# Merck and Company: Evaluating a Drug Licensing Opportunity

Topics: Decision tree, Arithmetic mean, Variance Pages: 2 (306 words) Published: October 14, 2008
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 in Black-Scholes Valuation

2 Decision Tree
See worksheet "Decision Tree"

3 Detailed description of Real Option Technique
"First, using a decision tree, I came up with a simple expected value of \$13,980,000......

Merck & Company: Evaluating A Drug Licensing Opportunity
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 in Black-Scholes Valuation

2 Decision Tree
See worksheet "Decision Tree"

3 Detailed description of Real Option Technique
"First, using a decision tree, I came up with a simple expected value of \$13,980,000 based...