LETTER OF TRAN

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DATE: September 28th, 2015 TO: Prof. John Keifer

Prof. Nadège LavelletProf. Luke McElfreshProf. Jamie Lambert

FROM: AM 101 Cohort, Team #6

Colin EspinosaNoah SaundersNicholas LearySteve SaboAndrew Shaw

SUBJECT: Global Pharmaceutical Analysis with Regards to Merck & Co. and Sanofi As requested by the senior partners of Copeland Associates on August 24, 2015, our team has performed and analysis of the companies Merck & Co. and Sanofi. This report contains research comparing the two companies and the evaluation leading to a decision on which company is in a less favorable position. Through our research and evaluation, we have identified three key success factors for companies in the pharmaceutical industry. To conclude the report, we offer recommendations to increase the value of the less favorable company. This report was created in consideration of the following criteria:

● Projected industry trends● Current position of the two companies● Key strategic issues in regards to success in the industry● Recommendations

Our report showcases that these companies are two of the top grossing companies in the industry and have some of the largest blockbuster drugs in the industry. They have successfully navigated many obstacles in the past decade such as the patent cliffs and Affordable Care Act. Both of these companies have a strategic plan for growth platforms and revenue streams for the future ahead. We have gone deep into the financials and literature of the two companies and gave a recommendation on which company we see being the best suited for the future pharmaceutical industry. Our team would like to thank Prof. John Keifer and the other senior partners for their assistance in the creation and editions this report. It would be our pleasure to further discuss the analyses and recommendations of our report upon request. Please contact Steve Sabo at ss843612@ohio.edu if you may have any questions or concerns.

Global Pharmaceuticals:Generating Value in an Evolving Industry

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Prepared by:Noah SaundersColin EspinosaAndrew Shaw

Steve SaboNicholas Leary

Prepared for: Catherine Penrod

Luke McElfreshJamie Lambert

John KeiferNadège Lavellet

EXECUTIVE SU

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ARYExecutive Summary

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The objective of this report is to conduct an environmental analysis of the industry and from that, we were able to evaluate two industry leaders, Sanofi and Merck & Co, and derive three key success factors for the industry. We analyzed the position of these companies by examining their revenue streams, cost structure, mergers & acquisitions, competitors, and financial position. From these findings, this report details key issues and gives recommendations to achieve a more favorable position in the industry.

From our research and analyses of Merck & Co. and Sanofi, we believe that Sanofi is in a better position to succeed in the industry, based on their performance within three key success factors. The first and most weighted factor is aggressive integration of biotechnology and efficient R&D, second is penetrating emerging markets that offer the most opportunity to the industry, and third is an adaptive capital investment strategy with a diverse product mix to reduce the risks of the industry.

The pharmaceutical industry is currently transitioning out of the blockbuster business model utilized in the 1990’s and into a new approach consisting of a revamped R&D platform with a refined focus on aggressive entry into biopharmaceuticals. Sales from biotechnology products are expected to grow around 44%, from $179 billion in 2014 to $278 billion by 2020, accounting for about 27% of the world’s prescription and OTC drug market. Since 2000, diversification within traditional pharmaceuticals and the streamlining of R&D processes through divesting underperforming research segments has categorized the acquisitions era. 51 M&A all valued over $1 billion has shaped pharmaceutical capital investment strategy. Increased political and regulatory pressures in the U.S have slowed industry growth near 1%, making entry into high growth emerging markets a top priority. The industry average for generated revenue amongst emerging markets is approximately 23%. When benchmarked against the industry average, we can see Sanofi generates 34% of revenue and Merck generates 17% of revenue from "pharmerging" markets.

Following the analysis, it was concluded that Merck & Co. was the least favorable company out of the two, when being weighed against the three key success factors. In the past decade, Sanofi has made a conscious effort to position themselves for growth and future success related to the three key success factors. The recommendations for Merck & Co., as well as Sanofi, to improve positioning in the pharmaceutical industry are as follows:

● Merck & Co. should continue to restructure and reinvest its capital. Using this strategy,, Merck can cut costs and be able to produce more revenue for both growth and R&D purposes.

● Capitalizing on emerging markets should be a larger priority. Becoming more active with mergers & acquisitions within global segments such as generic companies, will boost growth in emerging regions.

● Both companies should continue to become effective in diversifying their product lines. Merck is successful with diversification due to many smaller acquisitions of segmented firms. Merck, as well as Sanofi, can continue to improve by investing in R&D and global segments. Production of products such as vaccines, biopharmaceuticals and cancer medications should become more and more efficient.

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TABLE OF CO

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TS 1.0 Introduction

2.0 Industry Analysis

2.1 Macro-Environment

2.2 Micro-Environment

2.3 Segment Analysis

3.2 Sanofi Analysis

4.1 KSF 1: Aggressive Biotechnology Integration Paired with Efficient R&D

4.2 KSF 2: Penetrating Pharmerging Markets and Capitalizing on Developing Demands

4.3 KSF 3: Creating Value Through Fundamental Changes in Capital Investment Strategy and Product Mix Diversification

5.0 Scoring

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6.0 Recommendations 25

3.1 Merck & Co. Analysis 13-14

7.0 Conclusion

27-37Appendix

C:Sanofi Financial Statements & Ratios 30-34

B:Merck & Co. Financial Statements & Ratios 28-30

A:Porter’s Five Forces 27

D:Business Model Canvas 35-37

Works Cited 38-43

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3.0 Company Analyses 13-16

4.0 Key Success Factors 17-23

TABLE OF FIGU

RESFigure #1: Worldwide Pharmaceutical Revenues

Figure #2: Key Success Factors

Figure #3: R&D Expenditure by Industry

Figure #4: Pharmaceutical Lobbying Expenditures

Figure #5: Top Ten Pharmaceutical Companies by Income

Figure #6: Pfizer’s Patent Expiration Effects

Figure #7: U.S. Generics Market Worth

Figure #8: Merck Total Sales Vs. Segment Sales

Figure #9: Merck Top Expenses Vs. Total Expenses

Figure #10: Merck Financial Ratios

Figure #11: Sanofi Total Sales Vs. Segment Sales

Figure #12: Sanofi Top Expenses Vs. Total Expenses

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Figure #13: Sanofi Financial Ratios 16

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Figure #14: Total Biopharmaceutical Revenue 17

Figure #15: Global Prescription Orphan Drug Sales 17

Figure #16: R&DI Comparison 18

Figure #17: Sanofi R&D Model

Figure #18: Market Size By Country/ GDP Per Capita (1960-2014)

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Figure #19: Emerging Markets Map 19

Figure #20: Development of Therapeutic Areas by Emerging Market 20

Figure #21: Merck Revenues by Region 20

Figure #22: Sanofi Revenues by Region 21

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Figure #23: Mergers & Acquisition Transactions

Figure #24: Sales at Risk from Patent Expiration

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Figure #25: Herfindahl-Hirschman Index 23

Figure #26: Industry Benchmarks 24

Figure #27: Scorecard 24

Figure #28: Biopharmaceutical Blockbusters 25

INTRO

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1.0 Introduction

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Figure #1 (Statista)

The objective of this report is to perform an overview of the pharmaceutical industry by first examining the macro and micro environment of the industry, along with specific segment analysis. After analyzing the industry, we researched and compared two major pharmaceutical companies, Merck & Co. and Sanofi. We performed this task by inspecting revenue streams, cost structure, and key financial ratios. From these analyses, we determined three key success factors for the industry.

