Industry Analysis for Sustainability Pharmaceutical/Biotechnology

Industry Analysis for Sustainability

Pharmaceutical/Biotechnology

ABSTRACT

This paper is an analysis of innovation within the pharmaceutical industry with an emphasis on sustainable innovation.   Out of the industry, Merck will be featured as a specific company with specific areas of innovation to analyze. Drug discovery and innovation is a costly endeavor. It requires vast resources to bring a drug to market.  Annually only about 25 novel New Chemical/Molecular Entities are brought to market.

Sustainability through green chemistry, renewable fuels and packaging is one of the most critical ways the industry can innovate.  Utilizing new technologies in biotechnology and computerized testing can also help innovation grow. 

The pharmaceutical industry needs to become more sustainable.  The easiest method to start with and one with a significant impact is green chemistry. Green chemistry, also called sustainable chemistry, is a chemical philosophy encouraging the design of products and processes that reduce or eliminate the use and generation of hazardous substances and by-products.

Packaging of product is another aspect where the sustainable movement is growing.  From the point of manufacture to the point of delivery, drugs require extensive packaging. Some of this is necessary to prevent the spoiling or degradation of the product, and some is necessary for consumer protection from tampering, but there is still large amounts of waste plastic, foils, cardboard and plastic generated in this cycle.

Merck and Co. is poised to take advantage of a number of these opportunities and has the chance to become an industry leader for these areas of innovation. Today, the new Merck has about 51,000 employees in 120 countries and 31 factories worldwide.

Merck has recently completed many acquisitions to enhance its value to shareholders.  In November 2009 it merged with Schering Plough to enhance its pipeline of future drugs and augment its current product line.

talent management at Merck has allowed the company to retain the best it creates and attract top talent in an industry marked by uncertainty.

In the coming years the pharmaceutical industry will need to adapt to a changing world.  Those that can innovate will survive.  Merck has shown that they have a strategy to innovate in many different ways.  Through partnerships, acquisitions and internal research and development Merck has consistently produced useful and profitable drugs. 

Human kind has needed medicines for survival since the Stone Age.  Often natural plants and animals were used to treat and cure a host of ailments.  In the beginning, this was often fraught with disastrous results.  Various cultures refined the use of plants, herbs and animal parts to treat a varying list of ailments with moderate success.  As medicine evolved to diagnoses diseases so did the refinement of the herbs and products used to treat these diseases.  As far back as the Middle Ages, there were herbalists in what is now Iraq selling herbs and plants to treat specific maladies of the time Hadzovic, 1997).

As medicine advanced and knowledge of the body and world around us more focused therapies could be developed to target disease.  This was beneficial as early ‘drugs’ were often highly toxic and counter productive.  In the 1800’s heavy metals like mercury and arsenic were often used to treat maladies such as Syphilis and bacterial infection.  In the 1700’s blood letting and bitter almond (cyanide) were used to treat nearly all problems.  As medicine evolved, so did the drugs to combat disease.

The modern pharmaceutical industry came about in the late 19^th and early 20^th centuries.  Key scientific discoveries of products like penicillin and insulin led the way to commercial success for drug companies.  Penicillin was on of the first drugs to be mass-produced, marketed and distributed.  As more drugs were discovered and more money was to be made, a need arose to differentiate between the ‘snake oil’ products and real drugs and legislation began to be drafted to regulate the industry and drug development (Moynihan and Cassels, 2005).

In 1964, the World Medical Association issued its Declaration of Helsinki, which set standards for clinical research and demanded that subjects give their informed consent before enrolling in an experiment. Pharmaceutical companies became required to prove efficacy in clinical trials before marketing drugs.

The pharmaceutical industry has grown significantly since its inception with a myriad of drugs that can combat nearly every ailment medicine can discover.  Many billions of dollars are spent annually on drug development, drug marketing, drug testing and distribution of these products.  Innovation on the industry comes from research and development within the companies as well as university research partners.  Modern pharmaceutical companies also include biotechnology as part of their innovative pathway.

