Kenneth Frazier’s story is far from that of a typical CEO. He grew up in a tough inner-city neighborhood in Philadelphia. His education focused on a career in the legal field. And he is one of a tiny number of African-American CEOs in the Fortune 500.
Frazier has certainly beat the odds. As Merck’s general counsel, he led the defense against litigation over the recalled painkiller Vioxx. Since becoming CEO, in 2011, he has earned praise for stabilizing Merck—no easy feat in an industry convulsed by change. He has restored R&D’s prominence at the company and overseen promising new launches, such as the cancer drug Keytruda.
Frazier shot to national prominence in August 2017, after a white-power march in Charlottesville, Virginia, escalated into violence and the murder of a counterprotester. When President Trump made comments seemingly sympathetic to white supremacists, Frazier couldn’t stay silent. He issued a statement saying he felt a responsibility to “take a stand against intolerance and extremism” and resigned from the president’s American Manufacturing Council. Inspired by Frazier’s move, other members quit as well, leading Trump to disband his major business-advisory councils.
Frazier, who is 63, sat down with HBR at Merck’s headquarters in Kenilworth, New Jersey, a 45-minute drive from Manhattan, to talk about the future of the pharmaceutical business, the enduring problems of race relations in the workplace, and that time he took on Donald Trump. Here’s an edited version of the discussion.
HBR: You’ve been leading a Fortune 500 company for seven years, but you probably got the most attention of your life for your decision to quit President Trump’s business advisory council. If you had to do it again, would you do anything differently?
Frazier: When I saw what had happened in Charlottesville and when I heard the comments that had been made, I felt a strong conviction that by not taking action I would be endorsing what had happened and what had been said. I asked my board for its endorsement, because I wanted to speak to the company’s values as well as my own. I didn’t expect it to have the ripple effect it did. But I don’t think I would do anything differently.
The president responded with a critical tweet. Did that have any effect on you or on Merck’s business?
I don’t believe it has affected Merck, and the company continues to engage with Washington on key issues. To be honest, it hasn’t affected how I go about my job day to day. The president has his point of view on that issue. I have strong feelings and convictions too.
Having been through this, what’s your advice to other CEOs who may be tempted to wade into big social or political conversations?
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. But I didn’t see this as a political issue. It’s an issue that goes to our fundamental values as a country. We aspire to be a rational, tolerant, hopefully enlightened collection of free people. We don’t all look the same. We don’t come from the same countries. What we share are the ideals that make the United States unique.
Thinking more broadly about the role of business in society, Milton Friedman once said that a business’s sole purpose is to generate profit for shareholders. Does that seem right?
While a fundamental responsibility of business leaders is to create value for shareholders, I think businesses also exist to deliver value to society. Merck has existed for 126 years; its individual shareholders have turned over countless times. But our salient purpose in the world is to deliver medically important vaccines and medicines that make a huge difference for humanity. The revenue and shareholder value we create are an imperfect proxy for the value we create for patients and society.
How do you balance short-term pressures with long-term needs?
Certain constituencies, including some subsets of investors, often press us to focus on the short term. But if my choice is truly maximizing short-term earnings or building a great company for the long term, it’s very easy. I need to make sure that the company functions in a sustainable way to create long-term value for all its stakeholders, including shareholders.
It’s easier to measure short-term results, especially if you define them by share price. So how do you know whether you’re doing something right for the long term?
Product-development life cycles in this industry are very long. It takes us 12 to 15 years, on average, to bring a new drug to market. And our financial model is based on patents, which have a 20-year life—after which we lose exclusivity. If you don’t replace the products that drive short-term value with new ones, you won’t be in business. So my job is to ensure that our decisions don’t make sense only for the short term. Otherwise we’ll be borrowing value from the future and bringing it into the present, which would be a mistake.
You recently scored positive results in a trial with your cancer drug Keytruda. What does a report like that mean for Merck?
This gets to the point about short versus long term. When we presented our earnings last year, we disclosed that we chose to extend that study to examine overall survival in cancer patients, and the market’s reaction was negative. Our stock went down significantly, because some thought we had opened a window for competitors to catch up with us. But we felt that if we needed more time to prove what’s really important about this medicine, so be it. We took a long-term point of view. And now, with the latest results, the market is reacting positively. The lesson from this? Keep your eyes on the prize. Manage to the long term, not to what Wall Street says it wants in the short term.
Another Merck drug—verubecestat, for Alzheimer’s—hasn’t worked out as well in some patients, at least so far. What has been the lesson from that?
The business of biomedical research is mostly about failure. Few projects we commission will ultimately result in success. But every study we do contributes to the body of knowledge that brings science and society closer to a solution. I have high hopes for the study we’re running on Alzheimer’s. At the same time, I realize that 400 or so studies in the field have failed to come up with an agent that slows the process of dementia that occurs in Alzheimer’s patients. [Editor’s note: A few weeks after this interview, Merck ended its late-stage Alzheimer’s trial on the recommendation of an independent panel that said the test wasn’t producing positive results.
If we don’t make a breakthrough on Alzheimer’s, can the medical system even keep up? Won’t all the aging Baby Boomers who suffer from it doom the U.S. Medicare system?
