so of our sales going off patent over that period of time. If you don't have the drug discovery capability to replace those drugs that are going off patent, the experience of the industry is that companies disappear. So therefore there's a high impetus to be able to replace the drugs that you have going off patent, and continuing to innovate.

The only way to succeed in this industry is to have the capability to discover new drugs, and increasingly new drugs that are advances in patient care that are very significant. Otherwise, as a company, you're going to disappear.

What happens when you lose a patent on a drug? Does that market evaporate?

When a drug goes off patent, you lose about 80 percent of the business in the first year. So essentially, it goes to zero. That has a very significant economic impact on a company, if you don't have another drug of comparable size or potential to replace that.

Even large pharmaceutical companies are just one or two drugs away from failure?

I think it depends on the size of the company. If you're a smaller company, you could be very well one or two drugs away from failure. A larger company, such as ourselves, which participates in a variety of franchises, the impact is more likely, such as has been the case with us, a period of slowed growth or no growth, and then resuming growth, if you are successful in having discovered drugs to replace the ones going off patent. We are fortunate ourselves to be in that position.

The companies that don't manage this have been taken over, traditionally?

What happens to companies who fail to have drugs to replace the ones going off patent, or [who basically don't] have enough drugs to continue their growth rate, [is they] disappear, because they get taken over, or they merge with other companies. That, I think, basically provides a powerful impetus for all companies to innovate and to continue to look for advances in patient care.

Ethical charges. Some argue that recently the industry has been less innovative, the pipeline is dry, and they're compensating with "me too" drugs, marketing, and lawyers extending patents. Is the pipeline thin lately?

Not in our perspective. If we look at our own situation, or even if we look at some of the significant companies in the industry, there's no shortage of opportunities to work on, given the new knowledge about pathways of diseases such as Alzheimer's, obesity, diabetes, cancer. So there's plenty of opportunities to work on.

There is somewhat of a cyclical nature to this industry. There are periods of one or two years where, for a company like ourselves, we might not be filing as many drugs as we had in previous years, for example, in the early 1990s, when we filed a couple of new drugs. But then from the period of 1995 through 2001, we basically filed and launched 20 drugs.

We're about to enter another whole new cycle of drug launches once again. That reflects somewhat the nature of drug discovery. This is not simply a question of going to the lab and saying, "Discover this drug and come out in this certain time frame." There's a lot of uncertainties. There are a lot of failures in the drug discovery process, so it's somewhat lumpy at times.

So I think that to interpret a period where there are fewer filings as saying that the pipelines are running dry is just not understanding just what's behind the drug discovery process. Right now, what's coming in the future, I think, is an amazing array of new medicines.

So the fact that the FDA has been passing fewer drugs is temporary?

That's temporary for us, and I think it's temporary for at least a couple of other companies in the industry.

As far as this whole idea about "me too" drugs -- given the fact that it takes 12 or 15 years to discover a drug, and given the fact that we're all aware, as companies in the industry, about where are the new targets of opportunity, where are the possibilities -- you can assume pretty much they're all working on these things.

Now, whether or not any one company is successful or not depends upon their own individual research capability. So, in effect, you could think of us all entering the starting gate at about the same time. All of us expect to be first. When we get to the actual final approval process, we may or may not be first. So we may or may not have a drug that's significantly differentiated from the others.

The benefits of this are, first of all, you have a lot of people working on the drug discovery process, so you can overwhelm the odds of failure, if you will. The second thing is that when you have multiple drugs in a therapeutic category, you're able to basically deal with the fact that patients are different. They respond differently to different drugs. But also, importantly, it sets up a very competitive environment that managed care plans and health plans take advantage of, particularly in these times, as a way of containing costs by setting up price competition.

So a company is not in a situation of being able to say, "Gee, that drug is out there. I'm going to develop a 'me too,'" because that's 12 or 15 years away. By that time, the whole field has moved on.

So the idea of rushing out a knock-off drug is absurd?

The idea of knocking off a drug and say, "I'm going to have a 'me too' drug," is just not feasible. Any company that would be foolish enough to pursue the strategy of knock-off drugs or "me too" drugs just isn't going to survive in this industry.

What's your view on direct-to-consumer advertising?

Direct-to-consumer advertising, from the standpoint of the patient, and I think for the majority of doctors, is a very positive development. Based on the experience that we've had, and based on studies that have been done, patients who see these ads go see their doctors and ask about the drug. And because patients seek this kind of information, they act on it.

