Merck & Company Decision Tree

Background of Merck

• Leveraged.

Merck & Company Decision Tree

(Davanrik for Weight Loss Launching Cost: $225 million)

Phase III

87.5

Succeed

Gain: 60

85%

27.5

Phase I

LAB Decision Tree

Failure

Decision Node:

Bid for the license

15%

34.75

Enter Phase III

Succeed

78.5

60%

75%

Enter Phase 1

10.755

Phase II

17.5

10.755

Effective for Depression

Succeed

Failure

Cost: -30

10%

Enter Phase III

37.925

25%

30.44

Phase II

107.5

40%

Succeed for Depression

Gain: 10

Phase I

15%

Do Not Enter Phase 1

Enter Phase II

10%

15%

Effective for Weight Control

Enter Phase II

64.75

Failure

Enter Phase III

0

Succeed for Weight Control

Gain: 2.5

5%

Effective for Depression

136.11

-30

Succeed

5%

24.47

Cost: -40

Gain: 17.25

Cost: 0

15%

Gain: 40

70%

160

60%

Accumulated Cost: -30

Succeed for both

Effective for both

5%

Gain: 112.5

47.5

Effective for Weight Control

10%

85%

Enter Phase 1

Phase III

Failure

16.68

Failure

Enter Phase III

0

70%

40%

537.5

Succeed

Gain: 5

Failure

Accumulated Gain: 5

Cost: -200

7.5

Effective for both

70%

680

15%

Accumulated Gain: 7.5

Decision Node:

Selling License

Failure

Do Not Enter Phase 1

0

-270

Gain: 0

Failure

Decision Node:

Enter Phase III

16.68

-70

Enter Phase III

Accumulated Cost: -70

75%

-60

Cost: -150

Succeed

25%

120

Not Enter Phase III

Failure

0

0

-70

Cost: 0

680

Phase III

Succeed

-270

Failure

85%

25

-220

Succeed

15%

75%

Failure

Enter Phase III

380

537.5

Cost: -200

-325

Succeed for Depression

25%

Enter Phase III

15%

-36.25

Succeed for Weight Control

1280

Cost: -150

5%

Effective for Depression

Phase II

-570

Succeed for both

70%

Enter Phase III

879.75

Merck & Company Decision Tree

Merck Decision Tree

Cost: -500

10%

Failure

Effective for Weight Control

10%

15%

Enter Phase II

5%

Effective for both

Cost: -40

Phase I

43.3

Succeed

Failure

70%

-70

Accumulated Cost: -70

60%

Failure

-30

Merck & Company Decision Tree

(Davanrik for Weight Loss Launching Cost: $225 million)

Accumulated Cost: -30

40%

13.98

Enter Phase 1

Cost: -30

Decision Node:

Bid For the License

10.755

Phase I

Do Not Enter Phase 1

0

Enter Phase 1

Cost: 0

60%

10.755

Decision Node:

Bid for the license

Cost: -30

Succeed

Do Not Enter Phase 1

40%

37.925

13.98

0

Cost: 0

Failure

-30

Enter Phase II

Phase II

Accumulated Cost: -30

10%

Cost: -40

15%

Effective for Depression

5%

Effective for Weight Control

70%

Effective for both

Enter Phase III

85%

537.5

Phase III

Cost: -200

Failure

Not Enter Phase III

-70

Succeed

15%

Accumulated Cost: -70

Accumulate Cost:

-70

Failure

680

Enter Phase III

873.5

Cost: -500

15%

-270

5%

70%

Succeed for Depression

10%

Succeed for Weight Control

380

Succeed for both

-450

Failure

1280

-570

Two key points

• A graph illustrating future decision and events that could happen under certain combination of different decisions

• Only earlier phase succeed will entering the next phase be considered and only when one phase brings positive expected value will one choose to enter
• Each phase should be considered independently

Three basic elements

• What scenarios will there be
• What the probability is
• What the payoff is

Group Members

Profitability for Merck & Company

Background of the LAB

JI Meihui

DING Yi

MA Yu

WEN Yuxiang

ZHAN Weixin

• High profit and high return.

1999: 44.48%= 18.01% * 91.80% * 2.6911

1998: 41.00%= 19.51% * 84.44% * 2.4882

Dupont Model:

Outline

• specializes in developing compounds for the treatment of neurological disorders
• none of its drugs has ever completed the FDA approval process
• stock price to fall by over 30% and in need of cash

Merck & Company

• Global research-driven pharmaceutical company

Davanrik

Financial Analysis

Merck & Company

• Originally developed to treat depression
• May be efficacious for depression and weight loss
• Be ready to enter the three-phase clinical approval process

Product Lines

• Products in healthcare and manufacturing industry.
• Since 1995, successful products include Vioxx, Fosamx and Singulair.
• Other popular products: Vasotec, Mevacor, Prinivil and Pepcid.

Background of LAB

Challenges for Merck & Company

Merck-Medco Management Care

Joint-ventures

Health Care Services

Human and animal health products

Decision Tree

• Development
• Manufacture
• Marketing

• Providing Services

• Expiration of product patent.
• Patents for many of Merck & Company’s most popular drugs will expire in 2002.
• Result in loss in sales revenue of $5.7 billion.
• Must continue to develop and market new drug products.

Change of launching cost

Evaluating a drug licensing opportunity