Merck makes medicines for a number of maladies, from stuffy noses and asthma to hypertension and arthritis. The pharmaceutical giant's top prescription drugs include diabetes drugs Januvia and Janumet, anti-inflammatory Remicade, cholesterol combatants Vytorin and Zetia, and hypertension fighters Cozaar and Hyzaar. In addition, Merck makes childhood and adult vaccines for such diseases as measles, mumps, pneumonia, and shingles, as well as veterinary pharmaceuticals through Merck Animal Health. The company sold its OTC drug and personal care offerings, including Claritin allergy pills and Dr. Scholl's foot care products, to Bayer AG in 2014.
Merck has a broad portfolio of marketed and development-stage pharmaceuticals in areas including respiratory health, metabolism, infectious disease, cardiovascular, vaccines, immunology, women's health, endocrinology, and oncology. In addition to the pharmaceutical unit, which accounts for the majority (about 85%) of revenues, the company's structure includes additional operating segment animal health; closed segments as of 2014 include the company's consumer care and alliances ventures.
Best-selling drugs in the pharma segment include type 2 diabetes drug Januvia, which brought in more than $4 billion in revenues in 2013. Additional bestsellers earning more than $2 billion include Remicade and Zetia, while $1 billion top sellers include Vytorin, allergy treatment Nasonex, HIV therapy Isentress, diabetes drug Janumet, and HPV vaccine Gardasil.
Despite its blockbuster successes, Merck is subject to the same threat to its bottom line as all pharmaceutical companies large and small: patent expiration. For instance, the company's No. 1 drug, Singulair, began facing generic competition in August 2012. The drug's revenues dropped 30% from $5.5 billion in 2011 to $3.9 billion that year. To offset the financial impact of patent losses, the company works to release new drugs to replace the aging products. Successful launches in 2013 include selective relaxant binding agent Bridion, which, due to a denial of approval by the FDA, is being marketed outside of the US.
Merck markets its products in over 140 countries, with its largest market -- the US -- accounting for more than 40% of revenues. Some international products are marketed under the MSD (short for Merck Sharp & Dohme) brand. The EMEA (Europe, Middle East, and Africa) segment accounts for 30% of sales, and Japan accounts for about 10%.
The company operates principal research facilities in California, New Jersey, Pennsylvania, Massachusetts, and Nebraska. Outside of the US, it has research facilities in China, the Netherlands, and Switzerland.
Sales and Marketing
Merck markets its products through direct sales forces and international distributors. Customers include drug wholesalers, retailers, pharmacies, government agencies, and health care providers. Animal health products are sold to veterinarians, animal producers, as well as distributors. Some of Merck's products are sold through partnerships or joint ventures with other drugmakers. For instance, Johnson & Johnson markets anti-inflammatory drugs Remicade and Simponi in the US, while Merck has marketing rights in Europe, Russia, and Turkey. Ventures include AZLP, which sells Nexium and Prilosec in partnership with AstraZeneca (although that partnership, which has seen lower returns as of late, is expected to dissolve in the near future). Vaccine sales are made directly and through the Sanofi Pasteur MSD partnership.
The company spent $2.5 billion on advertising and promotion in 2013, as compared to $2.8 billion in 2012 and $3.1 billion in 2011.
After revenues nearly doubled to $46 billion in 2010 due to the previous year's acquisition of Schering-Plough, the patent expiration on Singulair took its toll on Merck's finances in 2012 and 2013. Revenues decreased by 7% to $44 billion in 2013 from $47 billion in 2012, due partly to lower sales of Singulair, as well as lower sales of migraine medication Maxalt, brain tumor treatment Temodar, and chronic hepatitis C drug PegIntron, among others. Markets hit the hardest included Japan (with a 21% decline) and the US (sales fell 11%). These declines were offset by increased sales of other products, including the company's Dulera Inhalation Aerosol asthma medication, shingles vaccine Zostavax, and Gardasil.
