If the U.S. government uses its bargaining power on Medicare to push drug prices lower, it may prove uneconomical for pharmaceutical companies to create important new medicines, said Merck CEO Kenneth Frazier.

Democrats have proposed such a strategy as a way to help curb the budget deficit.

“The short-term fiscal pressure that the U.S. has to contend with, if people go about fixing it the wrong way, could really damage innovation,” Frazier told the Financial Times.

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“Additional price controls on drugs would be something that would take away much of the incentive in the capital markets to invest in research and development.”

Frazier said his company, the second largest in the U.S. pharmaceutical sector behind Pfizer, can handle the additional costs created by the Affordable Care Act.

But, “If there are additional rebates or costs associated with fixing the current fiscal challenge, that’s where I think the concern and the danger lies,” he said.

As for Merck’s stock, it closed Wednesday at $45.26, not far from Morningstar analyst Damien Conover’s fair value estimate of $46.

He thinks the company is on the right path thanks to its 2009 purchase of Schering Plough. “Without Schering, Merck's prospects were muddled,” Conover writes on Morningstar.com. “With the addition of Schering, we believe Merck is favorably positioned for long-term growth.”

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