Leading For The Long-Term: How Kenneth Frazier Fulfills Merck’s Outsized Mission

When Kenneth Frazier was first appointed CEO of Merck & Co., Inc. in 2011, the investment community was calling for steep cuts to the pharmaceutical industry’s research budgets. Coming out of the Great Recession, some shareholders were even demanding that Merck stop investing in research altogether, and instead pick the low-hanging fruit by licensing other company’s products and bringing them to market. The prevailing wisdom was that this approach would satisfy investors with robust quarterly earnings. It would have certainly been the easier choice. Bringing in some quick wins to meet the numbers would have won Frazier praise early on in his tenure. But this approach didn’t feel right to the novice chief executive, who remembered the words of Merck’s founder from a 1952 Time magazine cover story: "We try to never forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear."

Mr. Frazier and his team decided to break away from the earnings guidance from shareholders and continue their core commitment to research, to the scathing reviews of many analysts and financial reporters, who called the move disingenuous, even unethical. "They felt we had broken a promise to our shareholders, but I felt it was my job to do the right thing to run the company for the long term, to ensure we develop the next generation of treatments." 

Mr. Frazier was sharing this story with a group of students, faculty, alumni, and industry peers as part of his acceptance of Columbia Business School’s Botwinick Prize in Business Ethics, awarded by the Bernstein Center for Leadership and Ethics. Annually, the prize is conferred upon an individual or representative of a business exemplifying the highest standard of professional and ethical conduct, as well as ethical decision-making and leadership. Endowed by the late Benjamin Botwinick, BS ’26, and his wife, Bessie, in 1989, the Botwinick Prize in Business Ethics is one of the most established and prestigious awards granted by Columbia Business School. 

Under Mr. Frazier’s leadership, Merck substantially increased investment in research and refocused the organization on the launch and growth of products that would benefit the public. While still building long-term and sustainable value to Merck’s multiple stakeholders – including investors – Mr. Frazier also led the formation of initiatives for the greater good of society, including investment in the research and development of a game-changing Ebola vaccine.

In 2018, these initiatives earned Merck the #2 slot on Fortune magazine’s "Companies that Change the World" list. It’s the kind of ethical leadership example that’s sorely needed in an era rife with corrupt business practices. "Now more than ever, we need business leaders to understand that effective ethical decision-making touches every aspect of business," noted Katherine W. Phillips, the Reuben Mark Professor of Organizational Character and newly-appointed Director of the Bernstein Center for Leadership and Ethics, succeeding Professor Bruce Kogut. "Kenneth understands all of this well as he continues to stand up for what he believes is right in the face of adversity, all while securing Merck's position as a world class and patient first healthcare institution." The challenge, however, has been to withstand the market pressures of short-term thinking that can compromise ethics and veer organizations off the path of longer-term goals. 

This is especially relevant to the pharmaceutical industry, where developing life-saving or life-enhancing drugs can take a dozen years or more. "Our business model requires access to large amounts of patientcapital – that is, for investors to be patient so that we can take the difficult and risky journey of developing new therapeutics for patients," quipped Mr. Frazier.

Drug development is a long and painstaking winnowing process, with more than 90% of ideas never making it to market. It takes more than 10 years and an excess of $2.5 billion to reach that point. When it works, it can be life altering. Keytruda, for example, which Merck acquired through a 2009 buyout of Schering-Plough Corp., has been over 50 years in the making as researchers have translated the science behind PD-1 antibodies into medicine with real-world applications. Under Mr. Frazier’s leadership, Merck invested heavily in the drug and successfully brought it to market, leading to the treatment of advanced non-small cell lung cancer, along with many other cancers, and with indications for treating additional cancers are likely to come. 

Today, Merck is running more than 850 clinical trials with Keytruda and testing it in more than 30 tumor types. At the same time, the CEO must be able to make the business case. To be sustainable, Merck’s leadership must balance the "abundant risks of failure with a sufficient reward when we are successful to produce a return on capital that is attractive to our investors," explained Mr. Frazier. The short-term pain of sinking prices when Mr. Frazier first took over as CEO eventually gave way to appreciation as shareholders received a return on investment. Indeed, returns for Merck’s shareholders have more than doubled since Mr. Frazier first took the helm.¹ But that doesn’t mean investors have become any more patient, and the challenge to stick to the long view remains. 

Asked how he does this, especially as similarly visionary CEOs like PepsiCo’s Indra Nooyi have been shown the door, Mr. Frazier pointed to his predecessor in the role and life-long mentor, Dr. Roy Vagelos, ‘54PS ‘83PS. "Roy was someone who showed through example what ethical leadership is all about.  He also had an outsized impact in shaping my personal understanding of the role of CEO." Dr. Vagelos, a proponent of investing in research passed along his own long view, as well has a desire to serve society that was demonstrated during his tenure at Merck. Back then, he was best known for agreeing to donate Mectizan treatments for as much and as long as needed, which has fueled the effort to help nearly eliminate river blindness. Additionally, Dr. Vagelos and his wife, Diana, ’55 BC, gave back to the Columbia community with a substantial gift to the re-named Vagelos College of Physicians and Surgeons. 

Although Dr. Vagelos likes to remind his protégé to "make money for your shareholders," Mr. Frazier is convinced this will happen anyway, as long as he continues to build upon Merck’s heritage and his mentor’s legacy. "The most successful businesses have a mission or purpose that extends beyond just good returns to shareholders…I believe Merck was put here for an outsized mission, to help relieve human suffering on a mass scale. To achieve that, we must take on big projects which are long, risky and expensive." And that is just what Kenneth Frazier plans on doing for the long term.