Hilton Hotels and Resorts market Analysis report.
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Hilton Hotels and Resorts
Market Analysis
A clear understanding of the market is an essential prerequisite to writing the marketing plan. Without a clear sense of the market you can’t possibly have any indication of your ability to compete. Begin this analysis with a brief summary of the company and the market it is competing in. A summary of the market is often useful; particularly for those readers who have no knowledge of the market.
Industry Analysis
In this section, you should answer the following questions:
What is the size of the market?
What percent do you currently have and what percent do you want to capture?
What is the growth prospect for this market? As the market increases, how will this affect your market share?
Longer term, how can you expand your markets? If you are selling worldwide, how will you address international markets?
Target Market
No single business can be everything to everybody. Most businesses focus on target markets — subsets of the overall market. You will need to define your target markets, determining such factors as population, the overall level of business activity, and your geographic region. For this section you need to write a description of your target market or markets. This should be a brief summary of the markets either by summarizing demographics of consumers or attributes of business customers (business-to-business marketing).
Who is expected to use your product or service? What will they use it for? Why do they buy the product? If you are already selling your products or services, who is currently buying them and why? One way to write the customer profile is to organize it by demographics or lifestyle descriptions.
Major Competitors and Participants
This section should also include a summary of the competitors and participants in the industry. Unless you have found a brand new market niche, chances are your market has already been penetrated by competitors. List all of your known competitors. Here are some questions to answers:
Are you competing with companies comparable in size, or much larger?
Are your competitors profitable?
What competitive advantages do you have?
What are your competitors’ relative strengths and weaknesses?
Can you anticipate the emergence of new competitors?
Discuss the current and expected competitive market. Is the market competitive? If not, why not? Be sure to rate your competitors’ market share, their financial strength and how their products compare with yours. What are the barriers of entry to the market that you wish to serve (i.e., how easy is it to get started in this business?)
Your competitive evaluation will help you demonstrate your role in the market and identify areas of the market that are not being sufficiently addressed.
Market Segmentation
What are the demographics of your target customer? If you are selling to individual consumers, what is their age, sex, income level, education, race, occupation, lifestyle, and number of children at home? Are they married, single, or retired? Where does the target customer live? Where will the business be located and how does that affect your target segment?
If you are selling to businesses, what kinds of businesses are purchasing your products (SIC codes, etc.), what is their sales volume, and how many employees do they have?
Research and Development
You should detail the steps involved in your R&D process, including new product or service design and existing product extension and improvement. Discuss how much you spend on R&D and any significant changes in that strategy. For example, if you plan to increase R&D investment for the upcoming operating cycle then you should note and explain that. Discuss your R&D priorities and how those priorities are in line with your company’s mission or vision statement. If you have significant product or service testing plans, explain those. Since many readers of a business plan have a great deal of interest in your future plans, product or service testing would be of great interest. Explain what your current plans are for new product development and list key R&D milestones. Some of the things a reader might be interested in include:
Research and development work conducted to date including prototypes (pictures help), lab results, product testing results, etc.
· How much will be needed in the future?
Any substantial R&D investment needed to be successful.
How do your competitors rate in the R&D area? What are they spending? How does it compare?
Does the business require substantial R&D to be successful? How do your competitors rate in this area?
Sample Market Analysis and Financial Analysis
Various metrics display
Merck
’s overall performance along with its growth in both US and international markets. Total revenues realized by Merck were $39.5 billion, $39.9 billion, $40.2 billion, $42.3 billion, and $46.84 billion in 2015, 2016, 2017, 2018, and 2019 respectively. Since 2015 through 2019, US was accounting for about 43% of total revenues while international markets accounted for remaining 57% of total revenues. Japan, Europe, & China are major markets for drugs and vaccines sold by Merck. Merck is operating in more than 100 world countries with more than 125 years of history. With increasing demand from pharmerging markets, Merck is striving to serve across various locations by involving in expedite development of cost-effective and blockbuster drugs to improve patients lives across the globe. Merck is under an intense competition from Roche, JNJ, Pfizer, GSK, Novartis, and Sanofi who altogether are actively seeking increased market share in the global pharmaceutical industry.
Merck has been an attractive company for investors over years owing to its financial resource allocation abilities. Starting from the cash flow, Merck has a positive and deemed cash cycle indicating its efficacy in allocating capital towards all its business activity. Merck’s working capital as percentage of revenue has been decent over years with a slight increase from 2016 to 2019 which is relatively better from its prime competitors Pfizer and JNJ. Merck has shown strong current ratio owing to its strengthening ability of catering to its short-term obligations. In addition, Merck also has relatively better position for quick ratio showing its liquidating ability for paying short-term debt without inventory sales. Merck has very strong accounts receivable turnover indicating its strong bargaining power over market, partners, and contractors which line up with higher inventory turnover, more than average of the industry.
Figure 1. Merck’s cash assessment[footnoteRef:1] [1: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Merck has been aggressive in boosting its ROE since 2016 following its discovery of Keytruda as well as digital transformation of its manufacturing and supply chain. ROA has also been increasing over years for Merck indicating its ability of higher asset turnover. Interestingly, Merck’s ROA has been over years almost near to industry average in 2017, and 2018 while greater than industry average in 2019. Merck is using its assets very effectively by deriving relatively greater share of profits from its assets. However, Merck has increased its debt due to capital sensitive digital transformation activity as part of its restructuring program and pipeline productivity. Given, positive cash cycle and cash retainment, investors are still keen on next developments under process by Merck despite more usage of debt leveraging. Merck’s gross profit margin as well as its operating margin have been increasing year-over-year indicating profitability for its shareholders. Merck divested Merck’s Consumer Care (MCC) as of October 01, 2014 as part of forming a focused and pure research-based organization. Moreover, shareholders are also confident given its new spin off by 2021 of women
healthcare
, trusted legacy brands and biosimilars into a new company. With such initiatives under process, Merck has shown investors all its future plans for growth boosting their confidence and retaining their debt position. All in all, this report has found that Merck has been active in reducing extra expenditure and diverting that cash into expediting R&D boosting its pipeline and global footprint.
