BUAD820 – Case 2
Merck Case Decision Tree and Analysis
Presented By –
Merck & Company :Evaluating a Drug Licensing Opportunity
• Background - Merck & Company :
•In 2000, it was a global research-driven pharmaceutical company that discovers, develop, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit management services through Merck-Medco Managed Care.
•Since 1995 , it has launched 15 new products like Vioxx (treats osteoarthritis), Fosamax(treats osteoporosis), and Singular(treats asthma) and most popular products that generated $5.7B in
worldwide sales (Vasotec, Mevacor, Prinivil)
•The company earned $5.9B on 1999 sales of $32.7B , is 20% better than 1998.
•Its Financial Evaluation & analysis team was working to decide whether the company should license Davanrik that is new drug.*
•To develop compounds for treatment of neurological disorders. •Although company is 15 years old, none of its drug was successfully completed by FDA approval process.
•Its stock price was declined by over 30% and needs cash.
•Therefore, it is looking for a large pharmaceutical company like Merck to license the drug, Davanrik.*
•Originally developed to treat depression and later observed that there was efficacy to treat weight loss.
•It is in pre-clinical development , ready to enter the three-phase clinical approval process.** • Objective
–To Evaluate a drug licensing opportunity by using decision threes.
The Three Phase Clinical Approval Process for Davarink
Purpose to test a
small number of
healthy volunteers for
Sample size : 20-80
2 years to complete
includes an initial
$5MM fee to LAB
Purpose to determine if the drug
is effective in treating a certain
condition like depression and/or
weight loss and to measure side
Estimated probability for
conditions : 10% efficacious on
depression, 15% efficacious on
weight loss, and 5% efficacious
Sample size : 100 – 300 patient
2 years to complete
Cost :$40MM, includes an $2.5
MM licensing milestones
payment to LAB
Purpose to determine
safety and efficacy in
long term use.
Sample size : 1000–
3 years to complete
Cost and probabilities
of success depend on
Phase II outcomes.
• Substantial Potential Profit for Davanrik
If the drug was approved only for the treatment of depression , it would cost $250 MM to launch, and had a commercialization present value (PV) of $1.2B. If the drug was approved only for the treatment of weight loss, it would cost $100MM to launch , and had a commercialization PV of $345MM. If Merck could launch the product with claims for both indications, it would be cost $400MM to launch and have a PV of 2.25B.
Merck Decision Tree for Davanrik
Decision Tree Analysis
• Decision tree for Merck Case is done using Excel
add on tool – Tree Plan. Results are attached here.
Decision Tree Plan
• Net Expected Value of the Decision Tree is =
• Expected Value is Calculated using below formula.
(Profitability of success * payoff if successful) +
(Probability of Failure * payoff if failure)
Licensing Dual Indicator Drug – Depression
and Weight loss
• Expected Value or Profit to launch Dual
Indicator Drug is -
License Depression Drug
• Expected Profit if Drug for Depression is
launched is $537.8 million.
• Launching the Drug for Depression is going to
be still profitable at the end of
Licensing Weight Loss Drug
• Expected Profit value at the end of Phase II for
Weight loss is showing at -$36.25 million.
• Going ahead with Phase III even with success
full testing is not resulting in any Profit....
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