Remarks by Raymond V. Gilmartin
The 2nd Annual National Congress on the Future of Genomics, Biotechnology and Pharmaceuticals in Medical Care
Hyatt Regency Crystal City, Arlington, Va.
Friday, November 17, 2000

 It's a pleasure to join you this morning to talk about the state of the pharmaceutical industry and the global health opportunities and challenges that we face.

        No one is more optimistic about the future of the pharmaceutical industry than I am. Ours has been a dynamic industry that has made, and continues to make, dramatic improvements to public health around the world. We have prospered as an innovative industry because many of the right conditions have been in place to support innovation.

        For example, we have market-based competition in the U.S. We have access to global markets. We as a nation make significant investments in basic research through the National Institutes of Health and academic research centers to provide the building blocks for science for the common good. Our regulatory system in the U.S. has set the standard for the rest of the world to follow. No one has been more adept at translating cutting-edge science into breakthrough medicines than the U.S. pharmaceutical industry.

All of these things have helped our industry to be extraordinarily successful.

        At the same time, there are threats to the sustainability of an innovative climate for pharmaceuticals. There are legitimate concerns about drug costs and access which, if not properly addressed, can severely challenge the health of this industry.

        Also, while we have strong intellectual property protection in this country, that is not the case throughout the world. We must as an industry ensure that patents are not seen as barriers to competition or access, but instead are viewed as potent drivers of innovation.

        So while I am optimistic about the health of the pharmaceutical industry moving forward, our success is by no means assured. In order to achieve its full potential in the years ahead, the pharmaceutical industry must successfully address three fundamental challenges. We as an industry and as individual companies must:

• Harness successfully the changes in technology that will fundamentally transform science and medicine in the 21st century
• Engage constructively with governments throughout the world to ensure access to medicines, and
• Provide clear evidence of the value of pharmaceuticals to patients, payers and providers.

        Success for companies will depend on their ability to translate cutting-edge science into breakthrough research. Success for the industry will depend on our ability to solve problems related to access, and success for both individual companies and the industry as a whole will depend on the ability to demonstrate the value of our medicines in an increasingly cost-conscious environment here in the U.S. and around the world.

Changes in Technology

        No one can deny that we are in the midst of a great biomedical revolution. The sequencing of the human genome, along with other advances in science and technology, means that researchers can begin to understand the secrets of human health and disease at a more fundamental level than any of us might have imagined a decade ago.

        At Merck we have long felt that fundamental genomics information belongs in the public domain. However, it is the understanding of gene products and their function in health and disease that provides potential new drug targets for companies like ours. Our challenge within the pharmaceutical industry is to apply this explosion of knowledge to produce the breakthrough medicines of tomorrow.

        As I said earlier, no one has been more adept at translating cutting-edge science into breakthrough medicines than the U.S. pharmaceutical industry, which has produced nearly half of all the important new drugs introduced globally over the past two decades. Merck alone has introduced 15 new medicines in the past six years for such conditions as high blood pressure, asthma, osteoporosis, arthritis and HIV/AIDS. Our continued commitment to research and development heralds even more new therapies for the treatment of disease and, increasingly, the prevention of chronic disease.

        Along with the rest of the industry, Merck's research budget has increased significantly, from $1.3 billion in 1995 to an estimated $2.4 billion in 2000. We have fully integrated genomics and DNA-based research throughout our laboratories and are using genomics research to identify targets for new medicines and potential new vaccines.

        In addition to science initiated in our own laboratories, we - and many other companies in our industry - are forming external research partnerships. For example, we have licenses and collaborations with more than 40 companies, universities and research institutions throughout the world. These collaborations include product candidates, genomics and gene technologies, vaccine arrangements and basic research tools.

        Discovering breakthrough medicines has been the cornerstone of our strategy for growth. In an era of heightened competition - where fast followers continually shorten an innovative company's market exclusivity - continued innovation is essential to our survival. Discovering breakthrough medicines is what will separate the winners from the also-rans in our industry.

