Merck & Company Case Study

Merck & Company Case

Group 11

Overview

Merck & Co., Inc is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit management services (PBM) through Merck-Medco Managed Care. Currently the company is evaluating a drug licensing opportunity with LAB Pharmaceuticals.

Question 1:

Table 1. Financial Ratios

Table 1 shows that the short-term solvency of Merck is decreasing, which means that its operation requires large capital input, resulting in increasing debt. However, Merck Company’s ROE increased between 1998 and 1999, showing its ability to make fully use of liability. This can be an overview of Merck’s operation efficiency.  

Table 2. Financial Indicators

Firstly, it can be seen form table 2 that Merck Company reached a 13.8% increase in sales in 1998 and 21.62% in 1999, and 16% increase in retained earnings in both years, which are all strong guarantee for a continuous inflow of capital. Moreover, Merck generated 5.7 billion through the sales of its most popular drugs, which further guarantees its capital accumulation. Secondly, Merck Company’s business strategy ensures a lower risk level. Merck developed partnerships with many smaller biotechnology companies, by which way its risk is dispersed. At the same time, the development and research of new drugs are all through internal ways, assuring its leading position in therapeutic categories. Furthermore, although new drug developing requires large costs and capital input, it can be made up by the sales income of pharmaceutical benefit management services (PBM). PBM sales in 1999 was 15.2 billion, accounting for almost half of the total sales, thus there is a stable source for capital returns other than drugs selling. Since Merck Company is not entirely dependent on the sales of drug, but also rely largely on PBM, it is able to keep substantial capital returns.