Strategic development of the pharmaceutical company

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Shareholder's Report

CONTENTS

Company Description

Merck was established in 1668 by the Merck family in Germany and during the course of its long history, the company has undergone through acquisitions, nationalization, expansions, mergers and other milestone events that have shaped the company into one of the pharmaceutical giants. Today Merck is known as a leader in sales of high-tech products of the pharmaceutical and chemical industries. In total, the company employs about 70 thousand employees in 120 countries. The main objective of the company - increase the quality of patient care, improve customer service and solve the most complex problems in the treatment of diseases.

Positioning Chart

The TOP 5 companies out of the “Big Pharma” in terms of Annual Revenue to R&D Expenditure are shown below (Figure 1), coupled with chart displaying Marketing Vs R&D expenditures (Figure 2).

Figure 1

Figure 2

The combined consideration of both carts tells us that top players, especially one like Johnson & Johnson have a wide spectrum of different products, that include a substantial number of products such as Listerine or Baby Powder, which do not invoke any R&D expenses, but that year after year are allocated marketing budgets to maintain strong brands and keep consumers purchasing. Still, the top pharmaceutical companies expend great funds annually on R&D to develop new products and update existing ones. competitive strategy sale assets

Competitive Advantage

The company has a very strong competitive edge. Not only Merck supplies the individual elements of a complex high-tech products, but it also completes technological solutions that cover all stages of production: developing, manufacturing and testing of products. The main advantages of the company are: the strife to set up the supply chain of their products in a particular country, and the desire to understand reliably one country or another, take into account the specifics of working with these countries. Branches in many countries are trying to explore every order to the smallest detail, which would then provide the most profitable individual solutions - Order option. A deep dive into the specifics of the customer greatly simplifies the process of satisfying all customer needs.

With contemporary potential challenges of global pandemics of viruses such as the Ebola and Zika viruses, as well as bird/swine flu, key factors like research capacity, expertise and scientific laboratory infrastructure are crucial for giants like Merck to staying competitive in the market.

Just another strong advantage of the company is the continuous focus of investment in to the R&D department. Merck was the first company in the World, which has released two revolutionary pharmaceutical drugs on the market: Gardasil - the world's first vaccine against cancer and a drug for diabetes treatment - Januvia.

Moreover, emphasis on the strategic alliances inmarketing and sales in the value chain contributes greatly to Merck's competitiveness (Figure 3, below).

Strategies

Generic strategy of the company Merck differentiation, which is based on innovation, quality, safety and supplier diversity. This differentiation begins with the scientific excellence in internal and external research and development departments of Merck. Merck invested $ 6.5 billion in R & D in 2014, which includes the high-risk factors and time. The company is committed to continuous innovation, which is the result of anticipation and market demand meeting

The main strategy of the Merck - as much as investing in innovative research and development department can be. In an average year the company invests in the information department of more than $ 6 billion. The company aims to improve the manufacturing process, but with the cost of its products leave the most appropriate, without prejudice to his own company.

Merck adheres to a long-term strategy for the company's development and growth, which will allow Merck to strengthen key business sectors: health, medical biology and high-tech materials.

Merck is using four strategies to have a continuous innovation and to be ahead of its competitors. These strategies are licensing, acquisition, divestitures and research collaboration.

Licensing

Merck creates collaborative alliances between internal with external capabilities. Recourse, skills, knowledge and other capabilities are shared by alliances. AstraZeneca, with the revenue of $920 million in

2013, is the main alliance of Merck.

Acquisition

Merck acquiring companies to have long-term growth and also, synergy with efficiency, market expansion, minimizing risks and costs decrease.

Divestitures

Merck uses disinvestment strategy to eliminate foods that least profitable and focus on products that are more in demand in the market. Merck tries to allocate its resources to bring it more effectively to the target, which can lead to higher profits. In order to increase the cost of products t also reduces the investment in some production lines. For example, in 2014, Merck sold its ophthalmology business Acorn Pharmaceuticals. This decision is connected with a focus on R & D, commercialization and efficiency.

Research Collaboration

Merck creates a scientific collaboration with other pharmaceutical companies to find a solution to the continuous and negative trends, such as incurable diseases.

The latest research collaboration in general was all about oncology clinical trails.

Trends and Tendencies

Merck has sufficient resources and is in a favorable position to take advantage of the upcoming tendencies and current trends in the global pharmaceutical market.

