Merck & Company

Merck & Company

Length: 874 words (2.5 double-spaced pages)

Rating: Excellent

Open Document

Essay Preview

More ↓
Main Issue
In 2000, Rich Kender, Vice President of Financial Evaluation and Analysis at Merck & Company was discussing the opportunity of investing in licensing, manufacturing and marketing of Davanrik, a drug originally developed to treat depression by LAB Pharmaceuticals. LAB proposed to sell the right of all the future profit made from the successful launch of Davanrik at the cost of an initial fee, royalty payments and additional payments as the drug completed each stage of the approval process. Merck & Company's organizational goal is to constantly refresh it's company's drug development portfolio and reach as many customers as possible during the patented time. So there was not only the potential of financial gain or quantitative aspect of the offer, but also the qualitative value which will be added by getting better positioning in the risky pharmaceuticals industry.
Presenting team analysis
The presenting team started out by giving a background about the industry and the companies. The main issue and financial terms were explained. However we feel that some of the assumptions such as Merck's flexibility to back out from building the plant in case of failure were not clearly mentioned. They failed to explain why Davanrik's market risk was lower than its stand alone risk. Discounted cash flow method which is the traditional financial tool for evaluating capital allocation was rejected without explanation. We can rationalize not using DCF for its inability to capture risk uncertainty. Passive investments such as stocks and bonds are good candidates to use DCF on. Once these investments are made investors cannot influence the cash flow generation. We agree that decision tree can be used to make preliminary judgment and real option analysis can be used to get more definitive answer. We think that sensitivity analysis and scenario analysis could have been useful since all inputs may change over time.

Merck's investment valuation
Decision tree approach: This approach is suitable for projects that do not have to be funded all at one time. The alternatives, probability of payoffs are identified using diagrams which are simple to understand and interpret with brief explanation giving important insights. It identifies managerial flexibility to reevaluate decisions using new information and then either invest additional funds or terminate the project.
Results of decision tree:
This analysis shows that the projects NPV as 13.37 million dollar. Our result is slightly different than the presenting team because of rounding. But both of our teams had positive NPV which suggest that the project should be accepted.

How to Cite this Page

MLA Citation:
"Merck & Company." 07 Apr 2020

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Merck's Response to the Vioxx Debacle Essay

- In 2004 Merck was met with serious accusations against the drug known as Vioxx. Vioxx was causing heart complications and increasing the odds of stokes within the patients using the painkiller, in which some cases were fatal. However, according to articles the foremost issue wasn’t Vioxx itself, but rather Merck knew since 2000 that Vioxx possessed these side effects and Merck decided to cover it up for four years, clearly leading to serious public relation issues. Merck was required to preserve the company’s reputation after numerous articles were released, reflecting negatively on Merck’s conduct due to the actions of the Vioxx case....   [tags: Vioxx Case Study]

Free Essays
880 words (2.5 pages)

Business Analysis: Merck & Co. Essay

- Introduction Since its humble beginning as a small drugstore, Merck has placed a large amount of importance on improving the health and well-being of its customers. As drug patents expire and genetic forms of their top products become available, Merck’s strategy is to do the unexpected; instead of raising the price of their older products in favor of patent protected new drugs, Merck focuses on reducing their cost in order to better compete with their generic counterparts. Additionally, Merck’s plan for growth now encompasses a much more aggressive pursuit of new drugs in their pipeline through extensive research....   [tags: Business Analysis ]

Research Papers
1393 words (4 pages)

Essay on The Vioxx Recall - Merck and FDA

- The Central Problem In the Merck, the FDA, and the Vioxx Recall case study, the question as to whether or not Merck conducted itself in a socially responsible and ethical manner with regard to Vioxx is the central problem we will examine in this case. Many argue that the sole problem lies within the pharmaceutical company Merck and Co., Inc., and while that may in fact be the case, other parties such as the Food and Drug Administration (FDA) can be held responsible as well. Merck a “research driven” pharmaceutical company “dedicated to putting patients first,” is one of the largest pharmaceutical companies throughout the world (Presley, 2)....   [tags: Vioxx Case Study]

Research Papers
2574 words (7.4 pages)

Essay on Merck & Co, Inc.

- RECOMMENDATION: Merck & Co., Inc. is one of the largest pharmaceuticals companies in the world. After analyzing recent performances and looking at the current events of the company, it would be in the best interest of a stockholder of “MRK” to either hold their stock or buy more stock dependent upon their current financial situation. Due to recent company developments such as multiple acquisitions and positive financial performances, investors are justified to continue to hold their stocks and potentially even buy more because stock prices will most likely continue to rise....   [tags: Stock, Stock market, Pharmaceutical industry]

Research Papers
1593 words (4.6 pages)

Merck And Its Effects On The Pharmaceutical Industry Essay example

- Introduction: Merck had a reputation of providing the best research in order to find the cure for diseases such as AIDS, tuberculosis, hypertension. They spend on average around $3 billion dollars on research on a yearly basis. However, they needed to produce a drug that would take Merck to the next level. Merck created Vioxx which was designed to treat osteoarthritis and in May 1999, the FDA approved Vioxx making it available with a medical prescription (Snigdha., 2007). During this period they were plenty of changes in the pharmaceutical industry....   [tags: Pharmacology, Pharmaceutical industry, Shareholder]

