Case

O&C Case: Build-up of pharmaceutical company

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Problem Definition

Our client Pharma Finance just finalized its first investment round and received $ 40m to invest in the build-up of a pharmaceutical manufacturing company. The CEO is mainly interested in high margins and profitable markets, with a sustainable and green production. This is why he wants you to find out, if a market entry in “New Land” would be interesting.

The aim is to build a company from scratch. There are currently no other local companies in the market and the government is dedicated to support the efforts and the market entry with a fixed, forced market percentage. Primarily the company will be focusing on the local market and there is no need to calculate the costs or revenues for international expansion.

The clear production focus will be on pain killers such as Aspirin, Ibuprofen, Paracetamol, Diclofenac. They will be sold as tablets, powders (to dissolve in water) and liquids. There are no licensing costs for all of the products and since all of these drugs are well known there will be no development or regulatory costs to consider in this case.


Comments

This case is divided into four tasks: The aim of the first task is to estimate the market size for pain killers in "New Land". In the second task, the interviewee should evaluate whether Pharma Finance can lift the investment of the build-up on its own. The third task involves assessing the investment in general. Here the interviewee should give general recommendations, propose changes and evaluate the basic fit with regards to the goals of Pharma Finance for the next 5 years. The goal of the last optional task is to mention further aspects to be considered for Pharma Finance to build a pharmaceutical manufacturing company from scratch?

The interviewee may not use a calculator when proceeding this case. If there are any open points remaining, the interviewee can ask for further explanation.

If any of the solutions are unclear, the interviewer may use the formulary for further explanation (see exhibits).


Short Solution (Expand)


Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

The following framework/structure provides an overview of the case:

I. Background

Tell the interviewee to start by writing down the important information!

Provide some additional information to help the interviewee understand the situation and the problem.

Helpful hints:

  • Population of “New Land” is about 5m inhabitants
  • People in “New Land” take pain killers with an average of 50 standard doses per person and year
  • Market shares of the products are equally spread
  • Tablets and powders are 80% of the consumed standard doses in the market

II. Market size

Share Task 1 with the interviewee: What is the market size for pain killer drugs in “New Land”?

You can provide some helpful hints to aid the interviewee in understanding the question.

Helpful hints:

  • Price for all drugs is $5 per 20 tablets/ liquids
  • 1 tablet equals one standard dose
  • 1 powder equals one standard dose
  • 1 liquid equals two standard doses

Calculation

Answer

The overall market size for pain killers in “New Land” is $ 56.3m.

III. Investment

Share Task 2 with the interviewee: Can Pharma Finance lift the invest of the build-up on its own?

You can provide some helpful hints to aid the interviewee in understanding the question.

Helpful hints:

  • Pharma Finance will reach a market share of 20 % within the first year due to governmental support
  • One Production line including the needed facilities is about $ 10m and has an output of about 30m tablets/ powders or 5m liquid doses per year
  • Further initial investment costs are $ 5m (only once)
  • Keep in mind that you have to consider machinery changes to produce the different drugs

Calculation

Answer

Due to the initial investment round Pharma Finance has the financial capabilities to build a plant that is capable of serving 20% of the entire pain killer market in “New Land” from scratch. Almost all of the money available would be used to construct such a plant.

IV. Assessment

Share Task 3.1 with the interviewee: Given the market size and the investment costs, is the investment interesting based on the goals of Pharma Finance for the next 5 years?

You can provide some helpful hints to aid the interviewee in understanding the question.

Helpful hints:

  • Variable costs are $ 1m (tablets and powder)/ $ 2m (liquids) per production line and year
  • All variable costs occurring due to production will be covered through sales directly.
  • Market growth is 0%

Calculation 3.1

Answer 3.1

The investment is generally interesting and promises very good returns due to high annual profit margins. After 5 years, the ROI is already above 100%.

Share Task 3.2 with the interviewee: What is your general recommendation to the CEO?

Calculation 3.2

Answer 3.2

However, initial construction costs are comparatively high, so that there is room for improvement in terms of ROI and profitability. Considering the costs of the investment and the maximum market share, Pharma Invest should only produce and sell tablets and powder. By doing so, they can reach a maximum ROI of about 160% in the first 5 years instead of 104%. Furthermore, there will be a much lower investment risk as a consequence of the possible market volatility between the 4 products.

When looking at the volume of the available capital ($ 40m), only a bit more than half of the available money would be needed to invest into the demonstrated value adding activities. Therefore, the company could diversify even more with the money left from their first investment round, if liquids would be excluded from the production planning.

Share Task 3.3 with the interviewee: Is the investment also promising for the investors of Pharma Finance? What changes would you make to act more in favor of the investors? Is the volume of the first investment round suitable for such an endeavor?

Calculation 3.3

Answer 3.3

On the other hand, the investors should also consider lowering their invested volume to a maximum of ~$ 25m to boost their ROI, as this is the maximum amount required for an initial setup. The remaining ~$ 15m could be invested elsewhere, if no diversified portfolio of value creating activities of Pharma Invest is presented. In the case of production excluding liquids, the ROI of the investor with a total investment volume of $ 40m is 100%. The ROI in case of a production of all products is ~91% for the investor.

Difficult Questions

This question is optional and may only be processed if time allows it!

Share Task 4 with the interviewee: What further aspects are to be considered for Pharma Finance to build a pharmaceutical manufacturing company from scratch?

The answer should involve some of the following statements:

  • Aspects like depreciation and taxes are not considered in the case
  • Licensing and regulatory costs are not considered
  • As there is no manufacturing of pharmaceutical products in the country so far, it might be harder to acquire and train staff
  • If there will be a governmental change, does the company still reach the needed market share of 20%
  • Procurement of the raw material might be an issue, depending on the political situation and regionality of the country
  • To sell the products you need to build a sales force as well as get in contact with your clients/ stakeholders (HCP, Clinics, wholesalers, regulatory authorities, insurances, …)
  • To be able to produce and sell you need to fulfill certain regulatory and manufacturing standards, including the relevant certification
  • The manufacturing plant needs time to be build and run up to full speed
Questions on this case

I'm confused :(, why the table given is the same as our own calculations? Should the table be given... (more)

Mistake in the hits?
Nathaniel
Expert
updated the best answer on Dec 08, 2019 - 1 answer
McKinsey | BCG | CERN| University of Cambridge
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Hi Domen, Yes, you are making a great point in pinpointing a confusing word on task 2 hints. Having "units" instead of "doses" would be most aligned with the calculation shown on the case, given t... (more)

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Show all questions on this case (2)
Case exhibits

Task 1: What is the market size for pain killer drugs in “New Land”?


Task 2: Can Pharma Finance lift the invest of the build-up on its own?


Task 3.1: Given the market size and the investment costs, is the investment interesting based on the goals of Pharma Finance for the next 5 years?




Task 3.2: What is your general recommendation to the CEO?




Task 3.3: Is the investment also promising for the investors of Pharma Finance? What changes would you make to act more in favor of the investors? Is the volume of the first investment round suitable for such an endeavor?


Task 4: What further aspects are to be considered for Pharma Finance to build a pharmaceutical manufacturing company from scratch? (optional)