project 1 - final deck

Memo of Transmittal

To: Integrated Business Cluster Associates

From: Bryan Croft, Adrien Helmuth, Allison Holtman, Corey Mouch, Catherine Stolar

Date: September 30, 2015

Subject: Analysis of Merck and Sanofi Against the Key Success Factors of the Pharmaceutical Industry

In the attached report, requested by the IBC Associates, the pharmaceutical industry is thoroughly analyzed. Subsequently, Merck and Sanofi are analyzed and compared against each other as well as the rest of the industry. This report will be helpful in reaching a deeper understand of the market as well as gaining insight on which company is more successful and how the other company can improve to reach a better level of success.

We arrived at our decision by conducting extensive research of the worldwide pharmaceutical industry, as well as digging into the business of Merck, Sanofi, and competitors by using 10-K’s, 20-F’s, and other financial documents. This research has led us to our final decision that Merck is in the more favorable position compared to Sanofi. Our decision matrix illustrates that Merck received an overall weighted score of 8.10, whereas Sanofi had an overall weighted score of just 6.10. These ratings were based off of three main key success factors, each of which are evaluated using specific criteria. The first key success factor is strategic mergers and acquisitions for IPR&D and geographic purposes. This KSF is broken down into M&A in order to jumpstart R&D and M&A for specific geographic location. Our second KSF was capitalizing on growing medical trends, which is broken down into diabetes, oncology, and diseases related to the aging population. Our final key success factor was navigating the patent process, which is categorized into taking advantage of favorable legislation and managing patents through pipeline efficiency.

Merck is in a more favorable position in the industry, but there are a few things Sanofi can do to get back on the right track. Sanofi should focus its R&D spending on upcoming anti-diabetic product Toujeo, review its negative outlook on engaging in mergers and acquisitions, and refrain from the re-purchasing of company equity from major shareholder L’Oreal.

We sincerely thank all of our faculty and our peer mentor for incredible support and assistance in allowing us to gain an extraordinary amount of knowledge so far this semester. We look forward to meeting with you and answering any questions you may have about the conclusions we have made.

Final Project: Key Success Factors of the Pharmaceutical Industry

Adrien Helmuth

AllisonHoltman

BryanCroft

CatherineStolar

CoreyMouch

Prepared for:Senior Partners

Copeland & AssociatesCollege of Business

Prepared by:Team 3

Mid Cohort 107College of Business

Ohio University

Table of Contents

Introduction 1Purpose 1

Positioning 1

Decision Matrix 1

Comprehensive Industry Analysis 2Overview of the Industry 2

Healthcare in the US 2

Technology Promotes Health Independence 2

Mergers and Acquisitions 2

Comprehensive Industry Analysis Continued 3Competition within the Industry 3

Biosimilars 3

Buyers and Supplies Shift Positions of Power 3

Comprehensive Industry Analysis Continued 4Over the Counter (OTC) Pharmaceuticals 4

Prescription Drugs 4

Animal Health Biotechnology 4

Company Analysis: Merck 5Company Overview 5

Competition 5

Financials of Key Products 5

Company Analysis: Merck 6Financial Position 6

Key Mergers and Acquisitions 6

Company Analysis: Merck 7Anti-Diabetics 7

Oncologics 7

Table of Contents

Company Analysis: Sanofi 8Company Overview 8

Competition 8

Financials of Key Products 8

Company Analysis: Sanofi 9Financial Position 9

Key Mergers and Acquisitions 9

Future Outlook 9

KSF #1: Strategic Mergers and Acquisitions 10Introduction to KSF 10

Criteria 1: R&D 10

Criteria 2: Geographic Location 10

KSF #2: Capitalizing on Alzheimer’s, Diabetes and Oncology 13

Introduction to KSF 13

Criteria 1: Alzheimer’s 13

Criteria 2: Diabetes 14

Criteria 3: Oncology 14

KSF #3: Navigating the Patent Process 15

Criteria 1: Taking Advantage of Favorable Legislation 15

Criteria 2: Efficiently Managing Patents 15

Decision Matrix Explanation 18

Sanofi Recommendations 18

Conclusion 19

References 20

Appendix 24

List of Figures

Figure 1: Scoring Matrix 1

Figure 2: Pharmaceutical Market Share by Country 2

Figure 3: Worldwide Mobile Health Revenue 2

Figure 4: Revenue at Risk from Patent Expirations 3

Figure 5: Market Share of the OTC Segment 4

Figure 6: Market Share of the Prescription Drug Segment 4

Figure 7: Prescription Drug Market Share – Top 10 Companies 5

Figure 8: Top Oncology Companies by Revenue 5

Figure 9: Merck Drugs by Percentage of Revenue 6

Figure 10: Top Anti-Diabetic Products by Market Share 8

Figure 11: Sanofi: Key Products’ Percentage of Total Sales 8

Figure 12: Prescriptions Drug Sales and R&D Spending 11

Figure 13: Statistical Variables 11

Figure 14: KSF #1 Decision Matrix 12

Figure 15: Age Dependency Ratios in the US 13

Figure 16: Projected US Alzheimer’s Costs from 2010-2050 13

Figure 17: Global Market Share of Top Pharmas by Anti-Diabetic Revenue 14

Figure 18: Top Oncology Companies by Revenue 14


Figure 20: Revenue From Orphan Drugs 16


Executive Summary

This report provides an analysis and evaluation of Merck and Sanofi against the pharmaceutical industry and its key success factors. Methods of research that were used to analyze the companies and find the industry’s key success factors included company financials, industry trends and global outlook. The three key success factors we found for the industry were: Strategic mergers and acquisitions for research and development and global positioning, engaging in lucrative growth opportunities, and navigating the patent process. After analyzing Merck and Sanofi against these KSF’s, it is clear that Merck is more favorably positioned.

Advantages of Merck:

• The selloff of Merck’s OTC segment will provide adequate working capital for a short term, providing an operational edge compared to competition.

• Recent engagement in M&A (Acquiring Cubist and OncoEthix)• Fourth largest market share in prescription pharmaceuticals• Strong R&D Pipeline• Revenue from Bayer’s purchase of OTC segment leads to $11.2 billion USD in net other income for short-

term advantage

Problems Facing Sanofi:

• Sanofi’s sales from multiple sclerosis unable to lessen the blow from patent expirations especially in the anti-diabetic segment, namely the termination of market exclusivity on flagship drug Lantus

• Expected to drop its 23% market share of anti-diabetics to 14.3%• Sanofi’s lack of a single flagship product in oncology places it at a disadvantage to already established

ones such as Rituxan, Herceptin and Avastin from Roche alone.

Recommendations for Sanofi:

To help Sanofi improve its positioning in the pharmaceutical industry we recommend the following:• Focus on Toujeo and Other Anti-Diabetic Products• Reposition Negative Stance on Future M&A• Postpone Repurchasing of 9% of company stock owned by L’Oreal

Conclusion:

Based on the key success factors, Sanofi is clearly inferior to Merck at this time and is positioned less favorably for the foreseeable future. However, the recommendations we have made based on Sanofi’s financial status as well as its subpar performance against the Key Success Factors can guide the company to future success. Sanofi has the tools to succeed, and these recommendations will put Sanofi in the right mindset to actively make use of these competitive advantages.

Introduction

1

The purpose of this report is to analyze the current and future state of the pharmaceutical industry as well as establish key success factors in the pharmaceutical industry, against which Merck & Co. and Sanofi will be analyzed. The first key success factor in pharmaceuticals is engaging in strategic mergers and acquisitions. The second key success factor is capitalizing on the variety of lucrative growth opportunities that the industry has to offer, mainly expansion into growing therapeutic markets. The final key success factor is effective navigation of the patent process, which is judged by two key criteria: ability to take advantage of favorable legislation and efficient product development. We will discuss these key success factors in more depth, as well as the ratings we assigned to each company based on these factors.

Purpose

Favorable Positioning Merck & Co., when compared to Sanofi, currently owns a more favorable position in the pharmaceutical industry. Merck received a higher rating in every key success factor. In particular, Merck received a very high rating of 8 for Key Success Factor #1 due to its outstanding M&A activities which have positioned the company well for future success. This is the most important key success factor, and Merck’s high rating not only for this key success factor, but its higher ratings in every Key Success Factor, correlate with its position as the more favorable company.

Less Favorable Positioning Sanofi is the less favorably positioned company, they received lower ratings than Merck did for each key success factor. Sanofi engaged in less strategic M&A’s than Merck did. Additionally, Sanofi did not take advantage of lucrative growth opportunities to the same effect that Merck did, and lastly, Sanofi has less products in their development phases. Sanofi is at a disadvantage because in order to sell their products, they have to abide by federal laws. This leads to complications in terms of whether Sanofi wants to try to have a drug approved in the EU, in the US, or both. Not producing drugs that follow the regulations of the FDA leads Sanofi to not being able to sell in the largest market of the pharmaceutical industry, which is the US. Sanofi is clearly in the less favorable position.

Scoring MatrixFigure 1 shows the three key success factors that play an important role in the pharmaceutical industry. Strategic M&A is the most important factor, second is engaging in lucrative growth opportunities by analyzing therapeutic markets, and third is navigating the patent process. Each key success factor was weighted based on its importance, backed by research and data. The weighted scores show how well each company is performing against these key success factors.

Figure 1: Scoring MatrixImage Source: Wikipedia

Intro | Industry Overview | Company Analysis | Key Success Factors | Recommendations| Conclusion

Merck Sanofi

Key Success Factor Weight Raw ScoreWeighted

Score Raw ScoreWeighted

ScoreStrategic M&A 40% 8 3.20 6 2.40Capitalizing on Alzheimer's, Diabetes and Oncology 35% 9 3.15 7 2.45Navigating the Patent Process 25% 7 1.75 5 1.25Total 100% 8.10 6.10

Spending in the global pharmaceutical industry reached a record $980.1 billion USD in 2013, moving closer and closer to the $1 trillion mark which is expected by 2018 (BPI, n.d.). Global and national issues such as government healthcare, reliance on technology, and ethical issues, shape the state of the industry. Competition between companies from Research and Development (R&D) to patent laws affects the power of buyers and suppliers in the industry, and threats from up-and-coming biosimilars suggest a change in the business environment of pharmaceuticals. The key players within the OTC, prescription, and animal health segments also provide an important picture of the current state of the industry as a whole, and help to indicate where the industry is headed in the near future.

Accessibility to detailed medical information via modern technology has changed the way consumers approach their personal health. By using online information patients can easily self-diagnose themselves and research health-related content. As a result, 48% of people attempt self treatment before visiting a physical clinic (Krol, 2015). There has been an increase of mobile and wearable technologies, that allow users to quickly and easily monitor personal health and progress. Health and fitness applications for mobile devices are some of the fastest growing in the industry, increasing 87% faster than the rest of the app industry and the worldwide mobile health movement is increasing too, as shown in Figure 3. (Khalaf, 2004).

Comprehensive Industry Analysis

Overview of the Industry Technology Promotes Health Independence

2

Healthcare in the United States The United States has the world’s largest market share in the pharmaceutical industry at 40% (See Figure 2). Because of this, the US market has a substantial impact on the global pharmaceutical industry. Between Medicare, Medicaid, and the Affordable Care Act 85% of the nation’s patients are limited to the drugs covered under these forms of insurance. This shifts a great deal of bargaining power over to the US healthcare system. If a particular company is on the list of drugs covered by US government healthcare programs, this drug will be significantly more successful in the US marketplace.

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USA Other Est. Mkts Emerging Mkts

Figure 2: Pharmaceutical Market Share by Country

2013 2014 2015 2016 20170

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Figure 3: Worldwide Mobile Health Revenue (Billion USD)

PwC (n.d.)

(Statista, 2015)

In 1985, the top 10 pharmaceutical companies accounted for 20% of sales in the global pharmaceutical industry. By 2012, sales by the top 10 companies reached 42% of the global market (Kermani, 2014). This trend can be attributed to mergers and acquisitions. The joining of two companies or the purchasing of smaller companies by large companies is beneficial for a number of reasons, mainly from a Research and Development standpoint.

