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?

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.

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?

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.pdf]

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.pdf]

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.pdf] [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.pdf ] [12: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood.pdf]

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.pdf]

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.pdf]

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.pdf]

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.pdf]

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.pdf]

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.pdf]

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.pdf]

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]