Strategic plan Hilton Hotel and Resort

Figure 5. Positioning map of Merck and peers

A Harvard research suggests that the company’s competitive strategy is essentially governed by the customer’s willingness to pay towards receiving perceived benefit from respective firm’s product.[footnoteRef:1] [1: D’Aveni, R. A. (2007). Mapping Your Competitive Position. Harvard Business Review, 85(11), 110–120.]

Figure 6. Essentiality of positioning for competitive advantage creation (self-made)

Thus, for devising a competitive strategy, it is necessary requirement for them to choose products or services to meet specific needs of target customer. Unique characteristics and market attributes are well studied, and above positioning map is created for Merck by placing it against its peers. Hence, it can be noted that Merck uses global differentiation strategy for conducting operations globally creating competitive advantage over peers.

Points of parity are the general characteristics possessed by various companies in an industry, as explained by Kotler.[footnoteRef:2] In other words, they are basic requirements to be held by the company for customers to have minimum perceived value about their brand making it as one of its peers in the industry. [2: Kotler, P. & Keller, K. L. (2015). Marketing Management. Fifteenth Global Edition. England, UK: Pearson Education Limited.p.302.]

Operating in the drug industry, quality and reliability of drugs is the first attribute of Merck which is also common in its peers. Drug approval is a lengthy and cost-intensive affair needing Merck and any other prescription drug companies to undergo stringent clinical trials and review procedures for final commercialization of corresponding drugs. Second point-of-parity is its distribution network in the US; Merck has nearly 44% of its revenues exclusively from the US market where most of its drugs are primarily sold to three channels namely McKesson, Cardinal Health, and AmerisourceBergen Corporations. Merck reported that these three companies account for 35% of total receivables as of December 31, 2019 where these three channels are the largest distributors in the US. Third point-of-parity is global outreach of Merck, similar to its peers such as Pfizer, JNJ, Roche, Novartis, and GSK. Merck also operates in more than 125 world countries offering wide variety of drugs to treat cancer, cardiovascular diseases, infectious diseases as well as serves through providing vaccines such as Gardasil, MMR-II and HPV. Another common attribute of Merck as of its peers include its relentless work committing to UN SGDs along with its sustainable corporate initiatives including eradicating river blindness in Africa. Aforementioned various attributes of Merck as an organization helps customers seek needed value for them to boost their willingness to pay for Merck’s drugs and vaccines.

‘Why Merck’ or ‘What is exclusive about Merck’ is the question which builds a perception in the minds of customers motivating them to buy Merck’s products, in turn creating competitive advantage for the company.[footnoteRef:3] In other words, points-of-difference are those characteristics of Merck which differentiate it from other pharma companies. Points-of-difference state Merck’s explicit capabilities of serving patients under certain chronic illness. As illustrated in the figure 6, positioning should be done such a way that the company can utilize all its exclusive abilities through its products and services motivating customers by solving their problems in turn creating their own competitive advantages over others. Focused R&D as well as drug manufacturing and delivery processes enable Merck to foster its leading position in serving global patients through their expertise in oncology, infectious diseases, vaccines, and cardiovascular disorder sciences. Merck’s relentless efforts mainly in diabetes, and cancer is facilitating its drug discovery and development in making cancer drugs which led to discovery of Keytruda. Today, Keytruda is the leader in immunotherapy which is used as both monotherapy and combination therapy in treating cancer from small cell NSLDC to heavy organ carcinoma. [3: Kotler, P. & Keller, K. L. (2015). Marketing Management. Fifteenth Global Edition. England, UK: Pearson Education Limited.p.300.]

Figure 7. Forecast of global prescription drugs demand[footnoteRef:4] [4: Consulting US. (2019, August 16). Cancer drug sales expected to increase dramatically by 2024. Retrieved from: https://www.consulting.us/news/2752/cancer-drug-sales-expected-to-increase-dramatically-by-2024]

Second point-of-difference is Merck’s aggressive nature strengthening its R&D candidature by involving itself in various business development activities. Merck recently acquired Peloton Therapeutics, Immune Design, ArQule, and Antelliq[footnoteRef:5] in order to retain its on-going discovery activity in various novel small molecule therapeutic candidates for the treatment of cancer and other diseases as well as kinase inhibitors for cancer types. By creating stronger pipeline, Merck is surpassing its peers through attaining tens of drug approvals every year despite inevitable patent expirations. Merck actively collaborates with peers such as Bayer AG[footnoteRef:6], Eisai[footnoteRef:7], AstraZeneca[footnoteRef:8] for developing, discovering, and delivering drugs such as Lynparza, Lenvima, and Bravecto in various international markets. [5: Merck & Co. (n.d.). Merck & Co 2019 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MRK_2019.pdf] [6: Hale, C. (2018, December 5). FDA grants breakthrough device designation to Bayer, Merck’s AI for spotting CTEPH. Fierce Biotech. https://www.fiercebiotech.com/medtech/fda-grants-breakthrough-device-designation-to-bayer-merck-s-ai-for-spotting-cteph] [7: Eisai Global. (2020, July 8). Eisai and Merck Receive Complete Response Letter for LENVIMA® (lenvatinib) plus KEYTRUDA® (pembrolizumab) Combination as First-Line Treatment for Unresectable Hepatocellular Carcinoma. https://www.eisai.com/news/2020/news202039.html] [8: AstraZeneca. (2017, July 27). AstraZeneca and Merck Establish Strategic Oncology Collaboration. Retrieved from: https://www.astrazeneca.com/media-centre/press-releases/2017/astrazeneca-and-merck-establish-strategic-oncology-collaboration-27072017.html#]

Third point-of-difference is Merck’s unprecedented ability of using advanced technologies towards R&D and manufacturing network; it recently announced major restructuring program aimed at reducing real-estate footprint and revamping supply chain into a digitally connected network. Merck is undergoing transformation of global manufacturing and supply chain by proactively linking suppliers, contractors, customers, and distribution partners together into a collaborated technological platform. Such highly integrated ecosystem shall enable Merck savings of estimated $500 million[footnoteRef:9] exclusively in manufacturing in the very first year. Owing to their drug shortfall in the US in 2017, executive team had formulated their global strategy in creating a lean and highly integrated supply chain directly leading to increase bottom-line figures. Merck strategically partnered with Accenture and Amazon for obtaining cloud computing and data analytics platforms for expedited R&D through clinical trials data in 2018.[footnoteRef:10] In addition, Merck also indulges in developing state-of-art technology hubs, since 2012, such as 3D printing tech labs across five global locations[footnoteRef:11] where they develop tissues and design various peculiar manufacturing parts, that are harder to be available in the market, thereby boosting its drug discovery and manufacturing abilities. [9: Abel, J. (2019, June 27). Digital Transformation at Merck Pharmaceuticals. ARC Advisory Group. https://www.arcweb.com/blog/digital-transformation-merck-pharmaceuticals] [10: Accenture. (2018, September 17). Accenture and Merck Collaborate with Amazon Web Services to Launch a Research Platform to Drive Innovation in Drug Discovery and Scientific Research. Retrieved from: https://newsroom.accenture.com/news/accenture-and-merck-collaborate-with-amazon-web-services-to-launch-a-research-platform-to-drive-innovation-in-drug-discovery-and-scientific-research.htm] [11: Merck & Co. (2020, June 25). Innovation: If you build it (in 3D), they will come. Retrieved from: https://www.merck.com/stories/if-you-build-it-in-3d-it-will-come/]

Fourth point-of-difference is their capital allocation mechanism along with strong organizational culture committing to vision of uplifting patients’ lives across the global markets they serve. Merck’s social initiatives of distributing medicines of $2.5 billion worth across the US freely along with Merck help program at developing South-western states in the US and their diabetes program makes it stand out of the peers. Merck has shown its commitment towards society by seeking water-free and zero waste solutions according to their corporate website. By working in conjunction to the UN, Merck successfully eradicated river blindness from Africa by 2019 according to the company’s corporate sustainability report of 2019-2020. Merck over years has increased its net income about 58% from 2018 to 2019 and 60% from 2017 to 2018 according to its 10-K filings.

Global pharmaceutical spending reached nearly $1.3 trillion in 2019 which is expected to raise to $1.5-$1.6 trillion by 2024 of which oncology might account for more than $300 billion, according to IQVIA study.[footnoteRef:12] Under such circumstances, Merck is all set to acquire more market share given it explicit drug discovery and development in fields of cardiovascular and oncology sciences. Although Merck’s revenues took toll following its patent expiry of Singulair, HCV in collaborative research with Gilead Sciences, Merck restructured their costs and retained position in the market. Thus, aggressive R&D along with explicit expertise in specific sciences and effective allocation of financial resources facilitate long-term sustenance of Merck in the global biopharma industry. [12: IQVIA. (2020, March 5). Global Medicine Spending and Usage Trends: Outlook to 2024. IQVIA. https://www.iqvia.com/insights/the-iqvia-institute/reports/global-medicine-spending-and-usage-trends]

Statistics show that global pharmaceutical companies have increased their revenues on an average by 1.02% in 2018 and an average of 1.88% in 2019. Merck also experienced raise in revenues from 2018 to 2019 with over 11% overall along with 2% impact from favorable foreign exchange on annual sales. Merck is both horizontally and vertically integrated accounting for about 4.44% of drugs consumed globally. Headquartered in Kenilworth, New Jersey, USA, Merck operates in more than 270 global locations across 125 and more world countries with main focus on oncology, vaccines, infectious disease, cardiovascular disorders, and COVID-19 fields through drug discovery, development, and commercialization activities.

