Merck Case Study

Merck

by eespinel | studymode.com

Executive Summary (Farzan's Part)

‍Introduction To Company and Problem (Farzan)

‍Methodology

The decision analysis that we did encompassed a number of different aspects. First we had to describe what the optimal decision would be based on the probabilities and the payoffs. For this, we designed a decision tree model to reflect the decisions that we to be made at each step, furthermore, the events that are out of control of the company are represented by chance nodes. After completing the outline of the model, we proceeded to “foldback” the tree to find out which decision would give us the highest Expected Monetary Value (EMV) calculated using the following formula: EMV = PAMA + PBMB (Dont worry about the formatting yet...we will do that section later)

Where:

PA = Probability of event A

PB = Probability of event B

MA = Payoff of event A

MB = Payoff of event B

Based on this analysis, we have can make a decision that will maximize our long term expected monetary value. Further, the decision tree allows the user to visualize the decision outcomes and the associated likely hoods involved with each decision.

(Added the Following Section)

The concept of risk was an important conclusion of the decision tree. After discussion, we contacted the consulting firm of Foresight Consulting to help manage this risk. They informed us that they have a method to determine the outcome of Phase I and Phase II before actually conducting these expriements, however, they did not quote a price. To further advance this analysis, we calculated the Expected Value of Perfect Information (EVPI). This figure tells Merck the maximum they should be willing for Foresight's services.

Another method of examination was to consider a sensitivity analysis. We used the existing decision tree model and applied a Monte Carlo simulation on some of the variables. The Monte Carlo simulation is used in stochastic and nondeterministic fields by using a pseudorandom algorithm to calculate a forecast cell. A total of three simulations were run. In the first simulation we varied costs associated of each Phase and the payoffs of successful drug release. For the second simulation we varied the probabilities accompanying each successful outcome. And the third simulation was a combination of the last two where we varied both the dollar amounts and the probabilities associated with each outcome. For each of the simulations we were given a mean and standard deviation for the forecast cell. Furthermore, we were able to perform a sensitivity analysis that shows which variable affects the forecast cell the most. Based on these sensitivity numbers we came up with ways so that Merck can control their risks and avoid losing too much money.

‍Analysis and Key Findings

(Need a transition paragraph)

‍Decision Tree

Expected Monetary Value

Two possible alternatives were examined: to buy the patent for KL-798 or not to buy. If the drug is purchased and Merck follows through with the research then the Expected Monetary Value of this option would be a loss of $ 260 000.00. This Criterion is calculated using the decision tree in Appendix A Decision Tree Diagram on page ZZ (When Referencing to the appendix we need to make sure we mention the page number).

The Decision tree shows what decision should be made given the circumstances. First, assuming that Merck will proceed with the purchase of KL-798, Merck will have to make a choice as to whether to complete Phase I, which only has 60% chance of success and will cost 5Million dollars. If they pass phase I, according to the EMV criterion, it would be advisable to continue on to phase II which has a number of different outcomes. Firstly, there is a chance that they could cure obesity only, cholesterol only, or both cholesterol and obesity.

If phase II gives an indication that it cures obesity, then Merck should continue on with Phase III and seek FDA approval. If phase II gives an indication of cholesterol success then Merck would be advised not to continue with phase III. This is for two reasons, firstly, a cholesterol drug will not make any money for the company, furthermore, Merck already has Zocor which is a drug proven to have adverse effects on the cholesterol level in human body. In both of these cases Phase III will cost 140Million.

Phase II showing signs that it can produce results that indicate it is a potential cure for both obesity and cholesterol. Surprisingly this outcome is less preferred then being a cure for obesity only, because continuing to phase III will require a significantly larger investment of 140Million. Phase III can lead to FDA approval of the following drugs, obesity, cholesterol, or both a cholesterol and obesity drug. If FDA approval is granted then Merck should release the drug, except in the case of cholesterol only due to the fact Merck already has a similar drug.

(I am not sure if we need all these numbers here. It kind of makes it too confusing to read) If Phase 1 results are completed, then Merck would have a 60 percent chance to obtain a return of $ 22.9Milion dollars and a 40 percent chance of loosing 35Million. Furthermore, favorable Phase 1 results showing a positive effect of KL- 798 on the obesity of people could lead to a 10 percent chance of obtaining a return of $ 197.5Million. A loss of $ 75Million dollars is associated solely with high cholesterol treatment; concurrently with 30 percent probability of $160.5Million in profits associated with the treatment of both diseases. And, there is also 50 percent probability of loosing 75Million if drug testing fails to provide any reliable results.

At this stage when Phase 2 results show positive effect of KL 798 on the treatment of High Cholesterol level economic efficiency would prevent Merck from pursuing testing any further. Another reason to stop research on KL-798 at this stage lies with the existence of the Zocor, drug with proven adverse effects on the cholesterol level in human body. This product is already in the market, consequently, Merck& Co is free of obligation to create another drug despite the loss.

Phase 3 of the testing would be based on successful findings of the Phase 2, when KL-798 provides evidence for effective treatment of obesity or both diseases. First finding could lead to a 75 percent chance of obtaining positive return of $305Million, and 25 percent of loss of $ 125Million if FDA does not grant approval to the drug.