The Evolving Finance

Function:
Judy C. Lewent at Merck & Co., Inc.

Introduction

In 1994
Sales 9.7 Billion
Net income 2.4 billion
Since 1985 sales growth 15%+ pa
Market capital 5 billion (1980) to 45
billion (1993)
Operated 31 production facilities in 61
countries with 11,600 employees

Transition

Finance personnel would become involved earlier and

more directly in many business decisions, contributing

Mercks Finance Function

Focused functional knowledge

Broad knowledge base in several additional

disciplines

Mercks strategy, value creating decisions

Communications skills

Monte corlo simulation, option pricing

Managerial skills

Applied economics, finance, applied statistics

Analytical skills

Accounting, cash management, tax etc

Client relationships

Learning capability

Update knowledge in analysis skills

Finance decisions

Control
Budget
Traffic cop

Business decisions

Client relationship
Effective decision at business level

Financial Evaluation & Analysis

(FE&A)

Created in 1985

Investments in Research, Manufacturing etc

Report to CFO
Not to controller, treasurer
Analytical skills
Advisory responsibility

Analytical tools
Clients
Not limited to CEO, Board etc

Mid level executives, Division heads, spending decisions

Anyone making significant investment decision was to be

provided before hand with quantitative assessment of risk
and returns

what decision, what

analysis

Financial Evaluation & Analysis

(FE&A)

Credibility

Quality of analysis
Documentation of their value

Value addition is difference

Decision on basis of analysis

Do it in the old way

Lewent Career

Acquisition and Capital

analysis

Financial check on valuation analysis in

various divisions
Cost of capital at Mercks
Capital investment decisions
Head of licensing becomes a regular
client

Lewent Career

Assistant controller

financial evaluation and control of

MSDRL
Development of original, interpretive
financial models for R&D projects
R&D projects faced relatively little
economic or financial scrutiny

Complexity of R&D process

Lack of historically adequate data
Computing resources

Lewent Career

Assistant controller

Top priority

Capability to asses risk and return

Ability to assess contribution of R&D to firm value

Inputs
Mote carlo simulation
Capital expenditure
Macro economic variables
Production and selling
costs
Product prices and
quantities

Out puts
Cash flows
Revenues
Return on investment
Net present value

Executive director
Analysis

Manufacturing
R&D

Option pricing for

structure licensing
agreements

Treasurer
Dynamic long term
hedging model
Commercial prospects
of products under
development
Improved
allocation/optimization
of resources
Debt restructuring
Treasury activities

Transferability

Can this skills or tools developed in

Merck transferable?
Success path

Understanding the questionnaires business

Worked with them
Designed a tool for analysis

Financial Programming and

Organizational Adaptability

Introduction of innovative and new

approaches
Adaptability of the new processes
Short term benefits

Research planning model

Yearly predections of Mercks future market
capitalization

Long run horizon benefits

R&D eventually boost by factor 10

Thank You