Figure 8. Operating results of Merck from both US and international markets[footnoteRef:13] [13: Merck & Co. (n.d.). Merck & Co 2019 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MRK_2019.pdf]

The US being the single largest consumer of prescription drugs made by Merck, accounted for 43% of its total revenues since fiscal 2015 to 2019. On the other hand, Japan accounts for 8% of its total revenues, which has been constant since 2015 and China contributed to 4% in 2017, 5% in 2018, and 7% in 2019 total revenues. As mentioned earlier, global healthcare spending is to be increased to nearly $1.6 trillion by 2025 with a CAGR of 4-5%[footnoteRef:14] indicating the growth opportunity for all the top ten global pharmaceutical firms including Merck. [14: Pharmaceutical Commerce. (2019, January 29). Global pharma spending will hit $1.5 trillion in 2023, says IQVIA. Retrieved from: https://www.pharmaceuticalcommerce.com/business-and-finance/global-pharma-spending-will-hit-1-5-trillion-in-2023-says-iqvia/]

Wall Street Analysts and healthcare analysts expect that Merck’s Keytruda could be the top of the best-selling drugs in the history for immuno-oncology treatments. Merck has reported almost $12 billion in sales of Keytruda in FY19 which is estimated to draw about $25-$30 billion by 2025. Merck also is committed in developing two mRNA-based antiviral vaccines for fighting COVID-19 as well as an oral antiviral drug for boosting immunity against the SARS COV-2 virus. Growth prospect for Merck ideally is whole world customer under oncology, diabetes, cardio-vascular diseases, and vaccines indicating Merck’s areas of focus. However, operating in an extremely regulated and fiercely competitive industry, Merck is constantly encountered with peer pressure from Roche, Novartis, Pfizer, JNJ, Sanofi, and GSK through various drugs such as Ibrance, Prevnar/Prevnar 13, Zocor and many more. In addition, IQVIA along with WHO studies suggest that over next five to ten years, healthcare spending from pharmerging nations will be increased at CAGR of 2-5%. IQVIA along with consensus from WHO, characterized pharmerging market as nation with less than $30k GDP/capita and greater than $1 billion absolute prescription drugs market growth potential between 2014 & 2019.[footnoteRef:15] China, Brazil, India, Russia, Mexico, Turkey, Poland, Saudi Arabia, Indonesia, Egypt, Philippines, Pakistan, Vietnam. Bangladesh, Argentina, Algeria, Colombia, South Africa, Chile, Nigeria, and Kazakhstan are termed as pharmerging markets whose growth potential is rapidly increasing.[footnoteRef:16] All in all, it can be noted future prospects from market and growth aspect seems to be highly attractive facilitating Merck to actively seek strategies for prolonged and long-term sustenance in the marketplace. [15: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood.pdf ] [16: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood.pdf ]

Targeting specific segment is crucial for organizations in order to serve precise needs in the market facilitating increased perceived value for respective brand. Targeting enables companies to have a clear understanding who and what their true or ideal customers want and be able to cater to those needs thereby boosting their performance in the global markets due to their competencies. Merck has targeted in terms of specific medical areas instead of demographics as it basically produces drugs that are used to treat patients of any demographic. Given its primary foci on oncology, infectious diseases, and cardiovascular diseases, it provides patients globally with blockbuster drugs for treating NSCLC cancer, breast cancer, metastatic cancer, colorectal cancer, lymphoma, leukemia, and other carcinoma types. With its discovery and development of Keytruda, sales of Merck skyrocketed following its approval by FDA in 2017 and later EMA approval in 2018. Keytruda today is being used as both monotherapy and combination therapies after the chemotherapies as an aid in immunotherapies. Merck is one of the pioneers in the industry in terms of making and selling cancer drugs with more than 180 drugs sold across international markets. Various market and drug analysts expect that Keytruda might draw about $25-30 billion revenues by 2025 making it the best gross-selling drug in the history crossing Humira. Merck also manufactures vaccines for measles, Ebola virus, mumps, rubella, varicella, shingles, rotavirus gastroenteritis, and other pneumococcal diseases which enable Merck’s at par performance in the global markets.[footnoteRef:17] [17: Market Beat. (n.d.). Merck & Co., Inc. Stock Forecast, Price & News. Market Beat. Retrieved from: https://www.marketbeat.com/stocks/NYSE/MRK/]

Merck could increase its customer base following the merger of Schering Plough in 2009 where through Merck’s expertise in science and Schering Plough’s international locations, had major global penetration boosting its performance over years. Merck not only targets in terms of areas of science but also in terms of geographic regions and business segments. For instance, in North American region, it focuses on healthcare and insurance management companies while in Asia it focuses on government agencies more than individual healthcare institutions. Targeting for Merck is also dependent on specific country’s healthcare system such as in the US, healthcare is privatized where individual corporations, health and care management firms bargain drugs. On the other hand, in case of Japan, healthcare is a public institution headed by Japanese government who have the power of bargaining where Merck has to comply with the norms of pricing, advertising, and selling in Japan.[footnoteRef:18] Targeting in terms of business segments include animal health revenues which are focused at both livestock and companion animals. It can be concluded that Merck classifies immuno-oncology, antiviral, antibacterial, diabetes, gastroenteritis, pneumococcal diseases, and other respiratory and anthelmintic markets as its target markets. [18: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Figure 9. Focused markets for global pharma forecast[footnoteRef:19] [19: Desjardins, J. (2019, January 30). Visualizing the Future of the Pharma Market. Visual Capitalist. Retrieved from: https://www.visualcapitalist.com/future-pharma-market/]

As aforementioned, customers of Merck include government agencies, health management companies, benefit management companies, insurance firms, doctors, physicians, nurses, pharmacy benefit manager (PBMs), welfare and employee management organizations, and other integrated delivery systems (IDS). With changing demographics, industrialization, increased healthcare spending across the globe, customers for healthcare companies are increasing every year according to WHO statistics. Pharmerging countries are expected to be the top customers for global healthcare companies where diabetes, cancer, and neurological disorders are increasing over years, thus, a definite prospect of growth for Merck. Below picture Merck’s customers growth that could in turn impact the performance of Merck in coming years.

Figure 10. Overall Customer base in terms of industry type[footnoteRef:20] [20: CSI Market. (n.d.). Merck & Co Inc. CSI Market. Retrieved from: https://csimarket.com/stocks/markets_glance.php?code=MRK]

Figure 11. Peer comparison of Merck[footnoteRef:21] [21: Morning Star. (n.d.). Pharmaceutical Industry Review. https://www.morningstar.com/ ]

Key therapeutic areas such as oncology, cardiovascular diseases, immunology & inflammation, vaccines, neuroscience, and antibiotics are very broader areas in medicinal sciences. Thus, similar to that of Merck, peers such as JNJ, Pfizer, GSK, Roche, Sanofi, Novartis, AstraZeneca, Abbott, Bayer, and AbbVie are some of the fortune 500 companies operating in same sciences.

Figure 12. List of top ten global pharma companies based on revenue generation[footnoteRef:22] [22: Top 10 pharma companies by revenues in 2019. (2020, March 4) https://www.beckershospitalreview.com/pharmacy/top-10-pharma-companies-by-revenue.html]

Figure 13. Net income trend for FY 2019[footnoteRef:23] [23: Morning Star. (n.d.). Pharmaceutical Industry Review. https://www.morningstar.com/]

Early discovery and development, and patent exclusivity are two attributes that make an organization competitive in any key therapeutic area in the global drug industry. Statistics show that Pfizer, JNJ, GSK, Merck, AstraZeneca, Roche, Novartis are some of the top ten global pharmaceutical companies maintaining their position constant in the list since 2012 as shown in figure below. While Sanofi, Roche, Bayer, Novartis, and GSK are foreign listed companies, JNJ, Pfizer, Merck, AbbVie, Abbott, and Gilead are American nationals listed on the NYSE.

JNJ and Pfizer are considered as prime competitors for Merck as all of them are American nationals operating in very similar therapeutic areas. Production capacity for JNJ is relatively larger than both Pfizer and Merck due to its humungous presence in consumer healthcare business selling women’s products, childcare products, OTC drugs as well as cosmetics. Product strategy for Pfizer and JNJ are more inclined towards diversification as both of them operate in consumer healthcare and generic drug markets. Whereas Merck divested its consumer business, called Merck consumer healthcare company as of October 01, 2014 and sold it to Bayer AG. Merck also undergoing the restructuring beginning in 2016 where it has planned a spinoff of women’s healthcare products, biosimilars, trusted legacy brands into a new company called as Organon & Co., by the first half of 2021. Such initiatives taken by Merck towards reorganizing organizational strategies and turning into a focused company strengthening its overall performance.

Figure 14. Merck and its peers’ performance (market cap)[footnoteRef:24] [24: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Above figures 12,13, and 14 show Merck’s performance against its immediate competitors which since 2017, was majorly driven by the discovery and development of Keytruda. Merck has globally recognized its brand name through Merck Manual since late 20th century which is still considered as one of the well-known medical journals across the world. As mentioned earlier, Merck actively seeks strategic collaboration strengthening its pipeline productivity. One such collaboration was the diabetes franchise of Merck along with Pfizer to produce SGLT2 receptor Ertugliflozin. SGLT2 inhibitors have demonstrated that these therapies, also decrease heart problems and blood strokes in diabetic cases by hemoglobin A1C,[footnoteRef:25] an indicator of blood glucose. Combination of Januvia and Ertugliflozin as for controlling AIC is also suggested by Merck to the diabetic patient community,[footnoteRef:26] entering niche market dominated by Eli Lily. Both Merck and Pfizer are seeking three NDAs from the US FDA; one for Ertugliflozin as a single agent, one for Ertugliflozin and Metformin combination and the third for Januvia and Ertugliflozin combination.[footnoteRef:27] Thus, despite operating in highly regulated and competitive industry, Merck is all set to achieve milestones through its ability of early discovery and relentless R&D efforts coupled with advanced technology usage. [25: LaMattina, J. (2017). Pfizer fueling growth of competitor’s pipeline. Forbes. Retrieved from https://www.forbes.com/sites/johnlamattina/2017/06/27/pfizer-fueling-growth-of-competitors-pipelines/#46ee736a2c9d] [26: LaMattina, J. (2017). Pfizer fueling growth of competitor’s pipeline. Forbes. Retrieved from https://www.forbes.com/sites/johnlamattina/2017/06/27/pfizer-fueling-growth-of-competitors-pipelines/#46ee736a2c9d] [27: LaMattina, J. (2017). Pfizer fueling growth of competitor’s pipeline. Forbes. Retrieved from https://www.forbes.com/sites/johnlamattina/2017/06/27/pfizer-fueling-growth-of-competitors-pipelines/#46ee736a2c9d]

a. Aggressive collaboration leading to consolidated research fuels the overall growth through niche opportunities

b. Effective resource allocation coupled with integrated supply chain facilitates overall growth creating increased value for shareholders

c. Active investments in advanced technologies as well as integration of global R&D prospects leads to strengthening pipeline productivity

d. Institutionalizing code of conduct and strong organizational culture promoting integrity boosts morale

e. Restoring brand image through competitive advertising and focusing on CSR initiatives by increasing resources for Merck GHI, Action Funds as well as funding joint research

Table 6. SWOT matrix for Merck

Following SWOT alternatives are suggested in line with the external environment conditions using which Merck could retain its competitive position in the global biopharma sector.

