6/24/2014

The Evolving Finance Function:

Judy C. Lewent at Merck & Co.,
Inc.

RATISH MAYANK

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CASE SUMMARY

This case explains the journey of Ms. Judy C. Lewent, in the organisation from Director of
Acquisitions & Capital Analysis to Sr. Vice President, Finance & CFO of one of the largest
Pharmaceutical Company Merck and in this process of her changing roles she has made major
changes in the way the organisation has integrated and the way Financial Areas in Merck has be
introduced with the changing time. The case tells about how the financial function has evolved from
just being an accounting job to a major financial advisor and controller with the integration of all the
functions decision making through the quantitative analytical models developed by the financial
team. The case also tells about the evolution of professional relationships between finance and
other professionals at Merck.
During 1980s the company has seen a remarkable growth on the basis of its scientific and financial
performance as well as the strength of its management team and market position. The company
had experience remarkable growth since 1985, sales grew at an average compound rate of 15%
per year & net income at the rate of 24%. Company market capitalization rose from $5 billion in
1980 to $45 billion in 1993. Marck was the most admired corporation in America with human and
animal health products accounting for $9.1 billion of sales. Their product development activities
were centered in the Merck Research Laboratory. More than $1.1 billion was spent on R&D in 1992,
and an increase of 11% was budgeted for 1993
Merck production was spread in 16 countries and they performed business in 40 different
currencies. Merck has also made many accusation and joint ventures in 90s eg: Astra/Merck, Du
Pont Merck Pharmaceutical Company, Johnson & Johnson, which led to an increase in their market
capitalisation. In 1990s was expected decade of slower growth & lower profit margin.
Ms. Lewent who was initially responsible of analysing and evaluating proposed acquisitions,
divestitures and the licensing-in of new product and establishing and maintaining analytical methods
for measurement of capital expenditure. With the initiative of Ms. Lewent in developing the
quantitative and analytical models to analyse the financial data which may help the various function
of Merck to take the correct decision and know the impact of any decision well in advance helped
the organisation in making the major decision based on the substantial financial back-up.
Since Company was investing huge amount in their R&D for developing new products and as a
Chief financial Advisor of the MSDRL Ms. Lewent has develop the financial evaluation of the R&D
project expenditure to determine their commercial potential. She developed the capability to assess
risk and return, project by project to help decision making prior to commitment. They did not have a
suitable model to classify the expenditure as capital or revenue, nor could they ascertain the
profitability from a given product or venture.
There was not commercial simulation software available hence Mr. Lewent along with her team had
developed the software to encode the necessary probability distribution to handle input and output
associated with pharmaceutical R&D.
Several types of outputs were produced including annual nominal and constant-dollar forecast of
revenue, cash flow, return on investment and net present value.
At a Role of Executive Director (FE&A) she was heading the MSDRL financial service, Acquisitions
& Capitals analysis, MCMD financial services, MSDRL financial services along with the role for
control and treasury part of finance. The financial service for both Research and Manufacturing was
placed within FE&A which enabled the analytical and advisory responsibility for practically every
major spending program under FE&A. This restructuring of the organisation has helped in
integrating the evaluation techniques much better. Since they had and exposure to 16 countries and
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with business covering 40 different currency the currency fluctuations was a major constraint and to
manage their foreign exchange hedging activities, a suitable long term revenue hedging model was
developed. The other object was to reduce the year to year impact of exchange rate fluctuation on
reported earnings.
They came up a long way under the effective leadership of Ms. Judy Lewent, who kept taking
initiative in carrying out various tasks outside her domain. Her job included 25% assignments and
75% initiative.
Research planning model continuously improved and applied to more and more projects and
programs. The analytical techniques were now a part of all the decision making of the organisation
and was also applied to capital budgeting decisions in manufacturing, licensing agreements and
similar contract. Any decision making on investment was provided with quantitative assessment if
the associated risks and possible returns. In 1987 the financial area was a respected participant in
all major spending decisions.
Changes in job definitions and the organization of the financial area:

The Evolving finance function in the Mercks was well illustrated by the Ms. Lewents career at the
company, which begin in 1980. Since then the financial area has grown from the accounting
function to the service-oriented function providing a wide range of financial services to the clients
within the company. These partnership/internal client within the company has helped the other
function in using the financial expertise to meet the company business objective.

Lewents Career path in the financial area:

She has started her job at Merck, as Director of acquisition & capital analysis, reporting to the
controller. In this position she was responsible for analyzing & evaluating proposed acquisition,
divestment etc. Her other deliverables were maintaining methodologies for measuring capex at
Merck.

At this time Merck Group Finance was divided into two areas
a) Financial Control at the different business unit & new venture level
b) Group Treasury, Forex Management.

She has then given the new position of the Asst Controller of MSDRL Financial Services. In this
new assignment she has used Monte Carlo simulation technique into the research planning model
for the Mercks R&D Process. These model has got lot of acclaim in the other functional area, like
manufacturing, Human Health. Animal Health etc.

She has become Executive Director, Financial Evaluation & Analysis Here she improved the
Research planning model to apply to all the projects & programs.

She then promoted to Vice President (Finance) & Treasurer - Here she came up with a simulation
planning & hedging model, which was very effective as they kept on innovating it.



Financial Area added value to the Mercks business beyond its typical financial work:
Merck didnt had any systematic planning model, and there were no standard software
available in the market for the analysis of the financial statements hence Merck develop their
research planning model.
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Merck also developed the simulation planning & hedging model, which helped the
organisation in long term business forecast and understand the exchange rate behaviour
and advanced asset-pricing technique to improve the expected performance of Mercks
foreign exchange Hedging program
The clients of the financial services of the Finance department was the internal departments
and existed within the company. The finance department provided a wide range of financial
services to various department like manufacturing, R&D etc in taking their decision.
The Analysis & forecasting department was merged with the finance department which
helped to shape the proposal from inception with help of high quality financial data rather
than just accepting or opposing the proposal on basis of individual proposal.
Merck had a centralized and well-integrated model which was controlled by financial head
and hence had better control.
Finance Department was committed to providing superior returns on the assets and maintain
the financial integrity of organisation by keeping the balance sheet sound.
Finance Dept. also promoted functional excellence by recruitments outstanding staffs
capable of applying and inventing analytical techniques. Hence the recruitment in Finance
dept. was higher than the other departments, which consisted of MBAs from good B-
schools in USA.
Finance department was constantly re-structured for integrating more functions and
considering more functions as a client to the finance dept.
Conclusion
Merck had a highly effective but complex model which was created by their finance department for
the actual understanding of the present and future situation of the company and its investment.
Research and Development was their strength which was the driver of their profitability however the
finance department has added a new paradigm to the business perspective and lead the way to the
success of all its projects with its inputs on the financial data.
In order to get this leverage of the financial analysis technique and integration of various functions
like marketing, R&D, production etc. the competitor companies also have to develop similar model
and then only they can stand in this business. All they needs is to become systematic and have
efficient leadership.