Access to Medicines

        As I stated earlier, the most successful companies in our industry will be those who are most adept at translating cutting-edge science into breakthrough medicines.

        But increasingly we are realizing that developing the best in medicines cannot fully accomplish our purpose of improving global health. For that, we need to ensure that those who need our breakthrough medicines have access to our medicines.

        In the U.S., there are two pressing issues on the national agenda as we look ahead to a new Congress and new President:

        First, prescription-drug coverage for Medicare beneficiaries and, second, health care coverage for the 42 million Americans who lack any insurance - including for medicines.

        On Medicare, Merck continues to believe that the inability of many seniors and people with disabilities to afford prescription drugs is an unsustainable situation demanding action. While it is always difficult to interpret election results - and no more so than this year - I believe that there is a consensus for positive action on Medicare prescription drug coverage.

        Whether that action will come in 2001 or 2002 or further down the road, it will come. Shaping that action is a crucial challenge for our industry. The right Medicare prescription drug legislation will extend to all Medicare beneficiaries the benefits of good drug coverage while preserving the incentives to find the cures.

        The wrong Medicare prescription drug legislation will perpetuate a failed model of government control over prescription drug prices and choices that many governments around the world are seeking ways to reform. The wrong Medicare prescription drug legislation will stifle the exciting race to put new science to work in the search for new medicines.

        We continue to believe that the best way to provide a prescription drug benefit to Medicare beneficiaries is by modernizing the current system so that it is much more like the best public and private sector employee systems such as the Federal Employees Health Benefits program.

        And, whether that path is taken by the new Congress and new President, or one more limited to adding a prescription drug benefit to the current Medicare program, we are hopeful that the principles of choice and competition that were included in many Republican and Democratic proposals over this past year will prevail.

        These proposals put a meaningful benefit within the reach of all Medicare beneficiaries - no matter how much or how little they earn. These proposals rely on the private sector, not a government bureaucracy, to deliver the drug benefit. These proposals give beneficiaries a choice of prescription drug plans so that they can select the best plan for their needs. And these proposals place the power to negotiate drug prices in the hands of the health plans instead of placing the power to set prices in the hands of the bureaucracy.

        At Merck, we also hope that as a nation we can begin to address the needs of the millions of non-elderly who lack health insurance including drug coverage. While some in our nation choose to forgo insurance, others have no option.

        Large portions of these are in families where a wage earner is employed by a firm that does not provide health coverage to its employees. Most of these firms are small and lack the infrastructure, purchasing power, and means to play the role of companies like Merck in giving employees a choice of health plans.

        Here again, there is reason for optimism that this problem is not intractable. Both Democrats and Republicans have proposed tax incentives and other means to provide businesses with the ability to provide insurance choices and give workers assistance in purchasing them. While proposals differ in critical details, many have the common goal of putting the private health insurance sector to work in meeting this urgent national need.

        And with good health insurance coverage comes good pharmaceutical coverage. At Merck, we understand our role in this important debate and look forward to working with all sectors of the health care industry in the months ahead.

 

        Around the world, the problem of access to pharmaceuticals is acute for the billions of people who also lack access to the basic health care needs that we as Americans take for granted.

        At Merck, we recognize that we have an important role in addressing this issue. A good example of our commitment to accelerate access to medical care in the developing world can be found in Botswana, a country with 1.5 million people - one-third of whose adults are infected with HIV.

        At the International AIDS Conference in Durban in July, the Republic of Botswana, along with Merck and the Bill & Melinda Gates Foundation, announced the Botswana Comprehensive HIV/AIDS Partnership. This initiative is designed to demonstrate the feasibility of a comprehensive, targeted approach to improving the entire spectrum of HIV care and treatment in one of the African countries hardest hit by the epidemic. Working together, we hope to stem the tide of the HIV epidemic in that country.