Table 7. SWOT alternatives for Merck

In February 2020, Merck announced spin-off of its women’s healthcare products, biosimilars, and trusted legacy brands into a new company, called as Organon & Co., estimated to complete it by 2021. Thus, today Merck operates internationally in four main segments: pharmaceutical, animal health, healthcare services, and alliances segments. Product portfolio of Merck is dependent on four specific areas in medical science which are oncology, infectious diseases, cardiovascular disorder (CVDs), and vaccines along with animal health products which includes drugs as well as vaccines.

a. Oncology

Keytruda (pembrolizumab), the Company’s anti-PD-1 (programmed death receptor-1) therapy, as monotherapy for the treatment of certain patients with melanoma, non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), head and neck squamous cell carcinoma (HNSCC), classical Hodgkin Lymphoma (cHL), primary mediastinal large B-cell lymphoma (PMBCL), urothelial carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient cancer, gastric or gastroesophageal junction adenocarcinoma, esophageal cancer, cervical cancer, hepatocellular carcinoma, and merkel cell carcinoma.[footnoteRef:34] Keytruda is also used for the treatment of certain patients in combination with chemotherapy for metastatic squamous and non-squamous NSCLC, in combination with chemotherapy for HNSCC, in combination with axitinib for renal cell carcinoma, and in combination with lenvatinib for endometrial carcinoma; and Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting. In addition, Merck also recognizes alliance revenue related to sales of Lynparza,[footnoteRef:35] an oral poly (ADP-ribose) polymerase (PARP) inhibitor, for certain types of advanced ovarian, breast and pancreatic cancers and Lenvima for renal cancers and other different types of carcinoma both in women and men. [34: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [35: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Figure 15. Vaccine revenues for global pharma[footnoteRef:36] [36: Shen, A. K., & Cooke, M. T. (2018, December 19). Infectious disease vaccines. Nature. Retrieved from: https://www.nature.com/articles/d41573-018-00011-6]

b. Vaccines

Merck is widely known for its vaccines worldwide contributing to about 23% sold across various nations (figure 15). With the creation of Isentress, one of the first in the international market for fighting against HIV has skyrocketed Merck’s performance over years. Some of blockbuster vaccines discovered and being delivered by Merck include Gardasil, Gardasil 9, ProQuad, M-M-R II, Varivax, Pneumovax 23, RotaTeq, and Vaqta. Merck supplies 11 out of 16 recommended list by US CDC for the US population.

c. Hospital Acute Care & Immunology

Bridion, Noxafil, Primaxim, Invanz, Cubicin, Cancidas, and Prevymis are some of the major drugs contributing to more than $500 million in revenues in hospital acute care division of Merck. While Simponi and Remicade are two major drugs that are contributing to more than $1 billion revenues, boosting overall revenues while significantly contributing to raise in net income over years.

d. Neuroscience, Virology, & CVDs

Belsomra, an orexin receptor antagonist for treating insomnia with sleep onset and/or sleep maintenance is one of the historical drugs in the medical field for neuroscience division of Merck. Isentress/Isentress HD, on the other hand, an HIV integrase inhibitor, as mentioned earlier is one of its kind in the virology market for treating HIV breakouts. Another drug, Zepatier for treating adult with chronic hepatitis C (HCV) with genotype (GT) t or GT4 infection variety are some of the majorly contributing drugs in the virology branch of Merck.

CVD is one of the four main areas of expertise for Merck which includes some successful drugs such as Zetia, Vytorin, Atozet, Rosuzet, and Adempas marketed both inside the US and internationally. Zetia and Vytorin have been crucial drawing more than $1 billion each in revenues over years.

e. Women’s health & Diabetes

Products such as Januvia, and Janumet focused at treating type-2 diabetes both in men and women are acclaimed drugs in the history of diabetes. Both of have been drawing billions since their discovery significantly boosting Merck’s position in the international markets. Women’s healthcare products such as NuvaRing, Implanon, and Nexplanon are some of majorly contributing drugs affecting Merck’s performance. However, with the new restructuring plan in place, approved in 2016, Merck is spinning off its women healthcare and trusted legacy brands along with its biosimilars into Organon & Co., to be finished by 2021.

f. Animal Health (livestock & companion animals)

Merck divides its drugs in animal segment mainly under two categories: livestock and companion animals. Total revenues for FY19 for the livestock category from both selling drugs and vaccines accounted for $2,784 million.[footnoteRef:37] In livestock category, Merck discovers, develops, manufactures, and markets drugs for treating cattle, poultry, aquaculture, beef cattle. Some of the significant drugs include Nuflor (for cattle, and swine), Bovilis (for cattle), Estrumate ( for cattle), Zupero ( for respiratory disease), Zilmax (for treating beef cattle), and Exzolt (for treating poultry red-mite infestations). Merck also developed Allflex Livestock Intelligence system for livestock animal monitoring, identification, and traceability. [37: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

On the other hand, Companion animal division accounts for developing, manufacturing, and selling drugs and vaccines for companion animals. This division accounts for revenues of about $1,609 million and $1,582 million in FY19 and FY18 respectively.[footnoteRef:38] This division directly assists vets, animal care homes and general public on how to use certain drugs and vaccines for their pets’ protection through Merck’s Animal Health Portal. Some of the drugs and vaccines include Bravecto (for dogs and cats), Panacur (used for many animals), Regumate (for treating horses), and Scalibor (for treating against mosquito and fleas, ticks, and sandflies). Below is the consolidated revenue information for major contributing products in various segments of Merck which conclude that pharmaceutical segment is the only business segment striving Merck’s existence in the market. [38: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Figure 16. Merck’s top product sales[footnoteRef:39] [39: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Organizations often ‘design goals which are either extremely difficult or extremely novel, termed as stretch goals’[footnoteRef:40] which are seldom communicated and achieved in long-term failing performance. A 1965 Harvard study suggests that goals and objectives should not only be designed in line with internal and externalities of specific organization operating in the respective industry but also be constantly communicated as well as measured for efficacy in organizational performance.[footnoteRef:41] As emphasized by David text, operational goals should be designed by considering internal strengths and weaknesses combined with opportunities and threats due to changes in external environment.[footnoteRef:42] Merck experienced a turmoil in delivering goals during early 2000s which increased burden on the company as well as Merck was succumbed to financial loss coupled with litigation, denigrated brand value and plummeting shareholder trust. [40: Sitkin, S. B., Miller, C. C., & See, K. E. (2017). The Stretch Goal Paradox. Harvard Business Review, 95(1), 92-99.] [41: Granger, C. H. (1964). The Hierarchy of Objectives. Harvard Business Review, 42(3), 63-76.] [42: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

With the outbreak of Vioxx side effects leading to recall of the drug in 2005, followed by economy downfall damaged the efficiency of Merck. Later on, with the leadership change in 2011 when Kenneth C. Frazier succeeded Richard T. Clarke as new CEO, Merck’s performance has been substantially increasing through years due to strategic revamping process. Merck, since 2011 has improved its performance at par through their significant changes in capital resource allocation as well as restructuring procedures. As of October 01, 2014, Merck divested consumer care unit (MCC) as a move towards creating a focused research-based company. The Board has also approved restructuring plan in 2016 in which Merck’s global manufacturing network is undergoing digital transformation where its global supply chain is integrated to the real-time demand. Under such circumstances, it is essential for Merck to design definite and measurable set of goals for future operations in order to attain leading position in the global biopharmaceutical industry. Below listed are five major goals which Merck could implement for next five years to observe significant change in its performance catering to increasing global demand.

1. Boosting annual revenues by 4% through expedited digital transformation of global manufacturing network

Figure 17. Merck’s performance over years

Earlier in 2016, executive team at Merck approved the restructuring plan for revamping their manufacturing and global supply chain owing to significant loss in market share due to product shortage. Merck experienced product shortages and loss in market share especially in the US during 2014-2015 due to poor demand forecast and irregularities in production scheduling and delivery.

Table 8. Income statement analysis of Merck[footnoteRef:43][footnoteRef:44] [43: Merck & Co. (2017) Merck 2016 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReportArchive/m/NYSE_MRK_2016.pdf] [44: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

According to the statistics reported by FDA and Drug Shortages Task Force (DSTF), 163 drugs were constantly short in the market over a 5-year period in the US which also drugs such as Keytruda and Varivax from Merck as well as Prevnar from Pfizer.[footnoteRef:45] Thus, Merck claims to have more than $500 million of cost savings in the first year after restructuring manufacturing which could be doubled and quadrupled over years. With effective forecast due to demand driven supply chain, Merck can conduct apt production activities preventing loss of revenues due to product shortage. It can be noted from the above graph (figure 17) that Merck’s performance has been improving since 2017 after the initial stage of executing global supply chain revamping activities. [45: U.S. Food and Drug Administration. (2020, February 21). Drug Shortages: Root Causes and Potential Solutions.. https://www.fda.gov/drugs/drug-shortages/report-drug-shortages-root-causes-and-potential-solutions]

Annual revenues (table 8) have soared by the end of 2017 given the approval of Keytruda, as it majorly contributed to raise in sales since early 2018 which gained neatly $12 billion in 2019 financial year. Various studies show that global pharmaceutical spending will reach nearly $1.5-$1.8 trillion by 2025 with pharmerging countries as major markets. MarketLine suggests that global drug industry is expected to raise with 6-8% of CAGR of which branded drug market is estimated to reach $1.2 trillion in five years.[footnoteRef:46] Thus, such a progressive external environment has strong prospect of fueling sales for the drugs made by Merck, thereby leading to raise Merck’s annual revenues every year by 4% seems to be a feasible and achievable goal. [46: MarketLine. (2019). Pharmaceuticals Industry Profile: Global, 1–41.]

