Merck & Co.

: Evaluating a Drug Licensing O DECISION TREE

Success Phase II

10%

15%

Depression Only

Weight Loss Only Phase III

85%

15% 75% 25% 70%

Success

Failure Success Failure Success Both

Considering all the possible outcomes and expected cash flows, the licensing project yields an expected net prese our recommendation is that Merck should take up the licensing opportunity. This particular investme Note : Please refer to calculations sheet

ating a Drug Licensing Opportunity DECISION TREE

Investments Phase I 60% 40%

Failure Phase II

30,000,000.00

5%

70%

Both

Failure

40,000,000.00

se III

15%

5%

10% $ 200,000,000.00 $ 150,000,000.00

Depression Only

Weight loss

Failure

$ 500,000,000.00

oject yields an expected net present value of $13.98 Million. Since the net expected value is positive, portunity. This particular investment is expected to add $13.98 Million to the firm value.

Cash flows Investments

Phases Phase I Phase II Phase III

Possibility

In $ Million 30 40

For Depression For Weight Loss For Both For Depression For Weight Loss For Both

200 150 500 250 100 400 1200 345 2250

Market Launch

Payoffs For Depression For Weight Loss For Both

Phase I

Success Failure

Phase II

Depression Only Weight Loss Only Both Failure Considering results of Phase II Depression Only Success Failure Success Failure Success In both Success in Depression Only Success In Weight Loss Only Failure

Phase III

Weight Loss Only

Both

% Probability

Cash Flows

NPV

Investment

Expected Payoff

0.6 0.4

73.3 0

43.98 0

30

13.98

0.1 0.15 0.05 0.7

607.5 33.75 949.75 0

60.75 5.0625 47.4875 0

40

73.3

0.85 0.15 0.75 0.25 0.7 0.15 0.05 0.1

1200 0 345 0 2250 1200 345 0

807.5 0 183.75 0 1295 142.5 12.25 0

200

607.5

150

33.75

500

949.75