Indian Institute of Management Indore

ASSIGNMENT-1 Finance - II Merck & Company : Evaluating a Drug Licensing Opportunity

Submitted ByRohit Arvind PGP2011828 Section A

I) Executive SummaryProblem-

This problem consists of Merck and Company which has to evaluate a drug licensing opportunity. In this case the company has to decide on licensing a drug named Davanrik. The drug Davanrik was developed by a company named LAB. Because the company lacked the resources to complete the approval process it approached Merck to licence the drug. Merck was a big player and had the capital , expertise and previous experience required to license the drug.

Merck & Company Merck develops, markets and manufactures drugs useful for both human and animals. Some of the salient points related to Merck are as followingi) Global research driven pharmaceutical company ii) Provides PBM services through Merck-Medko Managed Care iii) Launched 15 products iv) Earned $5.9 billion on 1999 sales v) Sales increased by 20% from previous year 1998 vi) Its most popular drugs were Vasotech, Mevacor, Prinvil, Pepcid generated $5.7 bn in sales vii) Company develops new products through internal research and through initiative with biotech companies

III) Alternatives to address the problemThe alternative used here to address the are as followingi) Do not license the drug ii) License the drug Phase I fails( P=0.6) Phase I succeeds(P=0.4) Phase II fails(P=0.10) Pursue Depression Suceeds Fails Pursue Weight reduction Suceeds Fails Pursue Dual

Dual claim Depression Weight loss Dual Fails

IV) Criteria used to choose the given alternativeThe alternative used to solve the above problem is that the payoff should be maximum for the company. The payoff in case is found by using a decision tree as shown below.

Source: Based on class discussion held in Managing Uncertainty class

The decision tree is drawn according to the information given in the case. We could observe from the above diagram that the payoff at each stages is shown in the end of the tree.

In each tree the expenses and gains are considered to reach a final value. This is shown in the above diagram.

The Expected Monetery Value can be found from the below table-

Probabili Value ty EMV 680 0.051 34.7 -270 0.009 -2.43 25 0.0675 1.7 -220 0.0225 -5 1280 0.021 26.9 380 0.045 1.7 -325 0.0015 -0.5 -570 0.003 -1.7 -70 0.42 -29.4 -30 0.4 -12 Total EMV 13.97

V) Most probable solution to problemMerck should go for licensing the drug. This is because the EMV in case of success is very high. In case the project succeeds the company will gain and will recover its investments with making huge profit. The following are the salient features in accepting the offer Gains are high Mercks patents will be expiring soon so it will lose its competitive advantage Company need to invest in new project as soon as possible to capture market share Negotiations need to be done for royalty payments