Figure 2. Profitability Assessment[footnoteRef:2] [2: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
From ranking #30 in the Forbes and JUST Capital top 100 firms for “doing right in America”[footnoteRef:3] to being one of the top ten pharmaceutical companies in the world, Merck is both vertically and horizontally integrated, accounting for about 4.4% global market share (in 2018) [footnoteRef:4] in biopharma industry. Not only attaining business excellence through operational efficiency but also having interconnected value chain altogether facilitate Merck to succeed in the global markets. Headquartered in Kenilworth, New Jersey, USA, Merck operates across 270 global locations in more than 100 world nations with focus on oncology,
vaccines,
infectious diseases, COVID-19 (beginning only in 2019), cardio-metabolic disorders, and discovery & development.[footnoteRef:5] Merck has substantially increased its R&D expenditure since 2011 determined to strengthen its pipeline boosting long-term sustenance. [3: Merck & Co. (2020, October 14). Merck named to Forbes Just 100 list for “doing right by America”. Retrieved from: https://www.merck.com/stories/merck-named-to-forbes-just-100-list-for-doing-right-by-america/] [4: Pharmaceutical Technology. (2019, March 7). The top ten pharmaceutical companies by market share in 2018. Retrieved from: https://www.pharmaceutical-technology.com/features/top-pharmaceutical-companies/] [5: Merck & Co. (n.d.). Merck & Co. Overview. Retrieved from: https://www.merck.com/]
Merck commercially conducts its business through four segments: pharmaceutical, animal health, healthcare services and alliances segments of which only the pharmaceutical segment is reportable under the SEC.[footnoteRef:6] The US being the single largest consumer of prescription drugs made by Merck, accounted for 43% of its total revenues since fiscal 2015 to 2019. On the other hand, Japan accounts for 8% of its total revenues, which has been constant since 2015 and China contributed to 4% in 2017, 5% in 2018, and 7% in 2019 total revenues. Ideally, whole world is the market for any biopharmaceutical company including Merck as every nation has its specific requirement of drugs for healthcare. It was estimated that global pharmaceutical revenues were about $1.3 trillion during fiscal 2019 of which top ten pharma companies accounted for about $392.5 billion.[footnoteRef:7] It is expected that global pharma spending would go up to $1.5 trillion by 2025 with a CAGR of about 4-5%[footnoteRef:8] encapsulating the growth for all the top ten firms in the market indicating the underlying potential for Merck. [6: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ] [7: Top 10 pharma companies by revenues in 2019. (2020, March 4) https://www.beckershospitalreview.com/pharmacy/top-10-pharma-companies-by-revenue.html] [8: Pharmaceutical Commerce. (2019, January 29). Global pharma spending will hit $1.5 trillion in 2023, says IQVIA. Retrieved from: https://www.pharmaceuticalcommerce.com/business-and-finance/global-pharma-spending-will-hit-1-5-trillion-in-2023-says-iqvia/]
Despite having its own niche opportunities, Merck is exposed to threat from its competitors in terms of discovering and filing early for prescription drug patent as well as increasing generic competition. Pfizer, Johnson & Johnson (JNJ), GlaxoSmithKline (GSK), Roche, Sanofi, Novartis, AbbVie, and Abbott are some of the explicit competitors operating in the similar market, often the top ten pharma firms across the globe. Merck was placed as third in terms of market cap with a total of $198.7 billion while Roche was second with $212.5 billion and Pfizer, first with cap of $253.2 billion while in 2018.[footnoteRef:9] As afore stated, firms like Merck devise strategies aggressively in order to more acquire market share despite being prone to loss induced due to loss of patent exclusivity (LOE). Above discussion portrays the dynamic nature of market Merck conducts its business providing a foundation for further analysis. [9: Phillpidis, A. (2019, November 18). Top 10 pharma companies of 2019. GEN Genetic Engineering & Biotechnology News. https://www.genengnews.com/a-lists/top-10-pharma-companies-of-2019/]
Global pharmaceutical spending is expected to reach $1.6 trillion by 2024 at an annual growth rate of 2-5% according to studies by IQVIA. Global medicine spending has decreased from CAGR of 4% between 2009-2014 to about 3% from 2015-2019.[footnoteRef:10] IQVIA along with consensus from WHO, characterized pharmerging market as nation with less than $30k GDP/capita and greater than $1 billion absolute prescription drugs market growth potential between 2014 & 2019.[footnoteRef:11] China, Brazil, India, Russia, Mexico, Turkey, Poland, Saudi Arabia, Indonesia, Egypt, Philippines, Pakistan, Vietnam. Bangladesh, Argentina, Algeria, Colombia, South Africa, Chile, Nigeria, and Kazakhstan are termed as pharmerging markets whose growth potential is rapidly increasing.[footnoteRef:12] [10: IQVIA. (2020, March 5). Global Medicine Spending and Usage Trends: Outlook to 2024. IQVIA. https://www.iqvia.com/insights/the-iqvia-institute/reports/global-medicine-spending-and-usage-trends] [11: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood ] [12: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood ]
Figure 3. Consolidated sales data by geographic division[footnoteRef:13] [13: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
IQVIA estimates that both the modern and pharmerging markets will see a growth rate of 1-4% next five years instead of 5-8% in last five years.[footnoteRef:14] Given trend of growing market, Merck has positioned itself in an efficient way catering to the growing needs of specific markets. [14: IQVIA. (2020, March 5). Global Medicine Spending and Usage Trends: Outlook to 2024. IQVIA. https://www.iqvia.com/insights/the-iqvia-institute/reports/global-medicine-spending-and-usage-trends]
Table 1. Specific region revenue contribution[footnoteRef:15] [15: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
It can be noted from the figure 1 above, that the US is the single largest market for Merck accounting for 43% of sales through 2019. Sales from the US have been trailing near 43-46% on an average from 2014 through 2019 which can be directly attributed to sale of blockbuster drugs such as Januvia/Janumet, Keytruda, and Gardasil. Merck until fiscal year 2017 never reported separate column for revenues from China as it used to contribute less than 3%. However, sales from China soared since 2016 which was highlighted in their 2017 10-K filings whose Chinese share was 4% of total revenue which increased to 5% and 7% in 2018 and 2019.
