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MERCK & COMPANY EVALUATING A DRUG LICENSING OPPORTUNITY Case Solution & Answer

Merck & Company EVALUATING A DRUG LICENSING OPPORTUNITY Case Study Solution

Introduction – Merck & Co.

Merck is an internationally researched pharmaceutical company that has been operating in the market for some time, and it is successful. At that time, the company’s most popular pharmaceutical patents (such as Pepcid, Prinivil, Vasotec and Mercator) expired in the year 2002.(Ruback, 2003).

Because generic drug substitutes will primarily replace these compounds if Merck does not introduce a new drug to the market; Merck could lose nearly 50% of its sales, equivalent to 5 times losses of $ 7 billion. Through in-house research and joint ventures with other biotechnology companies; the company regularly updates its product portfolio in order to maintain and stabilize its cash flow.

In 2000, LAB Pharmaceuticals and Merck & Co. entered into a quasi-license agreement for the new Bavarian compound. It was originally used to treat depression, but clinical studies have shown that the drug has the effect of blocking antidepressant receptors and hunger-causing receptors, so the compound can be used in depression as well as in obesity’s treatment. The company lacks marketing and marketing experience, because none of drug has ever gone through the FDA approval process.

As the FDA recently refused to use another compound; the company is reluctant to issue low-priced shares to fund the third phase of the clinical trial process, as the share price is more than 30%. In these drug licensing transactions; several tasks are shared between the licencor and the licensee.

Merck (Licensor) is responsible for the approval, manufacture and distribution of Bavarian. Initial license fees, royalties for all sales, and all additional fees are paid to the LAB (licensee) when Bavarian completes each step of the approval process.

Rich Sender, the vice president of financial valuation and analysis at Merck, is working with a team to decide whether the company should license Davanrik or not. Merck must also decide and analyze the number of bids and the likelihood of drug failure / success during the FDA’s seven-year approval process. The commercial shelf life of the drug will be ten years, after which it would become less valuable.

The purpose of this article is to describe Merck’s business model and its success in the pharmaceutical industry. In addition, it uses the decision trees of Merck and LAB Pharmaceuticals to assess Devanagari’s financial potential and advise on pursuing a licensing transaction.

Merck & Co.’s Business Model

Merck’s compounds are involved in drug development. Before a successful drug is introduced; the research and development work required is a long and time-consuming process and therefore it is very expensive. However, Merck has proven to be fully capable of a high return on capital. Return on assets (RoA) has averaged around 16.5% over the past two years. This is the result of many factors.

First, Merck was able to achieve significant sales. Since 1995, Merck has launched 15 new products, with sales of $ 32.7 billion in 1999, including pharmacy care (PBM) services……………

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