How This Industry Innovates

Drug discovery and innovation is a costly endeavor. It requires vast resources to bring a drug to market.  Annually only about 25 novel New Chemical/Molecular Entities are brought to market.  To reach this number of 25 there are often thousands of chemical entities that fail to pass various stages of development.  A typical drug spends years in development and discovery and clinical testing before it ever reaches the consumer market. Studies published in 2003 report an average pre-tax cost of approximately $800 million to bring a new drug (i.e. a drug with a New Chemical Entity) to market. (DiMassi, 2003)

Teams of chemists, pharmacologists and biologists then screen thousands of compounds - or chemically or genetically engineer new ones - to generate "lead compounds." These molecules have some desirable properties, but researchers usually must modify them to increase activity or minimize side effects - a process called "lead optimization." Out of this process come hundreds of potential drugs.

In choosing compounds for further testing researchers must weigh basic concerns: Is it likely to be more effective than current therapies? Will it be possible to manufacture? Does it have a reasonable dose range and delivery system? To find the right molecule scientists must have plenty of ingenuity and diligence.

Even after a chemical entity is discovered teams of engineers, biologists, chemists and physicists must spend long hours figuring out how to mass produce the results achieved by an individual scientist at his or her lab bench. Often promising experiments are not replicable on a large scale -the reaction may give off extreme heat, or cause an explosion, or release a toxic gas. The research may fail because it is not possible to manufacture the drug safely or to the proper specifications (Moynihan, 2003).

Once a drug candidate has been identified in the laboratory, it begins years of testing. It starts with lab and animal studies to evaluate its safety and demonstrate that it has biological activity against the disease target. In Vivo testing in animals also takes place as do pharmacokinetic and drug metabolism studies.  Over 85% of new chemical entities fail to pass these stages (Adams, 2006).

Key preclinical tests include pharmacokinetics, the study of how drugs move through living organisms. Scientists examine four key processes - absorption, distribution, metabolism and excretion - to ensure that the medicine reaches its intended target and passes through the body properly.

In addition to biological tests, researchers conduct a number of other preclinical studies. Chemistry tests establish the compound's purity, stability and shelf life. Manufacturing tests determine what will be involved in producing the medicine on a large scale. And pharmaceutical development studies explore dosing, packaging and formulation.

The main goal of preclinical studies is to rigorously assess safety before human tests begin and this can take anywhere from 3-6 years. Some preclinical safety tests continue even after the start of clinical trials in people to determine if there are any long-term adverse effects researchers should look for.  A clinical study is of critical importance to test the safety and efficacy of any new drug(Chiaroni, et al, 2008).

After preclinical testing is completed, a company files an IND with the U.S. Food and Drug Administration (FDA) prior to beginning any human testing. The application must show results of preclinical experiments; the chemical structure of the compound; how it is thought to work in the body; any side effects found in animal studies; and how the compound is manufactured.

 In clinical trials teams of physicians carry out studies designed to determine if the drug is safe in people and an effective treatment for the disease in question. Of the 250 compounds that enter preclinical testing, only five will make it this far.

There are three phases of clinical trials:

Phase I: The medicine is tested in a small group (20-100) of healthy volunteers - often in a hospital setting - to determine its safety profile, including the safe dose range. Pharmacokinetic studies examine how a drug is absorbed, distributed, metabolized and excreted, as well as the duration of its action. Phase I studies can take from six months to one year to complete.

Phase II: Placebo-controlled trials involving approximately 100 to 500 volunteer patients who have the disease being studied. The goal of this phase is to establish the "proof of concept" - i.e., the medicine effectively treats the disease. Researchers continue to evaluate the drug's safety and look for side effects, and determine optimal dose strength and schedule (e.g., once or twice daily). Phase II studies can take from six months from one year to complete.

Phase III: The medicine is tested in large, randomized, placebo-controlled trials with much larger numbers of patient volunteers - from 1,000 to 5,000, in hospitals, clinics and/or physician offices - to generate statistically significant data. Researchers closely monitor patients at regular intervals to confirm that the drug is effective and identify side effects (also called adverse events). Phase III studies can take from one to four years to complete, depending on the disease, length of the study, and the number of volunteers.

While Phase I-III studies are taking place, researchers are also conducting a number of crucial parallel studies: toxicity tests and other long-term safety evaluations; dosage forms; plans for full-scale production; package design; and preparation of the complex application required for FDA approval. (adapted from personal knowledge and FDA CFR)

Once all three phases of the clinical trials are complete, a company analyzes all of the data. If the findings demonstrate that the experimental medicine is both safe and effective, the company files an NDA with the U.S. Food and Drug Administration (FDA). 

