A Review of Merck & Co.

Approach to R&D Methodology

HBR Case Review 9-601086

By: Emery James Baker MS, MBA
October 24, 2010

Contents
Nucleolus of control, Management Stance. ............................................................................................. 2

The Cost of R&D ........................................................................................................................................ 3

Collaborations at Merck............................................................................................................................ 4

Functional Analysis: .................................................................................................................................. 5

Additional Strategic Issues: ................................................................................................................... 5

Symptoms of business issues - Functional Analysis .............................................................................. 5

SWOT analysis ........................................................................................................................................... 6

Recommendations .................................................................................................................................... 7
Nucleolus of control, Management Stance.

Merck and Co. has been one of the leading pharmaceutical development and discovery firms for
a very long period of time and in actuality has been in existence since the late 1800‟s. After a
number of iterations and world wars Merck and Co has headquartered. in Whitehouse Station NJ.
However the seat of product discovery and development is not necessarily located in the wood
lined private acreage connecting Route 22 and Route 78 of western NJ. For a long period of
time Merck Research Laboratories has been headquartered out of Rahway NJ the former home of
the US based Drug Company since just after WW1.

Merck Research Laboratories is a unique entity of itself. MRL governs the research and
development of all Merck and Co science. As of the writing of HBR case 9-601-086, Dr Edward
Scolnick presided over the R&D giant. In 2001 Merck was doing very well. The company‟s
stock price had risen over 25% and the ticker price was at an all time high of $91.99 per share.
Viox, Zocor, Singular and others all had strong market position. Dr Scolnick was well aware
that now was the time to engage in strategic change if necessary for the next 20 years of
prosperity, even the long R&D development lead times and the patent protection timeframes of
Merck and Co‟s pipeline, now was the time to invest and act.

The case presents the basic question of “What to do next Merge, Collaborate, Isolate?” and for
Merck and Company where should the control of these decisions lie? Merck and company had
not followed the market in the consolation of pharmaceutical companies. While other firms
Johnson & Johnson and Pfizer were making great strides in Mergers and Acquisitions, Merck
had decided to spend more time and effort in isolation from the influences that integration would
bring. The firm and MRL leadership specifically felt that monies and efforts would be better
spent in creating a smaller more scientifically focused development community. Merck
increased their research investment during the earlier part of the new century but not necessarily
its footprint in terms of staff members or research and development efforts/ budget.

Merck did follow its mantra of recruiting the best and brightest often directly from academia but
was this science perfection in isolation? Merck believed that given the right minds the firm
would lead the development community. MRL management believed that the same research
ideas and exposure was fairly available to all the drug development community. The theory of
the MRL management was if Merck remained untainted by mergers and acquisitions they would
be able to use the skills of well rounded although new to enterprise development scientists to
excel in new drug development.

The Cost of R&D

Merck may have had it right after all. The cost of research and development had risen greatly at
the hands of the competing firms. A large amount of the additional expense was focused on the
costs involved in integration. Besides the obvious M&A expenses the acquisitions brought about
inflated staff and duality of work in the research side.

Johnson & Johnson as well as Pfizer, Novartis and many others struggled to integrate smaller
more focused firms into their corporate and R&D expense line. Profits to investment ratio have
swung the less than desirable way, Pharmaceutical Sales in relation to R&D spending were
upside down (as seen in the supporting materials of the case, i.e. example 3). However history
shows that the M&A activities of the time were just the beginning. A new trend was beginning
to emerge in Pharmaceutical organization, it was the beginning of the great consolidation and
Merck was not playing the game.

During the early part of this century the lessons learned by pharmaceutical management shaped
the next ten years. Smaller firms and sometimes large firms were consolidating not only to
reduce expenditures but to advance the science. Some processes and skill-sets were best drawn
into the parent company some were best left to partnerships and collaborative efforts. Eli Lilly
was a perfect case of Merger and Acquisition that would bring into Lilly a new science
(Collaborative Chemistry) the old guard at Lilly had now expertise in but desperately needed in
order to grow. This was demonstrated by our previous case study.
Collaborations at Merck.
Merck & Co did not completely isolate themselves from the M&A trend however acquisitions
were few and far between. The firm also did believe in Collaboration with outside firms and
academic entities. Collaboration was also on the rise during the time of the case writing. Let‟s
face it outsourcing is not an IT only concept. Even Merck and Co had great success in third
party relationships. At one point one third of Merck‟s successful product base came from
external relationships. However Merck was neither the leader nor a close second in external
partnering. The firm believed in limited partnering and also had a few obstacles to overcome

First and foremost was the Merck funding model. As stated in-house work and external work
fought for funding. This led to less than optimal spending. Also there were management and
control issues to overcome between MRL and the corporate headquarters organizations. Merck‟s
duality was an issue. MRL finally won the day and control was corrected as well as budgeting.
Collaborative services and partnerships fell directly under MRL leadership and funding for
internal and external projects was completely separated.