Mergers and Acquisitions

Intro | Industry Overview | Company Analysis| Key Success Factors| Recommendations| Conclusion

The pharmaceuticals industry is concentrated with ‘Big Pharma’ companies; 70% of the industry's production is from 2% of the market (Pharmaceuticals USA: ISIC 2423 2014). On the other hand, 'micro' manufacturers (between 1-9 employees) account for 70% of the market but only 1.8% of production. A company's ability to gain market share is influenced by its ability to create new products through research and development and protection of its patents against generics manufacturing.

The main competition with brand name companies is the rise of generic companies. Brand name pharmaceuticals must maintain their patents because once the patents expire, the brand can lose up to 70% of its sales to generics (Turk, 2015). Figure 4 depicts the revenue that was at risk from expiring patents between 2006 and 2014, as well as what is projected to be at risk for the following six years. A “patent cliff” occurring in 2015 will put $44 billion dollars of revenue at risk for brand name manufacturers.

Benefits to R&D programs through mergers and acquisitions, including the ability to make up for lost sales due to patent loss, are key to the success of brand name pharmaceuticals. There is no reason to believe the mergers and acquisitions in the pharmaceutical industry will slow down. This creates competition on both sides; small companies and Big Pharmas will inevitably compete for the best M&A relationships.

Competition within the Industry BiosimilarsBiosimilar drugs are biological products that achieve the same effects as regular drugs, also known as reference drugs. Biosimilar drugs are becoming increasingly popular within the pharmaceutical industry. The similarity between reference drugs and biosimilars is slim to none, and the effects are the same. Additionally, the cost to switch from a reference drug to a biosimilar drug is relatively low. However, the regulation of biosimilars is very strict and gaining FDA approval is a strenuous process.

3

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Figure 4: Revenue at Risk from Patent Expirations

Buyer and Suppliers Shift Positions of Power

A large amount of US generic sales are made to a small number of retail drug chains and drug wholesalers. These retailers and wholesalers have been consolidating, which in turn has given them more purchasing power. On the other hand, the manufacturer of active pharmaceuticalingredients (APIs), which is a sub-sector of the chemical industry,is losing power. They are losing power because some of the pharmaceutical companies have large investments in the chemical manufacturers, which provide the companies with a degree of self-sufficiency (OneSource Global, 2014.).

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Animal Health Biotechnology is the segment of the industry that features the use of biological drugs for the treatment of animals as well as for the improvement of the breeding processes of various animals. Animal medical products are not that different from that of humans. Animal Medication for personal use is a smaller segment of the market, however, animal health is often used for livestock and other income producing animals. The US Animal Health Biotechnology industry had $8.7 billion in revenue last year and is a segment of the industry with low concentration. The top two companies in the industry, Zoetis and Merck, take up less than 20% of market share in the industry. The industry is poised for major growth over the next few years until 2020 due to helpful legislation and good economic conditions. These two components will allow for a spike in R&D spending and expansion of the industry, which is expected to grow at an average of 5.1% in revenue per year over the next five years.

Over the Counter pharmaceuticals are drugs that don’t require a prescription. The Over the Counter Pharmaceutical market segment had revenues of $29.3 billion in 2013, a 1.5% growth from 2012. The Asia-Pacific area has the largest market for OTC drugs with 35% of the market, followed by Europe (32.3%) and the United States (20.7%). Johnson & Johnson represents the largest market share in OTC production with 18.4%. Pfizer Inc. is the second with 5.9% as shown in Figure 5. Pharmacies and Drugstores are the largest distributors of over the counter products with 58.5% of all OTCs being sold by them. Supermarkets also are large distributors with 36.0%. According to MarketLine the OTC market is expected to increase 9% by 2018 to reach a value of $31.9 billion. This is mainly due to a continuing expanding market in the Asia-Pacific area, especially India and China.

Over the Counter (OTC) Pharmaceuticals Prescription DrugsThe prescription drug segment involves competition between generic and brand name drugs. Generic drugs are prescribed 86% of the time in the U.S. (Phillips, 2015). The key players for the prescription drug segment are the retail drug stores and wholesalers (see Figure 6). Those include CVS Caremark, Walgreen Co., and Rite Aid Corporation. The prescription segment forecast is that it will increase along with the increase in growth and indispensability of pharmacies and drug stores. Since the health care reform passed, more people are becoming insured, so more people will have less out-of-pocket expenses when picking up their prescription. Therefor people refill their prescriptions more often, which will lead to a rise in the prescription drug segment and in the pharmacies and drug stores (Turk, 2015).

4

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Figure 5: Market Share of the OTC Segment

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Figure 6: Market Share of the Prescription Drug Segment



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Merck & Co, founded in 1889, is a pharmaceutical giant based in New Jersey that provides treatments for a wide variety of ailments for humans, and also has a large animal health segment as well. The company has recently focused on key areas of antidiabetics and oncologics. Merck’s top selling drugs, Januvia and Janumet, are antidiabetic prescriptions. The company has recently engaged in strategic mergers and acquisitions to bolster its repertoire as well, acquiring Cubist for $9.5 billion and OncoEthix for $153 million (Merck, 2015). The company currently holds the fourth-largest market share in the highly concentrated field of prescription pharmaceuticals. Its animal health segment, Merck Animal Health, was the second-leading animal health company in 2013, generating $3.36 billion in revenue (FiercePharma, 2014).

Company Analysis: Merck

5

Company Overview

Competition Merck’s competition stems from three main sources: large R&D focused companies, patents granted to competitors, and generic manufacturers.

As you can see in Figure 7, Merck is the 5th largest biotech and pharmaceutical company in the world with revenues of $42.2 billion. The broadest competition (other pharmaceutical industry players) includes Johnson & Johnson ($74.3 billion), Novartis ($49.6 billion), Pfizer ($47.7 billion), Sanofi ($43.9 billion) and GlaxoSmithKline ($35.8 billion). While Johnson & Johnson has about 53% more revenue, it’s portfolio contains a significantly broader range of products across multiple industries rather than primarily pharmaceuticals.

Merck is currently the 3rd largest anti-diabetic medication manufacturer in the world at 14.5% of the market. This is primarily led by Januvia, an anti-diabetic medication which accounted for 9.3% ($3.9 billion) of their total revenue. Direct competition

includes Novo Nordisk (30%), Sanofi (23%), Eli Lilly (10.1%), and AstraZeneca (4.3%). Novo Nordisk’s large market share is due to their broad range of diabetic products, totaling 78.7% of their total revenue making their competitive edge significantly larger for this segment.

Merck is currently the 9th largest oncological treatment manufacturer in the world with 0.6% of the market. Industry leader Roche controls 32.6% followed by Novartis with 11%, Celgene with 9.4%, Bristol-Myers Squibb with 4.8% and Pfizer with 3.8%. However, 62% of Roche’s revenue comes from oncological products, making them highly more competitive than other companies within this segment.


Figure 7: Prescription Drug Market Share Top 10 Companies

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Figure 8: Top Oncology Companies by Revenue (In Billion USD)

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6

Financial PositionTotal sales for Merck reached $42.24 billion in 2014, a 4% decline from 2013 (Merck, 2015). While 1% of the 2013-2014 loss is attributed to poor foreign exchange rates, the remainder is mainly due to patent expiration. Losses of nearly $2 billion since 2012 are the result of the loss of patents for Singulair, a daily asthma medication, alone. In combination with an increasing cost of goods sold, this has led to a 3% decline in Gross Profit.

Due to high marketing and R&D expenses the operating margin for 2013 was lowered to 12.6%, a decline from 18.5% from the year before. However, 2014 saw a very significant change in the Merck operating abilities. Through Bayer’s purchase of Merck’s consumer care (OTC) business, the company realized $11.2 billion in profit. This in turn helped to offset operating expenses for the year, raising the operating margin to 40%. This in turn led to rises in ROA from 4.13% to 12.14% and ROE of 8.42% to 24.46%. While this will give additional operational funds for some time, operating margins and return ratios will decline back to where they were before the acquisition unless major product breakthrough or sale of products occurs.

Despite volatile value ratios and margins, Merck is a relatively liquid company with a quick ratio of 1.47 and current assets equaling 33.7% of total assets, 7.6% of which are cash and cash equivalents. While this is a decline from 2013’s cash and cash equivalents, the purchase of Cubist for $9.5 billion and OncoEthix for $153 million explain this drop. Should operational expenses continue to rise, Merck’s liquidity will help to continue adequate production.

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Figure 9: Merck Drugs by Percentage of Revenue

(Merck 10-K, 2014)

Financials of Key Products The leading branch of Merck’s revenue is its pharmaceuticals department, which accounts for 85.3% of its revenue at $36.04 billion. This number is down from $40 billion in 2014 (Merck, 2015).

Januvia, an antidiabetic that fights Type 2 Diabetes, leads the charge of Merck’s pharmaceutical sales with $3.9 billion in 2014. Janumet, a similar drug, posted $2.0 billion in sales last year (Merck, 2015). Merck’s two antidiabetic products make up for almost $6 billion, or 16% of Merck’s pharmaceutical sales.

Merck’s Animal Health segment is robust as well, the second-leader in the industry behind Zoetis. Animal Health drugs accounted for $3.45 billion of Merck’s revenue in 2014, an increase from $3.36 billion in 2013.


Future Outlook

Furthermore, through successful transfer of equity and headquarters to foreign firms Merck can take advantage of tax inversion, preventing payment of foreign income tax and boosting net profit significantly. This will be especially beneficial in controlling the large income tax payable increase from the purchase of Cubist and OncoEthix. This must be done before refined legislation is enacted or the total benefits of doing so won’t be realized.

Rising sales of key oncological products including Emend, Temodar and Keytruda as well as the purchase of OncoEthix will raise Merck’s oncology market share. Combined with expected patent losses for major oncological products from competitors, Merck’s market share is expected to rise to 3.6%.

In the diabetes segment, the expiration of Januvia’s in 2022 will lead to drastic losses in sales. Due to the company’s reliance on this product, major revenue losses will result in setbacks and loss of margins. While this isn’t for another 7 years, Merck must take charge in establishing new cash flows within this segment, which it has begun to do through its partnership with Pfizer and its progress on market entry of new products.


7

Future Outlook

Acquisitions leads to

cheaper R&D

Increasing market share in oncology

Needs more diabetes

products in pipeline

Selloff of OTC segment

provide short term working

capital.

Key Mergers and AcquisitionsIn early 2015, Merck completed its purchase of antibiotics specialist company Cubist for a $9.5 billion price tag. Cubist is a leader in producing innovative new antibiotics focused on fighting serious or even life-threatening afflictions. Merck and Cubist are working closely together on developing a number of new antibiotics (Merck, 2015).

Merck also acquired oncology innovators OncoEthix for $153 million (Merck, 2015). The company has identified oncology as an area of high growth in the coming years and has made oncology a key focus in its research and development.

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The selloff of Merck’s consumer care business will provide adequate working capital for a short term, providing an operational edge compared to competition. However, further constraints of operational expenses are necessary for long term sustainability. The acquisition of foreign firms with highly developed IPR&D will play a role in lowering R&D expenses which can be further allocated to marketing for higher sales or reinvested for further acquisitions.

Sanofi is a large-scale pharmaceuticals manufacturer based out of France. It is best known for its key drugs Lantus (anti-diabetic), Plavix (cholesterol), and Lovenox (deep-vein thrombosis), which alone made up for nearly 30% of its sales in 2014 (Sanofi, 2014). Sanofi has directed many of its resources for the future towards diabetes, oncology, and multiple sclerosis treatments. It also boasts a large animal health sector in the form of its child company Merial, which was third in 2013 animal health revenue at $2.73 billion (FiercePharma, 2014).

Company Analysis: Sanofi

8

Company Overview

Competition Sanofi faces competition in R&D and innovation from a wide variety of sources, and also faces heavy risks due to liability claims.

Sanofi is the 4th largest biotech and pharmaceutical company in the world with revenues of $42.2 billion. The broadest competition (other pharmaceutical industry players) include Johnson & Johnson ($74.3 billion), Novartis ($49.6 billion), Pfizer ($47.7 billion), Merck ($42.24 billion) and GlaxoSmithKline ($35.8 billion).

Sanofi is the 2nd largest anti-diabetic medication manufacturer at 23% of the market. 30% of the company’s revenue was a result of anti-diabetic diabetic products. Direct competition includes Novo Nordisk (30%), Merck (14.5%), Eli Lilly (10.1%), and AstraZeneca (4.3%).

