Merck Canada to Compete in Generic Painkiller Market

Case Type: business competition, competitive response; new business.
Consulting Firm: ClearView Healthcare Partners first round full time job interview.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences.

Case Interview Question #01211: Merck & Co., Inc. (NYSE: MRK) is one of the largest global pharmaceutical companies in the world by market capitalization and revenue. Its headquarters is located in Kenilworth, New Jersey, United States. Our client is Merck Canada, the Canadian subsidiary of Merck & Co. For this case, we will be talking about the Canadian pharmaceutical industry and Merck’s business in Canada only.

The CEO of Merck Canada is worried because the patent of their blockbuster drug Vioxx (a painkiller) expires in 3 years. Recently a generic drug maker brought our client to court regarding the legitimacy of its blockbuster drug Vioxx’s patent. Our client Merck Canada lost which means it could lose its patent within 12 months. Also, our client has nothing exciting in the R&D pipeline. What should they do?

Part II: What is the potential profitability for our client if they do decide to compete in the generic market? Should they do it?

Possible Answers:

1. Case Overview

In this two-part case the interviewer or case giver should first test the candidate’s ability to create a sound solution structure as well as their creativity. Eventually the interviewer should steer the candidate towards the idea of competing against the generics. At this point the case becomes numerical. The candidate will need to identify the drivers, calculate the profitability and make a recommendation.

2. Information Gathering

Additional Information: to give to candidates if requested

Part I — Background information

* Current revenues of Merck Canada are $3.5 Billion/year. The blockbuster drug Vioxx accounts for $1B of this (i.e. it is very important!).
* A new drug takes 15-20 years to develop.
* Patents last for 18 years but are only relevant for around 10 years (new drugs come along).
* If we fight the court ruling, the outcome is unclear. However, we can certainly delay the expiration of our patent by an additional 12 months. Overall, the ROI on litigation is exceptionally high.
* As a subsidiary, our client Merck Canada’s options are very limited. It does not control new drug research & development, it cannot buy a promising biotech firm –> Essentially our client Merck Canada is a manufacturer and distributor of the drugs that are created and owned by its parent company Merck & Co.

Part 2 — Competing against the generics

* Canada has one of the most highly developed generic drug industries in the world.
* There are 10 generic pharmaceutical firms — roughly similar in size.
* The generic market for painkiller drugs in Canada is $500M/year.
* Costs of generic drugs are 50% of sales: Rebates (30%-40%), Production + distribution (5%), overhead (5%).
* Generic drug sales are driven by relationships, low costs, and volume-based rebates given to buyers.
* The interviewer should ask the candidate to estimate our expected market share if we enter the generic drug market. Our strengths: Manufacturing, distribution, and brand. Our weaknesses: lack of relationships, lack of experience with generics. A reasonable expectation of market share is 10%.

3. Detailed Analysis

The candidate should start the case by clarifying the case question. In this case there are two distinct problems the client faces:
(1) what do we do about the recent legal decision? and,
(2) what do we do about the lack of new drugs in the pipeline?

A strong candidate should identify these two problems and attack them separately.

a. Immediate Issue: Court Ruling

* Economic Impact
– client’s revenue?
– revenue from drug?

* Fight in Court
– likely outcome?
– cost?
– ROI?

b. Long Term Issue: No New Drugs in Pipeline

* Obtain New Drugs
– develop new drugs?
– acquire promising biotech firms?

* Enter New Areas of Business
– client’s key competencies?

Quantitative Analysis:

Expected revenues from generic drugs are driven by the size of the market and our expected market share. Our expected market share is driven by the number and strength of competitors and our client’s ability to compete against the competition (i.e. our client’s strengths and weaknesses).

* Expected revenues = Market size * Market Share = $500M * 10% = $50M
* Costs = 50% of revenues
* Profit = Revenue — Costs = 50% of revenues
* Profit = $50M * 50% = $25M

Although $25M seems small in comparison to the $3.5B/year we currently make, at this point it appears to be our best option.

4. Conclusion & Recommendation

* Our client Merck Canada faces an immediate problem (the court ruling) as well as a more fundamental problem (lack of new drugs).

* As a subsidiary, our client’s options are limited. It cannot develop new drugs or purchase a promising biotech firm.

* The ROI on legal investments (i.e. fighting in court) is huge! With revenues of $1B/year, every day that our client extends its patent it earns about $2.75M.

* Our client’s key competencies are in manufacturing and distribution, not research & development.

* Competing against the generics will not generate revenues equal to those created by a new blockbuster drug. However, positive NPV projects are still worth pursuing. Our client has to accept this fact.