Business_Environment

Business Environment Research - Merck & Co., Inc. Susan Brenner Mgt. 521 May 16, 2011 Heather Rideout Merck & Co., Inc. Business Environment Merck & Co., Inc. is one of the Big Pharma companies operating worldwide. The term “Big Pharma” is used to describe companies with revenue in excess of $3 billion or in combination with research and development expenses in excess of $500 million. Merck and Schering-Plough merged in November 2009 to create a new company. Today Merck & Co., Inc. is the second-largest health care company in the world. Merck is also a global leader in consumer products and animal care (Merck, 2011). According to 2009 revenues, Merck’s rank is 6th, Johnson & Johnson’s rank is 7th, and Eli Lilly & Co.’s rank is 8th (Roth 2011). Financial Health of Merck & Co., Inc. Determining the financial health of any organization requires a review of three important accounting documents; income statement, balance sheet, and cash flow. A comparison to other similar companies is imperative. In this paper, Merck is in comparison with Eli Lilly (Lilly), and Johnson & Johnson (J&J). The income statement reflects the company’s profits. Important components are: 1) Total Revenue – value of sales of goods. Total revenue has nothing to do with profit. The revenue figure is important because a business must bring in money to turn a profit. If a company has less revenue, all else being equal, it is going to make less money (Kennon, 2011). For the period ending March 2011, Merck shows total revenue of $11.6 billion, Lilly shows $5.84 billion and J&J shows $16.8 billion. The comparatively large amount of revenue that J&J shows can be attributed to their diversity into medical devices and diagnostic equipment and their expansive consumer product line. 2) Gross Profit – the difference between total revenue and cost of acquiring that revenue. For the period ending March 2011, Merck shows gross profits of $7.5 billion (65% GPM), Lilly shows $5 billion (86% GPM) and J&J shows $11.4 billion (70% GPM). The gross profit margin is calculated by dividing the gross profit by the total revenue. The gross profit margin is the percentage of a company's sales left after cost of goods sold to cover payroll, rent, taxes, advertising, and other expenses. The GPM should remain fairly stable over time. Big changes either reflect an accounting error or fraudulent activity. The GPM of Merck, Lilly, and J&J are close in comparison, which provides more information than mere revenue figures. 3) Operating Income – the measure of earnings capacity. Operating income can be used to gauge the general health of a company's core business or businesses (Kennon, 2011). For the period ending March 2011, Merck shows an operating income of $2.2 billion, Lilly shows $1.3 billion and J&J shows $4.6 billion. As of December 2010 however, Merck showed a negative $5.6 million in operating income most likely resulting from its doubling of research and development expense for that period. Lilly and J&J have remained stable over the last four reporting periods. 4) Net Income – often referred to as the “Bottom line”. Many people mistakenly believe that a higher net income figure each year means the company is doing well. For example, Merck shows a total net income at the end of March 2011 of $1.043 billion while showing a negative $5.32 million at the end of 2010. Failure to look at the whole income statement may result in the assumption that the company was failing during that period. That was the period that Merck doubled its research and development expense and reported a loss of operating income after depreciation. For the period ending March 2011, Lilly shows $1.1 billion and J&J shows $3.5 billion. Lilly’s total net income has remained stable for the last four reporting periods whereas J&J shows a near $1.5 billion drop as of the end of 2010. This could be the result of a $1.1 billion loss of other income. Net profit margin is calculated by dividing net income by revenue. Merck shows a net profit margin of 9%, Lilly shows 18% and J&J shows 21%. All else being equal, the higher a company's profit margin compared to its competitors, the better. Using net profit margin, J&J is the strongest company of the three however, trading at $66.57 per share, it is the most expensive. Merck trades at $36.63 and Lilly trades at $38.28 making them a more affordable choice. These figures were obtained on May 11, 2011. The balance sheet is a “snapshot” of finances. The balance sheet shows the value of assets, amount of debt, amount of inventory, and the short term money available. Three important components of the balance sheet are: 1) Assets – the value of what the company owns. For the period ending March 2011, Merck shows $29.1 billion in current assets ($106 billion in total assets), Lilly shows $15.4 billion ($32 billion in total assets) and J&J shows $47.3 billion ($103 billion in total assets). Merck shows the highest total assets due to a showing of $40 billion in intangibles. Intangibles on a balance sheet can be quite deceptive because the numerical value is basically meaningless and can be artificially generated or inflated. 