S TRATEGY IN THE TWENTY - FIRST CENTURY PHARMACEUTICAL INDUSTRY : M ERCK & C O. AND P FIZER INC. MGMT 495 Summer 2011: Kelly Bossolt Marta Kovorotna Sarah Smith

P HARMACEUTICAL I NDUSTRY 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

G LOBAL F INANCIAL A NALYSIS : Global Industry Forecast 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: market-trends-2010.html

G LOBAL F INANCIAL A NALYSIS :

F INANCIAL A NALYSIS : P RESENCE OF G ENERICS 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: Pfizer Goes Generic:

F INANCIAL A NALYSIS : P FIZER I NC AND M ERCK & C O. PFE:Dec 31, 2010Dec 31, 2009Dec31, 2008 Total Revenue67,809,00050,009,00048,296,000 Net Income8,257,0008,635,0008,104,000 MRK:Dec 31, 2010Dec 31, 2009Dec 31, 2008 Total Revenue45,987,00027,428,00018,502,000 Net Income861,00012,899,0001,753,

F INANCIAL A NALYSIS : P FIZER I NC AND M ERCK & C O. Pfizer Inc: Ability to service debt: EBITDA Billion Operating cash flow: Billion Merck & Co.: Ability to service debt: EBITDA 7.01 Billion Operating cash flow: Billion

E XTERNAL A NALYSIS : 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 pharmaceutical mergers and acquisitions – over $1 trillion Pfizer, GlaxoSmithKline, and Sanofi-Aventis

E XTERNAL A NALYSIS : 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 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

E XTERNAL A NALYSIS : OVERVIEW For 20 years the U.S. granted patent protection to new chemical entities vs. FDA patent years on drug. “Generic versions”, 1984 – Hatch-Waxman Act Increasing competition – product reformulations. Economical process for mass production.

E XTERNAL A NALYSIS : O VERSEAS VS. D OMESTIC 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)

I NTERNAL A NALYSIS : 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

I NTERNAL A NALYSIS : M ERCK & C O. 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

I NTERNAL A NALYSIS : M ERCK & C O. 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

I NTERNAL A NALYSIS : P FIZER I NC. “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

I NTERNAL A NALYSIS : P FIZER I NC. 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

I NTERNAL A NALYSIS : 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

R ECOMMENDATIONS : Invest more in R&D Without drugs to sell, there is no business Merck & Co. Marketing Pfizer Inc. No more mergers

R ECOMMENDATIONS : 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.