merck and company case study solution

Merck Company and River Blindness Case Study Ethics

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This paper discusses the case of Merck, a pharmaceutical company, and their distribution of a drug against river blindness (onchocerciasis), a disease widely spread in Africa. You will discover how this case affected communities and what were the ethical implications of Merck’s actions. The Merck and river blindness case study highlights the importance of corporate responsibility and applies Merck’s situation to several ethical theories.

Introduction

• Merck’s Ethical Dilemma

Situational Analysis

Stakeholder analysis.

• Ethical Theories

Recommendations

Reference list.

New York Times (22 Oct, 1987) reported that Merck Company was distributing a new drug that cures river blindness without charges. According to the report, any country that requested for the drug would receive the drugs in coordination with the World Health Organization. At that time, river blindness was estimated to “affect 18 million people in Africa, Middle East, and South America” (para. 2).

A generic version of the drug (ivermectin) was made to make it affordable. According to Dr. Vagelos (New York Times, 1987), it was necessary because “those who needed it the most could not afford to pay for it” (para. 6). By the year 2006, “more than 68 million people were being treated annually” (The Merck MECTIZAN Donation Program – River Blindness, 2007, p. 2). It is estimated that 37 million people are infected annually. Those at risk may add up to 100 million people.

The cure for river blindness came as a result of a research work for animal treatment. The scientist realized that the drug used to treat animals could cure river blindness. The worm that causes river blindness may grow up to 2 feet in length. It distorts the texture of the skin and causes blindness when it reaches the eye (Murray, Poole & Jones, 2006).

The cost of developing the drug for the “purpose of treating river blindness was estimated at US$100 million” (Murray, Poole & Jones, 2006, p. 200). The company faced an additional challenge of putting at risk the animal treatment market. The market value for the animal treatment was estimated at about US$300 million. The risk would develop if the drug had side effects that bring negative publicity. Mectizan was the first version of the drug. The company stayed for seven years without finding a sustainable market for the drug. Merck offered to issue the drug free of charge but it lacked distributors.

Niles (2011) discusses that stakeholders are “interested entities that participate in an industry” (p. 24). Consumers, shareholders, employees, competitors, and the government are the main stakeholders. In the pharmaceutical industry, they may also include business partners such as health care providers, and insurance companies. By providing the drug free of charge, competitors cannot develop a substitute for the drug because it would lack a market.

Merck & River Blindness – Ethical Dilemma

Merck’s dilemma can be described as one in which a firm is supposed to make a right decision without legal requirements. Robinson (n.d) discusses that an ethical dilemma requires managers to weigh the outcome of different decisions. Legal obligations may arise in case the drug has side effects. There are additional costs associated with approving the safety of using the drug. The drug is not marketable because the disease affects regions with low purchasing power.

Jennings (2012) discusses that business ethical decisions require managers to examine whether there are legal obligations. They also check whether a decision is balanced and how they would feel after implementing the decision. To balance options, one takes the perspective of those in need. When checking the legality of a decision, a manager examines if there are sections of the law that can be used to sue the firm.

The manager thinks of the kind of description he/she would get from a newspaper’s analysis. Jennings (2012) discusses that how a person would feel is expressed in many ways. The Wall Street Journal Model requires that managers evaluate the “contribution of their decisions to shareholders, employees, community, and customers” (p. 44). Favorable headlines may be beneficial to the company and shareholders. Banerjee (2009) argues that big pharmaceutical companies spend at least twice as much on marketing their products than on research and development (R&D). Some companies choose philanthropy for marketing their brands. Profits may decrease or increase as a result of charitable activities. There may be long-term social benefits such as elimination of river blindness.

Banerjee (2009) discusses that pharmaceutical companies receive generous tax deductions as a result of engaging in R&D that creates a new drug. Most companies in the American pharmaceutical industry prefer to keep the real cost of R&D confidential.

Merck’s competitor, Pfizer, operates a free drug program in some African states for the treatment of trachoma (Banerjee, 2009). The benefits to the company include building a good reputation, increased customer satisfaction, better relations with communities, and motivation to employees. The cost is considered negligible compared to the benefits. Merck reduces cost by developing generic drugs.

World Trade Organization (WTO) has been debating over the effectiveness of patent protection that prevents the development of life-saving drugs for poor countries. Pharmaceutical companies receive great criticism over the “protection of intellectual property and patent rights for life-saving drugs” (Banerjee, 2009, p. 56). South Africa was once sued by 39 pharmaceuticals over the production of affordable generic life-saving drugs against WTO patent conventions. By developing ‘ivermectin’, Merck achieved to set corporate social responsibility standards for pharmaceutical companies.

Merck’s dilemma was that it was the only company with the drug to cure river blindness disease before it reaches an advanced stage. When the disease reaches the blindness stage, it is impossible to restore sight. Those at risk are unlikely to afford the full cost of the drug. It was a global problem. Donaldson & Dunfee (1999) discuss that “philanthropy is not mandatory, and firms may decide to give nothing at all to charity” (p. 254). There was need to develop a generic version to increase affordability.