2) Liabilities – Current liabilities are debts that the company owes due within one year and total liabilities include long-term obligations. For the period ending March 2011, Merck shows current liabilities of $15.6 billion ($51 total), Lilly shows $7.7 billion ($17.8 total) and J&J shows $23 billion ($46.3 total). Merck shows the largest amount of long-term debt. 3) Shareholder Equity - this is the net worth of a company. Shareholder equity consists of cash paid by investors who purchase stock, and retained earnings. J&J has the highest retained earnings of the three companies in comparison. This means that they are holding on to almost $78 billion of profits not being distributed as dividends to stockholders. The cash flow statement discloses how a company raises money and how it spends those funds during a given period. Generally speaking, if a company is consistently bringing in more cash than it spends that company is considered to be of good value. (Richards, 2011) Three main components of the cash flow statement are: 1) Operations – cash generated over the year from the organization’s core business transactions. For the period ending March 2011, Merck shows $10.8 billion in net cash from operating activities, Lilly shows $ 1.2 billion and J&J shows $16.4 billion. This figure that J&J shows, $16.4 billion in cash, plus the $78 billion in retained earnings reflects that they hold on to almost $95 billion of liquidity. 2) Investing – cash spent for investments that will lead to future growth. Each of the three companies in comparison show negatives in this area. J&J leads with $7.8 billion and Lilly shows the least of $40.7 million. A higher amount of cash spent may indicate a company’s belief in their future growth potential – this portrays confidence for the investor. 3) Financing – the movement of cash from financing activities such as taking on a loan or issuing stock to new investors. How much cash a company can generate is one of the more important measures of its health. Again, Merck, Lilly, and J&J all show negatives in this area. These negative numbers can mean the company is servicing debt, but it can also mean the company is making dividend payments and stock repurchases, which investors may be glad to see (McClure, 2011). Technological Advancements and Comparison According to Jean-Jacques Garaud, global head of Exploratory Development at Novartis, “There has been a significant shift in our understanding of drug development. A host of new technologies such as biomarkers that allow us to pinpoint the activity of a new target or pathway are now available to us and the use of these new technologies should be integrated into pharmaceutical company business models" (Barnes, 2006, pg. 1). Merck currently has five investigational medicines under regulatory review. Included is information regarding competitive drug research by other pharmaceutical companies. * Victrelis, Merck’s investigational oral hepatitis-C protease inhibitor. This drug won unanimous FDA approval for sale, which is considered a major advance because no new drugs have been developed within the last 10 years. Vertex Pharmaceuticals will win FDA approval in late May for its drug Telaprevir, which reports a 79% cure rate. Market analysts show a 60-40 market share split with the Vertex product in the forefront. Merck is counting on their marketing capabilities to overcome this disparity. * An investigational formulation of Janumet for type-2 diabetes under standard review by the FDA. Boehringer Ingelheim Pharmaceuticals, Inc. with Eli Lilly & Co. have FDA approval as of May 2, 2011 for Tradjenta, a prescription medication used for type-2 diabetes. Bristol-Myers Squibb Co. and AstraZeneca announced in March that the FDA has accepted for review a new drug application for Dapagliflozin, an investigational compound for the treatment of type-2 diabetes. Globalization and Strategy In 2012, the global pharmaceuticals market is forecast to have a value of $758.6 billion, an increase of almost 18% since 2009. The global environment is becoming increasingly complex and requires more sophisticated approaches to strategy. Globally, United States pharmaceutical companies compete with other Big Pharma companies based elsewhere. The top three global pharmaceutical products are: Lipitor (Pfizer), Plavix (Sanofi-Aventis of France), and Nexium (AstraZeneca). Important variations in consumer needs are recognizable regionally, locally, and globally (Stonehouse, 2004). Liptor, Plavix, and Nexium are only a small example of products used globally. Many pharmaceuticals and vaccines are developed for specific markets and for specific geographical needs. One example is Merck’s development and distribution of more than 2.5 billion tablets of Mectizan for the treatment of River Blindness in over 30 countries. As a result, the World Health Organization (WHO) has estimated that