Midterm Assignment
10/28/10
Mgmt 780
Professor Dali Ma
Executive Summary
In 1950, George W. Merck eloquently explained that Merck achieves its competitive
advantage by staying true to its strategic vision: "We try never to 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." Today, the pharmaceutical industry as a whole faces the challenge of
high R&D costs. Merck responded by merging to improve its drug pipeline, reorganizing to
reduce costs, and donating medicines to establish ties with developing countries. Thus, Merck's
key to survival amongst its industry peers is its ability to generate above-average returns by
producing quality products and services that improve both human and animal health.
Company Background
Merck & Co., Inc., headquarted in Whitehouse Station, NJ, is the third largest global
during 1891 by George W. Merck, the firm is renowned not only for its medications, but also for
its medical manuals, innovative chemical syntheses, and cutting-edge research. Merck is
mature brands, and women's health), Consumer Health (OTC drugs, foot care, sun care), and
Animal (livestock, poultry, aquaculture, and companion). Following the 2009 merger with
Schering-Plough, the "new" Merck now consists of roughly 100,000 employees worldwide.
Analysis of External Environment
Overall, barriers to entry remain extremely high for new entrants to the pharmaceutical
industry. Newcomers typically join the market as smaller biotechnology firms without a global
presence that produce limited niche drugs or technology services; such firms tend to co-market
their products with pharmaceutical partners or are acquired by other large corporations.
Skyrocketing R&D costs, high likelihood of new drug failure, significant government regulation,
patent expirations and disputes, stagnant pipelines, and intense generic competition that
adversely affect the market leaders are sufficiently high to prevent entry altogether or curtail
R&D expenditures. Finally, the Obama health care reform creates further uncertainty about
future regulations and revenue restrictions that may impact the drug industry.
Recently, the trend of the pharmaceutical industry has been to address Wall Street's
concerns through mergers, restructuring, and joint ventures. Over the past decade, 1,345 mergers
and acquisitions totaling over $694 billion were announced; the high-profile Pfizer-Wyeth,
Finally, Merck also faces intellectual research competition from non-profit, government,
and academic institutions, such as the NIH and various university research programs. However,
such organizations are not product driven and frequently collaborate with pharmaceutical
corporations.
Pharmaceutical giants have both the reputation and resources necessary to attract the
world's brightest scientists and thus maintain the capacity for innovation. For instance, employee
salaries overall have always been dramatically higher than those of non-pharmaceutical
organizations. Pharmaceutical employees maintain close ties with competing firms, regulatory
agencies, and academic institutions to create larger collaborative networks than their smaller
resources include a historical reputation of quality and corporate responsibility, although these
Tangible resources include but are not limited to a wealth of proprietary knowledge,
patents, trade secrets, significant PPE, and access to raw materials. In addition, conglomerates
formed from mergers benefit from increased pipeline diversity. Taken together, innovation,
talent, and product differentiation are the core competencies of the pharmaceutical industry.
The primary objective of the consolidation was to revitalize Merck's stagnant pipeline for end
oncology, neuroscience, and biologics franchises. SP has also contributed significant consumer
health and animal health products to expand Merck's core offerings. As of 7/30/10, SP pipeline
contributions in phase II and III range from asthma/allergy to contraception and schizophrenia.
Q4 town hall meetings have identified these disease areas as critical targets for the near future.
Because a disproportionately large percentage of the firm's profits and operating cash
flows are generated by only a few drugs, market events affecting these products inevitably
impact Merck's overall financial health. Such events include loss of patent protection, increased
manufacturing costs, and availability of generics. Merck does conduct joint ventures with
competitors such as AstraZeneca to diversity risk and share financial gains while maintaining
because both firms enhanced each other's portfolio weaknesses. As mentioned earlier, other
giants, most notably Pfizer and Wyeth, have similarly combined for precisely the same reasons.
industry, at least in the United States, may ultimately crumble under various external market
implemented the BRGOS reorganization in 2008 that reduced workforce by 25% (40% of which
were based in the US); SP had a similar Productivity Transformation Program. Another Merger
Restructuring Program is currently in effect and will eliminate an additional 15% of R&D
personnel and vacancies. Some employees will be relocated to other sites worldwide. Basic
For Merck, the reorganization is a double-edged sword. Wall Street responded favorably
to R&D decreases – the one-year total return for MRK is 21.08% as of 9/30/10. While
downsizing allows the merged firm to realize the cost synergies of eliminating both PPE and
personnel redundancies, Merck seriously risks losing the core competency of its human capital in
the long run. And although layoffs and restructuring are common among all of the major industry
players, distinguished scientists frustrated with the industrial environment may eventually seek
other career paths. For example, many have rejoined academia as professors. Thus, the
innovative capabilities of employees are being eroded by uncertainty for the future and lack of
consistent leadership.
Furthermore, Merck has damaged its reputation with future workers as well. Fifty years
ago, Merck scientists were given their own laboratories until retirement with carte blanche to
pursue their individual research. As of mid-2009, entry-level PhD scientists lost their managerial
privileges and must abandon novel projects deemed to have a low "possibility of success." The
continual lack of transparency between employees and executives is increasing, and staff may
not retain job loyalty for Merck when economic conditions improve; in other words, Merck may
have trouble continuing basic operations if too many key personnel exit the industry. In addition,
fewer students will pursue scientific careers if the industry no longer holds the prestige and
benefits of generations past, thus decreasing the overall pool of available future talent.
3. Corporate responsibility
Merck was ranked #17 on the 2010 list of the 100 Best Corporate Citizens by "Corporate
Responsibility" magazine. Despite the potential of enormous financial liabilities, Merck has
always prioritized responsible business practices and manages several departments dedicated
In 1987, in conjunction with the World Health organization, Merck made a commitment
of unlimited Mectizan donations to Botswana until river blindness is completely eradicated from
humanity. Until then, no other healthcare firm had been willing to incur the financial risks of
such an ambitious challenge. But by being the first mover in establishing charitable relationships,
Merck gained the trust of significant future customers – African governments. Merck has
followed suit in China with AIDS interventions and instituted the US Patient Assistant program
Although rivals have instituted similar donation programs, Merck's first mover
advantages combined with its unwavering commitment to charity despite unfavorable market
conditions help forge exceptionally strong ties with influential, future clients. In 2010, the
Conclusion
When taken together, the recent merger with SP, internal personnel restructuring, and
ethical corporate initiatives are the sources of Merck's competitive advantage. However, dynamic
market forces may eventually require entirely new strategic efforts for Merck to maintain its
2. http://www.phrma.org/sites/phrma.org/files/attachments/Profile_2010_FINAL.pdf
3. http://www.merck.com/investors/financials/home.html?WT.svl=content#
4. http://www.merck.com/about/our-history/home.html
5. http://www.merck.com/finance/annualreport/ar2009/pdf/Merck_form_10-k.pdf
6. http://www.merck.com/corporate-responsibility/approach/home.html
7. http://finance.yahoo.com/q/co?s=MRK+Competitors
8. http://www.glassdoor.com/Reviews/Merck-Reviews-E438.htm
9. http://www.thefreelibrary.com/Ten-
Year+Data+on+Pharmaceutical+Mergers+and+Acquisitions,+from...-a0222033052
10. http://money.cnn.com/2008/02/01/news/companies/drug_wrap/index.htm
11. http://www.suite101.com/content/eliminating-river-blindness-a25397
12. Nancy A. Nichols. "Scientific Management at Merck: An Interview with CFO Judy Lewent,"
Harvard Business Review, Vol. 72, Nº 1, 1994 , pgs. 88-99.