Some of the factors that hinder managers from making good decisions as discussed by Jennings (2012) include the consideration of what other firms practice. Firms consider the possibility of someone else taking full responsibility for the cost. The tradition of the industry also has an influence. Donaldson & Dunfee (1999) discuss that it was unlikely that “Merck would generate investment returns comparable to its typical marketplace drugs” (p. 254). Merck could have considered that all firms produce drugs for profitability. It is the industry’s tradition.

According to the Stakeholder Dialogue (2011), Merck’s stakeholders include “business associates, employees, the Merck family, investors, government authorities, associations, neighbors on their sites, NGOs among others” (para. 1). The method of balancing stakeholders’ interests is mentioned as the drive towards solving ethical dilemmas for the company.

Gilmartin (2011) discusses that Pfizer Company is Merck’s stakeholders for being the main competitor. Patients are stakeholders for being either beneficiaries or at risk of side effects as a result of using Merck’s products. The number of employees globally in 2010 was 95,000 (Looking Ahead, 2010). Employees are at risk of losing their jobs if the company engages in risky activities.

Donaldson & Dunfee (1999) discuss that other companies did not respond to the dreaded river blindness illness with a search for a cure. Merck could have chosen to ignore the product. Donaldson & Dunfee (1999) argue that Merck’s customers “may claim as stakeholders that Merck should invest all of its research efforts toward resolving health problems in their market base” (p. 257).

Customers may have considered that heart disease and cancer were the main threat in countries that Merck served. Donaldson & Dunfee (1999) discuss that sometimes stakeholders may raise claims that “violate fundamental and universal principles of human behavior” (p. 256). River blindness was a global problem that ought to have been of concern to all pharmaceutical firms that operate globally.

Merck and River Blindness – Ethical Theories

Donaldson & Dunfee (1999) discuss that a firm may engage in charitable activities at free will. There were no legal obligations that bound Merck to fund research on river blindness treatment. Cultural relativism is the logic of considering that all norms that are developed by society are equally valid (Cultural Relativism: All Truth is Local, 2013). They may vary across cultures. Merck’s decision under cultural relativism may prove acceptable in many societies. Business societies may disapprove the decision to develop a drug targeting a market that is unlikely to afford it. Other firms with a global market do not consider developing a drug without potential for profits.

Merck’s teleological approach is made stronger by the fact that developing a cure could lead to elimination of the disease. If the disease was eliminated, the cost of producing the drug would decline. Fernando (2009) discusses that teleological approach is results-oriented. Robinson (n.d) discusses that “utilitarianism concerns the greatest good for the greatest number” (p. 2). A cure that may result in elimination of the disease would reduce future costs.

Merck’s action may be disapproved from a deontological perspective. Merck is supposed to add value to stakeholders. The stakeholders may benefit from positive media coverage, and reputation of the brand. Merck is supposed to invest in research activities that improve the well being of its customers. The River blindness drug was developed for a market segment outside its positioning. Research incurs costs that reduce shareholder earnings. According to Robinson (n.d), deontology requires the “absolute necessity of duty irrespective of rewards or punishment” (p. 3). Following this view, Merck ought to have sought profitability and drugs that add value to customers within its market positioning.

Merck has the responsibility to develop drugs that add value to its market base customers. Research costs are generated from deductions that would have been shared as dividends. Shareholders expect investment and growth that involves increased future earnings. According to utilitarianism, the good of developing a cure for river blindness exceeds all other benefits. Neglecting to develop such a cure has negative impact such as irreversible blindness, skin deformation, and reduction of land under cultivation. Merck’s overall responsibility to society is to develop drugs that help improve human health.

Merck Company followed the right ethical procedures to develop the right drug. Fernando (2009) argues that Merck developed the drug for sale before developing generic drugs to be distributed free of charge. Pharmaceutical companies are under a legal obligation to ensure that drugs they develop do not harm patients. The generic drug was developed after the original version which must have been adequately tested before being marketed. Some drugs have mild side effects such headache or exhaustion. Mild side effects are labeled on drugs and are acceptable to society.

Merck developed a generic version of the drug to reduce the cost of philanthropy. Philanthropy is conducted out of free will. The management followed the right procedure to reduce the cost of developing the drug meant for philanthropy. By developing generic drugs, the drug is made available to a larger group of people. Reducing the cost of developing the drug protects the interest of shareholders. The company’s objective is to increase share earnings of shareholders and ensure delivery of high quality products.

Research and development of the drug involve a high cost which lowers share earnings. The drug had no potential market and could only be developed for charity. The drug was not the main target of the research. According to utilitarianism, it would be great evil to ignore a discovery of great importance to humanity because it lacks profitability. Merck was obliged under the corporate social responsibility to develop the drug. The impact of the disease to patients was overwhelming that it led to suicide and blindness. It would be inhumane to neglect the discovery because it lacked a potential market.

Merck considered that developing the drug for human beings could put at risk its animal drug market. Animals’ bodies such as cattle are strong. They can withstand powerful medicine. On the other hand, human beings are sensitive. Treated patients may report negative side effects that are not observable in animals. Such reports may lower the marketability of the drug. Merck followed the right procedure by first developing the drug for sale. It was acceptable in the interest of stakeholders.

