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 drug Januvia, asthma medication Singulair, 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 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 10%.
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 two additional operating segments: animal health and ventures.
Best-selling drugs in the pharma segment include type 2 diabetes drug Januvia, which brought in more than $4 billion in revenues in 2012, and Singulair, which earns more than $3 billion in annual sales. 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 2011 include Juvisync for diabetes in the US, contraceptive Zoely in Europe, and hepatitis C drug Victrelis in both regions. In 2012 the FDA approved Zioptan for glaucoma treatment, as well as once-daily diabetes treatment Janumet XR.
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. 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 most international regions. Ventures include AZLP, which sells Nexium and Prilosec in partnership with AstraZeneca. Vaccine sales are made directly and through the Sanofi Pasteur MSD partnership.
Patent expiration on Singulair took its toll on Merck's finances in fiscal 2012, as revenues fell 2% to some $47 billion. The decrease in sales was also attributed to a dip in Remicade revenues due to a change in the J&J marketing agreement during 2011. Lower sales for a handful of other products were largely offset by higher sales of products including Januvia, Janumet, Gardasil, and Isentress, as well as higher revenues from the animal health and consumer care segments. Net income fell about 2% to $6.2 billion in 2012 as a result of the reduced revenues, as well as from increased expenses related to litigation and divestitures.
In previous years, Merck's growth and cost-cutting measures balanced out patent protection losses to produce stable financial results for the firm, including a 4% revenue increase to some $48 billion in 2011 from higher pharmaceutical sales. The acquisition of Schering-Plough in 2009 nearly doubled revenues in 2010. Net income also increased in 2011 to some $6.3 billion, a vast improvement over 2010 when profits took a nosedive primarily due to lingering acquisition and integration costs from the Schering-Plough merger.
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.
Mergers and Acquisitions
Merck is increasing its M&A activities to further protect itself against competitive market challenges. Expansion measures taken in 2010 include the acquisition of private biotech firm SmartCells, a developer of glucose-responsive insulin products, in a deal worth up to $500 million, and the purchase of the biologics division of UK firm Avecia for $190 million. In 2011 Merck purchased Inspire Pharmaceuticals for some $430 million to expand its ophthalmology product line.
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.