Industry Analysis Of The Pharmaceuticals Sector


Pharmaceuticals are a large, high-growth, globalized and innovation intensive industries. Their products are directed to satisfy consumer needs in the health and care area which importance for society is fundamental and rapidly increasing (Mckelvey & Orseniko, 2001). Since the beginning of the pharmaceutical industry in the early 1900, it has sorted out several obstacles and now it is one of the most significant and indispensable industry in the world, because lots of unknown health problem, which threaten human being, occur day by day.

The pharmaceutical industry develops medical products to avoid or cure illnesses and try to discover if the new developing medicine succeeds, and as long as the new product succeeds, pharmaceutical companies can produce it. At the same time, they procure a patent of the new medicine. This is just a short brief of the procedure which has to be performed by all pharmaceutical companies.

Pharmaceutical industry is one of the most beneficial and competitive market to penetrate. In the ranking of pharmaceutical, the fifteen first positions are occupied by major giant companies (See appendix 1). According to this ranking, Merck KGaA is in the 21st position. (Clinton & Mozeson, 2010)


Company background

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At the present time, there are two big companies under the name Merck in pharmaceutical industry. However, they are two different companies. The first one is Merck KGaA in Darmstadt (Germany) and the second one is Merck & Co. in New Jersey (U.S.). Merck KGaA is the oldest healthcare company in the world because the establisher Merck family opened their first pharmacy in 1668.

Additionaly, it can be added that Merck is an innovation oriented company, which means that the company is highly interested in expansion of its competitive edge in pharmaceutical and chemical industry. Merck actively pursues the corporate strategy entitled as "Sustain-Change-Grow".

Business description

Merck has 33,600 employees in 64 countries and it had total revenue of € 7.7 billion during the financial year 2009 which means that it is really global and strong enterprise. (Merck KGaA, 2010).

The company has two business sectors such as chemicals and pharmaceuticals. The pharmaceutical sector of the company develops, produces and markets prescription drugs and has two divisions: Merck Serono and Consumer Health Care.

Merck Serono offers the treatment of very serious diseases such as cancer, cardio and neuro diseases, infertility, endocrine and metabolic disorders, sclerosis, psoriasis; while Consumer Health Care division deals with products for children's and women's health, everyday health protection.


Merck's innovation Strategies

Through the years, innovation has become the central part of the pharmaceutical industry for saving lives, solving diseases and improving the quality life worldwide. According to (Tidd & Bessant, 2009) Innovation is the process of exploiting ingenious ideas for generating successful products or services that can respond to market opportunities and satisfy customer needs.

Thus, Merck has seen innovation as the basis for its business strategy, understanding that to generate a competitive advantage, profitability achievement, liquidity and growth is necessary to establish a continuous cycle of research to develop and create new and better products every time. For this reason, every year, the company invested 22% of its revenues for development and implementation of innovative products with highest quality through the combination of new technologies, acquisitions and strategic alliances with biotechnological companies and academics groups. (Merck KGaA, 2009)

According to (Tucker, 2002) the most successful companies have a clear innovation strategy based on innovation topics for product development, clear vision and mission goals, realistic action plan, and innovation road map with a focus on the development of new products. Nowadays, Merck has an innovation strategy to achieve its business objectives as follows:

Vision: Merck is a company that through the years has strengthened its objectives to become one of the best pharmaceutical companies in the world and it is clear that innovation is the tool and the basis of its present and future success, as well as demonstrated in its slogan "Merck driven by innovation" (Merck KGaA, 2010) and its vison goals. Elmar Schnee, President of Merck Serono affirms that "Innovation drives everything we do, and we will create an innovative, successful pharmaceuticals business with global reach by leveraging our core strengths". (Merck KGaA, 2010)

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Innovation topic for product development: At Merck development and product research has been guided and classified according to therapeutic needs. Regarding the pharmaceutical area, which has become the central focus of the company due to generate 60% of its total revenues, it is developing treatments for cancer, endocrinology, fertility and neurodegenerative diseases, also, the focus of its chemical area has been the development of products such as liquid crystals and effect pigments. (Merck KGaA, 2010)

Development of new products: Merck goal is identify novel products that provide and improve quality of life and stop disease progression. For this reason, the company is building a portfolio of innovate treatment options in areas of not satisfied medical need. Actually, there are approximately 40 new products in pipeline. ( Appendix 2) (Merck KGaA, 2010)

Type of innovation

According to Link and Siegel (2008: 22) "when the innovation is the final marketable result, it is called a product innovation; when the innovation is applied in subsequent production process; it is called a process innovation". Merck's Innovation can be classified as a product innovation, which generates pharmaceutical and chemicals new drugs for improving the quality of life for people worldwide. However, the value of its innovation has been confirmed by one product: Erbitux. This is a powerful new product that will modify the care provided in patients with cancer that have not improved despite treatment with conventional chemotherapy.