In the final analysis, the physician is in charge, because more than half the time, they don't prescribe anything or prescribe something else. Studies have also shown that patients that have seen these ads are also more aware of the side effects of these drugs, as well as the benefits, than people who haven't. Doctors also report that they see patients that they otherwise would not have seen.

Now, direct-to-consumer advertising, in our experience, is only effective when you're talking about a brand new therapy, or when there's a situation where you have a large untreated population. So, for example, in the case of osteoporosis, there are about 20 million women who have osteoporosis in the U.S., yet less than 5 million women at this point are being treated. So encouraging a woman to be tested to see if she has any bone loss, I think is very positive, because that patient will be treated by the physician if that's the case.

In the case of cholesterol lowering -- Zocor, for example -- there are still approximately close to 40 million people that probably should be on a cholesterol-lowering drug, given risk factors, and who are not yet being treated. So therefore, encouraging people to consider Zocor and go to ask their doctor about it is very important as well. But for well-established drugs, therapies that are well established, DTC has no value. So it's not a mechanism for trying to sell a "me too" drug, in effect.

Do you have a position on "frivolous" patent extensions?

Merck's position on intellectual property and patent extension, I think, is quite straightforward. First of all, we'll defend our intellectual property rights as much as anyone. I mean, it's critical to the success and innovation in this industry. But we'll not engage in lawsuits simply to try to extend the patent or to try to stay on the market longer. Basically, as we analyze it, our investors really aren't that impressed by another six months or a year of a product staying on the market. What they're focused on is: What do you have to replace the drug that's going off patent? Therefore our focus is totally on replacing drugs that are going off patent.

People love innovation, but we have access issues. What is your response to the Maine Rx program?

Maine and we have the same goal, which is helping people gain access to medicines that are very important to saving their life or extending their quality of their life. … To us, the solution in Maine, for example, would be a Medicare prescription drug plan. What is really required here is that people should have insurance coverage.

Now, Maine, in terms of the approach that they're following, which is to try to lower prices, has the effect at the end of the day of either denying access to patients who are on Medicaid, in exchange for trying to have companies lower their prices, or Maine in effect puts themselves in a situation of setting prices. The experience in other parts of the world, of governments who set prices, is that it is a major obstacle to innovation, takes away the economic incentive, and has not only an impact on the established pharmaceutical industry, but a dramatic impact on the biotech industry, which [is] in a much earlier and risky stage.

Other advanced countries have sophisticated medical care and pharmaceuticals. You're saying they're much less innovative than the U.S.?

Europe has had a system of the government setting the prices in countries for some time now. It's a device that they use to try to basically control their health care budgets. They set the prices below market levels. The effect of that has been that the European pharmaceutical industry, which at one time arguably was the world leader, basically is far behind where the U.S. is right now, and in a continual state of decline. In fact, research is moving out of Europe to the U.S. Now the European Union at this point is very concerned about this, and in fact, has started studies and task forces to try to reverse this trend. But the fundamental issue is that the government sets the prices, and they set them below market.

That's also what the Canadians do?

In the Canadian system, which also sets prices, although we have a very productive research facility in Canada, which supports our global research capability -- for all intents and purposes, Canada does not have an innovative research industry. They have a very strong generics industry.

So they depend on innovation produced here?

Countries that have price controls as the means of trying to keep down their pharmaceutical costs have a double-barreled issue that they end up with. One is it ends up at the end of the day delaying access to new medicines by their patients. That's well documented in Canada. It's well documented in Europe. But it also puts them in a situation where they do not have their own industries for innovation, and increasingly these countries are becoming dependent upon the U.S. pharmaceutical industry for their advances and for innovation.

So the U.S. is the last big unrestricted market?

With a few exceptions such as Singapore, the U.S. is one of the few places in the world where we have the marketplace that sets prices in the industry. Basically it comes out of our tradition of being a market-based economy. The benefits of that [are] that the U.S. therefore … has the leading position in the world, in terms of research, discovery, new medicines, and the leading pharmaceutical companies in the world.

Maine politicians argue that if you weren't making money, you wouldn't sell to the Canadians. Why do you sell to Canada cheaper than you do here?

