taken pride in placing in the top 10 among the The Evolution of Astra best companies to work for in a number of ∗ magazine surveys, from Fortune to Working Merck Inc. in 1998 Mother. Merck & Co. sales grew from $9.6 billion in 1992 to $23 billion by the end of "We plan to revolutionize the pharmaceutical industry by 19972, topping the world drug sales league in being the best at linking patients and products.” Wayne Yetter, President of Astra Merck Inc. both years. In fact, Merck has seen its global market share jump one-third in the 1992-1998 period to edge Glaxo Wellcome in 1997 with a Section I. Background 3 4.6% world market share. In contrast to the In 1982, Merck & Co. and Astra AB signed an strategy of other pharmaceutical companies such agreement by which products resulting from as Glaxo, this growth was largely fueled by Astra’s research pipeline would be taken through internal R&D efforts as opposed to mergers and clinical trials and registration, to be ultimately acquisitions. marketed and sold by Merck in the United States. The initial terms of the contract specified Another major strategic move made to enhance that Astra’s products would be transferred to its competitive position was the acquisition of Merck’s development and marketing Medco Containment Services Inc. in 1993 organizations, with Astra receiving royalties on (renamed Merck-Medco Managed Care). the sales of the Astra drugs.1 Merck-Medco provides pharmaceutical benefit services in the United States to control The initial cooperation and relationship between prescription drug benefits cost. It has been the the two parties was handled at arm’s length by only pharmaceutical company to appear to the management of both firms. However, the co- manage this type of operation with success. In marketing agreement also specified that once contrast, Eli Lilly’s foray into managed care has sales of Astra’s drugs reached a pre-determined been a resounding failure; PCS was recently sold for $1.5 billion, after having a price tag of $4.4 threshold level of ~$500 million over a one year 4 period, Merck would be required to re-assess the billion just a few years ago . status of the relationship and establish a separate entity to develop and market Astra’s drugs. One of Merck’s key therapeutic focus areas Astra would obtain the right to buy a 50% during the 1980’s was the highly lucrative anti- interest in the newly created venture, if it so ulcerates. Merck’s H-2 agonist, Pepcid, was desired. third in a crowded and highly competitive field. Glaxo’s Zantac dominated the category. Glaxo By the end of 1993, Merck had generated had successfully persuaded physicians that in theH-2 agonist class of drugs, Zantac was the revenues of greater than $500 million dollars 5 with Astra’s products and needed to consider its most effective and safe . Hence, Merck faced an future with Astra. Should Merck establish a uphill battle to erode Zantac’s enormous lead joint venture with Astra? How should the joint against Pepcid. A frontal assault by Merck’s venture be structured? What strategies should Pepcid on Glaxo’s Zantac would be ineffective both companies utilize in an alliance? Would an and costly, as Glaxo (whose sales force was acquisition of Astra be a better strategy than a comparable in size and resources) would fight joint venture for Merck? tooth and nail.

Therefore, Merck sought a flank attack. It would A. Merck & Co. (1992-1998) search for a compound that was a newer and

better class than the H-2 agonists. It could then Merck & Co. is a research-driven pharmaceutical use its core high science strategy to develop a company that has established itself as the global new franchise with this product or cannibalize leader in the industry, both in terms of sales and the H-2 agonist market. Astra had the drug as an organization. The company has always compound that Merck needed.

∗ Tom Harper, German Pasteris, & DJ Phukan prepared this 2 Merck Annual Report 1997. case under the supervision of Professor Will Mitchell 3 IMS Pharmaceutical World Review 1997. (12/1998; revised 2007/11). 4 Wall Street Journal (Nov. 11, 1998). 1 “Astra/Merck Group”, Harvard Business School 5 “Zantac (A)”, INSEAD Publishing, Case #592-045-1, Publishing, Case #9-594-045, 1995. 1992.

