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Merck & Company, Inc.

- 2009
Case Notes Prepared by: Dr. Mernoush Banton
Case Author: Mernoush Banton

A. Case Abstract

Merck & Company, Inc. (www.merck.com) is a comprehensive strategic management


case that includes the company’s calendar December 31, 2008 financial statements,
competitor information, and more. The case time setting is the year 2009. Sufficient
internal and external data are provided to enable students to evaluate current
strategies and recommend a three-year strategic plan for the company.
Headquartered in Whitehouse Station in the U.S. state of New Jersey, Merck &
Company, Inc. is traded on the New York Stock Exchange under ticker symbol MRK.

B. Vision Statement

“To make a difference in the lives of people globally through our innovative
medicines, vaccines, biologic therapies, consumer health and animal products. We
aspire to be the best healthcare company in the world and are dedicated to providing
leading innovations and solutions for tomorrow.”

C. Mission Statement (Actual)

“We have made it our mission to provide innovative, distinctive products and
services that save and improve lives and satisfy customer needs, to be recognized as
a great place to work, and to provide investors with a superior rate of return.”

Mission Statement (Proposal)

To provide people worldwide (1, 3) with superior drugs (2) by developing innovations
and solutions using the latest technology (4) to satisfy customer needs, and to
provide employees (9) with meaningful work and advancement opportunities, and
investors with a superior rate of return (5). We are committed to the highest
standards of ethics and integrity (6). We devote extensive efforts to increase access
to medicines through far-reaching programs help deliver help to people who need
help (7). Through investments worldwide (3), we preserve and improve human life
(8).

1. Customer
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability, growth
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

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D. External Audit

CPM – Competitive Profile Matrix

Pfizer Bayer Merck


Critical
Success Weighted Weighted Weighted
Factors Weight Rating Score Rating Score Rating Score
Price
competitiveness 0.10 4 0.40 2 0.20 3 0.30
Global Expansion 0.07 4 0.28 2 0.14 3 0.21
Organizational
Structure 0.04 3 0.12 1 0.04 2 0.08
Employee Morale 0.06 2 0.12 1 0.06 3 0.18
Technology 0.08 3 0.24 1 0.08 2 0.16
Product Safety 0.15 3 0.45 1 0.15 4 0.60
Customer
Loyalty 0.08 3 0.24 2 0.16 4 0.32
Market Share 0.07 4 0.28 2 0.14 3 0.21
Advertising 0.12 3 0.36 2 0.24 4 0.48
Product Quality 0.10 3 0.30 1 0.10 2 0.20
Product Image 0.07 3 0.21 1 0.07 2 0.14
Financial
Position 0.06 3 0.18 1 0.06 4 0.24
Total 1.00 3.18 1.44 3.12

Opportunities

1. The industry is marked by rapid advances and is heavily based on research


and development
2. The United States leads the world with the highest market share and is the
home of five of the ten largest drug manufacturers
3. Japan is placed third with companies such as Sankyo Co., Takeda Chemical
Industries, and Yamanouchi Pharmaceutical
4. The industry is highly concentrated: the 50 largest companies control more
than 80 percent of the market
5. The pharmaceutical industry accounts for 27.3 percent of the healthcare
sector
6. The industry has been growing at over 10 percent annually and many large
drug companies supplement their own efforts by buying or licensing products
from other companies
7. Increasing elderly population offers a good opportunity for drug companies

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Threats

1. Strong competition with approximately 1,500 companies in the U.S.


2. The pharmaceutical industry is capital intensive with exorbitant research and
development costs
3. Drug discovery and development is a highly sophisticated process that can
take several years to complete and may cost more than US$500 million
4. The cost of making a drug has escalated tenfold every 20 years
5. Large investment is required for a long period of time with almost no
guarantee that the drug will even hit the market
6. Generic drugs rapidly enter the market when a patent expires by the original
brand-named drug manufacturer
7. The U.S. Congress has been considering changing advertising laws, which will
impact the drug companies considerably
8. The U.S. pharmaceutical industry spends almost twice as much on promotion
as it does on research and development

