Hi, Can anyone explain the solution of global pharm case they have in their website?
https://www.mckinsey.com/careers/interviewing/globapharm
I don't get how they came up with 40% increase. . .
Expected Probability of Success
Phase1: 70% > Phase2:40%>Phase3:50%>Phase4:90%
Global pharm will improve the product by investing 150M USD to Phase2. How much should the success rate have to be increased for investment to pay of. (Assume that if the drug is successful and sold its worth:1.2B USD)
Thanks
Seems to be a hard one! Now, I almost understood the logic vs the explanation on the site. Almost, except for "In order for the $150M additional investment to break even, we need the expected value to increase by the same amount. So the new expected value needs to be $150M + $150M = $300M." Can you please explain how do we know that?
Think of yourself as the person in charge of this decision: you can invest an additional $150M to improve the success rate. By how much does the expected value need to increase for you to want to make that investment? Assuming you're risk-neutral, it should increase by at least $150M also. For example, you wouldn't invest an additional $150M if the expected value grew by only $100M. Similarly, you would want to make the $150M investment if the expected value grew by $200M. Because we're trying to calculate the tipping point between those decisions (the "break even"), we calculate the success rate for which increase in investment = increase in expected value.