1 The Evolution of Astra Merck Inc.

its earnings before taxes increased three-fold and In 1994, Merck instituted a “Strategy for Growth its D/E ration plummeted from 85% down to campaign” that is credited with taking the 34%. By 1992, Astra was the 28th largest company to its current level of success. This pharmaceutical company in the world. long-term strategy has resulted in a number of significant achievements. The drug pipeline has Astra researches, manufactures, and markets been filled; eleven products were launched; the pharmaceutical products and medical devices. company climbed up to the industry top spot in The top five selling products in 1997 included: terms of sales; it flattened the organization; Losec (48% of total company sales); Pulmicort, promoted teamwork; and strengthened its focus an anti-inflammatory asthma agent; the anti- on ethics, teamwork, values, and leadership. hypertensive drug Seloken; a vasoselective calcium anatgonist, Plendil; and the most widely Merck is the undisputed leader in the vast market used local anesthetic in the world, Xylocaine. for high-margin cardiovascular drugs, with five drugs, led by Zocor, with aggregate sales of $9 Since the European pharmaceutical market has billion in 1997.6 Despite patent expirations on been growing by approximately 5%, while the five major drugs in 2000 and 2001, Merck U.S. market has been growing by 11%, Astra’s should retain its premier status on the U.S. and short-term strategy will be to concentrate its world drug industries. Merck has an impressive efforts on the U.S. Longer-term, the company portfolio of high quality drugs in key therapeutic plans to establish a presence in the second- classes, as well as a strong lineup of new largest pharmaceutical market in the world, products. These include: the Cox-2 inhibitor Japan. Vioxx for arthritis, Propecia for hair loss, and Singulair for asthma.7 The company is currently in a “buildup phase.” In 1995, Astra AB assumed management control By the early 1990s, Merck was considered to be in Japan of a long time joint venture with the the one of the premier pharmaceutical companies Japanese pharmaceutical company, Fujisawa. in the world. The strengths of the company as The goal is to grow Astra Japan into a full- described by the company’s annual report and fledged pharmaceutical company with facilities analyst’s reports are in the areas of R&D, for production, development, and marketing marketing, and sales management (Top 5 sales programs. Astra has a 700 person sales force in force by Scott Levin Pharmaceutical Sales Force Japan. In addition, it plans to begin operating its Survey). Competitors also considered Merck to own distribution plant in 1998 with the goal of have one of the best working relationships with being equipped to launch products in 1999. the FDA. Astra AB has long been known as an outstanding B. Astra AB (1992-1998) research driven organization. A number of new drug class discoveries had come from Astra AB Founded in 1913 and headquartered in Sweden, especially in the areas of asthma, anesthetics, and Astra AB boasts the number one prescription gastrointestinal therapies. By the 1980s, the firm medicine in the world, the gastrointestinal reflux had developed a reputation for marketing and drug Prilosec (called Losec outside the U.S.).8 distributing other firms’ drugs in Northern Although based in Sweden, the vast majority of Europe. Astra’s pharmaceutical sales take place outside that country (85% in 1992; 94% in 1997)9. The Hakan Mogren, Astra’s CEO, stated in the 1997 U.S. is Astra’s largest single market and annual report that: “Our long-term growth accounts for greater than 27% of Astra Group strategy is based on a strong conviction in our sales (in contrast, sales in the U.S. accounted for ability to discover and develop new, important 13% in 1992). Between 1982 and 1991, thanks drugs and thereby grow organically, through our in large part to the co-marketing agreement with own strength. In addition to organic growth, we Merck, Astra sales increased 356% (Exhibit 1), will take advantage of opportunities that can be identified to further strengthen our prospects for 6 Merck Annual Report 1997. growth.” Based on the company’s past history 7 “Is Merck the Drug Stock to Own?,” Fortune, September of successful alliances, particularly with Merck, 28, 1998 most industry observers interpreted the CEO’s 8 IMS America, Top 10 Selling Drugs in the U.S., 1997 9 Astra AB Annual Report 1997 statement to mean that Astra was opening up the

2 The Evolution of Astra Merck Inc. possibility of merging with another placement on formularies, the drug company pharmaceutical firm to achieve the firm’s must give volume discounts to the MCO and strategic goals. market the drug effectively (on economic and efficacy outcomes). Astra needed Merck’s C. Dynamics of the Pharmaceutical Industry expertise in this area as Merck had significant in the 1990s. experience on dealing with MCOs.

During the past ten years, the healthcare industry Healthcare reform. During the past decade, a has undergone dramatic fundamental changes number of attempts have been made by Congress that have transformed the clubby drug industry and by the Clinton Administration to reform into an environment of trench warfare. The most healthcare. The most notorious and unsuccessful significant change drivers have included the was attempted in 1992 by Hillary Rodham following: Clinton’s panel. Under this model, the U.S. government would be the single payer, funded Soaring Costs of Drug Development. Drug by payroll taxes, for all healthcare. This created development costs for the average drug company concern about price regulation, and the stocks of have soared from about $230 million per year in all major U.S. pharmaceutical firms declined. 1990 to about $500 million per year10 due to The attempt failed due to its complexity and the higher costs of drug research and clinical trials. objections of special interest groups. Some industry observers consider R&D budgets Successfully implemented reforms include under $1 billion to be noncompetitive. Firms like Medical Savings accounts and portable Hoechst and RPR are merging to stay healthcare insurance. In addition, industrial competitive. Major players Glaxo Wellcome and organizations like AT&T and GE (which have Novartis are the products of the mid-1990s thousands of employees covered and are a major mergers driven by potential R&D synergies. market for the drugs) demand, and have Mergers will continue to occur as patents expire obtained, large discounts allowing drugs to be and markets demand greater company covered by their healthcare plan. Hence there is performance. severe price pressure on the drug industry as regulations and customers change. Growth of Managed Care. Managed care organizations (MCOs), such as health FDA approval of drugs. The FDA has been maintenance organizations (HMOs) and under pressure from Congress to speedily preferred provider organizations (PPOs), now approve drugs for life threatening conditions like cover >80% of all insured Americans, up from AIDS and cancer. The review time has gone only 28% in 199011. Cost control and disease down from around 12-18 months in early 1990 to management are paramount to financial solvency about 9-12 months in 1998. The FDA also has for managed care programs of the future. A expedited review (now about six months) for a number of the MCO cost fighting measures have special category called breakthrough drug12. had a profound impact on the competitive Expedited review drugs include Warner- environment for pharmaceutical sales. Strict Lambert’s Rezulin diabetes drug. formulary (drug approval lists) have become commonplace and have pushed pharmaceutical A major drug company has to have a good companies to cut prices and profits to achieve relationship with the FDA and understand the sales objectives. If a prescribed drug has not process to win approval for its drugs. This has made it onto the formulary of a patient’s MCO, created a major entry barrier for the United most patients will seek a comparable States, the world’s largest pharmaceutical competitor’s drug that is on the formulary to market. Major non-U.S. drug firms either have avoid paying for the drug out of pocket. This this capability (such as Glaxo Wellcome) or have effectively shuts out a drug that is not on the teamed up with a U.S. company (such as Japan’s approved list for the MCO’s members. To win Sankyo, which allied with Warner Lambert to market Rezulin in the United States). 10 “Note on New Drug Development in the United States,” Harvard Business School Press, case #9-698-028, 1998. The Healthcare Advisory Board, “Rising Drug Development Costs” July 1998. 11 The Healthcare Advisory Board, “Rising Healthcare 12 Industry Week, “Warner-Lambert flying high”, March Costs”, July 1998. 1998.

