Part 2

Without considering the 5% royalty fee, the expected value of the whole licensing project is $ 13.98 million (shown in Figure 1). More exactly assessing, we actually need to take the 5% royalty fee into account, which is a type of cash outflow from the perspective of Merck. In this regard, the NPV of the licensing arrangement to Merck drop to $ 7.0973 million (shown in Figure 2). According to the draft of contract regarding to the licensing arrangement between Merck and LAB, the would-be royalty on the eventual sales of Davanrik seems to a must-be terms in the contract, contrary to a contingency provision. So to speak, assuming other things are constant and the royalty fee rate fixes at 5%, the bid to license Davanrik, at the standing point of Merck, should not exceed $ 7.0973 million.

In contrast to the NPV of $ 7.0973 million to Merck, the NPV to LAB is $ 16.6828 million (shown in Figure 3), based on the same assumptions. In other words, if Merck pay any bid amount higher than $ 7.0973 million, the licensing project seems to be economically unattractive, while in the eyes of LAB, the project would still worth $ 16.6828 million even without that cash inflow from initial bid.

Combining both sides analysis, it makes sense for Merck to bid for licensing Davanrik at a price not higher than $ 7.0973 million. Furthermore, even Merck bid at $ 0, the project seems to create positive NPV to both parties. However, in reality, Merck has to consider the health of business relationship between as well for long-term cooperation with LAB, or other factors, like