Merck & Co.: Evaluating a Drug Licensing Opportunity
Davanrik is a new drug developed by LAB Pharmaceuticals, which has the potential to treat depression and obesity. Davanrik was initially developed to treat depression by stimulating the receptor in the serotonin system that promotes anti-depression. However, it was discovered that Davanrik also blocks the receptor that causes hunger. LAB Pharmaceuticals obtained a patent for Davanrik with a max remaining life of 17 years.
LAB Pharmaceuticals is a small and relatively new (15 years) company in the pharmaceutical field. LAB Pharmaceuticals has never had any of their compounds successfully complete the FDA approval process and in a response to a denial of a recent compound, the company’s stock dropped by over 30%. In 2000, needing an in-flow of cash and also lacking the resources to complete the time-consuming FDA approval process, LAB Pharmaceuticals approached Merck & Co., a research-driven pharmaceutical company with presence in the global market, with an offer to license the Davanrik compound. In the terms of the license, Merck would be responsible for the approval process, the manufacturing, and the marketing of the drug. This opportunity is one to consider for Merck because of their expiring patents on four of their most popular drugs (Vasotec, Mevacor, Prinivil, and Pepcid generated $5.7 billion in worldwide sales in 1999) in 2002.
Merck’s evaluation team estimates that the approval process will take a total of seven years. With the 17-year life of the patent, this gives Merck 10 years of exclusivity. The financial team also estimates the likelihood and costs of completing each step in the approval process (see tree-diagram below). Their forecast predicts large profits if Davanrik can effectively treat both depression and obesity ($2.25 billion present value with $400 million cost). The forecast for the treatment of depression...