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Sri Bujang

on 9 December 2013

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What we will be covering?
History of Merck
Structure of the Pharmaceutical industry (Porters five forces)
SWOT Analysis
Merck’s innovation strategy
Open innovation and value of shareholders
Implementation issues
Positive and negative impact of SP for Merck’s transition
Merck’s performance 2013

Pharmaceutical industry
1. Rivalry amongst existing competition: is high, key players such as Pfizer, Glaxo-Smith-Kline compete strongly and closely in the market
2. Threats of new entrants: is seen as low due to,
High costs related to research and development
Government regulatory barriers
High capital costs, e.g. technology
3. Threat of substitutes: medium, as generic drug companies do not have high costs associated with research and development of new drugs
4. Bargaining power of suppliers: is low as sales for the pharmaceutical industry concentrate on a handful of large players only
5. Bargaining power of buyers: could be rated as medium due to pressure from hospitals, health care organizations to keep prices in check

SWOT Analysis
Merck and Co. History
A global research company that discovers and develops products to improve health.
Became known as the ‘’Harvard of Pharma’’ in 1950’s.
Attracted the most highly respected and talented scientists from around the world
Merck was a internal focused, research driven culture (closed innovation strategy)
One of the largest pharmaceutical companies in the world
However due to tough regulatory requirements, competitive market place and a harsh economic climate, The C.E.O of Merck decided that change was necessary.

Historical success
Investment in R&D
Well established reputation
Good financial background
Highly respected Scientists

Rising drug development costs
Intensive FDA reviews for approvals
Government health programs
Lack of innovation
Legal liabilities

Open innovation
Mergers / Acquisitions
Joint ventures
PhARMA investment

Generic Drugs
Shorter patent exclusivity
Decreasing pharmaceutical industry
Open innovation
Price Pressures
FDA approval

Contrasting Principles of open and closed innovation?
Can open innovation help Merck to succeed?
Positive effects
Merck and Schering Plough had previously each other’s two biggest rivals; by combining the two companies, not only did they eliminate a lot of competition, but Merck also took a step towards open- innovation.
Merck gain access to a lot of new and groundbreaking scientific intelligence and knowledge by merging with Schering Plough
This new knowledge and information would be invaluable to Merck when formulating and marketing new products
Schering plough (SP) was renowned globally, this global recognition and reputation would be transferred onto Merck

Increased economies of scale
Negative effects
Could potentially sell a billion-dollar drug to its direct competitor
Many scientists feel protective of their intellectual property

Is the strategy cost-effective and brings value for shareholders?
Collaborative effort with (SP) international sales grew from 10.5 billion to 25 billion
Open innovation strategy led to an increase in for the approval of new drugs
Shareholder value increased at its peak in the year of 2009 when merged with (SP)
Helped to facilitate cost containment

Open innovation
Implementation issues
Merck’s cultural resistance to change
Difficulty in integrating two large organizations due to differences in corporate culture.
Increased complexity to Merck’s structure, business and geography operations

How to overcome resistance to cultural change?
Connect with the internal environment through informal networking, conferences, and publications with other scientific organizations.
Encourage employees to support and accept the open innovation system

Current Performance
Merck’s profits plunge 50% (July 2013). ‘’ The drug maker Merck’s second-quarter profit fell by half as generic competition hurt revenue from several older medicines this year’’
2013, worldwide sales decrease by 11%
Why is this? Is it because of the expiration of many of Merck’s patents?
Alternatively, is this dip in profits due to the marketing rights that Merck had to relinquish to Johnson and Johnson?

Stock Return
Source: Strategic Management Lecture 5, 28 October 2013
Full transcript