I have been thinking about what Merck's strategy is for CGNH's paramagnetic beads. Cannibalization of their existing paramagnetic bead marketshare with CGNH's beads is not in their best interest as their licensing agreement requires Merck to pay 30% of Net Sales to CGNH.

At the present time, Merck's beads appear to be indistinguishable from the beads supplied by other manufacturers, thus subject to substitution. Could Merck's strategy be to strengthen their hold on their current market share by switching their customers to a superior bead that can not be substituted by a competing vendor's beads and to grow their market share to counter the lost revenue that will occur due to the 30% of Net Sales they must pay to CGNH?

Zacks' reported that Merck has between 15% to 25% of the existing $1 billion paramagnetic bead market. Should Merck elect to not charge a premium for CGNH's superior beads and is successful in switching all of their current customers to CGNH's superior beads they would lose $45 million to $75 million in Net Sales. To make up this lost revenue Merck would have to grow their market share to 21.5% to 35.7%; any market share greater than this range would generate an increased revenue stream for Merck.

Zacks also informed us that the current market leader for paramagnetic beads, Dynal, holds approximately 50% market share. IMO Merck's strategic goal in the paramagnetic bead market is to become the market leader and they believe they can accomplish this goal by commercializing the superior CGNH silver coated paramagnetic beads.

As we are all shareholders in CGNH, we would benefit significantly from this strategy as the annual revenue stream CGNH would receive from Merck from the sale of their paramagnetic beads would be between $64.5 million to $107.1 million per annum.

Ante