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McKinsey Sample Case - Logic Question...

http://www.mckinsey.com/careers/interviewing/globapharm

In the quant section of this case, why isn't the correct answer 28.93 percentage points (increasing Phase II success from 40% to 68.93...% - and therefore the value of a product at Phase III from \$540M to \$607.5M)? That answer would result in a final likely value of \$1.35B - which breaks even because it is \$150M higher than the current likely final value... and the investment cost is \$150M (isn't that the definition of breakeven?).

The answer key assumes that the measure of the \$150M investement is the value it adds AT Phase III - and that the \$150M should therefore be added to the Phase III value as deduced from the final value of \$1.2B. The problem is that using the logic articulated in the answer key would result in a final AT MARKET value of \$1.53B - which is significantly higher than the \$1.35M that I'm thinking really represents a breakeven proposition.

Thanks! :)

1 Antwort

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Hi there,

Let me chime in here. First, try to think of this problem in terms of the expected value of the candidate drug:

• Expected Value = Likelihood of success * Present Value (in case of success)

Second, with this framework in mind, consider two scenarios: (1) Current likelihood of success; (2) Increased likelihood of success.

1. In this scenario, we have: Expected Value = 70% * 40% * 50% * 90% * \$1.2bn Expected Value = 12.6% * \$1.2bn = ~\$0.15bn => this is your baseline and the \$150mn investment in Phase II has to be added to that. Thus, to breakeven, the expected value after the investment has to equal ~\$300mn
2. In this scenario, let's use "x" for the Phase II Likelihood of Success : Expected Value = \$0.30bn = 70% * x * 50% * 90% * \$1.2bn \$0.30bn / \$0.38 = x and, thus, x = ~80%

This means that, for the investment to break even, the likelihood of success in phase II would have to equal ~80%, a 40 p.p. increase from the current scenario.

Let me know if you have further questions.

Best

Paulo

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