River Blindness will be eliminated in parts of Africa. Another example is Sanofi-Aventis’ six-year collaborative HIV vaccine trial in Thailand. This trial, completed in 2009, has demonstrated that an investigational HIV vaccine regimen was safe and modestly effective in preventing HIV infection (Sanofi-Aventis, 2011). Today AIDS is the number one killer in Africa and the fourth worldwide. A significant factor in the global environment is the increased use of generic pharmaceutical drugs. The number one leader of the production of generics is Novartis, based in Switzerland. Another factor affecting United States pharmaceutical companies is that the number one producer of vaccines is Sanofi-Aventis, based in France. Outsourcing is another significant global factor. The most important benefit of companies outsourcing production is reaching economies of scale. When an economy of scale is achieved by a business, they can lower the price of their products which opens their market to more consumers. In terms of economies of scale, domestic spending power and quality of life, many people in developing nations are compensated exceptionally well. India leads the world in outsourcing with a cost of living that is 1/5 that of the United States. Outsourcing has three major benefits: 1) Increased tax benefit 2) Achievement of economies of scale 3) Decreased time to market One outstanding drawback is that Americans largely blame unemployment on outsourcing. While this dissention is a concern of organizations, it will have little effect on the decision to outsource. Benchmark Analysis Merck, Lilly, and J&J all have patient assistance programs and are in comparison in this paper as a benchmark analysis along with identification of best practices. The Merck Patient Assistance Program and Merck Vaccine Patient Assistance Programs are being used by millions of patients in the United States. For United States patients at or below 400% of the FPL (Federal Poverty Level), even if temporary, assistance is available. For a household income at or below $43,320 for individuals, $58,280 for couples, and $88,200 for a family of four, assistance is available through this program. Eli Lilly provides a patient assistance program called Lilly Cares™ that is available for those at or below 300% of the FPL. Patients must be United States residents, and have no prescription drug coverage. Johnson & Johnson provides several assistance programs. The Johnson and Johnson Patient Assistance Foundation, Participation for Prescription Assistance, and Together Rx Access. The conditions for these programs are that patients be Unites States residents, treated by United States physicians, and have no prescription drug coverage. For the Johnson & Johnson Patient Assistance Foundation, for self-administered products the income guidelines are as follows: at or under $21660 for individuals and $29140 for couples, for physician administered products: at or under $43320 for individuals and $58280 for couples. The Together Rx Access has similar income guidelines. All three pharmaceutical companies provide assistance, and all recently have increased availability due to the current economic crisis. Best practices are identified as follows: * Merck’s best practice is their Clinical Enrollment Optimization * Lilly’s best practice is their Lubrication Program Audit developed in 2009 * J&J’s best practice is their Corporate Crisis Management following the Tylenol recall of 1982 Conclusion Despite the recent Vioxx lawsuit, the unusually high reporting of intangibles, and global economic concerns, Merck remains a very strong and financially stable Big Pharma company. Merck is comparable in all areas to its competition, and shows growth potential for the rest of 2011. Big Pharma companies are concerned with loss of patent protection and the development of generic pharmaceuticals, Merck is no exception. References Barnes, K. (2006, Octobe 20). Big Pharma Business Model Needs to Change. Retrieved from http://in-pharmatechnologist.com Bio-IT. (April 13, 2011). Bio-IT WOrls Announces 2011 Best Practices Winners. Retrieved from http://bio-itworld.com Richwine, L., & Berkrot, B. (2011, May 13). Update 3-U.S. FDA Clears new Merck drug for hepatitis C. Retrieved from http://www.reuters.com Roth, G. Y. (2011). 2010 Top 20 Pharmaceutical Companies Report. Retrieved from http://contractpharma.com Stonehouse, G., Campbell, D., Hamill, J., & Purdie, T. (2004). Global and Transitional Business: Strategy and Management (2nd ed.). West Sussex, England: John Wiley & Sons, Ltd.. EzineMark. (2011, March 24). Globalization and Outsourcing. Retrieved from http://EzineMark.com Forbes.com. (May 11, 2011). Eli Lilly & Co.. Retrieved from http://finapps.forbes.com Forbes.com. (May 11, 2011). Johnson and Johnson. Retrieved from http://finapps.forbes.com Forbes.com. (May 11, 2011). Merck & Co., Inc.. Retrieved from http://finapps.forbes.com Kennon, J. (2011, Spring). Total Revenue or Total Sales. 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