3 merck & company - evaluating a drug licensing opportunity.pdf
TRANSCRIPT
Risk Based Investment Decision
Case: Merck & Company: Evalua<ng a Drug Licensing
Opportunity
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3
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Davanrik
Depression
Weight Loss
Depression & Weight Loss
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Discovers Develops Manufactures Markets
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Merck
Broad range human and animal health
products
Directly Through joint ventures
Providing pharmaceu9cal benefit management services (PBM) through
Merck-‐Medco Managed care
Role of licensee…
Design
Administer
Fund the clinical tes<ng
of the compound
Manufacturing
Marke<ng
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Lab Merck Davanrik
Responsible for the approval of Davanrik, its manufacture, and its marke9ng Senior researchers: evaluated scien9fic aspects of the compound Marketers: evaluate market size, poten9al compe99on, and requirements to successfully launch the drug Manufacturing manager: determine the capital required to produce the drug Financial experts: financial analysis of licensing decision
Ini9al fee Responsible for the approval of Davanrik, its manufacture, and its marke9ng Royalty on all sales
9 0 8 106 1412 1642
Discovery
Preclinical Testing
Phase I
Phase II
Phase III
FDA Review/Approval
AdditionalPost-marketing Testing
(2-10 Years)
Laboratory and animal testing
20-80 healthy volunteers used todetermine safety and dosage
100-300 patient volunteers usedto look for efficacy and side effects
1,000-5,000 patient volunteers used to monitoradverse reactions to long-term use.
Years
Compound SuccessRates by Stage
5,000-10,000screened
250enter preclinical testing
5enter clinical testing
Approved by the FDA
COMPOUND SUCCESS RATES BY STAGES
Phase I Phase II (clinical tes<ng) Phase III
Tested on 20-‐80 healthy volunteers
100-‐300 of pa<ent volunteers
1000-‐5000 of pa<ents
Tested for Safety Effec<veness Poten<al side effect
Safety and efficacy in long-‐term use
Time taken 2 years 2 years 3 years
Cost $30 million $40 million Depression: 200 mn Weight loss: $150 mn Both: $500 mn
Ini<al fee / Milestone fee to LAB
$5 million $2.5 million Depression: 20 mn Weight loss: $10 mn Both: $40 mn
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Probability of Success Phase I Phase II
(clinical tes<ng) Phase III
Chance of success 60% Depression: 10% Weight loss: 15%
Both: 5%
Depression: 85% Weight loss: 75%
Both: 70%
Depression: 15% Weight loss: 5%
Both: 10%
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Cash Flows Depression only Weight loss only Both
Cost to launch $250 million $100 million $400 million
Commercializa<on present value $1.2 billion $345 million $2.25 billion
All cash flows are expressed as after-tax present values discounted to time zero, including capital expenditures Present value is calculated as the after-tax present value of 10 years worth of cash flows from the drug discounted back to today It was believed that after 10 years, the drug had very little value to the company since it would be ‘off its patent’ by then (and thus a terminal value of zero was used in the calculations)
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Davanrik
In-‐License
Phase I – Success
Phase II – Depression
Phase III – Success
Phase III – Failure
Phase II – Weight Loss
Phase III – Success
Phase III – Failure
Phase II – Both
Phase III – Success – Both
Phase III – Success – Depression
Phase III – Success –
Weight Loss
Phase III – Failure
Phase II – Failure
Phase I – Failure
Do not License
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Possible Outcome
Davanrik
In-‐License
Phase I – Success 60%
Phase II – Depression
10%
Phase III – Success 85%
Phase III – Failure 15%
Phase II – Weight Loss 15%