NDAs typically run 100,000 pages or longer, just one illustration of the extensive testing a medicine must go through in order to gain FDA approval. They contain all of the information about all of the studies - including preclinical testing, all clinical trials, dosing information, manufacturing details and proposed labeling for the new medicine.

In this final stage, the FDA scientists review all the results from all the studies carried out over the years and determine if they show that the medicine is safe and effective enough to be approved.

Depending on the medicine or disease in question, the FDA sometimes convenes an Advisory Committee meeting. These independent panels of experts, appointed by the FDA, consider data presented by company representatives and FDA reviewers. Committees then vote on whether the FDA should approve an application, and under what conditions. The FDA is not required to follow the recommendations of the advisory committees, but they often do.

If the medicine is approved, or "cleared for marketing," it becomes available for physicians and patients. It took an average of 16.9 months for the FDA to review each medicine it approved in 2003. The proportion of rejected applications has remained constant over the years at about 10% to 15%.

Even after approval, the studies and observation continue. A much bigger group of patients may begin to use a medicine upon approval compared with the thousands of patients in clinical trials and in this larger scale rare side effects may occur, so companies must continue to monitor the drug carefully. The FDA requires them to continue to submit periodic reports, including any cases of adverse events (side effects or complications).

Sometimes, the FDA requires a company to conduct additional studies. Known as Phase IV or "post-marketing" studies, they evaluate long-term safety or generate more data about how the medicine affects a particular group of patients (e.g., children or the elderly).

Phase IV studies can continue for years; one study can cost between $20-30 million. Depending on the findings, a company can use the studies to submit a Supplemental NDA, seeking additional indications for the medicine.

Once approved, the marketing of the new drug takes massive resources to release it to the medical community and raise public awareness of the product and brand.  Cost recovery comes through high volume sales and medical insurance billing.

The industry has been long criticized for the high costs of drugs and the heavy marketing of drugs.  Given the state of government reforms on healthcare, the current economic climate and the costs of drug discovery and development the industry as a whole is in a cycle of consolidation and reorganization.  As a whole the industry is attempting to cut costs, increase efficiencies and streamline innovation to deliver useful products, maintain profitability and continue innovation.  There is tremendous pressure to achieve growth and sales, and innovation is part of this process (Rafiq and Saxon, 2000).

Industry Sustainability Status

       

Sustainability in the industry is varied, but a growing trend towards more sustainable practices is underway. Pharmaceuticals are indispensible for a high quality of life.  To achieve this quality there is a downside to the environment.  In recent years much data has been collected showing the wide spread occurrence of active drug ingredients in the aquatic environment, and in some cases drinking water.  There is scientific evidence suggesting these drugs are having an impact on the aquatic organisms at both the individual and ecosystem level. Given the demonstrated environmental relevance of pharmaceuticals, sustainable solutions are gaining importance. Green chemistry has shown that it is mandatory to examine the environmental relevance of all phases of a chemical’s life cycle. Sustainable pharmacy aims to take up the lessons learned from green chemistry. In a broader strategic perspective, sustainable pharmacy would not only foster the resource-efficient development of pharmaceuticals, which are optimized for both therapeutic efficacy and degradability in the environment. It would also provide support for the sustainable use of the products and give impetus for the implementation of innovative sanitation concepts in order to reduce emissions.

Packaging of product is another aspect where the sustainable movement is growing.  From the point of manufacture to the point of delivery, drugs require extensive packaging. Some of this is necessary to prevent the spoiling or degradation of the product, and some is necessary for consumer protection from tampering, but there is still large amounts of waste plastic, foils, cardboard and plastic generated in this cycle.  I asked my local pharmacist at the Bridgewater NJ Target pharmacy how many prescription vials they use in a month.  The answer was about 6500 containers.  At 1.2 ounces each, these 6500 containers equate to about 480 pounds of plastic.  If I look at Target alone, it lists on their website over 1500 pharmacy locations.  A rough estimate of 450 pounds per location equates to 675,000 pounds of plastic each month just from a single nationwide retail pharmacy chain.  This does not include the fuel to manufacture and transport these vials, the labels, receipts printed and the inevitable disposal of the plastic in landfills and incinerators. Multiply this by all the bottles of aspirin, cold medicine and pain relievers used worldwide and the amount of packaging is staggering (personal research conducted in 2010).

