Analysis of the firm’s existing business model
With the vision to provide innovative solutions for human’s health, Merck builds an
appropriate business model for it. Merck’s value propositions are innovative products for human
health including vaccines, biologicals and pharmaceuticals. It is also famous for successful R&D
projects for new products. It has various customer segments such as patients, hospitals,
pharmacies and health professionals not only in the U.S but also in global market, especially in
emerging countries. There are some channels used to reach the target customers such as health
institutions (hospitals, clinic, pharmacies and veterinary office), mergers and acquisitions, and
subsidiaries or branches in foreign countries. The key activity of Merck is product research and
development. Besides that, it also focuses on partnerships with supplies, production as well as
marketing and distribution. Its partners includes pharmaceutical buyers and suppliers, joint
ventures with Sanofi Pasteur, Schering-Plough and Centocor, and acquisitions with Afferent and
Vallée S.A. R&D facility and intellectual properties such as the best scientists and product
patents are the key resources of Merck. Its revenues come from regional sales of vaccines and
pharmaceuticals. R&D accounts for a huge amount of cost structure. Other costs are for global
expansion, restructuring and cost of sales.
Pro-Forma Financial Statements
Losing patent exclusivity and lack of innovative products are the main factors for worry
of revenue fall in near future. However, expectations in sales of new pharmaceuticals, Januvia,
can help to prevent a decrease in revenue. Moreover, in 2018, two new innovative products of
Merck will be introduced Keytruda and Bristol-Myers Squibb's Opdivo, which are expected to
hit the market and increase the revenue at that time. By implementing alternative strategies,
revenue and profit margin are expected to grow because of the cut of R&D expense. The
appendix 3 shows pro-forma financial statements with and without alternative strategies
Net Present Value and EPS/EBIT
According to Appendix 4, despite both strategies have positive NPV which shows that
both can make profit to Merck, alternative strategy has higher NPV than current strategy.
Therefore, Merck should implement strategy to gain competitive and profit advantages
Pro-forma
Statement
of
Income
-
USD
($)
$
in
Millions
12
Months
Ended
2016
2016
2017
2017
2018
2018
(withouts)
(with)
(without)
_(withs)
(without)
|_(with
s)
Sales
$40,683
[$
40,683
[$
41,090[$
41090|$
45,199
[$45,199
Costs,
Expenses
and
Other
Materials
and
production
$15,083
[$
15,083
$
15,234/$
1523a[$
15,91
|S
15,691
Marketing
and
administrative
S$
10416|$
10,416|$
10520/$ 10520|$
10,836|$
10,836
Research
and
development
szamaf$s
6905S
sii2fs
zaw[$
3923|/$
7,226
Restructuring
costs
$
[$s 65S
sails
eai|$
50S
650
Other
(income)
expense,
net
S$
asaz[$_1sa2/$
assa[$ issa[$
1604]
S$
1,608
Total
Costs,
Expenses
and
Other
S$
350a[$
34572[$ 36055[$
35,056|$
37,705[$
36,108
Income
Before
Taxes
$s
56a2[$ 6ini|S
5,034|S 6,03a|$ 7,494|S
9,091
Taxes
on
Income
$s
sea[s
ioss[s
s7e[s
1052[$ 1307/8
1,586
Net
Income.
S$
4es[s505[$
aise[s4982[$
61e7[S
7,506
Less:
Net
Income
Attributable
to
Noncontrolling
Interests
$ as|s$
vs
16
|$
ais
uls
1B
Net
Income
Attributable
to
Merck
&
Co.,
Inc.
$s
46a0[$
5028/$
4140[$ as67[$ 617a[S
7,493
Basic
Earnings
per
Common
Share
Attributable
to
Merck
&
Co.,
Inc.
1.65
179 147
77
2.29]
267
‘Common
Shareholders
(in
dollars
per
share)
Earnings
per
Common
Share
Assuming
Dilution
Attributable
to
1.63
77
1.45 1.74
2.47]
2.63
Merck
&
Co.,
Inc.