There are a couple of reasons why you would sell in Canada. … The first is that Canada has the capability to issue a compulsory license for your medicine, if they determine that you're not offering something to their citizens that's important to their health. So that's one thing.

Secondly, in terms of the economics of the industry, which are huge up-front research costs and very low ingredient costs, a very low variable cost, basically, that even at prices that are at the level set by Canada, you still are able to make contributions to your research. Therefore, basically you're still maximizing the sales of the company, and therefore the benefits to research, by participating. Now, you would do even better if there were market-determined prices. But here's still an economic reason to do it. ...

Then finally, there's an ethical reason. I mean, how could we place ourselves in a position of having a great breakthrough and just deciding that, because Canada has an administered pricing system, that we should put ourselves in a position of denying Canadian citizens access to our medicines?

You can see, though, why it would seem unfair to somebody who crosses the border and buys drugs at a considerable discount.

The impact of a price-administered system -- it happens in all price-administered systems -- is basically to under-value innovation, but to over-value older products that were off patent. So in Canada, Canadians actually [pay] much higher prices for generic drugs than we do here in the U.S. If you do the studies to look at the entire market basket of pharmaceutical prices and add in generics as well, there are a number of studies that show that Canadians, on a market basket basis, pay similar to what Americans pay. But you have the unique circumstance where they're under-paying for innovation and they're over-paying for old, outdated or off-patent drugs.

As a result, we have the innovative industry, because we're the other way. Canada does not have innovation.

So if the Maine system was copied by other states, what effect would that have on innovation?

If the U.S. were to follow a pattern, sort of on a state-by-state [basis], or even add prescription drug coverage to Medicare, using sort of a government-administered pricing system, the evidence is already in, based on the European experience: Innovation in the U.S. in pharmaceuticals would decline significantly. The more fragile part of the industry is actually the biotech industry, where some of the sort of riskiest, earlier-stage science is being practiced.

Ultimately it would have devastating effects on the ability of this industry to come up with the true advances in patient care that we've so successful at discovering over the past several decades.

If the federal government introduced a prescription drug benefit plan that was an extension of Medicare, what is the jeopardy for the industry in that, as opposed to something privately administered?

We're advocating adding prescription drug coverage to Medicare. We think it's very important. But it's also very important that this be added in a way that's modeled after the private sector, in effect, a model that's based on choice for plan members and competition among pharmaceutical companies. The combination of choice and competition, a market-based approach, I think has been demonstrated to be the best way to ensure quality and control cost. It's true across all industries. It's true in the health care system, pharmaceutical industry as well.

What we don't want to see happen -- and I think at this point is unlikely to happen -- [is] that prescription drug coverage just simply be added to Medicare and run the way Medicare is run right now, which is an administered pricing system. You can see the impact on physicians of an administered pricing system. This year, physicians, by legislation, will be facing a 5 percent reduction in reimbursement. It's just an anomaly built into the legislation.

People are trying to fix that. But nonetheless, at this point, physicians are looking at a reduction in their fees. As a result of that, you see physicians starting to withdraw in terms of their willingness to provide Medicare. That's just sort of a near-term indication of what would happen to the pharmaceutical industry and our ability to innovate in that kind of an environment.

If we had a private system, it would be heavily subsidized, because seniors need a lot of medicines and can't afford the full price? So the money to pay for this private system would come from taxes?

The way the … prescription drug alternatives that are being explored right now would work is that most would rely on the private sector. That's the most likely outcome at this point. But at the same time, since Medicare is a system that's designed to help, in particular, seniors who are not in a position to afford medicines, there would be subsidies for seniors at the lower end of the income scale, so they would be able to afford the prescription coverage offered through Medicare.

Oregon's program is an evidence-based preferred drug lists. Since this is science-based, do you feel more positively about that than about the Maine approach?

I think the important principles in terms of controlling drug costs are, first of all, to ensure that also at the same time, we're ensuring the quality of the pharmaceutical care as well. The best way to do that, I think, is to ensure that we have informed patients -- that they have access to information, and that physicians have the freedom to prescribe the medicine that they think is best for their patients. From their standpoint, they're best served by having evidence, if you will, or outcome studies. So a system based on evidence-based medicine with an informed patient is going to give us the best outcomes in terms of controlling costs and ensuring quality.