The first key success factor is aggressive biotechnology integration paired with efficient research and development. The second factor is penetrating pharmerging markets and capitalizing on developing demand. The final factor is diversifying risk in product mix and investment opportunities. We then graded the companies to determine which is better positioned in the industry moving forward. Even though both companies are successful and prominent in the industry, we concluded that Sanofi has positioned themselves more favorably for the future environment.

We decided that key success factor 1 is the most important, taking 55%, because this industry requires constant innovation. If a company is not on the cutting edge of innovation, then they will be at a competitive disadvantage. Key success factor 2 has a weight of 25% because the emerging markets are tomorrow’s source of revenue. The development of these large regions makes them attractive markets for pharmaceutical companies. Finally, key success factor 3 makes up 20% of the total score because the recent trends in the industry has led to the need for product diversification, mergers, and acquisitions of biopharmaceutical companies. Companies have pursued this trend to combat many factors such as the patent cliff and the race to develop new drugs.

Figure #2

PHARMACEU

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2.1 Macro-Environment Introduction

Technological Trends

A recent technological trend in the pharmaceutical industry has been a steady increase in the funding of research and development. This graph relates the pharmaceutical industry to other R&D dependent industries. The pharmaceutical industry is by far the biggest spender in this category. In 2009, companies in the Pharmaceutical Research and Manufacturers of America spent $34.8 billion on research and development, about 19% of sales in the United States (BMI Research, 2015).

A large portion of research and development is focused on biotechnology. In 2007, biotechnology accounted for 25.3% of research and development spending by companies in the Pharmaceutical Research and Manufacturers of America (BMI Research, 2015). Biotechnology differs from traditional pharmaceutical manufacturing because biotechnology focuses on manipulating living cells to produce new products. Biotechnology products brought in $179 billion in 2014 and are expected to grow to $278 billion by 2020, taking 27% of the drug market (Loo, 2014).

The pharmaceutical industry is vast, expanding over numerous countries and has a significant impact on the global economy. The macro environment is an interdependent system, due to many of its factors relating to one another. Technology is a determining factor for all the firms and an important key to success. The pharmaceutical market will be facing challenges in the near future, due to issues with patent expirations and new legislation. However, the overall state of the healthcare and pharmaceutical industry is still positive, which shows how secure and profitable the industry has become.

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According to the International Monetary Fund, about 85% of the pharmaceutical industry’s emerging markets come from developing nations and their population base. In these developing countries, national GDP is growing and demographics show that the standard of living is rising. This means that there is more readily available income in these societies, which results in more consumption and economic support. Growth can also be seen through the industrialization of nations through other factors. With the economy showing growth within these countries, more of the public has increased consumer activity. With industry and consumption increasing, countries are becoming more “westernized” and health factors are on the rise as well. The increase in demand to fight these health risks make these emerging markets so popular.

Emerging markets

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

FIgure #3

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Regulations & Political Costs

Today’s world of globalization has the pharmaceutical industry adapting to its environment quickly. New players are being absorbed by the larger ones not just in their own markets but internationally as well. Harmonization has created a difficult situation for major pharmaceutical corporations to manage regulations from governments to try and balance the high costs of medications. In the United States, after Barack Obama was elected, he launched the Affordable Care Act (ACA) to make healthcare affordable and available to the entire US population. The expected market expansion for the industry was around 9 million Americans but was exceeded and reached 11 million in 2015 (Loo, 2014).

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The economic freedom of emerging markets is a major risk that needs to be taken into account when working within certain countries. Indexes like Heritage’s Index of Economic Freedom can help prepare pharmaceutical companies ahead of entering a market. According to Heritage, of all the BRICS countries only South Africa is considered moderately free, and the rest are considered mostly unfree. Understanding how a country's ranking can affect possible business means that to operate inside those risky but rewarding nations, firms need to determine a strategy that will allow them the most freedom within a country. It’s also important for firms to constantly monitor the economic freedom of a country to avoid a major loss.

The macro environment for the pharmaceutical industry continues to expand and adapt to the trends of modern day business and government. The industry is bolstered by constant new technologies and innovative drug research. Sales continue to grow with the discovery and synthesis of drugs, despite patent expiration. Costs keep rising, but so does breakthroughs in the latest scientific fields of pharmaceuticals. The big companies in the pharmaceutical market continue to see revenue, and steady market growth. Emerging markets are also experiencing growth, due to factors of globalization and urbanization. Politically, regulations were put in place and health care reform. With technology advancing and revenues increasing, a push for mass globalization has taken place. With more consumers having available health care, the industry will gain value and grow.

Macro Wrap-up

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

A large problem companies face are the legal costs of doing business in this industry. Some generic manufacturers begin to file for marketing and production rights of products that still have legal patents attached to them. Companies must spend millions of dollars to file patent infringement lawsuits in the courts. This concerns companies since they could lose exclusivity on their products. To combat this, the large corporations would give a small profit to the companies to keep them away.

Figure #4 (Center for responsive products, 2015)

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2.2 Micro-Environment Introduction

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The pharmaceutical industry is facing pressure from patent expirations and increased government regulation on drug pricing. The global industry outlook is positive with strong growth in emerging markets coupled with high sector growth in biotechnology. Competitive intensity in this industry has increased since 2010 following a period of patent expiration and a surge of generic substitutes for many popular drugs.

Competitive Landscape

The current pharmaceutical industry is very competitive but the concentration of the industry is high. The top four companies bring in 36.9% of all revenue in the industry (Turk, 2014). The need to develop new drugs to introduce to market has caused research and development to be very competitive. Research and Patent protection of new products is needed in the industry. Companies have similar drugs to one another and also generic competitors so they are investing in marketing to help establish a presence in the market. Marketing techniques that are used throughout the U.S. are direct-to-consumer (Mansfield, 2005).

