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Raymond V. Gilmartin cautions Congress to be careful in looking for a solution.
By SARA FRITZ
© St. Petersburg Times, published August 1, 2001
WHITEHOUSE STATION, N.J. -- Raymond V. Gilmartin insists his company adheres strictly to the edict of founder George W. Merck: "We try never to forget that medicine is for the people, not for profits."
Yet Gilmartin, chairman of the giant pharmaceutical manufacturer, is not naive. He recognizes that soaring prices and huge profits have earned drug manufacturers a reputation for greed. And he knows many members of Congress are eager to impose restrictions on his industry in response to the complaints of consumers who cannot afford the medicines they need.
"When questions are raised about the profitability of our industry or the prices of drugs, we can cite a lot of evidence to come up with good answers to those questions," Gilmartin said. "But if you are a senior that is paying out of pocket and you're on three or four drugs that are chronic care drugs that you need, good answers don't make any difference."
During a wide-ranging interview with the St. Petersburg Times in his elegant Merck corporate office last week, Gilmartin, whose company manufacturers Vioxx for pain and Zocor to control cholesterol, indicated he now looks to Congress to enact legislation that his industry once strongly opposed: a Medicare prescription drug benefit.
The industry originally fought the creation of a Medicare benefit, fearing it would lead to price controls. Analysts say they decided to embrace it only after they realized it was inevitable that Congress would enact such a program. Like other drug company executives, Gilmartin hopes a new Medicare benefit will dampen criticism of drug prices.
But two other pending pieces of legislation spawned by public anger over drug prices have unnerved the drugmakers, including Gilmartin. These measures would allow American pharmacies to buy U.S.-made drugs at lower prices from foreign wholesalers and clamp down on efforts by the big pharmaceutical companies to prevent competition from generic drugs.
"In an environment where you have seniors who need access to prescription drugs, which is a highly emotionally charged environment, I think Congress has to be careful not to take precipitous action that could create unintended consequences," Gilmartin said.
Pharmaceutical prices are controversial not only because they are rising rapidly, but also because modern medicine relies more heavily upon drug therapy. Last year, total U.S. expenditures for prescription medicines rose nearly 19 percent.
In addition, because foreign customers, American health plans, nursing homes and hospitals get discounts on U.S.-made drugs, the highest prices are paid by Medicare beneficiaries and others who have no drug coverage. These are often elderly widows with no income other than Social Security.
Drug prices also are confidential. Thus, while studies show that Americans pay an average of $79.17 to fill a Vioxx prescription, the price to customers varies wildly and no category of customer knows what another one is paying for the drug. Hospitals and nursing homes pay the lowest prices; pharmacies and individuals pay the highest.
Gilmartin strongly defends this pricing system.
Unless the industry earns a substantial profit, he said, it cannot afford the cost of expensive scientific research to discover new drugs. Drugmakers say it takes $500-million to bring a new drug to market.
In Europe, Gilmartin contends, price controls have stifled innovation and talented researchers are moving elsewhere.
"Pricing policies are the same in the drug industry as they are in all other industries, in terms of offering different prices depending on the ability of a customer to affect your market share," Gilmartin said. "So if you are selling to Wal-Mart, it's a different (lower) price because they can deliver more market share."
Price lists ought to be secret because undisclosed prices increase competition in the industry, he said. "Disclosed prices lead to higher price levels. So this is a practice in the public interest."
In the high-powered, cutthroat world of drug manufacturing, Merck, which will post about $3-billion in sales during the current year, is seen as something of an anomaly.
"Merck has a squeaky-clean reputation," said industry analyst Hemant K. Shah. "In an industry that is under a constant cloud for putting profits before people, Merck is a leader in ethical conduct."
Likewise, Gilmartin, a trained engineer and 1968 Harvard Business School graduate who joined Merck 11 years ago, is one of the most respected drug company CEOs. He has a reputation of being a bright, down-to-earth guy.
Merck earned its good reputation, in part, by leading the way in the humanitarian activities of the industry. Its program to provide below-cost HIV and AIDS drugs to poverty-stricken people in Africa has gained the company considerable awards and praise. And others have followed. On Tuesday, it was announced that Nigeria has negotiated with the pharmaceutical company Cipla Ltd. to launch the largest AIDS treatment program in Africa using inexpensive generic drugs.
Critics say some drugmakers yielded to pressure to supply low-cost AIDS drugs to Africa as a public relations effort to stem criticism of high drug prices. But Gilmartin insists that Merck's program was the natural result of George Merck's 1950 dictum about putting people before profits.
He said the AIDS initiative was based on experience the company gained in its effort, beginning in the mid 1980s, to supply the drug Mecitzan to potential victims of river blindness in West Africa.