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted


Score

Opportunities
1. The industry is marked by rapid advances and is 0.08 4 0.32
heavily based on research and development
2. The United States leads the world with the 0.07 3 0.21
highest market share and is the home of five of
the ten largest drug manufacturers
3. Japan is placed third with companies such as 0.04 3 0.12
Sankyo Co., Takeda Chemical Industries, and
Yamanouchi Pharmaceutical
4. The industry is highly concentrated: the 50 0.06 4 0.24
largest companies control more than 80 percent
of the market
5. The pharmaceutical industry accounts for 27.3 0.07 3 0.21
percent of the healthcare sector
6. The industry has been growing at over 10 0.08 2 0.16
percent annually and many large drug companies
supplement their own efforts by buying or
licensing products from other companies
7. Increasing elderly population offers a good 0.07 4 0.28
opportunity for drug companies
Threats
1. Strong competition with approximately 1,500 0.05 4 0.2
companies in the U.S.
2. The pharmaceutical industry is capital intensive 0.07 2 0.14
with exorbitant research and development costs
3. Drug discovery and development is a highly 0.08 3 0.24
sophisticated process that can take several years

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to complete and may cost more than US$500
million
4. The cost of making a drug has escalated tenfold 0.08 2 0.16
every 20 years
5. Large investment is required for a long period of 0.05 2 0.1
time with almost no guarantee that the drug will
even hit the market
6. Generic drugs rapidly enter the market when a 0.06 2 0.12
patent expires by the original brand-named drug
manufacturer
7. The U.S. Congress has been considering 0.07 3 0.21
changing advertising laws, which will impact the
drug companies considerably
8. The U.S. pharmaceutical industry spends almost 0.07 2 0.14
twice as much on promotion as it does on
research and development
Total 1.00 2.85

Positioning Map

Price (High)

Pfizer

Merck

Bayer

Product Line Product Line


(Narrow) (Wide)

Price (Low)

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E. Internal Audit

Strengths

1. Continuous acquisition of companies has made the company stronger


2. Strong distribution channel for all its products
3. Having multiple segments helps the company to have higher market share
4. Merck’s revenue increased from 2006 to 2007 by US$1.56 billion
5. Merck’s net income more than doubled in 2008
6. Current asset increased by almost US$4.3 billion from 2007 to 2008
7. Committed to fostering diversity within the company
8. Strong and reputable brand image

Weaknesses

1. The problem with Vioxx created negative publicity for the company
2. Merck’s revenue dropped by approximately US$347 million from 2007 to 2008
3. Merck carries more than US$1.4 billion in goodwill on its balance sheet and
close to US$4 billion long-term debt
4. Very nominal expenditure in R&D which could impact the company long term
5. Hardly any increase in product sales from 2007 to 2008
6. Multiple products have been linked to negative health effects
7. Product quality (recalls)

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Financial Ratio Analysis (December 2009)

Growth Rates % Merck Industry S&P 500


Sales (Qtr vs year ago qtr) 1.80 3.20 -4.80
Net Income (YTD vs YTD) 3.80 5.10 -6.00
Net Income (Qtr vs year ago qtr) 212.30 38.80 26.80
Sales (5-Year Annual Avg.) 1.19 8.49 12.99
Net Income (5-Year Annual Avg.) 3.45 15.83 12.69
Dividends (5-Year Annual Avg.) 0.95 14.40 11.83

Price Ratios Merck Industry S&P 500


Current P/E Ratio 9.6 15.3 26.7
P/E Ratio 5-Year High NA 18.2 16.6
P/E Ratio 5-Year Low NA 5.0 2.6
Price/Sales Ratio 4.78 3.08 2.25
Price/Book Value 3.36 8.10 3.48
Price/Cash Flow Ratio 11.20 12.20 13.70

Profit Margins % Merck Industry S&P 500


Gross Margin 76.4 72.9 38.9
Pre-Tax Margin 46.0 24.0 10.3
Net Profit Margin 34.8 18.7 7.1
5Yr Gross Margin (5-Year Avg.) 75.9 72.1 38.6
5Yr PreTax Margin (5-Year Avg.) 30.1 21.3 16.6
5Yr Net Profit Margin (5-Year Avg.) 22.5 15.9 11.5

Financial Condition Merck Industry S&P 500


Debt/Equity Ratio 0.40 2.30 1.09
Current Ratio 3.7 1.9 1.5
Quick Ratio 3.4 1.6 1.3
Interest Coverage NA 20.6 23.7
Leverage Ratio 2.1 4.7 3.4
Book Value/Share 10.86 11.51 21.63
Adapted from www.moneycentral.msn.com

Net Profit
Avg P/E Price/ Sales Price/ Book
Margin (%)
12/08 10.20 2.73 3.42 32.7

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12/07 33.90 5.27 6.94 13.5
12/06 18.90 4.21 5.38 19.6
12/05 14.60 3.18 3.86 21.0
12/04 16.00 3.11 4.11 25.4
12/03 18.20 4.63 6.59 29.3
12/02 18.10 6.01 6.98 31.7
12/01 23.30 6.44 8.33 33.3