The drug failed to be marketable. Merck offered it for distribution to avoid an additional cost of distribution. The company lacked distributors so it decided to distribute the drug itself. Its corporate social responsibility would not have been effective had the company stopped because of lack of distributors. It would have incurred a cost without benefit.

Governments should make it mandatory for pharmaceuticals to disclose all beneficial discoveries even if they lack potential for profitability.

Pharmaceutical companies should partner with philanthropic organizations in case of such development to share the cost of the program.

Merck almost failed to take the drug where it was mostly needed because of lack of distributors. Pharmaceutical companies’ responsibility should be to hand over the drugs to the government of countries that are at risk. From that point, the authorities can conduct the distribution process themselves.

Pharmaceutical companies can partner with each other in case of such discovery to develop the drug at shared costs.

Pharmaceutical companies are under strict legal restrictions to distribute only drugs that have been approved as safe for human use. They should comply with this regulation even if a new drug has great potential for profits.

In such a discovery, pharmaceutical companies can first develop the drug for sale. In case of charity, it can look for philanthropic companies to incur a partial cost.

When corporate social responsibility involves a conflict of interest with stakeholders, managers should balance the benefits. The cost of philanthropy should not result in losses for shareholders or failing to meet consumer standards. In most cases, philanthropy is associated with increased profitability.

Banerjee, S. (2009). Corporate Social Responsibility: The Good, the Bad and the Ugly . Northampton, USA: Edward Elgar Publishing.

Cultural Relativism: All Truth is Local .

Donaldson, T., & Dunfee, T. (1999). Ties That Bind: A Social Contracts Approach to Business Ethics . Cambridge, USA: President and Fellows of Harvard College.

Fernando, A. (2009). Business Ethics and Corporate Governance . New Delhi, India: Dorling Kindersley.

Gilmartin, R. (2011). Merck Stakeholder Analysis .

Jennings, M. (2012). Business: Its Legal, Ethical, and Global Environment . Mason, USA: South-Western, Cengage Learning.

Looking Ahead. (2010).

Merck Offers Free Distribution of New River Blindness Drug . (1987). [Press release].

Murray, P., Poole, D., & Jones, G. (2006). Contemporary Issues in Management and Organizational Behaviour . Victoria, Australia: Cengage Learning Australia.

Niles, N. (2011). Basics of the U.S. Health Care System . London, UK: Jones & Bartlett Publishers.

Robinson, D. (n.d). Ethics & Ethical Dilemmas, Introducing, the Business Ethics Synergy Star, a Technique for Defining a Dilemma and Resolving it .

Stakeholder Dialogue . (2011).

The Merck MECTIZAN Donation Program – River Blindness . (2007).

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Merck & Co.: Evaluating a Drug Licensing Opportunity – Case Solution

This case study discusses the event where Merck & Co. was approached by LAB Pharmaceuticals for a prospective licensing deal for a newly developed drug compound called Davanrik. It looks into the value of the proposed deal.

​Richard S. Ruback and David Krieger Harvard Business Review ( 201023-PDF-ENG ) October 30, 2000

Case questions answered:

• How has Merck & Co. been able to achieve substantial returns to capital given the high costs and lengthy time to develop a drug?
• Build a decision tree that shows the cash flows and probabilities at all stages of the FDA approval process.
• Should Merck bid to license Davanrik? How much should they pay?
• What is the expected value of the licensing arrangement to LAB? Assume a 5% royalty fee on any cash flows that Merck receives from Davanrik after a successful launch.

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Merck & Co.: Evaluating a Drug Licensing Opportunity Case Answers

This case solution includes an Excel file with calculations.

Introduction – Merck & Co.

Merck & Co. Inc. (Merck) is an international, researched-based pharmaceutical company that has been in the business for a while and has been running successfully. At the time, patents for the company’s most popular drugs, such as Pepcid, Prinivil, Vasotec, and Mevacor, were due to expire in 2002.

Since generic substitutions would essentially replace these compounds, Merck could stand to lose almost 50% of its sales revenue, equating to a $5.7 billion loss, if it did not come up with a new drug to bring to the market.

The company refreshes its product portfolio periodically to have stable cash flows through its internal research as well as through joint ventures with other biotechnology companies.

In 2000, Merck & Co. was approached by LAB Pharmaceuticals for a prospective licensing deal for a newly developed drug compound called Davanrik.

It was initially developed to treat depression, but the preclinical development research revealed that the drug has influential effects on blocking antidepressant receptors as well as blocking the receptor that causes hunger, allowing the compound to be used in depression and obesity treatment.

The company lacked commercialization and marketing experience since none of its drugs had passed the FDA approval process.

With a recent denial from the FDA for another compound, the company was hesitant to issue underpriced equity to finance the three-stage clinical trial process since the stock price dropped by over 30%. In these pharmaceutical licensing deals, the various tasks are divided between the licensor and the licensee.

Merck (the licensor) would be responsible for the approval of Davanrik, its manufacture, and its marketing. They would pay LAB (the licensee) an initial licensing fee, a royalty on all sales, and make additional payments as Davanrik completed each stage of the approval process.

Rich Kender, the Vice President of Financial Evaluation and Analysis at Merck, was working with a team to decide whether the company should license Davanrik.