Merck is plainly proud of its initiative against river blindness. In the vaulted glass lobby of company headquarters, there is a sculpture depicting a young African boy guiding an old man blinded by the disease. But such humanitarian activities have failed to quell the criticism of drug prices in the United States.
"The drug companies are in a world of hurt; they are under attack from every angle," said John Rother, legislative director for AARP, a longtime advocate of legislation to create a prescription drug benefit for Medicare patients. "It's all about prices."
For many years pharmaceutical company executives argued strenuously that a Medicare prescription drug benefit would destroy their industry.
Merck was among the first drug manufacturers to drop its opposition to such a benefit, Gilmartin said. This was a result not only of growing public support, he said, but also because Sen. John Breaux, D-La., and Rep. Bill Thomas, R-Calif., wrote a proposal that the industry could accept.
Many reform bills offered before the Breaux-Thomas measure would have created a single government agency to manage a Medicare drug program. Instead, Breaux and Thomas called on the government to contract with private benefit managers to administer it. The final bill is expected to be patterned on this model.
Gilmartin's company has a subsidiary, Merck-Medco, that acts as a benefits manager for many employers and presumably would be one of the companies hired under such a Medicare drug program.
"If it's a totally government-run program," Gilmartin said, "it basically becomes one of administered prices. . . . If you have competitive plans, then they will create the price competition as one step to ensure that price increases aren't a factor."
Although the industry insists that drug prices must be set by free-market competition, it should be noted that manufacturers also enjoy benefits of government intervention, including federally funded scientific research, government regulation and tax incentives.
Once seniors are provided with federally subsidized drugs, Gilmartin predicts, Medicare patients will be less likely to need more expensive surgery or hospitalization. Therefore, he said, costs will fall. "I think you'll have a more satisfied constituency," he said.
There is no guarantee, however, that drug benefits will reduce Medicare expenditures. The AARP's Rother is one of many experts who predict that Medicare costs will continue to rise with the addition of a prescription drug benefit and that drug companies will come under government pressure to moderate their prices.
If the government is footing the bill for prescription drugs for seniors, will the companies be forced to disclose the prices they charge various customers? Rother thinks the companies will have to make prices public; Gilmartin says they can remain secret.
Enactment of a Medicare prescription drug benefit likely will kill support in Congress for legislation allowing reimportation of U.S.-made drugs sold at lower prices in foreign countries, according to experts on both sides of the debate.
Rep. Bernie Sanders of Vermont, the leading proponent of reimportation legislation, said the goal of his bill is to bring pressure on Congress to enact a drug benefit for seniors. In his state, he said, many seniors now go to Canada to get cheaper prescriptions.
The drug industry opposes reimportation on grounds that there is no way to prevent tampering while the drugs are in another country. Gilmartin said it raises "legitimate safety issues."
But creation of a prescription drug benefit for seniors is unlikely to dampen enthusiasm in Congress to curtail some practices of the industry. In fact, once the government is subsidizing prescriptions for seniors, pressure could increase on the industry to curtail costly and highly controversial advertising of prescription drugs on television and in magazines.
Consumer and seniors groups say expensive advertising of such products as Claritin and Viagra contributes to higher prices. In defense, Gilmartin says it often encourages patients to seek treatment for ailments that otherwise might be ignored.
Congress also may clamp down on the legal maneuvering by many companies designed to preserve patents on blockbuster drugs after the patents officially expire. By doing so, these companies seek to prevent low-cost generic drugs from being brought to market.
Gilmartin, whose company holds soon-to-expire patents on four popular drugs, says that any legislation changing the current patent process could make the situation worse. At the same time, he insists Merck does not engage in courtroom tactics to prevent generic competition. He thinks the government should resist the temptation to control the prescription drug market because, he said, the industry is on the verge of discovering many new medicines.
"That's why," he said, "it's critical at this point that we deal with things like prescription drug coverage without destroying our ability to innovate."
CORPORATE HEADQUARTERS: One Merck Drive, P.O. Box 100, Whitehouse Station N.J. 08889
STOCK: Listed on the New York Stock Exchange
SALES: $40.363-billion in 2000, up 23% from 1999
NET INCOME: $6.822-billion, up 16% from 1999.
RESEARCH AND DEVELOPMENT EXPENSES: $2.344-billion in 2000.
NUMBER OF EMPLOYEES: 69,330 in 2000
DRUGS MANUFACTURERED INCLUDE: Zocor for elevated cholesterol; Fosamax for postmenopausal osteoporosis; Propecia for male hair loss; Proscar for benign prostate enlargement; Pepcid AC for heartburn; Crixivan and Stocrin for HIV infection; Vioxx for osteoarthritis and pain; Maxalt for acute migraine; Singulair for chronic asthma; and Comvax, a flu vaccine.
DRUGS UNDER DEVELOPMENT INCLUDE: Vaccines for HIV/AIDs, genital warts, cervical cancer and shingles.