Analysing the business of Merck and Davanrik

Analysing the business of Merck and DavanrikThe recommendation is that, Merck should license the new drug Davanrik. The company is facing serious situation that most of their drug patents argon going to overstep soon. For maintaining companys value and profit, it is vital to invest into new drug development. In the other part of the report, a preamble of Merck and Davanrik, decision support data and the answers of important questions are provided in detail.MerckThe Company is discovering new innovative products and developing new indications for existing products the result of its continuing commitment to research (Annual Report, 2000). Several products eccentric expiration of product patents in the near term. U.S. product patents expired in 2000 for Vasotec and Pepcid and will expire in 2001 for Prilosec, which is suppliedexclusively to AZLP, Prinivil and Prinzide, for which co-marketing rights have been certify to a third party, Mevacor and Vaseretic. In the aggregate, domest ic sales of these products represented 19% of Merck human health sales for 2000 (Annual Report, 2000). The patent expiration can antecedent deeper drop in overall sales. (Mercks Consolidate Balance Sheet See Appendix A)DavanrikDavanrik originally developed by Lab Pharmaceutical Company to parcel out depression. Lab Pharmaceutical offered Merck to license her new developing drug. Lab Pharmaceutical is sole(prenominal) 15 years old company. FDA has recently denied to approval one of their drug which completed all three frames. In response to this decision, Lab lost 30% of her overall sales. As a result, LAB was hesitant to issue supernumerary equity to finance the testing of Davanrik and was seeking a oversizer pharmaceutic company to license the drug and provided the following facilitiesNeeded CashFund for clinical testingManufacturing and MarketingRoyalty on the eventual sales of DavanrikDecision Support DataMerckThe patent of Mercks most popular drug is going to expire by 200 2Expiration of Patent can cause a deeper drop in overall sales.Merck needs new drug development to maintain its set and refresh portfolio.The company sales reflect continuous growth in earnings.The supremacy of Davanrik would keep Merck Company in the black for the following seven years, enchantment the failure of Davanrik would ultimately force Merck Company to quickly develop other profit producing drugs.Davanrik and MerckDavanrik is drug compound for treatment of depression and neurological disorders.Its need 7 years or more to approve form FDA in three shapes. human body I would take 2 years. It was evaluate to appeal $30 billion, including an initial $5 trillion fee to Lab for licensing the drug.There was 60% chance that Davanrik would successfully complete Phase IPhase II would take 2 years. It was expected to cost $40 million, including $2.5 million fee to Lab.Phase third trial would cost $200 million including a $20 million fee to lab.Merck Co. should analyze the following different types of factors to make a decision to license DavanrikExpected revenueExpect royalty fees to labLicense fees for each phaseSuccess probability at each phaseMarketing costMerck responsibility at each phasePhase ITesting would cost $30 million including $5 million to labTotal duration of phase 2 yearsProbability of Success 60%Phase IITesting would cost $40 million including $2.5 million to labTotal duration 2 yearsProbability of success for depression only 10%, for freight loss 15% and for both 5%Phase IIICost and success probability are depend on the result of phase IITesting would cost for depression only $200 million including $20 million to Lab and probability is 85%Testing would cost for weight loss only $150 million including $10 million to Lab and probability is 75%Testing would cost for both (Depression and Weight loss) $500 million including $40 million to Lab and probability is 70%Depression only cost $250 million to launch with a PV of $1.2 billionWeig ht loss only cost $100 million to launch with a PV of $345 millionBoth depression and weight loss would cost $400 million to launch with a PV of $2.25 billionOverall Failure RiskQuestions and AnswersShould Merck bid to license Davanrik? How much should they pay?There is an extreme risk of failure in taking Davanrik. However, pharmaceutical drug producing industry does have to be risk seeking, because no any drug can get an approval. It is recommended that Merck Co. should accept Lab pharmaceutical offer for Davanrik. The expected value of Davanrik is around $14 millions.What is the expected value of the licensing arrangement to LAB? Assume a 5% royalty fee on any coin flows that Merck receives from Davanrik after a successful launch.LAB would also receive a 5% royalty fee on any from future sales of Davanrik crystalise from the milestone payments and regardless of the costs associated with getting the drug to market.Expected value of the licensing arrangement to LabPhase I (100% chance of success) $5 millionPhase II (60%) 2.5 millionPhase III depression (10%) $20 millionPhase III weight loss (15%) $10 millionPhase III both (5%) $40 millionDepression Success (85%) $1.2 billion * 0.05Weight evil Success (75%) $345 million * 0.05Depression Success Lower path (15%) $1.2 billion * 0.05Weight Loss Success Lower path (5%) $345 million * 0.05Both Success (70%) $2.25 million * 0.05How would your analysis change if the costs of launching Davanrik for weight loss were $225 million instead of $100 million as disposed in the case?Analysis is depending on the success probabilities and failure risks. At phase III, there is only 5% chance of success on weight loss. BY using decision tools the values will be calculating again.What other issues should Merck bring in taking this decision?Merck Co. should treat the cost of marketing, administration and overall sensitivity of each testing phase. The royalty, cost and overall failure risk is also vital factors to be conside red for the decision. Merck should also consider that their drugs patents are going to expire and their many other drugs are not approved by the FDA.How has Merck been able to achieve substantial returns on capital given the large costs and lengthy time to develop a drug?Merck Co. is a big and economically stable company which can afford large costs and lengthy time to develop a drug. In other hand Lab pharmaceutical is a small company which is not real flexible to handle such type of task. Research and Development is the strength of Merck. Once the drug approve, Merck can produce it for long time period.Appendix ASource Mercks Annual Report 2000Appendix BSource Unknown