Marketed as an anti-cancer vaccine, Gardasil is The HPV (human papillomavirus) vaccine. The FDA licensed Gardasil for use on June 8, 2006. Since its market approval, The Centers for Disease Control and well known professional organizations of physicians have since recommended routine universal vaccination in young girls (Collins p.463). Questions regarding the vaccines safety and effectiveness remain despite its FDA approval. According to Collins, Gardasil does not eliminate the need for routine Pap screening and there is no proof that it will decrease cervical cancer rates in the future (Collins p. 465).
The Zoster vaccine (Zostavax) is a new preventative immunization for adults 60 years of age or older with HZ or shingles. In May 2006, The Food and Drug Administration approved Zostavax. Subsequently, the Centers for Disease Control and Prevention further recommended Zostavax for routine vaccination in patients over 60 years of age. Like most antiviral medications, Zostavax has not been evaluated in any clinical studies.
Merck faced major sales declines due to generic competition its products like Singulair, Cozaar/Hyzaar, Fosamax and Zocor all, with patents set to expire out to 2013 (Data Monitor 2009, 25). Merck applied for a patent on Gardasil in March of 1995 and was granted in October of 1998. Granted patent extensions for both products, Word Press confirms that Merck has 17 years from the date of patent issuance or 20 years from application date under US patent law (Word Press 1). These laws prohibit generic companies from bringing a drug to market prior to patent erosion.
Weaknesses
Failure of the ENHANCE clinical trial exemplifies Merck's ability to overcome setbacks that could put them under water. Data Monitor states that in 2002 Zetia/Vytorin, a drug that lowers cholesterol provided a positive distraction to the revenue loss caused by their Vioxx and Zocor brands. Yet in the face of media backlash, Merck still has a pre-eminent position in the vaccine market with a focus in therapeutic and preventative agents, generating over 80% of 2007 sales as a small molecule company. According to Genentech, efforts in the department of Small Molecule Drug Discovery are “focused on the synthesis and development of new small molecule cancer therapeutics. Multidisciplinary project teams work on every aspect of drug discovery — from target identification to pharmaceutical optimization” (1).
When it comes to patent expiration, according to Data Monitor, the product in question exposes itself to any form of regulatory curtailment. Meanwhile, the R&D pipeline continues to move products through while delivering comparable revenue (6) However, Herper questions if pharma companies like Merck are truly R&D centric or whether they are in fact “large scale marketing operations” (1). As an expert that worked many years in research, Herper questions voluminous marketing budgets that supersede that of R&D. From an ethical position, Merck faces the same threat of drug industry mistrust. Stakeholders are now able to see through cover ups. With access to the internet and more information useful medical information found online, users of their drugs can do their due diligence and do not have to rely solely on the advice of their doctor.
Since seeing a product pass through the late stage pipeline comes with a hefty price tag upwards of $1 billion, their only solution to appease all stakeholders is to work with more researchers, invest aggressively in research and development while continuing to work with physicians, unions, and representatives. This collaborative effort will lead to better health for Merck.
Opportunities
As we age, there is a continued push from doctors to medicate. This is the reason for big pharmas financial success. If it wasn’t for doctors prescribing their products to patients, they would not be in business because they would not be profitable. Data Monitor states that "Gardasil, Januvia/Janumet and Ientress franchises brands—Fosamax, Cozaar/Hyzaar and Singular—means that successful drug development will remain crucial in securing Merck’s long-term commercial success" (5).
Mergers have the innate ability to cut operating costs and accelerate profit growth. The Schering merger accelerated Merck’s late state pipeline by allowing them to invest more aggressively in R&D. Since both companies already had plans to minimize costs prior to the merger, marketing and administration reductions resulted in cost savings exceeding $3.5 billion (Market Watch 25).
Threats
Schering-Plough's partnership with Johnson & Johnson has led to litigation which may cause Merck issues. Schering-Plough once had exclusive worldwide marketing rights to “anti-TNF Remicade” in all markets outside of the US, Japan and portions of the Far East. According to the Marshall Protocol Knowledge Base monitored by the Autoimmunity Research Foundation, Anti-TNF drugs or TNF blockers are drugs that interfere with the body’s production of TNF-alpha. MPMB also states that Anti-TNF drugs are expensive not only expensive but have adverse side effects. The drugs are also not effective in chronic disease treatment (MPKB 1).