3 The Evolution of Astra Merck Inc.

Drug Controversy. The flip side to the expedited company of the future”. Astra believed that by review has been concern about the safety of the partnering with Merck the company would learn newly approved drugs in the USA. Painkiller more about the US market than it ever could Duract, diet pills Phen-Phen and Redux (all through its US subsidiary, Astra USA. made by Wyeth Ayerst or American Home Products), and Posicor, a blood pressure Merck viewed the joint venture initially as an medication (made by Roche) were withdrawn opportunity to complement its strong from the market due to deaths and serious side gastrointestinal (Pepcid) and cardiovascular effects. Drugs such as Viagra and Rezulin had (Mevacor, Vasotec and Prinivil) franchises with their FDA labels changed for safety reasons after new products. The joint venture with Astra some patient deaths. Physicians are becoming would provide an ideal training ground for future more conservative about adapting a new drug. Merck executives14. Merck was especially keen They have to be persuaded more effectively to on making AMI a “laboratory” to investigate write a prescription for a new drug. Thus strong new management and operations concepts. marketing, reputation and a good salesforce are Merck has been long known for being a process ever more critical to launch and sustain a drug. driven and a structured company, so the The success of Pfizer and Warner-Lambert’s opportunity to investigate other management Lipitor marketing alliance illustrates this models to find new and tested “best practices” dynamic as Lipitor hit the $1 billion sales mark would be very appealing for Merck. Since all of in the shortest time ever. the top management was from Merck, there were no barriers for Merck to pursue its interests in Direct to consumer marketing. In the late 1990s organizational structure. Merck was also in need a major event is the advent of direct to consumer of additional sources of revenue, since the (DTC) marketing. It is now possible to generate majority of its new product launches would not prescription demand for a drug by advertising be ready for market until 1997 or 1998. and methods common to consumer products. Schering-Plough (SGP) made Claritin the largest Role of Merck in Joint Venture. Merck would anti-allergy medication despite a product that supply the manufacturing facilities and was widely considered inferior to Hoechst’s personnel, marketing support, FDA regulatory Allegra due to effective DTC. All drug firms expertise, and senior management to the joint have rapidly developed DTC capabilities. Merck venture. The first CEO of AMI was Wayne has also followed this trend with many of its ads Yetter, a Merck veteran who started his career at for Astra’s Prilosec. The trend impact is the Merck in 1977 as a product manager and most need for a firm to be more marketing savvy to recently was vice-president of Merck’s Far survive. East/Pacific operations. The majority of the senior management team was from Merck, Section II. Formation of Astra Merck Inc. including the next CEO, Matthew Emmens.

A. Initial Conditions of the Joint Venture Role of Astra AB in Joint Venture. Astra AB would bring expertise in R&D and technical During 1993, Merck’s sales for Astra’s products product support to the joint venture. Astra AB reached the “trigger” point of $500 million over had a potential breakthrough product in the a 12 month period which required that Merck largest drug market in the US, the form a separate entity to manage the Astra gastrointestinal (GI) market. Prilosec had product portfolio that Merck was currently significant efficacy and side effects advantages supporting. On November 1, 1994, a new entity over the current market leader, Glaxo’s Zantac. called Astra Merck Inc. (AMI) was formed with However, with Astra’s small presence in the US its headquarters in Wayne, Pennsylvania. Based market, Prilosec would never reach its sales on a deal negotiated by Merck CFO Judy potential in the very competitive GI drug class Lewent, Astra AB paid Merck $820 million for a without a strong sales and marketing partner 50 percent share of the new joint venture13. such as Merck. Both Merck and Astra treated this new entity as an opportunity to “design the pharmaceutical

13 Press Release from Astra Merck (Nov. 1, 1994) from Astra 14 “Astra/Merck Group”, Harvard Business School Merck Inc. website (www.astramerck.com) Publishing, Case #9-594-045, 1995.

