Topic 5: Conditional Probability and Decision-Making

Analysis
Case 5:
Licensing a New Drug

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Bachelor of Business Administration – BBA

Descriptive Statistics and Probability
ACADEMIC YEAR: 2023-2024
Case 5: Licensing a New Drug

1. Case Description

Merck & Company, an American multinational pharmaceutical company, has

the opportunity to license a new drug: Davanrik. Davanrik is now in pre-clinical
development, ready to enter the three-phase clinical approval process that will
last for seven years. Should Merck license the drug?
To help Merck with the decision, the document Case 5 Related Document
Merck&Company.pdf provides the information necessary to evaluate this
specific licensing opportunity, including the cost of the three phases of the
review process, the present value of the revenues associated with successful
outcomes, and the probability of various outcomes.
Read carefully the highlighted paragraphs of the document to extract the
necessary information.

Theory
The key elements for representing events related to a decision in a
decision tree are:
• Decision node (actions to take)
• Random node (event with probability)

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Case 5: Licensing a New Drug

2. Case Analysis

1. Complete the following decision tree. You may use the fillable version
available in the file Case 5 Decision Trees.docx. Fill in the blue boxes with
probabilities, the costs (red) in millions of USD next to the -$ symbols and
the incomes (green) in millions of USD next to the +$ symbols, where
D=Depression and P=Weight loss (for instance D P2 means Phase II would
show that Davanrik would be effective for weight loss but not depression).
Note that in Case 5 Related Document Merck&Company.pdf, the present
value (PV) can be equated to income.

-$ D P3 +$
D P3
D P2
-$ D P3 +$
-$
D P2 2 D P3
Phase I Success -$ DP 3 +$
-$
D P3 +$
-$ -$
DP 2 -$
D P3+$
-$ -$
License
D P3
D P2

Phase I Failure
Do Not
License

-$

2. Should Merck license the drug? What is the expected profit? To answer
this, move the information of each branch of the decision tree to the rows of
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 Case 5: Licensing a New Drug

the following table. Indicate the probabilities and costs of each phase, and
the corresponding income (see the first row as an example), and calculate
the total probability and profit of each branch. Use these to finally calculate
the expected profit.

Phase II Phase III Successful Prob. x

License Phase I (safety) (efficacy) Income outcome Prob. Profit Profit
Cost Prob. Cost Prob. Cost Prob. Cost
-30 0.6 -40 0.1 -200 0.85 -250 1200 Depression 0.051 680 34.68

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