2. Implementing stringent code of conduct and organizational policies owing to vision of positively impacting lives of patients & increased financial outcome

As the third-largest Drugmaker in the US, Merck faced litigation in light of its nonsteroidal anti-inflammatory drug, Vioxx, after the drug being recalled in 2004 due to increased heart attack and cardiac arrest when used by the patients. Vioxx scandal caused Merck to pay $4.85 billion in settlement towards numerous patients after drug usage.[footnoteRef:47] Merck, in 2011 was also fined an additional $950 million as settlement for civil case and was pleaded guilty to a criminal offence over marketing and selling death-causing drug in both US and international markets.[footnoteRef:48] Moreover, Merck was underperforming relative to its peers since early 2000s given its reduced research and development process. Research pipeline dwindled leading to Merck’s decrease in revenue and R&D denigrating its overall market performance plummeting investors belief. Merck could not even obtain at least ten FDA and EMA approvals over a period of two years between 2008 and 2010. Thus, Vioxx scandal, increasing generic and branded drug competition, insufficient funds for R&D and low pipeline productivity coupled with poor brand value due to customer mistrust diminished its corporate value in the pharma sector. Vioxx scandal had significant impact on Merck’s business activity for years along with nearly $6 billion loss in cash with brand reputation globally at stake. [47: Berenson, A. (2007, November 9). Merck Agrees to Settle Vioxx Suits for $4.85 Billion. New York Times. Retrieved from: https://www.nytimes.com/2007/11/09/business/09merck.html] [48: Wilson, D. (2011, November 22). Merck to Pay $950 Million Over Vioxx. New York Times. Retrieved from: https://www.nytimes.com/2011/11/23/business/merck-agrees-to-pay-950-million-in-vioxx-case.html]

Registered as a federal lobbyist, Merck actively suggests the federal government for product approvals as well as devising healthcare reforms across the US. Through Merck Foundation, it currently conducts social value optimization through initiatives such as access to health, employees, environmental sustainability, ethics & values, and reporting. However, these initiatives fall behind when compared to the activity performed by Pfizer Foundation and JNJ Social reach programs. Merck, in order to retrieve its decade-ago social value, should constantly evolve social engagement activity by increasing outreach activities to underprivileged parts of world. Merck should also strengthen their health accessibility program under Merck helps’, ‘Merck Access Program’, ‘Merck Manuals’, ‘Merck Connect’, ‘Merck for Mothers’, ‘Merck for Animal Health’, ‘Merck Diabetes Challenge’ through increased financial resources. These activities not only contribute positively for value creation but also equally improve financial results as they contribute in attaining data which directly impacts R&D pipeline. Such a full-pledged activity of increasing outreach of its services as well as developing low-cost techniques enhances Merck’s corporate outlook building stronger consumer recognition boosting earnings.

3. Soar profitability by 5% thereby escalating global market share

Figure 18. Profitability assessment of Merck & peers[footnoteRef:49] [49: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf ]

Merck has been delivering relatively better results since 2017 after formulating its capital resource allocation as well as an outcome of ongoing restructuring. Post divesting slow-growing consumer business segments and reorganizing itself into focused science fields, Merck has certainly boosted earnings. According to the market research, Merck acquired 4.44% of global market share in terms of manufacturing and selling branded drugs and vaccines internationally. Oncology is the key stem of Merck’s success marking the discovery of Keytruda, all set to surpass Humira sales, to be noted as the best gross-selling drug in the history by 2025. ROE of Merck is higher than both Pfizer and JNJ indicating its ability of boosting pipeline productivity and expertise in focused areas such as diabetes, cancer, infectious disease, and CVDs.

7.5% and 11.6% ROA for the FY18 and FY19 respectively also indicates Merck’s growing ability of effective usage of its resources towards delivering end results. It can also be noted from the figure 18 that net profit and gross profit margin are also increasing since 2017 whereas Pfizer had declining net profit margin due to LOE for its Lyrica. Pfizer’s sales plummeted to only $51 billion in 2019 from $54 billion in 2018 due to loss of sales from Lyrica.[footnoteRef:50] Pfizer is also expected to lose additional revenues consequently in the year 2020 again due to Lyrica exclusivity. Thus, it can be noted from the profitability assessment of Merck and its peers that Merck through 2017 has been delivering attractive results which recently is also proven by its stock market performance and market capitalization which in the beginning of 2020 was nearly $200 billion. Merck is playing smart using current policy as well as its capital and human resources holding on to the leading position in the market. Only downside for Merck is its overdependence on pharmaceutical segment especially key products such as Keytruda, MMR-II, Varivax, Gardasil, and Remicade. On the flip side, Merck is entitled to however enjoy its earnings from those products as they are relatively newly available to market, so they have certain time before patent expiration. In addition, given industry growth rate coupled with patent protection and aggressive cost optimization techniques in place, it seems feasible for boosting Merck’s profitability each year by 5% over next five fiscal years. [50: Pfizer. (2020). Pfizer 2019 Annual Review. Retrieved from https://s21.q4cdn.com/317678438/files/doc_financials/2018/ar/Pfizer-2019-Financial-Report.pdf]

4. Aggressive strategic collaboration facilitating expedited discovery and enhancing pipeline productivity

Unlike Pfizer, JNJ, GSK, Novartis and other leading pharma across the globe, Merck only operates in the branded drug market which indicates its necessity of patent protection for its drugs. Pfizer, JNJ and other peers gain significant revenues from medical equipment sector, consumer healthcare sector, generic drugs and vaccines sector which is not same in case of Merck. Divesting consumer healthcare unit in 2014 and executing spinoff of its trusted legacy brands, women healthcare, and biosimilar division, Merck has transformed itself into an undiversified and focused organization explicitly driven by R&D. According to a Forbes article, CEO Ken claims that technology and R&D coupled with expertise of people at Merck is their soul for sustenance in the business.[footnoteRef:51] Merck previously collaborated with Bayer AG in 2014, developing worldwide manufacturing and delivering agreement for making a soluble guanylate cyclase (sGC) modulators including Adempas by Bayer for treating pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. Merck also collaborated with AstraZeneca for Lynparza in 2017 and with Eisai in 2018 for making Lenvima. Oncology is expected to grow over next five years given changing world demographics and exposure which is a definite prospect for Merck. [51: Forbes, S. (2020, February 4). Merck has a Great Future, Because It has a Soul: Ken Frazier. Forbes. https://www.forbes.com/sites/steveforbes/2020/02/04/merck-has-a-great-future-because-it-has-a-soul-ken-frazier/#68191bfe7fdd]

As mentioned earlier, Keytruda currently major success driver for Merck until 2035 before its patent expiration. As known, drug companies should be ready for any sudden outbreak; one such is the COVID-19 outbreak since December 2019. According to the Bloomberg, COVID affected more than 180 world nations infecting more than 900 million people.[footnoteRef:52] Merck announced two mRNA-based vaccine discovery and development procedures along with an oral antiviral drug aimed at providing immunity against the SARS COV-2 virus. With such aggressive business initiatives, Merck can seek longing success as a leading pharmaceutical across the globe by actively seeking opportunities for partnerships inside the industry as well as exploring opportunities in IT, electronics industry which in turn could promote growth for Merck. Pfizer, AstraZeneca, and Moderna have already claimed their phase 3 results for COVID-19 vaccine; however, if Merck also announces its recent development for COVID vaccine, it will lead to assured profits spurring overall market performance. [52: Bloomberg. (n.d.). Mapping the Coronavirus Outbreak across the World. Retrieved from https://www.bloomberg.com/graphics/2020-coronavirus-cases-world-map/]

5. Establishing data-driven organizational culture enhancing shareholder value as well as revenue growth

Constantly evolving demographics due to changing lifestyle, exposure and medical accessibility mandates data monitoring as an essential tool for succeeding in the healthcare industry. Merck seems to have realized importance of technology in order to strive in the pharma sector which is indicated by its commitment to equip advanced tech platforms in conducting research and establishing various 3D-printing tech labs and cloud interfaced research platforms. With an ongoing project of digital transformation of existing manufacturing and supply chain network, Merck began realizing perks of on-time manufacturing and an integrated global network for effective business operations on a daily basis.

Merck is highly reliant on patents in order to secure market share for any product under any specific science, thus, should constantly explore new tech-based firms that facilitate effective patient monitoring as well as R&D procedures. Merck should also strive in collecting data not only from the pre-clinical, clinal, and post-clinical trials but also evolving data about specific outbreaks, local disease history, specific community attitude towards medicines and vaccines. Scholarly research from Harvard and MIT suggests that having a data-driven culture fosters strong organizational practices owing every business action to positively impacting financial growth of an organization.[footnoteRef:53] Having a data-driven culture especially in pharma company has the potential of boosting innovation by procuring new ideas with solid empirical evidence and creating explicit ways of customer satisfaction by providing definite opportunities of formulating strategies and streamlining operations. All in all, for Merck to acquire increased market share, committing to creating a data-driven culture definitely soars its earnings for long-term sustenance. [53: Waller, D. (2020). 10 Steps to Creating a Data-Driven Culture. Harvard Business Review Digital Articles, 2–6.]

