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Merck & Company Decision Tree

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by

Yuxiang Wen

on 23 September 2013

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Transcript of Merck & Company Decision Tree

Merck & Company Decision Tree
Enter Phase 1
Phase I
Phase III
Phase II
Do Not Enter Phase 1
Decision Node:
Bid for the license
Cost:
-30
Cost: 0
Succeed
Failure
Accumulated Cost:
-30
Enter Phase II
Cost:
-40
60%
40%
Effective for Depression
Effective for Weight Control
Effective for both
Failure
10%
70%
5%
15%
Accumulated Cost:
-70
Enter Phase III
Succeed for Depression
Enter Phase III
Enter Phase III
Failure
Succeed
Failure
Succeed
Succeed for Weight Control
85%
15%
15%
25%
75%
Failure
Succeed for both
5%
70%
10%
Cost:
-200
Cost:
-150
Cost:
-500
680
-270
25

-220
380
-325
1280
-570
13.98
537.5
879.75
-70
43.3
-30
13.98
0
Merck & Company Decision Tree
(Davanrik for Weight Loss Launching Cost: $225 million)
Enter Phase 1
Phase I
Phase III
Phase II
Do Not Enter Phase 1
Decision Node:
Bid for the license
Cost:
-30
Cost: 0
Succeed
Failure
Accumulated Cost:
-30
Enter Phase II
Cost:
-40
60%
40%
Effective for Depression
Effective for Weight Control
Effective for both
Failure
10%
70%
5%
15%
Accumulated Cost:
-70
Enter Phase III
Succeed for Depression
Enter Phase III
Enter Phase III
Failure
Succeed
Failure
Succeed
Succeed for Weight Control
85%
15%
15%
25%
75%
Failure
Succeed for both
5%
70%
10%
Cost:
-200
Cost:
-150
Cost:
-500
680
-270
120
380
-450
1280
-570
10.755
Not Enter Phase III
Cost: 0


537.5
873.5
-70
37.925
-30
10.755
0
-36.25
Merck & Company Decision Tree
(Davanrik for Weight Loss Launching Cost: $225 million)
Enter Phase 1
Phase I
Phase III
Phase II
Do Not Enter Phase 1
Decision Node:
Bid For the License
Cost:
-30
Cost: 0
Succeed
Failure
Accumulated Cost:
-30
Enter Phase II
Cost:
-40
60%
40%
Effective for Depression
Effective for Weight Control
Effective for both
Failure
10%
70%
5%
15%
Accumulated Cost:
-70
Enter Phase III
Succeed for Depression
Enter Phase III
Failure
Succeed
Succeed for Weight Control
85%
15%
15%
Failure
Succeed for both
5%
70%
10%
Cost:
-200
Cost:
-500
680
-270
380
-450
1280
-570
10.755
537.5
873.5
-70
37.925
-30
10.755
0
LAB Decision Tree
Enter Phase 1
Phase I
Phase III
Phase II
Do Not Enter Phase 1
Decision Node:
Selling License

Gain: 5
Gain: 0
Succeed
Failure
Accumulated Gain: 5
Enter Phase II
Gain: 2.5
60%
40%
Effective for Depression
Effective for Weight Control
Effective for both
Failure
10%
70%
5%
15%
Accumulated Gain: 7.5
Enter Phase III
Succeed for Depression
Enter Phase III
Enter Phase III
Failure
Succeed
Failure
Succeed
Succeed for Weight Control
85%
15%
15%
25%
75%
Failure
Succeed for both
5%
70%
10%
Gain: 20
Gain: 10
Gain: 40
87.5
27.5
34.75
17.5
107.5
64.75
160
47.5
16.68
78.5
136.11
7.5

24.47
0
16.68
0
30.44
Gain: 60
Gain: 17.25
Gain: 60
Gain: 17.25
Gain: 112.5
Decision Node:
Enter Phase III
Not Enter Phase III
Accumulate Cost:
-70
-70
0
-60
0
Merck Decision Tree
Evaluating a drug licensing opportunity
JI Meihui
DING Yi
MA Yu
WEN Yuxiang
ZHAN Weixin


Group Members
Outline
Background of Merck
Financial Analysis

Background of LAB

Decision Tree
Change of launching cost

Merck & Company
Global research-driven pharmaceutical company
Merck & Company
Merck-Medco Management Care

Joint-ventures

Human and animal health products

Development
Manufacture
Marketing

Health Care Services

Providing Services

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.

Profitability for Merck & Company
High profit and high return.

Leveraged.
Dupont Model:
1998: 41.00%= 19.51% * 84.44% * 2.4882
1999: 44.48%= 18.01% * 91.80% * 2.6911
Challenges for Merck & Company
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.
Background of the LAB
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
Originally developed to treat depression
May be efficacious for depression and weight loss
Be ready to enter the three-phase clinical approval process
Davanrik
A graph illustrating future decision and events that could happen under certain combination of different decisions
Three basic elements
What scenarios will there be
What the probability is
What the payoff is

Two key points
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
Full transcript