Figure #5 (Statista, 2015)

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Companies are also competing in the corporate venture capital arena. With the industry moving towards biotechnology, the need to acquire the property and knowledge of biotech companies is important. The industry trend is highly leveraged towards R&D. Without the acquisition of intellectual property, combined with in-house innovations, some companies may fall behind in terms of future growth and earnings.

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The Patent Cliff

This graph shows the difference in sales of Pfizer products with recently expired patent protection.The main substitutes of brand name pharmaceutical drugs are generic medications (Marketline, p. 17, December, 2014). Patents granted by the FDA expire after 20 years but the patent is granted before clinical trials begin. This results in the actual life of the patent lasting 7-12 years after the time the drug hits the market (Marketline, p. 16, April, 2014). In the time between 2010 and 2012, ten best selling drugs whose combined 2010 sales of 30.05 billion dollars would lose patent protection, opening up the door for generic manufacturers to produce these exact drugs for a fraction of the price (Loo, p. 18, 2014).

Figure #6 (Pfizer,2012)

Threat of New Entry

Entering the pharmaceutical industry can be quite the challenge for a developing company. Many industry factors pose high barriers to entry including high startup costs, a well-established competitive landscape, and the regulations involved to create and synthesize new products. Large businesses are also known to merge with other companies or even buy out smaller ones, which add more stress to startup companies. Another large factor, at least for American companies, is the FDA and other government agencies. There are quality control standards and regulations the FDA has put in place to ensure quality and safety in manufactured products. Costs are also a significant barrier to new entry. According to IBIS World, industry costs include company/material purchases (47.8% of revenue), salary expenses (13.2% of revenue), and a growing R&D cost (around 5.5% of revenue) (Turk, 2015).

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Micro Wrap-up

Overall, the pharmaceutical industry has a very complex microenvironment. Competition continues to increase, with existing firms controlling most of the capital and influence in the market. Patents continue to expire for brand name drugs and generic manufacturing increases the industry’s competition. This is allowing for more firms to capitalize on revenue and also motivate them to produce new patented products. Over the counter pharmaceuticals have gained popularity, with heavy marketing to the general public ever increasing. The industry is stable and competition is the main factor in the environment. Barriers to entry are high due to strict government regulations and the large capital investments required to reach economies of scale in manufacturing and to develop R&D pipelines.

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

SEGMEN

T ANALYSIS

2.3 Introduction

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The bulk of pharmaceuticals are controlled by only a handful of key competitors. Top names hold conpower, with the majority of the market share locked up in big business. In the past, the industry was comprised of small companies holding less market share, with steady, but slow growth. With the modern industry outlook, companies look to expand their reach in the global market. Buyers and suppliers follow suit with industry growth, and power shifts back and forth depending on the state of the economy.

With patents expiring, generic productions can increase and positively affect the economy. As these patents expire, large firms have begun to compete with generic firms to regain the lost market share. Over the counter drugs are becoming more readily available, with healthcare and insurance being accessible by more and more people. Overall, industry segments all have positive outputs, allowing the industry outlook to be prosperous.

Over-The-Counter Pharmaceuticals

American consumers have become more involved in their personal health, leading to moderate growth in the market for OTC medications. 77% of Americans take vitamin and mineral supplements in order to reduce their risks of sickness and disease (American Lifestyles, 2015). Decisions of which OTC medication to purchase is strongly influenced by consumer trust in popular brands such a Tylenol and Motrin as well as the claims the medications make on treating symptoms (Marketline, p. 17, 2014). The OTC industry has seen increases in competition in recent years as drug companies have grown larger through mergers and acquisitions (Marketline, p. 14, 2014).

Historically, generic and brand name drug manufacturers existed separately. But as growth in generics have risen, many brand name manufacturers have shifted focus into developing generics as a source of steady revenue. R&D spending has reflected this change in strategy, as large companies such a Pfizer have begun increasing their budgets for generic development (Phillips, p. 7, 2015). Market share concentration is relatively low; smaller companies in this market are able to be successful without the large R&D budgets required in brand name drug manufacturing.

The Affordable Care Act has increased the number of Americans who have insurance coverage for prescription medication which has helped contribute to steady growth in the market (Phillips, p. 8, 2015). As many top selling drugs have reached their patent cliffs, patients demand for lower priced generics has led to increased opportunities for generic manufacturers (Jessop, p. 8, 2013).

Generic Pharmaceuticals In the Industry

Segment Wrap-up

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Figure #7 (Marketline, 2014)

MERCK &

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3.1 Overview of Merck & Co.

Merck & Co. headquartered in New Jersey, was originally founded in 1891 and then became an independent company in 1917. Merck & Co. is the fourth largest pharmaceutical company in the world with $42,237 million in sales in 2014. The best selling products are Januvia, a medication for type 2 diabetes, and Zeita, a cholesterol medicine. Merck & Co. has found success in the field of pharmaceuticals in the ways of diabetes and cardiovascular medicine. They also have well performing segments in the fields of vaccines and animal health.

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

The revenue streams of Merck and Co. are found in their product offerings in the pharmaceutical industry. The markets of diabetes and cardiovascular medications seem to be the the largest sellers for the company. Januvia, a diabetes product, accounted for 3.93 billion euros in sales. Their next highest grossing product which is in the cardiovascular market, is Zetia. This product accounts of 2.65 billion euros in sales. Merck and Co. also has an important vaccine segment that is the second stream of revenue. Rounding out the product offering is animal health which is a bit smaller than the vaccine segment. This segment deals with animal health products such as vaccines and other health related medication. All analysis and research was found in the 10-K report. (2014, Merck and Co.).

Revenue Streams

Cost Structure

The figure to the left of the text shows how the company's top three and total expenses have changed over the past three years. One cause of concern for Merck and Co. is that their total expenses seem to be on the rise while total sales are decreasing. SG&A costs decreased due to lower selling costs and promotional spending. Merck is also going through some restructuring of the company and have taken some of those costs and put them on the income statement. This allows for less taxable income and is beneficial to the company. Expenses are also increasing due to mergers and acquisitions that look to position the company for a prosperous future. All analysis and research was found in the 10-K report. (2014, Merck and Co.).

Figure #8

Figure #9

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Notable Mergers and Acquisitions

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Merck & Co. has shown through acquisitions that they are committed to the expansion of their biopharmaceutical operations. In 2014, Merck purchased the biopharmaceutical company, Idenix for $3.9 billion. Idenix had the goal of developing a biologic treatment for hepatitis C. Another large biopharmaceutical acquisition was the purchase of Cubist, a leader in therapies against drug-resistant bacteria, for $9.5 billion. In 2015, Merck entered an agreement with NGM Biopharmaceuticals to develop new biologic treatments. The agreement lets Merck take over the development of products after human trials.

