Business description In 2000 Merck is a successful pharmaceutical company with a handful of drugs developed internally as well as in joint-ventures. Its success however linked to the exclusivity rights of its patents, which makes its investors concerned about the close expiration (2002) of several patents of its blockbusters, which would dry out future revenues. The long-term viability of the company depends thus on the ability to refresh its portfolio of patent-protected drugs in order to counterbalance the loss of sales resulting from the generics. The large financial capacity of Merck & Co enables the company to buy rights to test, manufacture and market compounds which were generated by smaller companies which lack the capital or want
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To make it easy to interpret, for every phase we have computed the net present value and we have considered only the expected payoffs and costs incurred after the decision; the final payoffs don’t include thus all the costs incurred during the decision making process. This approach makes the decision process straight forward: if the expected payoff of a decision in positive then the company will proceed with the phase, if not the company will chose not to continue and get a NPV of 0. This model is the basis for the answers to the following questions and can be seen in the Appendix.
Project’s value for Merck In order for Merck to bid for licensing Davanrik, it should have a positive NPV; the company will get positive payoffs only if the drug passes all the three testing phases and it is released on the market and it will have to pay for every phase of the testing, a royalty fee to LAB as well as an initial price for obtaining the contract. All the payoffs are actualized in time 0, so they don’t have to be discounted, the present values of the future cash flows post phase III exclude already the royalty fees towards LAB and the costs per phase already include the price LAB will get per phase; the NPV of the project for Merck is 13.98 mil as shown in the first decision