Now, what's important in implementing any one of these systems is that physicians truly are able to use this information as guides, but [that] it's not used in a way for budget purposes, as it is in other parts of the world, just simply to deny access on the basis of cost, by simply deciding this patient doesn't need that medicine. There's so many differences in patients, and there are differences in medicines, that at the end of the day, I think any one of us would want our physician making that final choice.

So your main worry is that it's too prescriptive?

Systems that would lead us toward an evidence-based system and a more informed patient I think are all for the good. But I think we also should be very alert to any abuses of this system, and any indication that a physician would be restricted in their ability to prescribe, or information denied to a patient.

The people who produce drugs are providing most of the medical education to doctors. There seems to be a lack of objective third-party information in the system. Do you sympathize with that argument? When we buy things in the rest of the economy, we don't go to Microsoft to tell us which computer to buy. We look at an impartial Consumer Reports approach.

If you're buying any product in the U.S., and you're doing comparisons, anyone who is offering you that product basically is putting their best foot forward.

In the case of the pharmaceutical industry, when we talk to a physician about our medicines, we're working within a very prescribed or constrained universe. When sitting down with a physician, we're obligated by law to not only talk about the benefits of our medicine, but also to give fair balance, to talk about the side effects of the medicine as well. We're restricted in terms of what we can say by what the FDA has approved.

Therefore, the information that a physician gets about our medicines is heavily regulated and closely monitored. Now, a physician therefore has accuracy in terms of the kind of information that he's receiving that basically is backed up by the FDA.

So a physician is able to look across all of the pharmaceutical reps that may appear in his or her office, listen to these different presentations, and therefore is in the best position, based also on his own scientific and medical training, or her scientific and medical training, to make the best decision about how to think about these medicines and how to best apply them to patients. In addition to that, there are peer-reviewed medical journals that publish information about outcome studies around these medicines. "Peer review" means that accuracy once again, and the validity, is verified.

In Oregon so far, some big drugs have failed to make the formulary -- Lipitor, Vioxx. Does this system make you nervous? Or do you think it's a good system long-term if it's fair, because it's a level playing field for everybody?

In the private sector as well as in a state like Oregon, basically companies that have health benefits for their employees and who use health plans rely upon these health plans through their independent pharmacy and therapeutic committees to look at drugs. They generally classify them into different categories. They recommend generics as appropriate. They recommend that there are groups of medicines that look very similar and therefore are liable for price competition, and then others that are absolutely essential, that there are no equivalents. Therefore, we're very much in favor of a system which basically encourages competition among the medicines, because that's ultimately the way that we're going to control costs, and it's in a system in which the best medicine wins. Therefore, that process, by itself, is not an issue.

Now in the private sector, you have the circumstance where you have many competing health plans. Basically they have to make the best possible decision on behalf of the plan member, or the corporation or the plan members are going to choose a different health plan. So there's a built-in check as to whether or not people have access to their medicines. Once you get into a government-run system where you don't have that competitive environment, in theory, this is a very good way to go. Once again, one has to watch out for the potential downsides, or even the unintended consequences of people being denied access to medicines arbitrarily and inappropriately.

But it's one thing to use preferred drug lists or formulary management, as it's called, as a way of stimulating price competition. It's quite another thing to try to use that to set prices. So once you move from market competition or price competition to setting prices, then you run the same kind of risks they have in Europe of having a declining industry in terms of its ability to innovate.

Are you optimistic that we'll solve this problem of innovation versus access?

In the year 2003, we have a very high probability of adding prescription drug coverage to Medicare. That will increase access to these important medicines in a very significant way.

Talk about what's coming in the future.

We're in an extraordinary time in the pharmaceutical industry, but also in biosciences in general. Because as we see it, there's an emerging revolution in how biomedical research will be carried out. In the past, it's been more a question of looking at sort of one thing at a time, one enzyme at a time.

Now, with the knowledge from the Human Genome Project, with advances in drug discovery tools I could name -- such as combinatorial chemistry, high throughput screening, gene expression analysis -- [with] the tools that scientists have available to them, and the new knowledge that we have about pathways of diseases, such as Alzheimer's or the advance we've made toward an HIV vaccine, which has been significant in the last couple of years, because of the new knowledge.

So we're on the threshold of being able to do extraordinary things, and to be able to take on disease categories that have before been, given the state of the science and the tools available, just impossible to crack. So as we look [forward over] the next 10 or 15 years, it's going to be an extraordinary time of scientific innovation.


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posted june 19, 2003

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