Merck must also decide and conduct an analysis of how much to bid for the license and the potential of failure/success of the drug through the seven-year FDA approval process. The drug would have ten years of commercial life, after which the drug would have little to no value.

The paper is prepared to explain the business model of Merck and the reasons for its success in the pharmaceutical industry. Moreover, it also evaluates the financial potential of Davanrik using decision trees for both Merck and LAB Pharmaceuticals with recommendations on whether to pursue the licensing deal or not.

Merck & Co.’s Business Model

Merck & Co. is in the business of developing compounds for pharmaceutical drugs. The required research and development efforts preceding the launch of a successful blockbuster drug is an extensive and lengthy process and is, therefore, a very expensive one. Nevertheless, Merck & Co. has proven perfectly capable of achieving high returns on capital. The return on assets (ROA) has averaged about 16.5% over the last two years. This is a result of numerous factors.

First of all, Merck has been able to generate tremendous amounts of sales. Since 1995, Merck has launched 15 new products, resulting in sales of $32.7 billion in 1999, which includes $15.2 billion in pharmaceutical benefit management services (PBM) sales.

Since Merck has a well-diversified portfolio of drugs, its four most popular drugs only account for 17% of sales. Some of these products were developed through joint ventures, allowing for a division of costs but also future revenues. This is evident through the moderate share of costs of goods sold in the sales structure (around 50%).

Furthermore, these new products are protected by law under patents, which gives Merck exclusive rights to production and sales. The company utilizes this opportunity to maximize the revenues, after which other companies can produce substitutes that push the profit margins down.

The company, therefore, is always on the lookout for additions to its product portfolio. Merck is also diversified in terms of business lines since it discovers, develops, licenses, and manufactures drugs for commercial use for humans and pets.

The valuation of a pharmaceutical licensing deal varies from that of a generic valuation technique. The differences are due to the fact that the drugs that are in the initial stages of clinical trials would have significantly negative cash flows prior to the approval of a drug.

In other cases, there is historical information about revenues that can then be used to forecast future cash flows. Since pharmaceutical cash flows are risky, the risk can be characterized based on the stage of development.

Risk-Adjusted NPV (rNPV) is a risk-weighted NPV that is widely used in assessing risky projects. It involves forecasting the revenues, costs, and their respective timing but additionally requires the relevant success rate for each stage of development. To account for risk, the expected net cash flow for a given time period is multiplied by the probability of it occurring.

The appropriate probability of success depends on the drug’s therapeutic area and stage of development. Once the net cash flow of each time period has been correctly risk-adjusted, these cash flows are then discounted using an appropriate discount rate. As most of the pharmaceutical revenue forecasts are real, the appropriate discount rate is the real discount rate.

In order to visualize the different stages of the FDA approval process with its likelihood and expected cash flows for Merck, a decision tree has been constructed. It is a decision support tool mostly used in decision analysis.

Merck’s Decision Tree

The decision tree for Merck & Co. can be found in Appendix I. As can be seen, the tree starts with the decision to license and begin Phase I with an initial cost of $30 million (including a $5 million licensing fee) with a 60% probability of success.

The alternative decision is to not license the drug. If Phase I is successful, Phase II trials start. This phase has a cost of $40 million with different probabilities of success. The probability of success as a depression medication is 10%.

For the drug to have a positive impact as a weight loss medication, the chances are 15%, and the probability of the drug successfully treating both depression and weight loss is 5%. The probability of passing Phase II is significantly low since it is administered to many people as compared to the Phase I trial.

If any of these outcomes are successful, testing begins in Phase III. Depending on the result of Phase II, each of Phase III possible outcomes has its own cost and probability of success. If phase III is successful, Merck will spend more money to commercialize the drug so that it can be marketed. In this case, the total cost of the whole phase will consist not only of the Phase III cost but also of the product launching cost.

All of the cash flows and probabilities have been taken into account in order to estimate the expected value of each possible outcome. For example, in order to calculate the expected value of the first possible outcome where the drug is only found to treat depression and is launched commercially, the cash flow was calculated as a commercialization present value minus total costs incurred.

Also, the total probability was calculated as a multiple of probabilities in each phase. Similar calculations were done for each branch, including those with failure as an outcome.

The decision tree provides a compelling argument for Merck & Co. to act upon it and move forward to acquire the license of Davanrik. With an NPV of $13.98 million, the benefits outweigh the associated risks of licensing the drug. The product portfolio, with the addition of Davanrik, would provide the company with the likelihood of higher future revenues.

Currently, Merck & Co. is considering paying the licensee $5 million to acquire the license since the initial payment upon the initiation of phase I is considered the amount paid out for the acquisition of the license.

A sensitivity analysis was conducted to look into the different payment amounts and the respective value it would have for Merck & Co. to recommend Kinder and his team about the price they should pay for the license. The sensitivity analysis is provided in Table 1.

Table 1 – Sensitivity analysis

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Merck & Co.: Evaluating a Drug Licensing Opportunity

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Merck & co.: evaluating a drug licensing opportunity description.

This explores the valuation of an opportunity to license a compound before it enters clinical trials. Describes Merck's decision tree evaluation process is presented. Information required to evaluate a specific licensing opportunity is provided, including the costs of the three phases of the review process, the revenues if approved, and the probability of various outcomes. It includes an introduction to decision tree analysis and valuation.