4 The Evolution of Astra Merck Inc.

By utilizing Astra AB’s rich R&D product pipeline and early product development, AMI By 1996, AMI had applied the multifunctional would not need to establish its own costly R&D team approach to most of its sales and marketing facility and program, which would save a strategies. AMI introduced a number of new tremendous amount of money early in the joint customer service initiatives that utilized the venture (see Exhibit 2 for an overview and company’s strengths in information technology evolution of the functions within the Astra and valued-added service to assist managed care Merck Inc. joint venture). groups and pharmacies to better manage their businesses. B. Astra Merck Inc. Organizational Structure and Corporate Philosophy15 One of the most innovative programs was a drug compliance plan established by the AMI “Trade From the first day of the joint venture, AMI Team” for Thrift Drug. The program monitored pursued the idea of creating a new patient prescription habits and contacted Thrift pharmaceutical company to better meet the needs Drug customers who did not refill prescriptions of a rapidly changing marketplace. The new within five days of their due date. The program organization would be structured around the was so successful that Rite-Aid and HEB of company edict of creating “the most flexible, Texas quickly joined to participate in the team-based structure and decentralized customer program. focused company in the pharmaceutical industry”. The company’s sales representatives, Through AMI’s proactive initiatives with its called sales specialists, would focus on customers, the sales force won numerous awards partnering with their customers by providing for excellence including the No. 1 ranked sales value-added customer services called force among gastroenterologists, and fourth “pharmaceutical solutions”. AMI utilized clinical ranked among managed care providers and information, varied product formulations, and PBMs16. physician/pharmacist education programs to create innovative, larger, integrated full-service C. Key Learnings by the AMI Joint Venture customer programs that could be tailored to meet From Astra and Merck the needs of a customer base that included MCOs, physicians, nurses and patients. AMI was able to learn and rely on Astra AB for many of AMI’s initial product concepts. For AMI believed that the pharmaceutical company example, the idea and support for new dose of the future would distinguish itself by adhering formulations and new indications came from to the following attributes: Astra AB. In European clinical studies, Astra AB ƒ Value Chain Management – integrating had been actively studying the role of Prilosec multifunctional teams throughout the on gastroesophageal reflux disease or GERD. organization will intensify the effectiveness The results from these studies were used to of every facet of the business. obtain new indications for Prilosec in the US. ƒ Enterprise-wide Information Technologies – However, as the joint venture developed utilize IT to streamline all of its operations confidence in its own understanding of the from licensing to sales. products and customers needs, AMI planned to ƒ Therapeutically-focused Drug Development share many of its best practices with Astra AB, – through clinical development leadership, especially in how to develop doctor’s awareness AMI will achieve faster drug approvals with to GERD and H. pylori generated ulcers. the FDA. ƒ Marketing and Sales Expertise – through 37 Merck’s early contributions to AMI were decentralized customer units nationwide, primarily in three key areas – a corporate identity AMI sales and marketing will deliver or vision, new product positioning strategy for tailored information to its customers Prilosec and knowledge of the regulatory system ƒ Licensing Efforts – offer partners the to facilitate FDA approvals. The product opportunity to develop their products with positioning strategy was significant. Prior to the AMI’s clinical development, regulatory launch of Prilosec, the gastrointestinal drug affairs and marketing expertise. market was a battle over which product did the

15 Astra Merck Inc. Corporate Report 1996. 16 Scott Levin Sales Force Report, 1996 and 1997.

5 The Evolution of Astra Merck Inc. best job to eliminate acid buildup in the stomach more value to their customers like AMI. Many and therefore ultimately alleviate stomach ulcers. regional sales mangers at SB believe that AMI has one of the most productive sales forces in the Merck had already fought that battle in the late business and believe that the AMI approach of 1980s with Pepcid and lost to Tagamet and strong customer focus through teamwork Zantac. The marketing managers at AMI were together with state-of-the-art IT may be the Merck veterans who had lived through the model of the future17. Tagament and Zantac wars and had no intention of reliving that battle again. Section III. The Evolution of AMI

