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Merck & Company: Evaluating a Drug Licensing Opportunity

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by

Richelle Molaro

on 7 February 2014

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Transcript of Merck & Company: Evaluating a Drug Licensing Opportunity

Davanrik
Originally developed by
LAB Pharmaceuticals
to treat depression, but also aids with weight loss.
Closing Remarks
Merck should react depending on the licensing costs. Based on the information we analysed, we have determined that the Net Present Value (NPV) of the Davanrik compound is $13.98M.
The value of the contract for LAB Pharamaceuticals is $16.68M.
This is a high-risk-high-reward scenario, so Merck & Co. should carefully hedge their bets in refreshing their pharmaceutical portfolio.
Merck & Company Inc.
Global research-driven pharmaceutical company
Established in 1891 -> independent in 1917
FDA Approval Process
Merck & Company: Evaluating a Drug Licensing Opportunity



Refreshing the company's portfolio
Merck's 4 most popular drugs generated a revenue of $5.7 billion worldwide, with patents expiring in 2002.
Merck & Co must counteract the loss of sales from expired patents by developing or acquiring licenses to new drugs.

LAB Pharmaceuticals
Specializes in developing compounds for the treatment of neurological disorders
None of their developed drugs have successfully completed the FDA approval processes
2
0
Discovery (2-10 Years)
4
6
8
10
12
14
16
Preclinical Testing
Additional Post-mktg Testing
Phase III
Phase I
Phase II
FDA Review/Approval
Licensing Davanrik
Bid Decision
Merck & Co. should bid to license Davanrik as long as the bid is less than or equal to $13.98 billion.
Success and Failure Rates
Licensing Analysis
The expected arrangement to LAB incl:
+ Initial payment
+ Additional payments after completing each cilinical testing Phase
+ 5% royalty in every Davanrik sale
Value of licence agreement to LAB Pharmaceuticals
Merck & Company's
Financial Health
$5.9 billion in sales (1999), 20% increase from 1998
Current Ratio
Debt-to-Equity Ratio
Total Debt Ratio
Yes
No
0
5
16.68
0
Success
0.60
0
Failure
0.40
0
1
Pursue Phase II
2.5
24.47
24.47
5
0.70
Failure
0
7.5
0.05
Both
0
1
136.11
Pursue Phase III
40
136.11
0
Weight loss only
0.15
1
Pursue Phase III
10
30.44
30.44
1
Depression only
0.10
0
Pursue Phase III
78.5
20
78.5
Success
0.85
0
Failure
0.15
0
1
Launch
87.5
60
87.5
87.5
1
Success
0.75
Failure
0.25
0
0
27.5
17.5
34.75
17.25
34.75
34.75
27.5
Launch
17.5
Failure
0.10
0
47.5
0
Weight loss only
0.05
1
64.75
17.25
Launch
64.75
64.75
47.5
1
Depression only
0.15
0
107.5
60
Launch
107.5
107.5
1
Launch
112.5
Success Both
0.70
0
160
160
160
7.5
5
0
Yes
No
0
-30
10.755
0
Success
0.60
0
Failure
0.40
0
1
Pursue Phase II
-40
37.925
37.925
-30
0.85
Failure
0
-70
0.05
Both
0
1
873.5
Pursue Phase III
-500
873.5
1
Depression only
0.10
0
Pursue Phase III
537.5
-200
537.5
Success
0.85
1200
Failure
0.15
0
1
Launch
680
-250
680
680
-270
-270
Failure
0.10
0
-570
345
Weight loss only
0.05
1
-450
-225
Launch
-450
-450
-570
1
Depression only
0.15
1200
380
-250
Launch
380
380
1
Launch
-400
Success Both
0.70
2250
1280
1280
1280
-70
-30
0
1
16.68
1
10.755
Sensitivity Analysis
Yes
No
0
-30
5.355
0
Success
0.60
0
Failure
0.40
0
1
Pursue Phase II
-40
28.925
28.925
-30
0.70
Failure
0
-70
0.05
Both
0
1
873.5
Pursue Phase III
-500
873.5
0
Weight loss only
0.15
1
Pursue Phase III
-150
-130
-130
1
Depression only
0.10
0
Pursue Phase III
537.5
-200
537.5
Success
0.85
1200
Failure
0.15
0
1
Launch
680
-250
680
680
1
Success
0.75
Failure
0.25
0
345
-270
-220
-100
-225
-100
-100
-270
Launch
-220
Failure
0.10
0
-570
345
Weight loss only
0.05
1
-450
-225
Launch
-450
-450
-570
1
Depression only
0.15
1200
380
-250
Launch
380
380
1
Launch
-400
Success Both
0.70
2250
1280
1280
1280
-70
-30
0
1
5.355
Assumptions
Merck & Co. seeks to maximize profits
Inflation is negligible and does not effect the time-value of money
All launches are successful
All cost estimates and probabilities are accurate
Best Choice Consulting Firm
Yes
No
0
-30
13.98
0
Success
0.60
0
Failure
0.40
0
1
Pursue Phase II
-40
43.3
43.3
-30
0.70
Failure
0
-70
0.05
Both
0
1
879.75
Pursue Phase III
-500
879.75
0
Weight loss only
0.15
1
Pursue Phase III
-150
-36.25
-36.25
1
Depression only
0.10
0
Pursue Phase III
537.5
-200
537.5
Success
0.85
1200
Failure
0.15
0
1
Launch
680
-250
680
680
1
Success
0.75
Failure
0.25
0
345
-270
-220
25
-100
25
25
-270
Launch
-220
Failure
0.10
0
-570
345
Weight loss only
0.05
1
-325
-100
Launch
-325
-325
-570
1
Depression only
0.15
1200
380
-250
Launch
380
380
1
Launch
-400
Success Both
0.70
2250
1280
1280
1280
-70
-30
0
1
13.98
Cashflow 680 = 1200 - 250 - 200 - 40 - 30
Cashflow -570 = 0 - 500 - 40 -30
537.5 = 680*0.85 + (-270)*0.15
879.75 = 1280*0.7 + 380*0.15 + (-325)*0.05 + (-570)*0.1
13.98 = 43.3*0.6 + (-30)*0.4
Success rate
Failure rate
(incl. $5 million initial to LAB
(incl. $2.5 million initial to LAB
incl. additional payment $20M to LAB
incl. 5% royalty fee to LAB
Full transcript