Drug Maker Merck Fires Back at Critics : Ads Say Government Is Making Industry a Scapegoat

In an aggressive campaign to answer government critics of the pharmaceutical industry, the nation’s largest drug firm on Friday defended its prices in newspaper advertisements, claiming that drug firms are being made scapegoats for the high cost of health care.

The Merck & Co. ads, placed in some large newspapers, note that drug costs represent a small portion of the nation’s total health care tab and asserted that proven drugs are a cost-efficient therapy for many illnesses.

Solving the nation’s health care crisis requires “ . . . a search for truth, not for scapegoats,” Merck & Co. Chairman and Chief Executive Dr. P. Roy Vagelos said in a letter contained in the ads.

The ads are an unusual public salvo in an industry relatively new to taking its message directly to consumers. And the campaign highlights the growing tension between the pharmaceutical industry and the government as the Clinton Administration develops a comprehensive health care reform package for submission to Congress this spring.

President Clinton has added his voice to a chorus of critics in Congress and among consumer groups who have increasingly complained that drug prices are outpacing the rate of inflation--creating fat profits for the industry but imposing a burden on consumers whose prescription drug costs usually are not covered by insurance.

The new President made it clear last month that lower drug prices will have a high priority in his Administration’s reform package.

In his statement in the ads, Vagelos says that inadequate vaccine distribution, not cost, is to blame for some children going without vaccinations, as Clinton alleged last week in a widely publicized announcement introducing a program that aims to ensure that every American child is immunized.

Vagelos also disputed a recent U.S. Senate Special Committee on Aging report that accused Merck of failing to live up to its 1990 promise not to raise its drug prices higher than inflation. Vagelos said Merck’s drug prices have risen an average of 3.6% a year, under the 4% annual inflation rate.

Vagelos also said that drug costs represent a small fraction of the overall dollars spent on health care and that effective drugs ultimately save money by keeping patients “out of hospitals, out of operating rooms and out of nursing homes.”

Clinton’s criticism of drug pricing has contributed to growing investor pessimism, and stock prices of Merck and many other health care companies have declined steeply in recent weeks. After trading as high as $53 a share over the last year, Merck closed on Friday at $36.875, down $1, in New York Stock Exchange trading.

Pfizer Inc., another leading drug firm, tumbled $4.625 to close at $54.50, and Baxter International slipped $1.625 to $28 in Friday’s stock trading.

Kristine Bryan, a drug analyst with S. G. Warburg investment bankers in New York, said the stock market is merely reflecting the gloomy outlook for drug firms.

“It’s been our own opinion that the Clinton Administration has been focusing on a purgatory for drug firms separate from health care reform and more extreme,” she said.

Drug makers have argued that high risks and the cost and long lead times required to develop new drugs justify their prices. And they say that tinkering with drug pricing could cause long-term harm to one of the nation’s leading industries, generating nearly $100 billion in worldwide sales last year.

A new drug typically takes $231 million and 12 years to get to market, according to a Tufts University study. Successful new drugs must also pay the costs of developing the hundreds, even thousands, of chemical compounds from which successful chemical compounds are culled.

Moreover, Merck and other companies say that even if the government took the drastic and hypothetical step of eliminating manufacturers’ profits--which would result in a 20% cut in prices--the cut would result in an overall health care cost savings of 1%.

Prescription drug costs accounted for $36.4 billion, or 5.5% of the $660.3 billion spent on personal health care in 1991, the last year for which figures are available, according to the Health Care Financing Administration. Hospital care ($288.6 billion) and physicians’ services ($142 billion) represented the lion’s share of 1991 health costs.

The industry insists that self-imposed price controls are working. The Pharmaceutical Manufacturers Assn., a Washington-based trade group, says drug price hikes in 1992 averaged 5.7%, down from the 9.4% average hike the previous year.

“The jawboning by Pryor and others has had an impact,” said PMA spokesman Jeff Trewhitt, referring to recent remarks by Sen. David Pryor (D-Ark.), a longtime critic of the industry who chairs the Senate Special Committee on Aging.

Discussing Merck’s new ad campaign, company spokesman Kevin Colgan said Friday that the firm “wanted to make it clear that Merck also wants health care reform. We want to engage in a constructive dialogue with policy-makers.

“But the issue of drug prices diverts attention from the real problem, which is that in the United States we need a health care system that ensures access to quality health care for all people, including medicines for everyone,” he said.

Drug Costs

Although the cost of prescription drugs has come under increasing attack in the effort to control healthcare cost, drugs account for only about 5.5% of total healthcare spending.

Health care spending in 1991 was $660.2 billion. Here’s how it broke down: Hospital care (in and out patient): 43.7% Physician services: 21.5% Dental services: 5.6% Prescription drugs: 5.5% Vision products and other medical supplies: 5.5% Other services: 5.4% Home health care: 1.5% Nursing home care 9% Other personal care: 2.1% Source: Health Care Financing Adminstration