AMI positioned Prilosec as the “drug of choice A. The Restructuring of Astra Merck Inc. for GERD”, a common pre-ulcer condition that Prilosec was effective for. AMI obtained an In June 19, 1998, Astra AB and Merck Co. indication for Prilosec with GERD and started to announced that they had agreed to restructure position the product as ulcer insurance. their joint venture. Management control of the partnership was ceded to Astra AB under terms D. The Impact of Astra Merck Inc. on the that Merck believed were likely to yield more Pharmaceutical Industry revenue and income to Merck than would have been likely under the previous joint venture Most observers in the pharmaceutical industry agreement. Merck was expected to continue to considered AMI to be a major success. The joint receive revenue streams associated with the venture was a strong force in the area of current product portfolio and pipeline for at least gastrointestinal drugs. During its three year ten more years. In addition, a total cash buy-out history, the firm almost doubled revenues and to Merck in the sum of $4.4 billion, including a made Prilosec the number one prescribed drug in loan of $1.4 billion, was proposed18. If required, the United States. Its marketing strategy is Merck could forfeit its right to revenues widely respected for redefining its product generated by the new combined company in category from ulcer treatment to GERD and exchange for a one time payment of ~$1 billion. ulcer prevention. No company has done a better In all, analysts believed that Merck’s cash job of establishing mind share with doctors than windfall could exceed $7 billion, and reach $10 the way AMI has done so over the last three billion depending on future sales. years. For instance, medical residents at the University of Michigan Hospital report an Astra AB disassociated from Merck largely extremely strong association for the drug because the original agreement signed in 1982 Prilosec with GERD, so strong that they discouraged the Swedish company from proscribe only Prilosec for GERD. becoming a partner with another drug firm. Despite the costly buyout, the Swedish market Many of AMI’s competitors have tried to adopt reaction to the announcement was favorable. AMI’s best practices in sales force management The market reaction did not signify that they had to their own sales force. Over the past two years, perceived the relationship between the two it has become more common for pharmaceutical transatlantic pharmaceutical companies to be a companies to decentralize their sales shaky one. At the announcement of the breakup management to regional offices and to give sales of the joint venture, Astra’s CEO, Hakan managers more autonomy. Merck, for example, Mogren said: “This transaction establishes a new is giving more say to its sales managers in how and more dynamic presence for Astra in the to best utilize and allocate their sales force. United States.” Astra’s CEO may have been hinting that Astra had plans to bolster the U.S. Firms outside of the alliance have been watching presence via a new merger. Otherwise, it is AMI to try to learn best practices. For example, difficult to understand why severing ties with SmithKline Beecham (SB) has recently Merck would “create a more dynamic presence.” revamped the IT capabilities for its sales force to better serve their customers. One of the IT models they studied in detail was AMI. SB, Bristol-Myers Squibb and Genentech have all 17 Discussions with SB managers during summer internship recently added more salespeople with advanced (TH). 18 Press Release from Astra Merck (July 1, 1998) from Astra science degrees and medical degrees to give Merck Inc. website (www.astramerck.com)

6 The Evolution of Astra Merck Inc.

Both parent companies appear to benefit from effectively. "We are well-positioned to enter the the restructuring of the alliance. By contrast, the U.S. market as the leading pharmaceutical alliance itself, although successful from a company in the gastrointestinal area, and also financial perspective, is unlikely to benefit from with an established presence in the or have a significant role in the restructuring cardiovascular field, as well as a rapidly program. Since its inception of the co-marketing expanding respiratory business," said Carl- agreement in 1982, the Astra Merck relationship Gustaf Johansson, president and CEO of Astra has evolved into a separate company from the Pharmaceuticals. founding parents. If it had the power, it would have probably voted to become an independent The creation of Astra Pharmaceuticals will firm and attempted to survive on its own under continue to display AMI’s model of establishing its current model. It was in the best interest of a pharmaceutical company that is not burdened Astra AB to exercise the option of buying out by extensive R&D costs. Astra Pharmaceuticals Merck’s share of the joint venture, but it was will still be dependent on its parent company for probably not in the best interest of the alliance. R&D. Astra Pharmaceuticals is responsible for One industry observer noted in 1993 that “Astra the manufacture, development and marketing of now has the financial resources to build its own Astra AB prescription products in the U.S., yet it American operations, if it chooses.”19 will also continue to license in products from other companies. AMI and Astra USA had their Why did Astra decide to restructure the alliance own alliances before the formation of Astra and go forward with a joint venture in the first Pharmaceuticals, and true to the AMI model, the place? What were Merck’s reasons? The impact new entity expects to continue to be “a of the joint venture on each parent, the alliance, compound magnet.” and the new entity, will be discussed in more detail in a later section. Since the majority of in-licensed pharmaceuticals emanate from the U.S. biotechnology industry, B. Creating Astra Pharmaceuticals LP (AP) Astra Pharmaceuticals can leverage its geographic locations, with ties to New England Astra Pharmaceuticals LP was established July biotechs and pharma-belt biotechs (NJ/DE/PA) 1, 1998, by Astra AB of Sweden, to consolidate to take advantage of market opportunities. The its U.S. manufacturing, development, and combined company is currently headquartered in marketing operations into one organization. The Wayne, PA, the location of the joint venture, new U.S. limited partnership is comprised of the with its manufacturing facilities in Westborough, personnel (mainly the sales force), property, and MA, the site of Astra USA. However, in the fall assets of Astra USA Inc., a wholly owned Astra of 1998, the parent company proposed to AB subsidiary, and Astra Merck Inc., the former relocate the U.S. headquarters to a facility joint venture between Astra AB and Merck Co. purchased from Pfizer Inc., the former Astra Merck Inc., which had 1997 sales of $2.3 Applebook Farm, a 312-acre farm in East billion, has 2,200 employees while Astra USA, Goshen Township, PA. which was founded in in 1947, had $400 million in sales and 1,600 employees in 1997. Astra Pharmaceuticals LP - Strengths.