Erbitux is the first drug for the treatment of head and neck cancer and has been developed specifically "to block the epidermal growth factor receptor, in that way blocking tumour growth and inducing tumour regression". The efficacy of this new drug has been shown in clinical trials, demonstrating the first vital advance for the treatment of this disease. According to Tucker (2002) all innovations can be categorized into three basic degrees: incremental, substantial and breakthrough. Dr Wolfgang Wein, Executive Vice President, Oncology stated that Merck Serono "has recognized not only the excellence of Erbitux but also the important breakthrough that the product offers people with head and neck cancer, which is complex to treat and in company profitability and growth (Figure 1). Thus, Erbitux was the winner of the Prix Galien Award in 2004, the most prestigious award in pharmaceutical industry for excellence in pharmaceutical development, research and innovation". (Merck KGaA, 2010)

Merck's Innovation Process

Research and Design

At Merck, the process begins with an intensive research and observation work of interdisciplinary teams. According to Dr Wolfgang Wein "around 3,400 Merck researchers and developers worldwide from Pharmaceuticals and Chemicals work to generate a successful exploitation of ingenuous ideas to develop a finished product that meets the customer needs and future market demands. Merck deploys an international network for its innovations, for this reason, it has important research locations in Japan, United States and United Kingdom" (Merck KGaA, 2010)

Develop and Implementation

Figure 2. Merck's innovation Process (Merck KGaA, 2010)

Figure 2 shows clearly that the Merck's drugs do not flow automatically from basic research and the identification of a gene for a specific disease. It requires much work in applied research and development, which is allocated to activities of efficacy, safety, compliance, medical and regulatory.

The development process, consumes the largest amount of time to achieve, it is only initiated after the company has identified potential projects for drugs. It is a very active process that requires substantial investments, specific technical expertise, logistical coordination and timeline considerable detail. Then the successful compounds are tested in humans in three phases of clinical trials. Then, if clinical trial results are satisfactory for quality, efficacy and safety, provides a regulatory dossier to regulatory authorities for approval and a patent strategy ensures its long-term utilization. (Merck KGaA, 2009)


Business is measured by its success and according to the achievement it can be recognized that Merck Serono is an innovative leader in pharmaceutical industry. Merck reacts to customer needs by producing effective and advanced pharmaceutical products and consequently replies to changing Markets. Development of innovative products reflects an improvement in Merck and reflects changes in the competitive market environment

Thus, stresses skills how to manage and lead change effectively for adopting the change and guiding successful change efforts. In order to specify types of change we need to identify External and Internal triggers of change. (Burns, 1995)

External and Internal triggers of change

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The whole process of strategic change begins with internal or external triggers. Markets are changing constantly and the companies have to react to the demand in the market in order to produce competitive products and create a value to the customer and for the business as well. (Carnall, 2002)

A number of key developments have been taking place in Merck regarding the management of new product development and innovation. This development reflects improvement in Merck and reflects changes in the competitive market environment. The whole process of strategic change begins with internal and external triggers of change.

External triggers are out of the organization's control; the external macro-environment in which the Merck operates is expressed by the following factors: Political; Economic; Social; Technological factors and is described by The PEST analysis:

1- New needs and wants from the customers-Merck produce effective medicines of the highest quality

2- New competitors in existing market. Merck is committed to the development of efficacious therapies for patients with significant unmet medical needs.

3- New product development based on new technologies. - Merck is internationally recognized as a biotechnology leader, having ability of high-quality manufacturing which is a key success factor especially in the biopharmaceutical industry. Pioneering technology-Merck Serono makes the medicines easier for the patients with the help of pioneering technology and as a result was awarded by a gold medal for its innovative design and ease of use. Merck Serono's easypod, the first electronic growth hormone injection device

4- New legislations introduced by the government.

Merck reacts to an increase in competition with internal triggers which is demonstrated by launching of rival product - Erbitux. Merck achieves competitive advantage by the resources and capabilities expressed by the firm's strengths:

Brand Loyalty

High cost structure

Clinical trial

The most common way of using a SWOT analysis as a great tool for strategic analysis is systematically discussing the firm's resources and emerging basic alternatives and objectives. The PEST factors are combined with external micro environmental factors can be classified as opportunities and threats in SWOT analyse as follows: (Markides, 1999)

(Markides, 1999).

Merck identifies that the top priorities of the process of effectively evaluating implementation mechanisms is systematically gathering and analysing qualitative information to determine whose interest should be taken into account when developing and implementing a policy or programme.