The pharmaceutical industry has a number is serious concerns that face it as a whole.  Sustainability is an emerging trend that all industries must adopt eventually.  The most pressing issues for the pharmaceutical industry are developing green chemistry practices for drug discovery and production and end of life product disposal.  The use of green chemistry will noticeably impact the local workspaces of the scientists as well as the local area environmental footprint at pharmaceutical facility plants.  Many metabolites of pharmacological products have been found in trace levels in the natural environment.  This is from discharge into the environment from drug disposal, manufacture and even end user waste.  Packaging and materials is another issue of sustainability.  Massive amounts of packaging and material are used for a variety of reasons. Finding innovation methods to reduce this and streamline the materials is required. Life cycle analysis of a pharmaceutical compound is intertwined with green chemistry.  In addition to green chemistry development, a plan for pharmaceutical disposal and reclaiming is needed.  Manufacturing of pharmaceuticals is a complicated process.  It has many pre-cursors and by-products that are harmful to the environment.  Innovations in manufacturing processes and by-products are open for sustainable improvement. With the current economic climate, healthcare reform and rising costs, finding innovative solutions to rising costs is a major consideration for the industry.  Keeping jobs in America is a prime concern for the American firms.  Protection of intellectual property and safety of the final product are part of the drive for a strategy to innovate the development process to reduce the overall costs of drug discovery and marketing and improve the benefits to the stakeholders.

Industry Composition & Companies

The pharmaceutical industry is comprised of over 40 pharmaceutical firms and biotech companies.  Many are international and global firms.  In total the industry represents billions of dollars in sales and employees hundreds of thousands of people worldwide.  Some of the largest members of the industry are as follows: Johnson and Johnson, Pfizer, Merck, GlaxoSmithKline, Novartis, Bristol Meyers Squibb, Astra Zeneca, Sanofi-Aventis, Abbot, Bayer, Hoffman-La Roche, Eli Lilly and for the biotech sector Amgen and Genentech.  In recent months there has been a number of consolidations and mergers.  Pfizer acquired Wyeth and Merck and Schering Plough merged in 2009 as well.  To battle the issues facing the industry it is likely other mergers and acquisitions will take place in coming years.  The top three in terms of product sales and size are Pfizer, Johnson and Johnson and now Merck.

As a whole the industry generates billions of dollars in annual sales (various corporate annual reports).  According to corporate annual reports for 2009, Johnson and Johnson topped the list with US revenues of 61,891 million dollars.  Pfizer was second with 50,009 million dollars.  The recent merger between Schering Plough and Merck place their combined total at 48,560 million dollars.  If these trends continue for 2010 then they will remain the big three pharma firms.

There are even more, small contract labs, manufacturing partners and outsourcing facilities in this industry.  According to the industry trade magazine MedAdNews, the entire sub industry and the 50 major firms comprised over 800 billion in sales for 2009 (www.pharmalive.com)

Innovation Opportunities

The pharmaceutical industry needs to become more sustainable.  The easiest method to start with and one with a significant impact is green chemistry. Green chemistry, also called sustainable chemistry, is a chemical philosophy encouraging the design of products and processes that reduce or eliminate the use and generation of hazardous substances and by-products. Whereas environmental chemistry is the chemistry of the natural environment, and of pollutant chemicals in nature, green chemistry seeks to reduce and prevent pollution at its source.

By utilizing green chemistry the industry will engender better relations with the stakeholders.  With the threat of government regulation that could place restrictions on the methods of chemistry used, it is in the industry’s best interest to be preemptive in its challenge for sustainable chemistry. 

Stakeholders like the communities, shareholders and employees are pushing the industry towards adopting more sustainable standards in chemistry.  As environmental regulations become tighter, the path towards green chemistry is inevitable.

Green chemistry faces many difficulties in achieving inroads into the chemical industry and the many downstream industries that depend on chemicals. While many research and development activities are underway in industry and university laboratories, companies have implemented relatively few green chemistry technologies and products (Woodhouse, 2003). A combination of reasons explains this situation. They include a lack of regulatory standards demanding prevention of waste and pollution, weak customer demand, the failure to internalize the environmental and health impacts of chemicals, flawed organizational practices for designing chemicals and inefficient dispersion of innovations across industry (Nissen, 2003; Wilson, 2006).

However, one vital part of the problem is that companies have not yet developed business strategies to make green chemistry actions commercially valuable. The Porter hypothesis suggests that companies can win business advantage from seeking resource efficiency (Porter and van der Linde, 1995). Companies could market green chemistry as a means of achieving this efficiency (Iles, 2008).

