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Case Challenge: Pharmaceutical Company, R&D Pipeline Value, Successful Rate

break-even analysis case question McKinsey pharma and health care cases
Neue Antwort am 17. Juni 2020
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Nancy
Kompetent
fragte am 17. Juni 2020
Hi I am actively preparing for cases since this May, please feel free to reach out!

Hi Experts,

I found this pharmaceutical case quite interesting but need some help on one of its questions. For me, the whole logic of the solution (I highlighted in yellow) to calculate the breakeven rate is really strange.

In my opinion, if we have an extra $150m invested in phase 2, then the result is that we will have a bigger tolerance for the failure rate of phase 2. This is why I struggle to understand why the success rate for phase 2 has to be improved by a certain percentage to ensure a breakeven?

Thanks in advance!

Best,

Jing

McKinsey  pharmaceutical case Question 3McKinsey pharmaceutical case question

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Luca
Experte
Content Creator
bearbeitete eine Antwort am 17. Juni 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello Jing,

This is a nice example of how you can use the "Expected value" theory. Let me try to clarify the solution:

  1. The value of a successfull candidate drug is 1.2 B$
  2. What is the expected value of a drug starts the process? We can calculate it as following:
    • Probability of success = % success Phase I x % success Phase II x % success Phase III x % success Filing = 70% x 40% x 50% x 90% = 12.6%
    • Expected value of a drug starting the process= Value of a successfull drug x Probability of success = 1.2 B$ x 12.6% = 151.2 M$
  3. In order to justify an investment of 150M$, this expected values has to increase by (at least) 150M$. The interviewer is asking us how much we should increase the probability of second step success. We can proceed as following:
    • First of all, we calculate the overall success probabilty that we need. New expected value of a drug starting the process= Value of a successfull drug x desired probability of success ---> Desired probability of success = New expected value of a drug starting the process / Value of a successfull drug = (151.2 M$ + 150 M$) /1200 M$ = 25.1%
    • In order to achieve that probability, we need a specific probability of success for second step: Desired probability of success= % success Phase I x Desired % success Phase II x % success Phase III x % success Filing --> Desired % success Phase II = Desired probability of success / (% success Phase I x % success Phase III x % success Filing ) = 25.1% / (70% x 50% x 90% ) = 80%

​Let me know if something is still not clear.

Best,
Luca

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Nancy am 17. Juni 2020

Thanks very much Luca! This is really helpful:)

Udayan
Experte
Content Creator
bearbeitete eine Antwort am 17. Juni 2020
Top rated Case & PEI coach/Multiple real offers/McKinsey EM in New York /6 years McKinsey recruiting experience

Hi Jing,

This is the practice case that they have on the McKinsey site.

Your question states - if we have an extra $150m invested in phase 2, then the result is that we will have a bigger tolerance for the failure rate of phase 2.

That is not what is said in the actual question - it says that if they invest in phase 2, there is a higher likelihood of success (which is not the same as bigger tolerance for failure rate). Hence the next step is to calculate how much the success rate has to improve by for it to make sense to invest 150M in phase 2

Hope that helps,

Udayan

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Ian
Experte
Content Creator
bearbeitete eine Antwort am 17. Juni 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi Jing,

Very important in your statement is a lack of understanding of sunk cost!

Past decisions should never affect your acceptance of failure/success for future decisions!

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Clara
Experte
Content Creator
antwortete am 17. Juni 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello Jing, could you share the link to this case?

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Nancy am 17. Juni 2020
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