As mentioned before, Erbitux is the main subject to study in this paper. And therefore, all improvement made is going to be a plus for the human life: "We are in business to preserve and improve human life. All our actions must be measured by the success in achieving this goal" (Merck KGaA, 2010)

The Medical Director of Merck in Spain said that after 30 years without evident progress in oncology , Merck Serono has succeed in providing a considerable improvement in patients with recurrent metastatic thanks to treatment with Erbitux, and that proves the commitment of the company to develop new tools that involve technological advances in the improvement of medical drugs.

According to Tucker (2002) managing is different to leading, and the leadership is what it takes to be competitive in the innovation field. For him there are five crucial functions in creating a company with innovation capacity:

"Design and implement an innovation strategy

Spread Responsibility for making innovation happen

Allocate resources and decide on risk levels

Establish innovation metrics

Reward innovation"

Regarding the function five, Merck promotes among their employees healthy competition in different areas and the development of several products to improve their process and acceptance in the pharmaceutical market. And they even won, as company, an award for the innovation used in the Erbitux medication.

Role of the manager in promoting the innovation

As a manager you can create an innovation atmosphere whereas your employees can create new ideas or develop the old ones by promoting spaces where this process can be made. In Merck they live this process all the time in every activity they do; the company want their employees to feel free when it comes to create and improve.

They live in an organizational culture of innovation, from the production process to the facilities of the company as the interview revealed. One of the directors said that his role is like a GPS, he leads the scientific team but the team is the one driving. Speed and quality are virtues to find balance in the decision making. (Merck KGaA, 2010)

Reaction of the industry customers and suppliers

According to Merck Serono, the biotechnical division of Merck KGaA revealed in Spain favourable results regarding the use of Erbitux in patients suffering from cancer. The study named EXTREME shows that the addition of the product in the patient´s treatment prolongs survival to 2.7 months (Vermorken, 2008) due to this, the European Medicine Agency (EMA) recently approved the expanded use of Erbitux (cetuximab) as first line treatment for the cancer of the head and neck; however, Erbitux is also used in cancer of the colon and rectum.

Despite the good news, Merck KGaA was denied the marketing authorization for the use of Erbitux in lung cancer by the EMA in 2009 saying that severe side effects were seen in some lung cancer patients who received Erbitux.


Merck spends more than I billion euro, on innovation on the well- being of many people and to address social issues. This in turn forms the basis of further business success, which adds value to the company. Innovation to Merck is considered as a matter of trust, because without the trust Merck will not be able to realize their targeted expansion of the various range of product they produce. (Merck KGaA, 2009)

Not only does the innovation open markets but also opens opportunities of new products, this is as a result of research and development, and the continuous desire for challenges and long-term success. Innovation does not come as a responsibility, but it also comes at a cost and a very expensive cost too. Not to say if the innovation is a success the cost can easily be cooped on the sales of the drugs and also the patent if it was to be sold which is the reward of every entrepreneur either a large one in this case or a small one which is ready to take risks.

When a company is successful with its innovation the effect of the success is like a chain reaction in every area that is affiliated with the company. This could be internally or externally. Internally being the research team, the managers and the employees as a whole, who not only have the benefit in working in a reputable firm, but also to be able to associate themselves to a firm with a winning and success mentality. This can go a long way in even giving the employees a boost in their career in terms of seeking new employment in the future. Such value cannot be overestimated.

Externally we will be looking at another set of people who are not employees of the firm but who are as important if not more important, although debatable, than the employees of the company at hand. These people not only provide the funds for the company, they also determine the success of the company. YES they do!!,for instance if there was no available fund there will be no research or even any company, also if there was no demand for the drug there will be no sales and then no revenue. And if there was no larger society there will be no volumes of sales which become profits.

This group of individuals are the customers (buyers & sellers), providers of capitals (investors), and society (countries, towns) as a whole, in terms of health and wealth (dividends, bonds) which is again the reward for investing.

The importance of innovation as an instrument of wealth creation, and also as a vital factor in giving a company a competitive advantage, is immeasurable in many areas of everyday business activities. This importance is something that the chairman executive of Merck noted which made him make this assertion.

"Innovation is defined not by creation of new knowledge, which is invention, but by the fact that this new knowledge is transformed economically and leads to measurable success in the market-place."

Karl-Ludwig kley (chairman executive of Merck)

It is important to highlight two factors that have improved the performance of the organization Value chain and branding as follow:


Consumers often combine quality perceptions with cost perceptions to arrive at an assessment of the value of a product. Cost here is not restricted to the actual monetary price but may reflect opportunity costs of time, energy and any psychological involvement in the decision that consumers might have.

From a firms perspective it is therefore necessary to take a broad view of value creation. Porter (1985) suggested that activities within the organizations add value to the products and services that the organization produces, and all these activities should be run at optimum level if the organization is to gain any competitive advantage. If they are run efficiently the value obtained should exceed the costs of running them, for instance, customers should return to the organization and transact freely and willingly.

