Risk Analysis for Merck and Company: Product Kl-798

Abstract

This case builds on the case "Merck & Company: Product KL-798" (UVA-QA-0582) by providing market uncertainties for the drug (drug quality, the presence of a competitor, market growth, and the time to the drug's release). Student and faculty spreadsheets are provided for the calculation of net present values for the scenarios. There is an additional challenge of how to treat the several downstream decisions (using OptQuest, for example) and how to value the license opportunity. A teaching note is also available to registered faculty members.

Excerpt

UVA-QA-0600

Rev. May 31, 2011

RISK ANALYSIS FOR MERCK AND COMPANY: PRODUCT KL-798

…our success or failure in R&D won't result from the quality of our scientists alone; it will also come from the quality of our thinking about where to invest.

—Judy Lewent, CFO, Merck & Co.

Pat Harlow sipped coffee in early January 2001 and pondered the decision to license product KL-798 from Kappa Labs. Many pharmaceutical analysts agreed that the antiobesity market offered the largest current opportunity for pharmaceutical companies. The few obesity drugs that had been released had all been suspect for safety reasons. Harlow's uneasiness centered on the uncertainty in the market potential for such a drug.

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Keywords: operations, decision analysis, Monte Carlo simulation