Competitors

Merck & Co.’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with morelimited therapeutic focus, and generic drug and animal health care manufacturers (Merck & Co. Inc., 2014). In the diabetes market, Merck competes with Sanofi, Novo Nordisk, and Eli Lilly. Top competitors of Merck’s cardiovascular treatments are AstraZeneca, Sanofi, and Pfizer. In the vaccine market, Merck competes with AbbieVie, Johnson & Johnson, and Pfizer.

Financial Analysis

When looking at Merck & Co.’s financials, certain trends can be evaluated over the past three fiscal years. The company’s profit margins have seen indefinite growth, showing slight decrease in 2013, but improving over 15.18%. 2014’s numbers show that 28.22 percent of the company’s revenue was income. However, this is a skewed measurement of income. Merck & Co. sold off their consumer health sector in 2014, which explains the drastic increase in profit. The firm's total asset turnover shows little volatility. The ratio explains how efficient the company’s assets are affecting the firm’s sales. The numbers are relatively similar, with slight decrease. return on Assets and Equity are also numbers that we affected by the sale of their consumer health line. Numbers appear to have great growth, but actually show little change at all. Both of these ratios are important because they represent the earnings generated from both assets and equity. When we further evaluate the company's ROE through the DuPont theory, we can evaluate how the company generates profits. Profit margins, total asset turnover and equity multiply all actually decrease slightly due to the sell off of consumer health, showing a better explanation of the company’s return on equity. Please see the appendix for the comparison of the two companies.

Figure #10

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SANO

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3.2 Overview

Sanofi was founded in France in 1994. Sanofi is one of the top ten company in the pharmaceutical industry, with $38,219 million in net sales. Sanofi’s best selling products are Lantus, a diabetes medicine, and the cardiovascular medicine, Plavix. Sanofi has found success in the pharmaceutical segments of diabetes and cardiovascular care. They have also been successful in the fields of vaccines and animal health.

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Cost Structure

Revenue Streams

Revenue streams for Sanofi are found mostly in their range of diabetes drugs which made up 7.27 billion euros in revenue in 2014, specifically Lantus which brought in 6.344 billion euros. The second highest grossing drug for the company is Plavix, which is a prescription medicine used to prevent blood clots after a stroke or heart attack. Sanofi also has a large vaccine segment that produces a large amount of flu vaccines, but found turmoil in 2012. The CEO explained that their was a shortage in vaccine supplies and is why the sales were low, and are now correcting. This is their second of three segments that follow pharmaceuticals. The company’s last business segment is their animal health division in which they partake in a joint venture with a global leader, Merial. All analysis and research was found in the 20-F report. (2014, Sanofi).

The basic cost structure of the three main expenses for the past three years is shown in the chart to the left. Sanofi had a large cost in terms of investments in associates and joint ventures when they acquired 7 million shares of Regeneron Pharmaceuticals that amounted to 1.63 billion euros. This appears to be the new way of big pharma with large partnerships and acquisitions of companies to streamline new products to the market. This new agreement in fact aims to produce drugs in the industry of cancer immunotherapy. Something else Sanofi stressed is their repositioning/restructuring operation they are currently going through. They want to decrease their reliance on blockbuster drugs and are implementing a strategy for sustainable revenue and earnings growth. All analysis and research was found in the 20-F report (2014, Sanofi).

Figure #11

Figure #12

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Notable Mergers & Acquisitions

A recent notable acquisition was in 2014 when Sanofi purchased 7 million shares in Regeneron, a biopharmaceutical company, for $1,911 million. This raised Sanofi’s total equity of Regeneron to 22.3%, up 6.4%. This agreement also made Sanofi responsible for the development of Zaltrap, an oncological treatment. Together Sanofi and Regeneron are collaborating to increase their share in the biopharmaceutical market. Another significant agreement was with Bristol-Myers Squibb. This most recent partnership gives Sanofi control of Plavix in all markets excluding the United States and Puerto Rico.

Competition

Sanofi competes with other major pharmaceutical and R&D companies to develop new products. Novartis, Pfizer, and Johnson & Johnson. They also have to compete against generic products. In the diabetes market, Sanofi competes mainly against Merck & Co., Novo Nordisk, and Eli Lilly. In the cardiovascular market, GlaxoSmithKline, Merck, and AstraZeneca are notable competitors.

Financial Analysis

When looking at Sanofi’s financials, there a number of conclusions to be drawn. First off, there is very little volatility within the company’s report. The profit margins from 2012 to 2014 show just above a 1% increase from the gross margin. Total asset turnover decreased 1%, showing that less of the company’s assets are contributing to the sales numbers. ROA & ROE show subpar numbers. From 2012 to 2014, ROA dropped from 4.95 to 4.54, and ROE dropped from 8.75 to 7.77. With slight decreases, the firm’s assets and equities are not being fully utilized to increase profits. Using the DuPont theory to further evaluate the company’s ROE, we can see why Sanofi’s ratios are resulting in little to loss of growth. Even though the company’s profitability isn’t positive, debt in the company is managed well. Sanofi maintained a 42% debt ratio over the course of three years. Having relatively low debt to assets allows for the firm to not stress so much on their liabilities, so they can move forward with their growth strategies. Please see the appendix for the comparison of the two companies.

Figure #13

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4.1 Key Success Factor #1: Aggressive Biotechnology Integration Paired with Efficient R&D

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

We believe biotechnology and R&D to be the most important success factor in the industry. The evolution of the industry can be seen in figure #14. Sales from biotechnology products are expected to grow around 44%, from $179 billion in 2014 to $278 billion by 2020, and will account for about 27% of the world’s prescription and over-the-counter drug market (EP Vantage, 2015). Biopharmaceuticals are attractive because they provide treatments that traditional drugs can’t offer, while also benefiting from reduced competition as biosimilars require exponentially more funding, time and regulation to develop than generics (Grabowski, Guha & Salgado, 2014). We see a very promising future in biotechnology. Fifteen companies in the Russell 3000 index are up more than 100 percent in 2015 (Regan, 2015).

Rare diseases have become more prevalent in the industry due to the possible revenue streams. The medicine is known as an orphan drug and normally the disease affects less than 200,000 people. As a group, over 25 million people in total have some type of rare disease. Most of the orphan drugs hitting the market are products of biotechnology. The FDA and other regulatory entities around the world have also begun to be more lenient on drug approvals to get products to the market faster. Criteria must be met for it to be classified as “special status” (FDA, 2013). Having these terms to get the drug to the market faster will cut down on R&D expenses and bring revenue streams faster than expected. The total market for orphan drugs is expected to be around 19% of the total global pharmaceutical market by 2020, according to figure #15.

