Create a decision tree for Merck. The 2 leftmost branches would identify the alternatives related to licensing Davarink (specifically license versus not to license). Next, if Merck decides to pursue license, they go into phase I which results in a success, or failure. Phase I success is followed by phase II where Merck has the opportunity to develop the drug to treat depression alone, weight loss alone, or both, or contemplate phase II failure. Finally phase II success for different options leads to phase III, and there are success or failure related outcomes for each of the alternatives in phase II (i.e. developing the drug to treat depression, weight loss, or both).
HINTS: Within each phase, remember that the probabilities of various outcomes (including failure, which is not always mentioned as an option) should add up to 100%.
In each phase, the stated cost already includes fees paid to LAB. For example, cost of Phase I is $30 million (this number includes $5 million paid to LAB).
A careful read of the case is critical to get the tree, various probabilities and the cash flows right. Please be sure to include your decision tree along with your answer to the questions below.
1) What is the expected value in launching Davarink as an antidepressant only?
2) What is the expected value in launching Davarink to treat only weight loss?
3) What is the expected value in launching Davarink for possibility of separate indications for depression, weight loss along with dual purpose in treating depression and weight loss?
4) What is the expected value in launching Davarink (i.e. what is the expected value for the entire decision tree)?
What to submit?
Please submit one hard copy of the report per team. List the last names of team members on the cover page in alphabetical order. Be sure to use a software package to draw your decision tree diagram. Possible choices are EXCEL (I can show you how...