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Paulo

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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.

Any clarifying advice would be helpful. Send me your wisdom!

Thanks! :)

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.

Any clarifying advice would be helpful. Send me your wisdom!

Thanks! :)

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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

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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