Share Podcast
The CEO of Merck on Race, Leadership, and High Drug Prices
Kenneth Frazier, the CEO of the pharmaceutical company known as MSD outside of North America, discusses his upbringing and how it influences his leadership as chief executive. He...
- Subscribe:
- Apple Podcasts
- Spotify
- RSS
Kenneth Frazier, the CEO of the pharmaceutical company known as MSD outside of North America, discusses his upbringing and how it influences his leadership as chief executive. He is one of the few African-American CEOs in the Fortune 500, and shot to prominence after resigning from a council advising the Trump White House. Frazier discusses the importance of values in leadership and how Merck thinks about R&D and drug prices.
CURT NICKISCH: Welcome to the HBR IdeaCast, from Harvard Business Review. I’m Curt Nickisch, in for Sarah Green Carmichael.
Whatever you call this multinational, it’s a huge one. If you’re in the United States or Canada, you know it as Merck. Everywhere else, it’s called MSD. Either way, it’s a global pharmaceutical company with $35 billion of revenue last year.
One of the roughly 70,000 employees is the CEO, Ken Frazier. He’s been in the job for seven years. And he’s one of the very few African-American CEOs in the Fortune 500.
Last year, he prominently resigned from a White House advisory council after U.S. President Donald Trump seemed to make statements in support of white supremacists who’d rallied in Charlottesville, Virginia. Other CEOs followed Frazier’s lead.
The president tweeted in response: “Now that Ken Frazier of Merck Pharma has resigned from President’s Manufacturing Council,he will have more time to LOWER RIPOFF DRUG PRICES!”
ADI IGNATIUS: All right, so this is all rolling…
CURT NICKISCH: Recently, Frazier sat down with us at a conference table in the company’s New Jersey headquarters.
KEN FRAZIER: I’m pleasured and honored to be interviewed for the Harvard Business Review.
ADI IGNATIUS: Well, we’re pleasured and honored that we’re sitting down with you. So thanks.
KEN FRAZIER: And those of us who were educated across the river, this is really a big deal.
CURT NICKISCH: At times during this interview, you’ll hear Frazier tapping on the table to emphasize his points. He was interviewed by HBR Editor-in-Chief Adi Ignatius, who started off by asking him about that time he stood up to Trump.
KEN FRAZIER: I didn’t expect that that decision that I made to have the kind of ripple effect that it seems to have had afterwards. Having said that, I felt a strong personal conviction that by not taking an action, I would be endorsing what had happened and what was said about it. And so for me, it was just a question of communicating my personal position as quickly as possible, and then asking my board for their endorsement, because I wanted to speak to my own personal values, but also to the company’s values. And in that second sense, meaning the company’s values, I felt I needed to talk to my board to see if I would get their support.
ADI IGNATIUS: And then the president sort of tweeted back at you. Did that, did that have any effect on you or on Merck or on business?
KEN FRAZIER: I don’t believe it’s had an effect on Merck, because I think the company will continue and has continued to engage the administration, both houses of Congress and policymakers on the key issues that make a difference for innovation and for patient access. So I don’t think it’s affected the company. And personally, to be honest, it hasn’t really affected me a lot, either. The president has his point of view on that issue, and other issues. But I also have some very strong feelings about those issues and convictions about those issues, too.
ADI IGNATIUS: So what would your advice be, I mean, this is such a polarized time now, and you know, we’ve seen CEOs get drawn in, reluctantly or otherwise, you know, what’s your advice as to at what point do you need to weigh in on a big social or political issue? And at what point do you just stand on the sideline?
KEN FRAZIER: Well, first of all, I don’t think it’s my responsibility or place as the CEO of a company to tell anyone what their political views should be. That’s not my role. That’s not my function. That’s not my goal. Every once in a while, a constellation of events and words have such consequence that one has to ask the question of whether one has a responsibility, not as a CEO, but as a citizen, to take a position. And I think the events around Charlottesville were one of those extraordinarily rare situations where I felt that, and I still feel that leaders across different sectors of society needed to take a position, because I do feel that, irrespective of what the president’s intent was, the words that were initially conveyed could be construed in a way that people questioned what our values are as a country.
You know, we aspire to be viewed as a rational and tolerant, hopefully enlightened collection of free people, because we share certain values. We don’t all look the same. We don’t come from the same countries. What we share is this series of ideals that makes the US-I don’t know of any other countries that were founded on a series of ideals, like all men are created equal. All people, now, we would say, are created equal. So I felt that given how those words that the president uttered could be construed, and again, I have no knowledge of whether that was his intent or not. I felt that this was one of those unusual sets of circumstances that not only allowed, but would urge leaders across different sectors, including the business sector, to take a public position.