Book Value/ Debt/ Return on Return on Interest


Share Equity Equity (%) Assets (%) Coverage
12/08 $8.90 0.33 41.6 16.5 39.0
12/07 $8.37 0.32 18.0 6.8 8.8
12/06 $8.10 0.39 25.2 9.9 16.6
12/05 $8.24 0.45 25.8 10.3 19.1
12/04 $7.83 0.40 33.7 13.7 27.2
12/03 $7.01 0.44 42.3 16.2 25.8
12/02 $8.11 0.47 37.3 14.3 24.7
12/01 $7.06 0.55 43.9 16.0 21.5
12/00 $6.43 0.47 46.0 17.0 20.3
Adapted from www.moneycentral.msn.com

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted


Score

Strengths
1. Continuous acquisition of companies has 0.07 4 0.28
made the company stronger

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2. Strong distribution channel for all its 0.08 3 0.24
products

3. Having multiple segments helps the 0.06 4 0.24


company to have higher market share
4. Merck's revenue increased from 2006 to 0.08 4 0.32
2007 by US$1.56 billion
5. Merck's net income more than doubled in 0.09 4 0.36
2008

6. Current asset increased by almost US$4.3 0.06 4 0.24


billion from 2007 to 2008
7. Committed to fostering diversity within 0.04 3 0.12
the company

8. Strong and reputable brand image 0.06 3 0.18

Weaknesses
1. The problem with Vioxx created negative 0.07 2 0.14
publicity for the company

2. Merck's revenue dropped by 0.06 1 0.06


approximately US$347 million from 2007
to 2008
3. Merck carries more than US$1.4 billion in 0.06 1 0.06
goodwill on its balance sheet and close to
$4 billion long term debt
4. Very nominal expenditure in R&D which 0.05 1 0.05
could impact the company long term

5. Hardly any increase in product sales from 0.08 1 0.08


2007 to 2008

6. Multiple products have been linked to 0.07 2 0.14


negative health effects

7. Product quality (recalls) 0.07 1 0.07

Total 1.00 2.58

F. SWOT Strategies

Strengths Weaknesses
1. Continuous acquisition 1. The problem with Vioxx
of companies has created negative
made the company publicity for the
stronger company
2. Strong distribution 2. Merck’s revenue
channel for all its dropped by

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products approximately US$347
3. Having multiple million from 2007 to
segments helps the 2008
company to have 3. Merck carries more
higher market share than US$1.4 billion in
4. Merck’s revenue goodwill on its balance
increased from 2006 to sheet and close to
2007 by US$1.56 US$4 billion long-term
billion debt
5. Merck’s net income 4. Very nominal
more than doubled in expenditure in R&D
2008 which could impact the
6. Current asset company long term
increased by almost 5. Hardly any increase in
US$4.3 billion from product sales from
2007 to 2008 2007 to 2008
7. Committed to fostering 6. Multiple products have
diversity within the been linked to negative
company health effects
8. Strong and reputable 7. Product quality (recalls)
brand image

Opportunities S-O Strategies W-O Strategies


1. The industry is marked 1. Invest additional 1. Form joint ventures
by rapid advances and funding in R&D, with companies who
is heavily based on improving new product are not in direct
research and introduction (S2, S3, competition with drug
development S8, O1, O4, O5) companies but are
2. The United States 2. Continue purchasing within health-related
leads the world with new companies in businesses for
the highest market segments that the developing/introducing
share and is the home company is losing non-competing
of five of the ten product sales or products (W2, W4, W5,
largest drug market share (S1, S3, O5, O6)
manufacturers S4, O2, O4, O5) 2. Increase quality control
3. Japan is placed third to improve reducing
with companies such product recalls (W6,
as Sankyo Co., Takeda W7, O1)
Chemical Industries,
and Yamanouchi
Pharmaceutical
4. The industry is highly
concentrated: the 50
largest companies
control more than 80
percent of the market
5. The pharmaceutical
industry accounts for
27.3 percent of the
healthcare sector
6. The industry has been
growing at over 10

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percent annually and
many large drug
companies supplement
their own efforts by
buying or licensing
products from other
companies
7. Increasing elderly
population offers a
good opportunity for
drug companies

