Merck CEO defends hefty research spending

NEW YORK Tue Dec 13, 2011 3:32pm EST

A view of the Merck & Co. campus in Linden, New Jersey March 9, 2009. REUTERS/Jeff Zelevansky

A view of the Merck & Co. campus in Linden, New Jersey March 9, 2009.

Credit: Reuters/Jeff Zelevansky

NEW YORK (Reuters) - The chief executive of Merck & Co (MRK.N) on Tuesday defended his refusal to slash the drugmaker's $8 billion research budget and warned that global price constraints threaten the pharmaceutical industry's ability to innovate.

The drug industry is embroiled in a debate over whether companies are spending too much on research given a poor track record in developing new drugs. Investors are asking whether that money should be spent elsewhere to produce better financial returns.

While Merck held firm on spending, Pfizer Inc (PFE.N) committed to cutting its budget by as much as $2 billion. So far this year, Pfizer's shares have outperformed Merck's.

"When one runs a company like Merck that has long lead times in terms of development, I think it's important to keep in mind that you're not necessarily running the company for the immediate reaction of the stock market," Merck CEO Kenneth Frazier told a Wall Street Journal breakfast meeting in New York.

"What we're really trying to do is run the company to create sustainable long-term value for our shareholders," Frazier said. "The most sustainable strategy is really around innovation."

Frazier noted that the success of new drug development ebbs and flows. Just a few years ago, Merck was introducing ground-breaking new medicines like Januvia for treating diabetes and Isentress for HIV, as well as Gardasil for preventing cervical cancer.

"At that time, no one was saying we shouldn't invest in R&D," Frazier said. "The problem with R&D is 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," he said.

Frazier is also worried about price constraints from debt-ridden governments trying to cut healthcare costs and how that might prevent drugmakers from taking risks for diseases with no real treatment, like Alzheimer's.

New pressure on U.S. government reimbursement for medicines could come from a new advisory board, created by the healthcare overhaul passed by Congress last year.

"If we start putting price controls in the United States that are like the ones in Germany and other countries, I think we are taking away a huge amount of incentive for innovation," Frazier said.

However, Frazier said he did not think it would be a good idea to repeal the law championed by President Barack Obama, as many Republican presidential candidates have suggested.

He is encouraged by its focus on preventive care and an expansion of healthcare coverage to millions of uninsured Americans. Frazier met with Obama at the White House for about a half-hour earlier this year, where they discussed the healthcare law and the Food and Drug Administration.

"I did get a good response," Frazier said. "I don't know that it has actually been translated into action so far."

(Reporting By Lewis Krauskopf, editing by Dave Zimmerman)