Generating, evaluating, and selecting strategies is the key part of strategic formulation for any organization in order to achieve desiring goals through stipulated objectives. As emphasized by strategic management concept in David text, final strategy to be followed by the organization is devised using 3-stage approach: Stage 1, referred as Input stage provides data about all the inputs available about the organization for starting and planning a strategic change which consists of IFE, EFE, and competitive profile matrix (CPM). Stage 2, referred as Matching Stage is where the current attributes of the organization are matched to external business environment and industry dynamics for generating feasible alternative strategies which consists of SWOT matrix, BCG matrix, Strategic Position and Action Evaluation (SPACE) matrix, Internal-External (IE), and Grand Strategy matrix. Lastly, Stage 3, referred as Decision Stage provides deeper insight on each of before considered alternative strategy by showing attractiveness of each, which consists of Quantitative Strategic Planning Matrix (QSPM). Thus, next section of this paper presents detailed process of generating and evaluating alternative strategies for Merck.

As emphasized by various strategic scholars, every organization aiming for success should devise its strategy by matching its strengths and weaknesses against the opportunities and threats created by the external business environment.[footnoteRef:54] All strengths, weaknesses, opportunities, and threats should be evaluated in terms of cost and benefits, thereby enhancing the scope of implementation of strategic alternatives. This section enlists Merck’s strategic options using four categories for strategic alternatives explained by David text: integration, intensive, diversification and defensive strategies (table 9) along with Michael Porter’s Competitive Forces Framework (table 10). [54: D’Aveni, R. A. (2007). Mapping Your Competitive Position. Harvard Business Review, 85(11), 110–120.]

Table 9. Alternative Strategy Choices for Merck[footnoteRef:55] [55: David, F. R., & David, F. R. (2013). Strategic management: Concepts and cases: A competitive advantage approach. Pearson.]

Table 10. Porter’s five generic strategies[footnoteRef:56] [56: Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.]

Michael Porter, on the other hand, suggests that organizations should design strategies in order to obtain sustainable competitive advantage in the industry, which he emphasized that those strategies can be termed into three main components: cost leadership, differentiation, and focus. Porter’s Five Generic Strategies consist of two cost leadership strategies, one differentiation strategy, and two focus strategies. Cost leadership strategies, low-cost (type 1) and best-value (type-2) are strategies mainly focused on cost optimization where companies either apt for low-cost products/services seeking more market share or seek best-value out of cost economy. Differentiation strategy (type 3) is the one where an organization makes unique products catering to the needs of relatively price-sensitive customers. Whereas focus strategy has two alternatives: low-cost focus strategy (type 4) and best-value focus strategy (type 5) where both of these are aimed at serving niche markets.

Operating in the branded prescription drug industry, it is inevitable for Merck to suffer losses incurred due to LOE as respective patent protection expires over a definite period of time. Under such circumstances, many of the distributors, drug wholesalers, pharmacists, and insurance companies along with the governments stop purchasing Merck’s drug ahead of its patent expiration. Such actions disrupt Merck’s inventory levels ahead of patent expiration increasing operating costs as wholesalers, distribution channels and retailers start piling generic versions of soon-to-expire patented drug creating bullwhip effect due to difference in demand quantities. Merck experienced denigrated performance during 2010 and 2011 given its patent expiration of an oral asthma and allergy drug, Singulair which raised $5 billion sales in 2010.[footnoteRef:57] Statistics show that Merck lost nearly 80% of sales of Singulair in 2011 post patent expiry which was very similar in case of Zocor and Vioxx sales.[footnoteRef:58] On the other hand, assuming if Merck had its control over the distribution channels through retail partners, it could restore at least extra 10-25% of sales instead of losing 6 months even before the patent expiry. It can be noted that if Merck can secure its soon-to-expire patented drugs until a month before expiration, its sales for respective drug trail at 35% instead of 10% or low where 20% of savings is directly added to net profits or inventory costs are decreased by 1-1.5% for that year. [57: Dlugosch, J. (2011, July 29). Five pharma stocks to buy as patents expire. Globe and Mail. Retrieved from: https://www.theglobeandmail.com/globe-investor/investment-ideas/five-pharma-stocks-to-buy-as-patents-expire/article616324/] [58: Dlugosch, J. (2011, July 29). Five pharma stocks to buy as patents expire. Globe and Mail. Retrieved from: https://www.theglobeandmail.com/globe-investor/investment-ideas/five-pharma-stocks-to-buy-as-patents-expire/article616324/]

In terms of backward integration, the US FDA statistics show that only 28% of APIs used by the US biopharma companies are made in the US importing rest from various nations in the world.[footnoteRef:59] On the flip side, when Merck gains the advantage over peers by owning peculiar API manufacturers along with partnership in various chemical companies, it directly leads to cost-saving spurring economies of scale. With the ongoing digital transformation of global supply chain network at Merck, there are definite savings of $500 million in manufacturing for first year which are expected to reach $1 billion each year in next five years. Due to fluctuations in demand, Merck is also exposed to definite burden on increasing costs of raw materials (chemicals, solvents, API supply) because Merck has to invest extra on procuring even though there is sudden demise in demand for some drugs due to outbreak or demographic change. Under such circumstances, Merck has an incentive of undergoing backward integration securing raw materials cost, API procuring costs, and manufacturing costs every year. Such changes in its value chain have positive outlook on financial performance of Merck as shown in table below. [59: United States Food and Drug Administration. (n.d.). Guidance and Manuals on Pharmaceutical Quality. Retrieved from: https://www.fda.gov/drugs/pharmaceutical-quality-resources/guidances-and-manuals-pharmaceutical-quality]

Table 11. Cost implications of first strategic alternative

Data Source: Self-made, according Merck 2019 10K filings

Pros:

· Existing global outreach of Merck boosts sales

· Increased guaranteed sales through Merck’s own distribution channels

· Cost reduction and escalated bargaining power

· Economies of scale are achieved over long run

Cons:

· Intensive capital requirement

· Retail control needs humungous corporate resources involving structural complications and disruption in business processes

2. Through horizontal integration and market development – Boosting sales teams across pharmerging nations by entering into new markets by partnering with peers

As explained by David text, horizontal integration is one of the tools used by turbulent, and high-velocity industries such as internet-based sectors or pharmaceuticals[footnoteRef:60] where collaborations create sustainable advantages improving operational efficiencies. Merck, being a renowned biopharma and a federal lobbyist, has superior power in the market with an ability to cater to needs of global patients suffering with cancer and CVDs. Merck, over years relied on M&As for obtaining sustainable advantage in terms of unique R&D and manufacturing opportunities. With the acquisition of Schering Plough in 2009,[footnoteRef:61] Merck could enhance its global footprint boosting its sales by selling all the patented drugs previously owned by Schering Plough. Merck acquired Immune Design,[footnoteRef:62] Path AI,[footnoteRef:63] Peloton Therapeutics, ArQule Inc.,[footnoteRef:64] Antelliq,[footnoteRef:65] Viralytics Limited,[footnoteRef:66] Vallee S.A.,[footnoteRef:67] Rigontec GmbH (Rigontec)[footnoteRef:68] and many other companies with expertise at various immunotherapies and gene technology. Merging and acquiring accordingly led Merck to build a sophisticated manufacturing and discovering network restoring its leading position in the global market. It can be noted from 2015 and 2016 10-K filings that China did not contribute more than 3% of its revenues. Later on, with an increase in sales team in China, Merck began gaining revenues of 6% in 2017, 7% in 2018 and 9% of total revenues. Merck made $1.5 billion investment on building Asia’s R&D headquarters in Wangjing Park, Beijing, China has led to various advancements in Merck Research Foundation collaborations. Statistics from WHO and IQVIA show that healthcare spending from pharmerging nations is expected to increase by 10% in next five years demanding number of cancer and infectious diseases eliminating drugs and vaccines. Such an increasing demand from developing markets is a positive indicator for Merck’s drugs whose profitability can be expanded to more than 12% annually by boosting its sales teams as well as seeking aggressive partnerships with peers. Thus, it seems that active collaboration with peers gives Merck an advantage of using their sales and marketing teams in order to boost its sales which has no additional capital implications apart from capital requirement for strategic partnership. [60: David, F. R., & David, F. R. (2013). Strategic management: Concepts and cases: A competitive advantage approach. Pearson.] [61: Goldman, D., & Smith, A. (2009, March 9). Merck and Schering-Plough in $41B merger. CNN Money. Retrieved from: https://money.cnn.com/2009/03/09/news/companies/merck_schering_plough/index.htm] [62: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [63: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [64: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [65: Merck & Co. (2017) Merck 2016 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReportArchive/m/NYSE_MRK_2016.pdf] [66: Merck & Co. (2017) Merck 2016 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReportArchive/m/NYSE_MRK_2016.pdf] [67: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [68: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Figure 19: IQVIA statistics[footnoteRef:69] [69: IQVIA. (2020, March 5). Global Medicine Spending and Usage Trends: Outlook to 2024. IQVIA. https://www.iqvia.com/insights/the-iqvia-institute/reports/global-medicine-spending-and-usage-trends]

Pros:

· Increased revenues due to partnerships

· Cost sharing allowing remaining cash to divert towards other capital necessities

· Sophisticated R&D opportunity

Cons:

· Consolidation in long run leads to saturation

· Only a part of revenues can be realized from alliance due to contractual obligation

3. Through related diversification – Re-initiating consumer healthcare business as well as tapping into generic market through collaboration or JV

Related diversification strategy helps the organization to transfer its technology and production capacity into another business segment, which in case of Merck, could be its consumer healthcare and generic unit. Today, Merck is reorganizing itself into a focused company with R&D as its key driver. However, increasing generic market and pharmerging countries actively seeking low-cost medicines is negatively effecting Merck. Merck sells allergy-symptom treatment Nasonex whose sales were plummeted due to release of generic version in the US market during 2016.[footnoteRef:70] Nasonex sales fell by more 21% during 2016 fiscal year along with its new drug called Zepatier.[footnoteRef:71] Not only Zepatier, Singulair, and Zocor are some of the blockbuster drugs developed by Merck over years. [70: Hufford, A. (2016, May 5). Merck Revenue Hit by Generic Competition, Dollar. Market Watch. Retrieved from: https://www.marketwatch.com/story/merck-revenue-hit-by-generic-competition-dollar-2016-05-05] [71: Hufford, A. (2016, May 5). Merck Revenue Hit by Generic Competition, Dollar. Market Watch. Retrieved from: https://www.marketwatch.com/story/merck-revenue-hit-by-generic-competition-dollar-2016-05-05]

Figure 20. Global pharma sales risk estimation due to generic competition[footnoteRef:72] [72: Waters, R. & Urquhart, U. (2019). World Preview 2019, Outlook to 2024. Evaluate Pharma. https://info.evaluate.com/]

Above graph shows the expected market trend about how the branded prescription drugs are at stake due to definite raise in generic competition. Unlike Merck, Pfizer and JNJ are securing their business by operating in consumer healthcare and generic businesses. JNJ has separate unit for consumer business whose products are sold in more than 180 world countries showing its stronger liquidity position. JNJ also operates in medical equipment division which raised about $20 billion in revenues during 2019 financial year. Pfizer, on the other hand, also conducts business in generic market through its Upjohn segment, and is also under a joint venture with GSK selling products in consumer healthcare business. Pfizer reported about $10 billion in revenues under Upjohn segment as the consumer healthcare joint venture is reported under GSK. Companies like Roche, and Novartis also operate in medical equipment as well as consumer healthcare business segments.