Threats S-T Strategies W-T Strategies


1. Strong competition 1. Use the excess cash by 1. Increase customer
with approximately acquiring awareness by
1,500 companies in the biotechnology or other educating consumer of
U.S. health related side effects,
2. The pharmaceutical businesses (S4, S5, consequences of
industry is capital S6, T1, T2, T5) mixing drugs or
intensive with 2. Work with the unhealthy habits (W1,
exorbitant research government and the W6, T9)
and development costs U.S. Congress in
3. Drug discovery and developing a medical
development is a program, discounting
highly sophisticated product pricing (S4,
process that can take S5, S6, T8)
several years to
complete and may cost
more than US$500
million
4. The cost of making a
drug has escalated
tenfold every 20 years
5. Large investment is
required for a long
period of time with
almost no guarantee
that the drug will even
hit the market
6. Generic drugs rapidly
enter the market when
a patent expires by the
original brand-named
drug manufacturer
7. The U.S. Congress has
been considering
changing advertising
laws, which will impact
the drug companies
considerably
8. The U.S.
pharmaceutical

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industry spends almost
twice as much on
promotion as it does
on research and
development

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G. SPACE Matrix

FS
Conservative 7
Aggressive

CS IS
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7

-1

-2

-3

-4

-5

-6

Defensive -7 Competitive

ES

Financial Stability (FS) Environmental Stability (ES)


Return on Investment 3 Unemployment -4
Leverage 4 Technological Changes -3
Liquidity 4 Price Elasticity of Demand -1
Working Capital 4 Competitive Pressure -4
Cash Flow 4 Barriers to Entry -1

Financial Stability (FS) Average 3.8 Environmental Stability (ES) Average -2.6

Competitive Stability (CS) Industry Stability (IS)


Market Share -1 Growth Potential 4
Product Quality -2 Financial Stability 3
Customer Loyalty -2 Ease of Market Entry 5
Competition’s Capacity Utilization -2 Resource Utilization 4
Technological Know-How -2 Profit Potential 4

Competitive Stability (CS) Average -1.8 Industry Stability (IS) Average 4

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Y-axis: FS + ES = 3.8 + (-2.6) = 1.2
X-axis: CS + IS = (-1.8) + (4.0) = 2.2

H. Grand Strategy Matrix

Rapid Market Growth


Quadrant I
Quadrant II

Strong
Weak
Competitive
Competitive
Position
Position

Quadrant IV
Quadrant III Slow Market Growth

1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Related diversification

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I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak


3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
I II III

High
3.0 to
3.99

IV IV VI

The EFE Merck & Company,


Total Medium Inc.
Weighted 2.0 to
Score 2.99

VII VIII IX

Low
1.0 to
1.99

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J. QSPM

Form joint
ventures
with
companies
who are not
in direct
competition
with drug
companies
but within
health-
Use the related
excess cash businesses
by acquiring for
biotechnology developing /
or other introducing
health- non-
related competing
businesses products
Key Factors Weight AS TAS AS TAS

Opportunities
1. The industry is marked by rapid advances 0.08 3 0.24 4 0.32
and is heavily based on research and
development
2. The United States leads the world with the 0.07 3 0.21 4 0.28
highest market share and is the home of
five of the ten largest drug manufacturers
3. Japan is placed third with companies such 0.04 --- --- --- ---
as Sankyo Co., Takeda Chemical Industries,
and Yamanouchi Pharmaceutical
4. The industry is highly concentrated: the 50 0.06 4 0.24 2 0.12
largest companies control more than 80
percent of the market
5. The pharmaceutical industry accounts for 0.07 --- --- --- ---
27.3 percent of the healthcare sector
6. The industry has been growing at over 10 0.08 --- --- --- ---
percent annually and many large drug
companies supplement their own efforts by
buying or licensing products from other
companies
7. Increasing elderly population offers a good 0.07 --- --- --- ---
opportunity for drug companies
Threats
1. Strong competition with approximately 0.05 4 0.20 1 0.05
1,500 companies in the U.S.
2. The pharmaceutical industry is capital 0.07 1 0.07 3 0.21
intensive with exorbitant research and
development costs