Sanofi, a global leader in the industry, has a strong subsidiary called Genzyme. This acquisition in 2011 lead the way for a strong position in the biopharmaceutical segment. Now the company is focused on the manufacturing of these new and innovative drugs and creating a more efficient production. Konstantin Konstantinov, vice president for late-stage product development at the company explains that, “With such compact manufacturing units, biotech companies could make more types of drugs, or they could quickly scale up production of blockbusters by adding units as needed” (Weintraub, 2013).

Figure #14 (Health Affairs, 2014)

FIgure #15 (Statista, 2015)

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

A good measure of R&D efficiency is to calculate a financial ratio known as R&DI. This calculation is done by dividing R&D expenses by revenues. The lower the number from that ratio the better because the less R&D a company can spend and still bring in revenue, the better. Current valuations of companies in the stock market are heavily based on the amount of R&D companies are spending. Figure #16 shows the ratios in graph form. Sanofi has the lowest ratio and is the most efficient company when balancing R&D with revenue payoffs. Merck and Co. lagged a bit behind, possibly due to their large scale efforts of reorganizing capital into R&D and, moving out of over the counter pharmaceuticals.

FIgure #16

Another key to efficient R&D is the implementation of information systems and predictive models. Genia Long, an analyst for the Analysis Group, explains that “Better predictive models would improve the efficiency of the drug development process by either narrowing the patient population where the drug has the best chance of success, or eliminating candidate drugs before risky and costly clinical trials begin”. The need for a centralized database of information is also very apparent. This allows for better communication across the firms R&D satellites. IT techniques such as categorization, clustering, similarity matching, and text extraction allow scientists and engineers to search very specifically through large amounts of data (Padilla, 2008).

Many of the top players of the industry have also reorganized their R&D model. For example, Sanofi changed their organizational model in an attempt to not only reduce the complexity of R&D, but to also to become more open to external sources of innovation and partnerships (Adeusi, 2011). This seems to be a growing trend. Reorganize for a stronger growth outlook and earnings potential. After the turmoil of the patent cliff, organizational structures that worked in the past were no longer sufficient. Merck & Co. went through a $2.5 cost saving initiative to reorganize a vertical organization to one that is more horizontal in nature. The process must now be streamlined for decision making in the firm. With a more decentralized approach to structure and a horizontal format, innovation and productivity will be significantly higher (Adeusi, 2011).

Figure #17 (Adeusi, 2011)

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Today’s emerging markets are popular with the pharmaceutical industry due to increasing growth of health issues amongst global markets. The increase in global GDP is leading to westernization and health problems arising from more modern living behaviors. For instance, projections conclude that by 2025, over 1 billion people will suffer from hypertension (mainly Chinese and Indian Markets) and 70% of diabetes cases emerging from low to middle income countries (Mackey, 5). The graph on page 18 shows the increase in diseases spending in emerging markets. As these nations industrialize, their societies adopt a diet of animal-based foods associated with more chronic disease (Campbell & Campbell, 2004). These countries show relatively low income levels and growing health problems, which make the market favorable to generic pharmaceutical companies. The chart to the right shows the forecasted growth of the industry by 2016.

4.2 Key Success Factor #2: Penetrating Pharmerging Markets and Capitalizing on Developing Demands

The BRICS nations are the top emerging markets for the pharmaceutical industry. These countries share common traits, such as large populations, prominent current annual growth rates (CAGR) and rising competition. These markets are largely generic favored, due to the median incomes of the demographic and the ease of access to many of the drugs. India has shown low growth because of the effects of the Patent Act of 1970 disallowing product patents and enforcing only process patents. An amendment to this act in 2005 now allows for product patents, creating opportunities for multinational companies. The visual to the left displays regulations BRICS countries are incorporating that generally benefit pharmaceuticals. Public health care is becoming more available, and price regulations are favoring the production of generic products. Russia and Indian markets have high competition, with Russia importing 70-80% of European products (Loo, 2014). Market shares amongst the top companies don’t rank very high, because of generic production. 60% of China’s market includes generic drug competition, and the patent cliff faces huge risk of generic subsidiaries. For 2015, the Asia Pacific market has a total of 2.9 billion dollars’ worth of pharmaceutical products at risk of losing their patent protection (Buente, 24).

FIgure #19

Brazil’s fast track approval for biosimilar drugs is expected.

South Africa is introducing national health insurance, influencing lower prices

China has introduced a unified price system to reduce gaps between generic & off patent brands.

India has seen erosion in its patent jurisdiction. A direct price control extension to halt free pricing is possible

In Russia, there is a price ceiling for “essential drugs”, and outpatient healthcare is expected to cover more of the population

Figure #18 (Ross, 2013)

Regulations Favoring Global Pharmaceuticals

BrazilRussiaIndiaChinaS. Africa

GDP Per Capita (1960-2014)

KEY SUCCESS FACTO

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

China’s growing GDP and population attracts much competition. There are currently 3,700 domestic firms inside the country which account for 75% of the country’s sales. 95% of these sales account for the generics market (Dierks, 1). Companies worldwide are starting to realize the full potential of capitalizing on global expansion. The top BRIC markets continue to grow and production and competition levels continue to rise. According to Statista, spending on medicine in pharmerging markets will rise to 372 billion dollars by the year 2018 (Statista, 2014.). The visual to the left displays what areas of spending receive the most financing. Sectors like diabetes and oncology are growing very fast over the next 5 years. the increase in sector spending relates back to how these companies are seeing more health issues.

Development of Therapeutic areas in Emerging Markets (Next 5 Years)

Figure #20 (Buente, 2013)

Revenues of Merck & Co. by region from 2012 to 2014

Figure #21 (Statista, 2015)

Revenue of Sanofi by region in 2014 (in million euros)

FIgure #22 (Statista, 2015)

KEY SUCCESS FACTO

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Sanofi’s main goal is to target healthcare issues such as diabetes, multiple sclerosis, oncology and rare diseases. The firm has always had strong incentives to expand to global pharmaceutical markets. In 2009, the company was ranked #1 in emerging markets, with a 6% global market share and a 10.2% year over year growth rate. The company had also purchased Zentiva for 2.6 billion, a European company with strong ties in countries such as Russia and eastern Europe. Zentiva recorded 70 million in sales in Russia going into 2009, with 735 million sales in Euros for the fiscal year(Black Book, 2009). Sanofi as of 2013 held 2.7% of the market share in Russia (Marketline, 2013).

