Pharma CEOs defend R&D model to investors

Eli Lilly John Lechleiter (left); Merck CEO Kenneth Frazier

Merck CEO Kenneth Frazier said last week that he wants to publicly dissociate innovative pharmaceutical companies like Merck from Turing Pharmaceuticals, the drugmaker criticized for raising the price of a drug that it acquired in August by 5,000%.

Frazier's remarks, made during the Prix Galien Forum in New York City, underpin a common perspective quietly held by many in the pharma industry: namely, that their companies are different than Turning or Valeant, another oft-criticized drugmaker, because they invest more heavily in research and development. But now CEOs of some of the world's largest drugmakers are publicly trying to reinforce that idea with investors.

Executives at Biogen, Eli Lilly, Johnson & Johnson, Merck and Roche used the most recent earnings season to promote their investment in the development of innovative new drugs.

During an Oct. 27 earnings call with investors, Frazier said that the current debate about drug pricing fails to differentiate companies that develop the drugs they bring to market from manufacturers that buy already approved products and then raise the prices of those drugs.

“There are a lot of companies, as you know, that purchase drugs, many of them older drugs,” Frazier said. “They raise the prices to whatever they feel the market will bear while significantly reducing or eliminating investment in R&D. Merck has not been that kind of company.”

Drugmakers of all sizes and composition have faced scrutiny in recent years for how they price their drugs as a national debate about drug pricing has slowly gathered steam. The Turing controversy, as well as fresh criticism of Valeant Pharmaceuticals' pricing practices, has turned what was once a fringe issue into a broad political topic.

Many drugmakers have sought to describe their business models as ones that focus on R&D, e.g., “We develop and shepherd new, innovative therapies through the different stages of clinical trials all the way to approval and commercialization.” They say this is a primary reason why some drugs have high prices—those prices offset the costs of R&D for many products in the company pipeline, including ones that failed to make it to market—and that this distinguishes their model from those of Valeant and Turing.

Eli Lilly CEO John Lechleiter told investors during an Oct. 22 earnings call that the company's recent decision to halt a clinical trial of an experimental drug showcases the risks that innovative drugmakers take when developing new medicines. The company had announced in mid-October that it would end clinical development of evacetrapib, a cardiovascular drug called a CETP inhibitor, because it wasn't an effective therapy to prevent heart attacks and strokes.

“We've got a great story to tell,” Lechleiter said. “We've got medicines—and if you look at the hepatitis space, if you look at cancer, if you look at diabetes, [there have been] huge advances in recent years [and] obviously lots of risks. Our evacetrapib trial calls that out.”

Still, there are several obstacles in front of pharma companies as they seek to address and influence public opinion about drug pricing. A number of presidential candidates have made pricing a campaign issue. Sen. Bernie Sanders (I-Ver.) and Hillary Clinton have both said they would advocate for legislation that would allow Medicare to negotiate drug prices an option that 83% of the American public supports, according to a August poll conducted by the Kaiser Family Foundation.

Other critics have said that drugmakers simply price their products based on what the market will bear. “There's a disjointedness between pricing and value,” said Dr. Peter Bach,  director of Memorial Sloan Kettering's Center for Health Policy and Outcomes, at the Prix Galien Forum.

In an Oct. 22 research note, UBS analyst Matthew Rodin reported that Biogen CEO George Scangos, who also serves as chairman of PhRMA, said the pharma industry is preparing a “thoughtful presentation” on the industry perspective on the value of innovative medicines.

Lilly's Lechleiter echoed that sentiment in his remarks to investors. “I think we've got to be careful and thoughtful here,” he said. “I don't think there's a way you can spend enough money to sort of all of the sudden change people's minds, because so much of the criticism comes in the form of earned media. No one's out there spending money, per se; they're just picking up quotes and amplifying those.”

(Earnings quotes are attributed to Seeking Alpha transcripts.)