Merck & Company, Inc. - 2009 Case Notes Prepared by: Dr. Mernoush Banton Case Author: Mernoush Banton A.
Case Abstract
Merck & Company, Inc. (www.merck.com ( 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 intern internal al and externa externall data data are provid provided ed to enable enable studen students ts to evalua evaluate te curren currentt stra strate tegi gies es and and reco recomm mmen end d a thre threee-ye year ar stra strate tegi gic c plan plan for for the the comp compan any. y. Headqua Headquarter rtered ed in Whiteh Whitehous ouse e Statio Station n in the U.S. state state of New Jersey, Jersey, Merck Merck & Company, Inc. is traded on the New York Stock Exchange under ticker symbol MRK.
B.
Vision Vision Statem Statement ent
“To make a difference in the lives of people globally through our innovative medicines, medicines, vaccines, vaccines, biologic therapies, therapies, consumer health and animal products. products. We aspire to be the best healthcare company in the world and are dedicated to providing leading innovations and solutions for tomorrow.”
C.
Missio sion Stat tatement (Ac (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 soluti solutions ons using using the latest technolo technology gy (4) to satisf satisfy y custom customer er needs, needs, and to provide employees (9) with meaningful work and advancement opportunities, and inve invest stors ors with with a supe superio riorr rate rate of retu return rn (5). (5). We are are comm commit itte ted d to the the high highes estt 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. 2. 3. 4. 5. 6. 7. 8. 9.
Customer Produ Product cts s or or ser servi vice ces s Markets Tech Techn nolog ology y Concern Concern for for survival, survival, profitabilit profitability, y, growth Phil Philo osop sophy Self Self-c -con once cept pt Conce Concern rn for for pub public lic ima image ge Conce Concern rn for for emp emplo loye yees es
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D.
External Audit
CPM – Competitive Profile Matrix
Pfizer Critical Success Factors Price competitiveness
Bayer
Merck
Weight
Rating
Weighte d Score
0.10
4
0.40
2
0.20
3
0.30
Global Expansion Organizational Structure
0.07
4
0.28
2
0.14
3
0.21
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 Customer Loyalty
0.15
3
0.45
1
0.15
4
0.60
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 Financial Position
0.07
3
0.21
1
0.07
2
0.14
0.06
3
0.18
1
0.06
4
0.24
Total
1.00
3.18
Rating
Weighte d Score
Rating
Weighted Score
1.44
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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3.12
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
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 per cent 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 Threats
0.08
4
0.32
0.07
3
0.21
0.04
3
0.12
0.06
4
0.24
0.07
3
0.21
0.08
2
0.16
0.07
4
0.28
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
0.05
4
0.2
0.07
2
0.14
0.08
3
0.24
Opportunities
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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 dr ug 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 Total
0.08
2
0.16
0.05
2
0.1
0.06
2
0.12
0.07
3
0.21
0.07
2
0.14
1.00
2.85
Positioning Map
Price (High)
Pfizer Merck Bayer
Product Line (Narrow)
Product Line (Wide)
Price (Low)
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E.
Internal Audit Strengths 1. 2. 3. 4. 5. 6. 7. 8.
