Merck & Co Case

Group 7
 Introduction Case

Merck & Company is considering licensing Davanrik, a new drug with the potential to treat both depression and
obesity.

LAB Pharmaceuticals, the developer of the drug, lacks the resources to complete the lengthy approval process and
bring it to market. They are offering to license Davanrik to Merck, who would then be responsible for development,
manufacturing, and marketing.

● Merck needs to refresh its product portfolio as patents on their existing drugs are expiring.
● Davanrik has high potential profit if successful, especially for both indications.
● The approval process is lengthy and uncertain:
○ 7 years to complete
○ Requires successful completion of 3 phases with associated costs and probabilities of success.
○ Uncertain market competition and launch costs.
 Questions

Build a decision tree that shows the cash flows and probabilities at all stages of the
FDA approval process
1. Should Merck license the drug? How much is the expected value?
2. How would your analysis change if the costs of launching Davanrik for weight loss
were $225 millions instead of $100 millions as given in the case?
3. How much is LAB’s expected value to receive from the proposed deal (from milestone
payments and 5% royalty fee)?
 Should Merck license the drug? How much is the expected
value?

1999 1998 1997 The expected value from taking 3 Phases licensing
Sales 32,714 26,898 23,636
Sales growth 21.62% 13.80% $13.980.000
Cost 24,094 18,765 17,174
Cost growth 28.40% 9.26%
Net Income 5,890 5,248 4,614
Net income growth 12.23% 13.74%

- the cost of executing this project is high

- and the expected value $13.980.000 is the half of yearly sales of the company
- If we compare to current condition of financial company, the company’s sales is increase YoY by avg
17%, and the cost is increase 19%, but the net income is only increase 13%
- It will be very risky if the company invest this new product development. The increased launch cost
for weight loss would make the overall project riskier and potentially less appealing for Merck.
Should Merck license the drug? How much is the expected value?
Decision Tree

The total Expected value will

be $13.980.000
 How would your analysis change if the costs of launching Davanrik
for weight loss were $225 millions instead of $100 millions as given
in the case?

The total Expected value will

be $10.755.000
If the weight loss were 225$
m, better to not continue
the process of weightloss
product due to higher
potential loss
How much is LAB’s expected value to receive from the proposed deal (from milestone payments and 5%
Milestone payments: royalty fee)?

○ Phase I: $5 million
○ Phase II: $2.5 million
○ Phase III = 200 million
■ Depression only: $200 million
■ Weight loss only: $150 million
■ Both indications: $500 million
● Royalty fee: 5% x $13.980.000 = $699.000

Here's how to calculate the expected value for each scenario:

● Depression only:
○ Expected value = (0.6 * $5 million) + (0.85 * 0.15 * $200 million) + $699,000
○ = $3,000,000 + $25,500,000 + $699,000 = $62,490,000
● Weight loss only:
○ Expected value = (0.6 * $5 million) + (0.75 * 0.15 * $150 million) + $699.000
= $3,000,000 + $16.875,000 + $699.000 = $20,574,000
● Both indications:
○ Expected value = (0.6 * $5 million) + (0.7 * $500 million) + $699.000
= $3,000,000 + $35,000,000 + $699.000 = $38,699,000
THANK
YOU