Figure 21: Forecast of branded & OTC market, 2024[footnoteRef:73] [73: Waters, R. & Urquhart, U. (2019). World Preview 2019, Outlook to 2024. Evaluate Pharma. https://info.evaluate.com/]

Merck previously divested its consumer business unit (MCC) as of October 01, 2014 to Bayer AG in a move of shifting towards a focused organization. Pfizer reported Upjohn revenues of $10.2 billion out of total $51.8 billion in the 2019 financial year. Upjohn accounted for 19.8% of total revenues in 2019, 23.3% in 2018, and 25.6% of total revenues in 2017 indicating Pfizer’s ability of generating vast revenues by operating in the generic market.[footnoteRef:74] Pfizer is also expected to close the merger between Upjohn and Mylan which will provide increased product pipeline as well as Mylan’s assets and holding across the globe, in turn boosting Pfizer’s generic revenues by 10% in next two years.[footnoteRef:75] JNJ, on the other hand, had $13.9 billion in sales from the consumer segment and $26 billion from the medical devices segment apart from $42.2 billion from pharmaceutical segment.[footnoteRef:76] Such humongous presence of JNJ and Pfizer in generic and consumer healthcare segments poses an imminent threat to operations of Merck in long run. Moreover, Merck is already an established organization with global presence and facilities equipped for production of generics and consumer healthcare products. Thus, it is beneficial for Merck to consider a related diversification strategy for being afloat in the long-term. Cost implication of having diversified business units: boosting revenues by 2% each year for next 2 years and then 4% for another 3 years; Merck made $46.84 billion in FY19 which can be increased to an additional amount of 6% including normal growth and added advantage due to diversification. For fiscal 2021, Merck could have revenues crossing $60 billion given the advantage from restructuring (additional $1 billion savings), 4% regular annual growth, and 2% growth from diversification. [74: Pfizer Inc. (2020). Pfizer 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/317678438/files/doc_financials/Quarterly/2019/q4/Pfizer-10-K.pdf] [75: Pfizer Inc. (2020). Pfizer 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/317678438/files/doc_financials/Quarterly/2019/q4/Pfizer-10-K.pdf] [76: Johnson & Johnson. (2020). Johnson & Johnson 2019 Annual Review. Retrieved from: https://www.investor.jnj.com/annual-meeting-materials/2019-annual-report]

Pros:

· Advantageous in terms of having multiple revenue streams

· Relative diversification fosters effective capital resources utilization creating longing competitive advantage

· Increased market presence maximizing shareholder value

Cons:

· Heavy capital needs disrupting cashflow initially

· Redundancy in organizational structure

· Need of human capital

4. Through intensive strategy – Product development through focused R&D

David explained product development as the strategy used by various organizations seeking to tap existing markets for acquiring market share. Organizations often try to attract existing customers by evolving their existing product lines as well as creating differentiated products targeting niche customers. Product development is also used by turbulent, high-velocity industries where product innovation due to technological advancements is done surpassing other sectors. This strategy is applicable when a mature company decides to make an early move in the market disrupting all the competitors by providing high-quality products/services at competitive pricing. One such active initiative taken by Merck is its discovery and delivery of Keytruda, which today is not only used for small-cell carcinoma but also used as both monotherapy and combination treatment under immunotherapy. This move has come after a series of mature products from Merck such as Zocor, Remicade, Simponi, Gardasil, and Zetia. In addition, due to patent protection, companies such as Merck, Pfizer, JNJ, and Roche tend to build on their specific niches. However, due to increasing competition, all the above-mentioned major players are expanding their horizon by discovering and developing drugs in various markets such as hypertension, infectious diseases, oncology, and heart diseases. Roche is the leader in oncology with more than 200 patented cancer drugs followed by Merck with basket of more than 180 patented cancer curing drugs. Pfizer and JNJ are also competing back-to-back in terms of obtaining patents through drugs such as Prevnar/Prevnar 13, Inlyta, and Lyrica.[footnoteRef:77] [77: Pfizer Inc. (2020). Pfizer 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/317678438/files/doc_financials/Quarterly/2019/q4/Pfizer-10-K.pdf]

Table 12. Merck’s R&D expense trend[footnoteRef:78] [78: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

R&D as been constant strength of Merck since late 20th century which substantially increased since 2011 after major leadership change. Merck’s explicit focus on oncology, CVDs, and infectious diseases led to discovery of state-of-art HIV vaccines, Isentress/Isentress HD, one of its kind in the market for treating HIV. Gardasil and Januvia/Janumet have shown blockbuster returns over years contributing to more than 15% of total revenues. As of July 31, 2020, Merck had 24 candidates in phase 2 and 3 under clinical trials along with another 3 molecules under review stage of approval and 9 molecules recently approved.[footnoteRef:79] Drug discovery & development is capital intensive and time-consuming process which lasting several years before attaining approval. In addition, if 100 molecules begin trials, only 5 of them are finally approved for clinical trials indicating high risk associated with drug discovery. [79: Merck & Co. (2020, July 31). Merck Pipeline: Q3 2020 Reflecting Pipeline to July 31, 2020. Retrieved from: https://www.merck.com/wp-content/uploads/sites/5/2020/08/Merck-Public-Pipeline.pdf]

A study by Pharmaceutical Research and Manufacturers of America (PhRMA) says that out of 5000-10,000 products being discovered, only 250 molecules have entered the pre-clinical trials; only five of them reached human trials and eventually one molecule is finally approved by FDA.[footnoteRef:80] Merck over years is known for its explicit research abilities (table 12) utilizing capital resources as well as equipping it with advanced tech constantly for progressive research process. Thus, with its ongoing restructuring activity along with explicit focus on key medicinal areas, Merck should continue its efforts towards building a robust R&D ability for long-term sustenance. Cost implication will continue to be about 22% in 2021 growing an average of 3% every year as 25% in 2022, 28% in 2023, 31% in 2024, and 34% by 2025 proportional to 12% profitability raise in those corresponding years. Merck should opt this strategy in order to stay up the competition as peers such as JNJ, Roche, Pfizer and Novartis are constantly seeking similar strategies for strengthening R&D pipeline. [80: Merck & Co. (2020). Merck Statement on PhRMA Revised Marketing Code. Retrieved from: https://www.merck.com/wp-content/uploads/sites/5/2020/08/Merck_Statement_on_PhRMA_Marketing_Code-Upated-June-2020.pdf]

Pros:

· Sustained competitive position in the industry

· Increased number of patent exclusivity boosting overall revenues

· Increase in market share through market penetration due to new drugs and vaccines

Cons:

· Humungous capital-seeking and risky affair

· Uncertainty outcome due to rejection ratio between discovery and approval levels

· Stringent policy and price restrictions

5. Through intensive strategy – Spurring health services segment growth using market development and market penetration strategies

One major drawback in current operations of Merck is its overdependence on pharmaceutical segment. Although Merck conducts its business through four segments: pharmaceutical, animal health, healthcare services, and alliances; pharmaceutical segment is the only reportable segment. Pharma revenues reported by Merck were $41.75 billion, $37.69 billion, and $35.36 billion in 2019, 2018, and 2017 financial years respectively which on average accounted for 89% of total revenue over years. Below table shows segment contribution to total revenues realized by Merck over years.

Table 13. Revenue distribution of Merck through segments (value in million USD)[footnoteRef:81] [81: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Moreover, pharma revenues are majorly driven by a set of 13 drugs and vaccines combined which include Keytruda, Gardasil, Bravecto, MMR-II, Varivax, Simponi, Remicade, Bridion, Isentress, Pneumovax 23, and NuvaRing. These products contribute to up to 60% of pharma revenues indicating high risk in losing sales during their respective years of patent expiration. Heavy reliance on patented drugs only from pharma segment is a definite risk factor for Merck’s operations in long-run. Another issue is due to changing demographics and exposure across the globe, healthcare sector is unpredictable as it is very hard to control outbreaks and epidemics, where one such case is pandemic due to COVID-19 since December 2019. Novel outbreaks serve as major hindrance for the operation of any pharma company due to unknown consequences; Merck along with Pfizer and peers reported sudden increased demand for vitamin D and antiviral drugs due to Coronavirus outbreak. Following the American Academy of Pediatrics and the U.S. Centers for Disease Control and Prevention's recommendation not to prioritize immunizing children over the age of two, Merck’s sales of Gardasil and Pneumovax 23 have declined.[footnoteRef:82] Merck decreased their 2nd and 3rd quarter earnings in 2020 by $2.5 billion which is 70% decline when compared to similar period in pre-coronavirus years. [82: Gibney, M. (2020, April 28). Merck's 2020 outlook clouded by COVID-19 impact on vaccine, oncology sales. S&P Global. Retrieved from: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/merck-s-2020-outlook-clouded-by-covid-19-impact-on-vaccine-oncology-sales-58323283]