Another of the potential drawbacks on green chemistry is the product cycle development time.  In the pharmaceutical industry it is critical to get your product to market as quickly as possible.  Switching to green chemistry may delay the speed of the development process.  Being second to market in a given product or drug class can mean the difference in much revenue and mindshare.  Curtailing development time is important to get the product ready, especially for iterative products on products with intense competition (Schilling, 2008).  Another challenging facing these firms is the product life cycle.  It is common to develop ancillary compounds based upon the first drug.  A great example is Claritin and Clarinex.  Both ar every similar, in fact Clarinex breaks down into the same molecule as Claritin once in the body.  By developing and marketing drugs of different delivery mechanisms and structures a pharmaceutical company and prolong its patent protection (Dubey and Dubey, 2009). This life cycle extension delays the migration from traditional to green chemistry applications and undermines momentum to take all R&D green.

Another opportunity to innovate is with biotechnology.  This is a growing subdivision of pharmaceutical research and development. Modern use of the term refers to genetic engineering as well as cell- and tissue culture technologies. Biotechnology really encompasses a wider range and history of procedures for modifying living organisms according to human purposes, going back to domestication of animals, cultivation of plants and "improvements" to these through breeding programs that employ artificial selection and hybridization. Biotechnology draws on the pure biological sciences (genetics, microbiology, animal cell culture, molecular biology, biochemistry, embryology, cell biology) and in many instances is also dependent on knowledge and methods from outside the sphere of biology (chemical engineering, bioprocess engineering, information technology, biorobotics).

The use of biotechnology for innovation allows for faster more streamlined drug development and targeting of disease.  Orphan drugs are an interesting opportunity for many pharmaceutical firms.  These drugs are to treat relatively obscure diseases that do not have much hope in blockbuster status sales to recuperate the costs of development.  Presently there is some patent longevity and protection for related research developed as a result of research on orphan drugs.  This may be sufficient motivation to apply resources towards treating diseases that do not effect huge populations.  The benefit to the firm is that the technology and discoveries that lead to this novel therapies may also lead to a blockbuster product.  Fostering innovation, even if it does not lead to blockbuster status is important to a firm for social and human resource reasons (Mathai, 2008).

The use of alternative fuels, materials and techniques for manufacturing product and packaging products are another opportunity for innovation.  Current production is based on older technology and has not yet been optimized for advances in green chemistry and biotechnology.  The use of alternative packaging has only just begun to appear in products.  A prima example is Merck’s Proventil HFA.  The previous incarnation of Proventil used a propellant that was harmful to the environment and released a number of by-products into the atmosphere during use and manufacture.  The new propellant is free of CFCs.  The change from chloroflurocarbons to hydrofluroalkanes is one such innovation that helped make the product more sustainable.

In terms of the drugs themselves, the use of Social Life Cycle Assessment will benefit the industry.  It may be scientifically impossible to make an active product that is completely harmless as it it deposited into the waste stream via urine or other disposal. However, using green chemistry to develop and manufacture and knowing the long term waste impacts can help improve the firms image amongst the public (Klopffer, 2003).  This social LCA shows consumers that the company is aware of its footprint and takes strides in other areas to compensate for this – such as alternative fuels or packaging materials.

The use of Life Cycle Analysis in regards to packaging materials is an opportunity for innovation for the industry.  Use of recyclable materials that can also be reused or recycled is one of the first steps. Stakeholders expect packaging free of dangerous byproducts like BPA and products that can be recycled.  Government regulations require safety in packaging to maintain tamper resistance and child safe packaging.

Pharmaceutical manufacturers are unlikely to embrace fully green packaging solutions, but there are aspects of the packaging life cycle where a philosophy of sustainability can be introduced to help reduce the environmental footprint, as well as manufacturing costs. Even biodegradable and renewable materials cannot offer a quick-fix solution. "They are not intrinsically more environmentally sustainable than other materials," (Rubenstein, 2009). "For instance, if there are no composting facilities available where the consumer can dispose of the packaging after use, then the function 'biodegradability' cannot be used."

According to Rubenstein, it is important to consider all the aspects of packaging, such as the supply chain, operations, further manufacturing, product use and disposal. The package itself can offer environmental performance by, for example, helping to reduce spoilage and optimizing product use. "Also, aspects such as compliance should be considered when looking at sustainability because improved compliance brings safety and health benefits for the consumer," he said.

