INDIAN INSTITUTE OF

MANAGEMENT RANCHI

Project report on case study

Merck & company

Course: Operation Research
Batch: 2018-20
Team Members:
Jafar ghori (X012-18)
Manish kumar (X015-18)
Ujjwal kumar (X021-18)
Rohan kumar (X017-18)
Shyam kumar (X019-18)
 MERCK & COMPANY
About :
• Global research –driven pharmaceutical company.
• Discovers , develop , manufacture product through
and markets healthcare products through Merck and
joint ventures

Top selling products :

• Vasotac • Vioxx
• Mevacor • Singulair
• Prinivil • Fasomax
• pepcide

Challenges :
• Patents for majority of popular drugs are to expire in 2002.
• Once the patents expire ,sales are expected to drop due to
presence of generic version.
• New drug development to counter the anticipated loss
 Problem statement

1. Design a decision tree that shows the cash flow and

probability at all stages of the FDA approval process

2. Should Merck bid to license Davanrick ? How much they

should pay.

3. How much should Lab expect to receive from the

proposed deal.
Decision tree
Ans-1: Decision Tree for FDA approval process
Q-2: Should Merck bid to license Davanrik?
How much should they pay?
Cash flow Probability (in Expected value
(in Million $) %) (in Million $)
Launch depression 680 5.1 34.68
Failure -270 0.9 -2.43
Launch Wt loss 25 6.75 1.69
Failure -220 2.25 -4.95
Launch both 1280 2.1 26.88
Depression only 380 0.45 1.71
Wt loss only -325 0.15 -0.488
Failure Both -570 0.3 -1.71
Phase -1 failure -30 40 -12
Phase-2 failure -70 42 -29.4
EMV 13.98
Ans: EMV of the decision tree is positive i.e $13.98M,
hence Merck should license Davanrik
Q-3: How much should Lab expect to receive from
the proposed deal?
Expected value of success payment to LAB
Expected
Assumed Royalty = 5%
Payment Payment (in The cash flows of LAB are :
Phase (in Million $) Probability Million $) $ 5 million initial licensing fee in Phase I ( irrespective of
Initial 5 100% 5 success of Phase 1)
Phase I Success 2.5 60% 1.5 $ 2.5 million in Phase II (Probability of occurrence 0.6)
Phase II Phase III
Depression 20 60% X 10% 1.2 $ 20 million if the drug cures only depression
Phase II Wt Loss 10 60% X 15% 0.9 (Probability of occurrence 0.1)
Phase II Both 40 60% X 5% 1.2 $ 10 million for weight loss only (Probability of
Total 9.8 occurrence 0.15)
$ 40 million if drug cures both depression and weight
loss (Probability of occurrence 0.05)

Expected value of Royalty Payment to LAB

Probability at Assumed Expected
Cash Flow Stages Probability (%) Royalty (%) Royalty (%)
Depression 1200 60%*10%*85% 5.10% 5% 3.06
Weight Loss 345 60%*15%*75% 6.75% 5% 1.16
Phase-II Depression 380 60%*5%*15% 0.45% 5% 0.09
Phase-II Wt loss 325 60%*5%*5% 0.15% 5% 0.02
Phase-II Both 2250 60%*5%*70% 2.10% 5% 2.36
4500 14.55% 6.70
Expected profit = (EV of Success Payment) + (EV of Royalty Payment)
= 9.8 + 6.7
= $16.68M
Conclusion…

With an expected profit of $16.68M , Merck to move forward with the licensing
proposal from lab pharmaceuticals.

It would be beneficial for LAB also to move forward with their proposal of licensing
to Merck