Research Papers
2243 words (6.4 pages)

Essay External Environment Analysis : Merck & Co

- External Environment Analysis Economy Merck & Co. has to be aware of the economy as with any industry. Within the recession, more and more were looking towards generic substitutes. This can at times not be a problem with patents. However, once a patent is up, a competitor who develops generic versions of Merck’s products becomes a low-cost competitor. However, during the recession from 2008 – 2009, Merck didn’t see any drop in sales. Actually, they were able to keep a continual increase in sales and net income....   [tags: Generic drug, Food and Drug Administration]

Research Papers
1610 words (4.6 pages)

FDA and Merck Essay

- The FDA and Merck Vioxx Scandal In the news recently, many different companies have been recognized for their unethical practices in their company and towards the public. One of these companies is the FDA and Merck. The FDA, the Federal Drug Administration, is one of the most trusted companies in the pharmaceutical market. This company tests different drugs and gives approval for them to be obtainable to the public. Merck is a company that creates these drugs and then has them tested by the FDA for approval....   [tags: essays research papers]

Free Essays
392 words (1.1 pages)

Vioxx and Merck & Co. Essay

- Vioxx/Merck Summary The painkiller Vioxx was introduced in 1999 by Merck & Co. It has been used by over 20 million Americans since it was put on the market. Vioxx remained on the market for approximately five years without adequate warnings about its risks. In September of 2004, Merck took Vioxx off the market after a study revealed that it doubled the risk of heart attack or stroke for patients that used it for more than 18 months. Although Merck claimed that they had no idea of these possibly lethal side effects, some internal documents imply that they had been aware of the problem for years and had not made moves to change it....   [tags: essays research papers]

Research Papers
585 words (1.7 pages)

Merck's Case Ethical Essay

- Merck Case Study Relevant Facts: Merck was one of the largest pharmaceutical companies in the world. Merck was about to lose patent protection of two of its best selling drugs, which had been a significant part of their $2 billion annual sales. Merck began putting millions of dollars into research (up to $1 billion) and within three years, Merck was able to discover four powerful medications. Profits weren’t all that Merck cared about; Merck’s founder believed that "medicine is for people....   [tags: Business Ethics]

Research Papers
1740 words (5 pages)

Essay Why Merck Did Not Act Responsible When The Issues Arose With Vioxx

- Merck did not act responsible when the issues arose with Vioxx. Corporate Sociel responsibility is defined by Investopedia as,” CSR may also be referred to as "corporate citizenship" and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change” ("Corporate Social Responsibility Definition | Investopedia"). During a COMMITTEE ON GOVERNMENT REFORM Dr.Grham testified that,” On the other hand, the FDA seems to be uninterested in the fact that--and part of the reason we are here today, Dr....   [tags: Social responsibility]

Research Papers
856 words (2.4 pages)

The presenting team mentioned coefficient of variation as 18.07 for the expected value which should be the standard deviation. In order to explore other uncertainty we would recommend using scenario and sensitivity analysis since variations in the inputs can largely change the successive outputs. In sensitivity analysis base case situation is developed using the expected values of the input. "What if" questions are asked to capture NPV value change with change in unit sales or variable costs. In Scenario analysis worst-case and best-case scenarios are developed using probability distribution. We are confident from our research that decision trees combined with scenario analysis will give us more reliability of our estimate.
Recommendation: Based on the forecast and profitability suggested by the finance team at Merck and Company the decision tree shows positive effect of Davanrik in its portfolio. Further investigations should be done if there are resources since decision tree result may fail if it is not revised periodically.
Real Option approach: Real option model are based on the assumptions that projects have underlying uncertainty such as the number of sales, variable costs or outcome of a research. The presenting team touched on how opportunities can be compared to managerial options. We would like to add that Merck's current situation can be analyzed using call option analysis where it can choose not to proceed with the project if it does not seem viable at any point. Any start up costs and fees incurred during this process is similar to the exercise price of a regular option. If the value of this option exceeds the cost of the option Merck should go ahead with this project.
Options available:
It is important that managers always look for ways to create options. The followings are the options that are always common and can be evaluated through real option approach while estimating projects value.
Investment timing options:
Rich Kender should check if delaying the project can offset the harm that might cause for delaying. This option adds value by giving the managers more time to analyze the size of the market and viability of the research. One downside would be the threat of competitor companies developing similar product and creating market loyalty.
Growth options:
The opportunity of adding new products has been the strategic mission and competitive advantage of Merck & Company. Even though NPV analysis can show negative result with the current market condition, some projects add value to the company by reaching out to new customers.

Abandonment Options:
Real option analysis considers the value of abandoning project which should be reflected while calculating the NPV.
Flexibility options:
Merck will have the option to alter its operations depending on the outcome of the project. It can increase capacity or cut down production depending on events.
Return to