Merck Corporation Harvard Business Case

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Conclusion and Recommendation

Based on our computations in the previously discussed sections, we recommend that Merck should bid to license Davanrik because of its potentially high return. After all, Merck’s business strategy to sustain itself in the industry was to constantly seek and invest in new projects to cover the loss patent expirations may bring about. We feel that there could be lots of space for negotiation and Merck is the one with the upper hand, the first reason being its larger size and greater competency to handle such complicated process that LAB is incapable of achieving on their own. Second of all, we saw that the 5% royalty fee reduction cut the profitability almost by half, however in reality, Merck would have the opportunity to negotiate for a better rate. Lastly, because LAB would not be taking any risks in the event of failure due to no costs, but significantly high expected payments from Merck in the event of success, and could potentially be gaining millions of dollar more than Merck, which needed to take on all the risks and responsibilities as seen previously, Merck could definitely use this as a bargain when it comes down to the final negotiation on pricing.

Another recommendation that we have for management is to pay additional attention to assessing the risk of this project. Even though we calculated the project to have a positive NPV, the success rate, however, is only at 14.55% as mentioned above. Failing at launching Davanrik would cost the company tremendously and all of the research and development funds would never be retrieved but flushed down the drain. Management should carefully determine the company’s level of willingness and financial ability to take such high risk.

Appendix

Appendix 1

Merck & Co. Ratios

1999

1998

1997

Liquidity

Current Ratio

1.29

1.69

Leverage

Debt/Equity

1.69

1.49

Profitability

Gross Profit Margin

46.40%

48.23%

50.12%

Net Profit Margin

18%

19.51%

19.52%

ROA

16.53%

16.48%

ROE

44.48%

41.00%

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