Podcast: The Future of the Pharmaceutical Industry, According to Former Merck CEO Roy Vagelos

Roy Vagelos, a highly regarded pharmaceutical executive who spent two decades at Merck, including 10 years as CEO, has often said that “research remains my life blood,” and indeed, he has stayed active in the industry since his retirement from Merck in 1994. For example, he is chairman of the board of two small drug companies, Regeneron Pharmaceuticals and Theravance, and in 2004 co-authored a book entitled, Medicine, Science, and Merck. Vagelos recently spoke with Robbie Shell, editorial director of Knowledge@Wharton, and Steve Guglielmi, Knowledge@Wharton senior editor, about the future of the pharmaceutical industry, including competition from generics, the impact of outsourcing, biotech alliances, pricing strategies, and the next big drug breakthroughs.

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Roy Vagelos podcast on April 10, 2006


Roy Vagelos, a highly regarded pharmaceutical executive who spent two decades at Merck, including ten years as CEO, has often said that “research remains my life blood”. And indeed, he has stayed active in the industry since his retirement from Merck in 1994. For example, he is chairman of the board of two small drug companies, Regeneron Pharmaceuticals and Theravance, and in 2004 co-authored a book entitled, Medicine, Science and Merck.


Vagelos recently talked with Steve Guglielmi, senior editor at Knowledge@Wharton, and Robbie Shell, editorial director of the Knowledge@Wharton network, about the state of the pharmaceutical industry today.


At a recent Wharton healthcare business conference held here, one of the panels was entitled Lagging R&D productivity – what should the pharmaceutical industry do?  Panelists ticked off a number of reasons for the slowdown in new drugs coming to market, including longer and more expensive clinical trials, an over emphasis on elusive blockbuster drugs, the huge amount of money spent on sales and marketing staffs and so on.  What do you think is the main culprit behind this perception that the big pharmaceuticals are no longer coming up with the drugs that people need, want and can pay for?


That’s a wonderful and very broad question.  First of all, all of the things that were listed as limiting the productivity of the pharmaceutical industry are correct to some degree.  However, one should take the long view and recognize that there are waves of new product discovery as new technology is introduced.  For instance, in the mid 70’s when I and a group of people with me moved to Merck, we brought biochemistry and molecular targeting to Merck that yielded such things as statins. The first one was not discovered at Merck, but the first one that went on to the market was discovered at Merck.

The drugs for high blood pressure, which were the drugs of choice, the drugs for glaucoma, new antibiotics — there was a whole stream of drugs, not coming only from Merck, but other companies, that caught on to biochemistry as a technology to use in drug discovery and molecular targeting. And so there was an upgrade in a number of new products that were introduced over a 15-20 year period, which came from that new technology.   

Well, the information that gave rise to those drugs is now tapering off. New sources of new information, coming from genomics and proteomics, are just beginning. We have seen more in the way of understanding proteins and the molecules that are involved in cancer.  For instance, new drugs like Avastin and Erbitux and things like that – these are products that are different kinds of cancer drugs. 

I think we are going to see drugs in Alzheimer’s disease simply because we have reached a new level of understanding based on genomics.  And so, we are going to hit another upgrade in introduction of new important drugs and vaccines I’m very optimistic over the long term and believe that the changes that we have seen in the last fifty years will be eclipsed by the changes we see in the next fifty years.


On the question of generic drugs, how big a hit are pharmaceuticals taking from the number of drugs that are coming off patent and thus susceptible to inroads from generics?


Well, the hits are enormous.  Almost every company has a couple of drugs that are their largest selling drugs.  That’s happening at Merck.  Everybody knows that Zocor is going to come off patent this year and there are drugs throughout the industry that represent often a disproportionate amount of their revenues and a much greater part of their profits.  And that is the game we play.  We know that the patents are going to be on paper for twenty years.  And in effect, after you go through the development program, you end up with perhaps 10-12 years of patented protection.

After that, your drugs are going to become generics.  And the question is do you have an adequate pipeline behind them?  And that’s the game that everybody is playing.  Those are the bets that are made.  And the only people who can solve that are the leaders of research.  Can they come up with new ideas?  Can they make new breakthroughs to really make significant improvements in health going forward? So as the big ones come off – new ones are starting up and coming in. 