        The partnership will be conducted with the participation of the Harvard AIDS Institute and other academic centers; global health and development agencies, such as the Joint United Nations Programme on HIV/AIDS; non-governmental organizations; HIV community organizations, and people living with HIV.

        The Gates Foundation will dedicate $50 million over five years to help Botswana fundamentally strengthen its primary health-care system. Merck and The Merck Company Foundation will match the Gates Foundation funding through two major components: the development and management of the program and the contribution of antiretroviral medicines. Two other companies, Boehringer-Ingelheim and Unilever, have already agreed to join this partnership.

        In Botswana we see our responsibility as working with the government and our partners to dramatically improve prevention, care, and treatment for HIV including training, education, testing, counseling, and medical care.

        We are all working together, looking for long-term solutions. Such solutions can come only from comprehensive approaches that draw on the complementary expertise of all stakeholders - so we are working with groups both global and local, governmental and non-governmental, public and private. We're involved because we want to make our medicines not only available but also accessible. The partnerships we have been creating are helping to build a health-care infrastructure that will allow medicines to be better delivered in the future.

        There is reason to believe that efforts such as the Botswana Partnership will be far more effective than other approaches that are destructive to innovation, such as the weakening of intellectual property rights through compulsory licensing and parallel imports of copies.

        Doing away with patents will not provide patients with medicines. But creating a health care infrastructure and delivery system and educating health care professionals can help.

        In fact, by improving the health care delivery system, it may be possible to stimulate further medical research and development and create new markets for our medicines, especially for diseases endemic in developing countries. And we would hope that intellectual property protection would be seen not as a barrier to access, but as a powerful incentive for badly needed innovation and research.

Value of Pharmaceuticals

        Ensuring access to pharmaceuticals is a critical challenge. And access costs money. As an industry, we must recognize that access is threatened if the governments, employers, insurers and individuals paying for our medicines do not believe they are getting good value.

        A study done earlier this year by our pharmacy services subsidiary, Merck-Medco, found that while absolute spending on medicines is continuing to rise at a double-digit rate, approximately two thirds of the increase can be attributed to increased utilization. Simply put, more people are using more medicines to treat conditions for a longer period of time. Price inflation, by contrast, has been the least significant factor.

        Utilization is growing in part because of the average age of the population. And as we age we tend to have more conditions that can be managed with medicines. Heart disease, arthritis, and osteoporosis are just as few examples. Regardless of age, people are also using more medicines because patients, health care professionals and providers are better informed about the benefits of using medicines to treat and prevent disease.

        Finally, utilization is growing because of the high rate of innovation of the industry - new treatments and more effective treatments have been driving not only the growth of the industry - but utilization as well.

        As more public health emphasis is placed on early detection and prevention, there is no question that the appropriate use of medicines can be cost-effective, often reducing hospitalization and other expensive and less effective medical interventions.

        Yet as purchasers of pharmaceuticals become more cost-conscious, price sensitive and indeed more powerful, the burden of proof lies more heavily than ever on the pharmaceutical industry to provide evidence of the value of its products. Let me cite a few examples of how we've been doing that.

        A few years ago, we conducted the landmark 4S (Scandinavian Simvastatin Survival Study) with Merck's cholesterol-lowering medicine Zocor. This study demonstrated for the first time that a statin medicine could help save lives and prevent heart attacks in patients with high cholesterol and heart disease. Subsequent analyses of that study showed that cholesterol-lowering treatment of heart-disease patients lowered hospitalization and reduced the need for costly bypass and angioplasty procedures.

        We also know that appropriate use of asthma controller medicines can reduce emergency room visits, and that osteoporosis therapy can reduce hip fractures, helping to keep people out of the hospital and reducing costs in other parts of the health-care system.

        Even when pharmaceutical care does not directly reduce costs, it still provides significant value. For instance, appropriate use of medicines can improve employee productivity, as employees lose less time to illness.