When Pfizer merged with Wyeth, together they formed a pharmacaceutical company that had yet to be seen. In 2008 the companies’ total sales tipped the scale at over $70 billion. Their prescription sales were $10 billion shy of their total around $60 billion (PharmaWatch 32). In evaluating the Pfizer-Wyeth merger, according to Pharma Watch, one must take into consideration that in order for it to be profitable, they must cut cost aggressively. To find the revenue loss resolution, they must consider all options for overhead reduction (34).
In conclusion, although Merck faces significant financial risk upon patent expiration of their highest selling products, they remain a world leader in healthcare and chemical production for two main reasons. First, Merck has continued sales growth. But most importantly, Merck saves lives with their innovative inventions. As mutual fund manager, based on the information gained from this analysis the strongest aspects of the SWOT analysis that influence my decision to invest in this company are its increased late stage R&D pipeline, consistent record of successful blockbuster products and recent portfolio expansion with the Schering-Plough merger.
PART II
Merck’s overall financial health shows positive future revenue growth potential. According to Merck’s income statement and by my calculations, there was a 32% profit increase in 2009 alone. This means that Merck earned an additional 8,926,000 annually on top of their 2008 earnings. In 2010 Merck increased their earnings by 40% gaining an impressive 18,559,000 annually on their already remarkable 2009 profits. Overall, between 2009 and 2010 post Schering Merger, the company has managed to increase their take home by almost 300%. With these calculations, I gather that Merck is in terrific financial health (“Merck Annual Report” 2011).
Merck’s Income Statement reflects continued revenue growth potential. According to their 10K form annual report pursuant to Section 13 or 15 of the Securities act filed with the Securities and Exchange Commission on February 28, 2011, on November 3, 2009, Merck & Co., Inc. (“Old Merck”) and Schering-Plough Corporation (“Schering Plough”) merged their assets. The Merger essentially made the MSP Partnership revenues account in their sales revenue (primarily Zetia and Vytorin). Much of Merck’s success in 2010 is attributed to Schering-Plough’s animal and consumer care products. Additionally, revenue from the MSP partnership products after the Schering Merger is all that is included for 2009 sales (“Merck Annual Report” 2011).
With their success largely attributed to the booming sales increase in popular Januvia and Janumet which both treat type 2 diabetes, Lsentress which is a HIV combination therapy for stage 1 treatment, and one of their biggest blockbuster drugs Singulair for asthma treatment and allergic rhinitis they have exceeded their 2010 annual profit goals. Of course, examining their income statement, their increase in sales for Januvia, Janumet, Lsentress and Singulair offset their declining sales of their once patented hypertension treatment Cozaar and Hyzaar. As stated, patent expiration can significantly reduce any pharmaceutical companies’ bottom line which underlines the significant importance of a strong late stage pipeline. Again, a strong late stage pipeline affords pharmaceutical companies with a unique patent advantage. This patent advantage works similar to a wheel; once one patent expires Merck has 4 strong products behind it to cover for the loss of sales for that particular product. This action was witnessed with both Cozaar and Hyzaar which lost its patent in April of 2010 (“Merck Annual Report” 2011).
Merck states that “Revenue was also negatively affected by lower sales of Fosamax (alendronatesodium) and Fosamax Plus D (alendronate sodium/cholecalciferol) for the treatment and, in the case of Fosamax, prevention of osteoporosis, which have lost market exclusivity in the United States and in several major European markets, and lower revenue from the Company’s relationship with AstraZeneca LP (“AZLP”), as well as by lower sales of Gardasil [human papillomavirus quadrivalent (types 6, 11, 16 and 18) vaccine, recombinant], a vaccine to help prevent cervical, vulvar, vaginal and anal cancers, precancerous or dysplastic lesions, and genital warts caused by the human papillomavirus (“HPV”) types contained in the vaccine, and lower sales of Zocor (simvastatin), the Company’s statin for modifying cholesterol” (3).
