Healthy Skepticism Library item: 15529

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: news

Steinberg M.
Can Merck Maintain Its Profitability as a Low Cost Drug Producer?
Seeking Alpha 2009 Apr 24
http://seekingalpha.com/article/132913-can-merck-maintain-its-profitability-as-a-low-cost-drug-producer

Full text:

Merck’s media relations representative Ronald Rodgers sent Click Broker a form letter objecting to the article “Merck and UnitedHealth Group Unprepared for Obama’s Healthcare Reform”. The purpose of my article was to highlight that Merck (MRK) and UnitedHealth Group (UNH) did not really believe significant change would happen and were unprepared if it did. Rodgers recommend that I read Merck’s Public Policy Position and Merck’s President of Global Human Health Kenneth C. Frazier’s speech before the FDA-CMS Summit for Biopharm Executives (12/04/2008) to correct the record.

Rodgers’ form letter contends:

“We believe your significant misstatements of fact are based on a lack of awareness of Merck’s positions on health care reform. The fact is Merck supports comprehensive healthcare reform in the U.S. While much work remains to be done, we believe healthcare reform is the right path forward for the patients we serve, our company and our industry.”

The documents make it clear that Merck and their trade group PhRMA wanted a seat at the healthcare reform table. The Wall Street Journal’s “Business Spends Less, Unions More on Lobbying” reports the Pharmaceutical Research and Manufacturers of America increased lobbying 12% in Q1 2009 to $6.9M. But the majority of their effort is focused on health insurance rather than reforming the practices of the pharmaceutical industry.

Merck’s recommendations center on maintaining the current public-private system with the following insurance reforms: play or pay for employers, mandated catastrophic coverage for individuals, guaranteed issue, community rating by age, eliminating pre-existing conditions with continuous coverage, and equal tax treatment for individuals and businesses. Merck is against any “Medicare for All” options. But Medicaid should be available for individuals up to 100% of the federal poverty level. Subsidies should be provided for private plan participants with incomes up to 300% of the federal poverty level.

Merck claims they support The Comparative Effectiveness Research Act of 2008, along with “more research and public dissemination of cost and quality”, and more transparent pricing. But Frazier really is not interested in the government determining cost effectiveness of drugs, only “comparative effectiveness” (efficacy). Merck does not want the government to say that the slight benefit of one drug over another is not worth the cost difference, or a drug is not worth its cost at all. This is a critical area were consumers need help.

Merck chooses not to address any of the pharmaceutical industry’s practices that drive up the cost of healthcare: direct to consumer advertising, life cycle management, and the ever expanding use of cholesterol and other lifestyle drugs. Direct to consumer advertising has created diseases and consumer fears where often no treatment is required. The idea is to create awareness that a slight pain or ache is really a serious problem. The advertisements say one disappointing evening leads to dependency on ED medications, or too many trips to the bathroom can spoil your day. Fortunately, the recession has stunted the effectiveness of direct to consumer advertising.

Life cycle management is a far more sinister version of the new and improved Tide syndrome. First, once a drug is approved, price increases one or more times a year are common. After the R&D and manufacturing startup costs are fully amortized, there is no free market explanation for price increases. The pharmaceutical market lacks any free market discipline; it functions more like an oligopoly. Merck is staunchly against the re-importation of drugs and Medicare Part D directly negotiating drug prices. Merck must believe that Americans should pay the highest price in the world for drugs.

Life cycle management part two is even more difficult to defend. The year before a drug’s patent is due to expire and be subject to generic competition its price is raised significantly. The new and improved version is much cheaper to attract all of the new prescriptions. Patients on the new and improved drug cannot easily be switched back to the generic form of the old drug. This transitioning severely weakens generic competition. A true free market would never support the volume of branded statins with so many generics available.

Lifestyle drugs for cholesterol, high blood pressure, asthma inhalers and others have been the lifeblood of the traditional pharmaceutical industry for the last two decades. Each year the disease delineation line for cholesterol and blood pressure are systematically lowered so more Americans fall into the group that needs treatment. Merck does not want the government to challenge the cost effectiveness of constantly expanding the target audience for lifestyle drugs. Pfizer (PFE) sees this ending and is dropping out of the cholesterol business once the patents for Lipitor expire.

Drug pricing has become much like the due diligence of corporate compensation committees. Drugs are priced to equal their peers, not compete against their peers on price. Competition is the roles of sales and marketing, in a world where cost is of no object.

In conclusion, Merck has not told us specifically how they are preparing to be a more cost effective participant in healthcare reform. Can Merck maintain its profitability as a low cost drug producer? Can Merck withstand world pricing coming to the American market? What changes in marketing and distribution would be required for Merck to compete under President Obama’s vision of healthcare?