Merck into Emerging India

Be Well
India – Key to Emerging Market
Work on biotech
Enhance cost structure
Leverage our expertise in diabetes & hepatitis C
Lead in the pharmaceutical industry

Merck is facing significant revenue pressure due to patent expiration in
5 years
Pharmace
utical
, 89%
Consumer
Care, 4%
Animal
Care, 7%
Revenue streams of Merck
Patents of the 3 best-selling products
(Singulair, Vytorin, Zetia) will expire in
5 years
Threats
Expected revenue loss of US$10bn
Source: Merck 2011 Annual Report, Pharmaceutical Industry
Structure
Overview R&D in China Manufacturing in India Offerings in India Financials Implementation
2

Merck is further alarmed by limited growth in developed market and
lagging behind major competitors in emerging market
5%
16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Developed
Market
Emerging
Market
Market growth rate in
2011-2015
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2009 2010 2011
Percentage of sales from emerging market
Merck
Average of top 3 players
Source: Global Pharmaceutical Industry Report, Annual Reports of Johnson & Johnson, Pflizer, Novartis and Merck 3

Merck should invest in R&D of biologics, establish a manufacturing
hub in India, and sell specialized biological offerings in India
Patent expiration
Intensifying
competition in
generics
Current high R&D
and
manufacturing
cost
Optimization of
core business
Refinement of
cost structure
Investment for
future growth
Challenge
Global Strategy
Biologics
R&D in Beijing
Specialized
biologics
offerings in
India
Manufacturing
hub in India
Recommendation
to Merck India
Source: Team analysis 4

5
Biologics would be the key growth driver in pharmaceutical
Biologics Chemical
Growth rate

15-16%

5-6%
Profitability

Higher margin

Lower margin
Protection of
intellectual property
right

Higher technology
complexity

Lower technology
complexity
Development risk

Success rate 30.1%

Success rate 25.6%
Source: Case pack, DiMasi & Grabowki

Beijing would be R&D center for biologics
0
1
2
3
4
5
Biology talent
supply
Maturity of
skills
Synergy with
outside R &D
Presence of
key pharmas
Government
support
China
India
Fast expanding
biology talent pool
Limited due to focus
on genetics
>100 supporting
companies
Less supporting
companies
Established skills
5 companies
with proven
skills
> 12
8
Better
infrastructure
Education
support
Source: Case pack, The Korn Ferry Institute
6

India would be the biologics manufacturing hub for lower cost and risk
29.9 34.3
27.5
29
31
33.6
0
10
20
30
40
50
60
70
China India
Attractiveness index for FDI
(Higher score = Lower cost, lower risk)
Cost
Risk
Source: PwC
7

Manufacturing in India would facilitate cost-effective distribution for
Indian market
Distribution is 50% of total supply
cost in India
Streamlining and reducing
middlemen
Introduction of
Goods and
Service Tax
Ensuring quality of biologics
Partnership with local distributors
Lower distribution cost

Merck should build its own production facilities in India in order to
protect our technologies and ensure product quality
Licensing Joint-venture Acquisition
Internal
expansion
Intellectual
properties
protection
Quality
assurance
Cost
Set-up time
requirement
1 year 1 to 2 years 1 to 2 years 2 to 3 years
= the best

The production facilities will manufacture biologics, primarily to satisfy
domestic demands
Major considerations
 Site economics
 Proximity to skilled workers
 Proximity to end market
 Proximity to raw materials
Key facts
• Located in Maharashtra, the richest
and 2nd most populated state
• 60% of Merck’s global biologics
production
• Initial employment of about 100
people

Merck should leverage its leading position in diabetes and hepatitis C
pharmacies to capture the huge market potential in India
21
13
80
28
-
10
20
30
40
50
60
70
80
90
Diabetes Hepatitis C
Size of Indian market (US$bn)
2010 2025
2 existing products
2 in R&D pipeline
3 existing products
2 in R&D pipeline
Source: PwC, WHO
11

Merck should utilize its differential pricing strategy to educate the Indian
market about our brand and foster good relationship with stakeholders
• Keep our own brand to increase awareness
• Sell at low price to reduce incentives for copycat
• Obtain large volume to achieve profitability
• Include Merck’s
products on the
essential drug list
Government
• Familiarize with
Merck
Doctor
• Understand Merck
as affordable
medicine with
superior quality
Patients

We will be able to finance investment through shifting manufacturing
and growing sales to emerging market
0.2 0.5 0.5 0.5 0.2 0.2 0.2
0 0 0
1.0
1.0 1.0
2.0
2.0 2.0 2.0 2.0 2.0 2.00
0 0
0
0 0.3 0.3 0.3 0 0
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Capital investment and available fund (US$bn)
Biologic plant in India R&D for biologics in China
New capacity in EM Fund available
Source: Team analysis
13

Merck’s new biologics will grow exponentially after launch
600
1,400
2,600
3,900
668
1,397
1,923
2,386
200
700
1,000 1,350
216
738
639 566
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1st Year 2nd Year 3rd Year 4th Year
Since the product launch
Sales projection for new biologics
(Benchmark with existing products in US$m)
Bio Diabetes I Januvia
Bio Hep C Pegintron
Source: Case pack, Team analysis
14

Merck’s biologics will become crucial profit driver in the future
0.3 0.9 1.6 2.3
15.3 15.4
15.5
15.6
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2022 2023 2024 2025
Profit projection for Merck (US$bn)
Others Bio Diabetes I + Bio Hep C
12.6% of total
profit
15

Merck can mitigate the risks by continuous technology
improvement, building good relationships with India government and
regulatory bodies
16
High LikelihoodLow Likelihood
High
Impact
Likelihood and impact of potential risks
1. Government
restrictions on
mode of entry
and research
activities
3. R &D
failure
2. Uncertain
FDA biologics
approval
regulations
1. Build relationship
with government by
• Lobby group
• CSR
• Local
employment
and training
2. Maintain close
connection with
FDA, actively consult FDA
and reflect concerns
Low
Impact 3. Enhance quality of
expertise and technology

While biologics is Merck’s key growth driver, chemical products remain
as the cash cow
Short-term
2012 - 2016
Medium-term
2017 - 2021
Long-term
2022 - future
Biologics
Chemical
• Continue R&D
with biosimilar
acquired from
Schering-Plough
• Start biologics
R&D in China
• Expand R&D
activities in
emerging markets
• Build
manufacturing
capacity in India
• Manufacture
biologics in India
• Sell biologics in
India and other
emerging market
countries
• Sell low-price
branded products
to India
• Shift capacity to
emerging markets
• Continue to
launch new
products in India
with differential
pricing
• Review pricing
strategy and
modify Merck’s
overall strategy in
emerging markets

Merck should immediately enhance R&D in China and boost local sales
in India while planning for plant construction in 5 years’ time
‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24
RESEARCH AND DEVELOPMENT
Biologics R&D in China
MANUFACTURING
Production increase in existing
EM plants
Construction of India plants
India plants in operation
MARKETING AND SALES
Enhance sales network in India
Sales of certain branded
products at low margin
Sales of diabetes and hepatitis C
products
Sales to other emerging markets
18

Be well - a promise we’ve made to the world since 1917
Be Novel
Be First
Be the Best
That promise of Be Well is kept in the heart of this strategy

Appendix - Competitive analysis of Merck and Indian local players
Merck Indian Local Players
Cost Advantage in
Generics
Disadvantaged
Dominant
(Reverse-engineering
expertise)
Financial Resources Favorable Limited
Know-how of
Advanced Genomics
Leadership Significantly behind
Academic
Collaboration
Mature Lacked
20

Merck into Emerging India

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