Significant pharmaceutical advances in treatments for Alzheimer’s, cancer, diabetes and other diseases are all but inevitable in the coming years, said former Merck CEO P. Roy Vagelos at a presentation at Wharton last month. Small drug companies, he added, will be responsible for the most innovation in these areas largely because they can attract the best researchers with potentially valuable stock options. Vagelos also warned that the drug industry is courting disaster with pricing policies that appear divorced from the economic benefits its drugs provide.

In both his presentation and an interview with Knowledge at Wharton, Vagelos, a highly regarded executive who headed Merck labs and the company from the mid-1970s to the mid-1990s, said he is troubled by clumsy public relations and some recent policy initiatives of the pharmaceutical industry. “The industry is doing things now that I don’t think are right,” he noted. High prices for drugs without profound medical value “are turning people against the industry.” But Vagelos remains convinced that the pharmaceutical industry has vast potential to improve the health of individuals and society. “The next breakthrough will be startling and it will make people realize just how important the industry is.”


Always aware of the power of publicity, Vagelos said the pharmaceutical industry blundered by not quickly reaching an agreement to provide AIDS drugs cheaply to African nations. It did so only after massive public pressure. Many companies, he noted, don’t realize the benefits in better employee morale and favorable press coverage that come from doing good deeds.  At Merck, Vagelos and his executive team decided in the 1980s to give away a drug that could cure river blindness in Africa – a move that to this day helps tens of millions of people in that part of the world. The decision, however, was controversial. Merck, a profit-making drug company, was clearly expected to earn profits from drugs coming out of its laboratories – not give them away free. But Vagelos said the favorable publicity resulting from the decision was invaluable. It energized the Merck labs and instilled in the company a sense of mission. “We could hire almost anybody we wanted for 10 years because of the feeling in the company.”


Merck also struck a deal with the Chinese government, agreeing to sell the technology needed to manufacture a hepatitis B vaccine pioneered at its plant in Montgomery County, Pa., for $7 million. China had a major hepatitis B problem and Merck wanted to build a relationship with the Chinese government, Vagelos said. “We thought that one day China could be a great market for Merck. I am still hopeful.”


The Competition for New Ideas

Big pharmaceutical companies are facing a situation where costs to market drugs to physicians and the public are increasing enormously while drug-company laboratories are having trouble developing new blockbuster drugs to drive revenue. Something has to give, Vagelos said. “Everything is growing together and costs are becoming astronomical. We need a new paradigm.” These companies “continue to think they are a growth industry and I would like them to be a growth industry … But how do you get 10 percent or 12 percent growth a year? … It is becoming a mature industry.” Pharmaceutical companies, he predicted, will look outside their own labs for new drugs. “There will be lots of outsourcing” to smaller drug companies to develop medications. “Megacompanies will be competing wildly for new ideas.”


During his tenure as CEO at Merck, Vagelos restricted drug prices to increases in the consumer price index. At that time, inflation was much higher than it is today, which allowed him leeway to set prices. Merck also tried hard to price a drug so that it reflected economic benefits to the individual. This included making economic calculations as to how much money a drug saved when it prevented an individual from having heart surgery, or the economic benefit of allowing an individual to continue working when, without the drug, that would not have been possible. Merck pioneered the multi-billion-dollar statins cholesterol drug market under Vagelos.


“One should price for true value,” Vagelos said. He noted that one new cancer drug from a small biotechnology company – that would extend the life of a patient by a few months – was priced at $40,000 but did not treat the underlying cancer. Another formulation is the combination of two separately available drugs that deliver a 10 percent improvement in effectiveness but were doubled in price by the drug company marketing it. “I do have a problem with pricing,” he said.


Vagelos, 75, spoke at Wharton as part of a tour promoting his new book, Medicine, Science, and Merck, written with Louis Galambos, a history professor at Johns Hopkins University in Baltimore. The book is on the life and career of Vagelos, who was CEO of Merck from 1985 to 1994, and was 10 years in the making.


“One Price Policy”

During a Q & A with the audience, Vagelos suggested that the pharmaceutical industry adopt a “one price policy” when selling drugs in different countries, a strategy that would neutralize the current debate over drug imports from Canada and also would spread out the costs of research more evenly across consumers in different countries. He admitted that achieving a one-price policy would be difficult. Vagelos also predicted that with companies bringing to market similar drugs, the industry will have to compete on price. As a result, prices will come down.


During the interview with Knowledge at Wharton, Vagelos said that research remains his “lifeblood” and indeed, he is deeply involved in two small drug companies, Regeneron Pharmaceuticals Inc. and Theravance Corp. Regeneron is developing drugs for cancer and rheumatoid arthritis and Theravance is developing antibiotics and drugs for asthma and over-active bladders. Vagelos speaks with executives at the two companies almost daily.


In discussing the issue of leadership, Vagelos said it’s crucial to surround yourself with the right people, and keep employees focused on the project and feeling that they are successful. “Good leaders are very selective in the people they bring around them.” These subordinates are “people who understand the science and can translate the science into product.” Corporate leadership needs “to share the ups and downs of the research process. They live for the successes, buffer the downturns and bring people to their potential.” Success feeds on itself and institutions can easily feel defeated. “The longer you go without a new product the harder it is maintain spirit and momentum.”


Several weeks after Vagelos spoke at Wharton, three pharmaceutical companies in the U.S. announced they would step up research to produce a new combination AIDS drug that consumers could take in one daily dose. The goal is to make treatment for the disease easier and less costly – crucial elements in the effort to help millions of AIDS victims in Africa and other regions. The three companies are Merck, Bristol-Myers Squibb and Gilead Science.


As for the pharmaceutical industry’s focus on lifestyle drugs, such as Viagra and its copycats, Vagelos suggested that “there is nothing wrong with improving lifestyle but it would be hard to keep people at a research organization – one that is devoted to health care issues – incentivized and feeling good about reaching their career objectives if their products were exclusively lifestyle improvements,” Vagelos said. “It’s been clear to me and everyone in the industry that a drug company prospers when it comes up with important new drugs.”