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3. Drug discovery and development is a highly 0.08 3 0.24 2 0.16
sophisticated process that can take several
years to complete and may cost more than
US$500 million
4. The cost of making a drug has escalated 0.08 1 0.08 3 0.24
tenfold every 20 years
5. Large investment is required for a long 0.05 2 0.10 4 0.2
period of time with almost no guarantee
that the drug will even hit the market
6. Generic drugs rapidly enter the market 0.06 4 0.24 2 0.12
when a patent expires by the original
brand-named drug manufacturer
7. The U.S. Congress has been considering 0.07 --- --- --- ---
changing advertising laws, which will impact
the drug companies considerably
8. The U.S. pharmaceutical industry spends 0.07 --- --- --- ---
almost twice as much on promotion as it
does on research and development
TOTAL 1.00 1.62 1.7
Strengths
1. Continuous acquisition of companies has 0.07 4 0.28 2 0.14
made the company stronger
2. Strong distribution channel for all its 0.08 --- --- --- ---
products
3. Having multiple segments helps the 0.06 2 0.12 4 0.24
company to have higher market share
4. Merck's revenue increased from 2006 to 0.08 4 0.32 2 0.16
2007 by US$1.56 billion
5. Merck's net income more than doubled in 0.09 --- --- --- ---
2008
6. Current asset increased by almost US$4.3 0.06 2 0.12 4 0.24
billion from 2007 to 2008
7. Committed to fostering diversity within the 0.04 2 0.08 3 0.12
company
8. Strong and reputable brand image 0.06 --- --- --- ---
Weaknesses
1. The problem with Vioxx created negative 0.07 --- --- --- ---
publicity for the company
2. Merck's revenue dropped by approximately 0.06 2 0.12 1 0.06
US$347 million from 2007 to 2008
3. Merck carries more than US$1.4 billion in 0.06 --- --- --- ---
goodwill on its balance sheet and close to
US$4 billion long-term debt
4. Very nominal expenditure in R&D which 0.05 --- --- --- ---
could impact the company long term
5. Hardly any increase in product sales from 0.08 2 0.16 1 0.08
2007 to 2008
6. Multiple products have been linked to 0.07 --- --- --- ---
negative health effects
7. Product quality (recalls) 0.07 1 0.07 4 0.28

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SUBTOTAL 1.00 1.27 1.32
SUM TOTAL ATTRACTIVENESS SCORE 2.89 3.02

K. Recommendations

Form joint venture with smaller companies or companies that are in health-related
sector but are not in direct competition with Merck by making and introducing
health-related products such as vitamins, over the counter consumer products or
small medical devices.

L. EPS/EBIT Analysis

US$ Amount Needed: $300 million


Stock Price: US$37.00
Tax Rate: 20.4%
Interest Rate: 4.75%
# Shares Outstanding: 3.1 Billion

Common Stock Financing Debt Financing


Recession Normal Boom Recession Normal Boom
$3,000,000,00 $5,000,000,00 $8,000,000,00 $3,000,000,00 $5,000,000,00
EBIT 0 0 0 0 0 $8,000,000,000
Interest 0 0 0 16,625,000 16,625,000 16,625,000
EBT 3,000,000,000 5,000,000,000 8,000,000,000 2,983,375,000 4,983,375,000 7,983,375,000
Taxes 612,000,000 1,020,000,000 1,632,000,000 608,608,500 1,016,608,500 1,628,608,500
EAT 2,388,000,000 3,980,000,000 6,368,000,000 2,374,766,500 3,966,766,500 6,354,766,500
#
Shares 3,109,459,459 3,109,459,459 3,109,459,459 3,100,000,000 3,100,000,000 3,100,000,000
EPS 0.77 1.28 2.05 0.77 1.28 2.05

70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock


Recession Normal Boom Recession Normal Boom
$3,000,000,00 $5,000,000,00 $8,000,000,00 $3,000,000,00 $5,000,000,00
EBIT 0 0 0 0 0 $8,000,000,000
Interest 13,300,000 13,300,000 13,300,000 3,325,000 3,325,000 3,325,000
EBT 2,986,700,000 4,986,700,000 7,986,700,000 2,996,675,000 4,996,675,000 7,996,675,000
Taxes 609,286,800 1,017,286,800 1,629,286,800 611,321,700 1,019,321,700 1,631,321,700
EAT 2,377,413,200 3,969,413,200 6,357,413,200 2,385,353,300 3,977,353,300 6,365,353,300
#
Shares 3,106,621,622 3,106,621,622 3,106,621,622 3,102,837,838 3,102,837,838 3,102,837,838
EPS 0.77 1.28 2.05 0.77 1.28 2.05

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M. Epilogue

Merck will pay Dynavax Technologies Corp. US$4 million to cover costs of the
Heplisav program. This was based on partnership and the payment was the result of
negotiation since December 2008. Merck backed out of the deal after the FDA put a
hold on their joint venture testing program even though they lifted the hold later on.

After collaborating on a new cancer drug, pharmaceutical giant Merck and GTx are
parting ways, leaving the smaller player to fund clinical trials on its own. GTx will
reacquire rights to cancer drug Ostarine and its selective androgen receptor
modulator (SARM) program after dissolving its collaboration with Merck. Cutting ties
with the larger drug company will bring GTx closer to becoming a self-sustaining and
profitable company, says CEO Mitchell Steiner as the drug trials have faced
significant delays during Merck's recent merger with Schering-Plough. (Forbes, March
15, 2010)

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