ADI IGNATIUS: It’s funny, because I know there’s some businesspeople who think, look, I just want to stay neutral, especially in the age of Twitter. Neutral is a statement. There’s no, there’s really, there’s no sitting it out, really, that you, even silence can be a statement.
KEN FRAZIER: I don’t believe it’s appropriate for me or any other CEO to wade into every political dispute. That’s not what we’re here for. I did not see this as a political issue. I saw this as an issue that went to our fundamental values as a country.
ADI IGNATIUS: I’d love to talk about your journey to becoming a CEO. Unusual, atypical, and I guess what was it that you learned in growing up in your childhood that gave you the values that have kind of taken you to where you are now?
KEN FRAZIER: I was born in the inner city of Philadelphia, ultimately the son of a single parent father, because my mother died when I was rather young. And my father was a caring but somewhat unsentimental father. And I had the good fortune of being bussed from my inner-city neighborhood to the best schools in Philadelphia, to achieve what was then called racial desegregation. And it’s very hard to reduce one’s life to a single variable, but I’m quite sure that the fact that I rode those busses 90 minutes a day to go to better schools made a big difference in my life. And I think, you know, if you grow up in a neighborhood like that, and you’re forced to decide what you stand for early in your life, because there are a lot of peer pressures that can take you the wrong way, if you’re able to make those decisions, and to stand for what you think you ought to be doing in life, it really help later on in your career, when you’re being asked to make tough decisions.
ADI IGNATIUS: Did a lot of your other, these other kids who were bussed with you, did they also, were they also kind of on a curve like that? Or were you unusual?
KEN FRAZIER: No. The social engineers in Philadelphia they wanted a few black children in what otherwise would have been all white schools. Most of the kids I grew up, almost all the kids I grew up with went to the neighborhood schools. In fact, when we were kids, we felt like, why do we have to get up early in the morning? Why do we have to ride these busses? Why don’t we get to hang out with the other cool kids in our neighborhood? Why are we going all the way out there with people who we don’t know and who are unlike us? But I was saying, looking back on that, I was the beneficiary of having to go to schools where the ambient academic standards were higher than the schools in my neighborhood.
ADI IGNATIUS: And so in your case, you graduated from Penn State. You went to Harvard Law School, and yet still coming out of that, you’re saying there’s still a path that an African American graduate of Harvard Law School is on that might be different from a white counterpart in terms of your career.
KEN FRAZIER: It absolutely is different. As a young lawyer in a law firm, very large Philadelphia law firm, I had to learn how to become user-friendly for partners and clients who are not prepared to understand really who I was or where I came from or my experiences in life. And you know, I’m not saying that’s fair. But learning how to get along with people who are white was a critical success factor in my life.
ADI IGNATIUS: What does it mean to, what did it mean in your case to become user-friendly?
KEN FRAZIER: Well, that’s a very complicated question. But it’s a question around, without giving up who you truly are, I needed to learn how to socially integrate myself into the firm, because law is a relationship business, at the end of the day. And you never get those relationships of trust and confidence if people are not at ease with you socially. I think it’s fascinating to look at investment banking firms. You look at the people who are on the public or municipal finance side of the house, there’s a lot of diversity. Why? Because the mayors are diverse. You look on the private side, it’s not diverse at all, because the clients on that side tend not to be diverse, and they don’t demand diversity in the people who are servicing them.
ADI IGNATIUS: Your legal background, is that a good preparation for a CEO? Or-
KEN FRAZIER: I think a legal education equips one to ask good questions. Right? And sometimes when the answer comes back, if I don’t understand the answer, I’m not shy about showing my own ignorance and saying, could you say that again? But in my case, I think the preparation that I had for the CEO role had a great deal to do with the fact that the first CEO I worked for, namely Roy Vagelos, insisted that I not be in the legal department. And I remember him calling me into his office and offering me responsibility for what was then called the public affairs department in the company, which was communications and philanthropy and policy and government relations. And my response to him was, I would like to contribute to the company in my own discipline, meaning law, and he said, that’s the most ridiculous thing I’ve ever heard. [LAUGHTER] We’re a pharmaceutical company. And you really ought to understand what drives the success of a pharmaceutical company. And so I’ve been in this company now for 25 plus years. And the vast majority of that time has been spent outside the legal department, By the way, this is a diversity question, too.
ADI IGNATIUS: Yeah, it is.
KEN FRAZIER: And if you think about it.
ADI IGNATIUS: Are you surrounded by MBAs?
