STRATEGY IN THE TWENTY-FIRST CENTURY PHARMACEUTICAL INDUSTRY: MERCK & CO. AND PFIZER INC.

MGMT 495

Summer 2011:

Kelly Bossolt

Marta Kovorotna

Sarah Smith

PHARMACEUTICAL INDUSTRY

Financial situation Financial Forecasts Global financial situation Financial analysis for Merck & Co. and Pfizer Inc.

Industrial overview External factors Internal factors Merck & Co. and Pfizer Inc. positions

Recommendations

GLOBAL FINANCIAL ANALYSIS: Global Industry Forecast- 2010

Overall market projected to grow 4-6% exceeding $825 billion

Overall market sales projected to grow at a 4-7% compounded annual growth rate through 2013

Pharmaceutical Market Trends 2010: http://www.pharmaceutical-drug-manufacturers.com/articles/pharmaceutical-market-trends-2010.html

GLOBAL FINANCIAL ANALYSIS:

31.50%

35.90%

12.70%

5.70%

2.80%

Pharmaceutical Market by Region

EuropeUSAsia, Africa, Aus-traliaLatin AmericaCanada

FINANCIAL ANALYSIS: PRESENCE OF GENERICS

79 percent of FDA approved drugs have a generic version available

69 percent of prescriptions dispensed are generics The generic industry is currently worth $80 billion Worldwide market for off-patent drugs is set to balloon to

$520 billion in 2012, up from about $270 billion in 2006

The US Generic Drugs Industry Overview: http://www.themedica.com/articles/2009/04/the-us-generic-drugs-industry.htmlPfizer Goes Generic: http://blogs.wsj.com/health/2008/10/16/pfizer-goes-generic/

FINANCIAL ANALYSIS: PFIZER INC AND MERCK & CO.

PFE: Dec 31, 2010 Dec 31, 2009 Dec31, 2008

Total Revenue 67,809,000 50,009,000 48,296,000

Net Income 8,257,000 8,635,000 8,104,000

MRK: Dec 31, 2010 Dec 31, 2009 Dec 31, 2008

Total Revenue 45,987,000 27,428,000 18,502,000

Net Income 861,000 12,899,000 1,753,000

http://finance.yahoo.com/q/is?s=PFE+Income+Statement&annualhttp://finance.yahoo.com/q/is?s=MRK+Income+Statement&annual

FINANCIAL ANALYSIS: PFIZER INC AND MERCK & CO.

Pfizer Inc: Ability to service debt: EBITDA

25.48 Billion Operating cash flow:

22.46 Billion

Merck & Co.: Ability to service debt: EBITDA

7.01 Billion Operating cash flow:

11.18 Billion

http://finance.yahoo.com/q/ks?s=MRK+Key+Statisticshttp://finance.yahoo.com/q/ks?s=PFE+Key+Statistics

EXTERNAL ANALYSIS: OVERVIEW

2005 global pharmaceutical industry $602 billion Increase in life expectancy Rising income Discovery of new drugs for major diseases

600 publicly traded pharmaceutical and biotechnology companies - $1.5 trillion

1995-2005 pharmaceutical mergers and acquisitions – over $1 trillion Pfizer, GlaxoSmithKline, and Sanofi-Aventis

EXTERNAL ANALYSIS: OVERVIEW

Focus on therapeutic categories Economic return Diabetes, Alzheimer’s/memory, anti-aging

Increased efficiency 1983 the Orphan Drug Act: tax credits,

research grants. By 2006 - 280 drugs approved. Propecia for male pattern baldness and Viagra

for erectile dysfunction. The growth of biotechnology:

Positive cash flow Lower up-front payments and high payouts

EXTERNAL ANALYSIS: OVERVIEW

For 20 years the U.S. granted patent protection to new chemical entities vs. FDA patent 11-12 years on drug.

“Generic versions”, 1984 – Hatch-Waxman Act

Increasing competition – product reformulations.

Economical process for mass production.

EXTERNAL ANALYSIS: OVERSEAS VS. DOMESTIC

Europe Regulatory approvals Government power

over price; prescriptions limitations

Local competition

Developing Countries Challenging pricing Limited access

U.S. Market High price Easy access: chain

stores, independent pharmacies, food stores, care facilities, mail orders

Bargaining power of wholesalers and retailers.

Managed Care Organizations (medical care for employees)

Negotiating discounts – moving market share.

Investing strategies (university research)

INTERNAL ANALYSIS: OVERVIEW

R&D – Time & Money Saver Every $1 increase in drug expenditure led to $2.11

decrease in other health care spending. 100 prescription increase led to 16 less days in the

hospital. Manufacturing – 10% of costs

Difficult and requires expertise Majority is outsourced

Counterfeiting costs $35 billion a year, and causes deaths

Marketing Personalize medicine based on genetic profile Direct to Consumer

Specific drug and illness treated

INTERNAL ANALYSIS: MERCK & CO.

Research Expert Detailed biological and chemical drug profiles

Assess projects early High FDA approval rate – 70% (Industry was 50%)

“Hire brilliant Scientists and let them follow their instincts” 6 major labs in the US and Japan Smaller research labs in the U.K., France, Spain, Italy Focus on Blockbuster drugs in all areas

“Discover new and better medicines through breakthrough research and then demonstrate their value” – Ray Gilmartin, CEO Recruit top scientists Decentralize R&D department

INTERNAL ANALYSIS: MERCK & CO.

Mergers Science not size Establish relationships with firms pursuing

complementary research 1999 entered into 10 alliances to complement its

internal R&D and stay competitive with new technology

Marketing Undervalued, out of the loop, off target

Label is the product, not the molecule Pfizer’s Lipitor

Switched to “key-franchise” management Data- driven approaches Assigned and organized a sales force to each top

selling drug Increased marketing presence in clinical trials

INTERNAL ANALYSIS: PFIZER INC.

“Hunter, not a gatherer” Merger maniacs

Research $17 billion on R&D 12,000 researchers 9 major labs in the U.S., U.K., and Japan Several satellite labs

Mergers Warner-Lambert – Lipitor $89 billion

Hostile takeover after they merged with American Home Products

Lowered costs by $270 million Pharmacia

Helped with the generic line when patents came up

INTERNAL ANALYSIS: PFIZER INC.

Marketing Effective, and largest sales force in the industry

$3.5 billion budget 9,000 representatives Targeted reach and frequency of doctors Highly ranked by physicians

Training 40 simulated calls 30 second briefs

“Partner of Choice” Biotech marketing Bundle drugs for PBMs

INTERNAL ANALYSIS: 2005-2006

Merck & Co. Restructuring Closed 5 manufacturing plants Laid off 7,000 workers Closed 3 of the smaller research labs

2006 Narrows research to the 9 areas of the world’s most critical

health care challenges Pfizer Inc. Cost Cutting Initiative

Save $4 billion over 4 years Closed plants Administrative cutbacks Streamlining sales forces

2006 Sold their Consumer Healthcare Business Spend $17 billion excess cash on future acquisitions Spend $17 billion on buy back stock

RECOMMENDATIONS: Invest more in R&D

Without drugs to sell, there is no business Merck & Co.

Marketing Pfizer Inc.

No more mergers

RECOMMENDATIONS:

Increase global presence by filling the 10/90 gap How?

This can be done by increasing generic pharmaceuticals that are affordable to the rest of the world.

Why? The market for generic pharmaceuticals is growing at a

fast pace, and with patents expiring, the competition will only increase. It’s time to penetrate this market.