However all was not solved, if we look back to the MRL center of excellence mindset, building
an advanced community of in-house science, we quickly see issues arising. Merck had
established process, mindset and guidelines for external work that would affect them greatly.
Controls were enacted against partnerships that seriously limited the efforts. First, Merck would
duplicate the external partner process. Knowing and being able to take over development was a
key to the MRL collaboration efforts. This would slow development down greatly as well as
create a serious expense item.

Second Merck only would engage in very select collaborations with a focus on blockbuster drug
development. Merck had made a financial and research decision in-house that overlapped onto
its external partnerships. Merck had made a commitment to pursue those efforts that brought the
most ROI to the firm. Through its internal committees and review boards Merck focused on big
hitters and emerging markets for these drugs (i.e. cancer, obesity, etc) exploratory work suffered
and so did collaboration on exploratory sciences of which many Biotech firms outside of Merck
were involved in.
Lastly Merck was focused on early stage development efforts only. While other firms would
establish collaborations on proven products near release, Merck and Co felt that early science
was more rewarding and profitable since the collaborative deal making was less in favor of the
outside firm.

Functional Analysis:

Additional Strategic Issues:

Merck & Co MRL made serious strategic decisions that would influence their growth and survivability
over the next ten years:

 Keep mergers and acquisitions to a minimum

 Focus R&D Spending on Blockbuster drugs for emerging markets

 Restrict Collaborative efforts to focused, small ventures ran and managed from MRL..

Symptoms of business issues - Functional Analysis

1. Not agile in relation to smaller firms

2. Organizational structure very restrictive due to the parent companies size
3. Not open to widespread exploration (outsourcing)
4. Not resilient, cannot absorb viox issue soon to come
5. Not enough partners and internal competitors
6. Inexperience employee’s (new collage hires)
7. Building in house and not buying enough solutions , reduced incentive buy vs. build issues
8. Not expanded enough, closed culture
9. Authority Vs. Responsibility, battles between MRL and Corporate for power
10. Narrow Channels, need to embrace more collaborative opportunities
11. Failures of acceptance other organizational issues from one division to another
12. Weakening Pipeline, Generic Threats will occur but too far away to motivate
Management Functions/ Planning Organization Control

Business Functions

Top Management 1, 8, 12 2, 3, 7,9 2, 3, 4, 9

Marketing 10

Finances 3 3 1

Production/ Sourcing 12 5 5

R&D/ Technology 11, 12 12 11

Human Resources 3 7 6

SWOT analysis
Merck’s (MRL) Strengths
 Strong presence in blockbuster market, low competition to date
 Financial strength
 Strong brand value
 Scientific pedigree

Merck’s Weaknesses
 Few novel products
 Underperformance of pharmaceutical process (too many control issues, not flexible in collaboration efforts
 Huge company moves to slow

Merck Opportunities
 Smooth Acquisitions & Integrations
 Growing global market
 Many small firms to collaborate with

Merck’s Threats
 Other firms Mergers and acquisitions best opportunities already taken
 Increased competition due to other firms perfecting M&A as well as Colaberation processes
 Generic competition to mainstay drugs
Swot Analysis Merck & Co. including actions taken by Merck Research Labs. Timeframe 2001

Merck’s (MRL) Strengths Merck’s Weaknesses

1. Strong presence in blockbuster market, 1. Few novel products
low competition to date 2. Underperformance of pharmaceutical
2. Financial strength process (too many control issues, not
3. Strong brand value flexible in collaboration efforts
4. Scientific pedigree 3. Huge company moves to slow

Merck Opportunities Merck’s Threats

1. Smooth Acquisitions & Integrations 1. Other firms Mergers and acquisitions best
2. Growing global market opportunities already taken
3. Many small firms to collaborate with 2. Increased competition due to other firms
perfecting M&A as well as Colaberation
processes
3. Generic competition to mainstay drugs

Recommendations
Hindsight being 20/20 I would have altered both Merck & Co‟s approach to M&A as well as
their collaboration policies. Perhaps not as promiscuous as a Johnson & Johnson methodology,
during the earlier part of the century J&J had made a large number of M&A‟s to the point were
now the firm resembles that of a holding company rather than a Pharmaceutical firm.

Looking back on Collaborative investment at the time and M&A „s per year as a metric, Pfizer
and Aventis appear to have throttled both at a reasonable rate to become successful. I believe
that the larger firms are to slow to react quickly to market and that (as is pointed out in the case)
the better part of new development is done outside of the pharma giants.

If there is a lesson learned over the past ten years of pharmaceutical company development it is
that new discoveries flourish in smaller companies with focused teams. Major drugs are then
take from the research companies, developed at scale, productized, marketed and sold to great
success by the larger firms with the personnel, skills and resources to mature the breakthrough
drugs.

The Merck model did not support this framework. Small internal labs spread across the nation
and an almost aristocratic approach to collaborations worked somewhat, but not necessarily as
well as they may have hoped. In years after the case Merck seems to have changed its ways.