Merck & Co.

: Evaluating a Drug Licensing O

DECISION TREE

Success
Phase II

10% 15%

Depression Only Weight Loss Only

Phase III

85% 15%
75% 25%
70%
Success Failure

Success Failure

Success Both

Considering all the possible outcomes and expected cash flows, the licensing project yields an expected net prese
our recommendation is that Merck should take up the licensing opportunity. This particular investme

Note : Please refer to calculations sheet

ating a Drug Licensing Opportunity
DECISION TREE
Investments
Phase I

60% 40%

Failure $ 30,000,000.00
Phase II

5% 70%

Both Failure $ 40,000,000.00

se III

15% 5% 10%
$ 200,000,000.00

$ 150,000,000.00

Depression Only Weight loss Failure $ 500,000,000.00

oject yields an expected net present value of $13.98 Million. Since the net expected value is positive,
portunity. This particular investment is expected to add $13.98 Million to the firm value.
Cash flows Phases Possibility In $ Million
Investments
Phase I 30
Phase II 40

Phase III For Depression 200

For Weight Loss 150
For Both 500
Market Launch
For Depression 250
For Weight Loss 100
For Both 400
Payoffs
For Depression 1200
For Weight Loss 345
For Both 2250

Phase I Success
Failure

Phase II Depression Only

Weight Loss Only
Both
Failure

Phase III Considering results of Phase II

Depression Only Success
Failure

Weight Loss Only Success

Failure

Both Success In both

Success in Depression Only
Success In Weight Loss Only
Failure
% Probability Cash Flows NPV Investment Expected Payoff
0.6 73.3 43.98 30 13.98
0.4 0 0

0.1 607.5 60.75 40 73.3

0.15 33.75 5.0625
0.05 949.75 47.4875
0.7 0 0

0.85 1200 807.5 200 607.5

0.15 0 0

0.75 345 183.75 150 33.75

0.25 0 0

0.7 2250 1295 500 949.75

0.15 1200 142.5
0.05 345 12.25
0.1 0 0