Case Description Merck & Co.: Evaluating a Drug Licensing Opportunity

Strategic managment tools used in case study analysis of merck & co.: evaluating a drug licensing opportunity, step 1. problem identification in merck & co.: evaluating a drug licensing opportunity case study, step 2. external environment analysis - pestel / pest / step analysis of merck & co.: evaluating a drug licensing opportunity case study, step 3. industry specific / porter five forces analysis of merck & co.: evaluating a drug licensing opportunity case study, step 4. evaluating alternatives / swot analysis of merck & co.: evaluating a drug licensing opportunity case study, step 5. porter value chain analysis / vrio / vrin analysis merck & co.: evaluating a drug licensing opportunity case study, step 6. recommendations merck & co.: evaluating a drug licensing opportunity case study, step 7. basis of recommendations for merck & co.: evaluating a drug licensing opportunity case study, quality & on time delivery.

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Case Analysis of Merck & Co.: Evaluating a Drug Licensing Opportunity

Merck & Co.: Evaluating a Drug Licensing Opportunity is a Harvard Business (HBR) Case Study on Finance & Accounting , Texas Business School provides HBR case study assignment help for just $9. Texas Business School(TBS) case study solution is based on HBR Case Study Method framework, TBS expertise & global insights. Merck & Co.: Evaluating a Drug Licensing Opportunity is designed and drafted in a manner to allow the HBR case study reader to analyze a real-world problem by putting reader into the position of the decision maker. Merck & Co.: Evaluating a Drug Licensing Opportunity case study will help professionals, MBA, EMBA, and leaders to develop a broad and clear understanding of casecategory challenges. Merck & Co.: Evaluating a Drug Licensing Opportunity will also provide insight into areas such as – wordlist , strategy, leadership, sales and marketing, and negotiations.

Case Study Solutions Background Work

Merck & Co.: Evaluating a Drug Licensing Opportunity case study solution is focused on solving the strategic and operational challenges the protagonist of the case is facing. The challenges involve – evaluation of strategic options, key role of Finance & Accounting, leadership qualities of the protagonist, and dynamics of the external environment. The challenge in front of the protagonist, of Merck & Co.: Evaluating a Drug Licensing Opportunity, is to not only build a competitive position of the organization but also to sustain it over a period of time.

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The Merck & Co.: Evaluating a Drug Licensing Opportunity case study solution requires the MBA, EMBA, executive, professional to have a deep understanding of various strategic management tools such as SWOT Analysis, PESTEL Analysis / PEST Analysis / STEP Analysis, Porter Five Forces Analysis, Go To Market Strategy, BCG Matrix Analysis, Porter Value Chain Analysis, Ansoff Matrix Analysis, VRIO / VRIN and Marketing Mix Analysis.

Texas Business School Approach to Finance & Accounting Solutions

In the Texas Business School, Merck & Co.: Evaluating a Drug Licensing Opportunity case study solution – following strategic tools are used - SWOT Analysis, PESTEL Analysis / PEST Analysis / STEP Analysis, Porter Five Forces Analysis, Go To Market Strategy, BCG Matrix Analysis, Porter Value Chain Analysis, Ansoff Matrix Analysis, VRIO / VRIN and Marketing Mix Analysis. We have additionally used the concept of supply chain management and leadership framework to build a comprehensive case study solution for the case – Merck & Co.: Evaluating a Drug Licensing Opportunity

Step 1 – Problem Identification of Merck & Co.: Evaluating a Drug Licensing Opportunity - Harvard Business School Case Study

The first step to solve HBR Merck & Co.: Evaluating a Drug Licensing Opportunity case study solution is to identify the problem present in the case. The problem statement of the case is provided in the beginning of the case where the protagonist is contemplating various options in the face of numerous challenges that Tree Licensing is facing right now. Even though the problem statement is essentially – “Finance & Accounting” challenge but it has impacted by others factors such as communication in the organization, uncertainty in the external environment, leadership in Tree Licensing, style of leadership and organization structure, marketing and sales, organizational behavior, strategy, internal politics, stakeholders priorities and more.

Step 2 – External Environment Analysis

Texas Business School approach of case study analysis – Conclusion, Reasons, Evidences - provides a framework to analyze every HBR case study. It requires conducting robust external environmental analysis to decipher evidences for the reasons presented in the Merck & Co.: Evaluating a Drug Licensing Opportunity. The external environment analysis of Merck & Co.: Evaluating a Drug Licensing Opportunity will ensure that we are keeping a tab on the macro-environment factors that are directly and indirectly impacting the business of the firm.

What is PESTEL Analysis? Briefly Explained

PESTEL stands for political, economic, social, technological, environmental and legal factors that impact the external environment of firm in Merck & Co.: Evaluating a Drug Licensing Opportunity case study. PESTEL analysis of " Merck & Co.: Evaluating a Drug Licensing Opportunity" can help us understand why the organization is performing badly, what are the factors in the external environment that are impacting the performance of the organization, and how the organization can either manage or mitigate the impact of these external factors.

