Statement of the problem
Merck & Co. Inc. is a large multinational pharmaceutical company engaged in research and manufactures a wide range of medicines and drugs for human and veterinary use.
The problem currently facing the company is that four of its most popular drugs would be facing substitutes in the market which will result in volume of sales to come down. These four drugs together contribute nearly 29% of the company’s total revenue. The reason for substitutes appearing is that the patent for these four drugs is set to expire in 2002. The option for drug companies in such a situation is to introduce new drugs into the market
Merck and company had been given an offer to test and license a new drug developed by LAB Pharmaceuticals a relatively small research company.
The drug in question was developed for treating depression. Due to its action on receptors in the brain, researchers at LAB found that it may also help to cut down hunger and hence be used as a weight loss drug also. The combination, if successful would generate huge revenues for Merck and hence their Financial Evaluation and Analysis Department is now assigned to study the potential success of the drug in three areas. The first is to see whether the drug could be used to treat depression, secondly to see whether it can be marketed for weight loss and thirdly its chances at achieving both the above results.
Statement of Assumptions
Merck & Co Inc. is considering licensing a new drug called Davanrick, which is primarily intended to treat depression, but has the potential to be marketed as a weight loss drug also. The drug was developed by LAB Pharmaceuticals and they have approached Merck for licensing the drug. LAB is facing a financial crunch and hence is unable to license the drug by themselves. Obtaining a license for a new drug is a very costly and time consuming affair. Any pharmaceutical company would have to weigh all its options before embarking on such a process and Merck is no exception. An analysis of the situation was undertaken and the following assumptions are given here. The licensing procedure has to undergo three phases of clinical trials before being allowed to be marketed. The drug has a 60% chance of getting through the first phase. This is a good percentage as far as new drugs are concerned.
Estimated costs of completing phase are 30 million dollars. Phase two is more complicated because two studies, one for depression and the other for weight loss, are conducted here. It is estimated that the percentage of the drug’s success as an antidepressant is 10%, its effectiveness for weight loss is 15% and for both the above, only 5%. The total estimated cost for completing the second phase is 40 million dollars. Phase three will ultimately show the outcome of the whole process. Estimated costs of the drug being passed as an antidepressant is 200 million dollars and chances of success are 85%. A success rate of 75% and costs of 150 million dollars is assumed for the Davanrik being marketed as a weight loss drug only. The success rate of the drug at this time as a solution for either of the two problems is 70% and the drug can be marketed at this stage. But more resources and time will have to be spent to see its efficacy for both the problems. Success for depression alone is 15%, weight loss alone is 5% and dual success rate is 10%. Total costs are estimated to be 500 million dollars.
Pre launch expenditure as an antidepressant is expected to be 250 million dollars and total income for the life of the drug would be 1.2 billion dollars. Expected profit is 680 million dollars. As a weight loss drug, launch expenditure is 100 million dollars, revenue is 345 million and profit is 25 million. Marketed as a solution for both problems, launch expenditure is 400 million, revenue is 2.25 billion and profit is 1.28 billion. A decision tree is appended for reference.
Key facts: Apart from royalty on all sales, payments of 5 million in phase 1, 2.5 million during phase 2 and 20 million at the end of phase 3 have to be paid to LAB Pharmaceuticals as a part of the licensing agreement (Total payment will come to 26.5 million). Phase 1 would take two years to complete and will need 20 to 80 volunteer patients, phase 2 will need 100 to 300 volunteer patients and two years to complete and phase three will need 1000 to 3000 volunteer patients and three years to complete.
Alternative solutions
- Merck Co. Inc. can market the drug as soon as trials find efficacy for either depression or for weight loss.
- The company can develop a similar drug abandoning Davanrik totally..
The first alternative would be a safer bet if the company is unsure whether Davanrik would be effective for both problems. It will also cut losses if by any chance the fails to clear phase 3. Launch costs could be reduced considerably. The second alternative would mean that the company can save license agreement fee to be paid to LAB Pharmaceuticals. Additional profits can be generated because no royalties have to be paid.
Alternative 2 would be the better option since the company cannot expect to generate much profit if the drug is marketed for either of the problems as stated in alternative ‘a’. Moreover Merck already would have some drugs that are ready for testing and it would be better if the company uses its resources for marketing its in house products.
Decision
After discussing and analyzing the above mentioned suggestion, Merck Co. Inc. has decided to drop the idea of licensing Davanrik and instead focus on starting clinical trials for its own products.