Oncology accounted for only $1.3 billion in revenue for Sanofi, with its top selling product only accounting for $354 million of this. This places it at 15th in the world with a market share. Bayer, Otsuka and Eisai all represent the nearest competition, while single product competition from larger market share holders present a larger threat to Sanofi’s share (Statista, 2014).

Financials of Key Products Sanofi’s key drugs Lantus, Plavix, and Lovenox accounted for nearly 30% net sales in 2014. All three of these drugs, however, have expired patents in the US and EU. Anti-diabetic drug Lantus, Sanofi’s top selling drug, lost its patent in 2015 so sales are expected to decline with the entry of generics into the market. Lovenox and Plavix have already seen decreased sales in the last few years after their patents expired (Sanofi, 2014). Overall, these three key sales drivers do not put Sanofi in a good position moving forward, so the company will have to create other sources of income in the future.

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Januvia (Merck)Lantus (Sanofi)NovoRapid (Novo Nordisk)Victoza (Novo Nordisk)Humalog (Eli Lilly)Other

Figure 10: Top Anti-Diabetic Products by Market Share

Figure 11: Sanofi; Key Products & Percentage of Total Sales

(Sanofi 20-F, 2014)

(Statista, 2014)

Sanofi reached revenues of $43.9 billion (1.3 exchange rate) in 2014, a 2% increase from 2013 (Sanofi, 2014). This growth is a combination of two things: large sales growth in the flagship diabetic product Lantus and the increase in its Consumer Health Care division in emerging markets. However, full potential was not realized due to a 35.5% loss in oncological sales due to the expiration of patents for Eloxatin (Sanofi, 2014).

Sanofi continues to be a very stable operator with little fluctuation in operating profit margin (18.4% maximum and 15.49% minimum) or net profit margin (23.18% maximum and 20.27% minimum). While return on assets has been slightly below the industry average by around 1% for the past three years.

Sanofi has a Debt to Equity ratio of 0.71, showing relatively high equity leverage. This is mainly due to a 9% ownership by L’Oreal. Sanofi has expressed interest in buying these shares back while L’Oreal has been resistant to sell (Wall Street Journal, 2015). Re-purchasing of these equities could shift the leverage to a more equal debt to equity. Despite this, Sanofi has maintained a stable cash cover for the past three years, fluctuating between 0.46 and 0.59.

Company Analysis: Sanofi

9

Financial Position Future Outlook With the purchase of Genzyme in 2011 and the obtainment of its Multiple Sclerosis products, Sanofi has positioned itself for future success. Due to the aging population of Baby Boomers, the market growth for multiple sclerosis medication and treatment is expected to rise from its 2012 valuation of $14.3 billion to $21.5 billion. With products already on the market and advertising in place, Sanofi has a competitive lead in obtaining these expected sales.

However, sales from multiple sclerosis growth won’t be able to greatly lessen the blow from patent expirations, especially in the anti-diabetic segment. Sanofi is expected to drop its 23% market share of anti-diabetics to 14.3%. While Touejo is expected to make a highly successful market entry, it won’t be able to support the revenue loss from patent expirations of other anti-diabetic products.

Sanofi’s lack of a single flagship product in oncology places it at a disadvantage to already established ones such as Rituxan, Herceptin and Avastin from Roche alone. However, through the purchase of Genzyme new oncological developments were acquired which may signal the company’s first large market entry product. With the oncology market expected to growth and the expiration of competition’s patents, timing of development and legal navigation may place Sanofi at the forefront to grow in this segment,

Despite these sales losses, Sanofi’s ability to market consumer healthcare to emerging markets has given them a competitive edge over companies who have yet to break into them. By placing Sanofi products on their lists of approved healthcare candidates, emerging markets are forced to narrow their pharmaceutical selections to Sanofi products. This in turn raises sales even if these drugs are distributed at a discounted price.

Key Mergers and Acquisitions Sanofi’s two major acquisitions are subsidiaries Genzyme and Merial. Genzyme, a proven innovator in biotechnology, was acquired by Sanofi in 2011 as a result of Sanofi’s recent focus on rare diseases and specifically Multiple Sclerosis, a $14.3 billion market in 2012 with lots of expected growth.

Merial, acquired by Sanofi in 2009, is the company’s dedicated animal health sector. It is currently ranked third in overall animal health revenue with $2.35 billion in 2014, trailing Merck and Zoetis. Sanofi’s focus on animal health through subsidiary Merial is another instance of its desire to keep up with growing trends, as an improved economy and increased awareness of farming safety are expected to increase the market.


Merck Sanofi

Key Success Factor Weight Raw ScoreWeighted

Score Raw ScoreWeighted

ScoreStrategic M&A 40% 8 3.20 6 2.40Capitalizing on Alzheimer's, Diabetes and Oncology 35% 9 3.15 7 2.45Navigating the Patent Process 25% 7 1.75 5 1.25Total 100% 8.10 6.10

Introduction Engaging in strategic mergers and acquisitions is the most important KSF, followed by capitalizing on lucrative growth opportunities and lastly navigating the patent process. Strategic M&A was weighted at 40%, engaging in lucrative growth opportunities at 35%, and navigating the patent process at 25% respectively.

Strategic Mergers and Acquisitions: 40%Strategic M&A is weighted the highest because if a company is not acquiring other companies, they are failing to reach many opportunistic global markets. Expanding a company’s reach abroad is of major importance because these opportunistic markets are positioned for substantial pharmaceutical growth, and therefore financial growth for companies. The second part of strategic M&A is acquiring smaller companies to kickstart research and development. Having strong R&D leads to the development of successful drugs and therefore growth in sales. These two important criteria explain why strategic M&A is weighted highest at 40%.

Capitalizing on Alzheimer’s, Diabetes and Oncology is the second most important key success factor. Without acquiring companies for their location or for their R&D it would be much harder to partake in these growth opportunities. Successfully analyzing and predicting medical trends can be very helpful in the pharmaceutical industry. However, this is very difficult to do, especially without having strong R&D efforts, so companies can not strictly rely on it for success. However, growing markets like anti-diabetics and oncology present very important opportunities for pharmaceutical companies. This is why capitalizing on these diseases was weighted at 35%.

The final key success factor is navigating the patent process. Taking advantage of favorable legislation is increasingly important in today’s world when the government is always finding another way to restrict the pharmaceutical industry. If companies are able to take advantage of legislation like the GAIN Act, they will receive attractive incentives such as extended market exclusivity to further drive profits. Efficiently managing patents is also an important part of this KSF. Without constant development of new drugs, a company has fewer chances to gain approval and earn more sales revenues. This factor is somewhat reliant on strategically merging and acquiring, though, because new drugs are only produced through the R&D pipeline, which can be supplemented by M&A activities. This is why this key success factor is rated lowest at 25%.

Capitalizing on Alzheimer’s, Diabetes and Oncology: 35%

Navigating the Patent Process: 25%

Decision Matrix Weighting Explained


Decision Matrix

10

The first key success factor for pharmaceutical companies is engaging in strategic mergers and acquisitions. There are two main reasons to merge and acquire other companies, and judging companies’ M&A activities against these two reasons helps to gauge the efficiency of the mergers and acquisitions-- jumpstarting R&D with products already in development and obtaining geographic location.

Introduction to KSF

Research and DevelopmentIn order to save money on research and development many companies will acquire other, usually smaller, companies that have specialized areas of research and development already in progress. This allows the larger company to use their information and hopefully develop a product without having to invest in the actual R&D costs. Doing this adds to a company’s pipeline of research. Global pharmaceutical companies are using new methods for deal structures in order to gain strategic assets. In Novartis’s acquisition of GSK’s oncology division, $14.5 billion dollars was spent as well as up to $1.5 billion in contingent payments for the company’s oncology R&D pipeline (KPMG, 2015). Illustrated in Figures 12 and 13 is a high statistical correlation between the amount spent on R&D and the prescription drug sales.

Geographic Location

KSF #1: Strategic Mergers and Acquisitions


11

2.162.31

3.043.58

4.74 5.87.48 8.2

11.9716.35

19.8830.73

44.510123456789

10

Series2 Linear (Series2)

Prescription Drug Sales (billions)

R&D

Spen

ding

(bill

ions

)

Figure 12: Prescription Drug Sales and R&D Spending

Variable Value

r 0.93884

R^2 0.68551

Equation Y=0.1345x -1.4731

Mean Sales $15.52 billion

Mean R&D Spending $2.74 billion

Figure 13: Statistical Variables

With the industry being dominated by 15 multinational companies, having locations abroad to research and manufacture pharmaceuticals is an integral part of industry performance. (Turk, 2015) The US pharmaceutical market share has declined by 10% overall in the last 10 years, despite the fact that global pharmaceutical revenue has increased by 8.3%. Established markets faced an average sales growth of 7.3% in the last 3 years, whereas opportunistic markets experienced a growth of 11.6% in that same time (AstraZeneca, 2014.). Developing countries are a huge juncture in the pharmaceutical industry, with some of the largest opportunities being China and India (Hoovers, 2015). These opportunistic markets were involved in strong M&A activity in 2014 (KPMG, 2015).

Another catalyst for growth in some of these opportunistic markets is increased pharmaceutical spending per capita. The average of the OECD per capita spending on pharmaceuticals is $498 USD, whereas countries like China only spend $121 USD per capita (Statista, 2014). However, China’s per capita spending is projected to increase by over 70% in five years to about $205 USD in 2020 (IMS Heath, n.d.). China is not the only market that is ripe with opportunity, though. Pharmaceutical revenue in Asia-Pacific as a whole is expected to grow an average 6.1% each year for the next 3 years. (KPMG, 2015).

Engaging in M&A to gain entry into these markets can lead a company to success by giving them access to research and manufacturing facilities abroad.

KSF #1:

Merck Analysis Sanofi Analysis

Informational Analysis

Criteria 1: In-Progress Research and Development:Two major acquisitions occurred in 2014: Cubist and OncoEhtix.

The purchase of Cubist yielded three Phase 3 antibiotics (Merck, 2015), one with pending FDA approval. While not a key driver, the antibiotic market is expected to increase from $18 to $21 billion by 2018.

The $153 million purchase of OncoEthix on the other hand resulted in the acquisition of Keytruda, a treatment for melanoma which is expected to become a major product in Merck’s portfolio. This product has recently been accepted by the FDA for a Supplemental Biologics License Application, allowing it to be extended to treatment of non-small cell lung cancer which has been identified as a large market. With the average cost of developing a new drug costing $2.5 billion (Grabowski, 2014), this acquisition saved massive R&D expenses.

Criteria #2: Geographic Location:While no new acquisitions were made in opportunistic geographic markets, redistribution of funding to these areas provide similar benefits. The launch of Merck’s 2013 Reconstruction Program has led to increased spending on primary manufacturing firms, one of which is in China (Merck, 2015). Increasing funding to this previously established channel provides the benefits of acquisition without the expenses of starting from scratch.

Criteria #1: In-Progress Research and Development:Sanofi’s most significant acquisition was of Genzyme in 2011 for $20 billion. This provided multiple rare disease products, including two treatments for multiple sclerosis. However, so far Sanofi has only raised $635 million in sales from this $20 billion purchase (Sanofi, 2014). While sales have been rising each year for these products, it will be difficult for Sanofi to break even.

Another non-key segment acquisition was of Merial in 2009 for $4 billion. This animal-health company broadened Sanofi’s animal-product portfolio and has resulted in billions of dollars in additional revenue since its purchase. While this has been a beneficial buyout, Merck’s cheaper acquisition of OncoEthix is aligned to provide higher return at a lower cost with the growth of the oncologics market.

Criteria #2: Geographic LocationPart of Sanofi’s rise of sales is attributed to an increasing increase in its Consumer Health Care division in high growth market. 53% of healthcare sales comes from these markets, with Brazil and China playing a large role in this (Sanofi, 2014).

However, the CEO has made a statement that the company has no plans on relying on M&A for the future (Abboud, 2015), whereas Merck has clearly taken the opposite, more effective route by purchasing Cubist and OncoEthix. This is possibly linked to poor performance of the Genzyme acquisition, turning the company skeptical of future results. Sanofi’s executives have created a mindset that puts the company at a disadvantage for strong future M&A, whereas Merck has made this a key focus.