Table 2. Specific region revenue contribution[footnoteRef:16] [16: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Another single major market for Merck is Japan whose sales were constant 8% of total revenues from 2014 through 2019 except 7% in 2014 and 2015. Increase in aging Japanese population as well as Japanese governments mandate of price reduction has boosted earnings from the Japanese market. Despite Merck taking the toll of pricing pressures, Japanese market is a definite long-term market creating value for its brand.
The EMEA (Europe, Middle East, and Africa), on the other hand, is the second major region after the US, accounting for an average of 30% of total revenues (shown in table 3) over years through FY19. Asia Pacific segment includes India, Indonesia, Philippines, and other nations whose medical spending is reportedly increasing over years which are part of pharmerging markets as characterized by WHO. Latin American markets also are substantially increasing their expenditure in an attempt to prevent adverse effects from epidemics and outbreaks.
Table 3. Specific region revenue contribution[footnoteRef:17] [17: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Along with the initiatives of the UN, Merck is also putting efforts in serving underprivileged population across Africa as part of its commitment to UN SDGs. Thus, Merck is reaching out to wider global markets creating a strong platform for its long-term sustenance.
Growth prospect for Merck ideally is whole world customer under oncology, diabetes, cardio-vascular diseases, and vaccines indicating Merck’s areas of focus. However, Merck operates in a highly regulated and competitive pharmaceutical market, always under peer pressure due to increase of generic competition. Merck, Pfizer, Sanofi and JNJ are always in an intensive competition for more market share in oncology and diabetes[footnoteRef:18] whereas Merck, Roche, Pfizer, Novartis, and other firms compete in cardio-vascular diseases for drugs such as Zocor.[footnoteRef:19] It indicates degree of rivalry for which Merck has to relentlessly devise innovative strategies by discovering drugs in order to be ahead of the competition. [18: CSI Market. (n.d.). Merck & Co Inc. CSI Market. https://csimarket.com/stocks/competition.php?code=MRK ] [19: CSI Market. (n.d.). Merck & Co Inc. CSI Market. https://csimarket.com/stocks/competition.php?code=MRK]
Wall Street Analysts and healthcare analysts expect that Merck’s Keytruda could be the top of the best-selling drugs in the history for immuno-oncology treatments. Merck has reported almost $12 billion in sales of Keytruda in FY19 which is estimated to draw about $25-$30 billion by 2025. As mentioned earlier, Merck’s market share was about 4.4%, marking itself right after Pfizer and JNJ portrays further potential for acquiring more market share. In addition, Merck is also forward in developing two COVID-19 vaccines along with an oral antiviral drug which might skyrocket its market share curve over the next few years along with Keytruda. Moreover, Merck as part of its Restructuring Program[footnoteRef:20] began transforming its manufacturing and supply chain into an advanced integrated and demand-driven production along with digital transformation. Aforesaid strategic initiatives taken by Merck indicate its foreseeing ability for long-term value creation facilitating its smooth performance across the competitive international markets. [20: Merck & Co. (n.d.) Merck 2016 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReportArchive/m/NYSE_MRK_2016 ]
Figure 4. Market leaders in oncology[footnoteRef:21] [21: Parrish, M. (2020, March 23). In Pharma, Cancer is King. Pharma Manufacturing. Retrieved from: https://www.pharmamanufacturing.com/articles/2020/in-pharma-cancer-is-king/]
Targeting enhances the ability of serving customers as organizations gain the clear understanding of who their actual customers are in line with their competitive advantage. Merck has targeted in terms of specific medical areas instead of demographics as it basically produces drugs that are used to treat patients of any demographic. In case of Merck, its major target markets are oncology and cardio-vascular diseases providing more opportunities to serve patients of cancer with breakthrough drugs. Merck is one of the top leaders in cancer market by selling 180 drugs globally. It is expected that Merck’s own Keytruda to be the best-selling drug historically by 2025 drawing $25-30 billion in revenues. Merck also manufactures vaccines for measles, Ebola virus, mumps, rubella, varicella, shingles, rotavirus gastroenteritis, and other pneumococcal diseases which enable Merck’s at par performance in the global markets.[footnoteRef:22] [22: Market Beat. (n.d.). Merck & Co., Inc. Stock Forecast, Price & News. Market Beat. Retrieved from: https://www.marketbeat.com/stocks/NYSE/MRK/]
Figure 5. Focused markets for global pharma[footnoteRef:23] [23: Desjardins, J. (2019, January 30). Visualizing the Future of the Pharma Market. Visual Capitalist. Retrieved from: https://www.visualcapitalist.com/future-pharma-market/ ]
Merck, after the merger with Schering Plough in 2009 has gained significant presence in the global market, has positioned itself strongly with innovation focused strategy bolstering its revenues and R&D through years. Merck not only targets in terms of areas of science but also in terms of geographic regions and business segments. For instance, in North American region, it focuses on healthcare and insurance management companies while in Asia it focuses on government agencies more than individual healthcare institutions. Targeting for Merck is also dependent on specific country’s healthcare system such as in the US, healthcare is privatized where individual corporations, health and care management firms bargain drugs. On the other hand, in case of Japan, healthcare is a public institution headed by Japanese government who have the power of bargaining where Merck has to comply with the norms of pricing, advertising, and selling in Japan.[footnoteRef:24] Targeting in terms of business segments include
animal health
revenues which are focused at both livestock and companion animals. Merck develops and produces both vaccines and prescription drugs to treat poultry, aqua life, cattle, and companion animals in areas such as providing anthelmintic drugs, antibacterial drugs, and injections. [24: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Above figure 5 shows forecast of the major focused markets for drugs in coming years where oncology tops the list followed by anti-diabetes, vaccines, and antivirals. Merck has Keytruda, Januvia/Janumet, and MMR-II competing in oncology, anti-diabetes and vaccine portfolios respectively marking its long-term guaranteed growth. Thus, targeting in terms of focused areas of science enable effective functioning of Merck rather than usual demographic target due to the nature of its operating industry. It can be concluded that Merck classifies immuno-oncology, antiviral, antibacterial, diabetes, gastroenteritis, pneumococcal diseases, and other respiratory and anthelmintic markets as its target markets.