Common
Shareholders
(in
dollars
per
share)
APPENDIX 4
12
Months
Ended
Pro-forma
Statement
of
Cash Flows
-
USD
($)
$
in
Millions
2016
2016 2017 2017
2018
2018
(without
s)|
(with
s) |(withouts)}
(with
s)
|(withouts)]
(with
s)
‘Cash
Flows
from
Operating
Acti
Net income
S$
4658/$
5,045|$
4156|$
4,982]
$
6,187|
$7,506
‘Adjustments
to
reconcile
net
income
to
net
cash
provided
by
operating
activiti
Depreciation
and
amortization
S_6a3a[$
6
503[$
5503/8
6633|$ 6508|$
6,765
Intangible
asset
impairment
charges
S$
1al$
165
Foreign
currency
devaluation
related
to
Venezuela
S$
sa5[$
s5[$
o9[$
sm1/$
995/$
995
Net
charge
related
tothe
settlement
of
Viowx
shareholder
[5
oss]
5
gaz/sgaols
cals
cas 5 oas
class
action
litigation
Gain
on
divestiture
of
Merck
Consumer
Care
business
so
-
[s
-
|s_-
[s
-
|$
-
Is
-
‘Gain
on
Astrazeneca
option
exercise
s
-
fs
-|s
-f[s
-|s
~-Ts
z
Loss
on
extinguishment
of
debt
s
-
fs
-|s -[s -|s
~-
|s
z
Equity
income
from
affiliates
S$
onls
(209[$s
(ons
(aia[s
ants
(218)
Dividends
and
distributions
from
equity
method
affiliates
[$ _51|
$
si[s
sil
s2[s
52s
53
Deferred
income
taxes
$s
(als wals mals Gs[s
canis
(si)
‘Share-based
compensation
S$
302[$
_305/$
305[$
aui$
308
|S
317
Other $
765
$
T2\|$_
772\$
738
$
780
|$
803
Net
changes
in
assets
and
‘Accounts
receivable
S(aas)[$
(a3[$_
(as0)[$
(B89)
$
(495)
$__(350)]
Inventories
$
813
$
725|$_
821|$ 652|$ 829|$
587
Trade
accounts
payable
s@nls
(aa|/$__(3a)|$
(Bo[$
(3a)
$
(27)
‘Accrued
and
other
current
liabilities
sls
@s
els
(als
(a[
$
(6)
Income
taxes
payable
S$
_(265)[$
(239)
$
_(27)|$
(aus)
$
(27a)
$
(294)
Noncurrent
liabilities
S$
(280)[$ (2a9)[$
(283)
$
(22s
(285)
$
(202)
Other,
$
(5)
$
(5)
$
(5)
$
(als
(5)
$
(4)
Net
Cash
Provided
by
Operating
Activities
$
i699
[$
13183|$ 12207[$
13,220[$
14310/$
15,911
‘Cash
Flows
from
Investing
Capital
expenditures
S
(2296)
$
(2,026)
$
(us09f$s
(924)[$
(4,322)
$
(87)
Purchases
of
securities
and
other
investments
$
(16,848)|$
_(23,345)[$
(17,016)'$
(22,010)
$_(17,186)|
$
_(22,530)]
Proceeds
from
sales
of
securities
and
other
investments
S$
20,617|$
16,330[$ 2,823['$
14697[$
21,032|$
14,109
Pvestture
of
merc
consumer
care
businessnetofeash
Ts
fs
gs
ds.
7
livested
Dispositions
of
businesses,
net
of cash
divested
S$
si9[$
als
322/[$
aa8[$
3265 2s
‘Acquisitions
of
businesses,
net
of cash
acquired
S$
(7ass)[$ aan|
$s
(s7af$s
(a05)[$
(8,058)
$
(01)
‘Cash
inflows
from
net
investment
hedges
$s
mols
imils
w2fs sols
_1aals 36
Other $
83|$
66
|$
84/1
59|$
84/5
57
Net
Cash
Used
in
Investing
Activities
$
(4saa)[$
2272[$
(4,932)|$
2,085
[$
(as8i)|
$1,963
‘Cash
Flows
from
Financing
Activities
Net
change
in
short-term
borrowings
S_(asss)[$
(as7yf$
(usmj|$
(2602S
(a587)|$
(1,634)
Payments on
debt
S$
(2,935)[$
(2,969[$
(2,968)
$_(3,023)[$
(2,994)
$__(3,084)]
Proceeds
from
issuance
of
debt
$_8017/$
8097/$
3098|/$
8,259/$
8179|$
8,424
Purchases
of
treasury
stock
Ss
(4228)
$
(4,270[$
(4,270)|$
_(4,355)[S
(4,313)|$
(4,442)
Dividends
paid
to
stockholders
S$
(5168)
$
(5,219[$
(5,220)|
$
_(5,324)S
(5,272)
$
(5,430)
Other
dividends
paid
s_-
|s
-
[$s
-
Is
-_[s -_|$
-
Proceeds
from
exercise
of
stock
options
$s
a0[$
as5[S
a95[$ s05[$ s00|S
sis
Other $
s7|$ s7{$ s7|$
58[$
58|$
59
Net
Cash
Used
in
Financing
Activities
$_
(5323)
$
(5.375)
$_(5,376)|
$
(5.483)
$
(5.430
$
(5,598)
Effect
of
Exchange
Rate
Changes
on
Cash
and
Cash
Equivalents]
$
(1,323)|
$
_(1,323)]$
(1,336)|$
—_(1,336)]
$
(1,376)
$
(1,376)
Net
Increase
(Decrease)
in
Cash
and
Cash
Equivalents
$
tosa[$ 1a37[$
1105[$
iasa[$ aaie[$
1254
‘Cash
and
Cash
Equivalents
at
Beginning
of
Year
$
7sis[$ 7813|$
7sa1|$
820a|$ 7,666[$
8.614
‘Cash
and
Cash
Equivalents
at
End
of
Year
$s
se09[$ 3950|$
3695|$
9398[$ 37a2[$
9,868,
Merck
EBIT
(2016
2016
2017
2017
2018
2018
Period
Ending
(usb
in
millions)
|
tnouts)
(with
withou
(with
s)
withou
(with
s)
pi
a
fae
a
Merck
NPV
[Current
Strategy
[Alternative
Strategy
NPV,
$12,954
$13,879