How to do PESTEL / PEST / STEP Analysis? What are the components of PESTEL Analysis?

As mentioned above PESTEL Analysis has six elements – political, economic, social, technological, environmental, and legal. All the six elements are explained in context with Merck & Co.: Evaluating a Drug Licensing Opportunity macro-environment and how it impacts the businesses of the firm.

How to do PESTEL Analysis for Merck & Co.: Evaluating a Drug Licensing Opportunity

To do comprehensive PESTEL analysis of case study – Merck & Co.: Evaluating a Drug Licensing Opportunity , we have researched numerous components under the six factors of PESTEL analysis.

Political Factors that Impact Merck & Co.: Evaluating a Drug Licensing Opportunity

Political factors impact seven key decision making areas – economic environment, socio-cultural environment, rate of innovation & investment in research & development, environmental laws, legal requirements, and acceptance of new technologies.

Government policies have significant impact on the business environment of any country. The firm in “ Merck & Co.: Evaluating a Drug Licensing Opportunity ” needs to navigate these policy decisions to create either an edge for itself or reduce the negative impact of the policy as far as possible.

Data safety laws – The countries in which Tree Licensing is operating, firms are required to store customer data within the premises of the country. Tree Licensing needs to restructure its IT policies to accommodate these changes. In the EU countries, firms are required to make special provision for privacy issues and other laws.

Competition Regulations – Numerous countries have strong competition laws both regarding the monopoly conditions and day to day fair business practices. Merck & Co.: Evaluating a Drug Licensing Opportunity has numerous instances where the competition regulations aspects can be scrutinized.

Import restrictions on products – Before entering the new market, Tree Licensing in case study Merck & Co.: Evaluating a Drug Licensing Opportunity" should look into the import restrictions that may be present in the prospective market.

Export restrictions on products – Apart from direct product export restrictions in field of technology and agriculture, a number of countries also have capital controls. Tree Licensing in case study “ Merck & Co.: Evaluating a Drug Licensing Opportunity ” should look into these export restrictions policies.

Foreign Direct Investment Policies – Government policies favors local companies over international policies, Tree Licensing in case study “ Merck & Co.: Evaluating a Drug Licensing Opportunity ” should understand in minute details regarding the Foreign Direct Investment policies of the prospective market.

Corporate Taxes – The rate of taxes is often used by governments to lure foreign direct investments or increase domestic investment in a certain sector. Corporate taxation can be divided into two categories – taxes on profits and taxes on operations. Taxes on profits number is important for companies that already have a sustainable business model, while taxes on operations is far more significant for companies that are looking to set up new plants or operations.

Tariffs – Chekout how much tariffs the firm needs to pay in the “ Merck & Co.: Evaluating a Drug Licensing Opportunity ” case study. The level of tariffs will determine the viability of the business model that the firm is contemplating. If the tariffs are high then it will be extremely difficult to compete with the local competitors. But if the tariffs are between 5-10% then Tree Licensing can compete against other competitors.

Research and Development Subsidies and Policies – Governments often provide tax breaks and other incentives for companies to innovate in various sectors of priority. Managers at Merck & Co.: Evaluating a Drug Licensing Opportunity case study have to assess whether their business can benefit from such government assistance and subsidies.

Consumer protection – Different countries have different consumer protection laws. Managers need to clarify not only the consumer protection laws in advance but also legal implications if the firm fails to meet any of them.

Political System and Its Implications – Different political systems have different approach to free market and entrepreneurship. Managers need to assess these factors even before entering the market.

Freedom of Press is critical for fair trade and transparency. Countries where freedom of press is not prevalent there are high chances of both political and commercial corruption.

Corruption level – Tree Licensing needs to assess the level of corruptions both at the official level and at the market level, even before entering a new market. To tackle the menace of corruption – a firm should have a clear SOP that provides managers at each level what to do when they encounter instances of either systematic corruption or bureaucrats looking to take bribes from the firm.

Independence of judiciary – It is critical for fair business practices. If a country doesn’t have independent judiciary then there is no point entry into such a country for business.

Government attitude towards trade unions – Different political systems and government have different attitude towards trade unions and collective bargaining. The firm needs to assess – its comfort dealing with the unions and regulations regarding unions in a given market or industry. If both are on the same page then it makes sense to enter, otherwise it doesn’t.

Economic Factors that Impact Merck & Co.: Evaluating a Drug Licensing Opportunity

Social factors that impact merck & co.: evaluating a drug licensing opportunity, technological factors that impact merck & co.: evaluating a drug licensing opportunity, environmental factors that impact merck & co.: evaluating a drug licensing opportunity, legal factors that impact merck & co.: evaluating a drug licensing opportunity, step 3 – industry specific analysis, what is porter five forces analysis, step 4 – swot analysis / internal environment analysis, step 5 – porter value chain / vrio / vrin analysis, step 6 – evaluating alternatives & recommendations, step 7 – basis for recommendations, references :: merck & co.: evaluating a drug licensing opportunity case study solution.

