Merck & Co

1066 WordsMay 21, 20125 Pages
Executive Summary 1. How has Merck been able to achieve substantial returns to capital given the large costs and lengthy time to develop a new drug? Merck had a 14% increase in sales between 1997 and 1998 and 22% increase in sales from 1998 – 1999, and a 13% annual increase in earnings over the same period. Merck’s business strategy consists of two parts: (1) developing and marketing new drugs through internal research, and (2) developing partnerships with smaller biotechnology companies. Since 1995, Merck had launched 15 new products that earned $5.9 billion on sales of $32.7 billion. Furthermore, Merck may agree to license new drugs from other firms and with its larger capital and greater assets, can assume the risk of submitting…show more content…
Merck should take this into consideration in its decision-making and negotiation with LAB. Recommendation Based on our analysis, the value of this license is $13.98 million so we recommend that Merck agrees to accept the agreement but for a bid price up to that amount. We also suggest that Merck consider another option, which is to eliminate the license fee ($5 million, $2.5 million and $10-$40 million in Phase I, II and III respectively) and instead, pay Merck a royalty fee on any sales of the drug. Under the current agreement, Merck bears all the risk while LAB bears none. Even if the drug fails FDA approval, Merck would still need to pay an expected $9.8 billion in licensing fees to LAB in addition to all the costs for FDA testing. Instead, Merck should consider removing all licensing fees and only offer a royalty. This way, both LAB and Merck would have a strong incentive to seeing that the drug passes FDA testing. In that case, Merck should offer a royalty of 9.03% to LAB, which will give LAB an expected $9.8m in royalty. Without the licensing fee, Merck can offer up to 21% royalty fee (Appendix 4). The sensitivity analysis in Appendix 4 provides a benchmark for Merck to negotiate with LAB (no higher royalty fee than 21% without licensing and maximum of 12% with the licensing fee of $9.8m as in the current situation). This will be a win-win solution for

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