The Alzheimer’s Association predicts that if we don’t find a disease-modifying agent, the cost to the U.S. alone could be $1 trillion by 2050. If you live to 85 years old, which most of us hope to do, you have a one-in-two chance of getting the disease. We could pretty much become a country of Alzheimer’s patients and Alzheimer’s caregivers. So we have to arrest the arc of Alzheimer’s in the population and, along with that, the economic costs associated with caring for it.
Does Merck’s research in this field give any reason for optimism?
I never want to give false hope. But human genetics and some early data suggest that verubecestat can reduce the development of a key component of the plaques characteristic of Alzheimer’s. We don’t know whether these plaques actually cause the death of the neurons or are the result of an upstream pathological process that both creates plaques and kills neurons. We also don’t know how early in the disease process one must intervene in order to spare enough neurons to preserve cognition. But that’s why you run experiments.
What’s the biggest hurdle to innovation in drug development? The science? Regulations? The costs of R&D?
I’d say the main factor is our lack of knowledge about the human body and human biology. People talk about the importance of sequencing the human genome and the fact that we are generating more and more genetic insights. But as Roger Perlmutter, our head of research, says, what that really gives us is a parts list. It doesn’t tell us how those parts are integrated to operate the human body. That’s what we’re now interrogating across multiple disease areas.
It sounds like your business is evolving from the chemistry of drug making into new areas such as genetics and computational biology.
Yes. Initially Merck was focused on chemistry and vaccines. Now we’re also into the biologics field. Human genetics has a big impact on what we do; computational sciences are important. We try to be modality-agnostic. Our job is to go where the science leads us and to use the tools that will best help us ask and answer the most important medical questions
.
The drugs you produce save lives. Yet prices can seem exorbitant. How does Merck determine the price point for a lifesaving drug?
There’s no easy formula, obviously. But the North Star of our analysis is, What value does this new medicine provide to patients and to the health care system? And how should we price it to get the adoption curve we want? Implicitly that means, What can patients and the system afford? We try to balance those things with the goal of ultimately providing a good return to our shareholders—because they keep financing the research that will produce tomorrow’s drugs. We want to price our drugs to both optimize our ability to do future research and give patients meaningful access to them.
Keytruda costs roughly $150,000 for a year’s supply. Why is that the right price?
First of all, we’re talking about a life-and-death situation. For people who are suffering and bereft of hope, we can actually make a difference. Then there’s the cost to the system of not treating cancer. Data shows that a 10% reduction in cancer deaths would have a huge positive impact on society economically—far and above the cost of Keytruda. We’re saving society money in that respect. And consider the financial model of the pharmaceutical business: The price of this successful drug is paying for the 90%-plus projects that fail. We can’t have winners if we can’t pay for losers.
What do you say to a patient who isn’t interested in your business model and just wants access to this lifesaving medication?
We recognize our obligation to help make sure that people who need these medicines have meaningful access to them, and we’ve provided Keytruda to thousands of patients at no cost. And on the question of price, the full cost of the drugs we sell doesn’t come back to Merck. On average, 30% of it goes to others in the supply chain: insurers, governments, distributors, hospitals. But you’re right, a lot of the public concern is about the cost to the patient. And that has to do in part with the design of insurance benefits. An in-network patient might pay roughly 3% of the medical bill but would pay about 15% for pharmaceuticals in copay and coinsurance. We negotiate substantial rebates and discounts with large payers, but often they aren’t passed on to the patient. If you have to pay that much money, the arguments I’ve made are not going to please you.
Shareholder value is an imperfect proxy for the value we create for society.
Let’s talk about your personal journey. Were there things you learned in your childhood that gave you the values you hold now?
Bill George, of Harvard Business School, says that a big part of leadership traces back to life experiences. I was born in inner-city Philadelphia in the mid-1950s. I was ultimately the son of a single-parent father, because my mother died when I was young. My father was caring but unsentimental. In my house, education was the paramount value. And if you grew up in a neighborhood like mine, you were forced to decide early on what you stood for in life, because there were a lot of peer pressures that could take you the wrong way.
What was your educational experience?
I had the good fortune to be bused from my neighborhood to the best schools in Philadelphia. The city’s social engineers were engaged not in school integration but in desegregation, meaning they wanted a few black children in otherwise all-white schools. The fact that I rode those buses 90 minutes a day to better schools made a big difference in my life.
Was it emotionally jarring to travel so far from home each day?
Let’s just say that the “complexion” of the neighborhood was different. You got off the bus, and you felt like a stranger in a strange land. But in terms of things like standardized test scores, I benefited from going to schools where the academic standards were high.
Let’s fast-forward to your tenure at Merck. You’re one of very few African-American CEOs.
With Ken Chenault stepping down at American Express, there will be just three in the Fortune 500—less than 1%.
Which means that you’re a role model, whether you want to be or not. What’s your advice to others who would like to follow a similar path?
I think mentorship is really important. I’ve been the beneficiary of mentors throughout my career, both when I was a lawyer and at Merck. I had very good African-American mentors who understood what I was up against. And I had others who were white, who could mentor me in the context of the business.
