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

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

(edited)