Merck & Company: Product KL-798 Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Merck & Company: Product KL-798 Case Solution

Introduction

Merck and Co., Inc. is a multinational pharmaceutical company that was established 131 years ago in 1891 as a subsidiary of Merck and later on, in 1917 it became an independent company. The company was founded by Theodore Weicker and George Merck and provides its services globally. The company is considered one of the leading companies in the pharmaceutical industry and has a strong market presence due to which the company successfully sustained its business growth and developed its business core objectives.The company has a strong financial status that allows Merck and Co., Inc. to make acquisitions and established a profitable market. The main operations of the company are to provide high-quality drugs and other medications to its clients while the key drugs which are manufactured by the company include Pharmaceutical drugs, generic drugs, over-the-counter drugs, vaccines, contact lenses, and veterinary medicines (Bodily S. C., 2002).

The strong marketing strategies and retention of the high quality of their services and products allow the company to generate huge and profitable revenue as the company generated record revenue of more than $ 14 billion in 2002 while the company had never generated since 1999 however in 2021 the company had generated around $48.70 billion. The financial records indicate that the company has well-established market regulatory strategies and a highly skilled full workforce that enable the company to sustain the high quality of its products and services.

Problem Statement

Merck has a brand legacy in the pharmaceutical industry and various companies' approaches to the company for acquisition and collaboration. A small biotech research company approaches Merck to buy the drug license for fat and a cholesterol-reducing drug known as KL-798 while the drug is in the mid of its approval by the FDA So the executives and decision-makers face difficulty to decide whether they should buy its license or not due to the uncertainty regarding the market potential of the drug (Bodily S. C., 2002).

Part (A)

The proposal of the biotech company regarding the fat and cholesterol-reducing drug is challenging for the company and its management as it is in the mid of FDA approval. KL-798 is the cholesterol and fat-reducing license and the company is struggling to decide whether it should buy the license or not. However, the decision-maker of the company i.e. Pat Harlow could not decide regarding the proposal approval to buy the drug due to the future uncertainties regarding the effectiveness of the drug as the drug might be effective for obesity only not for fat and it might be effective for fat but not for obesity or the drug could be effective for both cholesterol and fat at the same time. So, these uncertainties resist the decision maker to purchase the licensed drug. Furthermore, to find out financial differences and their effects in the future the decision maker calculated the net present value (NPV) of each consequence through a discounted cash flow of around 15 percent. The NPV for the three outcomes includes $430M NPV for obesity only, $510M NPV for cholesterol and obesity, and $50M NPV for cholesterol only. Harlow reached these figures by makingnumerousrule booksabout the size of the market, growthof the market, gross margins, and penetration of the market, SG&A outflow, and royalty rate expense. However, these statistics and expectations have been futileinyieldingnumerousreservations into account, which would be the model for the company in the upcoming period.

KL-798 can be anadvance or a me-too drug. Advanced drugs are present in the market which have premium prices and have strong penetration in the market as compared to the other drugs. While the me-too drug is one of the modified forms of the advanced or breakthrough drug which have similar treatments while having differences in its effects and drawbacks. However, the analysis of the decision maker of the company regarding the KL-798 parching fails to take into account that the difference in values depends on whether KL-798 is anadvance or a me-too drug. While the type of drug as a breakthrough or me-too drug is depended on the license approvedby their opponent who is developing anakin drug(Guedeney, 2019).

Part (B)

Breakthrough and Me-too Drugs

There is a 37.5% possibility of the getting FDA by its competitors in this case KL-798 will just be a follow-on drug. Hence, the possibility of KL- 798 presenceas anadvanced drug is around 62.5 percentwhile the possibility of itspresence as a follow-on drug is around 37.5 percent. In the case of the breakthrough drug, there will be an 85% of gross profit in the obesity plus cholesterol drugs while a gross profit margin of 70% will be for only obesity drugs. As a follow-on drug, the gross profit margins will be 45 percent and 35 percentseparately(Carlisle, 2020).

The cholesterol-only drug’s value will remain static at $50 million. There is a separate financial statement for each of the four scenarios i.e. the obesity-only drug being a breakthrough and me-too drug and the obesity plus cholesterol drug being a break-through or me-too. Other changes have also been incorporated in the calculations of the net present values of the drugs in each scenario. The SG&A expense would have additional components of $50 million as a breakthrough drug and $350 million as a me-too drug due to the marketing and sales costs. The SG&A expenses were then adjusted in each scenario e.g. for an obesity-only breakthrough drug, the SG&A expense would be 20% of sales plus $350 million......................

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Merck & Company: Product KL-798 Harvard Case Solution & Analysis