12

Merck Sanofi

Strategic M&A Raw

ScoreRaw

ScoreIn Progress R&D 5 3Geographic Locations 3 3Total 8 6

Figure 14: KSF #1 Decision Matrix

2010 2020 2030 2040 20500

20406080

100

45 46 48 48 48

22 28 35 37 37

Old Age Dependency Youth Dependency

KSF #2:

Introduction to KSF

Capitalizing on Alzheimer’s, Diabetes, and Oncology

The second Key Success Factor of the pharmaceutical industry is capitalizing on Alzheimer’s, Diabetes and Oncology. This includes three criteria stated directly in the KSF title: Alzheimer’s, Diabetes, and Oncology. Research shows that companies with the best drugs in these three categories are leaders in the industry. This is because each of these diseases is predicted to experience major growth in the coming years.

Companies that are consistently capitalizing on medical trends are the ones who consistently coming out on top. A historical example of a company that analyzed and predicted a major therapeutic need, and capitalized on it is Eli Lilly and Co. Back in the 1940’s when strep throat was a fatal disease, Eli Lilly and Co. was one of the first companies to mass produce and distribute penicillin. During WWII, many US soldiers were getting strep throat when they were over seas, so Eli Lilly and Co. mass distributed this penicillin to soldiers. They became one of the most profitable pharmaceutical companies of the time period because they analyzed a possible growing therapeutic need, and capitalized on this market potential. Between 1932 and 1948, Eli Lilly and Co. grew their business 13 times. Their sales rose from $13 million to $117 million due to this sales of penicillin (Bodenhamer and Barrows, 1994). Today Eli Lilly and Co. can be found on the Forbes Global 500 list with a valuation of $79.2 billion (Forbes, 2015), all thanks to their breakthrough innovation, penicillin. They are listed as the 12th largest pharmaceutical company in terms of revenue (IMS Health, 2015).

Criteria 1: Alzheimer’s Disease


13

Alzheimer’s diagnosis is projected to increase a great deal in the coming years. This is a due to an increase in the aging population. Figure 15 depicts the number of age dependent people in the United States. The total cost of Alzheimer’s and dementia worldwide is $605 billion. This is equivalent to 1% the entire world’s GDP. In the United States, the baby boomer generation is starting to become affected by these age related diseases. In 2050, the US census projects that more than 16 million people in the United States will have Alzheimer’s. Since the United States has 40% of the pharmaceutical market share this is a trend that will affect the entire industry. By 2050, Alzheimer’s spending is projected to reach over $1 trillion in the United States alone, a huge growth of $474 billion from today’s market (Alzheimer’s Association, 2014). This is a $526 billion market opportunity. Figure 16 shows the projected Alzheimer’s costs in the US broken down into Medicare, Medicaid and out of pocket.

Figure 15: Age Dependency Ratios

{$526 billion market opportunity }

Figure 16: US Projected Alzheimer’s Costs 2010-2050 (in billion USD)

2010201520202025203020352040204520500

200

400

600

800

1000

1200

30 33 40 48 63 85 108 134 15734 39 46 56 72 95 123 151 178

88 107 128 166225

306406

519627

22 23 2836

47

62

80

101

117

Out of Pocket MedicaidMedicare Other

Roche

Celgene

Bristol-M

yers

Squibb

Novarti

sPfize

r

Johnson &

Johnso

n

Astra Zeneca

Astella

s Pharm

a

Merck &

Co

Eli Lilly

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2014 2020

KSF #2:

Criteria 3: Oncology

Engaging in Lucrative Growth Opportunities

In the last five years, spending on specialty medication increased by $54 billion, which accounted for 73% of total pharmaceutical spending growth from 2010-2015. Oncology was first on the list with spending at $32.6 billion in the US alone in 2014, which accounted for about 50% of global oncology spending. Global Oncology spending is projected to increase from $65 billion to $100 billion in 2018 (IMS, n.d.). Pharmaceutical companies that are consistently tapping into these medical trends and creating products that their patients need, are the companies that are coming out on top.


14

Figure 18: Top Oncology Companies by Revenue

(Statista, 2014)

Novo Nordisk

Sanofi

Merck & Co

Eli Lilly

AstraZeneca

Boehringer Ingelheim

Johnson & Johnson

Novartis

Takeda

Merck KGaA

0 5 10 15 20 25 30 352020 2013

Figure 17: Global Market Share of Top Pharmas by Antidiabetic Revenue in 2013 and 2020Diabetes is becoming a more common medical

problem across the globe. 10% of the global population is expected to have Diabetes in the next 20 years. In order to account for this growing patient need, pharmaceutical companies can create drugs designed for this disease (International Diabetes Federation, 2013). The average medical expense of people diagnosed with diabetes is $13,700 (American Diabetes Association, 2013). Worldwide spending on the treatment of diabetes and the management of related complications totaled $548 billion in 2013, and by 2035 is projected to reach over $627 billion (International Diabetes Federation, 2013). This is a projected future market increase of $79 billion that should be tapped into by pharmaceutical companies that want to be successful.

Criteria 2: Diabetes

$79 billion market opportunity in Diabetes{ } (Statista, 2014)

KSF #2:

Merck Analysis

Engaging in Lucrative Growth Opportunities

Sanofi AnalysisCriteria #1: Key Age-Related Disease Drugs and Pipelines:Merck has shown somewhat of a focus on Alzheimer’s in its portfolio of drugs for aging-related diseases. While no products are currently on sale, Merck is working to set itself up for success with the market, which is expected to grow by $474 billion by 2050 (Alzheimer’s Association, 2014), a yearly average of over $13 billion in growth. Merck currently has two Alzheimer’s drugs in development, with one in Phase II and one in Phase III (Merck, 2015).

Criteria #2: Key Anti-Diabetes Drugs and Pipelines:Merck’s Diabetes segment will experience problematic losses due to patent expirations on Januvia. Januvia is responsible for $3.9 billion of sales, or 9.31% of Merck’s 2014 revenue (Merck, 2015). However, Merck has ample time to develop a replacement as the patent expiration occurs in 2022. The company is currently developing only one diabetes drug which is in Phase III. Two more are in earlier stages of development, including a joint venture with fellow pharmaceutical giant Pfizer. While Merck is set for the near future, the company will need to invest further in a new anti-diabetic drug in order to maintain its market share.

Criteria #3: Key Oncologic Drugs and Pipelines:Through its acquisition of OncoEthix for $153 million comes a new product, Keytruda. With the FDA’s recent acceptance of the product’s Supplemental Biologics License Application, Keytruda will soon be licensed to treat non-small cell lung cancer (Merck, 2015). 85% of cancer patients are treated for lung cancer, 90% of which are non-small cell lung cancers. With projected cancer growth, Keytruda and other oncological products are expected to raise Merck’s oncology market share from 0.6% to 3.4% (Evaluate, 2015).

Criteria #1: Key Age-Related Disease Drugs and Pipelines:While multiple sclerosis is only expected to increase by $7 billion by 2017 as compared to the huge potential of Alzheimer’s ($474 billion growth by 2050), Sanofi is still taking advantage of a decent growth opportunity. It has a portfolio of 2 established MS drugs, Aubagio and Lemtrada, which together had $467 million in sales in 2014 (Sanofi, 2014). Compared to Merck’s 2 aging-related disease drugs in Phases II and III of development, Sanofi has 4 MS drugs in Phases II or III (Sanofi, 2014). However, the company has failed to realize the importance of the Alzheimer’s market in the coming years.

Criteria #2: Key Diabetes Drugs and Anti-Diabetics Pipeline:Sanofi currently holds a strong position in the diabetes segment, but it compared to Merck it is not as well positioned for the future. Merck’s flagship diabetes product Januvia has another 7 years of exclusivity while Sanofi’s top product Lantus lost market exclusivity in the US early this year (Sanofi, 2014). Furthermore, two biosimilar products have been developed in Europe and have a scheduled market entry of June, 2016. These products will prove a major market competition to Lantus. However, Sanofi does have 4 diabetes drugs in its R&D pipeline (Sanofi, 2014) compared to Merck’s 3, which will help to compensate for some of the losses of Lantus.

Criteria #3: Key Oncologic Drugs and Pipelines:While Sanofi has a wide portfolio of 10 different oncology products, those drugs only accounted for $1.14 billion in 2014 sales revenue (Sanofi, 2014). Merck nearly reached half of this number with one drug, Emend, in 2014 ($553 million in revenue). Sanofi’s portfolio is more expansive than Merck’s, but Merck has a clear edge in quality. Compared to Merck’s 6 oncology drugs in the critical Phases II, III, and under review development stages, Sanofi only has 3 Phase II oncology drugs. Merck’s advantages lie in its extremely promising Keytruda drug and overall efficiency in oncology R&D compared to Sanofi’s shortcomings.


15

Figure 19: KSF #2 Decision MatrixMerck Sanofi

Capitalizing on Alzheimer's, Diabetes, and Oncology

Raw Score

Raw Score

Alzheimer’s 2 2Diabetes 3 3Oncology 4 2Total 9 7

Bristol-Myers Squibb

Novartis

Celgene

Roche

Pfizer

Alexion Pharmaceuticals

Sanofi

Vertex Pharmaceuticals

GlaxoSmithKline

Merck & Co

11.1

10.510.4

9.9

9.4

6.3

5.75.5

5.1

4.5

KSF #3:

Introduction

Criteria 2: Efficiently Managing New Patents

The third key success factor for the pharmaceutical industry pertains to how companies navigate the patent process. There are two major ways that companies can accomplish this: taking advantage of favorable patent legislation and efficiently managing new patents. Criteria 1: Taking Advantage of Favorable LegislationA new law that will positively benefit the industry and more specifically prescription drug companies, is the Generating Antibiotic Incentives Now (GAIN) Act. The GAIN Act incentivizes companies who develop drugs against antibiotic resistant diseases. The incentive is five extra years of market exclusivity. Companies previously focused developing these types of antibiotics have recently cut back on R&D and focused on developing more profitable drugs, but with the GAIN Act, companies are likely to bring their attention to these antibiotics once again (IBIS 2015).

One example of a company capitalizing on the GAIN Act is Merck. In early 2015, Merck purchased antibiotics specialist company Cubist for $9.5 billion. Cubist is one of the leaders in producing antibiotics that fight serious and life-threatening diseases (Merck & Co., 2014). This is likely a strategic purchase on Merck’s part because of the GAIN Act.

The Orphan Drug Act also provides incentives for companies that develop a drug that treats, prevents, or provides a diagnosis of life-threatening or chronically debilitating diseases. In the U.S., the drug receives 7 years of market exclusivity, reduced regulatory fees, tax credit on clinical trials, and other related subsidies. The 7 years of market exclusivity starts when the FDA approves the drug, which is different from average patents. In Europe, the Orphan Drug Act offers ten extra years of market exclusivity

after FDA approval, but does not include tax credit on clinical trials or specific subsidies for clinical trials (Hall, Carlson, 2014). Although the R&D for these drugs is very high, it is key to the success of companies because ten years of market exclusivity can result in huge revenues for any company.

Capitalizing on patent protection is vital for pharmaceutical companies. In 2015, $44 billion in revenue is at risk for brand name manufacturers due to patent losses (Phillips, 2015). For example, Merck’s products Singulair and Cozaar/Hyzaar expired a few years ago, and the 10-k shows a significant drop in revenue from these products in particular (Merck & Co., 2014). For Sanofi, Aubagio and Aprovel both expired a few years ago, and sales have decreased as well (Sanofi, 2014). This hurts the companies as a whole because those sales are lost to generic companies. To make up for these lost sales, companies need to get new drugs patented. Companies that want to make up for the lost sales from patent expirations should have a substantial amount of drugs in Phase ll and Phase lll of drug development. It is crucial for companies to have drugs in Phase ll and lll because the more they have in those phases, the more that are likely to be approved through an extremely rigorous FDA process. With more chances for approval comes more approval, which inevitably means more revenue.

Navigating the Patent Process


16

Figure 20: Revenue From Orphan Drugs in Billions

(Statista, 2014)

Merck Analysis Sanofi Analysis Criteria #1: Taking Advantage of Favorable LegislationMerck’s acquisition of Cubist was not only important because of its R&D implications, but also because it helped Merck to navigate patent processes by taking advantage of favorable legislation, notably the GAIN Act. Since the acquisition of Cubist took place in early 2015, Merck now has two “GAIN-friendly” drugs in Phase III of development and one in Phase I of development (Merck & Co, 2015). Merck also has one drug that falls under the Orphan Drug Act: Letermovir. This drug treats very specific infections and has been given Fast Track designation by the FDA. In addition to its recognition of the GAIN Act, Merck is in a favorable position by taking advantage of orphan drugs, as Letermovir’s patent will not expire until 2025 (Merck & Co, 2015).