According to Porter "firms are a collection of activities that are performed to design, produce market, deliver and support products. In his value chain he suggests that organizations are split into primary activities and support activities". (Whewell, 2008)

In Merck Erbitux as a result of innovation has added value to the company in terms of the technology development, human resource management in terms of specialist in various fields of discipline. Merck as a company is also partners with three other companies which add value into the value chain, this gives it a competitive edge in terms of distribution, procurement and efficient coordination. And also is important in effectively managing core business processes and cross-functional integration and cooperation.


In the case of Merck the new innovation in terms of the new drug that it produced (Erbitux), has gone a long way in adding value to Merck not in terms of revenue alone but has greatly enhanced and strengthened the brand name of a long period of time.

The innovation product (Erbitux) has been a great improvement for the company regarding branding and recognition. After the product succeeded in the pharmaceutical market Merck the position of Merck was clarified and differentiated from USA Merck Co, which represented a big advantage and gave the organization an even better position in the market. In addition to this, Merck went up in the ranking of the best pharmaceuticals in the world and also gained credibility among clients.

However, as Merck is going through the process of rebranding, the fact of gaining recognition through

This innovative product allows the company to have changes in its name and still keep the position it has in the market.

The innovation process helps the companies in general thought organizational level, production level and in marketing level. For the organizational the most relevant is to gain sustainable competitive advantage. This is a sneak view into what promises the new innovation has been able to offer the company and society.

Financial highlights 1st quarter 2010 (Appendix 3)

Total revenue increase 13% to EUR 2.1 billion

Profit after tax more than triples to EUR 195 million

Erbitux sales + 19% to EUR 192 million

Free cash flow improves to EUR 195 million from EUR 164 million

Innovation award

In 2004 Grand Prix Award: Erbitux for its clinical excellence and innovation.

In 2008 the biomarker task force Erbitux KRAS won the innovation award.

All these achievements at a view on just one product clearly show the impact that such a product has had in making Merck as a company stand out from its competitors. These were only achievable with the implementation of a well run innovation programme that seeks to be the best in new ground breaking technology, research and development.

In the Production the improvements and quality of existing products, service and development of alternative techniques in existing technologies is the aim (Tidd & Bessant, 2009) .In the marketing level increase the sales and the customer focus as the loyalty is very important for the growth of any company.


After going through the analysis of the chosen company Merck, it is concluded that the organizations has a good criteria to deal with development and innovation, given that it invests in innovation process as an essential method to grow.

On the one hand, the innovative product developed by Merck (Erbitux) represents an excellent alternative for cancer patients, and on the other hand, as the new drug was a success, it provided great advantages to the company such as the recognition into the pharmaceutical industry by obtaining the Prix Galien Award in 2007 and as a consequence an stronger brand name.

Additionally, the success of any innovation will directly depend on the managerial ability to adapt and overcome the implementation stage of the new product and its internal and external triggers. This is one of the strengths that Merck can count on, which is easily appreciated when we look at the percentage of the total revenue that the company invests in the development and implementation of innovative products, the research and clinic trials that are performed in order to create new drugs a even better alternatives for serious diseases.

However, in order to improve innovation in the company, the following recommendations are to be taken into account:

As well as finding new alternatives for serious diseases, the company could produce a wider range of medicines for more common diseases which are more commercial and would increase the sales and profitability, enabling more of the revenue to be taken to reinvest.

The company could obtain government funds to increase the amount of money invested in the development of innovation and therefore gaining a better quality and results. It is a well known fact that the pharmaceutical industry is associated and in some cases regulated by the government, so it would be a great advantage to have the government support at the moment of finding the resources to develop new products.

The creation of new centres of research should be considered in order to achieve and develop even more innovative product that will enhance the company's profile and increase customer satisfaction in different parts of the world as part of a lager program directed to globalization.

More advertisement and promoting are also recommended to ease the differentiation of the two companies under the same name (Merck) and make use of the company's previous achievements such as the award it won.

Investment and more research dedicated to the study of the side effects of the drug Erbitux in other types of cancer. In other words, if the quality of the drug continue to improve and diminishes the side effects, more patients would have access to a better treatment and a better quality life.

Top 10 pharmaceutical companies worldwide have been clear that a strategy of growth and consolidation in the market are the mergers; due to acquisition is not always signal strength and competitiveness in the market. For this reason, the company to eliminate inefficiencies and increase overall sales should seek mergers with competitive companies.


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Ranking Top 50 Pharmaceutical Companies

Source: (Clinton P & Mozeson E 2010).


Merck Serono's key research areas and pipeline compounds

(Merck Innovation 2010)


Financial highlights 1st quarter 2010 (Appendix 3)

(Merck KGaA Profile, 2010)


(Merck KGaA Profile, 2010)