He explained that Alean Packaging implements sustainability in its facilities (optimizing operations), people (education and raising internal awareness), partnerships (working with suppliers and customers to produce products with minimal footprint, and optimized social and economic performance) and, ultimately, in the final product through the total life cycle. Although the company does also look at material alternatives, Rubenstein stressed that the most important consideration should be the best material for a given job. "Packaging is designed to do a job, such as protecting and delivering the product, and one needs to find the best material for that," said Rubenstein. He added that most biodegradable materials do not provide the same barrier functions as traditional materials, such as aluminum foil or fossil-based plastic films. "It is important to focus

on actual performance and not on the perception of sustainability alone," he said (Rubenstein, 2009).

Use of alternative fuels to power manufacturing and research is another opportunity.  Each firm has multiple campuses all over the world each with massive power requirements.  Use of solar, wind and geothermal energy sources can greatly improve the sustainability of these operations.  Adding solar panels to most pharmaceutical facilities would reduce carbon dioxide emissions greatly in terms of electricity generation. This push to green power would enhance the industry view in the eyes of stakeholders.

The production segment of the industry through a systemic focus on innovation is required. Like R & D in the late 1980s and Sales and Marketing in the late 1990s, Production improvement can contribute significant benefit to the Pharmaceutical Industry in the next decade (Tyson, 2007).   Showing corporate responsibility in terms of sustainability will go far to help the industry improve its public perception.  Many of the trends on CSR include ‘going green’ and for this reason alone it helps bolster the case for pharma to move towards green sources of energy (Nussbaum, 2008).  In many cases the amount of roof real estate and power needs, the change over to solar would be paid back in 5 to 7 years (personal calculations) and provide up 60% of the required power needs (personal experience with this technology). Adding in government incentives, power company incentives, it makes a very compelling set of reasons to pursue green energy.

The main draw back is capacity.  To go green means shutting off some of the landline utilities.  If you exceed what your wind, geothermal or solar systems can generate you pay a higher rate for the make up.  Many pharmaceutical plants are a considerable tax base and employer to their communities and get an amazing break on utilities with conventional sources. The opportunity cost of the investment in new technologies is such many executives believe the dollars are better spent in R&D rather than being socially responsible and sustainable (Nussbaum, 2008).

Talent management is an opportunity for the industry to capitalize upon.  These human resources provide the future innovative ideas that will be needed to continue sustainable practices into the future.  Development of these resources and training them to be versed in sustainable practices is critical. For innovation to take place companies need individuals who can think differently about the problems facing the company.  The companies that utilize autonomous teams with nearly full independence from the culture of the company can often break through cultural obstacles (Schilling, 2008).  These teams can be cultivated to spearhead innovation throughout the organization and bring fresh ideas back to their functional areas (Bernard, 2009).   Managing the talent of the industry is of key importance.  The current economic climate and rash of mergers is a both a force for and against talent management.  With all of the mergers, and layoffs there is a larger than average talent pool available to hire.  With good selection, any company can hire top talent to help it drive innovation.  The forces against innovation are the cumulative fear and uncertainty about the lack of stability in the industry.  Broad layoffs can impact even those with high talent and with jobs scarce many are unable to focus their energies on their work and continue to innovate.  The current industry climate is one of contraction and this is not conducive to risk and innovative thinking.

       

Merck & Co.

Today, the new Merck has about 51,000 employees in 120 countries and 31 factories worldwide. Products include medications to treat cardiovascular disease, diabetes, cancer, allergies, hepatitis, HIV as well as vaccines, animal health products and consumer health products (www.merck.com).

The history of Merck & Co., Inc. can be traced back to Darmstadt, Germany, in 1668 when an apothecarty named Frederic Jacob Merck opened a chemical firm. In 1891, George Merck began to establish his roots in the United States and set up Merck & Co., Inc. in New York, U.S.A. Originally started off as a fine chemicals suppliers, Merck & Co., Inc began its pharmaceutical research in the early 1930's. Through many acquisitions Merck has grown to become the company it is today.

During the past six decades, Merck & Co., Inc. has built a global research organization that ranks among the best worldwide in terms of the caliber of its scientists and breakthrough medical research. Today, Merck & Co., Inc. has about 70,000 employees in 120 countries and 31 factories worldwide. Our products are sold in more than 200 countries.