Choosing the right customer is the very necessary and first step of any winning strategy as emphasized by a Harvard study.[footnoteRef:25] Merck’s vision is to serve and improve patients’ lives but that does not imply that Merck is sufficient to serve all the patients across the globe. Above target market section has provided sufficient insight on Merck’s clan of customers that are served through their business activity. [25: Simons, R. (2014). Choosing the right customer: the first step in a winning strategy. Harvard Business Review, 92(3).]
Figure 6. Market performance of Merck & its customers
Merck markets and sells its drugs to healthcare professionals and to direct consumers (in case of the US) through various distribution channels such as McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc., in the US. Merck reported that account receivables only from these three agencies in the US is approximately 35% of total receivables as of December 31, 2019[footnoteRef:26] indicating its customer profile in its largest market. Below figure portrays how Merck and its customers are performing effecting each other’s market presence. [26: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Categories of customers. Merck makes and sells drugs to government agencies, health management companies, benefit management companies, insurance firms, doctors, physicians, nurses, pharmacy benefit manager (PBMs), welfare and employee management organizations, and other integrated delivery systems (IDS). Drugs are an essential need for life irrespective of age and sex; Merck also provides healthcare services such as educating doctors and patients about diseases and monitoring patients and promoting benefits of usage of certain drugs under its healthcare services segment indicating its wider customer basis.
Figure 7. Overall Customer base in terms of industry type[footnoteRef:27] [27: CSI Market. (n.d.). Merck & Co Inc. CSI Market. Retrieved from: https://csimarket.com/stocks/markets_glance.php?code=MRK]
Demographics. Merck’s customer base ranges from infants to old people including both men and women. Merck, effective October 01, 2014 divested Consumer Care business (MCC) as a move indicating its focus strategy. Towards more focused approach, Merck is all set to spin-off its slow growing women’s healthcare products along with legacy brands and biosimilars into a new company called as Organon & Co., expected to finish it by 2021.[footnoteRef:28] Aforesaid both recent business developments indicate Merck’s ability of segregating its business in line with customer focus strategy facilitating effective performance while meeting specific customer market needs globally. [28: Hopkins, J. S. (2020, February 5). Merck to Spin Off Slow-Growth Products into New Company. Wall Street Journal. https://www.wsj.com/articles/merck-to-spin-off-slow-growth-products-into-new-company-11580903102]
Lifestyle. Last attribute for customer profile of Merck as in more urbanized lifestyle is needing more drugs which is an additional advantage for increasing revenues. Developed and pharmerging nations have substantially been increasing their spending on healthcare which soars the revenue for Merck. Research[footnoteRef:29] shows that lifestyle upgrade in pharmerging nations is one of the major reasons for increased healthcare spending in those nations which is positively impacting earning of Merck. Following figure shows Merck’s customers contribution to its revenues for on-going FY20. It can be noted that financial and raw materials industries form major portion of its customer base irrespective of gender. [29: Grand View Research. (2017). Pharmerging Market
Size
Worth $2,231.9 Billion By 2025, CAGR: 17.1%. https://www.grandviewresearch.com/press-release/global-pharmerging-market]
Areas of science such as
oncology, cardio-
vascular diseases, diabetes, and vaccines in huma health as well as animal health are very broad which are also main areas of focus for another big pharma such as Pfizer, JNJ, Novartis, Sanofi, Roche, GSK, Abbott, AstraZeneca, and AbbVie. These are the top healthcare companies listed in the Fortune 500 constantly involving in an intensive competition for acquiring major market share globally. What makes the difference for a company to sustain in the specific area of prescription medicine is their ability of early research and patent exclusivity of their respective drugs. While Novartis, Sanofi, Roche, and GSK are foreign listed, Pfizer, AbbVie, and JNJ are listed on the NYSE.
