DECISION TREE

ANALYSIS
MERCK &SLEMBA
SG-5 CO. CASE STUDY
BPOM 1:
1. Ely Rahmawati (NIM 29320072)
2. Imam Luqman Hakim (NIM 29320073)
3. Jazari Alfaridi (NIM 29320067)
4. Kurniawan Norat (NIM 29320042)
5. Rizka Ayu Kusuma Widjanarko (NIM 29320139)
6. Shanty Sarah (NIM 29320212)
 1. Should Merck license the drug? How
much is the expected value?
◦ EV = USD 13,980,000
◦ Since the EV of the decision tree is positive, Merck should license the drug (Davanrik)
Q.1 Decision tree
2. How would your analysis change if the cost of launching Davanrik
for weight loss were $225 millions instead of $100 millions as given in
the case?

◦ Based on the decision tree, the company will suffer a loss (USD -100 millions) if it decides to launch the
product (as weight loss).
◦ However, net EV of the decision tree is still positive = USD 10,942,500 (less than the first option)
◦ If Merck finds out the Davanrik can effective only for weight loss after Phase II, it should not proceed
any further (the value = USD 0; 100% probability). If Merck decides not to continue, the losses incurred
(USD -70 millions) will be less than the losses if the product is launched (USD -100 millions).
Q.2 Decision tree
3. How much is LAB’s expected value to receive from the proposal
deal (from milestone payments and 5% royalty fee?

◦ The cash flows of LAB are :

1. $ 5 million initial licensing fee in Phase I ( irrespective of success of Phase 1)
2. $ 2.5 million in Phase II (Probability of occurrence 0.6)
3. Phase III
a. $ 20 million if the drug cures only depression (Probability of occurrence 0.1)
b. $ 10 million for weight loss only (Probability of occurrence 0.15)
c. $ 40 million if drug cures both depression and weight loss (Probability of occurrence 0.05)
4. Royalty fee 5% of the present value (PV) obtained by Merck

◦ Based on the decision tree, LAB’s EV from the proposal deal = USD 16,682,750
Q.3 Decision tree
Thank You