As a legacy Schering Plough employee, and now a Merck employee I have been a part of this transformation into an industry leader.

Innovation at Merck

Merck has recently completed many acquisitions to enhance its value to shareholders.  In November 2009 it merged with Schering Plough to enhance its pipeline of future drugs and augment its current product line.   Previously Merck had been involved in a long-term joint venture with Schering to develop and Markey its Vytorin product for cholesterol.  This type of innovation by acquisition seems to be the standard for pharmaceutical companies and Merck in particular. The pharmaceutical industry is evolving. Over the past ten years the industry has been attacked by societal, legislative, structural, competitive and technological changes. Technological advances, threats of increased regulation, government interference, and business and public cost containment pressures have caused firms in the pharmaceutical industry to actively seek new strategic responses and joint ventures (Loomis, 1994).

Strategic alliances are defined as a long- term, explicit contractual agreement pertaining to an exchange or combination of some of a firm’s resources with a competitor (Burgers et al., 1993). These alliances are inter-organizational agreements that go beyond a legal contract. They are bilateral relationships characterized by the commitment of two or more organizations to a common goal (Jorde and Teece, 1989).

Strategic alliances are becoming increasingly important in the pharmaceutical industry. Many pharmaceuticals, such as SmithKline/Beecham, Marion/Merrell, Bristol-Myers/Squibb, and Schering Plough/Merck, forged strategic alliances with benefit management companies in an attempt to gain control over distribution channels and to expand market coverage of products (Pisano, 1997). Some of these eventually lead to further developments like the merger of Merck and Schering.

Despite the increased frequency and major importance of strategic alliances in the pharmaceutical industry, little is known about the formation of these alliances, or factors by which these alliances affect business and industrial practices. An integration of the diverse research streams used to analyze strategic alliances in the pharmaceutical industry is desirable so that the results and perspectives can be viewed as complementary rather than contradictory.

Another way Merck drives innovation is its human capital.  Its scientists and staff are the driving force to its success.  Having top talent is directly correlated with a high discovery of New Chemical Entities, which are the foundation for new drugs (Gassman & Reepmeyer, 2005).  Merck manages the staff by challenging them to achieve stretch goals and building their knowledge base through conferences and scientific conference participation.

Merck also innovates through applied science.  Merck will focus on a breakthrough product and try to find better ways to deliver the end result to the consumer in a way that lowers costs and maximizes profits (Mathai, 2008). Merck’s diabetic franchise is an example of how they deliver a product that leads its class, like Metformin and as it approaches the end of its patent, release similar yet incrementally better products to take its place.  This incremental innovation is what gets the firm through the drought of truly novel product discoveries.

       

       

Sustainability & Innovation at Merck

With the merger of Schering Plough and Merck, a wealth of green chemistry resources was assumed.  Schering Plough had been utilizing green chemistry in some aspects of its operation for some time, and had already worked out many of the hardships associated with scaling the process up for manufacture.  Schering in early 2009 was awarded the EPA Energy Star award for having a plant that demonstrated excellent energy resource management (Schering, 2009).  Merck was also a participant in the Green Chemistry Institute Pharmaceutical Roundtable, a symposium of industry partners to share ideas on sustainable chemical methods. 

Merck has been active in registering its products, especially in its animal health and anti-effective product lines.  This voluntary registration helps track the LCA of the constituent products and allows the end users a more complete picture (de Braal, 2009).

Every few years the Dow Jones ranks the top 10% of sustainable companies by industry.  In the early 200’s Merck was absent from the list.  By taking a more open approaching, using SLCA and green chemistry Merck has tried to develop a more sustainable architecture to demonstrate to its stakeholders it commitment to sustainability (Kingo, 2004).

By contributing to the global knowledge base of sustainable green chemistry Merck can further the movement. The internal and external communication of the corporate performance is a very important benchmark to demonstrate sustainable development. The communication of the corporate performance comprises the strategic and operational goals, the corporate performance data on inventory level, the translation of the inventory data to sustainability core indicators as well as the performance evaluation in terms of sustainability. This transparency can go a long way in helping demonstrate a commitment to sustainability (Pflieger et al, 2005).