KEN FRAZIER: Yeah, I am.
ADI IGNATIUS: It seems like you don’t need an MBA degree to run a successful company.
KEN FRAZIER: Is that a secret? [LAUGHTER] I’m not so sure that Bill Gates ever had one, or-I’m not knocking MBAs. I’m simply saying that a lot of what makes business work is understanding customers, understanding the underlying technology, understanding what makes the business model work. And you don’t necessarily have to have an MBA to be good at that.
ADI IGNATIUS: So fast forward now. So whether you like it or not, I mean, there are very few African American CEOs.
KEN FRAZIER: I think there are three in the Fortune 500, when Ken Chenault steps down next month.
ADI IGNATIUS: So, you’re a role model to, so I guess, what’s your advice to people of color who would like to follow a path like the one you’re on?
KEN FRAZIER: For young minority employees, and African American employees, I think it’s really important to understand the importance of mentorship. it’s an unfair situation, but often when the African American person is introduced into the broader culture of a largely white working group, the African American has to work hard to create those relationships which don’t happen necessarily as spontaneously and naturally as they do for other people.
ADI IGNATIUS: Why don’t they happen?
KEN FRAZIER: Well, we live in a complicated, fast-moving, pluralistic society. But people feel comfortable with people who like them and are like them. And I show up, I’m an African American man when I first show up, when I walk through the door. And you know, just to answer your question, why is it the case that most people, if you ask them, who their friends are, I think most people who are white in this country, if they were honest, would say, I actually don’t have many friends who are African American. And so you bring that to the workplace, or your experiences socially become your experiences in the workplace. Most of my diversity conversations are had with the majority population, because frankly, those people are the people who have the most influence over everybody’s career.
ADI IGNATIUS: So let’s talk about, all right, so you become CEO. I’d love, you know, you’ve been in the job for seven years. What have you learned about the job on the job? What is it, what’s the key to being a successful CEO?
KEN FRAZIER: The first thing that I’ve learned is, nothing that happened before prepared me in the remotest sense for how hard this job is. It really is. It’s 24/7. There are many different constituencies that have conflicting demands that you have to be able to respond to. It is critical for you to know what you stand for, that you have to have a series of very strongly held convictions, because you’re constantly under stress, you’re constantly frustrated. You’re pulled in different directions. And when you have to make the hard decisions that only the CEO makes, and people don’t bring you the easy decisions. They bring you the harder decisions. It’s very helpful to have a really strong sense of what’s right and wrong for the company, not for you. That’s an important distinction. And be able to make those decisions and stand fast behind those decisions. To me, that’s the single most important thing that I learned. Because in most of the other jobs that I had, I could make a decision applying my own logic to a situation. You could say those were pragmatic decisions. But here you have to make value-based decisions.
ADI IGNATIUS: So the old line ascribed to Milton Friedman, a business’s sole purpose is to maximize value for shareholders. Does that ring true? Did that ever ring true? To what extent is that your job? Or is that too narrow a definition?
KEN FRAZIER: I don’t agree with that point of view. While the fundamental, a fundamental responsibility of a business leader is to create value for shareholders, I think businesses exist to deliver value to society. Merck has existed for now 126 years. During that period of time, the individual shareholders have turned over countless times. But our salient purpose is to deliver medically important vaccines and medicines that make a huge difference for humanity. And the shareholder value we create, the revenues we generate are an imperfect proxy, I believe, for the value we create for patients and society.
ADI IGNATIUS: So you’re feeling constantly, presumably, short term and long term pressure.
KEN FRAZIER: Absolutely.
ADI IGNATIUS: So how do you balance that?
KEN FRAZIER: So let me start by saying that I think when you sit in this position as CEO of a company like Merck, there are many stakeholders who have interests. And I see my job generally speaking as to try to meet the needs of multiple stakeholders whose interests are often, if not opposed to one another, in some dynamic tension with one another. And so that actually gets to the short-term versus the long-term issue. Maximizing the short-term earnings versus building a great company for the long term, the choice for me is very easy. I think my responsibility, again, taking over a company that’s been in place for 126 years and has made a huge impact on life expectancy, I think it’s my job to ensure that the company functions in a sustainable way to create long-term value for all of its stakeholders, including its shareholders.
ADI IGNATIUS: The challenge, I would think, is that it’s easy to measure short term, especially if you define it in the terms of share price. How do you measure, I mean, you’re, look, long-term for me is, we’ll publish this in a few weeks, long-term for you could be five, ten or more years.
KEN FRAZIER: It’s longer than that.