4.3 Key Success Factor #3: Creating Value Through Fundamental Changes in Capital Investment Strategy and Product Mix Diversification

The new business model focuses on balancing risk and opportunity through diversification. Large scale mergers and acquisitions create a depth of products which spread risk over a variety of sectors (Marketline, 2012). Increasing reliance on partnerships, acquisitions and joint ventures has proved to be an effective method of funding R&D, as internal development has failed to deliver lucrative drugs to market. R&D efforts now represent a major component of competitive advantage, and strategies for enhancing performance are being based in the principles of accumulation theory and the dynamic capabilities perspective (Fortune & Shelton, 2012). The growing size of the major companies makes them less reliant on traditional pharmaceuticals and expands their product lines to include biopharmaceuticals, animal health, and consumer health divisions as well as expand their presence in new and emerging markets (Rockoff, 2009).

Merck plans to target emerging markets by attacking diabetes, cardiovascular and respiratory diseases. China and India have been amongst its top targets, raising 60% of sales force in China and quadrupling is salesforce in India in 2009 (Black Book, 2009). By 2012, the company had invested in a new R&D headquarters located in Beijing. Being part of a 1.5 billion dollar project, Merck’s intentions were to expand their vaccine possibilities to target the growing number of health issues in the country (Chain Drug Review, 2012).

As of 2014, total sales of pharmaceuticals amongst the Asia Pacific region (China, India & Russia) were recorded at $3.95 billion dollars and 3.15 billion in sales amongst Latin American countries (Hoover’s, 2015). These regions only account for 9% and 8% of total revenue respectively, and falls short of the industry average by 6%. The graph on page 20 represents Merck’s sales by region from 2012 to 2014. Despite company efforts to grow in emerging markets, revenue numbers show no success in increasing growth.

As of 2015, Sanofi has announced that 34% of overall sales and 53% of consumer healthcare sales have come from emerging markets. Overall growth of the company’s generic division has come from Africa(10%) and Asia (6%). For sales growth, emerging market revenues increased to 9.3% in 2014 (Sanofi, 2015). On page 20 are visuals that represent the revenue earned by Sanofi in global regions and the respective growth of each region. Through these graphs, further analysis can be determined and a conclusion can be made. Sanofi, with 34% of revenue being generated in emerging markets is above the 23% industry average by 11%.

The pharmaceutical industry is currently in a period of transition out of the business models used during the 1990’s and towards a new strategy for growth in an increasingly globalized market (Baum, 2013). The empire building strategy utilized by management executives a decade ago has now been replaced by a disciplined and thoughtful capital allocation structure, focused on strategic acquisitions and partnerships. The slowing pace of drug discovery amidst heightened regulation has increased the urgency of adding new lines of business (Baldi, Baglieri & Corea, 2015).

KEY SUCCESS FACTO

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Large drug companies have recognized that their expertise lies in managerial knowledge and logistical proficiency (Ramirez, 2015). These firms seek to establish CVC funds to invest in small biopharmaceutical companies that are on the cusp of emerging technology. Early stage technological investments are inherently difficult to value because of their high technical and market uncertainty (Baldi, Baglieri & Corea, 2015). The benefits from these investments are that they are critical in developing the capabilities to succeed in being the market leader in bringing emerging technology into their product pipelines, which has significant financial benefits (Loo, 2015).

Considerably more value is yet to be unlocked through the fundamental changes occurring within the framework of capital investments consisting of mergers, acquisitions and corporate venture capitalism (Baum, 2013). Divestitures of therapeutic segments that are not compatible with the growth plan of the company have led to major fluctuations in company financials but reflect the strategic modification of long term goals to gain competitive advantage. Mergers and acquisitions have been utilized to strengthen key therapeutic areas as well as increase market share in new and emerging markets. Corporate venture capital investments (CVC) have become increasingly important as early stage biopharmaceutical advancements become more prominent “CVC investments are dominated by strategic goals

Using the Pharmaceutical company Pfizer as an example, “Pfizer has seen its sales plunge more than 9% from a high of $54.7 billion in 2012 to $49.6 billion last year (Johnson, 2015) after four of its major sellers’ patent protections have expired in both the US and Europe. The effects of the 2012 patent cliff are a strong example of why companies need to diversify in order to weather a top selling drug going generic. The figure to the left (Figure 21) from Casey Research shows past data and future predictions of how much expiring patents cost the pharmaceutical industry. In order to combat risk in the pharmaceutical industry, companies need to be able to diversify their product offerings (Marketline, 2012).

Figure #23 (Loo, 2015)

entailing beneficial learning processes and the development of managerial capabilities in new technological domains, which in turn nurture corporate growth opportunities” (Baldi, Baglieri & Corea, p. 222, 2015).

Figure #24 (Horing, 2013)

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Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Sanofi is a major global conglomerate with many subsidiaries specializing in different segments of the pharmaceutical market “Beginning in 2009, Sanofi began cutting back on its pipeline of drug candidates in an effort to save on R&D costs, narrowing its focus on the most promising candidates in targeted areas” (Law, p. 2, 2015). This company has identified branded drugs, vaccines, and biotechnology as their focus going forward. This specialized view increases their risk but also allows for them to have higher profit margins in these areas through streamlined R&D and managerial efficiencies “Their investment strategies are targeted at compounds featuring those development stages that are predominant in the parent firm’s R&D pipeline” (Baldi, Baglieri & Corea, p. 222, 2015).

Figure #25 (Baldi, Baglieri & Corea, 2015)

Merck & Co. is one of the top companies in the world when it comes to pharmaceuticals. Their successful operations can be understood through their ability to use acquisitions and joint ventures to diversify. Two examples of their joint ventures were Sun Pharma (2011) and Supera Farma (2012). These two joint ventures helped “develop and sell branded generic medicines in high-growth markets” (Ramirez, p. 3, 2015). To help protect itself from the volatility of the pharmaceutical industry, Merck & Co. spent $3.9 billion acquiring “Idenix, which develops treatments for viral diseases” (Ramirez, p.3, 2015). Their acquisitions and joint ventures allowed them to move into new emerging markets and protect against risk. The recent acquisition of the Swiss biotechnology company OncoEthix in 2014 through a subsidiary for $110 million (Merck & Co., 2014) further diversifies Merck & Co. in the field of oncology by moving into new ways of treating cancer. The acquisition of OncoEthix not only brings new technology in the field of oncology but it also creates knowledge transfer of biotechnology which in turn will strengthen other areas of product diversification for Merck & Co. Merck has taken a more diversified approach to R&D than Sanofi. This strategy reduces overall risk but due to the principles of accumulation theory, reduces the effectiveness of organizational processes within those therapeutic segments (Fortune & Shelton, 2012).