After the issues with Vioxx, Merck had to change its R&D practices.  Through joint ventures, licensing and acquisitions, Merck entered the biotechnology space.  Working with licensed compounds and new software innovations, Merck focused on a new method of drug target discovery.  This system involved the heavy reliance on computers, and molecules artificially produced (Carr, 2004).  This was a departure from the homegrown approach that had successfully led Merck to be a top firm in its industry.  However the old approach proved to have many flaws as witnessed by the Vioxx product (Nesi, 2008). 

Looking to biotechnology Merck found a way to develop a pipeline of drugs using an entirely new method while it could repair the problems in its own development methods that led to the Vioxx concerns (Nessi, 2008).

The current pipeline at Merck is a mixture between biotech and traditional discovery products.  This provides an excellent divestiture of resources and science in the event the current innovation fails to deliver new chemical entities (Merck, 2009).

Merck has also undertaking a number of manufacturing initiatives with new plants for vaccine production in Pennsylvania and North Carolina.  By building modern plants that are energy efficient and have some portion powered by alternative resources Merck can work towards the goal of sustainability.  Geographic distribution is also a key factor as the final product is manufactured at locations close to regional distribution centers.  With the merger with Schering Plough, Merck has manufacturing along the east coast, west coast and central south of the US to allow for a shorter distribution of product to pharmacy shelves.

With modern factories involving robotics, flexible production and automation, Merck can operate at  lower costs and save time and energy (Tyson, 2007).  These factories of the future allow for more streamlined operation and energy usage.

One growth opportunity for Merck comes in the form of packaging.  Along with the sustainability concerns for the pharmaceutical industry an the LCA of the packaging, the buyers i.e. hospitals are looking to maintain a sustainable business.  By being in the forefront of sustainable packaging, Merck can take advantage of opportunities by marketing and targeting hospital chains seeking sustainable packaging (Kumar et al, 2008). This trend towards more recyclable and minimal packaging benefits hospitals as their costs are reduced for storage, labor to un-package and dispose of the materials and they can benefit from benefiting from sustainable packaging among their stakeholders.

Distribution of the final product is a major cost for any pharmaceutical firm.  While safety and anti-theft packaging still needs to exist, the materials and style can be enhanced upon.  By managing cyclical product demands, Merck can leverage the manufacture of sustainable packaging materials from its suppliers and make distribution more efficient to it suppliers.  One of the most variable costs to a pharmaceutical firm is the cost of packaging and distribution of the final goods. Using cyclical purchasing of materials and distribution, Merck could potentially save money and reduce its environmental impact (Strijbosch et all, 2002). 

Merck has long been considered an innovator through its sheer tenacity at applied science (Nesi, 2008).  Human talent is one of the major assets of Merck that allows it to maintain a competitive and innovative edge.  By forming teams that are both diverse and cross-functional in design, Merck ensures a high level of cross functional teamwork and communication.  The diversity of the team intrinsically allows for greater knowledge span that can lead to innovative ideas (Schilling, 2008).  Merck’s scientists are a diverse group and not all of them are from traditional academic backgrounds.  While academic schooling is an important aspect at Merck, many talented employees have worked their way up through valuable contributions without the benefit of a formalized education.  This diverse work force has benefited the firm in generating a wide range of ideas and concepts (Gilmartin, 1999). 

Merck uses creativity as a business asset. The key is to turn ideas into useful knowledge and the useful knowledge into added value. In practice, this means bringing together the creative thinkers so that they can discuss and elaborate on their ideas, even if they do not really want to. It also means finding the resources necessary, when resources are limited, and trying to manage what is often an unpredictable, unmanageable process. (Kao, 1997). Through an incentive plan that encourages both meeting operational and stretch goals, Merck has fostered a climate where employees can think outside the box, at least part of the time.  Merck has leveraged this opportunity with its merger with Schering.  While Pfizer is undergoing immediate and massive layoffs following its buyout of Wyeth, Merck has stated it will review the business needs, strategic needs and individual knowledge base of its employees before setting a course on layoffs.  It is hopeful that a company is looking at human resources with an eye towards value to the company rather than geographic location or salary numbers.

This talent management at Merck has allowed the company to retain the best it creates and attract top talent in an industry marked by uncertainty.

In the coming years the pharmaceutical industry will need to adapt to a changing world.  Those that can innovate will survive.  Merck has shown that they have a strategy to innovate in many different ways.  Through partnerships, acquisitions and internal research and development Merck has consistently produced useful and profitable drugs.  In the upcoming year the strategic vision of Merck will become apparent and we shall all see if their strategy allows them to surpass their peers in the industry.

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