Merck Case Study

Statement of the Problem. Many of Merck’s most popular drugs, VasotecTM, MevacorTM, PrinivilTM, and PepcidTM are approaching their patent expiration date; these drugs have generated $5.7B in Merck’s worldwide sales. It is expected that sales of these products will drop precipitously as generic substitutes become available after patent expiration. Merck has an opportunity with LAB Pharmaceuticals to license Davanrik which is currently in pre-clinical development and was originally developed to treat depression but it also has the potential to treat obesity by blocking the receptor that causes hunger. The proposal, if approved, would require Merck to design, administer, and fund Davanrik’s clinical testing, and manufacture and market the drug.

Discussion. Merck is a global research-driven pharmaceutical company that develops, manufactures, and markets a broad range of products. Merck has a history or producing successful products beyond the products mentioned above, including VioxxTM, FosamaxTM, and SingulairTM. Both sales and net income rose significantly from 1998 to 1999 with sales surging 22% to $32.7M and net income rising 12.2% to $5.9B in 1999. Short and long-term investments have risen in this period by 57% and 32%, respectively. The development of pharmaceuticals is a high cost business especially for R&D and the long FDA clinical approval process. The approval process can take 7 years, which leaves only a 10-year period of exclusivity within the 17-year patent life.

The FDA approval process is a 3 phase process and is designed to test the efficacy and safety of Davanrik. Phase I will take 2 years and consist of administering Davanrik to 20-80 people to determine if it’s safe enough to continue to Phase II. Phase II (2 ...

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...25M since the Phase I and II costs are now sunk costs and not considered in determining financial impacts and probability of the deferred path for Phase III weight loss trials. Milestone payments and royalties are unchanged from LAB’s proposal which include an initial $5M licensing fee, $2.5M Phase II milestone payment, $20M Phase III milestone payment for depression, 5% royalties on sales, and a $10M Phase III milestone payment for weight loss should that option be exercised at a later date. If Merck accepts the LAB proposal as-is, Merck should negotiate to receive downstream preferences for future drugs developed by LAB. This strategy provides a win-win solution for both Merck and LAB; it significantly reduces risk and cost for Merck, provides financial stability for LAB, and creates a foundation for success as future development, testing, and marketing partners.