Criteria #2: Efficiently Managing PatentsThe second criteria of navigating patent processes is based on how many drugs a company has in Phase II and III in development. Compared to the top 3 companies’ averages of products in Phase II (27.7 average) and Phase III (30 average), Merck has 14 products in Phase II and 17 products in Phase III along with 8 drugs under review for full FDA approval. This leaves them with a total of 39 drugs in these three stages of completion, which is a number well below the industry leaders, but still respectably adequate. Merck’s impressive capitalization on favorable legislation still overshadows any shortcomings, and its respectably efficient pipeline certainly holds up to industry standards. This reflects Merck’s good score of 7.

Criteria #1: Taking Advantage of Favorable LegislationSanofi’s ability to manage the patent process takes a hit with its failure to recognize the importance of the GAIN Act in the United States. Sanofi has none of these types of antibiotics currently in development. It has two Orphan drugs, Lumizyme and Mozobil (Sanofi, 2014). Only Mozobil currently still retains US market exclusivity, but that is set to expire in December 2015. Lumizyme has already lost its patent protection in the US and is slated to lose exclusivity in Europe in March 2016 (Sanofi, 2014). With a lack of any similar drugs flowing through its pipeline, Sanofi’s shortcomings in taking advantage of these favorable drug acts have hurt its score in this criteria.

Criteria #2: Efficiently Managing PatentsIn terms of sheer numbers of drugs in the critical stages of development, Sanofi is also lacking. It only has 12 drugs in Phase II, 12 drugs in Phase II, and 4 drugs under review-- a total of 28 in critical stages of development (Sanofi, 2014) as compared to Merck’s 39. Gaining patent protection will not be as easy for Sanofi, as it has failed to advance an adequate quantity of drugs through its R&D pipeline to the late stages of development. Overall, Sanofi’s ability to effectively navigate the patent process is not what it should be. It has done well with its current Orphan Drugs, but has failed to recognize critical favorable legislation as well as the necessity of having a large quantity of drugs advanced into later stages of the R&D process. Sanofi’s poor rating in this category reflects these shortcomings.


17

KSF #3: Informational Analysis

Merck SanofiNavigating the Patent Process Raw Score Raw Score

Taking Advantage of Favorable Legislation 4 3Efficiently Managing Patents 3 2Total 7 5

Figure 21: KSF #3 Decision Matrix

Sanofi Recommendations

Focus on Toujeo and Other Anti-Diabetic Products

In order for Sanofi to improve its position in the pharmaceutical industry, our team has three recommendations: focus R&D spending on its upcoming anti-diabetic product Toujeo, reviewing its outlook on the company’s stance on mergers and acquisitions and delay on the re-purchasing of equity from major shareholder L’Oreal.

With the expiration of patents on flagship product Lantus comes large expected loss of revenue, drastically depleting their market share in the anti-diabetic segment. With this single product carrying such a significant revenue stream, Sanofi cannot afford to lose this position. In order to maintain this market, Sanofi must focus on the entry of its new insulin product, Toujeo. This product is considered the “next generation Lantus” with some patents carrying over to the new product. Of its portfolio, this product has the greatest chance of reclaiming lost market share once Lantus expires next year. By focusing R&D and marketing expenses to this, large revenue loss can be avoided.

Reposition Stance on Future M&AWith its statement on mergers and acquisitions being “indispensable” to Sanofi, the company is losing long term cost saving advantages as well as the ability to take advantage of tax inversion; by transferring 50% of its shares to a foreign firm and establishing it as company headquarters, Sanofi can avoid paying foreign income tax. This will provide large operational advantages by allowing further reinvestment into R&D and marketing for products. Furthermore, IPR&D through mergers and acquisitions provides long term cost savings and faster market entry, providing quicker sales. Sanofi’s cost-savings mentality of avoiding M&A will actually hurt them in the long run.

Postpone Repurchasing of L’Oreal StockFinally, Sanofi has expressed interest in repurchasing its shares that are currently owned by L’Oreal. Owning 9% of the company, this would be a multi-billion dollar transaction. Following the purchase of Genzyme, Sanofi has a large amount of income tax still outstanding, raising their liabilities significantly. This combined with the expected loss of sales due to Lantus may put large operational constraints on the company. Repossession of its shares will only further this operational burden. While this saves them dividend , Sanofi should wait until the financial implications of upcoming patent expirations settles before such a large purchase in order to guarantee operational efficiency.


Focus on Toujeo &

Other Antidiabetic

Products

Reposition Stance on

Future M&A

Postpone Repurchasing

of L'Oreal Stock

18

Conclusion

In a highly regulated, competitive, and intricate industry such as the pharmaceutical industry, a few important key success factors can make or break a company’s ability to make a substantial impact and position itself for future success. These key success factors are engaging in strategic mergers and acquisitions, capitalizing on lucrative growth opportunities, and navigating the patent process. When pursuing strategic mergers and acquisitions, a company can gain numerous benefits to its Research and Development programs as well as other incentives. Recognizing lucrative growth opportunities such as the growth of markets like oncology and antidiabetics as well as other growing health trends helps a company to position itself for the future rather than focusing on current issues alone. Finally, navigating the complicated patent process by sending a large quantity of drugs through the critical stages of product development gives a company more tools to increase sales revenue.

When comparing Big Pharmas Merck and Sanofi, it is clear that based off of these three key success factors that Merck is in a more favorable position both now and in the future. Merck’s key acquisitions of Cubist and OncoEthix have given the company ownership of key drugs created by these companies as well as control of promising new drugs that these subsidiaries have in development. Sanofi has shown no such dedication to acquiring companies for the benefit of R&D as of late. Merck has also taken advantage of lucrative growth opportunities through its clear commitment to producing cancer and diabetes treatments, two markets expected to experience vast growth over the coming years. Sanofi has recognized these trends and is producing a few new drugs in anticipation of them, but not with the precision and intensity that Merck has shown. While this key success factor yielded closer results, Merck still has the edge with its excellence in recognizing and acting on important upcoming trends.

Finally, in terms of navigating the patent process, Merck wins again. It has taken full advantage of the helpful GAIN Act and has also made sure to keep a respectable quantity of drugs flowing through its R&D pipeline in the critical Phases II and III. Sanofi, on the other hand, has recognized the Orphan Drug Act as a legislation it should focus on. While Sanofi has a few Orphan drugs on the market, these drugs have been adversely affected by patent losses and the company is not in a position to make up for these losses with new Orphan drugs. Sanofi also has far fewer drugs in the Phase II and III stages at this time, which will result in fewer upcoming approvals and therefore fewer sales.

Based on these key success factors, Sanofi is clearly inferior to Merck at this time. However, a few recommendations we have made based on Sanofi’s financial status as well as its performance against the Key Success Factors can lead the company in a better direction. By focusing its efforts on promising new drug Touejo, Sanofi can gain a better positioning for the future expansion of the antidiabetics market. Sanofi has also expressed somewhat of a desire to repurchase about 9% of its stock which is owned by L’Oreal, but the company should hold off on this for now-- its current financial position does not seem fit for another multi-billion dollar transaction. Lastly, Sanofi’s executives have made it clear that they do not believe mergers and acquisitions are vital to success. This mindset needs to change if Sanofi wants to get back on the right track. Mergers and acquisitions have become almost second nature in the pharmaceutical industry, and they present numerous benefits to those involved. Sanofi has the tools to succeed, and these recommendations will put Sanofi in the right mindset to actively make use of its competitive advantages.


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Danova, T. (2014, June 25). CHART: Health And Fitness App Usage Is Growing Faster Than App Usage Overall. Retrieved

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Falit, B., Singh, S., & Brennan, T. Biosimilar Competition In The United States: Statutory Incentives, Payers, And Pharmacy

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Frederick, J. (2015, January 12). Pharma Regains Growth Momentum in 2014. Retrieved from Business Source Complete

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GlobalData. (2015). Merck & Co [Strengths/Weaknesses (SWOT)]

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http://www.sec.gov/

http://www.sec.gov/






Appendix A:

Political

Pestle Analysis

Healthcare coverage and policies vary around the world. The major trends in healthcare policies are focused in the United States around Medicare and Medicaid, as well as the changes the affordable care act made.

Medicaid is a resource that helps with medical costs available to those with limited income, that are 65 years or older, under 19, pregnant, living with a disability, a parent or an adult caring for a child, or an eligible immigrant. Services Medicaid covers includes doctors visits, hospital stays, preventative care, mental health care, medications, prenatal and maternity care, and vision and dental care for children.

Medicare is health insurance provided for those who are 65 years and older or to people under 65 that have certain disabilities. It is also offered to people who suffer from End- Stage Renal Disease, which is permanent kidney failure that requires dialysis or a transplant. There are five different sections of Medicare that provide and offer different services. Part A: Hospital Insurance. This covers hospice, home care, skilled nursing facilities and inpatient care. Part B: Medical Insurance. This section covers doctors services, outpatient, home care, durable medical equipment, and some preventative services. Part C: Medicare Advantage. This includes prescription drug coverage as well as Part A and Part B. Part D: Medicare Prescription Drug Coverage. This helps cover, or lowers the cost of prescription drugs. The Affordable Care Act, also known as Obamacare, set up a comprehensive health insurance reform that expands coverage, holds insurance companies accountable, lowers healthcare costs, and enhances the quality of care for all Americans. Before Obamacare insurances companies did not have to offer their services to those with preexisting medical conditions, and premiums were also more expensive.

There are two different parts of the Affordable Care Act legislation. The Patient Protection and Affordable Care Act emphasizes excellent, affordable health care and commands the development of a national strategy that will improve healthcare delivery, the population’s health, and patient results. This law also intends to improve the quality and effectiveness of health services as well as starting a payment reform program. The Health Care and Education Reconciliation Act expands Medicaid coverage to millions of low income Americans and makes improvements to Medicaid and the Children’s Health Insurance Program.

Right to Health:

According to the MSF (Doctors without Borders), “infectious diseases kill over 14 million people per year – over 38 thousand per day – with 9 out of 10 deaths occurring in developing countries.” The WHO projects that increasing the access to medical practices can save the lives of up to 10 million people per year. However, one-third of the global population, particularly the developing world, does not have any access to medications they need to survive (Lee and Kohler).

NGO’s, like the World Health Organization, have a mission to provide health care because they believe it’s a basic right to all people. The “right to health” is basically the belief that all people have the basic right to health care. Created in 1946, the WHO’s constitution states “[the] right to the highest attainable standard of health... is a fundamental right of every human being...” Many governments do not acknowledge the right to health in their constitutions (Lee and Kohler). Even well industrialized countries, like the United States, did not include the right to health in their Constitution. Although the US doesn’t explicitly

24

Appendix A:

Political Continued

Pestle Analysis

state the right to health for their citizens, the Preamble to the Constitution has a “General Welfare” clause. Many Constitutionalists interpret this clause to be a vague statement about the general health and happiness of American citizens as a basic right. Generally speaking, most governments are concerned about the health of their citizens, but they do not view it as a basic right (National Archives and Record Administration).

The right to health is consistently backed by international agencies, such as the UN. The UN believes that individual nations are ultimately responsible for the right to health of their own citizens but through the UN’s General Comment 14 they state, “the private business.. . [also]... has responsibilities regarding the realization of the right to health.” So they ultimately believe not only the public industry, but the private industry is also responsible for the right to health of a particular country (Lee and Kohler).

A major trend in the economic state of the pharmaceutical industry is the increasing frequency and importance of mergers and acquisitions. This has come in waves throughout the years, and is continuing to grow now. In 1985, the 10 largest pharmaceutical companies accounted for about 20% of sales in the industry. By 2012, that number soared to 42% of sales coming from the top 10 companies in the industry. Through consolidation, companies were able to increase market share and sales. One major reason companies have decided to merge with and acquire other companies is to increase the power of their Research and Development programs. By strengthening R&D, manufacturers have a better chance of gaining approval for new drugs and sending them to the market, which in turn gives them an increase in sales. Combining R&D departments can help manufacturers to compensate for revenue losses due to failed drug approval processes as well as patent expirations (Kermani, 2014). With the 10 major companies owning 42% of industry sales, there is no reason to expect a slowdown in mergers and acquisitions, as they are the major driver for the large sale that these manufacturers own. Especially with the coming wave of patent losses, combining R&D departments to compensate for lost revenue is a trend that will continue to increase.