Continuous acquisition of companies has made the company stronger Strong distribution channel for all its products Having multiple segments helps the company to have higher market share Merck’s revenue increased from 2006 to 2007 by US$1.56 billion Merck’s net income more than doubled in 2008 Current asset increased by almost US$4.3 billion from 2007 to 2008 Committed to fostering diversity within the company 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
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
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
Merck
Industry
S&P 500
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
10.86
11.51
21.63
Net Income (Qtr vs year ago qtr)
Price Ratios
Financial Condition Debt/Equity Ratio
Book Value/Share Adapted from www.moneycentral.msn.com
12/08
Avg P/E
Price/ Sales
Price/ Book
Net Profit Margin (%)
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/ Share
Debt/ Equity
Return on Equity (%)
Return on Assets (%)
Interest 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 Adapted from www.moneycentral.msn.com
17.0
20.3
Internal Factor Evaluation (IFE) Matrix Key Internal Factors
Weight
Rating
Weighted Score
0.07
4
0.28
Strengths 1. Continuous acquisition of companies has made the company stronger
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2. Strong distribution channel for all its products
0.08
3
0.24
3. Having multiple segments helps the company to have higher market share
0.06
4
0.24
4. Merck's revenue increased from 2006 to 2007 by US$1.56 billion
0.08
4
0.32
5. Merck's net income more than doubled in 2008
0.09
4
0.36
6. Current asset increased by almost US$4.3 billion from 2007 to 2008
0.06
4
0.24
7. Committed to fostering diversity within the company
0.04
3
0.12
8. Strong and reputable brand image
0.06
3
0.18
1. The problem with Vioxx created negative publicity for the company
0.07
2
0.14
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 $4 billion long term debt 4. Very nominal expenditure in R&D which could impact the company long term
0.06
1
0.06
0.06
1
0.06
0.05
1
0.05
5. Hardly any increase in product sales from 2007 to 2008
0.08
1
0.08
6. Multiple products have been linked to negative health effects
0.07
2
0.14
7. Product quality (recalls)
0.07
1
0.07
Total
1.00
Weaknesses
F.
2.58
SWOT Strategies Strengths 1. Continuous acquisition of companies has made the company stronger 2. Strong distribution channel for all its
Weaknesses 1. The problem with Vioxx created negative publicity for the company 2. Merck’s revenue dropped by
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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
3.
4.
5.
6.
7.
approximately US$347 million from 2007 to 2008 Merck carries more than US$1.4 billion in goodwill on its balance sheet and close to US$4 billion long-term debt Very nominal expenditure in R&D which could impact the company long term Hardly any increase in product sales from 2007 to 2008 Multiple products have been linked to negative health effects Product quality (recalls)
Opportunities
S-O Strategies
W-O Strategies
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
1. Invest additional funding in R&D, improving new product introduction (S2, S3, S8, O1, O4, O5) 2. Continue purchasing new companies in segments that the company is losing product sales or market share (S1, S3, S4, O2, O4, O5)
1. Form joint ventures with companies who are not in direct competition with drug companies but are within health-related businesses for developing/introducing non-competing products (W2, W4, W5, O5, O6) 2. Increase quality control to improve reducing product recalls (W6, W7, O1)
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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 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
1. Use the excess cash by acquiring biotechnology or other health related businesses (S4, S5, S6, T1, T2, T5) 2. Work with the government and the U.S. Congress in developing a medical program, discounting product pricing (S4, S5, S6, T8)
1. Increase customer awareness by educating consumer of side effects, consequences of mixing drugs or unhealthy habits (W1, W6, T9)
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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
Aggressive
7 6 5 4 3 2 1
CS
IS -7
-6
-5
-4
-3
-2
-1
1
2
3
4
5
6
7
-1 -2 -3 -4 -5 -6
Competitive
-7
Defensive
ES Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow Financial Stability (FS) Average
Competitive Stability (CS) Market Share Product Quality Customer Loyalty Competition’s Capacity Utilization Technological Know-How Competitive Stability (CS) Average
3 4 4 4 4
Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry
-4 -3 -1 -4 -1
3.8
Environmental Stability (ES) Average
-1 -2 -2 -2 -2
Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential
4 3 5 4 4
Industry Stability (IS) Average
4
-1.8
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-2.6
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 Competitive Position
Weak Competitive Position
Quadrant III
1. 2. 3. 4. 5. 6. 7.
Slow Market Growth
Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification
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Quadrant IV
I.
The Internal-External (IE) Matrix The IFE Total Weighted Score
Strong 3.0 to 4.0 I
Average 2.0 to 2.99 II
Weak 1.0 to 1.99 III
IV
IV
VI
High 3.0 to 3.99
The EFE Total Weighted Score
Merck & Company, Inc.
