McKinsey Case Interview Practice #2: Pharma Acquisition
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- เผยแพร่เมื่อ 27 ส.ค. 2020
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This McKinsey case interview practice case is an acquisition case, a common type of case given in consulting first-round and final-round interviews. In order pass consulting interviews and land a consulting job offer, it is critical that you practice and master the right case interview strategies and frameworks.
This case is taken from McKinsey's case interview library, which can be found at: www.mckinsey.com/careers/inte...
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This was pretty helpful for somone doing a M&A case for the first time.
i think question 3 is wrong, the expected value is related to probability afterwards. so the expected value at the start of phase III doesn't change no matter how much invested in phase II. so at start of phase III , the expected value is $540m whether or not invested 150m more. the expected value after phase I is 540*0.4=216m. if invested 150m in phase II, the new rate is x, 540*x=216m+150m=366m, (the old value is 540*40%=216). x=67.7% ,old rate is 40%, so it have to increase by 27.7%.
your calculation makes sense to me, still the correct solution as stated on the McKinsey website is as follows:
"Investment would need to increase the probability of success in Phase II from 40 to 80 percent (that is, increase of 40 percentage points). There are multiple ways to approach this calculation. One method is shown here:
If a candidate drug passes Phase II, then it has a 50% x 90% = 45% chance of being successfully marketed and sold. Since a successful candidate drug is worth $1.2 billion, a candidate drug that passes Phase II is worth 45% x $1.2 billion = $540 million.
To break even (that is, to make the $150 million investment worthwhile), the value of the candidate drug that passes Phase II would need to increase to $540 million + $150 million = $690 million. This means, the probability of combined success in Phase I and II would need to increase by (150/540) = 28 percentage points.
So the current probability of Phase I and II, that is, 70% x 40% = 28% would have to increase by 28 percentage points, to 56%. In order to come up to 56%, Phase II probability would have to increase from 40% to 80% (70% x 80% = 56%).
This seems like a very big challenge, as an increase by 40 percentage points means that the current probability of 40% needs to double."
term:
0:28 regional (sales) office 企業常會在代表性地區設立Regional Office來協助各國市場的經營
0:44 aspirin, cholesterol 膽固醇
1:03 pharmacos: 製藥公司
1:14 jumpstrat 快速啟動
1:19 biological 生物的；與生命過程有關的
1:30 at its current share price, the company worth 1 bn.
1:56 molecule 分子
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2:07 the objective
Quite interesting....and very helpful
There's an easier way to think about Q3 that also shows why the video is correct. We want to know what percentage point change in Phase II probability will equal $150M in expected value. That is, (X/100)*($ value of 100% Phase II probability)=$150M. First, calculate the total expected value if the probability of Phase II is 100%, or $1.2B*0.9*0.5*1.0*0.7=$378M (note that this includes the probability of Phase I--more on that below). Then, just divide $150M/$378M ≈ 40%. This works regardless of the original Phase II probability. But since we begin with 40%, it means the company must achieve a 40%+40%=80% Phase II probability to make the investment worth it.
Why Phase I matters: we're analyzing the impact on the expected value of a single drug, "BioFuture's primary drug candidate," which has not yet reached Phase II. Since there's only a 70% chance it even gets to the point where the investment was made, that probability must be included in the expected value of the investment. On a related note, since the case includes the slightly confusing statement that the investment means "more candidate drugs successfully make it to Phase III and beyond," a good clarifying question or next step could reference the additional value the Phase II improvement would provide for other drugs.
But why would you invest in phase 2 before phase 1 is complete?
Great video!
Thanks! Any suggestions for types of videos you'd like to see in the future?
Cool case, especially the calculation part.
i dont understand the argument why the 150M paid needed to be justified over the increase in success rate of clinical trial. i was thinking biofuture revenue should be projected, then valuated using dcf model. and the 150M would mean how many % of share, and how much return given every year and so on. pls advise
Hi - what about the fact the new company is in a different country? US has different regulations from the EU (Germany) especially when it comes to drugs. Would they even be able to be sold in the European market? Would it make sense to include that in the market bucket?
Yes! Definitely a great point. Market regulations could fall under the market bucket.
Not very clear (1,2*0,9) = 1,08 * 0,5= 0.54 + 0,15 = 0,69 *0,8 = 0.55 * 0,7 = 386,4 millions is the profit if the product arrives to the market with an investment of 1,2 billions? is that correct?
Great work. You just forgot to mention a very important factor under synergies bucket in the first question, and thats Cultural Synergies, meaning will the two companies mesh well
how is the drug worth related to the probability of success??
How do we break even if the expected value at the beginning of phase III increases by exactly $150 million? We have to invest the $150 million during phase 2 but we still have a chance that the trial does not pass phase II. Hence, I would think that our expected value after phase II (and thus at the start of phase III) needs to increase by more than $150 million to offset the risk of failing the project during phase II. Instead, I would argue that the expected value at the beginning of phase II (rather than III) has to increase by $150 million, to offset the investment of $150 million made at that point in time. Or am I overlooking something here?
What a weird Exercise 3 to begin with, whose solution is also all sorts of wrong:
Error 1: the $150 investment is done at Phase II, not Phase III (as others have picked up here)
Error 2: even if the $150 million investment was done at Phase III, we would have to divide the $690 million ($150 + $540) by $1.08 billion at Filing to get to the minimum new expected value at Phase III, resulting in a minimum increase of 64% (up from of 50%).
@7m30 can anyone explain how 50% of $1.08 Billion is $540 Million? Is it not $504 Million?
1.08 billion is 1,080,000,000 if you divide that by 2 you get 540,000,000 M or in simpler terms 0.54 B + 0.54 B = 1.08 B
504M is 50% of 1,008,000,000 or 1.008 B
@@danielaraimund4783 yes thank you... clearly absolute brain fart earlier 👍
In Q3. How come an increase of 28% in expected value results in an increase in 28% for the probability of getting to phase III? If the expected value for the drug needs to be 690M in phase III doesn't that mean it needs to have a 57.5% (690M/1.2B) chance of getting to market?
i think its 86%
so 46% required increase in phase 2
instead of 28%, it should actually be around 14% I think the calculation is wrong in the video
This is a probability question using 2 instances. Check the the link to P(P1P2),I.E, probability of instance 1 occuring along with instance 2). Now for the question, 28% is the original probability of a product of passing both phase 1 and phase 2 which does not depend on an 150 million investment, which in turn is a 28% increase in value
We are also not taking about the percent need to get to market, but by what amount do we get a return on that investment. Because you need to consider the failure rate and whether investment is going to yield any result. You assumed that investing will help the product go into market, which is not the case since that mych increase would require something else