Figure 8. Peer comparison of Merck[footnoteRef:30] [30: Morning Star. (n.d.). Pharmaceutical Industry Review. https://www.morningstar.com/ ]
Headquartered in New York, New York, USA, Pfizer is operating using a new global structure, effective from January 01, 2019 in three business segments: Pfizer Biopharmaceuticals Group (Biopharma), Upjohn and through July 31, 2019, Consumer Healthcare which is a joint venture with GSK;[footnoteRef:31] Pfizer holds 32% of stake in the joint venture operated globally under GSK’s holdings making only Biopharma and Upjohn as reportable segments under the SEC. Some of elite drugs by Pfizer include Prevnar/Prevnar 13, Ibrance, Eliquis, Lyrica, Viagra, Lipitor, Enbrel, Chantix/ Champix, and Norvasc.[footnoteRef:32] Pfizer is adamantly investing in developing gene therapies for rare diseases seeking a long-term innovative position in the global drug market. [31: Pfizer. (2020). Pfizer 2019 Annual Review. Retrieved from https://s21.q4cdn.com/317678438/files/doc_financials/2018/ar/Pfizer-2019-Financial-Report ] [32: Pfizer. (2020). Pfizer 2019 Annual Review. Retrieved from https://s21.q4cdn.com/317678438/files/doc_financials/2018/ar/Pfizer-2019-Financial-Report ]
Headquartered in New Brunswick, New Jersey, USA, JNJ is one of the most reputed brands across the world operating in three divisions:
consumer healthcare
, medical devices, and pharmaceutical divisions.[footnoteRef:33] Some of the well-known drugs such as Remicade, Stelara, Semponi/ Semponi Aria, Prezista/Prezcobix/Rezolsta/Symtuza, Invega Sustenna/Xeplion/Invega Trinza/Trevicta, Imbruvica, and Opsumit[footnoteRef:34] are blockbusters in
immunology,
infectious diseases, oncology, and pulmonary hypertension sciences. [33: Johnson & Johnson. (2020). Johnson & Johnson 2019 Annual Review. Retrieved from: https://www.investor.jnj.com/annual-meeting-materials/2019-annual-report] [34: Johnson & Johnson. (2020). Johnson & Johnson 2019 Annual Review. Retrieved from: https://www.investor.jnj.com/annual-meeting-materials/2019-annual-report]
Often referred as ‘Roche’, is based out of Basel, Switzerland conducts its commercial operations under two segments: Pharmaceuticals and Diagnostics.[footnoteRef:35] Roche, listed on the SIX Swiss Exchange, is the world leader in oncology with more than 240 cancer drugs across various global markets. Roche is known for its best-selling drug Herceptin used to treat breast cancer in women; Herceptin is the top grossing drug sold across the globe which has drawn about 6 billion CHF alone in 2019.[footnoteRef:36] Some of the blockbuster drugs sold by Roche are Ocrevus, Hemlibra, Tecentriq, Perjeta, Kadcyla, Avastin, Alencensa, Actemra/RoActemra, Gazyva/Gazyvaro, and Lucentis.[footnoteRef:37] [35: Roche, AG. (2020). Roche 2019 Annual Report. Retrieved from: https://www.roche.com/investors ] [36: Trefis Team. (2020, October 2). What’s the Buzz About Roche’s New Drugs?. Forbes. https://www.forbes.com/sites/greatspeculations/2020/10/02/whats-the-buzz-about-roches-new-drugs/#2783a67c3cf0] [37: Roche. (2020). Roche 2019 Annual Report. Retrieved from: https://www.roche.com/investors]
Also based out of Basel, Switzerland, Novartis conducts its business globally in two divisions: Innovative medicines (deals with innovative patent-protected prescription drugs) and Sandoz (generic pharmaceutical and biosimilars).[footnoteRef:38] Novartis reported total revenues of $47.4 billion with a net income of about $11.7 billion for the FY19 according to norms of the International Accounting Standards Board.[footnoteRef:39] Operating in more than 155 world countries, Novartis employs about 104,000 employees globally as of FY19 according to their IFRS filings with concentrated sales generated from the US, Japan, China, and Europe. Some of the major breakthrough drugs developed by Novartis include Clozapine (Clozaril), Diclofenac (Voltaren), Carbamazepine (Tegretol), Valsartan (Diovan), Cyclosporine (Neoral/Sandimmune), Letrozole (Femara), Methylphenidate (Ritalin), terbinafine (Lamisil), and Deferasirox (Exjade).[footnoteRef:40] [38: Novartis. (2020). Novartis 2019 Annual Review. Retrieved from: https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2019 ] [39: Novartis. (2020). Novartis 2019 Annual Review. Retrieved from: https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2019 ] [40: Novartis. (2020). Novartis 2019 Annual Review. Retrieved from: https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2019 ]
Market is growing year-on-year due to increase in healthcare spending in both modern and pharmerging nations due to advancement in lifestyle and aging world population. However, using Porter’s Five Forces framework,[footnoteRef:41] it can be concluded that due to high degree of concentration among existing firms and high power of producers, threat of new entrants is relatively less in the pharmaceutical market. As barriers to entry are high because of the explicit R&D spending (need for intense capital) and patent exclusivity as two main factors, new entrants do not seem a threat to mature organizations such as Merck. [41: Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.]
All in all, aforementioned prime competitors of Merck provide an insight on the level of concentration in drug sector across the globe constantly seeking increase in market share. All of these major firms are profitable as each of them is fostering towards drug innovation and development strategies in specific areas of science. One major advantage is that Merck is turning into a focused and pure-science based research organization whereas its competitors are also innovative but are more diversified. Other advantage is Merck’s transformation into an end-to-end integrated manufacturing and supply chain driven by real-time demand[footnoteRef:42] gives the scope for its long-term sustenance through early and explicit discovery and development. [42: Abel, J. (2019, June 27). Digital Transformation at Merck Pharmaceuticals. ARC Advisory Group. https://www.arcweb.com/blog/digital-transformation-merck-pharmaceuticals]
On a global frontier, Merck’s products are marketed and sold to healthcare providers and patients through various marketing and selling channels. Healthcare providers includes government agencies, doctors, hospitals, physicians, pharmacists, nurses, welfare & employee management firms, PBMs, insurance and risk management firms, business organizations, community management, and benefit management firms. In case of the US, Merck uses direct-to-consumer (DTC) advertising in order to sell specific drugs directly to patients. As Merck predominantly deals with innovative and patent protected drugs, pricing is at par posing an increased pressure from various governments. In addition, through its healthcare services business division, Merck provides detailed information about drugs, treatments, therapies, dosage and monitors real-time usage of its drugs while assisting doctors, caregivers, patients directly. In order to cater efficiently through all its business activities, Merck segments into B2B and B2C channels for easier and focused markets.
