How Merck Makes Money? Understanding Merck Business Model

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This article is about how Merck & Co. makes money. Firstly, we explain the current (Rx Business model) and evolving business model (Beyond the pill business model and integrated healthcare business models) of Merck & Co. Then, we share Merck & Co revenues by business segments and revenue type for the year 2015. Finally, we share the revenues, the profits, and the profit margins of Merck & Co for 2015.

Merck & Co., Inc. is a global health care company that offers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and healthcare services businesses. Over last 5 years, company has taken multiple initiatives to “Become The Best Healthcare Company In The World”. This post is written to better understand the current and emerging business model of Merck & Co. and how Merck makes money?

Understanding Merck & Co. Business Model

Merck vision is to “Become the best healthcare company in the world”. To realise this vision, Merck is looking beyond the pill and building businesses outside of its core pharma business. Following graphic shows how Merck is building its pathway to growth in the future by investing in three future ready growth businesses.

Merck Business Model

Pharmaceutical Products Business Model

In Pharmaceutical Product Business, Merck utilizes both direct and indirect channels to influence the prescribers to:

  • Prescribe new medicines to existing and new patients
  • Get new patients for existing drugs by making patients aware about their diseases
  • Promote new indications for existing drugs to providers.

Company sells these products primarily to drug wholesalers and retailers, hospitals, government agencies and health maintenance organizations (HMOs).  Vaccines are also directly sold to physicians. Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Following diagram shows how Merck generates revenues in pharmaceutical product business.

Pharma Product Business Model

Merck is using the following strategies to maximise its return on investment and become a leading Pharmaceutical company:

  • Prioritised Portfolio: Merck has prioritised its portfolio recently and has invested behind the best sources of growth in pharma business, as part of portfolio prioritisation, merck has retained animal health business and divested non-core assets, including consumer care and ophthalmics.
  • Focused Therapy And Priority Markets: Merck has identified 4 focused therapy areas that include, Diabetes, oncology, hospital acute care and vaccine and 10 priority markets.
  • Targeted Business Development: Company has developed aggressive business development strategy to augment research and commercialisation in targeted therapy areas. Acquisition of Idenix and Cubist and partnership with OncoEthix, NewLinkk, Bayer and NGM are few of the examples in this direction.

Beyond The Pill Services Business Model

Building pharmaceutical blockbuster products is only part of the overall strategy for Merck. Merck is investing aggressively to adapt to the new realities of healthcare, in which, all the the healthcare stakeholders including pharmaceutical companies would be reimbursed differently- on the patient outcomes achieved in real world healthcare setting. Company is investing heavily in focused priority digital health areas to establish beyond the pill services business model that promises to improve the patient outcomes. Merck is capitalising on the synergy between health technology and patient data to build beyond the pill services. Company has established healthcare services segment that provides services and solution to improve patient engagement, health analytical and clinical services.

As part of healthcare service segment, Merck had a dedicated innovation group called Merck Medical Information and Innovation (M2i2). This team built partnerships with providers, EMR vendors, and startups to explore some of the possibilities of digital health. Merck is investing on following three overarching themes:

  • Capturing The Patient Voice To Better Define Populations And Outcomes. This involves, Merck working with social media data to better define the diseases & symptoms and build optimal patient engagement and care solutions.
  • Innovative Uses Of Data To Find New Opportunities For Treating Disease. This includes, partnership with the healthcare Institutes in using clinical data to identify new and better better ways to care for patients in targeted therapy areas
  • Technologies To Help Clinicians Improve Care Quality, This includes, building technology solutions to help doctors track, remind and engage the patients in clinical care.

Beyond the pill services is very small business today, but has the ability to push Merck into a new growth trajectory.

Integrated Healthcare Company Business Model

long term vision of Merck is to become an integrated healthcare company that offers product and services across the care continuum. Company is working on building partnerships across the care continuum through Merck Global Health Innovation Fund. Merck Global Health Innovation Fund is its corporate venturing unit. It has dedicated $500m and is executing deals with private equity and strategic partners. Merck is investing in future ready health segments, including interactive cloud, security and privacy and technology-enabled care. Merck has already invested in more than 32 companies and is looking to play a bigger role in improving the quality of health care while lowering system costs.

Company is currently building a suite of services and solutions in following areas:

  • Care Management
  •  Clinical Decision Support
  • Remote Monitoring
  • Patient Adherence
  • Prevention

Few of the bigger names owned or supported by Merck in this area are: TeleRx, Aptus Health, Univadis, Med Help, Ilum Health Solutions, doctor Plus, Closer Care and HMR Weight Management. 

How Merck Makes Money?

As discussed earlier, Merck & Co. sells Pharmaceutical product to patients through drug wholesalers &  retailers, hospitals, government agencies &  HMOs. Merck also offers healthcare services to patients, providers, payers and also pharmaceutical companies. Following diagram shows how the money flows-in from the different customer segments and the key cost elements where the money flows-out to

How Merck Makes Money?

Merck Revenues by Business Segment FY’15

In FY’15 (fiscal year ended December 31, 2015), Merck generated $39.5 billion of total revenues. Of these total revenues, Merck generated.

  • $7.6 billion revenues, 19.2% of the total, from the Hospital and Specialty Brands
  • $6.0 billion revenues, 15.2% of the total from Diabetes Brands
  • $5.3 billion revenues, 13.5% of the total from Vaccine Brands
  • $3.9 billion revenues, 9.8% of the total from diversified Brands
  • $3.8 billion revenues, 9.6% of the total from Cardiovascular Brands
  • $2.2 billion revenues, 5.7% of the total from General Medicine & Women’s Health Brands
  • $1.4 billion revenues, 3.6% of the total from Oncology Brands
  • $4.6 billion revenues, 11.5% of the total from Other Pharma Brands
  • $3.7 billion revenues, 9.3% of the total from Other Segment sales that include: Animal Health, Alliances and Healthcare Services
  • $1.1 billion revenues, 3.7% of the total from Other revenues that include revenues from revenue hedging activities, and third-party manufacturing sales

Merck Revenues- FY15

Merck Profits and Profit Margins FY’15

Of the $39.5 billion of Merck total revenues in FY’15, $14.9 billion were the material & production costs. This resulted in $24.6 billion of gross profit and a gross margin of 62.2%. Merck other operating costs were $17.0 billion. These include marketing & administrative expenses, research and development (R&D) expenses. This resulted in $7.5 billion of operating profit and an operating margin of 19.1%. After interest and other non-operating income and expenses and income taxes, Merck had a net profit of $4.4 billion and a net margin of 11.2%.

 

 

FY15- Merck Profits and Profit Margins

Must Read- To Understand All Pharma Business Models

6 COMMENTS

  1. […] Pharma companies like any other business are here to make money. Pharma companies make money by discovering and marketing the drugs. These drugs before hitting the market need to undergo lengthy and expensive clinical trials to prove their safety and effectiveness over existing alternatives (if any). Once approved, these drugs are then launched in the market for specific use that too for a limited time. This whole process of discovering, manufacturing and marketing the drug makes the business expensive and risky. To know more about Pharma Business  Model, Read- How Merck Makes Money? […]

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