In contrast to the 2010 rise in revenues after the Schering-Plough acquisition, profits took a nosedive that year primarily due to lingering acquisition and integration costs. Net income rebounded but in 2013, as a result of sales declines as well as restructuring costs, profits fell 29% to $4.4 billion.
Cash flow from operations increased 17% to $11.6 billion in 2013 due to decreases in accounts payable and liabilities.
In the midst of massive big pharma consolidation, Merck in 2014 sold its consumer business to German conglomerate Bayer for $14.2 billion. Merck got to shed a line where it didn't dominate and use the funds to support its oncology R&D. As part of the deal, the two companies are collaborating on Bayer's hypertension candidates; Merck paid Bayer $1 billion to participate. Profits will be split 50/50.
The increasing threats of generic competition on top blockbusters require Merck to push new products through its development pipeline, with a focus on bringing its most promising late-stage development candidates to market to replace its aging blockbusters. Focus areas of growth include biologics, vaccines, and emerging markets; it also conducts research for new animal health medicines. Biotech R&D includes programs in areas such as monoclonal antibodies (single-source proteins) and RNA interference (RNAi), a gene silencing process, as well as the development of follow-on (generic) biologics.
In addition to creating new medicines, Merck also works to gain approval for new indications on existing drugs. It is also increasingly seeking out collaboration, licensing, and outsourcing agreements in the R&D arena to cut costs. In 2013 Merck announced that it would rearrange the structure of its R&D organization to further reduce expenses; the reorganization includes workforce reduction efforts.
Research isn't the only area where partnerships are benefiting Merck: In 2011 Merck moved to expand in emerging markets by forming a joint venture with Sun Pharma to develop and sell branded generic medicines in high-growth markets, and in 2012 it teamed up with Supera Farma to sell prescription drugs in Brazil. Other target markets include China -- where Merck opened a new R&D center and a new manufacturing plant in 2011 and 2013, respectively -- and Japan.
While Merck's leadership team remains committed to growth efforts, it is also focused on reducing operating expenses to offset losses from patent expirations. Since its 2009 merger with Schering-Plough, Merck has been conducting integration efforts (including asset sales and facility consolidations) to combine the two massive organizations, which resulted in an estimated 17% reduction in the combined workforce during 2009-2012. In 2011 Merck announced that merger restructuring and other cost-cutting measures would result in an additional 12% to 13% workforce reduction between 2012 and 2015. After shaving off about 2,000 more positions, in 2013 Merck bumped that number up, announcing it would reduce its workforce by 20% by 2015 to save $2.5 billion in annual costs. The reduction will make Merck's total headcount just 17% higher than it was prior to the Schering-Plough merger.
As part of an ongoing assessment of Merck's portfolio, the company sold the US marketing rights for antipsychotic drug Saphris in 2014. It also sold its Sirna Therapeutics subsidiary and related assets to Alnylam Pharmaceuticals for some $25 million.
The company in 2014 forged an agreement with Santen Pharmaceutical to sell certain opthalmic products (including Cosopt, Trusopt, and Saflutan) in Japan and key markets in Europe and the Asia/Pacific.
Mergers and Acquisitions
Merck is increasing its M&A activities to further protect itself against competitive market challenges. Expansion measures taken in 2014 include the $3.9 billion acquisition of biopharmaceutical company Idenix, which develops treatments for viral diseases. It plans to combine the two companies' existing drugs to develop an improved therapy for hepatitis C. In early 2015, the company bought antibiotic maker Cubist for $9.5 billion. Merck gained a stronger foothold in the hospital acute care and antibiotic resistance market though the acquisition.
Merck completed one of the largest pharmaceutical mergers in recent history in 2009 when it paid $41 billion to acquire the operations of top drugmaker Schering-Plough. The purchase expanded Merck's pharma, biotech, consumer health, and animal health operations and created a number of new growth opportunities for the organization.