The critical synergies may come from the union An analysis of Astra Pharmaceutical LP (AP) of AMI’s 1,500-person sales force with Astra suggests that the newly created entity has several USA’s 700-person sales force. The parent strengths that, if properly utilized, may improve company reported no plans to reduce the size of its future survibability as well as profitability. In its new combined sales force. Astra particular, the company has a strong product line, Pharmaceuticals expects that the new entity will experienced personnel, a successful approach to yield annual cost savings of about $100 million marketing, and a strong financial position. beginning in the year 2000. It also expects that revenue synergies will be created by the In the words of Astra’s CEO, Hakan Mogren: combination of both companies and the resultant “The strength of our product portfolio and our opportunities to market products more R&D pipeline will be complemented and enhanced by the efficiency and critical mass resulting from the creation of Astra 19 “Astra/Merck Group”, Harvard Business School Publishing, Case #9-594-045, 1995. Pharmaceuticals.” Although there is much

7 The Evolution of Astra Merck Inc. uncertainty regarding the sales potential of Astra efficiencies as well as facilitate the transfer of AB’s drug pipeline, as is the case with most knowledge across the separate organizations. companies in the industry, the consensus assessment of many analysts is that Astra has Before AP, Astra AB had several duplicative built a solid platform for future gowth in its three efforts in the U.S. The fact that the joint venture major therapeutic areas: gastrointestinal diseases, was only half-owned by Astra AB created some respiratory diseases, and local anesthesia. conflicts of interest. For example, licensing opportunities that came to the parent company Astra Merck Inc., or AMI, was responsible for were channeled to Astra USA to avoid giving marketing three drugs discovered by Astra: the away profits to Merck. From a logistics antisecretory medication Prilosec (omeprazole), perspective alone, the unification of the U.S. and the cardiovascular drugs Plendil (felodipine) operations could prove invaluable to Astra AB. and Tonocard (tocainide HCl). AMI also marketed the combination therapy Lexxel The new 2,300-person sales force may also be a (enalapril maleate-felodipine ER), which strong factor in AP’s success. The 700 field combines therapeutic agents from Astra and personnel from Astra USA will have to learn Merck Co., Inc (Exhibit 2 shows 1995 to 1997 AMI’s “pharmaceutical solutions model.” On the revenues). other hand, AMI’s salesforce, with their atypical style, could learn from Astra USA’s traditional Astra USA, has been a leading marketer of sales “pitch” approach. After an initial learning hospital products in the U.S., including the curve period, it is expected that the combined leading anesthetic, Xylocaine. In total, the sales force will be able to realize some company’s portfolio of products numbers economies of scale and achieve greater coverage approximately seventy with the vast majority of in the U.S. market. products originating in Astra AB’s own rich pipeline. In addition to products emanating from Another advantage of AP concerns the Astra AB, Astra USA Inc., like AMI, has been knowledge of Astra’s pipeline. AMI’s former active in acquiring marketing rights to promising CEO, Wayne Yetter noted: “It [Astra] won’t new products through strategic in-licensing divulge what products in the pipeline might be effort. In all, from a product profile perspective, suitable for AMI. Not knowing which drugs are AP appears to be properly endowed to succeed. in the pipeline, we must train our people for And, of course, AP’s flagship product, Prilosec , those we have today. But …we must also build is the best selling prescription medication in the an organization that, longer term, can sell world. products from a variety of sources in a number of therapeutic areas.” Another major strength that AP possesses is a highly trained sales force and in particular, its Under the new system, AP will be able to more senior management personnel. Since 1994, efficiently prepare the American launches of Merck has rotated employees through the joint Astra’s products, from development to marketing venture. Several key experienced personnel have and sales. The new insight will allow Astra spent time managing the joint venture – although Pharmaceuticals to more effectively manage its some remain with AP, others have returned to product portfolio and may give direction to the Merck or gone on to other companies. As an business development efforts. In the past, AMI example of the high caliber of its management, concentrated in the therapeutic areas of expertise, one needs look no further than AMI first CEO, GI and CV. However, opening up the pipeline Wayne P. Yetter, who left AMI in 1997 to head also opens the possibility of extending the firm’s up Novartis’ U.S. pharmaceutical operations. reach into other therapeutic categories. Under this scenario, AP will have more discretion in The training and skills of AP’s management as accepting higher positive NPV “deals” that may well as its business-unit personnel (60% of or may not be in therapeutic areas of interest. which originated from Merck) are definitely an asset to the new organization. The additional Astra Pharmaceuticals LP - Weaknesses. joining of personnel from Astra USA and AMI will allow the parent company to properly There are also several weaknesses that have the redeploy its human capital and realize cost potential to adversely affect the company’s performance. The manufacturing facilities will