        A Merck-Medco analysis of 10,000 employees, for example, demonstrated that patients with asthma and migraine headaches missed far fewer days at work if they received the optimal prescription medicines.

        We believe that when medicines are used appropriately, increased use can be seen as a positive trend. Two decades ago, the U.S. spent almost 50 percent of its health-care dollars on hospitalization. Today, hospitalization accounts for less than 40 percent of spending and is heading even lower, signifying a profound shift in how we treat illness and maintain health. Even so, spending on pharmaceuticals still accounts for less than 10 percent of total health-care spending in the U.S.

        Nevertheless, government, health care providers, employers and health plans are concerned about the rise in pharmaceutical spending versus other costs. The key to addressing this challenge is to have breakthroughs that are true advances in medical care, with benefits that patients can clearly perceive and which physicians can tangibly appreciate. With these conditions in place, payers will recognize the value of our medicines.

 

        Let me say a few words about the role of pharmaceutical benefit managers in this environment. We have seen through Merck-Medco that when companies and health plans adopt such tools as utilization management, generic substitution, formulary management, appropriate use of the Internet and mail-service pharmacy, they can cut their rate of increase in pharmaceutical spending by up to half.

        The Internet offers vast potential to add value for the people who take our medicines. At merckmedco.com, we became the world's leading Internet pharmacy because we were able to offer our customers more than just an opportunity to order medicines. As we continue to enhance our site, we are using it to develop customized health information and services tailored to the unique needs of each customer.

        Use of the Internet and health management tools are adding value for people who have pharmaceutical coverage. But what about those who pay out of their own pockets for prescription medicines? Using many of the tools Merck-Medco employs for its funded customers, in April we launched a program called YOURx PLAN. This program provides consumers with discounts on virtually all prescription medicines but also gives them access to the health management information and drug-interaction services which before were only available to customers with prescription drug insurance.

        These efforts by Merck-Medco are continuing. Just this week we announced the launch of an innovative new effort to help health plans and employers manage their prescription drug spending more effectively. It's called Generics First. Under this program, Merck-Medco pharmacists will be calling on physicians and making samples of generic medicines available for use in appropriate patients.

        As a company, we believe this is the right thing to do. With the availability of important new generic medicines over the next few years, we now have a unique opportunity to substantially reduce the cost of care, while maintaining the highest quality. To put this in perspective, just a one percent increase in the use of generic drugs equates to a more than $200 million savings for our plan sponsors and their members.

        In addition, Merck believes the savings achieved by the increased use of generics will create more headroom for innovation by freeing up money to pay for the latest breakthrough medicines from the pharmaceutical industry.

 

        What I've tried to do this morning is to give you a glimpse of some of the key issues and challenges facing our industry at this time of significant growth and change:

• From the explosion of knowledge about the pathways of disease
• To the problems of access to medicines both in the U.S. and around the world
• To the ever-increasing challenge of demonstrating the value of our medicines to health-care decision makers in HMOs, large companies and governments.

        The key to mastering each of these challenges is innovation: taking cutting-edge science and turning it into breakthrough medicine, ensuring that the barriers to access are removed, and demonstrating the value of medicines to healthcare decision-makers globally.

        In this increasingly competitive environment, I believe that success can only be determined by innovation. Competitive forces will bring about further industry consolidation, but consolidation is not what will guarantee growth or success. As it always has been, our industry will remain a knowledge-based enterprise.

        So in closing, I think this is a time of unprecedented opportunity within our industry, given the rapid pace of technological change. But it is also a time of tremendous challenge. The companies that survive and grow in this environment will be the ones with the strategic insights to recognize true scientific breakthroughs and quickly translate those discoveries into breakthrough medicines, companies that will work with governments throughout the world to assure access to their medicines while protecting intellectual property abroad and a market competition in the United States, and companies that are most adept at demonstrating to health-care purchasers around the world the true value of our medicines.

# # #