In addition, Merck states that “the implementation of certain provisions of U.S. healthcare reform legislation during 2010 resulted in increased Medicaid rebates and other impacts that reduced revenues by approximately $170 million. Additionally, many countries in the European Union (“EU”) have undertaken austerity measures aimed at reducing costs in health care and have implemented pricing actions that negatively impacted sales in 2010” (3).
According to their Balance Sheet, penalties and interest in excess of $6 billion include a hefty $903 million in current liabilities along with unrecognized tax benefits. Purchase obligations total $3,862 million with loans payable and current portion of long-term debt totaling $2,400 million. Their long term total debt equates to $15 million with an interest related to debt obligations around $9 million. Unrecognized tax benefits total $903,000 with operating leases costing them $879,000. This brings their payments due by period total to $32,223 million. Merck states “due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for unrecognized tax benefits beyond one year, a reasonable estimate of the period of cash settlement for years beyond 2011 cannot be made.”
Merck’s cash flow statement shows a positive trend of finding new ways to increase profits. By this statement alone, an analyst should feel secure investing in Merck’s stocks and bonds. Since the company is able to pay for investing out of their operating profit calculations without having to borrow the funds. Their cash flow statement shows a tremendous jump from $3,392,000 in 2009 to $10,822,000 in 2010. According to their annual data, this is a $7,430,000 cash flow addition in operating activities. This is positive news for Merck and investors since their operating cash flow in 2008 was barely $4 million. Their cash flow is much healthier with their new mergers and acquisitions. These numbers indicate that they have enough cash to cover their investments totaling $3,497,000 in 2010 (“Merck Annual Report” 2011)..
In comparison to Merck’s competitors such as Abbot Laboratories and Bristol-Myers Squibb, the financial health of the company is pioneering and groundbreaking organizational cost control and investing without the need for financing. Abbott Laboratories ended 2010 with a gross profit of around $20 million. This is a mere $3 million increase on their 2009 annual profit. Further, in 2008 Abbot only saw $16 million. According to Abbot Laboratories Income Statement, most of their expense is selling general and administrative (“Abbot Financial Statement” 2011). Bristol-Myers Squibb Company performed slightly worse according to their Income Statement. Bristol-Myers ended 2010 with a gross profit of $14 million, slightly better than their 2009 annual profit of $13 million. Sales slipped in 2009 as they performed better in 2008 with $14 million annual gross profit. Bristol-Myers has an even spread across their operating expenses (“Bristol-Myers Financial Statement” 2011).
In comparison to Abbot Laboratories and Bristol-Myers Squibb Company Merck has a much better pharmaceutical financial stance. Bristol and Abbot seem to put more emphasis on their product pipeline than the drugs that are actually on the market which reflects in their annual sales. By reviewing each statement I learned how Merck has become one of the world’s largest and most profitable pharmaceutical companies. Because Merck has enough finances to cover their investments and research development they have a strong lead on competitors. Because their statements reflect good financial health and high foreseeability of continued groundbreaking gross profits there are no concerns. Managers can use this information to continue to make smart business decisions. These decisions directly impact operations which trickle down to profits. Analyzing annual and quarterly statements give management a better indication of how the company is spending money and where most revenue is originating. Management can also use these statements to communicate goals with all stakeholders.
In comparison to Abbot and Bristol that virtually have no new technological advances of acknowledgeable degree, Merck has several technologies that are pioneering the scientific and technical universe. According to Insightful Corp, one of Merck’s new technological advances is there High Throughput Screening or HTS. HTS allows researchers to test thousands of samples from Merck’s natural and chemical product “libraries” to determine how they affect disease processes” (1). Previously researches were limited to testing a few hundred samples daily where this technology allows a 500% production increase. Another technology is the Stat Server that Dr. Bill Pikounis pioneered, built and applied data analysis solutions to. This technology assists scientists with “limited statistical knowledge to produce a short list of promising chemical samples or important goal or entities” constructed by working closely with HTS scientist aimed at lowering “false positive” rates (1).
