Merck & Co. has been a global leader in pharmaceutical research and has been enjoying a strong position in the industry. It has been successful in creating a gross profit margin of about 45% for the past three years and a net margin of about 20% every year. However, the company would suffer severely in the near future, as most of its existing patents would expire by 2012. To overcome this challenge the company has decided to take the license of Davanrik, an antidepressant that could work as an antidepressant and also for weight loss from a small drug research company LAB Pharmaceuticals.
The drug has a high failure rate and a high gestation period, but a cash flow analysis shows a $ 13. 98 million positive cash flow, which is depicted from a decision tree. The project has an expected value of $ 16. 68 million and should be more profitable after the initial costs have been recovered. Merck & Co. Inc. , desires to continue with the licensing of Davanrik, keeping in mind the need to sustain itself from an onslaught of generic substitutes that would be available in the market, once the patents that Merck possesses expires. Introduction to the case In the year 2000, it dawned on the management and leadership of Merck & Co.
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, Inc. that most of their licenses for patents would expire in the year 2002. Merck & Co. , Inc. has been a research driven global pharmaceutical leader that discovers, manufactures and markets a wide range of human and animal products. The company has been very successful and popular for its several initiatives in research over the years. However, it faces a challenge currently, which can cause a severe fall in revenues if the company does not take adequate measures to focus on research. LAB Pharmaceuticals, a company that specializes in developing compounds for treatment of neurological disorders, offers Merck & Co. , Inc.
to license ‘Davanrik’, a drug being developed by LAB Pharmaceuticals, to help reduce depression, obesity and possibly both too. However, the drug was in the pre-clinical stage and was not yet ready for manufacturing. It had to go through the three-phase clinical tests approved by the FDA, before being available for mass production. The testing phase of the product would be substantial and would go on for almost seven years, which can be a very costly affair, and has a huge chance of failure, especially during the first and second stages. The licensing agreement between Merck & Co. , Inc. and LAB Pharmaceuticals states that Merck & Co.
, Inc. would be responsible for all approvals from the FDA, the complete end to end manufacturing process and also the marketing of the product, until it reaches the final customer. In return for the right of licensing, Merck & Co. , Inc. would pay LAB Pharmaceuticals an initial fee, a royalty on the sales and make additional payments to LAB at every stage of approval. The proposition is not without its share of concerns, but one major factor that is driving Merck to accept the offer is due to the simple fact that Merck is soon going to lose a significant market share when generic substitutes for its patented products are available.
Also, the deal does seem lucrative as it generates a Present Value of Net Cash flow’s to the tune of $ 13. 98 million within a three year period. Hence, over the period of the license the investment should yield high yield for Merck & Co. , Inc. , reducing the loss caused by the expiration of many other patents. The analysis of the required questions, along with all exhibits, tables and illustrations are studied below.
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