Analysing the business of Merck and Davanrik

Analysing the business of Merck and DavanrikThe recommendation is that, Merck should license the new medicine Davanrik. The company is facing serious situation that most of their do medicines patents are going to expire soon. For maintaining companys time value and profit, it is vital to invest into new medicine development. In the other part of the report, a preamble of Merck and Davanrik, finality stand data and the answers of important questions are provided in detail.MerckThe Company is discovering new in advance(p) point of intersections and developing new indications for existing products the result of its continuing commitment to research (Annual musical composition, 2000). Several products face 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 ache been licensed to a third party, Mevacor and Vaseretic. In the aggregate, domestic sales of these products represented 19% of Merck human health sales for 2000 (Annual Report, 2000). The patent expiration hobo crap deeper drop in boilers suit sales. (Mercks Consolidate Balance Sheet See Appendix A)DavanrikDavanrik originally positive by research laboratory pharmaceutic Company to treat depression. Lab Pharmaceutical offered Merck to license her new developing drug. Lab Pharmaceutical is only 15 geezerhood old company. FDA has recently denied to approval one of their drug which sinless all three stagecoachs. In response to this decision, Lab lost 30% of her general sales. As a result, LAB was hesitant to issue redundant equity to finance the testing of Davanrik and was seeking a larger pharmaceutical company to license the drug and provided the following facilitiesNeeded Cash stock for clinical testingManufacturing and MarketingRoyalty on the eventual sales of DavanrikDecision Support DataMerckThe paten t of Mercks most popular drug is going to expire by 2002Expiration of Patent can cause a deeper drop in overall sales.Merck needs new drug development to maintain its values and refresh portfolio.The company sales reflect continuous growth in earnings.The achievement of Davanrik would keep Merck Company in the black for the following seven years, while the failure of Davanrik would ultimately big businessman Merck Company to quickly develop other profit producing drugs.Davanrik and MerckDavanrik is drug flux for treatment of depression and neurological disorders.Its need 7 years or more to approve form FDA in three mannequins. physique I would take 2 years. It was expected to equal $30 zillion, including an initial $5 meg 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 cardinal, including $2.5 one thousand thousand fee to Lab.Phase three trial would cost $200 mi llion including a $20 million payment to lab.Merck Co. should analyze the following different parts of factors to make a decision to license DavanrikExpected revenueExpect royalty fees to lab indorse fees for each phase supremacy probability at each phaseMarketing costMerck responsibility at each phasePhase ITesting would cost $30 million including $5 million to labTotal duration of phase 2 yearsluck of victory 60%Phase IITesting would cost $40 million including $2.5 million to labTotal duration 2 yearsProbability of success for depression only 10%, for heaviness mischief 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 tip loss only $150 million including $10 million to Lab and probability is 75%Testing would cost for both ( economic crisis and tip loss) $ euchre million including $40 million to Lab and pro bability is 70%Depression only cost $250 million to launch with a PV of $1.2 billionWeight loss only cost $100 million to launch with a PV of $345 millionBoth depression and weight loss would cost $four hundred million to launch with a PV of $2.25 billionOverall Failure gambleQuestions and AnswersShould Merck bid to license Davanrik? How much should they pay?There is an extreme risk of exposure of failure in taking Davanrik. However, pharmaceutical drug producing industry does have to be risk seeking, because no any drug can plump an approval. It is recommended that Merck Co. should accept Lab pharmaceutical offer for Davanrik. The expected value of Davanrik is nigh $14 millions.What is the expected value of the licensing arrangement to LAB? Assume a 5% royalty fee on any cash flows that Merck receives from Davanrik subsequently a successful launch.LAB would also receive a 5% royalty fee on any from future sales of Davanrik reissue from the milestone payments and regardless o f 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 victor (85%) $1.2 billion * 0.05Weight Loss 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 given 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 collusive again.What other issues should Merck meet in taking this decision?Merck Co. should consider 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 considered 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 pileus 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 menial company which is not very flexible to handle such type of task. Research and Development is the strength of Merck. Once the drug approve, Merck can construct it for long time period.Appendix ASource Mercks Annual Report 2000Appendix BSource Unknown