For instance, as the cholesterol drugs at Merck go off patent, there is a new stream of high cholesterol controlling drugs that are just entering the market.  And, the question is will they grow up fast enough to pick up the losses that will be resulting from the fact that there will be generic competition. So it’s a big deal.


What about India specifically?  How serious is the competition viewed there in terms of generics?


Well, India of course is an entirely different thing because they do not adhere to patent laws and therefore they will introduce generic competition whenever they can get away with it.  It’s not a problem in the United States because they can’t bring in generic products into the U.S. and compete illegally. But they do in other parts of the world.  So on the one hand, Indian generics are an issue in that you have to be careful that they are not illegally coming in and taking your market. 

On the other hand, they were important in introduction of modern HIV drugs in Africa when the multinational large pharmaceuticals were putting their head in the sand and saying that they could not possibly provide drugs to Africans, because the prices would have to have been too low to allow them to even recover their costs.  Well, when the Indians started putting in generic drugs and making a profit, that was very embarrassing, as it should have been to the multinationals.  And each one then, somehow out of magic, was able to introduce a program picking their own country, where they did a magnificent job at introducing HIV drugs, which they could have done before without getting a black eye.  But the whole industry took a terrific bashing, which was well deserved.


Drug companies’ return on investment has been fairly abysmal, I think from a Wall Street point of view.  And some would say that the business model is broken.  One suggestion has been to ramp up the alliances with biotech companies.  Pfizer announced last week that it would acquire Rinat Neuroscience; the biotech company that works on drugs for Alzheimer’s and pain medication.  Is acquisition of biotechs a viable path?


I think acquisitions, licensing, long term deals of various sorts are going to be the norm going forward.  There are several reasons for this. One is that much of the inventive talent that is coming out of the training lines is being attracted to the small companies for obvious reasons. These small companies are often started by professors with good ideas.  And when the professors start their little company down the street, of course they want to succeed and they’ll send their best students to that little, small company. 

So they are siphoning off the top those who would have otherwise gone to the large pharmaceutical companyies and driven their research productivity.  So a lot of that is going there and the large companies are recognizing that much of the inventiveness, the people who are the risk takers, and the people who are coming up with the exciting new stuff, are at small companies.  So they are acquiring them, they are licensing them etc. and that’s what they are going to do.


But at the same time, the biotech industry has lost literally tens of billions of dollars over the last three decades.  So, how hard is it for a pharmaceutical company to do an alliance?  How do you know when to get into that company?  What stage of development do you enter into a deal?


That’s a good question.  It depends on your understanding of the signs of what they’re doing and the sophistication of the people making the choices; because the trick obviously is going to be to select the winners.  There are very few winners among the biotech startups.  Most of them are not going to succeed. And so one must select the winners before they’re obvious, before they are in the clinic, because once they are in the clinic everyone is going to go after them.  There will be huge competition.  The trick is to go earlier than that, before it is obvious.  This takes enormous sophistication but there are some people who can do it, some are sophisticated.  And what the large companies are discovering is that instead of having most of their hot shots in the laboratories, they’re going to have to have some hot shots making the selections.


A growing trend in the pharmaceutical industry is the outsourcing of work at various stages of drug development, whether it’s been entering data or running clinical trials, which are now being conducted in places like China, India, South Africa, and Eastern Europe.  Is this a positive trend or do you foresee problems with that model? 


I don’t see any problems with that model as long as the studies are done in places that adhere to FDA requirements and are FDA approved.  As long as you have that there’s no problem.  The issue is finding enough patients who fit the criteria that are required for the studies and have on the ground adequate facilities and people to carry out good studies.  So wherever you do the studies is okay with me, so long as they’re done well and can be audited and monitored well and adhered to all the regulations. 

So, I don’t think that’s a problem, and I think not only clinical studies, but many things are going to be outsourced in the future.  For instance, most of the big pharmas have enormous, dedicated manufacturing facilities.  One can have chemicals or even proteins made at a fraction of the cost by going outside of the United States and outsourcing.  And these are plants, (especially small molecules) that are completely FDA approved.  And so big pharma is going to be left with this huge plant, wondering what to do with it at some point.


We had a speaker from a major pharmaceutical company here several months ago, who contended that the pricing system for drugs in the U.S. simply doesn’t work.  At one point you had suggested that the industry should adopt a one price policy when selling drugs in different countries.  This is a strategy that would neutralize the current debate over drug imports from Canada, for , and also would spread out the cost of research more evenly across consumers in different countries.  How difficult would it be to achieve that one price policy?