8 The Evolution of Astra Merck Inc. need to be ramped up to meet U.S. demand. In firms20. Intercardia, Inc. has recently notified addition, the geographic spread of several units Astra Pharmaceuticals, L.P. that it believes that may be a stumbling block to AP’s effort to as a result of the recent restructuring of Astra realize future efficiencies. Since the firm’s Merck Inc., AP has a conflict with the terms of a situation is likely to change depending on prior agreement that Astra Merck Inc. and whether the parent company merges with another Intercardia formed. The agreement involved partner, the analysis will focus on the current collaboration for the commercialization in the strengths and weaknesses of the post joint United States of BEXTRA (bucindolol HCl), venture entity, Astra Pharmaceuticals. which provides treatment of congestive heart failure (CHF). Intercardia believes Astra There are two major weaknesses that need to be Pharmaceuticals has a beta-blocker from the addressed by Astra AB with regards to the U.S. previous Astra USA entity that is currently on operations. First, Astra must resolve the the market for hypertension, which is also being uncertainty surrounding the location of the U.S. investigated for treatment of heart failure and headquarters of AP. A fragmented operation is may therefore compete with the BEXTRA unlikely to achieve the expected cost savings. project. Clayton I. Duncan, President and CEO Then, it must re-adjust to “life without Merck.” of Intercardia, said: "We have built a positive AP can no longer rely on Merck’s personnel to relationship with Astra Merck Inc., but their rotate through and diffuse learnings into the restructuring into Astra Pharmaceuticals could organization. AP also loses the Merck brand create a serious issue for us.” If the BEXTRA name. These factors, coupled with the agreement falls through, not only will AP be uncertainty of relocation and restructuring moves liable for damages, but it may hurt AP’s of the parent company may adversely affect the reputation as a partner. Clearly, there are may be ability of Astra Pharmaceuticals to attract and other issues that Astra USA and AMI bring to retain talented people. the table that could have a serious impact on AP’s future performance. To date, AP has a limited track record in the in- licensing of compounds and the subsequent C. Astra AB: Key Learnings from the Astra development of those compounds. Since Merck Inc. Experience marketing and sales is AP’s forte, AP may feel that as long as the sales force has strong products Astra had several goals when it formed the 1982 to sell, the firm will perform well. However, co-marketing agreement with Merck. One goal given the weaknesses outlined above, when the was to learn about the U.S. pharmaceutical blockbuster drug Prilosec goes off patent in the industry, particularly in the areas of drug year 2000, AP may find itself with a great development and sales and marketing. Another system to sell and no drugs to push. The danger force behind the joint venture was to expedite the is to rely on past successes and current introduction of new Astra products to the U.S. profitability and feel a false sense of security as and to market current Astra products via an far as future earnings are concerned. AP can innovative sales and marketing approach, the leverage its strong financial position to make the “pharmaceutical solutions” mentality. At the necessary changes to succeed in the long run. time, Astra AB’s CEO, Dr. Hakan Morgren said: Although strong in marketing and sales, AP has “Our strategic intent is to revolutionize the limited expertise in drug development, and may pharmaceutical industry by being the best at have relied too much on Merck’s FDA ties in the linking patients and products through unique, past. responsive, customer-shaped pharmaceutical solutions.” The new model of “detailing” Other problems may surface as a result of the physicians worked well for AMI. In turn, Astra creation of AP. There are financial and AB learned that there are better ways of organizational synergies between the two educating its customers, the physicians, perhaps companies that are forming AP (Astra USA and even the managed care organizations, as well as AMI) but, as with any merger, there are also the end-users, the patients. conflicts that resulted from the pooling of interests of the separate entities. For example, Merck transferred a substantial amount of know- Intercardia and Astra Pharmaceuticals, L.P. are how to the joint venture in the form of personnel currently in discussions to resolve a conflict that may terminate the collaboration between the two 20 Intercardia, Press Release (Aug. 8, 1998)

9 The Evolution of Astra Merck Inc. and processes that were internalized by the joint Merck welcomed the opportunity to terminate venture throughout the term of the alliance. the joint venture. Once Astra recognized that it no longer needed the contribution of Merck to the alliance, but that Section III. Conclusion. it could acquire the relevant skills by absorbing the alliance, it did just that. By acquiring the Astra Merck Inc., a joint venture between Astra AMI entity, Astra AB hoped to transfer the AB and Merck, has been one of the most individual-level learnings and expertise as well successful joint ventures in the pharmaceutical as the organizational-level learnings and routines industry during the 1990s. In July 1998, Astra back to the parent company. If AMI had been AB and Merck modified their alliance to provide spun off as an independent organization, then for an exit strategy from the joint venture. Astra Astra AB would have lost access to a substantial will buy out Merck’s stake in the joint venture portion of the learnings acquired through the during the next ten years. While the joint years. venture has had a successful conclusion, both firms have new critical needs that must be Of course, Astra AB and Astra USA benefited resolved soon by either new alliances or from the Merck association throughout the years. acquisitions. The point is that since the AMI joint venture’s organization was so different from the Swedish parent, had the parent walked away from the joint venture, it would have lost most of the value of the organization it had so arduously created. Astra made a deal that exchanged a substantial amount of cash for the opportunity to build the necessary capabilities to effectively function as a pharmaceutical company in the U.S. If it had not ended the alliance, it would have run the risk of becoming dependent on Merck to function in the U.S.