As Porter’s competitive model suggests, organization obtain sustainable advantage when they perform distinguished business action which boosts their profitability in long-run. Thus, it can be directly applied to Merck as it already has fair presence offering various health services such as training physicians and medical practitioners about patient observations and drug usage, educating patients, insurance companies, welfare organizations, and care takers on effective usage of treatments offered through Merck’s drugs and vaccines. Through health services, Merck provides services and solutions for patients and doctors by direct engagement with community using health analytics and clinical services. ‘Merck helps’, ‘Merck Access Program’, ‘Merck Manuals’, ‘Merck Connect’, ‘Merck for Mothers’, ‘Merck for Animal Health’, ‘Merck Diabetes Challenge’ are some of the business initiatives[footnoteRef:83]. Although it has above-mentioned programs going on, they are not offered widely across the US and international markets. Operating in more than 100 countries, Merck has an advantage of obtaining health data once healthcare services are offered across nations. Thus, Merck should actively seek those healthcare services expansion across the all parts of the US and Canada which can later be extended to parts of Europe and Asia. Cost implication of enhancing and building infrastructure around increasing healthcare segments would be in the form of hiring experts to conduct campaigns, marketing and advertising expense, and investment on technology for data collection and analysis. Merck currently spends about $3.5 billion on average under SG&A expense which when this strategy is applied will have an additional $500 million-$1.5 billion burden. However, $500 million-$1.5 billion investment is done by parts in next three to five years which can be derived from the savings due to reorganizing manufacturing network. When the saved manufacturing capital is diverted to expand infrastructure for enhancing healthcare service, Merck can boost its healthcare revenues by 3% every year which will directly add to 1% rise in net profit over next 5 years. [83: Merck & Co. (n.d.). Company Overview. Retrieved from: https://www.merck.com/company-overview/]

Pros:

· Multiple revenue streams enhancing net profits

· Data-driven organizational activity boosting operational efficiency

· Increased scope of early and expedited R&D facilitated by constant real-time data

· One-time investment with long-term guaranteed positive financial outcome

Cons:

· Costly affair due to need of capital and human resources

· Longer turnaround period

· Unstable macroenvironment

· Limited growth in international market due to privacy policy infringement

Second stage of devising a strategy is analyzing all the strategic options, which is done in this section. Stage 2 facilitates strategists to analyze the implications of above suggested strategic options using five different matrices: Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix; Boston Consulting Group (BCG) Matrix; Strategic Position and Action Evaluation (SPACE) Matrix; Internal-External (IE) Matrix; and Grand Strategic Matrix (GSM). SPACE matrix is applied for aforementioned strategic options in this paper in order to find a competitive strategy that can be applied for Merck using a comprehensive approach.

Firstly, based on previous internal business and external environmental attributes, Merck has an IFE score of 3 and EFE score of 3.03, (3, 3.03) which puts Merck in the segment I, according to the IE-matrix described in David Text.[footnoteRef:84] Characteristics of segment I include companies to grow and build using integration and intensive strategies. Which in case of Merck is that it needs to keep growing by adopting backward, forward, and horizontal strategies along with market development, market penetration, and product development strategies, as shown by figure below. [84: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

Figure 22. IE-matrix, Merck’s segment location[footnoteRef:85] [85: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

Merck (3, 3.03)

Next matrix used for further insight on strategy that should be adopted by Merck can be devised using the SPACE-matrix which has two axes: financial position (FP) and stability position (SP) along Y-axis while industry position (IP) and competitive position (CP) on X-axis. FP and CP axes make Merck’s comparison to competitors while the IP and SP axes make Merck’s comparison across different industries.

Table 14. Strategic Positioning and Action Evaluation (SPACE-matrix) for Merck[footnoteRef:86] [86: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

Figure 23: SPACE-matrix with Merck positioning[footnoteRef:87] [87: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

It can be noted from above evaluation tools, Merck falls in I segment when analyzed using IE-matrix and Quadrant I, when analyzed using SPACE-matrix. Thus, Merck should devise new strategies for next five years using an aggressive approach, which could be any of three integration, three intensive, and two diversification strategies. Out of five strategic options listed in previous section, options 1, 2, 3, 4, and 5 are applicable for Merck to devise a 5-year strategic plan.

STRATEGIC PLAN 1

Often referred as Stage 3, decision is made by mapping strategic choices to the internal strengths and weaknesses along with

external opportunities and threats of the organization using the Quantitative Strategic Planning Matrix (QSPM). QSPM is a tool that enables strategists to systematically weigh all the strategic options in line with attributes inside and outside an organization.

Table 15: Quantitative Strategic Planning Matrix of Merck[footnoteRef:88] [88: David, Fred R. & David, Forest R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

Thus, it can be observed from the QSPM that Merck could obtain maximum profitable outcome by applying strategic choice 5 Market Development along with Market Penetration, as well as strategic option 2 Horizontal Integration along with Market Development. However, all five strategic choices seem to be beneficial given the internal and external attributes of Merck, indicated by the average score of 5.5. Thus, Merck should continue growing and building itself because of definite potential by investing in integration activities as well as involving itself in aggressive marketing.

Forward and Backward Integration Strategy

2021

1. Communicate and stretch the downstream and upstream opportunities for the organization by designing an expansion plan.

2. Pick and create a separate team for determining the scope of expansion according to the new expansion plan.

3. Appoint outside professionals for filling in explicit details with an expertise in distribution and contracting services along with an outside team of financial and legal advisors.

2022

1. With due diligence, Merck’s newly created expansion team should scrutinize all the action at acquiring targeted suppliers and distributors.

2. Ensure adherence to the legalities as well as regulatory policies before expansion.

3. Secure foreign national policy obligation as present suppliers before turning into an integrated unit, are succumbed to respective national policies and tax reforms.

2023-2024

1. Ensure smooth negotiation with upstream and downstream targets narrowing down to specific price and condition.

2. Agreement is drafted with the finalized upstream and downstream targets by closing the deal.

3. Merck gains the ownership of target firms by fulfilling contractual obligations and paying out the balance.

4. Initiate integration procedure of new holdings into Merck’s existing global supply chain network.

2025

1. Seeking capital resources for filling in the obligations left by the acquired target.

2. Ensure positive morale in the organization by actively communicating to the employees transitioned from the target companies’ boosting their motivation to adapting Merck’s culture.

3. Amend the corporate structure of the acquired targets in line with Merck’s internal policy.

Horizontal Integration Strategy

2021-2022

1. Scouting various alternatives that have at par value-creating and financial growth; communicate the opportunities and devise a new M&A plan.

2. Hire industry outsiders for efficient planning and executing M&A activity with expertise in legal action and financial resource allocation.

3. Establish an action-oriented M&A team exclusively for reviewing all the M&A activity going forward equipped with vast knowledge in M&A action.

2023-2024

1. Evaluate various targets shortlisted by the M&A action team by comparing and contrasting consequences and results.

2. Scrutinize prospective targets in terms of legal and regulatory obligations, either local policy or national norms and weigh out accordingly.

3. Begin negotiations with targets by stringent conditions and price range.

4. Owing to the agreeable contract by two parties, Merck gains either holding interest or transfer of ownership (as directed by contract) by settling to contractual obligations.

5. Formulate the acquired/merged targets into the corporate structure of Merck.

2025

1. Ensure smooth integration of human capital and other holdings into Merck’s business functions for sooner results.

2. Segregate financial resources for closing the previous obligations committed by target firms.

3. Consolidate business action for effective utilization of target company assets and expertise

Market Development, Market Penetration & Product Development – Intensive Strategy

2021

1. Seek capital for building infrastructure for R&D as well as production by short-listing capacity expansion locations globally.

2. Sort out the feasible locations for production expansion owing to expanding specific products into new markets, following regulatory approvals from EMA and Chinese governments, for instance.

3. Establish focused market research teams along with support from Merck’s healthcare services segment for post clinical study analysis

4. Design global teams for focused market research along with obtaining resources for various national government agencies and health experts from the UN.

2022-2023

1. Strengthen cultivation of talent through investment in human capital contributing to effective and high-quality research teams by providing feasible performance incentives.

2. Build advanced tech-powered infrastructure for expedited drug discovery and development using cloud, AI, and data analytics tools.

3. Ensure active collaboration between R&D, new product development, and market research teams for effective utilization of pre-clinical and post-clinical trials.

4. Increase human capital explicitly in Center for Observational and Real-World Evidence (CORE), for continuous exchange between R&D, and new-product development teams.

5. Conduct preliminary testing ensuring safety and quality standards and formulating discovery procedures, according to changes in molecular action in research candidates.

2024-2025

1. Design and execute the clinical test plan by secure prospective candidates with patents in phase-2 & 3 along with NDA certifications.

2. Retain toxicology and pathology reports as well as NDA, ANDA, and generic program evaluation reports for every stage of both preliminary testing and clinical testing of every candidate and file with FDA.

3. Obtain IPR protection for prospective molecular candidates in the discovery pipeline in order to expedite further pre-clinical and clinical trial phases for FDA review and approval.

Establishing Data-Driven Organizational Culture Through Supply Chain Integration & Active Strategic Collaboration

2021-2022

1. Expedite integration between manufacturing network and global upstream players in manufacturing ecosystem.

2. Revamp existing manufacturing network by connecting all the locations on a common platform to avoid disruption in production activity

3. Build high-tech powered integration infrastructure by collaborating with companies like Oracle or Accenture or Amazon and design respective platforms for analytical studies.

4. Integrate the upstream suppliers, manufacturing network with downstream demand in order to prevent bullwhip effect.

5. Ensure the demand-governed manufacturing, procurement, and delivery system at Merck manufacturing and research divisions.

6. Compare and contrast various molecules aimed at developing immunity against SARS COV-2 virus (COVID-19) in Merck’s own pipeline.

2023-2024

1. Commit to focused research and market teams for obtaining ongoing data about changing exposure, outbreaks, and demographics.

2. Evaluate Merck’s own pipeline for unknow and novel opportunities out of existing research candidates.

3. Explore external market for any specific fit for above discovered peculiar molecule and enlist available options for collaboration

4. Conduct financial and manufacturing impact for respective collaborations; where choice for choosing collaborative partners depends on related diversification by tapping into consumer healthcare, and generic markets.

