Merck & Co.
Evaluating a Drug Licensing
Opportunity "
Members:
Ana Carina Villa
Guillermo Previti
Carlos Nievas
Vanina Anconatani
Simulation of Business Decisions 1
Merck & Company, one of the largest pharmaceutical companies in the world, is in the process of negotiating with LAB
Pharmaceuticals to determine if it would be feasible to license a new developed product called Davanrik that directly has
the potential to treat both obesity and obesity. the Depression.
With LAB Pharmaceuticals having little experience in the market and still not having sufficient resources, they turn to
Merck to be in charge of obtaining approval of the drug, its manufacture and marketing. Even so, before making a
decision regarding this drug, the Merck organization decides to carry out a study in which they analyze the probabilities
and costs of possible events that may occur according to
s for them.
two
In order to know which decision to make, a decision tree is drawn up, which is a diagram of sequential decisions that
shows us its possible results. These help companies determine what their options are by showing them the various
decisions and their results. The option that avoids a loss or produces an extra profit has value. The ability to create an
option, therefore, has a value that can be bought or sold.
Including information given by the case and doing this study, the risk is reduced by making the best decision according to
our assumptions and that we will conclude in this work.
3
• Merck has the capital to be able to invest and sustain an investment to develop a new drug.
• Through patents Merck obtains exclusive rights through which it obtains high monetary profits.
• Through the investment strategy in new drugs, high returns can be maintained.
4
• From sales from 1998 to 1999, Merck had an increase of almost 20% with sales of 5.9 billion dollars.
• Part of the patents for the drugs that generated these profits would no longer be available by 2002; for this reason Merck
predicted that sales on these would decline as generic substitutes became available.
• Merck obtained 5.7 billion in international sales of drugs such as Vasotech, Mevacor, Prinvil, Pepcid that are patented.
• LAB Pharmaceuticals, a company with only fifteen (15) years in the market, still has Phase I and Phase II drugs but none with
FDA approval.
• As investigated, LAB's share price fell 30%, since the FDA did not approve one of its compounds during that time.
5
cost Value Flow Value
PHASE I PHASE II PHASE III
present cash release expected
15.0% 0.9%
Not to do
- 200 - 270 0 - 270 - 2.43
10.0% phase III
Depression
- 40 - 270
85.0% 5.1%
Do
- 200 - 270 - 250 1200 680 34.68
60.0% phase II
if I do - 30 - 137.5
25.0% 2.25%
Not to do
- 150 - 220 0 0 - 220 - 4.95
15.0% Random
Weight - 40 - 220
75.0% 6.75%
Do
- 150 - 220 - 100 3. 4. 5 25 1.6875
15.0% 0.45%
depression
- 500 - 570 - 250 1200 380 1.71
5.0% Random
Both - 40 - 570
5.0% 0.15%
weight
- 500 - 570 - 100 3. 4. 5 - 325 - 0.4875
70.0% 2.1%
Both
- 500 - 570 - 400 2250 1280 26.88
10.0% 0.3%
failure
- 500 - 570 0 0 - 570 - 1.71
70.0% 42.0%
failure
- 40 - 70 0 0 - 70 - 29.4
phase I
Throw
0 - 94.5
40.0% 40.0%
I do not perform
- 30 - 30 0 0 - 30 - 12
Drug license
0.0%
Don't throw
0 0 0 0 0 0
TOTAL EXPECTED VALUE 13.98
6
• The only way to counteract lost sales due to patent expiration is to develop new drugs and constantly update the company's
portfolio.
• The company is financially healthy In the three years it
has a high liquidity (> 1).
• Short-term debt, deferred taxes and non-current liabilities and interest have a higher% than the long-term debt of the total
liability.
• In the past three years, the company had a direct gross margin of 46% to 50%, indicating the company is efficiently using assets
to make substantial profits.
• The ROA (16.5%), ROE (44%) and EPS (2.1) all indicated the company is profitable and attractive to creditors and investors
(reinvestment of profits).
• Overall, Merck's healthy financial situation is healthy and it is able to finance new drug development "internally and externally.
• You could invest by using retained earnings, selling, and issuing stocks or bonds.
7
Our evaluation was based on the analysis of the decision tree, expected value and accompanied by a financial
analysis.
It gave ten possible results from the 3 testing phases (5 successes and 5 failures). The sum of the
expected return was $ 13.69M, represents the maximum value,
"Merck could absorb the implementation of the Davanrik license"
There are concerns related to this investment.
1) There is a high failure rate with clinical testing and FDA approval
2) The duration of the clinical trials is seven years (from 200M to 350M on average). Since Merck will not
receive income or benefits for at least seven years, the company will You will face uncertainties, such as
economic changes, government regulations and restrictions, and operating risks in the development
period.
3) Third, the test could fail at any stage, leading to considerable costs. Costs will be $ 70M or lower in the
early stages. If it fails in phase III, the losses will be between $ 220M and $ 570M.
Overall, could Merck support a high-risk investment with no return in at least seven years? If for having a
positive van to 10 years