For catering demand from B2B in the US, three largest wholesalers for the drugs sold by Merck are McKesson, Cardinal Health and AmerisourceBergen Corporation, whose together account receivables constitute about 35% of total receivables in FY19. As 43% of total revenues come from the US, 35% of receivables can be attributed to these three corporations in the US with major share. Besides, Walgreens, CVS Health Corporation are also some of the other customers of Merck. McKesson is a dental and hospital equipment and supplies wholesaler based in San Francisco, California, with SIC code 5047[footnoteRef:43] while Cardinal Health is a healthcare service provider based out of Dublin, Ohio with the SIC 6719[footnoteRef:44] and AmerisourceBergen Corporation is based out of Wayne, Pennsylvania, also business partner with Walgreens, deals with end consumers with SIC code 5912.[footnoteRef:45] Merck while selling in international markets, uses local distribution chains or partners in order to supply them with required drugs; for instance, in Japan, Merck sells along with collaboration with Eisai Corporation.[footnoteRef:46] [43: The United States Department of Labor. (n.d.). Standard Industrial Classification (SIC) System. Retrieved from: https://www.osha.gov/] [44: The United States Department of Labor. (n.d.). Standard Industrial Classification (SIC) System. Retrieved from: https://www.osha.gov/] [45: The United States Department of Labor. (n.d.). Standard Industrial Classification (SIC) System. Retrieved from: https://www.osha.gov/] [46: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
As mentioned earlier, drugs are an essential need, but Merck does not discover and develop for every disease. Merck previously had consumer healthcare under its portfolio serving from infants to older population which was divested effective from October 1, 2014. In addition, Merck is also spinning-off its trusted legacy brands along with biosimilars and women healthcare products into a separate company called as Organon & Co, expected to be finished by 2021. With five main areas of focus in science, Merck segmented its products into smaller and homogenous categories such as income, gender, and age after the detailed research from previous buying patterns.
Income. Keytruda, for instance, is priced at $9,869.94 given one dose every three weeks as part of immunotherapy after the chemo session.[footnoteRef:47] Given patent exclusivity and explicit functioning of the drugs, these drugs are targeted at high-income group. However, Merck has been making efforts for serving low-income group by providing about $1 billion of zero-price prescription drugs in the US. Similarly, for Merck’s blockbuster vaccines, Gardasil, for example is sold at $210-$400 depending on the dosage and type of vaccination.[footnoteRef:48] Nevertheless, for the insurance coverage, drugs of Merck are still being used by middle and low-income group but fairly lower rate. [47: Gapper, J. (2019, February 12). Keytruda shows the high price of curing cancer. Financial Times. https://www.ft.com/content/c1dacca6-2ec2-11e9-ba00-0251022932c8] [48: Saarman, E. (2017, June 10). Why Is the HPV Vaccine So Expensive? Discover. https://www.discovermagazine.com/health/why-is-the-hpv-vaccine-so-expensive]
Gender. Merck has also involved itself in catering to specific needs of men and women separately by developing Lynparza for metastatic breast cancer while Keytruda along with chemo for prostate cancer.[footnoteRef:49] Merck’s Keytruda in combinations with PD-1 is also promising under non-small cell lung cancer (NSCLC) types. [49: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Age. Merck’s drugs are targeted at all age groups of consumers such as Gardasil, MMR-II vaccines. However, there are limitations for usage of anesthetic drugs such as Bridion is used for adults which was approved by the FDA in 2015.[footnoteRef:50] Merck also develops pediatric drugs such as Emend which is specifically targeted at infants with six months or more. In this way, Merck although involves in discovering drugs in focused areas of medical science, it still caters to heterogenous needs of various segments of markets depending on the disease type. [50: U.S. Food and Drug Administration. (2015, December 15). Drug Trial Snapshot: BRIDION. https://www.fda.gov/drugs/drug-approvals-and-databases/drug-trial-snapshot-bridion]
Merck, as part of it implementing its focused strategy has begun business action of turning itself into a pure-science and research-based organization. Thus, Merck has planned to spin off its women’s health division, trusted legacy brands and biosimilars divisions into a separate publicly traded company, known as Organon & Co., which is expected to finish by first half of 2021.[footnoteRef:51] As an early mover in the industry, beginning in 2011, Merck has substantially increased its R&D spending over years realizing innovation is the only key for its long-term sustenance. Merck, as of October 01, 2014 divested Merck Consumer Care (MCC) to Bayer AG as a move to get rid off the slower growing business unit. With aforesaid business segregation activity, Merck is creating a sure shot performance graph by making investments for building a stronger pipeline. [51: Forbes, S. (2020, February 4). Merck Has A Great Future, Because It Has A Soul: Ken Frazier. Forbes. https://www.forbes.com/sites/steveforbes/2020/02/04/merck-has-a-great-future-because-it-has-a-soul-ken-frazier/#68191bfe7fdd]
Beginning in 2012, Merck established an in-house 3D printing tech lab where they actively are exploring on developing various tissues and manufacturing parts which are hard to attain from market. During early 21st century, not many drugs were being approved by the FDA which decreased number of blockbusters rolling out every year. A HBR study[footnoteRef:52] concluded that there are three main reasons for sliding decline in the R&D in pharma during early 21st century. First reason is that discovering, developing, manufacturing, marketing, and selling drugs is very capital intense process. Drug development on an average takes about 12 years with almost $1 billion investment which is more than NASA budget for sending one rocket into space.[footnoteRef:53] Greater regulatory requirements, skyrocketing expense of each stage of R&D, and complex and diversified organizational structures of pharma companies served as high obstacle for growth of R&D. [52: Garnier, J.-P. (2008). Rebuilding the R&D engine in Big Pharma. Harvard Business Review, 86(5), 68–76.] [53: Garnier, J.-P. (2008). Rebuilding the R&D engine in Big Pharma. Harvard Business Review, 86(5), 68–76.]
