Merck & Company, Inc.

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

A. Case Abstract

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

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

B. Vision Statement

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

C. Mission Statement (Actual)

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

Mission Statement (Proposal)

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

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

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D. External Audit

CPM – Competitive Profile Matrix

  Pfizer Bayer Merck

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

Opportunities

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

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

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 Threats

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

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

External Factor Evaluation (EFE) Matrix

Key External Factors Weigh Rating Weighte

t d Score

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

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3. Drug discovery and development is a highly 0.08 3 0.24
sophisticated process that can take several
years to complete and may cost more than
US$500 million
4. The cost of making a drug has escalated tenfold 0.08 2 0.16
every 20 years
5. Large investment is required for a long period 0.05 2 0.1
of time with almost no guarantee that the drug
will even hit the market
6. Generic drugs rapidly enter the market when a 0.06 2 0.12
patent expires by the original brand-named
drug manufacturer
7. The U.S. Congress has been considering 0.07 3 0.21
changing advertising laws, which will impact
the drug companies considerably
8. The U.S. pharmaceutical industry spends 0.07 2 0.14
almost twice as much on promotion as it does
on research and development
Total 1.00   2.85

Positioning Map

Price (High)

Pfizer

Merck

Bayer

Product Line Product Line

(Narrow) (Wide)

Price (Low)

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E. Internal Audit

Strengths

1. Continuous acquisition of companies has made the company stronger

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

Weaknesses

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

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Financial Ratio Analysis (December 2009)

Growth Rates % Merck Industry S&P 500

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

Price Ratios Merck Industry S&P 500

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

Profit Margins % Merck Industry S&P 500

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

Financial Condition Merck Industry S&P 500

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

  Avg P/E Price/ Sales Price/ Book Net Profit

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 Margin (%)
12/08 10.20 2.73 3.42 32.7
12/07 33.90 5.27 6.94 13.5
12/06 18.90 4.21 5.38 19.6
12/05 14.60 3.18 3.86 21.0
12/04 16.00 3.11 4.11 25.4
12/03 18.20 4.63 6.59 29.3
12/02 18.10 6.01 6.98 31.7
12/01 23.30 6.44 8.33 33.3

Book Value/ Debt/ Return on Return on Interest

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

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted

Score

Strengths      

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

2. Strong distribution channel for all its 0.08 3 0.24

products

3. Having multiple segments helps the 0.06 4 0.24

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

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

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

8. Strong and reputable brand image 0.06 3 0.18

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

2. Merck's revenue dropped by 0.06 1 0.06

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

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

2007 to 2008

6. Multiple products have been linked to 0.07 2 0.14

negative health effects

7. Product quality (recalls) 0.07 1 0.07

Total 1.00   2.58

F. SWOT Strategies

Strengths Weaknesses
1. Continuous acquisition 1. The problem with
of companies has Vioxx created negative
made the company publicity for the

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 stronger company
2. Strong distribution 2. Merck’s revenue
channel for all its dropped by
products approximately US$347
3. Having multiple million from 2007 to
segments helps the 2008
company to have 3. Merck carries more
higher market share than US$1.4 billion in
4. Merck’s revenue goodwill on its balance
increased from 2006 sheet and close to
to 2007 by US$1.56 US$4 billion long-term
billion debt
5. Merck’s net income 4. Very nominal
more than doubled in expenditure in R&D
2008 which could impact the
6. Current asset company long term
increased by almost 5. Hardly any increase in
US$4.3 billion from product sales from
2007 to 2008 2007 to 2008
7. Committed to 6. Multiple products have
fostering diversity been linked to
within the company negative health effects
8. Strong and reputable 7. Product quality
brand image (recalls)

Opportunities S-O Strategies W-O Strategies

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

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 industry accounts for
27.3 percent of the
healthcare sector
6. The industry has been
growing at over 10
percent annually and
many large drug
companies
supplement their own
efforts by buying or
licensing products
from other companies
7. Increasing elderly
population offers a
good opportunity for
drug companies

Threats S-T Strategies W-T Strategies

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

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 been considering
changing advertising
laws, which will
impact the drug
companies
considerably
8. The U.S.
pharmaceutical
industry spends
almost twice as much
on promotion as it
does on research and
development

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G. SPACE Matrix

FS
Conservative 7
Aggressive

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

-1

-2

-3

-4

-5

-6

Defensive -7 Competitive

ES

Financial Stability (FS) Environmental Stability (ES)

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

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

Competitive Stability (CS) Industry Stability (IS)

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

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

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

H. Grand Strategy Matrix

Rapid Market Growth

Quadrant I
Quadrant II

Strong
Weak
Competitive
Competitive
Position
Position

Quadrant IV
Quadrant III Slow Market Growth

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

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 I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak

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

High
3.0 to
3.99

IV IV VI

The EFE
Total Medium
Weighted 2.0 to Merck & Company,
Score 2.99 Inc.

VII VIII IX

Low
1.0 to
1.99

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J. QSPM

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

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

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

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 SUBTOTAL 1.00   1.27   1.32
SUM TOTAL ATTRACTIVENESS SCORE     2.89   3.02

K. Recommendations

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

L. EPS/EBIT Analysis

US$ Amount Needed: $300 million

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

  Common Stock Financing Debt Financing

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

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

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

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M. Epilogue

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

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

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