Oguamanon states that “The neglect of the health needs of the 90% of the global population and the apparent disconnect in patent-based pharmaceutical R&D between need and market is instructive. It shows that the impact of the reward and incentive narrative of the patent system on promotion of inventiveness and innovation is, like the overall market economic system, unable to optimally extend the benefits of innovation to the most needy” (6). Sales are expected to grow tremendously in the next few years mainly because more people have access to healthcare in countries where it was largely not afforded to the population. According to Oguamanon, patent-based pharmaceutical R&D does not “push or explore the frontiers of innovation to accommodate needs of the most vulnerable” (6). Merck has a detailed plan on its strategic long-term global plans to continue market products worldwide.
When it comes to benchmarking, Merck can look to Pfizer innovative approach to acquiring companies with different portfolios than their own and their “Invest to Win” plan. By acquiring companies strategically they are able to place “less of its revenue stream on products with patent expirations” thereby reducing their threat immensely to patent expiration. Pfizer’s “Invest to Win” plan implements focus primarily on late-stage molecules to treat Oncology, Pain, Inflammation, Alzhimer’s disease, Psychoses and Diabetes, as well as biologics and vaccines. Currently Merck has a wide variety of products with no specific focus. The idea behind Pfizer’s plan is to concentrate on all the major diseases that are effecting the population which will increase the demand for the drugs or therapy. In other words, by marketing products for major illnesses they are able to maximize full blockbuster drug potential. Also, Pfizer is breaking pharmaceutical ground by expanding into China. By forming a partnership with Japanese pharmaceutical firm Takeda they are able to promote the Type 2 Diabetes Actos (part of their “Invest to Win” strategy) across China (13). From a global perspective Merck can look to Pfizer’s innovative strategy to develop treatments for cancer types that are common in East Asia (14).
References
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Amst,Catherine, Amy Barrett, Michael Arndt, and John Carey. 2004. "THE WANING OF THE BLOCKBUSTER." Businessweek no. 3904: 36-38. Business Source Complete, EBSCOhost (accessed November 23, 2011).
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Collins, T. P. (2010). Is Gardasil Good Medicine?. National Catholic Bioethics Quarterly, 10(3), 459-469.
DATAMONITOR: MarketWatch: Pharmaceuticals. Retrieved from http://www.farmavita.net/content/view/1059/51/ on November 23, 2011.
DATAMONITOR: Merck KGaA. (2010). Merck KGaA SWOT Analysis, 1-8.
References
DATAMONITOR: Schering-Plough Corporation. (2009). Schering-Plough Corporation SWOT Analysis, 1-10.
Granier, L., & Trinquard, S. (2010). Entry Deterrence and Mergers under Price Competition in Pharmaceutical Markets. Applied Economics, 42(1-3), 297-309.
Herper, M. (2011). The Blockbuster Drug Comes to an End. Forbes, 187(7), 26.
J&J acquires Merck's stake in joint venture. (2011). Retrieved from http://finance.yahoo.com/news/JJ-acquires-Mercks-stake-in-apf-2857310221.html?x=0
Kesit, D. (2009). Strategic Analysis of the World Pharmaceutical Industry. Management, 14(1), 59-76.
Laustsen, G., & Neilson, T. (2007). Drug news. Prevent shingles with Zostavax. Nurse Practitioner, 32(6), 6-7.
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Merck Deploys Web-Based Visualization and Data Analysis Solution Enhancing Drug Discovery Efforts. (2011). Retrieved from http://spotfire.tibco.com/~/media/Files/Collateral/Case-Studies/Merck.ashx
References
Oguamanam, C. (2010). Patents and Pharmaceutical R&D: Consolidating Private–Public Partnership Approach to Global Public Health Crises. Journal Of World Intellectual Property, 13(4), 556-580. doi:10.1111/j.1747-1796.2010.00396.x
Pfizer’s acquisition of Wyeth brings scale but will fail to deliver sustainable sales growth. (2009). PharmaWatch: Monthly Review, 8(3), 31-33.
Risk-Benefit Analysis Methods for Pharmaceutical Decision Making- Where Are We Now?. (2006). Retrieved from http://www.ispor.org/news/articles/Dec06/RiskBenefitsAnalysis.asp
Schering-Plough acquires Organon BioSciences. (2008). PharmaWatch: Biotechnology, 7(1), 18-19.
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