Statistically, mergers and acquisitions make sense monetarily for an R&D standpoint. From 2004-2010, R&D expenditures throughout the US industry have increased from $47.6 billion to $64.7 billion (PhRMA, n.d.). This is a 41.5% increase over just six years. Globally, R&D expenditures have followed a similar trend to the US, increasing from $108 billion to $142 billion between 2006 and 2014 (Evaluate. n.d.), which is a 34% increase over an eight year span. This increase in R&D expenditures is attributed to companies merging with and acquiring other companies, as they now have more funds to develop new drugs.

Economic Spending in the global pharmaceutical industry reached $980.1 billion US dollars in 2013, inching closer to the $1 trillion mark, which is predicted to be eclipsed before 2018. Experts predict that spending will reach $1.3 trillion US dollars by that time. (IMS Health, n.d.)

The United States has the largest industry in the world and is a key driver of global pharmaceuticals. In 2013, spending in the US pharmaceutical industry had slowed down to just 3% growth, but 2014 saw pharmaceutical spending make a big resurgence to 11% growth. Statistically, experts predict the US industry to grow at a healthy 5-8% through 2018. (Frederick, 2015).

25

Appendix A:

Economic Continued

Pestle Analysis

Another important economic driver of the industry is the increasing trend of generics over brand name drugs. When patents of brand name drugs expire, the door is opened for more cost-effective generic alternatives to soak up a large amount of sales from brand name manufacturers. The “big four” US pharmaceutical companies (Pfizer, Merck, Eli Lilly, and Bristol-Myers Squibb) have seen sales decline 8.1% and 4.9% in 2012 and 2013 respectively, whereas generics manufacturers Actavis, Teva, and Mylan saw their sales grow at 29%, 10.9% and 10.9% respectively in 2013. The transfer of sales can be attributed to the loss of patents by the big four US companies.

In 2015, a “patent cliff” is expected to occur. This means that in 2015, drugs that generate an average of about $66 billion will all lose their patents. However, many of these drugs are biopharmaceuticals, so sales may not drop as drastically as they did in 2012 because of a very stingy and confusing approval process for these types of drugs. Generics will not pose a huge threat to biopharmaceuticals and therefore will not negatively affect sales of drugs already on the market. (Standard and Poor’s Net Advantage, 2014)

approximately 66%, will occur in Asia (Pezzini 2012). Not only will this lead to a prosperous future for the industry as a whole, it will also lead to success in the generic market because more generic drugs will be purchased over brand name. Additionally, growing consumer power is a trend in the industry, mainly because consumers have the power to choose generic or brand name drugs. While 86% of prescriptions in the U.S. are generic, this number is expected to increase because by 2020, there will be a 5.1% increase in of consumer preference towards generic brands (Phillips, 2015). The forecast shows the expected success of the generic segment and a decline in the brand name segment in the future.

Since generic drugs are consumers’ preference, brand loyalty is becoming very important to the brand name segment. Brand name companies will have to work harder on advertising and sustaining their current customers with brand loyalty (Mintel, 2015). Moreover, society’s awareness of their personal health is increasing, which leads to self-diagnosis. When OTC drugs are concerned, spending increased 11% between 2009 and 2014. (Mintel, 2015). The amount that consumers are spending on OTC drugs forecasts success for the OTC segment. Social

With the growing population, there is no surprise that there is a shortage of Doctors, Pharmacists, and Healthcare providers. The shortage of physicians is problematic when mobile health is concerned. Mobile health is a growing trend in the industry, and it is forecasted that 5,000 new doctors will need to be hired for any region that wants to pursue mobile health (Chain Drug Review, 2013).

Another social trend is that the growing population naturally leads to an increase in the global middle class. By 2020, the global middle class is expected to have 3.2 billion people (Pezzini, 2012). Most of this growth,

TechnologyInternet access and mobile technology have allowed consumers to monitor personal health virtually anywhere, anytime. Major trends in technology are focused on increasing self-diagnostics and portable access to information. With the development of online medical sites and web forums consumers are able to access a plethora of health related information. A study revealed 48% of people attempt self treatment before visiting medical clinics (Krol, 2015), many of which whom use online sources for diagnosis. 22% of electronics consumers own some sort of smart-band (Krol, 2015). This is equal to the number of tablet owners in 2012.

26

Appendix A:

Technology Continued

Pestle Analysis

Health and fitness apps are some of the fastest growing in the industry, increasing 87% faster than the rest of the app industry (Khalaf, 2014). 62% of active users are female and 38% are male.

The increasing production of biosimilars threaten current pharmaceuticals and biologics. However, complicated patent laws and the The Biologics Price Competition and Innovation Act suppress its market entry. While no official guidelines have been published to clarify the approval pathway laid out by the BPCIA it is expected that the FDA will release them soon.

The Patent Dance, the name for the process a biosimilar must go through in order to be approved by the FDA, is a series of patent law exchanges between the biosimilar manufacturer and the drug it derives from. Both companies must list all patent infringements the biosimilar may break and then make a claim as to why the drug either is or isn’t infringing it.

Arguments against biosimilars include high pricing, high research and development costs and expensive market entry, keeping startup manufacturers out of the market almost entirely due to costs alone. Arguments for biosimilars claim that over time prices will reduce due to cost-sharing strategies and manufacturer couponing.

Some of the positives that come from patenting pharmaceuticals are allowing innovators to receive the benefits and cover the costs of R&D investments. Some of the negatives that come from patenting pharmaceuticals are the added extra costs from the patent application and the amount of time it takes to get a patent can delay sequential innovations. There are also opportunities for groups of countries with similar pharmaceutical needs to make patent laws together. This would then provide a market incentive for innovators.The legal process of getting Medications approved can vary across the world. There are two major regulatory agencies from the United States and Europe. In the United States the regulatory agency is the Food and Drug Administration (FDA). Out of every 500 new pharmaceuticals that go through the FDA only 1 reaches the open market. The control and urgency for safety and regulation in pharmaceuticals is so intense because the difference between a lifesaving drug and a life ending drug can be so minute. It can take about 6 years to get a new drug approved by the FDA, through their three-phase approval process. Phase 1 is the testing of the drug on a small number of healthy people to find the dosage range. Phase 2 is the testing of the drug on many patients that have the disease with placebo control. Phase 3 is when there are thorough tests on a large amount of ill patients. The European Union funds the European Medicines Agency (EMA), which evaluates pharmaceuticals to see if the meet the criteria to get approved.

The European Union has this centralized agency to try to reduce the cost companies must face when getting approval from each nation. The EMA’s main concern is safety in medicines, but they also provide guidelines for research.

The EMA’s three step process to approval comes across much simpler than the FDA’s. Step 1 is when the pharmaceutical company submits an

LegalPatents often stimulate developed countries with high levels of education and economic freedom, however implementing them by themselves does not simply encourage innovation. More patent protection in developing countries, for example, could potentially be counterproductive, and not add much to R&D investment incentives. (Qian, 2007)

27

on someone. In turn, making it extremely challenging to determine a proper price point. According to Buckley and Tauma, drugs should be categorized to determine their importance. “i.) Essential and Breakthrough drugsii.) Me-too drugs (Generics)iii.) Cosmetic drugs”

Essential and Breakthrough Drugs, and their Generic versions are often vital for human survival. But sometimes these drugs have only a small marginal effect on the user’s health and both physician and families are forced to weigh the cost vs. benefits of the medication in question. Spinello created a set of questions to be asked when deciding price vs. therapeutic value. He suggests that if the appropriate questions are asked, it is easier to determine price vs. therapeutic value. “(i) The nature of the malady.(ii) Whether it is life-threatening, or fundamentally threatening to the quality of life.(iii) The availability of other options – is it a drug of last resort? (iv) What other drugs are available and at what prices?(v) At planned prices will people be deprived?(vi) What support can be expected from funding sources in co- payment?(vii) Who is the likely end user?(viii) What is their capacity to pay?”

After asking these questions, it is easier to define what’s important when it comes to price vs. therapeutic value. One of the key questions to ask when trying to conclude the cost vs. benefit of a drug is “At planned prices will people be deprived?” If drug is too high cost where patients will not be able to afford it, it can be considered unethical. The World Health Organization came out with a list of drugs they’ve deemed medically essential. This list includes 319 different medications and actually considers cost effectiveness as a factor of vitality. MSF argues that

Appendix A:

Legal Continued

Pestle Analysis

application for marketing approval that must be authorized by the EMA. In step 2, the Committee for Medicinal Products for Human Use (CHMP) submits an analysis of the drug. The final step is when the drug can get approved, if it comes back that the drug is safe, the European Commission allows marketing authorization and approval throughout the European Union. There is a major push across the world for standardized regulations in pharmaceutical products. These global regulations are needed for multinational companies and for the worldwide market of the industry’s products. The pharmaceutical industry is a major supporter in the efforts to match requirements for pharmaceutical registration around the world. The World Health Organization (WHO) defines counterfeit pharmaceuticals as medicines that are “deliberately and fraudulently mislabeled with respect to identify and source.” (Mackey, Liang, 2011) There is a debate over the definition of counterfeits due to some countries, such as Kenya, that have their own anti-counterfeit laws. This may seem like a positive, but since Kenya’s laws are even more inclusive that WHO’s, it could possibly impact the trade of legitimate and unauthorized generic drugs.

In the Interpol counterfeit seizures of 2009, 20 million pills in China and Southeast Asia, 34 million pills in Europe, and million of dollars of counterfeit drugs in Egypt were accounted for. Counterfeit pharmaceuticals can penetrate global markets of both developed and undeveloped countries.

EnvironmentKehoe argues that “ethically any price set by a firm should either be equal to or proportional to the benefit received.” Ethics in the pharmaceutical industry is becoming an increasing problem as the industry continues to grow bigger. Big Pharma companies are under more legal scrutiny than ever, and the issue of “Price vs. Therapeutic Value” is a big debate. It can be incredibly difficult to determine the therapeutic effect a drug will have

28

Appendix A:

Environment Continued

Pestle Analysis

many medically essential drugs are left off of this list because of patent regulations and cost effectiveness. Price vs. Therapeutic value is a challenging ethical debate, and it is a huge reason behind the growth of generic medication (Buckley & Trauma).

Across the globe, fraudulent medical care is a serious issue. Developing countries do not have the same quality medical system as many industrialized countries do, so fraudulent health care is prevalent in these parts of the world. This includes much of Africa, Asia, and South America. However, even established countries in Europe and North America experience health care fraud as well-- despite the fact there is legislation in place to protect against this problem.

Fraudulent health care describes the many facets of illegal medical practice. Schemes from pharmaceutical manufacturers and distributors is the biggest concern in the American Health Care System. Some forms of health care fraud include: manufacturing practice, fraudulent marketing practice, pricing fraud, continuing medical miseducation, false health insurance price reporting, and kickbacks to healthcare providers/physicians for selling a certain amount of medication.

According to Valverde, medical fraud accounts for $80 billion a year in US medical cost. This is a rising threat, as the United States is spending an estimated $2.7 trillion on healthcare alone, and with rising expenses continuing to exceed inflation, this is creating huge problems (Valverde).

Despite the ongoing health care fraud in the United States, policies are in place to prevent this from happening. For example, it is illegal in the US to compensate physicians based on pharmaceutical sales/prescription sales. However, this is not the case throughout the entire world. Asian countries-- specifically China is having many problems with healthcare fraud.

Chinese physicians working in hospitals are paid bonuses linked to the revenues generated for the hospital, which results in over prescription of medicines and more expensive medications being prescribed. This can be a serious ethical issue, because doctors may prescribe drugs that are not right for their patients in order to make more money. All of these factors are leading to a lower popularity of generic medication in Asia, because physicians and patients do not have trust in the generic brands, and physicians are less likely to recommend them to patients. Chinese medical fraud is a major part of why the generic market share if so low in Asia (Banerji & Azad).