D. Merck: Key Learnings from the Astra Merck Inc. Experience

When Merck entered the alliance, learning objectives did exist, but they were secondary to Merck’s financial motivations for forging the deal. The agreement entitled Merck to exclusive rights to most of Astra’s compounds in the U.S. Merck was able to capitalize on the ability to market those compounds at a time (especially the early 1990’s) when its own product portfolio was less than ideal to meet shareholders’ earning expectations for the pharmaceutical giant. From Merck’s perspective, the alliance was a low risk gamble that resulted in a tremendous payoff, mostly financial, but also from an organization- level learning perspective.

Merck was able to learn from the alliance by taking part in a sales and marketing approach that was innovative and distinct from the typical conservative Merck style. However, the alliance had reached the point of diminishing returns for Merck. By 1998, it was clear that Astra had more to gain from the alliance than Merck, and

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Sales, 6000 $M

Total Astra 5000 $28B Cap Losec by Astra

(Includes Astra Merck Inc.) $22B Cap 4000 Losec by Licensees $14B Cap

3000 $10B Cap

$7B Cap 2000 $3B Cap

1000

1988 1989 1990 1991 1992 1993 1994 1995 1996 0

Exhibit 1. Impact of Prilosec/Losec and Joint Venture Initiatives on Astra AB Firm Value from 1988-1996

Source: Astra Annual Reports, IMS America, Goldman Sachs, Morgan Stanley and Boston Consulting Group

11 The Evolution of Astra Merck Inc.

Astra Astra Merck Pharmaceuticals

R&D R&D Astra

Oper. Oper.

Mktg. Mktg. Merck Reg. Reg. (FDA) (FDA) Merck

???? Key Events

1982 1994 1998 Astra AB & Formation of Formation of Astra Pharmaceuticals. Astra Merck sign US Astra Merck buys out Merck for $10 billion co-marketing Inc. agreement

Exhibit 2. Evolution of Astra Merck Inc. Joint Venture Based On Function. Gray represents contribution of Merck to the joint venture. White represents contribution or ownership by Astra AB

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Exhibit 3. Astra Merck’s Financials (Millions of US Dollars)

Statement of Earnings 1997 1996 1995

Revenue 2,315 1,819 1,312 Operating Expenses (1,466) (1,167) (905) Net Financial Income 12 30 11 Taxes (477) (356) (235) Net Earnings for the year 384 325 182

Balance Sheet 31-Dec-97 31-Dec-96 Non Current assets 1,344 1,497 Current Assets 571 461 Total Assets 1,915 1,958 Less:- Provision and long term liabilities 89 64 Current Liabilities 463 317

Equity 1,363 1,577 Source: Astra AB Annual Report 1998

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Exhibit 4. Information for the parent corporations

Astra AB, Corporate information, 1980-1997 SEK mln 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 Revenue 41,186 39,379 40,156 29,973 19,737 15,568 12,501 7,457 6,278 5,406 4,960 4,436 3,911 3,564 2,740 2,250 1,988 Net income 9,354 9,544 9,829 7,195 5,323 3,527 2,182 962 682 597 554 383 245 200 105 106 Assets 62,280 52,224 43,715 35,318 10,097 8,278 7,063 6,319 5,369 4,969 4,117 3,306 2,386 1,992 Foreign sales % 94 91 92 87 85 83 Employees 22,206 16,962 11,288 7,800 6,977 6,880 6,768 6,405 6,314 6,264 6,162 6,267 6,213

US $ mln Revenue 5,680 5,665 5,352 3,812 2,703 2,193 2,029 1,119 942 811 744 665 587 535 411 338 298 Assets 8,589 7,513 6,588 4,492 1,515 299

Merck & Co., Inc., Corporate information, 1980-1997 US $ mln 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 Revenue 23,636 19,828 16,681 14,969 10,498 9,662 8,602 7,671 6,550 5,939 5,061 4,128 3,547 3,559 3,246 3,063 2,929 2,734 Net income 4,614 3,881 3,335 2,997 2,166 1,984 2,121 1,781 1,495 1,206 906 676 540 493 450 415 441 477 Assets 25,812 24,293 23,832 21,856 19,927 11,086 9,498 8,030 6,756 6,127 5,680 5,105 4,902 4,591 4,214 3,655 Employees 53,800

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