Medium 2.0 to 2.99 VII
VIII
Low 1.0 to 1.99
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IX
J.
QSPM
Key Factors
Weight
Opportunities 1. The industry is marked by rapid advances and is heavily based on research a nd 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 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
Use the excess cash by acquiring biotechnology or other healthrelated businesses AS TAS
Form joint ventures with companies who are not in direct competition with drug companies but within healthrelated businesses for developing / introducing noncompeting products AS TAS
0.08
3
0.24
4
0.32
0.07
3
0.21
4
0.28
0.04
---
---
---
---
0.06
4
0.24
2
0.12
0.07
---
---
---
---
0.08
---
---
---
---
0.07
---
---
---
---
0.05
4
0.20
1
0.05
0.07
1
0.07
3
0.21
0.08
3
0.24
2
0.16
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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 TOTAL 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$4 billion long-term debt 4. Very nominal expenditure in R&D which could impact the company long term 5. Hardly any increase in product sales from 2007 to 2008 6. Multiple products have been linked to negative health effects 7. Product quality (recalls) SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE
0.08
1
0.08
3
0.24
0.05
2
0.10
4
0.2
0.06
4
0.24
2
0.12
0.07
---
---
---
---
0.07
---
---
---
---
1.00
1.62
1.7
0.07
4
0.28
2
0.14
0.08
---
---
---
---
0.06
2
0.12
4
0.24
0.08
4
0.32
2
0.16
0.09
---
---
---
---
0.06
2
0.12
4
0.24
0.04
2
0.08
3
0.12
0.06
---
---
---
---
0.07
---
---
---
---
0.06
2
0.12
1
0.06
0.06
---
---
---
---
0.05
---
---
---
---
0.08
2
0.16
1
0.08
0.07
---
---
---
---
0.07 1.00
1
0.07 1.27 2.89
4
0.28 1.32 3.02
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K.
Recommendations
Form joint venture with smaller companies or companies that are in health-related sector but are not in direct competition with Merck by making and introducing health-related products such as vitamins, over the counter consumer products or small medical devices.
L.
EPS/EBIT Analysis US$ 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
EBIT Interest EBT Taxes EAT # Shares EPS
Debt Financing
Recession
Normal
Boom
Recession
Normal
Boom
$3,000,000,00 0 0 3,000,000,000 612,000,000 2,388,000,000
$5,000,000,00 0 0 5,000,000,000 1,020,000,000 3,980,000,000
$8,000,000,00 0 0 8,000,000,000 1,632,000,000 6,368,000,000
$3,000,000,00 0 16,625,000 2,983,375,000 608,608,500 2,374,766,500
$5,000,000,00 0 16,625,000 4,983,375,000 1,016,608,500 3,966,766,500
$8,000,000,000 16,625,000 7,983,375,000 1,628,608,500 6,354,766,500
3,109,459,459 0.77
3,109,459,459 1.28
3,109,459,459 2.05
3,100,000,000 0.77
3,100,000,000 1.28
3,100,000,000 2.05
70 Percent Stock - 30 Percent Debt
EBIT Interest EBT Taxes EAT # Shares EPS
70 Percent Debt - 30 Percent Stock
Recession
Normal
Boom
Recession
Normal
Boom
$3,000,000,00 0 13,300,000 2,986,700,000 609,286,800 2,377,413,200
$5,000,000,00 0 13,300,000 4,986,700,000 1,017,286,800 3,969,413,200
$8,000,000,00 0 13,300,000 7,986,700,000 1,629,286,800 6,357,413,200
$3,000,000,00 0 3,325,000 2,996,675,000 611,321,700 2,385,353,300
$5,000,000,00 0 3,325,000 4,996,675,000 1,019,321,700 3,977,353,300
$8,000,000,000 3,325,000 7,996,675,000 1,631,321,700 6,365,353,300
3,106,621,622 0.77
3,106,621,622 1.28
3,106,621,622 2.05
3,102,837,838 0.77
3,102,837,838 1.28
3,102,837,838 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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