Mckinsey real case

Question

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

Answer 1

Hi Anonymous,

Here's a slightly different approach to the calculation that might make more sense:

Currently, the probability of success for a candidate drug before Phase I trial is 70% * 40% * 50% * 90% = 12.6%

If a successful drug is worth $1.2B, then the expected value of a candidate drug before Phase I trial is $1.2B * 12.6% = $151.2M. I would likely round this to $150M in an interview.

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.

What increase would we need to see in the Phase II success rate in order to double the expected value from $150M to $300M? You could set this up as an equation, but it's pretty apparent just looking at it: it needs to double from 40% to 80%, an increase of 40 percentage points.

Once you have the answer, it's then important to comment on the implications: if we need the Phase II success rate to reach 80% just to break even, this is probably not a good investment.

-Matt

Answer 2

The solution presented on their website is not very intuitive for some people. Here is a different way of understanding the math.

We know that once a drug reaches market, it's worth $1.2 billion. Using the success rates of the 4 different stages, we can calculate that the expected value of a candidate drug (before it passes any trial) equals to the product of $1.2 billion and all those success rates, which equals to roughly $150 million.

We also know that the investment required is $150 million. Therefore, to justify this investment, the expected value of a candidate drug has to increase to $300 million, essentially doubling the original value. This in turn means that the overall success rate has to double. Because the investment only affects Phase II trial, the success rate of Phase II trial has to double. Hence the 40% increase.

Hope this helps.

Answer 3

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Answer 4

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Answer 5

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