Well, it is extremely difficult because the prices in other countries, other than the United States, are controlled by government.  They are all negotiated prices and so you have the situation in the United States where a company would come up with a price that is based on the value delivered for that drug and that was the U.S. price.  Then they would try to deliver that in other parts of the world. Most other places will not pay that price because they don’t want to pay for the research. 

So the trick going forward — and it probably will never happen — is that a very important new drug will be invented in the United States again, (as they always will be) I think.  Then that company will say, look we have this one price and if you want it, that’s what it will cost because that is how we can run our research organization.  It will be a fair price.  It will be priced to value.  Are you improving quality of life? Are you keeping people alive? Are you keeping them out of a hospital? 

If you take criteria of that sort and base your pricing on it, then you can be very tough about it. I would be very tough.  But you have to have a life saving, important drug and force the other countries if they want it, to pay for it. Now I will say that some of the pricing recently, of some cancer drugs, some of these prices are excessive and they don’t adhere to my value model.  They say. ‘Here is a drug that will increase life on the average of four to six months, and for that you pay $50,000.’  I can’t accept that 


Do you feel that companies are maybe too focused on lifestyle drugs like Viagra rather than on important life saving drugs?  And also, do you think that companies are focusing maybe too much on producing drugs for illnesses for which there are existing treatments?


Your first question with regard to lifestyle drugs, Viagra came out of a research program that was looking for a cardiovascular product and it turned out that it wasn’t very good for cardiovascular disease, but it went to the genitals and it had an affect on erection.  And, therefore they got a big product out of it, but they were not focusing on that.  Now others went after that same mechanism to get another Viagra and so there are several on the market now.  That has never been a major target.  I think most pharmaceutical companies are looking for life saving drugs and are dedicated to improving health.  I really believe that.


So, some of these lifestyle drugs are more of an accident?


Yes.  After the first one, of course the ones that also follow the same approach come up with another accident.


Sure – the profitable accident.


But the other question was, you also asked are there people working on drugs where there are already drugs in the field. Well, yes that is done and the reason for that usually is that you are looking for an improvement.  For instance, you have a drug for high blood pressure, but you have to take it three times a day.  People with high blood pressure don’t want to take pills three times a day.  So a once a day drug for compliance alone would be an improvement.  

You can also have side effects which you can eliminate by a second generation drug.  So you can improve compliance and you can get rid of side effects.  You can sometimes increase potency over the original drug and achieve a level of therapy that was not achieved by the first product in the field. And so there are good reasons to try to improve drugs in places where there are already drugs, but which are not good enough.


Your leadership in the 1980s when you spearheaded the effort at Merck to give away a drug to cure River Blindness in Africa is still cited as a textbook example of a company stepping up to its responsibility as a global citizen.  Of course the move brought favorable publicity to Merck, but it also energized the company and gave it a sense of mission for probably decades after that.  You don’t hear stories like that any more.   Why not?  And how can pharmaceuticals do a better job of restoring the public’s confidence?


Well that’s a very complicated question also.  We did something; it was a strategic move in 1987 to supply Ivermectin, a drug we call Mectizan for when it was applied to River Blindness.  We started with a program knowing that there were eighteen million people who were infected, one hundred million people who were at risk, and we decided after I worked for over a year to try to identify sources of funds to cover those drugs in governments where they would be sold the drug by Merck essentially at cost.  And they would not do it. 

So we had this possibility of a drug sitting on the shelf that was going to prevent eighteen, twenty, fifty million people from becoming blind.  And we stepped up to it and said that we would contribute it free to anyone in the world for as long as it was required.  That stunned the world and I will tell you the people of Merck were absolutely ecstatic.  They said, ‘You know we never thought we would ever do something this good.’  And it assured Merck’s being able to recruit the top people in every field for decades. It was a terrific move that had been stewing for many months on how to get it done, to get the drugs to the people. 

Why aren’t other companies doing as much?  I don’t know.  I think they look at the immediate expense and they back away from it.  They fear affects on pricing which we did not have with that particular product, because it wasn’t going to be sold in other parts of the world.  River Blindness is only in poor places.  So for various reasons people have not been very positive in following us there.  Some have, but few.

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