ADI IGNATIUS: Longer than that before, so how do you measure long-term, whether you’re doing something right for the long term?
KEN FRAZIER: Each company and each industry is different. The product development lifecycles in this industry are extremely long. It takes us on average 12 to 15 years to bring a new drug to market. So my job in this company is to ensure that there is a sustainable series of new products that come out that actually make a difference in the world. It’s particularly true, because not only do I have a long product cycle time, the financial model of this business is based on patents. And at the end of that 20 years, you lose market exclusivity. And if you don’t replace those products that are actually driving short-term value with products tomorrow, you won’t be in business. In effect what you’re really doing is, you’re borrowing value from the future, and you’re bringing it into the present, which I think is a mistake. I sit on the board of Exxon Mobil. And I feel very fortunate to have served on that board, because sitting in that boardroom, I learned that lesson, because their product development cycle is extremely long, just like ours is. And you’ve got to think about how do you run those companies for the long term?
ADI IGNATIUS: So you get credit in the market for not overhyping. I wonder how you balance that. Because on the one hand, when you see results you help the company by talking it up. On the other hand, you don’t want to go too far. I mean, that must be a balance that you are sort of wrestling with all the time.
KEN FRAZIER: Yeah, I think the way you deal with that is to be factual and say what you know and don’t overstate what you know. And to be humble. I mean, really. I mean, this is a humbling business, because you’re constantly getting new test results and study results, and most of them are not positive. And so, I think it makes sense for a company like Merck to be reserved and to say what it knows and to be clear about why we did the study. We’re very clear in explaining to investors and others why we thought there was a reason to do this, that there was a hypothesis that was reasonable to pursue. But that’s why you run the experiment.
ADI IGNATIUS: The public has mixed reviews for my profession. But lead up has probably, fair to say, mixed review of the pharmaceutical practice.
KEN FRAZIER: I think you’re being kind.
ADI IGNATIUS: So on the one hand, obviously, yay, saves lives. On the other, prices are sort of the touchpoint. How do figure out that price point? You know, sometimes they seem astronomical to a civilian like me. How do you decide? What’s the formula for figuring out how you come up with the right number?
KEN FRAZIER: Well, there’s no easy formula, obviously. But the main, the North Star of our analysis, so to speak, is, what is the value that this new medicine provides to patients and to the healthcare system? And we try to do that by looking at what are the unique attributes of this medicine versus predecessor medicines? And then we also consider how should we price it such that it can get the kind of adoption curve we want it to have? Because one question is, what is the value it brings? And the second one implicitly is, what can patients and the health system afford? So we try to balance those two things, and the goal ultimately is to provide a good return to our shareholders, because they keep giving us the capital to do the research that’s going to produce tomorrow’s drugs, while at the same time allowing patients and health systems to have access.
ADI IGNATIUS: On the pricing thing, you know, it seems to me the rise of, well, the attention to income inequality, the rise of populism, social media and the kind of accelerating effect it has in sort of magnifying issues, does that affect sort of pricing decisions? Are we in a new world in terms of what is the right level? What can society bear, I guess?
KEN FRAZIER: I can say at Merck, I don’t think that has changed how we’ve analyzed things. I think if you look at Merck’s history, I think Merck has a reputation for having been a reasonable company when it comes to pricing, sort of a leader in that respect. Our drugs actually have value. Can I give you one example?
ADI IGNATIUS: Mm hm.
KEN FRAZIER: When we first brought Keytruda into the lung cancer market, our drug was accompanied by a diagnostic test, a biomarker test that allowed health systems and clinicians to identify those patients most likely to respond favorably to Keytruda. Wall Street wasn’t in love with our approach. They said, wait a minute, why would you restrict the population of patients who are eligible for therapy with your drug? But if you take a big step back, and you look at the cost to healthcare, that’s the right answer for healthcare systems and patients, because if you want to be able to show that the drug has real value, therapeutic and economic value, obviously if it doesn’t work, it doesn’t have that value. And so, we thought it made sense as we move into a world of precision medicine and constrained healthcare budgets, to give people a biomarker that would be predictive, not perfect, but generally speaking, directionally predictive of whether a particular patient would benefit from this medicine.
ADI IGNATIUS: I think I saw the estimate that Keytruda, a patient might, it might cost roughly $150,000 a year?
KEN FRAZIER: Something like that.
ADI IGNATIUS: So how does, again, as a civilian, how does that make sense? That sounds like crazy money.
