Merck & Company Evaluating a Drug Licensing Opportunity

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Table of Content | |Page | |1. Executive Summary…………………………………………………………… |1 | |2. Main Report…………………………………………………………………….. |2 | |3. Bibliography…………………………………………………………………….. |6 | 1. Executive Summary In 2002 the patents for the most popular drugs which generated $5.7 billion in worldwide sales would be expired. In order to anticipate the loss of…show more content…
[pic] Assuming that LAB receive 5% royalty annually on any cash flows received from Davanrik, the total value on royalty fee for the whole 10 years (started from launching) will be $91 million. Considering this fee, the expected value of licensing arrangement to LAB should be at max. $29 million. [pic] The launching cost, if Davanrik is approved only for depression, will be $250 million and $100 million if it is approved for weight loss only. If it is approved for dual indication, the launching cost is estimated to be $400 million with present value of 10 years worth of $2.25 billion. If the launching cost for weight loss is 225% beyond the estimation, the NPV is still in positive result: $42 million (disregard the royalty fee). By getting the exclusivity of Davanrik from LAB, Merck become the only manufacturer of this product, therefore Merck can put high price in order to cover the high expenses during the approval process. Since the patent has life only for 17 years (7 years is approval process); Merck has to consider that the revenue can first be expected on the 8th year. Patents have a limited life time and as it expires, generic substitutes tend to emerge on the market which causes a decrease in Merck’s product sales. In order to cover the loss of sales, Merck should constantly update the product portfolio by investing in the development of new products that could be patented. Merck should also diversify in order

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