MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY Case Solution

Because, Merck offers a wide range of drugs; the four most popular drugs account for only 17% of sales. Some of these products are developed by joint ventures that can share costs and distribute the future income. This can be evidenced by the modest (around 50%) share of sales costs in the sales structure.

In addition, these new products are protected by patents and laws that allow Merck to exercise an exclusive manufacturing and sales rights. The company seizes this opportunity to maximize its revenue, after which other companies can produce alternatives, thereby reducing the profit margin.

For this reason, the company always strives to complement its product portfolio. Merck has discovered, developed, licensed and manufactured commercial drugs for humans and pets as well, so its field of activity is very diverse.

The evaluation of drug’s approval transactions depends on the evaluation of general evaluation techniques. The difference is because a drug has a significant negative cash flow in the initial stages of the clinical trials before it is approved.

In other cases, there is historical income information that can be used to predict the future cash flows,because cash flow from drugs is risky. The risk can be characterized by the degree of development.

Risk-adjusted net present value is widely used to evaluate the risk projects. It is about forecasting revenues, costs and appropriate schedules, but it also requires a relative success rate at each stage of development. To account for risk, multiply the expected net cash flow over a given period by the probability of occurrence.

The proper likelihood of success depends on the therapeutic area and the stage of development of the drug. Once the net cash flows for each period has been properly adjusted; these cash flows are discounted at the appropriate discount rate. Since the prediction for most of the drugs is true; the appropriate discount rate is the actual discount rate.

A decision tree was created to display the various stages of the FDA approval process and the expected cash flows for Merck. It is a decision support tool that is mainly used for decision analysis.

Merck’s Decision Tree

The Merck decision tree is in an Excel spreadsheet. We see that this tree begins with the permitting decision and begins at the first phase. The initial cost is $ 30 million (including a $ 5 million license fee) and the probability of success is 60%. Another decision is not to allow the use of the drug. If the first stage gets successful; the second stage of the test begins. The cost of this move is $ 40 million, with varying degrees of success. The probability of success in treating depression is 10%.

For a drug to have a positive effect on a weight loss drug; the probability is that the drug is successful in treating depression and weight loss by 5%. Compared to the first phase of the study, the possibility of treatment in the second phase is very low because it applies to many people..............

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MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY Harvard Case Solution & Analysis