Merck
Case Study Questions

Instructions: We will discuss the Merck case in class on Thursday, February 20, 2014. In preparing for our class discussion, please focus on the following questions.

1. How has Merck been able to achieve substantial returns to capital given the large costs and lengthy time to develop drugs?
- New product process: Merck is real fast in marketing drugs, as it develops cross-functional teams and starts marketing early in the development process only
- through the new process development Merck is able to stand out in the crowd of pharma company, as its giving a specialized and patented medicine which a patient ccant get from any other pharma company. Besides this, the company manufactures certain hightly critical patented drugs. This helps it to capture the untapped market od such drugs.
- Through the late 80's to early 90's, Merck was able to boast profits and sales through biochemistry drugs that were seen as breakthrough drugs in this new market. With this sudden boom competitors started to take notice and emulate Merck's business model. This success also brought up a number of questions within Merck as a company; mainly how was Merck going to keep up with its numbers and keep pumping new drugs into the market. By assessing some strengths, weaknesses, opportunities and threats (SWOT Analysis) of the firm itself and offering some recommendations of how Merck may be able to conquer this challenge, you will be able to conclude that the success of Merck as a company relies heavily on its management and how they adapt the business model that is already in place to that of the ever-changing pharmaceutical industry.
- This success of Merck's novelty drugs not only reaffirmed Merck's reputation in the market but it also increased sales and profits to imaginable numbers. The organization garnered in 2001 a total of $50,691,000,000 in sales and $13,909,000,000 (Exhibit 1) in profits pertaining to human health management, prescription, animal health and other departments.

2. Build a decision tree that shows the cash flows and probabilities at all stages of the FDA approval process.
- A second strength for the Merck organization is the establishment of the Drug Development Process for new potential drugs. After the pre-clinical phase and animal study trials, Merck files an Investigational New Drug application with the Food and Drug Administration (FDA). Through the FDA system, the potential drug goes to Phase I where it is given to a small sample of volunteers and at different level of dosages. Next is Phase II in which the drug is studied in patients for long durations. Phase II provides preliminary evidence regarding safety and appropriate doses for larger studies. In Phase III the drug is studies in two groups, the double-blind test placebo group and the inert substance group. The group study will look at the risks and benefits and establishes labeling for the drug. After Phase III, Merck would file for a New Drug Application which is then reviewed by the FDA. Phase IV can be used if Managed Care Organizations (MCOs), outside researchers or the FDA requested for more study and evaluation after the drug is approved and goes into the market.

3. Should Merck bid to license Davanrik? How much should they pay?
- yes.

4. 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 after a successful launch.

5. How 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?
- if the costs of launching Davanrik for weight loss were $225 million instead of $100 million. Then Merck shouldn’t bid more than $10.75

Outline:
Should Merck license the compound? Merck would be responsible for 1) the approval of Davanrik 2) the manufacture of Danavrik 3) marketing of Danavrik Merck would pay LAB for 1) initial fee 2) royalty on all sales 3) make additional pymts as Danavrik completed each stage of approval process (3 Phases) Additional facts: approval process should take 7 years patent will cover 17 years (7 of approval process nad 10 yr period of exclusivity beginning in yr 7)
1 Assumptions: All Cash flows are expressed as after tax present values discounted to time zero, including capital expenditures At any point "failure," investment decision is to stop funding Assuming Standard deviation of 0.5 Using T= 7 years in Black-Scholes Valuation

2 Decision Tree See worksheet "Decision Tree" & ...

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