Executive Summary
The pharmaceutical company Merck has traditionally sold medicines and products that have been developed through its internal research. So, it is not surprising to see that the company spends quite a large amount of money on research. This is reflected in its financial statement as given in the exhibit 1. The R&D expenditure is about 7% of Merck’s revenues. The life cycle of a drug takes it from the research labs to three phases of testing, each increasingly complex, then through a rigorous Food and Drug Administration (FDA) approval process before it can be marketed and sold. The entire cycle of testing from the time the drug has been lab tested to market can take up to seven years. And, there is inherent risk involved in any drug making through this rigorous process of testing.
The most popular and most profitable drugs from Merck include Vasotec, Mevacor, Prinivil and Pepcid, generating $5.7 billion in worldwide sales, in the year 2000. The patents for these drugs stand to expire in 2002, making the formula for these drugs available for generic drug makers. This would cut into the anticipated sales of these drugs, since Merck would no longer be the sole manufacturer of these drugs. Any new drug will take longer than the two years to become marketable. In order to offset this, Merck is considering the purchase of the licenses for Davanrik from LAB Pharmaceuticals. Davenrik has just completed pre-clinical development and is ready for the clinical approval process of 7 years. If purchased, Merck would be responsible for the clinical trial process.
Merck has hired us to determine if it should buy the licenses of Davanrik from LAB Pharmaceuticals. Merck has retained us to determine the financial viability of entering into the licensing agreement. We used the Net Present value of the Future Cash Flow and the effective payoff method to determine if