Problem Statement. Many of Merck's most popular drugs, VasotecTM, ​​MevacorTM, PrinivilTM, and PepcidTM are nearing their patent expiration dates; these drugs generated $5.7 billion in Merck's worldwide sales. Sales of these products are expected to decline rapidly as generic substitutes become available after patent expiration. Merck has the opportunity with LAB Pharmaceuticals to license Davanrik which is currently in preclinical development and was originally developed to treat depression but also has the potential to treat obesity by blocking the receptor that causes hunger. The proposal, if approved, would require Merck to design, administer and fund clinical trials of Davanrik, as well as manufacture and market the drug. Discussion. Merck is a research-oriented global pharmaceutical company that develops, manufactures and markets a broad range of products. Merck has a history of producing successful products beyond those mentioned above, including VioxxTM, FosamaxTM, and SingulairTM. Both sales and net income increased significantly from 1998 to 1999, with sales increasing 22% to $32.7 million and net income increasing 12.2% to $5.9 billion dollars in 1999. Short-term and long-term investments increased over this period by 57% and 32%, respectively. . Pharmaceutical product development is a high-cost activity especially due to research and development and the lengthy FDA clinical approval process. The approval process can take 7 years, which only leaves a 10-year exclusivity period within the 17-year patent life. The FDA approval process is a 3-stage process and is designed to test the effectiveness and safety of Davanrik. Phase I will last 2 years and will consist of administering Davanrik to 20-80 people to determine whether it is safe enough to continue with Phase II. Phase II (2… middle of paper… 25 million as Phase I and II costs are now sunk costs and not considered in determining the financial impacts and likelihood of deferred pathway for Phase weight loss studies III Milestone payments and royalties remain unchanged from LAB's proposal, which includes an initial licensing fee of $5 million, a Phase II milestone payment of $2.5 million, a for the Phase III milestone payment of $20 million for depression, 5% royalties on sales, and a Phase III milestone payment of $10 million for weight loss if that option is exercised at a later time If Merck accepts LAB's proposal as is, Merck would have to negotiate to receive downstream preferences for future drugs developed by LAB. This strategy provides a win-win solution for both Merck and LAB; significantly reduces risks and costs for Merck, provides financial stability to LABs and creates the foundation for success as future development, testing and marketing partners.