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MERCK &CO., INC.: CORPORATE STRATEGY, ORGANISATION AND CULTURE (A) CASE STUDY

Merck & Co., Inc. is one of the largest pharmaceutical companies in the world. Merck also develops, manufactures, and markets pharmaceuticals through a number of joint ventures, including: a partnership with Johnson & Johnson that concentrates on designing and commercializing over-the-counter versions of prescription medications, such as Pepcid AC; a venture with Aventis A.G. focusing on the European vaccine market; and another partnership with Aventis, this one concentrating on animal health and poultry genetics. Nearly half of the company's revenues are generated by Merck-Medco Managed Care, a pharmacy benefit management subsidiary principally involved in selling prescription drugs through managed prescription drug programs. Merck spends more than $2 billion each year on pharmaceutical research and development. About 40 percent of the company's human health product sales are generated outside the United States.

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Merck & co., inc. case study analysis & solution, harvard business case studies solutions - assignment help.

Merck & Co., Inc. is a Harvard Business (HBR) Case Study on Innovation & Entrepreneurship , Fern Fort University provides HBR case study assignment help for just $11. Our case solution is based on Case Study Method expertise & our global insights.

Innovation & Entrepreneurship Case Study | Authors :: Frank T. Rothaermel

Case study description.

The protagonists of the case are CEO Kenneth Frazier and Roger Perlmutter, president of research, as they contemplate Merck's future in light of a difficult external environment and multiple internal challenges. Overall, the pharmaceutical industry faces the threat of patent expirations, diminishing new drug breakthroughs, adverse regulatory laws, increasing competition, and a harsh economic climate. With its new drug pipeline running dry, Merck accepted that the biotech industry is too complicated for it to navigate alone. As it stood, it was producing only 1 percent of the biomedical research in the world. Thousands of new ideas were emerging around the world, both inside and outside of the company. While Merck had been moving toward an open innovation strategy, its stellar history of internal research and development had created a culture resilient to working externally. Should Merck pursue an open innovation strategy? If so, how? Another issue that the case deals with is executing corporate strategy via acquisitions of smaller biotech companies such as Merck's recent acquisition of Idenix.

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[10 Steps] Case Study Analysis & Solution

Step 1 - reading up harvard business review fundamentals on the innovation & entrepreneurship.

Even before you start reading a business case study just make sure that you have brushed up the Harvard Business Review (HBR) fundamentals on the Innovation & Entrepreneurship. Brushing up HBR fundamentals will provide a strong base for investigative reading. Often readers scan through the business case study without having a clear map in mind. This leads to unstructured learning process resulting in missed details and at worse wrong conclusions. Reading up the HBR fundamentals helps in sketching out business case study analysis and solution roadmap even before you start reading the case study. It also provides starting ideas as fundamentals often provide insight into some of the aspects that may not be covered in the business case study itself.

Step 2 - Reading the Merck & Co., Inc. HBR Case Study

To write an emphatic case study analysis and provide pragmatic and actionable solutions, you must have a strong grasps of the facts and the central problem of the HBR case study. Begin slowly - underline the details and sketch out the business case study description map. In some cases you will able to find the central problem in the beginning itself while in others it may be in the end in form of questions. Business case study paragraph by paragraph mapping will help you in organizing the information correctly and provide a clear guide to go back to the case study if you need further information. My case study strategy involves -

• Marking out the protagonist and key players in the case study from the very start.
• Drawing a motivation chart of the key players and their priorities from the case study description.
• Refine the central problem the protagonist is facing in the case and how it relates to the HBR fundamentals on the topic.
• Evaluate each detail in the case study in light of the HBR case study analysis core ideas.

Step 3 - Merck & Co., Inc. Case Study Analysis

Once you are comfortable with the details and objective of the business case study proceed forward to put some details into the analysis template. You can do business case study analysis by following Fern Fort University step by step instructions -

• Company history is provided in the first half of the case. You can use this history to draw a growth path and illustrate vision, mission and strategic objectives of the organization. Often history is provided in the case not only to provide a background to the problem but also provide the scope of the solution that you can write for the case study.
• HBR case studies provide anecdotal instances from managers and employees in the organization to give a feel of real situation on the ground. Use these instances and opinions to mark out the organization's culture, its people priorities & inhibitions.
• Make a time line of the events and issues in the case study. Time line can provide the clue for the next step in organization's journey. Time line also provides an insight into the progressive challenges the company is facing in the case study.

Step 4 - SWOT Analysis of Merck & Co., Inc.

Once you finished the case analysis, time line of the events and other critical details. Focus on the following -

• Zero down on the central problem and two to five related problems in the case study.
• Do the SWOT analysis of the Merck & Co., Inc. . SWOT analysis is a strategic tool to map out the strengths, weakness, opportunities and threats that a firm is facing.
• SWOT analysis and SWOT Matrix will help you to clearly mark out - Strengths Weakness Opportunities & Threats that the organization or manager is facing in the Merck & Co., Inc.
• SWOT analysis will also provide a priority list of problem to be solved.
• You can also do a weighted SWOT analysis of Merck & Co., Inc. HBR case study.

Step 5 - Porter 5 Forces / Strategic Analysis of Industry Analysis Merck & Co., Inc.

