Merck Open for Innovation free essay sample

Founded in 1891 as an American subsidiary of his German namesake, Merck was once considered the â€Å"undisputed king of the pharmaceutical industry with ground? breaking drugs†(The Chief Executive 2003). But for the last decade, Merck has gone through a period of stagnation; it began to lose exclusivity patents on blockbuster drugs and has witnessed Pfizer’s rise to top place in the industry. It seemed now that internal RD that was once the company’s main asset would not be enough to compete in an industry defined by innovation. Thus the recent 2009 merger with rival Schering and Plough could be the beginning of a new take by Merck. Could Merck prosper with an open innovation strategy? Structure of the pharmaceutical industry An analysis of the industry is essential to gain a better insight on how Merck is operating and how well it is performing The structure, conduct, performance model was developed by economists in the 30s. We will write a custom essay sample on Merck: Open for Innovation ? or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Its aim is to explain the different performances by companies within the same industry. It claims the industry structure affects the firm conduct, which in turn affects the performance of the company. There are four main type of industry structure with different characteristics. In liaison with the SCP model Michael Porter developed the Five Forces model in which five forces need to be considered while analysing the industry. The first one is the Threat of entry determined by entry barriers, which are obstacles that determine how easy one can enter a market. A high entry barrier signifies a high profitability. The high barriers are usually due to high costs of gaining and maintaining a place in the industry (infrastructure, government and international trade regulations). For the pharmaceutical industry the threat of entry is quite low due to the high costs of RD ($130 billion in the world last year1, $7. 7 billion for Merck last year2), the long duration it takes from drug discovery to production (approximately 15 years) and the government regulations (difficult to get an FDA approval). The second force, Power of Suppliers, is how much pressure the supplier can exert on the industry. This power is gained by the demand of the supplied product, the unavailability of close substitutes and its uniqueness. In pharmaceutics the suppliers are chemical companies providing raw material. Due to the abundance of these companies and the fact that they provide more or less similar products the power of suppliers is very low. The Power of Buyers is how much pressure buyers can put on the suppliers to reduce prices or increase quality. In this case the power of buyers is high because hospitals and healthcare professionals are the intermediate between patients and the drugs prioritise efficiency and lower costs to brand name. The Internet has also increased the medical knowledge of patients (Mullins, 2007, p89). The Threat of Substitutes is the threat that products from other industries will meet the needs of customers. With patents expiring more quickly the generic drug market (e. g. Boots) and natural remedies are threatening the market (Mullins 2007, p90). The Rivalry among the competitors is the intensity at which firms fight for market share and profits. The higher this is the less profits can be made. There is high competition in the pharmaceutical industry but companies are also keen on maintaining profits with thousands of recent mergers. The industry is composed of few large firms and most of them are the result of mergers to gain market share and specialize in one area of the industry. It seems to present all the characteristics of an oligopoly: long and costly research period, local and international regulations, a handful of large corporations and a considerable pricing power. The pharmaceutical industry is still very profitable and attractive with stable growth and more than ten companies in Fortune, 500 with combined profits around $28 million (Mullins, 2007, p 91). The main nuisance is high and costly entry barriers and high buying power. SWOT Analysis Merck has much strength. For one, Merck’s name carries much weight in the pharmaceutical industry, it is a company that has been around for a long time and has established a name for itself. Also, it has a large RD department that has been instrumental in shaping the current drug industry. For example, their drug ‘Insentress’, has been, and still is, one of the leading HIV treatment drugs. In addition, Merck operates on a very large scale; it is multinational corporation with much power in the industry and sells its products all over the world. Merck’s name has garnered much support from their customers, who have over the years become loyal to the company and their products. However, Merck also faces several challenges. Most notable was the VIOXX scandal: the drug was linked with increasing the risk of heart attacks and strokes. This resulted in their paying a 4.  