Figure 22. Key areas of investment through Merck GHI Fund
Merck realizing this need of changeover, turned around its R&D structure by boosting its annual investments in R&D since 2011. Starting in 2012, Merck created Merck Global Health Innovation (GHI) Fund (Figure 22) where it takes about $500 million every year by investing in globally proven technology companies where Merck’s expertise can accelerate their dug discovery and patient therapies. Merck through GHI also invests in more than 50 digital platforms focused on healthcare. Therapy Planning, Care Management, eClinical Trials, Health Analytics & AI, and Enabling Technologies are the key areas which are invested through GHI by Merck[footnoteRef:54] aiming for increased value creation focused at its customers (as new developments are aimed at improving health of patients). Antidote, Arcadia, Ciox, PathAI, GNS Healthcare, Infectious Disease Connect, Patient Safe, Preventice Solutions, Tasso, Strata, and Prognos are some of the companies that are funded by Merck through its GHI fostering development of drugs aiming for increased patient recovery. [54: Merck & co. (n.d.). Global Health Innovation Fund: Leadership in Digital Health Investing. Retrieved from: http://www.merckghifund.com/]
Merck abides by the philosophy that data is the currency of healthcare which is indicated by all its investments made for boosting R&D and its business development initiatives. Merck is an active member of the Pharmaceutical Research and Manufacturers of America (PhRMA) which is the body representing drug firms in federal and statutory affairs. Some of other members of PhRMA include AbbVie, Alexion Pharmaceuticals Inc., Alkermes, Astellas, AstraZeneca, Bayer, Biogen, Bristol Myers Squibb, Daiichi Sankyo, Eisai, Eli Lily & Company, Gilead Sciences, GSK, JNJ, Novartis, Pfizer, Sanofi, Takeda, and Teva. According to the releases by PhRMA, American pharmaceutical industry invests about $90 billion towards R&D of which Merck alone has invested almost $10 billion in 2019.[footnoteRef:55] In 2017, the US FDA has approved 59 new medicines of which 42 gained first approval alone in the US. In order for Merck to be competitive in the domestic US and the foreign markets, it targets collaborations and aggressive strategic partnerships with biotech firms. [55: Merck & co. (n.d.). Global Health Innovation Fund: Leadership in Digital Health Investing. Retrieved from: http://www.merckghifund.com/]
In 2019, significant approvals gained by Merck include Ervebo (2 approvals), Keytruda (16 approvals including monotherapy and combination with chemo), Lynparza (6 approvals in which Merck entered into strategic collaboration with AstraZeneca for co-developing and co-marketing in both US and outside), Pifeltro & Delstrigo, Recarbio, Zerbaxa (2 approvals), and Bravecto. As a part of strengthening R&D, Merck acquired Peloton Therapeutics in July 2019, a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with cancer and other non-oncology diseases.[footnoteRef:56] [56: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
On April 1, 2019, Merck acquired Antelliq Corporation, leading in digital animal identification, traceability, and monitoring solutions.[footnoteRef:57] Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next generation in vivo approaches to enable the body’s immune system to fight disease. Moreover, in June 2018, Merck acquired Viralytics Limited, an Australian publicly traded company with focus on oncolytic immunotherapy treatments for a range of cancers.[footnoteRef:58] Merck also acquired Rigontech GmbH[footnoteRef:59] who is a leader in accessing the retinoic acid inducible gene therapy which boosts the innate immune system in treating patients under immunotherapy by inducing both immediate and long-term anti-tumor immunity. Aforementioned investments are focused at developing inhibitors in oncology which is one of the strongest areas of expertise for Merck which are recorded as part of their R&D expenses. [57: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ] [58: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ] [59: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
In addition, Merck strategically collaborates with its peers in the industry such as partnership with JNJ for Remicade since 1998, Eisai for co-development and co-commercialization for Lenvima in 2018, with AstraZeneca in July 2017 under global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types.[footnoteRef:60] Merck has also patented its current phase-3 drug candidates in its pipeline of which one is being developed in collaboration with Bayer. As of July 31, 2020, Merck has 20 programs under phase 2, 24 candidates under phase 3 trials(figures 23 & 24); and 3 programs under review program by the FDA according to their latest 10-Q filings.. [60: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ]
Figure 23: Phase 2 & 3 drug candidates of Merck as of July 31, 2020[footnoteRef:61] [61: Merck & Co. (2020, July 31). Merck Pipeline: Q3 2020 Reflecting Pipeline to
July 31, 2020. Retrieved from: https://www.merck.com/wp-content/uploads/sites/5/2020/08/Merck-Public-Pipeline ]
Merck has also filed for additional drug candidates for its existing candidates for using in additional treatments which were proven to relief to patients. Previously approved candidates such as Lynparza, Keytruda, Recarbio, and HPV recombinant vaccine are re-filed for using additionally as monotherapies and combination therapies. Merck believes that those special filings for explicit review by FDA will be finishing review process by 2022 at the latest stage which give it increased revenues from new development to existing drugs.
