“Medicine Is for People, Not for Profits”

February 8, 2000
Marketing

Merck & Co., Inc., located in Whitehouse Station, New Jersey, is known as America’s leading pharmaceutical company.  In 1999, the Company had revenues of $23.8 billion through its third quarter and has successfully launched 15 new products in the past five years.  These new products accounted for 28% of the company’s total revenue in 1999.[1]

In the past decade, the company has been faced with two major changes caused by external forces.  Mergers of other large pharmaceutical companies have caused an increase in competition and the growing managed care business has brought about changes in political and regulatory issues.  Although some critics have not agreed with Merck’s reaction to these changes, the company is successfully overcoming these obstacles and still thriving today.

One of the largest challenges that Merck faced was the U.S. Healthcare Reform and the threat of pharma-ceutical price controls.  Merck chose a proactive response to this potential problem that initially created a threat to the company.  In 1993, Merck acquired the pharmaceutical distribution company, Medco, in hopes of purchasing its way into the distribution channels of the pharmaceutical industry.  They felt that by obtaining some control of product distribution, they would be in a better position to face the threat posed by managed care and the healthcare reform.

In an attempt to compete with other companies, Merck also began manufacturing its own generic drugs.  Their strategy was to create cheaper drugs so that if patients chose not to use the name brand drug for various reasons, Merck would still be able to obtain their business.

These two actions on Merck’s part were not viewed as favorable solutions to their problems.  First, by Merck creating generic drugs, they were competing with themselves.  Instead of focusing on their main products and stressing the benefits these products offered, they suggested that their products could be manufactured at a lower cost and perform the same function.  It did not take very long for Merck to realize they had made a mistake, and they have since ceased manufacturing generic drugs.

By acquiring Medco, Merck limited the company’s ability to negotiate contracts with other competitive manufacturers.  Merck investors became concerned when revenue and profit growth fell into the single digits.  Merck now has determined that Medco is more successful operating independently of Merck.  Keeping Merck and Medco separate shows other manufacturers that Merck’s ownership of Medco would not affect their contractual relationships with Merck’s competitors or Medco’s negotiation power for its customers.

It became obvious to Ray Gilmartin, CEO of Merck & Co., Inc., that Merck’s preliminary strategies were not going to be successful and other changes would need to be made.  He responded to the challenge by reaffirming Merck’s strategy for breakthrough research.  The company became committed to developing new treatments for large patient groups whose needs were not being met.   They also took a new approach to managed care by finding opportunity and entering into partnerships with large-scale managed care customers.  The goal set for the company was not just to be the largest pharmaceutical company, but also the fastest growing.  It now became most important that everything Merck did contributed to that goal.

Merck also began using the direct-to-consumer (DTC) marketing approach with some of its products.  Although not all physicians are in favor of DTC marketing, Merck has found that if physicians are prepared and have had an opportunity to establish a confidence in the product before the DTC advertising occurs, it can prove to be a beneficial marketing technique in the industry.

Merck continues to place emphasis on research and development (R&D).  In many cases, Merck’s perseverance has paid off when other companies had given up.  This is especially true in HIV research and genomics.

Merck is now back to basics when it comes to its business.  Although profit is important to the management, they are still looking to the original principle established by George W. Merck that “Medicine is for people, not for profits”.[2]

The future stands to be a constant challenge, but Ray Gilmartin seems confident that Merck will survive and maintain its market position.  Not only will future mergers occur and managed care will become more popular, Merck will be facing yet another major obstacle.  Four of Merck’s most important products will go off patent in the next two years.[3]  Merck’s strategy, of course, is to develop better products to replace them.

Merck is an example of how even the leading companies can make bad choices when it comes to change.  The company will be the first to admit it has made mistakes.  What have they learned from their mistakes?  Ray Gilmartin suggests that when faced with decisions on how to adapt to change, you must not lose sight of what the company’s main purpose is.   Although there may be many changes ahead that Merck cannot control, Ray Gilmartin feels that by acknowledging the importance of values and ethics, the company will continue its commitment to excellence and remain number one in the pharmaceutical market.