Merck & Company: Evaluating a Drug Licensing Opportunity Essays

1034 Words Oct 15th, 2005 5 Pages
Should Merck license the compound? Merck would be responsible for 1) the approval of Davanrik 2) the manufacture of Danavrik 3) marketing of Danavrik Merck would pay LAB for 1) initial fee 2) royalty on all sales 3) make additional pymts as Danavrik completed each stage of approval process (3 Phases) Additional facts: approval process should take 7 years patent will cover 17 years (7 of approval process nad 10 yr period of exclusivity beginning in yr 7)
1 Assumptions: All Cash flows are expressed as after tax present values discounted to time zero, including capital expenditures At any point "failure," investment decision is to stop funding Assuming Standard deviation of 0.5 Using T= 7 years
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I have listed out the differences between the black-scholes model valuations and the decision tree analysis results below.
I also attempted some sensitivity analysis by changing the standard deviation within the range 0.4 and 0.6 and found that the results were extremely sensitive to the change in volatility."

Simple Expected Value Decision Tree Analysis Valuation Black Scholes Model (Sigma= .5) Black Scholes Model (Sigma= .4) Black Scholes Model (Sigma= .6) Dep alone $34,680,000.00 $48,450,000.00 $57,183,065.00 $35,298,491.00 $79,271,963.00 Dep Both $1,710,000.00 $4,800,000.00 $37,946,960.00 $18,883,685.00 $59,659,834.00 Weigh Alone $1,687,500.00 $(46,852,500.00) $9,078,380.76 $3,945,847.00 $15,426,873.00 Weight Both $(487,500.00) $(97,777,500.00) $3,625,879.00 $940,463.00 $8,247,272.00 Both $26,880,000.00 $64,470,000.00 $102,770,810.00 $62,897,776.00 $143,194,146.00 Failure $(50,490,000.00)

4 Brief one paragraph summary of the Issues you are analyzing We are trying to determine whether Merck should take on the responsibility of funding LAB Pharmaceuticals in the testing, marketing, and maufacturing of the new drug, Davanrik, by utilizing Real Options techniques. Merck would be
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