A few months ago, Merck Group CEO Dr. Belén Garijo said she wanted the company to log annual revenue of €25 billion by 2025. In 2022, Merck’s revenue was €22 billion, so this challenge seems well within the company's reach. But life in the pharmaceutical industry has become difficult of late: inflation, a trade war between the US and China, and government efforts in some countries to lower drug prices. Tough competition in the electronic components market, where Merck also operates, does not make Garijo's life easy.
But when asked what she sees as the company's biggest challenge, she points in a different direction. "The challenge is that my employees, like all of us, are tired of uncertainty and change, but change today is a constant thing. My job is to give people a sense of security and make sure that we are resilient against storms, while at the same time maintaining agility."
This answer should, perhaps, come as no surprise. Garijo, who was chosen in 2022 as one of Fortune magazine’s 30 most influential women in the world, often speaks in interviews and also writes about employee management and corporate responsibility. One of her mantras is, "There is no business plan without a human plan." In the past, when she wanted to implement a digital revolution at Merck, she said: "It's not about bringing in digital people, it's about making everyone digitally literate, including me!". The same is also relevant, she says, to artificial intelligence.
"Getting used to a new market reality"
The Merck Group, also known as Merck KGaA (as opposed to the US Merck that was nationalized in World War II and is today known outside the US as MSD), was founded in 1668 in Germany by the Merck family, and is considered the oldest major chemical company in the world. At the beginning of the 19th century, it entered the pharmaceutical industry as a pioneer in the isolation and production of morphine (as well as cocaine, before it became illegal.) Later on, Merck found success as a manufacturer and marketer of vitamin D.
Since the 1990s, Merck has traded on the Frankfurt Stock Exchange, but the Merck family still controls 70% of its shares. It is currently traded at a market cap of about €20 billion, and its stock has stood up well to the market upheavals of recent years. Unlike other pharmaceutical companies that crashed in 2021, Merck lost only 27% from its market high, and over the last five years, has posted a 94% return rate.
Garijo, who has led the company since 2021, says Merck's revenue grew by 6% in 2022, similar to 2021, and this despite the fact that in 2022, revenue recorded during the Covid-19 period was deducted. "We are optimistic that we will be able to emerge strengthened from this slight recession, but this is the new reality that we have to live with, be creative and move forward even in volatile markets. Our electronics segment is particularly volatile because it operates in a competitive market where buyers are very centralized."
The company recently stated that it may make large acquisitions in order to grow. Garijo believes she can reach the $25 billion target even without these, but currently sees acquisition opportunities in the market.
Does the recession that pressures small companies and lowers the valuations on which they base their fundraising, present an opportunity for you to make acquisitions or engage in collaborations?
"Today, part of our innovation is in-house. We have our own R&D centers. We have funds that invest in early-stage companies to help them grow, and we have investment funds. Meaning, we invest in innovation at very early stages and are less in need of acquiring companies with advanced products, although this also happens, and may happen more in the future. For this reason, we view a devalued small or medium-sized drug development company as less as an acquisition opportunity and more as a challenge, both because they are our customers for research equipment, and also because we want the entire sector to be healthy and for innovation to continue to nourish us."
"You are a resilient people - you will find solutions"
Modern-day Merck has three divisions: pharmaceuticals, chemicals for research and the life sciences industry, and chemicals for the electronics market. Within the Israeli market, the company is known mainly for its multiple sclerosis treatment, Rebif, developed by Serono and the Weizmann Institute. The drug came into Merck's ownership when it acquired Serono in 2006.
With the purchase, it was decided to close the Rebif manufacturing plant in Israel, but Merck continued to maintain extensive R&D activity in Israel, including a development center and partnerships in technological incubators, both private and governmental. In addition, the company has R&D activities in life science and electronics in Israel. It employs about 450 people in Israel and owns the largest R&D center for a pharmaceutical company in Israel, aside from Teva.
Is there any chance you will set up an Israeli manufacturing plant again?
"Our large manufacturing plants are often close to our large markets. On the other hand, we have R&D here, a lot relative to the size of the country."
Does politics affect your activity in Israel?
"You are a resilient people. I hope you will find solutions. I hope this country, which has so much talent and ability, will find a way not to jeopardize it."
What would be a red flag for you?
"If we start to feel that science is not independent, that there are problems with protecting intellectual property. But I don't believe that will happen. We are currently working with several hospitals in Israel, with the Weizmann Institute, we are totally here for the time being, and hope the situation will continue to allow this."
