Strategic alliances, with care and creativity.

• Author: Spiegel, Jr., Francis H.
• Position: Management Strategy

Many businesspeople consider Merck the master of the strategic alliance. What are the company's secrets for setting up profitable alliances?

At Merck, we make almost every decision within a strategic setting. Because our business is ethical pharmaceuticals, or drugs you purchase with a prescription, and thus driven by research, we constantly examine whether the world will continue to economically reward new drug discoveries. Then we factor in the very high risk of creating and developing these new drugs. After all, when we create a new product, we're undertaking a long-term project. The process generally takes 10 to 12 years, and the costs average about $230 million for each product.

Each time we've raised that question, we've concluded that we will be properly rewarded for novel new drug discoveries. These are the kinds of new products that not only help the country through innovation, employment and investment, but keep people gainfully employed and out of high-cost health care alternatives. So we're comfortable staying focused on ethical pharmaceuticals--and we accept the high level of research that entails, on which Merck spends more than a billion dollars each year.

But we realize we need continuing access to new technologies to stay competitive in the pharmaceutical industry. I think having access to new technologies, and to new partners by setting up strategic alliances, is a cost-effective way to do that.

What made us first consider strategic alliances? In the 1980s, we watched a "merger mania" going through our industry. First, mann-La Roche pursued Sterling Drug, then Eastman Kodak acquired Sterling, Bristol-Myers acquired Squibb, Beecham merged with SmithKline and eventually Roche gained control of Genentech. Then, of course, the Japanese purchased several smaller firms, and the French company, Rhone-Poulenc, gained control of Rorer.

Each one of these mergers required the buying companies to pay a premium, well above the acquired company's market value. In essence, these companies were paying the eventual synergies of the combination to the selling shareholders. It appeared they were putting themselves behind from the start. That seemed too expensive for us. We want to bring down the costs and minimize the risks of our external growth program, so we decided on strategic alliances.

MERCK'S PARTNERS

Before we entered into our first alliances, we identified Merck's primary strategic needs, which were to gain access to: 1) more research, 2) more products and 3) more global presence. That helped us target the most appropriate partners.

For instance, in 1982, we entered into a collaboration with a very successful Swedish company, AB Astra. Essentially, Astra licensed its current and future products to us for marketing in the United States, due primarily to our expertise in the regulatory approval process and in marketing in this country. The initial agreement is for Merck to develop and market the products through a royalty-bearing license. However, the agreement provides that, when we reach a certain sales level by year-end 1993, we'll form a joint venture by 1995, at which time all the products that come to the United States from Astra Sweden's research will be owned 50/50 by Merck and Astra.

As for our ethical pharmaceuticals, we know that one way we can extend a...