Sanofi’s strength in the global vaccine market is expected to increase within the emerging markets as lowering infant mortality rates is a basic health goal of industrializing nations (Anderson, Scannell, Das, Olson & Badner, 2011). Restructuring R&D and increasing specialization is helping Sanofi to strengthen its product pipelines following a period of notable R&D failures such as Acomplia and Iniparib (Anderson, Scannell, Das, Olson & Badner, 2011). R&D specialization allows for Sanofi to increase their knowledge of highly utilized activities which leads to more effective research efforts and greater value through economies of scale and efficient firm performance within key areas (Fortune & Shelton, 2012).

SCORES

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5.0 Industry Benchmarks

B

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

Above is a table representing Merck & Co. and Sanofi comparing notable ratios against the entire pharmaceutical manufacturing industry. Both Merck and sanofi have relatively lower P/E ratios compared to the industry, due to above average EPS amounts.This is most likely due to the diversity of the industry. Companies, such as biotech firms would have a higher P/E ratio due to the revenue of more expensive products. Biotech companies generate higher revenues and would generally have higher profit ratios. Merck & Sanofi ar more diversified, which lower their earnings. Merck has an above average ROE, with sanofi severely below to industry curve. Profit margins between the two companies follow the same suit as well. As stated earlier in the report, Merck has higher numbers due to their sell-off of consumer health lines.The short term solvencies compared to the industry are close to their respective ratios. This is due to the stability of the industry's current assets and liabilities.

Company Scoring

Figure #26

Figure #27

RECOM

MEN

DATION

S6.0 Recommendations

25

We chose Sanofi as our company of choice relative to our key success factors. This decision was difficult due to the relative similarities in terms of financials and company positionings. For our first key success factor pairing biotechnology and R&D, we wanted to see which company was not only heavily investing in biotechnology, but also who was efficiently using the technology. Although Merck & Co. was investing large amounts of capital in biotechnology, from what we researched, Sanofi was well ahead of the curve. In 2011, Sanofi restructured their organizational structure. This was a result of the patent cliff and a bigger move towards biotechnology. They also created a new form of production that will boost efficiency with getting products to market quickly. We would recommend that Merck & Co. continue to restructure their model. After the large sell off of the OTC segment, Merck will have more time to refocus their efforts in biotechnology and efficient R&D. We believe that Merck should also pay closer attention to their R&DI ratio and try to bring that down closer to Sanofi’s ratio.

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

The most recent sales data even shows that emerging market revenue streams outweigh that of the United States. We recommend that Merck & Co. should focus more on global growth and refinance their investments. They need to utilize mergers with OTC and generic companies that target countries with rapid urbanization and growth. Generic brands are merck’s biggest competitors, due to their demand in less income regions. As stated earlier in the report, regions such as the Asia Pacific are only generating 9% of company revenue. The company is taking the right steps by establishing company branches in other countries, but should make pharmerging markets more of a top priority.

After scoring Merck. on product diversity we found that they performed better at diversifying their product offerings than Sanofi. The reason Merck. earned the score that they did was because they acquired smaller firms in different segments of the industry rather than specializing in a select few therapeutic areas.

Sanofi was also chosen as the leading company in emerging markets. The company is constantly using supportive data concerning emerging markets in documents such at their 20-F. Emerging markets is described as one of sanofi’s “pillars to success” in their overall business strategy.

Although Merck reduced their level of risk by diversifying, they forgo the benefits that result from being the market leader in the segments they operate in. Going forward, Merck can improve their position by restructuring their R&D focus by selecting 3-4 of their key competencies and refining the management and logistical support behind them. Globalization has made the new and emerging markets the regions to focus on to secure future sources of revenue. Merck could adapt their major product development areas to focus on serving these growing segments by investing in vaccines, biopharmaceuticals and cancer medications.

Figure #28 (Evens, R., & Kaitin, K., 2015)

26

CON

CLUSIO

N7.0 Conclusion

VIn this report, we did an industry overview and then analyzed Merck & Co. and Sanofi compared to the rest of the industry. After the analysis, we came to the conclusion that Sanofi has placed itself in a more favorable position than Merck & Co. Sanofi achieved this because of the the three key success factors that we have identified. These factors looked to encompass the industry as a whole on what it takes to be a successful pharmaceutical company.

The first key success factor deals with biotechnology and R&D and was an industry wide concern. Utilizing new technology is crucial in creating innovative and groundbreaking medicines. The sector of biotechnology has a lot to offer the industry of pharmaceuticals and will have a lasting effect. The next success factor was solely based on emerging markets. Markets like China and Russia were discussed due to the high possibility of future growth. Globalization has created a market demand in many new countries due to changing lifestyles. The third and final success factor dealt with corporate venture capital and product diversity, both in the scope of risk management. The industry is focused on attaining knowledge and capabilities of technology with the acquisition of biotechnology companies. The uncertainty is somewhat of a worry in the industry and only time will tell how big of a pay off these acquisitions will prove to be.

Many investors are very bullish on these companies and believe that acquisitions and mergers will pay off in the long run. Product diversity deals with keeping volatility of company revenues low and making sure in any downturn, a certain product or segment will not financially harm a company if it begins to lose its advantage in the market. Overall, we see the pharmaceutical market as an evolving entity. The new and improved strategy is to plan for the future and structure the company for earnings potential and steady growth.

Introduction Industry Analysis Merck & Co. Sanofi Key Success Factors Recommendations Conclusion

KEY SUCCESS FACTORS

Figure #28

APPENDIX-A

13.1 Porter’s Five Forces

Threat of New EntryThe cost to enter the industry is high. Patent protection, high production costs, and government regulations pose high barriers of entry. Generic companies have to make sure that they conform to government rules to be able to produce generic equivalents. It is estimated that developing a new name brand drug costs around $1.5 billion to produce (Sarah Turk, 2015). The cost of entry is expected to decrease with patents expiring, allowing for more opportunities for generic companies.

Competitive OutlookThe level of competition in the industry is high and is expected to continue to grow. There is a high degree of competition between name brand companies and also between name brand and generic companies. The concentration of the competition is low, having only a few companies command a large portion of revenue. Companies competing to develop new blockbuster drugs has caused research and development to increase in importance.