5. Phase I, and Phase II clinical trials are conducted simultaneously reporting results to FDA for further approval.

6. Vaccine and drug dosages are stipulated along with collaborative partners and clinical patients with necessary patent protection are ensured

7. Manufacturing and packing machinery commissioning are ensured at specified locations ahead of FDA and EMA approval for COVID-19 vaccine along with collaboratively developed drugs.

2025

1. Final stage of Merck’s global supply chain integration is implemented ensuring all the divisions of production, procurement, planning, and operating teams are actively connected.

2. Phase III trials are conducted along with necessary toxicology and autopsy reports are provided as evidence for drug/vaccine functioning.

3. Post phase-III trial review is also conducted by FDA ahead of final regulatory approval for commercialization of respective candidate discovered and developed under collaboration by Merck.

4. Financial capital and human capital are also adjusted according to the demand forecast provided by the global research teams.

Reinvigorating Organizational Vision through Code of Conduct and Enhanced CSR Activity

2021

1. Ensure explicit communication on company’s policies by reinstating purpose of Merck existence to all stakeholders of the organization.

2. Increase capital allocation for the activities conducted by the Merck Foundation such as the Merck Access Program and the Merck Diabetes Franchise for next six years.

3. Increase GHI Fund through Melinda and Bill Gates Foundation by 1.9% to $110 million in 2021 from $108 million in FY19.

2022-2023

1. Initialize $20 million worth free dosage of COVID-19 vaccines to underdeveloped nations over the span of two years, similar to case of eradicating river blindness through Merck’s collaboration with the UN.

2. Continue collecting and allocating funds for eradicating malaria in underdeveloped African nations until 2024.

3. Increase Merck Foundation grant to AMR Action Fund aimed at discovering antibodies to kill the superbugs spurring antimicrobial resistance along with Pfizer, John Hopkins University, NIH, and other seven institutions.

4. Continue to contribute to previous year’s listed charities through the Merck Foundation.

5. Begin gathering resources for building a premier medical research university funded through Merck GHI Fund and the Merck Foundation.

2024-2025

1. Continue to build the Merck’s medical research university in 2024 and begin admitting doctorates and students by actively conducting research at school by 2025; provided students retain at Merck for future employment without talent loss for Merck.

2. Periodically, researchers and doctors from the Merck’s Research Laboratories (MRL) are assigned to conduct and help with research at the Merck University.

3. Ensuring Merck Foundation and organizational commitment to achieving UN SDG-3 & 5 as well as zero emissions beginning at 2025.

As David text emphasized, well-managed operating budget facilitates effective capital resource allocation giving insight on how and what is to be achieved yearly to fulfill yearly goals.[footnoteRef:89] Pro-forma income statements provide a benchmarking for organizations in terms of providing insight on budgeting for conducting business throughout the five-year period. Following table is an operating budget designed for Merck, indicating estimated results that can be obtained upon implementation of aforementioned strategic plan. [89: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

Table 16. Merck’s pro-forma operating budget

As Peter Drucker says, “unless strategy evaluation is performed seriously and systematically, and unless strategists are willing to act on the results, energy will be used up defending yesterday”[footnoteRef:90], which emphasizes on necessity of strategy evaluation. Continuous, rather than periodical strategy evaluation enables Merck to outperform expectations, in turn boosting shareholder trust and value in the global market. As explained by David text, strategy evaluation is performed for understanding three core aspects: ensuring basis of adopted strategy, obtained outcome versus expected outcome, and corrective actions ensuring conformity to devised strategic plan. [90: Drucker, P. F. (2006). Classic Drucker: essential wisdom of Peter Drucker from the pages of Harvard Business Review. Harvard Business Press.]

David text explained that there are seven ways to ensure strategy in action: management by wandering around, reviewing underlying bases of organization’s strategy, measuring performance, correct action, balance scorecard, contingency plan, and auditing.[footnoteRef:91] Merck is expecting to increase its annual sales by 4% spurring profitability by 5%, through revamping code of conduct and establishing data-driven organizational culture, which can be assessed by following measures. [91: David, F. R. & David, F. R. (2016). Strategic Management: Concepts & Cases, 16th Edition. Pearson. ISBN: 978-0-13-416784-8.]

1. Using financial outcomes as Key Performance Indicators (KPIs)

As Merck executes afore devised strategic plan, financial outcomes are the key indicators of whether Merck is outperforming expected outcomes or is underperforming or even performing very near to the expected outcome. Strategists can use ROE, Total Revenue, Net Income and EPS can be analyzed ensuring Merck’s stance on strategic plan. If the cost-to-benefit ratio is achieved as expected, it indicates the effective functioning of above devised strategic plan.

2. Using Balanced Scorecard (BSC) Approach

BSC offers a holistic view of an organizational performance by measuring the effectiveness of business activity in terms of both financial and non-financial measurements. BSC evaluation has four main aspects which include customer perspective, internal perspective, learning and innovation perspective, and financial perspective. BSC evaluation directly governs shareholder satisfaction and employee attitude towards Merck, reflecting its value in the market. Merck when implemented the strategic plan if results are aligned with the BSC attributes, then the strategic plan adopted is effective. Merck can use customer satisfaction, employee retention ratio, acquired market share, customer profitability as some of the KPIs and evaluate the implemented strategic plan.

3. Using Management by Wandering Around (MBWA) Approach

This method infers managers to be actively involved in establishing liaison with employees and continuously seeking efforts to understand ongoing strategic implications. This channel allows Merck’s executive team along with senior managers to obtain specific information, which is often missed out in formal communication channels. Especially functional divisions such as manufacturing, planning, and procurement are often undermined which through MBWA can be brought into spotlight positively impacting overall performance of Merck by effective evaluation of the strategic plan.

4. Using Enhanced Corporate Governance (Auditing) and Organizational Culture Approach

Operating as one of the premier biopharma companies in the world, it is necessary for Merck to understand customer’s perception about its drugs and vaccines which then governs the demand. Thus, Merck should envisage its brand value by focusing on data obtained through a real-time demand-driven global supply chain. Auditing and organizational policies, on the other hand, are other tools that can be used by Merck to evaluate the results obtained if they are adhering in line with the company’s by-laws. Merck previously was negatively affected due to Vioxx scandal, denigrating its corporate image; thus, stringent policies regarding financial reporting and drug approvals should be in place to ensure effective functioning of strategic plan.

5. Contingency Plan and Corrective Action

As and when the deviation is found during implementation years of devised strategic plan, Merck should improve the plan accordingly to fill out the necessary gap. Contingency plan is a mandate as drug discovery and development is a high-risk task whose final outcomes are unpredictable. There is significant risk of developing unknown side-effects even after years of testing of particular drug such as Vioxx, in addition to the risk of unknown side-effects of drug in the research pipeline. Thus, companies like Merck should be ahead in fighting such unpredictable circumstances using corrective action of formulating strategy whenever required. Merck should constantly seek activities focused at enhancing pipeline productivity such as strategic partnerships, M&As to supplement its existing product lines.

Merck retained its brand value fostering its commitment to improving patients lives post Vioxx scandal in 2004 through innovative drug discovery and peculiar business action. By adhering to aforementioned strategic plan, Merck can grow continuously increasing its global market share. Merck should not only depend on external environmental conditions but also retrospect its internal performance for achieving outstanding results.

It should be reinstated in the business philosophy of Merck that not only financial performance indicators are crucial for assessing Merck’s position but also customer and employee attributes are equally crucial for Merck’s accomplishment, in line with its corporate vision. Employee views, especially from lower managerial levels as well as bottom-level employees provide deeper insight about organizational culture and practices, which could be of significant value while implementing and evaluating strategic change inside the company. In terms of customers, customer return rate, brand image, customer loyalty and satisfaction are some of the key indicators representing Merck’s achievement ensuring long-term sustainability.

2019 global pharma NET income Trend

Net Income

Johnson & Johnson, US Roche, Switzerland Pfizer, US Merck & Co., US Amgen Inc., US AbbVie, US Novartis, Switzerland Bristol-Myers Squibb, US Gilead Sciences, US Novo Nordisk A/S, Denmark 16.329999999999998 11.89 11.84 9.7200000000000006 7.96 6.8 6.79 6.23 5.97 5.69

AttributeMerck PfizerJNJRoche

Size

>120 nations>125 nations>100 nations>100 nations

Employees (FY19)

77,00088,300130,00097,735

Areas of focus

oncology, cardio-

vascular,

diabetes, vaccines &

animal health

internal medicine,

inflammation &

immunology,

oncology, rare diseases &

vaccines,

anti-infectives, consumer

healthcare

immunology,

cardio-vascular,

pulmonary hypertension,

infectious disease,

vaccines,

neuroscience, oncology &

consumer healthcare

Oncology,

immunology,

opthalmology,

infectious dieseases

& neuroscience

Revenues (FY19)

$46.84 billion$51.75 billion$82.06 billion$67.6 billion

Net Income (FY19)

$9.84 billion$16.27 billion$15.12 billion$14.9 billion

R&D expense (FY19)

$9.9 billion$8.8 billion$11.46 billion$13.2 billion

201720182019201720182019201720182019

ROE7.0%23.0%37.6%29.8%17.5%25.7%2.2%25.6%25.4%

ROA2.8%7.5%11.6%12.4%7.0%9.7%0.8%10.0%9.6%

Net Profit Margin6.0%14.6%20.9%40.6%20.8%31.5%1.7%18.8%18.4%

Gross Profit Margin68.2%68.1%69.9%78.6%79.0%80.3%66.8%66.8%66.4%

Operating Income Margin18.2%21.1%26.1%26.8%28.0%26.9%24.5%24.6%24.5%

Income before Tax Margin16.3%20.6%24.5%23.4%22.2%34.2%23.1%22.1%21.1%

Profitability Assessment

MerckPfizerJNJ

PfizerRoche

JNJMerck

TevaPfizer

LupinJNJ

SunMerck

Perceived LowValue(generic drug market)InnovativePerceived HighValue(brandeddrug market)Reactionary

ProductPositioning Niche OpportunitiesCustomers'willingness-to-payPerceived ValueCompetitiveAdvantage