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.
- 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
- 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.