Merck & Company: Evaluating a Drug Licensing Opportunity

01-023 Harvard Business School Case 201-061 Case Software 201-707 Copyright 2000 by the President and Fellows of Harvard College This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Exhibit 1

Consolidated Statement of Income & Retained Earnings

Year Ended December 31, 1999 1998 32,714.0 26,898.2 17,534.2 5,199.9 2,068.3 51.1 (762.0) 0 3.0 24,094.5 8,619.5 2,729.0 5,890.5 2.51 2.45 20,186.7 5,890.5 (2,629.3) 23,447.9 13,925.4 4,511.4 1,821.1 1,039.5 (884.3) (2,147.7) 499.7 18,765.1 8,133.1 2,884.9 5,248.2 2.21 2.15 17,291.5 5,248.2 (2,353.0) 20,186.7

Sales Costs, Expenses, and Other Materials and production Marketing and administrative Research and development Acquired research Equity income from affiliates Gains on sales of businesses Other (income) expense, net Income Before Taxes Taxes on Income Net Income Basic Earnings per Common Share Earnings per Common Share Assuming Dilution Retained Earnings Balance, January 1 Net Income Common Stock Dividends Declared

1997 23,636.9 11,790.3 4,299.2 1,683.7 0 (727.9) (213.4) 342.7 17,174.6 6,462.3 1,848.2 4,614.1 1.92 1.87 14,772.2 4,614.1 (2,094.8) 17,291.5

Retained Earnings Balance, December 31

Exhibit 2

Consolidated Balance Sheet

Year Ended December 31, 1999 1998

Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses and taxes Total current assets Investments Property, Plant and Equipment (at cost) Land & Buildings Machinery, equipment and office furnishings Construction in progress Less allowance for depreciation Goodwill and Other Intangibles Other Assets Liabilities and Stockholders Equity Current Liabilities Accounts payable and accrued liabilities Loans payable and current portion of long-term debt Income tax payable Dividends payable Total current liabilities Long-Term Debt Deferred Income Taxes and Noncurrent Liabilities Minority Interests Stockholders Equity Common Stock Other Paid-in capital Retained earnings Accumulated Other Comprehensive Income (loss) Less treasury stock, at cost Total stockholders equity 29.7 5,920.5 23,447.9 8.1 29,406.2 16,164.6 13,241.6 35,634.9 29.7 5,614.5 20,186.7 (21.3) 25,809.6 13,007.8 12,801.8 31,853.4 4,158.7 2,859.0 1,064.1 677.0 8,758.8 3,143.9 7,030.1 3,460.5 3,682.1 624.2 1,125.1 637.4 6,068.8 3,220.8 6,057.0 3,705.0 4,725.0 7,385.7 2,236.3 14,347.0 4,670.3 9,676.7 7,584.2 2,353.3 35,634.9 3,892.8 6,211.7 1,782.1 11,886.6 4,042.8 7,843.8 8,287.2 1,886.2 31,853.4 2,021.9 1,180.5 4,089.0 2,846.9 1,120.9 11,259.2 4,761.5 2,606.2 749.5 3,374.1 2,623.9 874.8 10,228.5 3,607.7

Exhibit 3

Compound Success Rates by Stage

Compound Success Rates by Stage Discovery
(2-10 Years)

COMPOUND SUCCESS RATES BY STAGES

5,0 00-10,000 screened

Preclinical Testing
Laboratory and animal testing

250 enter preclinica l testing

Phase I
20-80 healthy volunteers used to determine safety and dosage

5 enter clinica l testing

Phase II
100-300 patient volunteers used t o look for efficacy and side effects

Phase III
1,000-5,000 patient volunteers used to monitor adverse reactions to long-term use.

FDA Review/ Approval Additional Post-marketing Testing

0
Years

10

12

14

16

Approved by the FDA

Compound Success Rates by Stage 5,0 00-10,000 screened

250 nter preclinica l testing

5 enter clinica l testing

Approved by the FDA