Strategy in the 21th Century

9-707-509

REV: NOVEMBER 16, 2007

DAVID COLLIS TROY SMITH

Strategy in the Twenty-First Century Pharmaceutical Industry: Merck & Co. and Pfizer Inc.

We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. — George Merck, Founder of Merck & Co. In May 2005, Richard Clark became CEO of Merck & Co. A little over a year later, Jeffrey Kindler was named CEO of Pfizer Inc. Clark had joined Merck in 1972 and came from a manufacturing background, while Kindler had joined Pfizer from McDonald’s in 2002 as general legal counsel.1 Like their CEOs, the two companies had historically followed very different paths; Merck was known for its research expertise, while Pfizer was considered a marketing powerhouse. Though different, the CEOs of the two companies faced similar challenges, including headline-grabbing litigation, imminent patent expirations, new technologies, rising drug development costs, generic-drug substitution, international competitors, and complex public-policy issues. How each tackled the difficult questions of scope, size, and vertical integration they faced would determine their future success.

Industry Size and Composition

In 2005, sales in the global pharmaceutical industry reached $602 billion, up from $298 billion in 1998 (Exhibit 1).2 By 2010, the global pharmaceutical market was expected to exceed $767 billion.3 Growth of the industry was attributed to increasing life expectancy; rising incomes, especially in poorer countries; and the discovery of new drugs for major diseases, such as coronary failure. One study found that the average life expectancy in 52 countries increased by almost two years between 1986 and 2000 and that 40% of this increase could be attributed to new chemical entities.4 The North American market accounted for nearly half the worldwide market at $266 billion, while Europe accounted for approximately $170 billion...