In our live classes we often come across business managers who pinpoint one problem in the case and build a case study analysis and solution around that singular point. Business environments are often complex and require holistic solutions. You should try to understand not only the organization but also the industry which the business operates in. Porter Five Forces is a strategic analysis tool that will help you in understanding the relative powers of the key players in the business case study and what sort of pragmatic and actionable case study solution is viable in the light of given facts.

Step 6 - PESTEL, PEST / STEP Analysis of Merck & Co., Inc.

Another way of understanding the external environment of the firm in Merck & Co., Inc. is to do a PESTEL - Political, Economic, Social, Technological, Environmental & Legal analysis of the environment the firm operates in. You should make a list of factors that have significant impact on the organization and factors that drive growth in the industry. You can even identify the source of firm's competitive advantage based on PESTEL analysis and Organization's Core Competencies.

Step 7 - Organizing & Prioritizing the Analysis into Merck & Co., Inc. Case Study Solution

Once you have developed multipronged approach and work out various suggestions based on the strategic tools. The next step is organizing the solution based on the requirement of the case. You can use the following strategy to organize the findings and suggestions.

• Build a corporate level strategy - organizing your findings and recommendations in a way to answer the larger strategic objective of the firm. It include using the analysis to answer the company's vision, mission and key objectives , and how your suggestions will take the company to next level in achieving those goals.
• Business Unit Level Solution - The case study may put you in a position of a marketing manager of a small brand. So instead of providing recommendations for overall company you need to specify the marketing objectives of that particular brand. You have to recommend business unit level recommendations. The scope of the recommendations will be limited to the particular unit but you have to take care of the fact that your recommendations are don't directly contradict the company's overall strategy. For example you can recommend a low cost strategy but the company core competency is design differentiation.
• Case study solutions can also provide recommendation for the business manager or leader described in the business case study.

Step 8 -Implementation Framework

The goal of the business case study is not only to identify problems and recommend solutions but also to provide a framework to implement those case study solutions. Implementation framework differentiates good case study solutions from great case study solutions. If you able to provide a detailed implementation framework then you have successfully achieved the following objectives -

• Detailed understanding of the case,
• Clarity of HBR case study fundamentals,
• Analyzed case details based on those fundamentals and
• Developed an ability to prioritize recommendations based on probability of their successful implementation.

Implementation framework helps in weeding out non actionable recommendations, resulting in awesome Merck & Co., Inc. case study solution.

Step 9 - Take a Break

Once you finished the case study implementation framework. Take a small break, grab a cup of coffee or whatever you like, go for a walk or just shoot some hoops.

Step 10 - Critically Examine Merck & Co., Inc. case study solution

After refreshing your mind, read your case study solution critically. When we are writing case study solution we often have details on our screen as well as in our head. This leads to either missing details or poor sentence structures. Once refreshed go through the case solution again - improve sentence structures and grammar, double check the numbers provided in your analysis and question your recommendations. Be very slow with this process as rushing through it leads to missing key details. Once done it is time to hit the attach button.

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MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY Harvard Case Solution & Analysis

Home >> Harvard Case Study Analysis Solutions >> MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY

MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY Case Solution

Because, Merck offers a wide range of drugs; the four most popular drugs account for only 17% of sales. Some of these products are developed by joint ventures that can share costs and distribute the future income. This can be evidenced by the modest (around 50%) share of sales costs in the sales structure.

In addition, these new products are protected by patents and laws that allow Merck to exercise an exclusive manufacturing and sales rights. The company seizes this opportunity to maximize its revenue, after which other companies can produce alternatives, thereby reducing the profit margin.

For this reason, the company always strives to complement its product portfolio. Merck has discovered, developed, licensed and manufactured commercial drugs for humans and pets as well, so its field of activity is very diverse.

The evaluation of drug’s approval transactions depends on the evaluation of general evaluation techniques. The difference is because a drug has a significant negative cash flow in the initial stages of the clinical trials before it is approved.

In other cases, there is historical income information that can be used to predict the future cash flows,because cash flow from drugs is risky. The risk can be characterized by the degree of development.

Risk-adjusted net present value is widely used to evaluate the risk projects. It is about forecasting revenues, costs and appropriate schedules, but it also requires a relative success rate at each stage of development. To account for risk, multiply the expected net cash flow over a given period by the probability of occurrence.

The proper likelihood of success depends on the therapeutic area and the stage of development of the drug. Once the net cash flows for each period has been properly adjusted; these cash flows are discounted at the appropriate discount rate. Since the prediction for most of the drugs is true; the appropriate discount rate is the actual discount rate.

A decision tree was created to display the various stages of the FDA approval process and the expected cash flows for Merck. It is a decision support tool that is mainly used for decision analysis.

Merck’s Decision Tree

The Merck decision tree is in an Excel spreadsheet. We see that this tree begins with the permitting decision and begins at the first phase. The initial cost is $ 30 million (including a $ 5 million license fee) and the probability of success is 60%. Another decision is not to allow the use of the drug. If the first stage gets successful; the second stage of the test begins. The cost of this move is $ 40 million, with varying degrees of success. The probability of success in treating depression is 10%.

For a drug to have a positive effect on a weight loss drug; the probability is that the drug is successful in treating depression and weight loss by 5%. Compared to the first phase of the study, the possibility of treatment in the second phase is very low because it applies to many people..............

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