Phase III – Success 75%
Phase III – Failure 25%
Phase II – Both 5%
Phase III – Success – Both 70%
Phase III – Success – Depression
15%
Phase III – Success – Weight Loss
5%
Phase III – Failure 10%
Phase II – Failure 70%
Phase I – Failure 40%
Do not License
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Probability
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Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
Cash Ou_low
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Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
$1200 mn
$345 mn
$2250 mn
$1200 mn
$345 mn
Commercial Value
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
0.90%
2.25%
0.30% 42%
40%
Total: 85.45%
Failure Probability
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
5.10%
6.75%
2.10%
0.45%
0.15%
Total: 92.55%
Success Probability
60% 6%
9%
3%
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
5.10%
6.75%
2.10%
0.45%
0.15%
0.90%
2.25%
0.30% 42% 40%
Total: 10%
Total Possible Probability
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
$680 mn
$25 mn
$1280 mn
$380 mn
-‐325 mn
-‐$270 mn
-‐$220 mn
-‐570 mn -‐$70 mn -‐$30 mn
Cash Flow Outcome
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
5.10%*$680 mn = $34.7 mn
6.75%*$25 mn = $1.7 mn
2.10%*$1280 mn = $26.90 mn
0.45%*$380 mn = $1.70 mn
0.15%*-‐$325 mn = -‐$0.5 mn
0.90%*-‐$270 mn = -‐$2.4 mn
2.25%*-‐$220 mn = -‐$5 mn
0.30%*-‐370 mn = -‐$ 1.7 mn 42%*-‐$70 mn = -‐$29.4 mn
40%*-‐$30 mn = -‐$12 mn
Total: $14 mn
Expected Cash Flow
Expected value = weighted average outcome, where the weights are probabili9es of each state
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
Total: $9.8 mn
Expected Milestone Payment
60% * $2.5 mn = $1.5 mn
6%* $20 mn = $1.2 mn
9% * $10 mn = $0.9 mn
3% * $40 mn = $1.2 mn
100% * $5mn = $5mn
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
5.10% * $1263 mn *5% = $3.22 mn
6.75% * $363 mn * 5% = $1.23 mn
0.15% * $2368 mn * 5% = $2.49 mn
2.10% * $1263 * 5% = $0.28 mn
0.45% * $363 mn * 5% = $0.03 mn
Total: $7.25 mn
Expected Royalty Payment
Davanrik
In-‐License -‐$30 mn
Phase I – Success 60%
-‐40 mn
Phase II – Depression 10%
-‐$ 200 mn
Phase III – Success 85%
-‐$250 mn
Phase III – Failure 15% -‐$0
Phase II – Weight Loss 15%
-‐$150 mn
Phase III – Success 75%
-‐$100 mn
Phase III – Failure 25% -‐$0
Phase II – Both 5%
-‐$500 mn
Phase III – Success – Both 70%
-‐$400 mn
Phase III – Success – Depression
15% -‐$250 mn
Phase III – Success – Weight Loss 5%
-‐$100 mn
Phase III – Failure 10% -‐$0
Phase II – Failure 70% -‐$0
Phase I – Failure 40% -‐$0
Do not License -‐$0
Expected Value of Perfect Informa9on (EVPI)
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Expected value of perfect informa9on (EVPI) = measures the difference, or the gain due to perfect informa9on EVPI = measures the difference between certain payoff that could be realized under a condi9on of certainty and the expected payoff under a condi9on involving risk EVPI = EPC – EMV EPC = expected payoff under certainty
$680 mn -‐ $34.7 mn = $645.3 mn
$25 mn -‐ $1.7 mn = $23.3 mn
$1280 mn -‐ $26.90 mn = $1253.1 mn
$380 mn -‐ $1.70 mn = $378.3 mn
-‐$325 mn + $0.5 mn = -‐$324.5 mn
-‐$270 mn +$2.4 mn = -‐$267.6 mn
-‐$220 mn +$5 mn = -‐$215mn
-‐370 mn +$ 1.7 mn = -‐$368.3 mn -‐$70 mn +$29.4 mn =
-‐$40.6 mn
-‐$30 mn +$12 mn = -‐$18 mn
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CB Techniques
Non Risk Based – Non-‐Discoun9ng
Techniques
PBP
ARR
Non Risk Based – Discoun9ng Techniques
NPV
IRR
MIRR
PI
EA
Risk Based Techniques
Sensi<vity analysis
Scenario analysis
Certainty equivalent model
Decision tree analysis
Dura<on
Simula<on
Risk adjusted discount rate
Real op<ons
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Non risk based techniques assumes that all projects were to be equally risky, acceptance of any project would not alter the firm’s overall risk