29

Appendix B:

Threat of New Entry

Porter’s Five Forces Analysis

The threat of new entry for the pharmaceutical industry is biosimilar drugs. To have a biosimilar introduced as a product, manufacturers must send in a 351(k) biologics license application (BLA). A BLA has many sections, including studies showing that the biological product is very similar to the product they are referencing, animal studies reports, and clinical studies to show that the product to determine if it is safe and pure. If the FDA doesn’t think the 351(k) is necessary for the element, then the FDA says the manufacturers should contact a research development company for input on how they can change their product. Additionally, an interchangeable product, also called a biosimilar, has to show biosimilarity before it is approved by the FDA. The interchangeable drug must also insure that it will have the same effects as the reference drug, and if patients use the interchangeable and reference drug alternatively, nothing different will happen (U.S. Food and Drug Administration, 2015). Start up companies that want to develop their own biotech drug will need to have significant up-front investment. The process to bring a new drug into the market usually takes around 10-15 years. The selectiveness of the industry is high because the FDA only approved 35 drugs per year in 2011 and 2012. To show the selectiveness further, out of 5,000 to 10,000 screened compounds, only 250 got approved for preclinical testing. Out of those 250, only 5 entered the human clinical trials, and only one is eventually approved by the FDA. Although entering a specific market where a drug is already present may be easier to enter, it is still very difficult to get the funding and capital (OneSource Global, 2014).

that achieve the same effect. A large amount of the US generic sales are made to a small number of retail drug chains and drug wholesalers. Retail drug chains and drug wholesalers have been consolidating, which in turn has allowed these wholesalers and drug chains to gain more purchasing power. This purchasing power has increased the business competition for generic drug producers. (OneSource Global, 2014.)

Buyer PowerOverall, the Pharmaceutical Industry has moderate buyer power. One factor increasing buyer power is that widespread price control policies keep prices reasonable for the most part, allowing consumers access to affordable medication. The huge availability of cost-effective generic alternatives gives buyers the option to purchase cheaper drugs

Supplier PowerThe major suppliers in the pharmaceutical market are the manufacturers of active pharmaceutical ingredients (APIs), which make up a sub-sector of the chemical industry. Some pharmaceutical companies have large investments in fine chemical manufacturing, which provides them with a degree of self- sufficiency and some what reduces the supplier power.

The laboratory equipment and chemicals that are used to make pharmaceuticals have very little distinction between suppliers, so customers are able to have many choices in order save money but still get the best quality.

This results in a reduced supplier power. There are a few instances where pharmaceutical manufactures need specialized facilities or raw materials in this case supplier power is much higher. (OneSource Global, 2014)

A large amount of the US generic sales are made to a small number of retail drug chains and drug wholesalers. These retail drug chains and drug wholesalers have been consolidating, which in turn has allowed customers to gain more purchasing powers. This purchasing power has increased the competition for generic drug producers for business.

30

Appendix B:

Threat of Substitution


There are a variety of substitutes available in today’s pharmaceutical market. For example, holistic and and traditional remedies are very popular in China, and are becoming increasingly more popular throughout the globe. Many generic drugs are available when brand name drugs come off of patent. Switching from brand name to generic is cost effective, which is why generic drugs account for 85% of the pharmaceutical market share. These low costs are very significant to health care providers, who are recommending generic drugs to their patients.

Brand name drugs are definitely experiencing the threat of substitution because generics are a lower cost substitute and the biosimilar industry is growing rapidly. Generic drug manufacturers produce the same drugs for lower prices, because they rely on the “safety and efficacy” data of the brand name drug in order to get approved in its respective country, therefore they do not have to pay for all of the R&D costs reflected in the prices of brand name medications.

Additionally, there is an increasing threat coming from biosimilars. Many countries in Europe and the US have created abbreviated pathways for biosimilars to get approved because they are based on licensed biologics. Biosimilars have a comparable effectiveness, and the cost of switching is relatively low. Overall, there is a strong threat of substitution in the industry (One Source).

partners with small companies in order to maximize innovation. (Pharmaceuticals: Introduction, n.d.). This creates competitiveness for small companies to find team with Big Pharmas and increases competitiveness between Big Pharma.

Competition in the generics segment are mainly on the basis of price with companies constantly focusing on increasing cost- efficient methods without disrupting the drug’s effectivity. Another competitive basis for the generics are through the limited number of retail chains that sell their products. (Generic Pharmaceutical Manufacturing: Competitive Landscape, 2015). In order to get shelf space generics must actively innovate packaging and size.

In order to keep generics at bay, brand name pharmaceuticals must maintain patents. Once patents expire, a brand can lose up to 70% of its sales to generics (Turk, 2015). Laws and regulations under the Biologics Price Competition and Innovation Act currently keep biosimilars from competing with biologics while the high pricing of biologics keeps them competing with traditional pharmaceuticals.

Competitive RivalryThe pharmaceutical industry is highly concentrated; 70% of production comes from “Big Pharma” of 500+ employees which account for only 2% of the market. 70% of the market are considered “micro” or between 0-9 employees but are only 1.8% of production (Pharmaceuticals in USA: ISIC 2423, 2014). Success is determined by a company’s ability to create new products and protect current patents. Due to the complexities and regulatory environment in R&D, many Big Pharmas either buyout or become

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Appendix B:

Threat of New Entry


The threat of new entry for the pharmaceutical industry is biosimilar drugs. To have a biosimilar introduced as a product, manufacturers must send in a 351(k) biologics license application (BLA). A BLA has many sections, including studies showing that the biological product is very similar to the product they are referencing, animal studies reports, and clinical studies to show that the product to determine if it is safe and pure. If the FDA doesn’t think the 351(k) is necessary for the element, then the FDA says the manufacturers should contact a research development company for input on how they can change their product. Additionally, an interchangeable product, also called a biosimilar, has to show biosimilarity before it is approved by the FDA. The interchangeable drug must also insure that it will have the same effects as the reference drug, and if patients use the interchangeable and reference drug alternatively, nothing different will happen (U.S. Food and Drug Administration, 2015). Start up companies that want to develop their own biotech drug will need to have significant up-front investment. The process to bring a new drug into the market usually takes around 10-15 years. The selectiveness of the industry is high because the FDA only approved 35 drugs per year in 2011 and 2012. To show the selectiveness further, out of 5,000 to 10,000 screened compounds, only 250 got approved for preclinical testing. Out of those 250, only 5 entered the human clinical trials, and only one is eventually approved by the FDA. Although entering a specific market where a drug is already present may be easier to enter, it is still very difficult to get the funding and capital (OneSource Global, 2014).

that achieve the same effect. A large amount of the US generic sales are made to a small number of retail drug chains and drug wholesalers. Retail drug chains and drug wholesalers have been consolidating, which in turn has allowed these wholesalers and drug chains to gain more purchasing power. This purchasing power has increased the business competition for generic drug producers. (OneSource Global, 2014.)

Buyer PowerOverall, the Pharmaceutical Industry has moderate buyer power. One factor increasing buyer power is that widespread price control policies keep prices reasonable for the most part, allowing consumers access to affordable medication. The huge availability of cost-effective generic alternatives gives buyers the option to purchase cheaper drugs

Supplier PowerThe major suppliers in the pharmaceutical market are the manufacturers of active pharmaceutical ingredients (APIs), which make up a sub-sector of the chemical industry. Some pharmaceutical companies have large investments in fine chemical manufacturing, which provides them with a degree of self- sufficiency and some what reduces the supplier power.

The laboratory equipment and chemicals that are used to make pharmaceuticals have very little distinction between suppliers, so customers are able to have many choices in order save money but still get the best quality.

This results in a reduced supplier power. There are a few instances where pharmaceutical manufactures need specialized facilities or raw materials in this case supplier power is much higher. (OneSource Global, 2014)

A large amount of the US generic sales are made to a small number of retail drug chains and drug wholesalers. These retail drug chains and drug wholesalers have been consolidating, which in turn has allowed customers to gain more purchasing powers. This purchasing power has increased the competition for generic drug producers for business.

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Appendix C:

Strengths

Merck SWOT Analysis

One of Merck’s strengths is the ability to to capitalize on product growth. The areas of product growth include immunology, diabetes, hospital acute care, vaccines, and animal health. Immunology is the leading category for Merck, with the two most popular reporting significant sales growth. Additionally, Merck’s diabetes sector heavily contributes to the overall revenue of the company. The next strength is their strong in-house research capabilities (OneSource Global, 2015). The innovation of Merck is one of their strengths because they have high numbers of products in the different phases of development. Other than the strong product pipeline, Merck has a diverse portfolio, which includes biologics, peptides, and RNAi (OneSource Global, 2015). The last strength is that Merck has a leading market position. Merck has great market position in all therapeutic categories. Merck is the leader in market share for vaccines at 26.4%, and has the third largest market share in cardiovascular and diabetes, with 10.5% and 16.6% respectively.

Weaknesses:One of the weaknesses is the safety issues Merck has. A few of the company’s products have had potential safety problems. These issues can lead to litigation. There have been two lawsuits against Merck about the efficiently of drugs (OneSource Global, 2015). The next weakness is product defects. Product defects could lead to decreased brand loyalty, which causes customers to find different companies to buy their product from. This will also impact sales. The last weakness is the competitive positioning in the respiratory area. In the past three years, Merck has experienced a decline within their respiratory segment (OneSource, Global, 2015). The decrease can be because of patent losses in their three products that sold the most in that segment. The patents expired in 2014, and the decreases in sales have been major.

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One of the opportunities for Merck is the new products that can be approved and launched. As stated early, one of Merck’s strengths is their number of drugs in the development phases, and their diverse portfolio. The launch of different markets, such as a drug that treats insomnia for adults, and this is due to their extensive R&D spending and drug portfolio (OneSource Global, 2015). Next is Merck’s strong product pipeline. Merck has products in their portfolio that are specialty products, and this helps them grow in the market even more. The product pipeline includes biologics, small molecules, and vaccines that can be in the preclinical trials stage to the Phase lll stage. The third opportunity is that Merck engages in strategic agreements and strategic acquisitions. One strategic agreement that Merck made was joining the Medicines Patent Pool, which licenses Merck’s pediatric products that treat HIV infections in infants and children in developing countries (OneSource Global, 2015). It is focused on providing access to this drug where HIV infection rates are highest. One of the company’s strategic acquisitions was buying Cubist Pharmaceuticals. Cubist is a global company that has a strong antibiotic presence in the market, which Merck doesn’t have a big presence in. Merck also acquired Idenix Pharmaceuticals (OneSource Global, 2015).

One of Merck’s threats is the competitive nature of the industry. The major competition within the industry is companies that are similar to Merck: companies that have products in the same therapeutic categories (OneSource Global, 2015). They also have to deal with the competitiveness from generic companies, that produce the same product at a cheaper cost to the consumer. Losing patent protection from some of the major products that Merck offers will also increase competition. The next threat is pricing pressures. There are product pricing initiatives that the US federal and state governments set in place (OneSource Global, 2015).

Opportunities

Weaknesses

Threats

Appendix D:

Strengths

Sanofi SWOT Analysis

One major strength of Sanofi is its strong R&D innovations. In areas of growing need such as oncology, diabetes, and cardiovascular health among others, Sanofi’s R&D pipeline is set up for success through innovations in these areas (OneSource Global, 2015). Their 2011 acquisition of Genzyme to focus on Multiple Sclerosis and other rare conditions (Sanofi, 2014) highlights the extent of Sanofi’s strength of innovation through research and development aimed at future medical needs. Another strong point of Sanofi’s business is its strong market position. Sanofi is a global leader in pharmaceuticals with $33.77 billion in 2014 sales revenue (Sanofi, 2014). Sanofi is the third-largest player in the global pharmaceuticals market (OneSource Global, 2015).

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Opportunities

Weaknesses ThreatsSanofi has had issues with product recalls and discontinuations. Legislation has cracked down on some of Sanofi’s key drugs, which hurt sales as well as money spent on R&D and intellectual man-power. In May 2014, Sanofi actually self-recalled some drugs including animal health and human biologics products because of safety and stability issues (OneSource Global, 2015). Product safety and discontinuation issues are huge issues for any company in the pharmaceutical industry, as consumers want guaranteed low-risk drugs. This will hurt Sanofi’s customer trust as well as its financials. Key patent losses are also going to be a problem for Sanofi’s future outlook (Sanofi, 2014).

