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Fin 431 Presentation

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Kelly Huang

on 15 October 2012

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Transcript of Fin 431 Presentation

John Scarbrough
Josh Quarles
Weiyun Huang (Kelly) Merck & Company Evaluating a Drug Licensing Opportunity Merck & Company Rich Kender, Vice President of Financial Evaluation and Analysis at Merck, is working with his team to decide whether they should license Davanrik a new drug that will treat depression and obesity. Davanrik was developed by a small Pharmaceutical company named LAB but they lacked the resources to see the drug through the whole approval process. LAB will be paid an initial fee, a royalty on all sales and make additional payments as Davanrik completes each stage of the approval process. Background Merck has the capital to sustain the large required capital to develop a drug.
Merck’s gets exclusive rights and are able to pull in large monetary gains.
Once the generics begin production Merck’s margin and volume will be decreased.
Through the strategy of having a constant flow of newly developed drugs they are able to keep returns up. Merck’s sustainable returns If the costs of launching Davanrik for weight loss are $225
Merck should bid no more than $10.75M Expected value (5% royalty fee) Phase 1(100%)= $5 million
Phase 2 (60%) = $2.5 million
Phase 3 Depression(10%)= $20 million
Phase 3 Weight Loss(15%)= $10 million
Phase 3 Both(5%)= $40 million
Depression Success(85%)= $1.2 billion *.05
Weight Loss Success(75%)= $345 million *.05
Depression Fail(15%)= $1.2 billion *.05
Weight Loss Fail(5%)= $345 million *.05
Both Success(70%)= $2.25 billion *.05 $16.68 million
(probability of success X payoff if successful) + (probability of failure X payoff if failure) Expected Payoff = Never do weight loss, even if Phase II testing allow us to.
Because If the costs of launching Davanrik for weight loss are $225 If success: NPV before phase II = (345M-225M)*0.75=120M *0.75=$90M

Less than the cost continuing $150M

So, The tree would get pruned.

Decision tree gonna looks like this... Pruned weight loss : -(40+30)-(25*0.75+(-220)*0.25)
Back out = 33.75 * 0.15*0.6 = 3.0375

Back out $125M from lower part of the tree: 125*0.05*0.05*0.6

The PV is lowered by 3.0375+0.19 = 3.2275

PV now = 13.98 - 3.2275 = $10.75 million I) Global research
II) PBM service
III) Launched 15 products
IV) $5.9 billion sales
V) sales increased by 20% from 1998
VI) Vasotech, Mevacor, Prinvil, Pepcid generated $5.7 billion in sales
VII) develops new products through internal research and through initiative with biotech companies. Operating Information 5+.6(2.5)+(.6)(.1)20+(.6)(.15)10+(.6)(.05)40+.6(.1).85(1200).05+.6(.15).75(345).05+.6(.05).15(1200).05+.6(.05).05(345).05+.6(.05).7(2250).05=5+1.5+1.2+3.06+1.16+.27+.03+2.36=
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