Figure 24. Merck’s pipeline snapshot of ‘Under review stage’ as of July 31, 2020[footnoteRef:62] [62: Merck & Co. (2020, July 31). Merck Pipeline: Q3 2020 Reflecting Pipeline to
July 31, 2020. Retrieved from: https://www.merck.com/wp-content/uploads/sites/5/2020/08/Merck-Public-Pipeline ]
R&D is conducted in four main stages at Merck: candidate discovery, preclinical development, clinical development, and real-world data. Candidate discovery is the first step where they discover new medicines and vaccines by studying the inner workings of the particular disease.[footnoteRef:63] Preclinical development is the second stage where the scientists take years to design, make and test thousands of molecules discovered for finding one or two to be tested in humans.[footnoteRef:64] Then clinical development is conducted in three stages as phases 1, 2, & 3 where the discovered molecule is tested on humans and results are calibrated to provide evidence to all the scientific questions raised internally as well as in the medical community.[footnoteRef:65] [63: Merck & Co. (n.d.). Research & Products: Discovery & Development. Retrieved from: https://www.merck.com/research-and-products/discovery-development/] [64: Merck & Co. (n.d.). Research & Products: Discovery & Development. Retrieved from: https://www.merck.com/research-and-products/discovery-development/] [65: Merck & Co. (n.d.). Research & Products: Discovery & Development. Retrieved from: https://www.merck.com/research-and-products/discovery-development/]
Figure 25. Merck’s existing product supplemental filings under review[footnoteRef:66] [66: Merck & Co. (2020, July 31). Merck Pipeline: Q3 2020 Reflecting Pipeline to
July 31, 2020. Retrieved from: https://www.merck.com/wp-content/uploads/sites/5/2020/08/Merck-Public-Pipeline ]
Merck uses AI, and data analytics to study and analyze, and eventually affirm to their findings. After these three stages, drugs are sent to ‘under review’ program of the FDA where the final evidence is being studied and then decided if or not the drug can be commercialized. Final stage real-world data is where Merck has their Center for Observational and Real-World Evidence (CORE) dedicated to understanding how their medicines are contributing to the functioning of patients in the real world.[footnoteRef:67] Merck claims that fourth stage is very crucial for their business as it not only provides information about existing drug usage but also provides deeper insight on future concerns as well as if drug has any multifunctional usage and its further impact. [67: Merck & Co. (n.d.). Research & Products: Discovery & Development. Retrieved from: https://www.merck.com/research-and-products/discovery-development/]
Figure 26. R&D expenditure trend of Merck and its peers
In order for Merck to succeed in the global market, it has to aggressively invest towards R&D. One of the main reasons is the competition as its prime competitors such as Pfizer, JNJ, Sanofi, Roche, Novartis, and GSK also have abundant resources in R&D along with their respective expertise. Merck invested nearly $9,872 million, $9,752 million, and $10,339 million in FY19, FY18, and FY17 respectively which accounted for about 21% of total revenues in ,FY19 (figure 26).[footnoteRef:68] Whereas Pfizer spent $8,650 million, $8,006 million, and $7,683 million for FY19, FY18, and FY17 respectively[footnoteRef:69] while JNJ spent $11.4 billion in 2019(figure 26).[footnoteRef:70] Roche on the other hand, spent nearly $13 billion in FY19[footnoteRef:71] indicating aggressive need of R&D expenditure across the industry. Over years, Merck has been sound in allocating its financial resources for new product developments and R&D activities which resulted in developing Keytruda, growing to be one of the best-selling drugs in the history. [68: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final ] [69: Pfizer. (2020). Pfizer 2019 Annual Review. Retrieved from https://s21.q4cdn.com/317678438/files/doc_financials/2018/ar/Pfizer-2019-Financial-Report ] [70: Johnson & Johnson. (2020). Johnson & Johnson 2019 Annual Review. Retrieved from: https://www.investor.jnj.com/annual-meeting-materials/2019-annual-report] [71: Roche. (2020). Roche 2019 Annual Report. Retrieved from: https://www.roche.com/investors]
% in 2019% in 2018% in 2017% in 2016% in 2015% in 2014
US43%43%43%46%44%40%
China7%5%4%
% in 2019% in 2018% in 2017% in 2016% in 2015% in 2014
Japan8%8%8%7%7%8%
% in 2019% in 2018% in 2017% in 2016% in 2015% in 2014
EMEA27%29%29%28%27%31%
Asia Pacific6%7%7%10%10%9%
Latin America5%6%6%5%7%7%
Rest of the world3%3%4%4%5%3%
AttributeMerck PfizerJNJRoche
Size
>120 nations>125 nations>100 nations>100 nations
Employees (FY19)
77,00088,300130,00097,735
Areas of focus
oncology, cardio-
vascular,
diabetes, vaccines &
animal health
internal medicine,
inflammation &
immunology,
oncology, rare diseases &
vaccines,
anti-infectives, consumer
healthcare
immunology,
cardio-vascular,
pulmonary hypertension,
infectious disease,
vaccines,
neuroscience, oncology &
consumer healthcare
Oncology,
immunology,
opthalmology,
infectious dieseases
& neuroscience
Revenues (FY19)
$46.84 billion$51.75 billion$82.06 billion$67.6 billion
Net Income (FY19)
$9.84 billion$16.27 billion$15.12 billion$14.9 billion
R&D expense (FY19)
$9.9 billion$8.8 billion$11.46 billion$13.2 billion
201720182019
Current Ratio1.331.171.24
Quick Ratio0.830.720.78
Accounts Receivable Turnover5.845.986.91
Inventory Turnover2.512.482.36
Accounts Payable Turnover0.820.80.76
Long-term Debt / Owners’ Equity11.251.39
Cash from Operations64471092213440
Cash Assessment Ratios
Working Capital
(as percentage of annual revenue)
11.2%8.7%
Merck
15.3%
201720182019
ROE7.0%23.0%37.6%
ROA2.8%7.5%11.6%
Net Profit Margin6.0%14.6%20.9%
Asset Turnover0.460.510.55
Total assets/ Owners’ Equity2.543.073.25
EPS0.92.393.85
Gross Profit Margin68.2%68.1%69.9%
Operating Income Margin18.2%21.1%26.1%
Income before Tax Margin16.3%20.6%24.5%
Profitability Assessment Ratios
Merck