Increase in spending on Generics

According IMS Institute for Healthcare Informatics, the global expenditure on Generics is expected to grow substantially (Figure 4). This growth is affected by factors such as:

· Growth of consumption in the so-called “pharmerging markets”, mainly the BRICS (Van Arnum, 2012), but that also includes smaller emerging markets: Mexico, Turkey, and Poland (Lorenzetti, 2015).

· A recent “patent cliff” of 2015, totaling at around $66 billion in effect on revenue (Benson, 2015).

Figure 4

Post-antibiotic Era

The World is on the doorstep of the post-antibiotic era, which means that various bacteria are becoming increasingly more resistant to antibiotics,dangerously leading to a situation when the “…common infections become untreatable and surgery and cancer therapies, reliant on antibiotics, are unusable” (Das, 2016). According to a recent statement byWHO's Director General - Dr. Margaret Chan, "Antimicrobial resistance is beyond the capacity of any organization or country to manage or mitigate alone”. During the recent World Economic Forum, more than 80 pharmaceutical companies, Merck included, have signed a joint declaration and addressed the governments around the globe to develop new ways of paying pharmaceuticals to develop antibiotics (Gallagher, 2016).

Future Strategies

1. Lobby for favorable policies outside US

Merck and its “Big Pharma” colleagues regularly donate funds to US candidates' campaigns as a way of lobbying for its interests and pass favorable legislation. Recently, such donations were made to the US Presidential campaign (Wasserman, 2016; Kounang, 2016).

With the “pharmerging markets” on the rise,Merckshould lobby for its interests in those countries through various pharmaceutical associations that exist in those countries and ally with other members of “Big Pharma” to create such associations where necessary. As the consumption in the developing countries will increase, Merck will need to shift more production to those countries. Attempts should be made to acquire local producers, especially of generics, or at least form some forms of alliance. Such alliances are also preferable because they allow to enter markets such as China or Russia, where the market is very regulated.

2. Think outside the box: more R&D focus on specific areas

There have been some recent breakthroughs, which were made not by commercial labs with big budgets and top equipment, but by teenagers:

· VetiGel, a solution that stops bleeding within seconds - created by Joe Landolina at the age of 17 (Weller, 2015);

· A 30 minute express Ebola detection test with the cost of $25 has been invented by a 16-year old Olivia Hallisey, who won first prize in Google Science Fair (McDonald, 2016);

· Anya Pogharian has invented a $500 home use dialysis machine at the age of 17 (Hamilton, 2015).

It is both inspiring and somehow shameful, that such brilliant solutions were invented not by a multinational corporate entity, but by mere kids who succeeded in creating affordable and effective solutions. For example, VetiGel can be used during emergency relief operations and is perfect for the first aid kits. Merck should direct some of its research resources to change its approach to everything, so that the “next VetiGel” would be invented and patented by Merck in-house scientists.

3. Concentrate on “Biosimilars” to negate competitive advantage of others

Unlike the “pharmerging markets”, the US market grows slower, but still remains the highest yielding one. Last year, Pfizer has spent staggering $17 billion to acquire Hospira, a leader in biosimilars - drugs that amount to approximately$4.8 billion in European sales (Lorenzetti, 2015). The next market to open up to biosimilars is the US, which has big potential for biosimilars. That is why Merck should take urgent action to gain access to that portfolio - whether toacquire or merge or ally with a company that has a biosimilar portfolio: extensive knowledge, experience, existing research materials, etc. Biosimilars are less have a very wide range and can be used to treat cancer and diabetes - this is a very important area and we must not allow any of our competitors gain or at least maintain the advantage for long.

References

1. Benson, M. (2015, February 20). Why big pharma values a secure supply chain. Retrieved February 17, 2016, from

2. Das, S. (2016, February 17). Viruses worse than Zika threaten global economic growth. Retrieved February 17, 2016, from

3. Gallagher, J. (2015, November 19). Antibiotic resistance: World on cusp of 'post-antibiotic era' Retrieved February 17, 2016, from

4. Hamilton, M. (2015, February 12). Montreal teen invents $500 dialysis machine for home use. Retrieved February 17, 2016, from

5. Kounang, N. (2016, February 11). Big Pharma's big donations to 2016 presidential candidates. Retrieved February 17, 2016, from

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