SCM 421: Merck & Company: Product KL-798
Kristin Olson, Michael Lombardi, Kristen Prazenica, Anthony Sung
The Opportunity: Merck, a global, research-driven pharmaceutical company, has core
values invested in cutting edge science programs. Recently the organization was accosted by
Kappa Labs with a proposal to purchase the product KL-798. This drug is associated with
obesity and weight-loss which is becoming a valuable investment to the pharmaceutical industry.
The initial decision Merck must make is whether to purchase the drug rights of the KL798 product. It will initially cost $30 million up front and an additional $5 million to complete
phase one. Disregarding Mr. Merck’s philosophy, the program suggests to not invest in drug
rights due to an overall loss of $260,000.
Phase One: The KL-798 product has been under testing phases for six months. Based on
Kappa Labs’ project team research there is a 60% chance of Phase One successful
completion. If Merck were to buy the product rights, the cost incurred to complete this would be
$5 million.
The software states there is a 40% chance of Phase One failing resulting in a loss of $35
million. If the first round proves successful then Merck faces the decision of progressing to
Phase Two.
Phase Two: If Merck decides to advance into Phase Two there presents a multitude of
opportunities. The first decision involves treating just obesity at 10% likelihood. A 10% chance
also exists of the drug treating only high cholesterol. There also is a possibility of the drug
effectively addressing both conditions at 30%. The chance of the drug not treating any of the
maladies is 50%. The cost of completing Phase Two is $40 million. For each condition that is
addressed, the decision remains whether to seek out FDA approval. The program suggests if
Phase Two is successful, the company has two feasible options, to produce a drug for just obesity
or attain a drug that combats both obesity and cholesterol. The more practical decision for the
company is to produce a drug that addresses only obesity since there is a higher overall profit as
compared to producing a drug that targets both maladies. The drug that targets only obesity has
an overall benefit of $197.5 million, whereas the drug that targets both has an overall benefit of
$160.5 million.
FDA Approval: The decision tree advises Merck to seek out FDA consent. For the
product that treats only obesity, there is a 75% chance of receiving FDA acceptance. This would
cost Merck $50 million to go through with this process. After seeking approval, the company is
faced with the decision whether or not to market the drug. If the drug is approved and marketed,
a gain of $430 million will be attained. The next option is to decide if we should continue on to
FDA approval for the drug that treats only cholesterol. Decision Tree Analysis advises Merck to
not continue with this process even though a 75% chance exists of attaining approval. The cost
of seeking acceptance is $50 million, meanwhile a decision to market the drug if approved
results in a profit of $50 million. The third option is to decide on seeking FDA acceptance for a
drug that treats both maladies. According to a detailed analysis, producing this drug is also a
viable option, although the benefit would be less than producing for only obesity.
Sensitivity Analysis: The first analysis conducted was on attaining success in Phase
One. This phase is extremely sensitive up until 60% probability. Up until this percentage, the
expected value is negative. Any probability greater than 60% results in a positive expected
value. If the probability increases by 1%, the program decision will change to suggest the
company to move forward (please refer to Decision Tree 2). For the second sensitivity analysis,
we set the option with the highest possibility as the constant, which is the decision to produce
neither drug. This option also proves to be very sensitive at the 50% probability mark. If the
percentage were to be greater than 50%, then it would not be optimal to move forward. The last
analysis involved the probability of both drugs receiving FDA approval. Like the previous two
analysis, a value higher than 60% will result in an expected value that is positive. This results in
the drugs receiving acceptance.
Consensus: According to Decision Tree software, the optimal recommendation is to not
purchase drug rights. This results in neither profits or losses, and the optimal situation for the
Merck organization. If the firm were to first hire a consulting firm to research the probability of
success in phase one and the consultants prove that success is viable, the value of providing this
information results in an overall benefit of $57.9 million. This provides a $55.3 million
difference from not hiring a consultant of $2.635. Therefore, Merck could acquire a consultant
up until the cost of this difference (please refer to Decision Tree 3).