Garijo is currently very interested in bio-convergence, (an area on which the Israeli Innovation Authority is also focused), and has drawn attention to this issue in several recent interviews and statements.
"We are a company that integrates biology with electronics, so this field is tailor-made for us, and we are enthusiastic to see where we can collaborate," she says.
According to Regine Shevach, Country Speaker and Head of Merck Israel Innovative Technologies Enablement Center, "Israel plans to allocate a good amount of funding to this area, and we want to be partners, along with other Israeli parties that can’t be revealed yet. I hope we will be able to manage an official technology incubator in this field, along with the AION Labs project where we are partners, and our private incubators."
The "China for China" strategy
Merck's growth in recent years has been based on improving innovation output, but no less on globalization. "When I took up my position as the head of the pharmaceutical sector in 2015, 45% of the profits came from Europe, and we were not strong in the US or China, and today these are our strong markets. We had already been active for 90 years in China, but we were small there. Today, we have a vibrant local branch in China that does direct marketing, but also R&D and production in all our divisions. We have a 'China for China' strategy, which means that what is produced in China is mainly intended for them."
Do the new regulations to lower drug prices in the US affect your activity?
"These regulations mean that the government insurer in the US, Medicare, will be able to enter into negotiations with the drug companies regarding lowering prices after a certain period of exclusivity, and it is clear to everyone that this means that eventually the prices will come down. The exclusivity period is shorter for small molecules, i.e. non-biological drugs, and there is a real concern that companies will not invest in these products now. Fortunately for us, our activity in this area is relatively small."
Will pharmaceutical companies raise prices in other countries to regain what they’ve lost in the US?
"It will be almost impossible because the market is even more concentrated in other countries. Their governments regulate prices or conduct tough negotiations. It's hard all over the world, and now it will be hard in the US too."
How did you manage to grow in China during Covid?
"The areas of pharmaceuticals and electronics were hurt by the lockdowns, but the area of products for life science research grew due to an acceleration of research in the areas of tests, drugs, and vaccines, and this was our compensation. That is why it is very important that we have these three legs.
"Today we see the effects of the trade restrictions between the US and China: difficulty in transporting high-tech goods and genetic material, too. This tension can harm the ability of companies headquartered in the US or China to operate globally. This is a significant challenge to globalization. Although this is not the end of globalization, it is not as we knew it in the past and certainly not where we thought it was going.
"The question of where we situate each of our factories or branches has become more significant than before, and we are careful about geographical decentralization. We are talking to all governments about the significance of decisions on trade restrictions, whether in terms of the ability to obtain medicines and equipment, whether in terms of the impact on innovation. We hope that the world will remain as global and open as possible, but we take into account that this might not happen."
The road to the top of the pharma heap
Garijo is today one of the world’s most influential women in pharma. Even as a child, she says, she already knew she would be a doctor. "My mother told me that as a child I always played 'doctor' with my dolls. I did not come from a family of doctors, like many of my colleagues, but today my sister is a doctor as well."
After fulfilling her childhood dream, she still wanted to do something more. "At that time (the late 1980s and early 1990s), this industry did not have such a good reputation. The perception was that anyone who goes into the pharmaceutical industry is an unqualified doctor or someone who had been drummed out of the system. But I was fascinated by the idea of bringing new drugs to the market."
Garijo started her industry career at Abbott where she stayed for eight years. "And before my eyes Spain became a country of R&D. The local team transformed from just marketing into a partner in every development," she says.
Garijo grew up with the company, worked in several of its branches around the world, then asked to return to Spain, to work in marketing with an eye towards managing the company's local branch in the future. But at that time, Abbott did not promote medical professionals to marketing positions. "I said, I don't mind starting over. I was already a VP in the medical division, but I didn't mind compromising on the title in order to develop another feature in my career. In Spain, from nothing - I brought them to 25% of the company's profit in four years."
She then moved to Aventis, which later became part of Sanofi, and lived in ten countries. "My daughters have always moved with me and they also became international girls. One of them lives today in the US, one in Barcelona, and I live in Frankfurt."
She joined Merck in 2011. "I saw a very successful family company, but one that was ready for a big change, and at the same time I saw a decrease in R&D productivity, which characterized many companies in the medical field at the time. Therefore, in my vision for the company, the most important thing was to improve innovation. We didn't really have a reliable engine for innovation back then to make good new products with high probability. Today we are very innovation-oriented."
Published by Globes, Israel business news - en.globes.co.il - on May 31, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.