Merck & Company: Evaluating a Drug Licensing Opportunity
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
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The approval process should take 7 years and the patent will cover 17 years (10 years of exclusivity beginning in year 7). Merck determined the probabilities of success in each of the three phases and also the costs that would be associated with each phase based on historical information. One of the concerns is that LAB Pharmaceuticals has never successfully completed all three phases. Merck must look at the probabilities of success and the costs associated and then determine if they would like to accept LAB's offer and for what price they would be willing to pay for this option. The drug Davanrik has potential to help with depression and/or obesity.
5 Brief one paragraph conclusion where you will report your 1) valuation (amt I believe that Merck should pay and 2) recommendation I would accept the project and fund the project through phase I, Phase II and then only continue to Phase III testing if Phase II resulted in a Success for either "both indications" or the "Depression Only". If the Phase I was successful, I would then proceed with Phase II testing, but would abandon the project and not pay for Phase III testing if there was success only with weight loss. The costs associated with the launch and continued testing if only Weight Loss had shown to be successful would not be worth the further investment. I would finance LAB Pharmaceuticals