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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

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?

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

The value of a successfull candidate drug is 1.2 B$

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$

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

Hello Jing,

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

The value of a successfull candidate drug is 1.2 B$

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$

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

(edited)

Thanks very much Luca! This is really helpful:) —
Nancy on Jun 17, 2020

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

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

Case Interviews can be led by the candidate or by the interviewer: In Candidate-led cases the main challenge is the structure. In Interviewer-led cases the main challenge is to adapt quickly

A break-even analysis aims to find the point at which a project generates neither losses nor gains. This so-called break-even point can be a point in time, an amount of money or a certain condition

McKinsey Questions
Tell me of a situation where you had an opinion and no one seemed to agree with you.
What was your goal when you decided to join university / work / clubs / a sports team?
Did you have a goal that you were not able to reach? What did you do?
What do you want to be remembered for and how are you achieving it?
What is your typical way of dealing with conflict?

Tell me of a situation where you had an opinion and no one seemed to agree with you.
What was your goal when you decided to join university / work / clubs / a sports team?
Did you have a goal that you were not able to reach? What did you do?
What do you want to be remembered for and how are you ... Open whole case

MBB Final Round Case - Smart EducationOur client is SmartBridge, a nonprofit educational institution offering face-to-face tutoring services. The client operates in the US.
The mission of SmartBridge is to help as many students as possible to complete studies and prevent that they drop from the school system, in particular in disadvantaged areas.
The client is considering starting operations for its services in the Chicago area. They hired us to understand if that makes sense. Due to the nonprofit regulation, SmartBridge should operate on its own in the market, without any partnership.
How would you help our client?

Our client is SmartBridge, a nonprofit educational institution offering face-to-face tutoring services. The client operates in the US.
The mission of SmartBridge is to help as many students as possible to complete studies and prevent that they drop from the school system, in particular in disadvant ... Open whole case

Rally racingYour client is the owner of UBS #42, a rally racing team. There are 36 races in a season. At the end of the season, the driver who has earned the most number of points will win the championship.
Jeff Tarin, a well-known driver, races for UBS #42. He began racing in this tournament six years ago and is currently ranked fifth in a field of 40 drivers.
The director of marketing at Jazz Sweets recently contacted your client to ask whether your client would like to start a second racing team that Jazz Sweets could sponsor. The director realizes that rally racing is the fastest-growing race sport segment among males aged 18-45.
He has already asked a successful driver from a regional conventional racing circuit to be the new team’s first driver. Your client wants to know whether he should go ahead with this opportunity.

Your client is the owner of UBS #42, a rally racing team. There are 36 races in a season. At the end of the season, the driver who has earned the most number of points will win the championship.
Jeff Tarin, a well-known driver, races for UBS #42. He began racing in this tournament six years ago and ... Open whole case

Universal TVOur client is a Canadian TV company, Universal TV. They recently entered the US market in the northeast to expand its market share and capture a large part of the 4 m consumers in a market that has little competition. However, in the past few years, Universal TV has been unable to realize a profit.
You are hired to figure out why this is the case and what their next move should be.

Our client is a Canadian TV company, Universal TV. They recently entered the US market in the northeast to expand its market share and capture a large part of the 4 m consumers in a market that has little competition. However, in the past few years, Universal TV has been unable to realize a profit.
... Open whole case

Motivational questions – FIT interview preparationDuring this exercise, we will deep-dive in 4 of the most common Motivational questions asked in FIT interviews:
Why Consulting?
Why this particular company? (McKinsey, Bain, BCG, others)
Why this particular location?
*Particularly relevant to people re-locating or choosing an office not in their region
Why this particular specialized business function
*Only relevant when not applying for a general role (e.g., McKinsey Advanced Analytics, BCG Gamma, etc.)
*box-open green*
*See Graph 1 – Note: "Motivational" are one of the 4 types of questions you can find in FIT interviews.
*box-close*
➥ Graphs from the Integrated FIT Guide for MBB

During this exercise, we will deep-dive in 4 of the most common Motivational questions asked in FIT interviews:
Why Consulting?
Why this particular company? (McKinsey, Bain, BCG, others)
Why this particular location?
*Particularly relevant to people re-locating or choosing an office not ... Open whole case