KEN FRAZIER: So first of all, we’re talking about a life and death situation. So I would say on the fact of it, taking a human being who is going to die, not to be emotional, but a painful death from cancer, actually I would say that you have to look at what that is from a human standpoint. But another point needs to be made. And it goes back to the financial model of the pharmaceutical business. When you say the $150,000 for this successful drug doesn’t make sense, you have to realize that we’re actually paying for the 90% plus projects that fail. Because we can’t have the winners if we’re not able to pay for the cost of the losers, so to speak. So it’s a little bit unfair just to look at the cost of the relatively few winners that you have in this business and say, aren’t you making a lot of money on those winners? When in fact, in order to be a sustainable, ongoing business, you have to be able to pay for the cost of all those programs that inevitably don’t succeed.
ADI IGNATIUS: And how do you make that case to a patient who, well, I’m not so interested in that. I’m just trying to be able to afford this life-saving medication.
KEN FRAZIER: Well, a couple of things about the patient. So first of all, the cost to the patient isn’t simply the price. We’ve done a lot in this company to try to be transparent about the percentage of the price that actually accrues to the manufacturer or the researcher, Merck, versus how much goes into the supply chain. And you know, on average in this industry, 30% of the price goes to others in the supply chain, whether they’re insurance or governments or PBMs or drug distributors or hospitals. So let’s start with the fact that that whole $150,000 doesn’t come to Merck in the first place. Another issue for patients, before we get to your question, is a lot of the public concern, which is legitimate about pricing, relates not just to the price of the medicine itself, but the cost to the patient. And that has to do with the design of insurance benefits. The substantial rebates and discounts that we negotiate with large payers, whether they’re government payers, overseas, or in this country, private payers, are substantial. And with respect to insurance in this country, often those rebates and discounts are not being passed on to the patient at the counter. So ultimately, those are two factors. Now, getting to your question, it’s an emotional question. And if you have to pay that much money, all of the things that I’ve just said are not going to make you pleased with the system. And so it’s our job to work along with other participants in the healthcare system to try to ensure that patients can afford the medicines.
ADI IGNATIUS: So the move towards sort of outcomes-based pricing, does that threaten or effect or do anything to your business model?
KEN FRAZIER: I think it’s good. Because at the end of the day, we have to, look, there’s only so much money society can spend on healthcare. Right? Without saying, OK, what are we not going to do? We’re going to stop having colleges? We’re going to stop having police? I mean, what is it we’re not going to do? Right? And so, I think, given that there is a limit to how much money society can spend on healthcare, we have to spend it wisely. And to me, it seems incredibly important that we spend it on things that are actually creating value and having an impact. And that’s what outcomes-based pricing is all about. So we welcome that here at Merck, because our goal is to invent medicines that make a real difference. So we’re prepared to live in that world.
ADI IGNATIUS: Do you feel the way many CEOs do that the business model is perpetually changing in two years, five years down the road it may be something completely different, and you’re trying to run a business while also reinventing the future?
KEN FRAZIER: Fundamentally, our business model still is intact. And that is to say that as long as there are diseases for which there are no good treatments, there will be a need for the research function within Merck. And what I want to make sure is that everything, including how we do the research, is subject to change, but the what, our raison d’être, stays the same.
ADI IGNATIUS: So what do you feel like is your thorniest challenge right now?
KEN FRAZIER: Hm, that’s a very good question. If I have to reduce it to one. I can take two? [LAUGHTER] So first of all, I think we want to make sure that our people who are very good at operating today’s business model are prepared to adapt to the changes that are happening on the outside. For example, the changes around the kind of information and evidence that’s being used by our largest customers in evaluating pharmaceutical benefit. So that’s one thing that I worry about. I think the other thing that anyone always worries about in any institution is, are we hiring the next generation of leadership? Because ultimately, those of us who sit in these key positions only sit there for a finite period of time. We hope we leave the firm better than we found it. But the ultimate test of your legacy is, who are the people that you’re leaving behind, and are they as talented and as committed as they need to be in order to carry that off?
ADI IGNATIUS: My last question was going to be, what would like your legacy to be? [LAUGHTER]
KEN FRAZIER: I would like people to say that Merck continues to be a company that makes a difference in the world. I think I said from the very beginning, I believe in this company. I believe in what it’s here to do in the world. It has done phenomenal things. You know its history. My legacy is that Merck continues to do what Merck has always done, which is to make singular impact on human health and animal health around the world. It’s that simple.
CURT NICKISCH: That’s Ken Frazier, the CEO of Merck. He was interviewed by Harvard Business Review editor-in-chief Adi Ignatius.
If you like learning about leading organizations, subscribe to HBR’s leadership e-mail newsletter. You can sign up at HBR.org/email-newsletters.
Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.