How can diversity in business be improved?
Minority students often face an opportunity gap. Being bused to better schools closed that for me. There’s also what I call the access gap. If you’re a minority person or a woman introduced into the culture of a largely white male working group, it’s often hard to develop relationships with the people who can make or break your career.
What prevents those relationships from developing organically?
Many people feel more comfortable with those who look like them and are like them. People say they’re color-blind, but they notice your extrinsic characteristics. When I walk through the door, I’m an African-American man. You bring that to the workplace.
You graduated from Harvard Law School, one of the most elite institutions in the country. Are you saying that even with that credential, your career path isn’t the same as a white counterpart’s?
Absolutely. As a young lawyer in a large Philadelphia law firm, I had to become more “user-friendly” for partners and clients who were not prepared to understand who I really was or where I came from. I’m not saying that’s fair, but learning how to get along with people who are different has been a critical success factor in my life.
What did it mean to be “user-friendly”?
Without giving up who I truly was, I needed to learn how to socially integrate myself into the firm. Law is a relationship business. People are successful in the legal profession not just because of their skills but because they have relationships of trust and confidence. You don’t get those relationships if people are not at ease with you. The people at investment banking firms who are servicing city governments have a lot of diversity. Why? Because mayors are diverse. On the private side there isn’t a lot of diversity. The clients tend not to be diverse, and they don’t demand diversity in the people who are servicing them.
What have you learned since becoming CEO? What’s the key to being successful in this role?
First, nothing that happened before remotely prepared me for how hard this job is. It’s 24/7. There are many constituencies with conflicting demands. It’s critical to know what you stand for, because when you have to make the hard decisions that only the CEO makes, you need a strong sense of what’s right or wrong for the company.
Where do you most need to apply your time and attention, and where can other people lead?
I think the CEO needs to focus on three critical areas. The first is setting the strategic direction of the company. The second is deciding how to allocate capital across the company to produce the greatest long-term value for society and shareholders. The third, and by far the most important, is to ensure that the right people are in the right jobs. And CEOs have to be willing to give up power: The most important decisions made inside Merck are not made in my office.
What has been your biggest contribution to Merck’s strategy?
When I came to this job, some pharmaceutical companies were taking resources away from R&D. Merck is a science-based, R&D-based company, and I wanted to reinforce that from the very beginning. We’ve even begun to insource things that we outsourced 10 years ago, because we realize that they are critical to our long-term success. At the end of the day, the quality of this company largely comes down to the quality of the science and of the scientists.
When you took over, Merck was still recovering from the Vioxx recall and lawsuit controversy. Did you feel the culture needed to change after that?
I was general counsel during the Vioxx situation. I think what actually happened then is misunderstood, but we don’t need to get into that now. Let me just say that I think culture really matters. And I think it is the hardest thing to change. The most significant levers CEOs have are to put the right people in leadership positions and to ensure that the incentives inside the company are aligned so that people are working toward a common purpose. Leaders need to be purpose-driven, not personality-driven. If you don’t believe in your company’s intrinsic value or its contribution to society, if you’re just focused on trying to make money, you’re not going to be successful in the long run.
Do you feel, as many CEOs do, that your business model is fundamentally shifting?
Yes and no. Many aspects of the model are changing. The digital revolution is having a big impact on health care delivery and financing and on how we interact with customers. But fundamentally our model is still intact—meaning that as long as there are diseases with no good treatments, there will be a need for the kind of research we do at Merck.
How does the trend toward outcomes-based pricing in the health care industry affect Merck?
I think it’s a good thing. Society can spend only so much money on health care, so we have to spend it wisely. It’s important that we spend it on things that are actually creating value and having an impact. That’s what outcomes-based pricing is all about.
Let me ask about other looming shifts in the market. One is the prospect of Amazon’s moving into the health care space. The other is the Aetna-CVS merger. Do you view these as threats?
On the Amazon question, anything that makes the distribution system more efficient for patients is good for us. If Amazon can help with that, more power to it. On Aetna and CVS, when large payers consolidate, you have fewer buyers, who can have tremendous pricing power. That’s likely to lead to more consolidation on our side of the business.
What do you see as your biggest challenges going forward?
First, we want to make sure that our people, who are very good at operating in today’s business model, are prepared to adapt to change. What I worry about most is that we’re so comfortable with what we know that we won’t make the kinds of changes we need to make. My other big concern is whether we’re hiring the next generation of leaders. The ultimate test of a leader is, Who are the people who will take over from you, and are they as talented and as committed as they need to be to succeed?
How do you plan for that transition?
You have to fight against hierarchy, which is one of the biggest obstacles to success and innovation. It’s important for leaders to diffuse power to people who are actually in a position to make a difference. I’d love to convince Merck’s people that they already know what to do—that they don’t need to look up to their leaders for answers.
What would you like your ultimate legacy to be?
I’d like people to say that Merck continues to make a difference in the world by harnessing science and translating it into solutions that really matter for human and animal health around the world. It’s that simple.
Courtesy : Harvard Business Review , hbr.org