Merck Case Study

1. How has Merck been able to achieve substantial returns to capital given the large costs and lengthy time to develop drugs?

Analyzing Merck’s ability to achieve substantial returns to capital requires an in-depth analysis of the pharmaceutical industry where Merck is working in.

After this analysis, we try to figure out Merck’s company-specific success factors which have been the basis for the prosperous circumstances Merck has been facing in the early 2000’s as well as today.

Based on these insights, we try to evaluate the question whether Merck should license the drug Davanrik independent from our findings in the exercises 2-4, taking into account possible alternatives for the company during this decision process.

Pharmaceutical Market

The pharmaceutical industry is coined by an intense international competitive pressure. The combination of an increasing medication of generic substitutes and a world-wide tendency towards cost reductions in the public health sector leads to a severe price competition. Additionally, a large number of expiring patents, constantly increasing Research & Development costs and decreasing market exclusivity strongly put a strain on the future prospects of the pharmaceutical companies.

Furthermore, the amount of development failures in the third phase of the Research and Development process has significantly exceeded the usual amount in the years 2000 and 2001.[1] Taking into consideration the fact that only 5 out of about 10,000 screened discoveries enter clinical testing at all, it can easily be concluded how harmful such an unusual increase in failures shortly before the approval is to the affected companies.[2]

The following picture (extracted from TNS Healthcare, the world's leading healthcare focused primary research and consulting company) [3] shows the industry-specific product life cycle of a drug from the beginning research to the point where the patent expires and the generic substitutes are allowed to enter the...