Sanofi’s best opportunities lay in the partnerships that it has made with other companies. LeadPharma, a cancer and autoimmune disease specialist, as well as Boehringer, a German manufacturer, highlight Sanofi’s opportunistic partnerships (OneSource Global, 2015). Sanofi also has received promising FDA approval for its new insulin-based drug Touejo and is waiting full market approval (Sanofi, 2014). It is similar to Sanofi’s lead drug Lantus, but has seen even better results in some cases. This new drug approval bodes very well for Sanofi and is an opportunity the firm needs to capitalize on.

The pharmaceutical industry is a highly competitive landscape and patent losses are bound to hurt Sanofi with the arrival of generic alternatives. Lovenox and Plavix already have generic competitors on the market which have made sales decline (Sanofi, 2014). Sanofi also faces credit risks, as its three top customers accounted for 22.5% of its entire revenue in 2014 (OneSource Global, 2015). Another threat to Sanofi’s overall health as a business is its reliance on third parties for support. For example, the company heavily relies on Bristol-Meyers Squibb and other companies for marketing support, and relies on suppliers of APIs and other ingredients necessary for pharmaceutical manufacturing (OneSource Global, 2015). This is threatening for a few reasons, including the fact that Sanofi could cut costs in the long run by developing these ingredients themselves.

Appendix E:

Key Partners

Merck Business Model Canvas

• Sanofi: New vaccine (6-in1), trying to partner if approved by the FDA.

• Grastek & Ragwitek working on an allergy immuno therapy tablet for house dust mites.

• Endocyte Inc. ovarian cancer treatment

• Pharma, animal health, consumer care, and alliances

• Maintaining patent rights• Development and Marketing +new products• R&D• Animal health• Partnerships• Cut spending by layoffs

Key Resources

• To improve life, achieve scientific excellence, operate with the highest standards of integrity.

• Curing diseases, preventing pregnancy, allergy relief, disease preventions, product variety

Key Activities

• Building strong external alliances, developing lasting relationships with companies, academics and organizations that are at the confluence of emerging ideas.

• Merck for Mothers- no woman should die giving life.

35

Value Propositions• Patents, research pipeline, investors, capital

Customer Relationships

Channels• Wholesalers, retailers, distributors, hospitals,

healthcare providers• Plan to acquire customers through marketing,

and advertising through physicians and ads/commercials

Cost Structure• Medicare/Medicaid cost considerations• R&D expenditures are recorded as they are

incurred• Pay for employees and R&D and other operations

Revenue Stream• About half of their patents are expected to expire

in 2020, and the other half in 2030.• Revenue comes from diabetes, oncology, age

related diseases, vaccines, and women health.

Customer Segments• Animal People:

• Vets, distributors, and customers that • raise animals

• Diabetes, oncology, vaccines, hospital acute care

• $17.1 billion is US market.

Appendix F:

Key Partners

Sanofi Business Model Canvas

• Acquisitions of Chattem (consumer OTC)• Genzyme Corp makes biopharmaceuticals for

Sanofi• Merial is an animal health firm• Covance does drug development for Sanofi

• Pharmaceuticals, human vaccines, and animal health

• Involved in emerging markets, diabetes solutions, vaccines, consumer healthcare (CHC), animal health, and Genzyme.

Key Resources

• Meet patient’s needs and make medicine for everyone

• Have knowledge in all areas of medicine and take advantage of the patent cliff by getting experience in the generic drug segment by developing their brand name, prescriptions drugs, into OTC generic drugs.

Key Activities

• Sanofi has partnerships with companies and has held them for a long time.

• They are expanding their knowledge to the generic segment, which will make customers happy.

36

Value Propositions

• Patents, but Sanofi also has a presence in generic drugs.

• Took advantage of patent expirations and started making generic versions of their brand name drugs for OTC use.

• Capital because they have many smaller acquisitions and they have capital in all their areas.

Customer Relationships

Channels• Wholesalers, retailers, distributors, hospitals,

healthcare providers• Plan to acquire customers through marketing,

and brand loyalty.• Ads/commercials, physician marketing, and

drugs for life threatening disease are marketed through physicians.

Cost Structure• R&D expenditures, especially with new products

and biopharmaceuticals.• Employee salaries

Revenue Stream• Unlike other brand name pharmaceutical

companies, Sanofi invested in the OTC market by acquiring Chattem.

• Revenue comes from diabetes, oncology, age related diseases, vaccines, animal health, women health, and generics.

Customer Segments• Animal People:

• Vets, distributors, and customers that • raise animals

• Diabetes, oncology, vaccines, hospital acute care

• $8.7 billion in US market.

Appendix G: Merck Common Size Balance Sheet

37

METRIC % CHANGE (2014-2013) 2014 2013 2012 % CHANGE (2013-

2012)Assets:Current Assets Cash and cash equivalents -48.8% 7.6% 14.8% 12.7% 16.7%Short-term investments 376.9% 8.4% 1.8% 2.5% -30.3%

Accounts recievable -0.9% 6.7% 6.8% 7.2% -5.9%

Inventory -3.9% 5.7% 5.9% 6.2% -4.3%Total Current Assets -0.1% 33.7% 33.8% 32.8% 2.8%Investments 48.6% 13.7% 9.2% 6.9% 34.4%PPE 1.1% 31.7% 31.3% 31.5% -0.5%Total Fixed Assets 1.1% 31.7% 31.3% 31.5% -0.5%Goodwill 13.5% 13.2% 11.6% 11.4% 1.8%Net Intangibles -8.0% 20.7% 22.5% 27.4% -17.8%Total Assets -6.9% $98,335 $105,645 $106,132 -0.5%

Liabilities and Equity: Current Liabilities Loans Payable -35.6% 5.5% 8.5% 8.5% -0.4%Trade Accounts Payable 24.2% 5.3% 4.3% 3.5% 23.3%Accrued Liabilties 19.2% 21.2% 17.8% 19.2% -7.3%Income Taxes Payable 588.6% 3.2% 0.5% 2.4% -80.1%Dividends Payable 6.6% 2.6% 2.5% 2.7% -6.5%Total Current Liabilities 13.0% 37.9% 33.5% 36.2% -7.5%Long Term Debt: -2.0% 37.7% 38.5% 32.1% 20.1%Deferred Income Tax: -32.2% 8.6% 12.7% 11.3% 12.2%Other Noncurrent Liabilities: 3.3% 15.8% 15.3% 20.4% -25.1%Total Liabilities -7.1% $49,544.00 $53,319.00 $50,669.00 5.2%

Stockholder's Equity: Common Stock: 7.2% 3.7% 3.4% 3.2% 6.0%Other paid-in capital: 7.0% 82.8% 77.4% 73.3% 5.6%Retained Earnings: 25.7% 94.3% 75.0% 72.1% 4.1%Accumulated other comprehensive loss 111.0% -8.9% -4.2% -8.4% -50.3%

Less, treasury stock: 27.8% 72.3% 56.6% 44.6% 26.9%Noncontrolling Interests: -94.0% 0.3% 4.9% 4.4% 11.1%Total Equity: $48,791 $52,326 $55,463

Appendix H: Merck Common Size Balance Sheet

38

METRIC % CHANGE (14-13) 2014 2013 2012 % CHANGE (13-12)

Net Sales -4% $42,237 $44,033 $47,267 -7%

COGS 3% 39.7% 38.5% 34.8% 11%

Gross Profit -3% 60.3% 61.9% 65.2% -5%Marketing and administrative 2% 27.5% 27.1% 27.0% 0%

R&D Expenses: 0% 17.0% 17.0% 17.3% -1%

Restructuring Costs: -38% 2.4% 3.9% 1.4% 176%Other (income) expenses, net: -1553% -26.9% 1.9% 2.4% -22%

Operating Income 225% 40.9% 12.6% 18.5% -32%

Tax Expense: 442% 12.7% 2.3% 13.3% -82%Net Income 183% 28.3% 10.0% 13.3% -25%

Appendix I: Merck 2014 Financial Ratios

39

Merck (2014) Accounts Payable Turnover 6.20Accounts Receivable Turnover 6.37Capital Intensity 2.33Cash Coverage 0.40Cash Ratio 0.40Current Ratio 1.77Days' Cost in Payables 58.86Day's Sales in Inventory 121.27Day's Sales in Receivables 57.26Debt Ratio 0.50Debt/Equity 1.02Dividend Payout Ratio 0.43EPS 4.12EBITDA Ratio 11.16Equity Multiplier 2.02Gross Profit Margin 0.60Inventory Turnover 3.01Net Profit Margin 28.25%Operating Profit Margin 40.92%P/E RatioQuick Ratio 1.47ROA 12.14%ROE 24.46%Total Assets Turnover 0.43Total Debt Ratio 0.05Internal Growth Rate 0.0739Market/BookPrice/SalesRetention (plowback) ratio (b) 0.5669Sustainable Growth Rate 0.161Times Interest Earned

Appendix J: Sanofi Common Size Income Statement

40

METRIC % CHANGE (14-13) 2014 2013 2012 % CHANGE

Assets:Current Assets Cash and cash equivalents -12% 7.5% 8.6% 6.4% 35%Accounts receivable 3% 7.3% 7.1% 7.5% -5%Inventory 2% 6.7% 6.6% 6.4% 4%Total Current Assets -3% 24.1% 24.9% 22.7% 10%Investments 425% 2.4% 0.5% 0.5% -4%PPE 1% 10.7% 10.6% 10.5% 1%Total Fixed Assets 1% 75.9% 75.1% 77.2% -3%Goodwill 4% 40.2% 38.7% 37.9% 2%Net Intangibles -7% 14.9% 16.0% 20.1% -20%Total Assets 1% € 97,392 € 96,055 € 100,399 -4%

Liabilities and Equity:

Current Liabilities Accounts Payable: 18% 9.1% 7.7% 7.4% 3%Trade Accounts Payable:

Accrued Liabilties 19% 21.2% 17.8% 17.8% 0%Income Taxes Payable 589% 3.2% 0.5% 0.5% 0%

Dividends Payable 7% 2.6% 2.5% 2.5% 0%Current Liabilities: -9% 32.5% 35.7% 32.3% 11%Long-term debt: 24% 33.1% 26.7% 25.0% 7%Deferred tax liabilities: -21% 10.2% 13.0% 13.8% -6%Total Liabilities: 3% € 40,124 € 39,021 € 42,874 -9%Shares Outstanding: 0% 99.7% 99.8% 99.8% 0%Total Equity: -1% € 56,268 € 57,033 € 57,486 -1%

Appendix K: Sanofi Common Size Income Statement

41

METRIC % CHANGE (14-13) 2014 2013 2012 % CHANGE (13-

12)Net Sales 2% € 33,770 € 32,951 € 34,947 -6%COGS -2% 32.7% 33.3% 31.7% 5%Gross Profit 1% 67.3% 66.7% 71.2% -6%SGNA: 72% 26.6% 15.5% 25.6% -39%R&D Expenses: -1% 14.3% 14.5% 14.0% 3%Other (income) expenses, net: -64% 0.5% 1.4% 0.4% 222%

Operating Income -1% 28.0% 28.3% 32.8% -14%Tax Expense: -1% 6.4% 6.5% 7.7% -16%Net Income 0% 20.3% 20.3% 23.2% -12%

Appendix L: Sanofi 2014 Financial Ratios

42

Sanofi (2014)3.024.722.880.560.561.80

120.83217.25

77.270.420.710.843.34

16.261.730.681.68

20.27%18.19%

1.001.29

7.03%12.17%

0.350.43

Accounts Payable TurnoverAccounts Receivable TurnoverCapital IntensityCash CoverageCash RatioCurrent RatioDays' Cost in PayablesDay's Sales in InventoryDay's Sales in ReceivablesDebt RatioDebt/Equity Dividend Payout RatioEPSEBITDA RatioEquity MultiplierGross Profit MarginInventory TurnoverNet Profit MarginOperating Profit MarginP/E RatioQuick RatioROAROETotal Assets TurnoverTotal Debt Ratio

Appendix L: Worldwide Pharmaceutical Growth in Billions

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2008 2009 2010 2011 2012 2013 2018*0

200

400

600

800

1,000

1,200

799 830.6891.3

965.2 957.3 980.1 1,000

Worldwide Pharmaceutical Growth in Billions

Year

Reve

nue

in b

illio

ns

project 1 - final deck

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