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 global sales for Merck. Sales of these products are expected to fall rapidly as generic substitutes become available after patents expire. Merck has the opportunity with LAB Pharmaceuticals to license Davanrik, which is currently in preclinical development and was originally developed to treat depression, but it also has the potential to treat obesity by blocking the receptor responsible for hunger. The proposal, if approved, would require Merck to design, administer and finance clinical testing of Davanrik, as well as manufacture and market the drug. Discussion. Merck is a research-driven global pharmaceutical company that develops, manufactures and markets a broad range of products. Merck has a history of producing successful products beyond the products mentioned above, including VioxxTM, FosamaxTM and SingulairTM. Sales and net income increased significantly between 1998 and 1999, with sales jumping 22% to $32.7 million and net income jumping 12.2% to $5.9 billion in 1999. Short-term and long-term investments increased during this period by 57% and 32%, respectively. . Pharmaceutical product development is an expensive business, especially in terms of R&D and the lengthy FDA clinical approval process. The approval process can take 7 years, leaving only a 10-year exclusivity period during the 17-year patent lifespan. The FDA approval process is a 3-phase process designed to test the effectiveness and safety of Davanrik. Phase I will last 2 years and will involve administering Davanrik to 20 to 80 people to determine if it is safe enough to move on to Phase II. Phase II (2 ...... middle of document ...... 25 M since the costs of phases I and II are now sunk costs and are not taken into account in determining the financial impacts and Likelihood of Delayed Pathway for Phase III Weight Loss Trials Milestone payments and royalties are unchanged from LAB's proposal which includes an initial licensing fee of $5 million, a milestone payment Phase II payment of $2.5 million, a 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 this option is exercised at a later date. If Merck accepts LAB's proposal as is, Merck should negotiate to receive downstream preferences for future drugs developed by LAB. for Merck and LAB; it significantly reduces risks and costs for Merck, ensures the financial stability of LAB and creates a foundation for success as future development, testing and marketing partners..