58 billion dollars in damages to the families of the victims who suffered from such side effects from the use of VIOXX. From a financial perspective, Merck also experienced liquidity problems, in part caused by their high RD expenses. Furthermore, they have also had to face charges by the government for the violations of several rules. Merck possesses many opportunities as well especially after the merger with Schering? Plough which exposes Merck to larger scale of opportunity for research and develo pment (notably the biotechnology) and has higher means to finance it. Merck can also expand its grasp by operating in additional growing countries and make a name for itself via donations to healthcare and charities. Despite its powerful presence in the industry, Merck still faces several real threats. Despite the merger, Merck still faces competition for profits and market share notably from its rival Pfizer. Furthermore the recent loss of patents and the rise of the generic market have caused Merck to lose significant credibility. The Schering ­Plough merger: pros and cons â€Å"A drug deal that is mainly about drugs†(NY Times 2009) It was in fall 2009 that Merck merged with fellow pharmaceutical company Schering? Plough in a deal involving $41 billion. Although Merck had acquired SP, it was officially put on paper as a reverse merger to avoid giving up rights to a popular drug Remicade to Johnson Johnson. (NY Times 2009) This merger can have many advantages. Firstly the merger would allow the companies to combine their sales and market share to reach $37 billion and 5.  5% (IMS Health, 2008) respectively to place second after Pfizer. By partnering with a potential rival Merck also eliminates a competitor. â€Å"The deal should afford the opportunity to cut costs. Mr Clark said that 15% of the combined firms 106,000 employees would lose their jobs†(The Economist, 2009). The latter is one of the many examples of economies of scale the company would benefit from by operating on a larger scale and spreading the fixed costs. These costs sa vings are believed to around an annual $3.  5 billion and would allow the company to fund RD and previously risky investments (PharmaNews, 2009) Merck can also benefit from SP’s investments in biotechnology ($14. 4 billion for Organon), drugs based on living cells which are very hard to copy for the generic market (NY Times, 2009). SP also retains drugs with longer patents to replace the likes of Fosamax and Singulair that have fallen to the generic market. But with benefits also come costs. For instance, less competition and higher market share can lead to less pressure and thus lower  quality products. Furthermore, the merger may lead to managerial difficulties and hinder the integration process. Decisions are harder to make due to the â€Å"larger scale† aspect. Another handicap is the long and costly settlement case with JJ, which has involved a $500 million payment plus half the profits of Remicade sales. (Johnson Johnson, 2011) Despite minor inconveniences th e merger presents Merck with high opportunities for investment, RD, development of longer lasting drug patents and innovation. Merck’s Innovative Strategy: A change for future success The strategic move allowed the Merck to sell their products in over 140 countries as well as a sales jump from 10. 5 to 25 billion. By making their products accessible internationally they broaden their target clientele. However, their closed innovation approach made it difficult to keep up with many of their competitors. Traditional pharmaceutical companies tend to strongly believe that closed innovation is the way to achieve long? term success. Closed innovation involves all processes made internally (Spasic, 2011). This approach however, has become obsolete in today’s business practice. Open innovation is the way to go for Merck. Working with the closed innovation model will ultimately cause Merck to lose its cutting edge. Not changing in an ever? changing world is unhealthy for company. As Charles Darwin once said, â€Å"It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change†. Merck must let go of its past and develop its future by working on its present. Open Innovation at Merck: cost ­effective and creative or dangerous? Open innovation is the opening up of a company’s business model by accepting and integrating ideas stemming from an outside source as well as sharing their ideas and unused technologies to allow other firms to use them and unlock their potential (Berkeley). This may sound counter? productive and almost self? destructive. It is not. The other firms, in turn, share their information which Merck can use, thereby unlocking their own potential. It becomes a battle for identifying which information and technologies will have a future yield. This can be dangerous as well as advantageous for Merck, in essence, it can be compared to a double? edged sword. By forming strategic alliances and bringing in new human capital as well as continuing to innovate internally as well, Merck can set itself upon a path that will allow it to maximize their potential. Open innovation also allows the firms to get rid of any internal inventions it does not intend to pursue and therefore they do not need to patent it, which can be a costly process since the inventions may not even bear fruit. These inefficiencies and those additional costs are avoided. InnoCentive (a smaller competitor) has developed a global network of independent researchers, allowing a great sharing of information and knowledge with a higher success rate than the internal research and development approach at 1/6 of the cost. A higher success rate means more drugs discovered and more inventions, which means more products to be sold, leading to higher returns and as a result more value to its shareholders. However, it should also be noted that there is a high risk with attempting to integrate open