27

Threat of SubstitutionCompetitive intensity in this industry has increased since 2010 following a period of patent expiration and surge of generic substitutes for many blockbuster drugs such as Lipitor in 2012. Generic manufacturers are able to produce drugs for much lower prices because they do not have to recover the funds sunk during the R&D stage. As growth in brand name pharmaceuticals has slowed, recent trends promoting personal health and wellness have led to increases in the market for OTC drugs and products. Regulation and policy changes favoring generic manufacturers and allowing them additional ease in entering the market have increased their threat of substitution.

Buyer PowerWhen buyer power is high, it’s because the market consists of large firms that can buy a large quantity of pharmaceuticals and deliver them to the mass consumer. Buyer power can be low when looking at the market for specialized pharmaceuticals that are bought on a case by case basis. In the US market buyer power varies depending on the type of drug that is being bought. The generic drug submarket has a lot of competition and the drugs have usually been in the market for a while letting buyer power to rise and lower the costs. Opposite of the high buyer power in the US is its low buyer power segment where newly released drugs as well as very specialized drugs that can not easily be substituted creates the low buyer power.

Supplier PowerSupplier power in the US is generally high looking at the suppliers that are not operated by the major pharmaceutical firms. The newer firms that are trying to get into the industry have to go through the suppliers to be able to get the materials for the drugs giving the suppliers more power. The large pharmaceutical companies develop their own materials to make drugs decreasing the suppliers power over the pharmaceutical industry.

APPENDIX-B

14.1 Merck & Co. Financial Statements

28

Short Term Solvency Ratio

Current Ratio 1.77

Quick Ratio 1.47

Cash Ratio 0.39

14.2 Merck & Co. Ratios & Current Market Status

Profitability Measures Ratio

Gross Profit Margin 60%

Operating Profit Margin 13%

Net Profit Margin 28%

Return on Assets (ROA) 12%

Return on Equity (ROE) 24%

Long Term Solvency Ratio

Debt Ratio 50%

Debt to Equity Ratio 1.02

Equity Multiplier 2.02

Times Interest Earned 24.61

Cash Coverage 33.75Asset management Turnovers

Ratio

Inventory Turnover 3.3

Account Receivable Turnover

6.37

Total Asset Turnover 0.43

Day Sales (Inventory) 110.61

Day Sales (Receivables) 57.3

Merck & Co. Inc. MRK : US

Market Value Measurements

Ratio

Stock Price at Years End $56.79

Price/Earnings (diluted) 13.95

Market/ Book 3.56

As of September 26th, 2015, merck & Co. closed at 49.60 per share. This is a 0.99 decrease from the previous closing and is down 1.96%. Today's current value is also down 7.19 since the end of 2014.

APPENDIX-B

30

We conducted further research with our colleagues from the Bloomberg Institute. By accessing the Bloomberg Terminal, we can construct a customized quote to show the market value of Merck & Co and evaluate the snapshot of the company’s equity. Here, this quote can show us the number of shares the company has issued, high and low price valuations, top market ratios and a head to head comparison of the stock to leading competitors. The price chart shows volatility amongst the shares day trading and for two months, with long term valuation not as optimistic. The relative Value section may strike some red flags, as we can see the overall year percent price change is down 14.15%.

Bloomberg Terminal. (2015). Bloomberg Quote for Merck & Co. Inc. Retrieved September 26, 2015

APPENDIX-C

14.3 Sanofi Financial Statements

31

Sanofi Ratios & Current Market Status

Short-Term Solvency Ratio

Current Ratio 1.8

Quick Ratio 1.29

Cash Ratio 0.56

Profitability Ratios Ratio

Gross Profit Margin 68.34%

Operating Profit Margin 18.19%

Net Profit Margin 13.35%

Return on Assets 4.63%

Return on Equity 8.01%

Long-term Solvency Ratio

Debt Ratio 42.23%

Debt/Equity 0.73

Equity Multiplier 1.73

Times Interest Earned 10.15

Cash Coverage 38.15

Asset Management Ratio

Inventory Turnover 1.71

Accounts Rec. Turnover 4.83

Total Asset Turnover 0.35

Day Sales in Inventory 213.45

Day Sales in Accounts Receivable

75.57

Market Value Measures Ratio

Stock Price at Year End $67.55

Price/Earnings 22.93

Market/Book $1.47

Book Value/Share $42.28

As of September 26th, 2015, Sanofi closed at 87.01 per share. The share is up 2.61 points since the last closing, with a 3.09% increase. Today’s current values is also up 11.35 points since the end of 2014.

Sanofi SAN:FP

APPENDIX-C

33

Now looking at Sanofi, the Terminal can also make a custom quote to evaluate the price of the stock and its key ratios. Like Merck, there is an intraday (day to day) price chart along with a two month price chart. There is volatility in the short term of this stock, but we can be optimistic about the company’s value. We can see positive change of 3.11% in market value over the course of one fiscal year.

Bloomberg Terminal. (2015). Bloomberg Quote for Sanofi. Retrieved September 26, 2015

APPENDIX-C

Key Ratio Comparison

34

APPENDIX-D

15.1 Business Model Canvas (Merck & Co. and Sanofi)

35

Key Partners

● Joint Ventures○ Bayer○ Regeneron○ Schering-Plough

● Acquisitions○ Idenix○ Cubist○ NGM

● Pharmaceutical Suppliers● Pharmaceutical Buyers

Key Activities● R&D● Marketing & Distribution● Partnerships● Production

○ Consumer Health○ OTC ○ Generic○ Vaccines○ Animal Health

Key Resources

● Human Capital/Labor○ Regional Expansion○ Scientists/ Researchers

● Patent Protection/ Intellectual Property○ Utilizing Resource Until Patent Cliff

● Research & Development○ Discovering New Drugs

APPENDIX-D

15.2 Business Model Canvas (Merck & Co. and Sanofi)

36

Cost Structure

● Research & Development● Global Expansion● Restructuring● Cost of Sales

Value Propositions● Company Performance● World Leaders in Products

○ Vaccines○ Biologicals○ Prominent Pharmaceuticals

● Product Ease of Access● Usability● Investment in R&D● Quality Partnerships & Global Strategy

Revenue Streams

● Assets● Regional Sales● Customer Demand

○ Vaccines○ Consumer Health○ Generics○ Animal Healthcare

APPENDIX-D

15.3 Business Model Canvas (Merck & Co. and Sanofi)

37

Customer Relationships● Safe & Effective Products● Honesty In Labeling● Consistent Product Quality

Channels● Communication Through Institutions

○ Pharmacies○ Hospitals○ Clinics○ Veterinary Offices

● Commercial Presence● Mergers & Acquisitions

Customer Segments● Physical Segments

○ Patients○ Health Professionals○ Hospitals/ Pharmacies

● Global Segments○ Patents ○ Emerging markets

WO

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