McKinsey Case Interview Practice #2: Pharma Acquisition

This McKinsey case interview practice case is an acquisition case, a common type of case given in consulting first-round and final-round interviews. In order pass consulting interviews and land a consulting job offer, it is critical that you practice and master the right case interview strategies and frameworks.

[harrysun]

i think question 3 is wrong, the expected value is related to probability afterwards. so the expected value at the start of phase III doesn't change no matter how much invested in phase II. so at start of phase III, the expected value is $540m whether or not invested 150m more. the expected value after phase I is 540*0.4=216m. if invested 150m in phase II, the new rate is x, 540*x=216m+150m=366m, (the old value is 540*40%=216). x=67.7%, old rate is 40%, so it have to increase by 27.7%.

[niranjansitapure]

This was pretty helpful for somone doing a M&A case for the first time.

[judyl.]

term:
0:28 regional (sales) office 企業常會在代表性地區設立Regional Office來協助各國市場的經營
0:44 aspirin, cholesterol 膽固醇
1:03 pharmacos: 製藥公司
1:14 jumpstrat 快速啟動
1:19 biological 生物的；與生命過程有關的
1:30 at its current share price, the company worth 1 bn.
1:56 molecule 分子

2:07 the objective

[rnmcggc]

There's an easier way to think about Q3 that also shows why the video is correct. We want to know what percentage point change in Phase II probability will equal $150M in expected value. That is, (X/100)*($ value of 100% Phase II probability)=$150M. First, calculate the total expected value if the probability of Phase II is 100%, or $1.2B*0.9*0.5*1.0*0.7=$378M (note that this includes the probability of Phase I--more on that below). Then, just divide $150M/$378M ≈ 40%. This works regardless of the original Phase II probability. But since we begin with 40%, it means the company must achieve a 40%+40%=80% Phase II probability to make the investment worth it.

Why Phase I matters: we're analyzing the impact on the expected value of a single drug, "BioFuture's primary drug candidate, " which has not yet reached Phase II. Since there's only a 70% chance it even gets to the point where the investment was made, that probability must be included in the expected value of the investment. On a related note, since the case includes the slightly confusing statement that the investment means "more candidate drugs successfully make it to Phase III and beyond, " a good clarifying question or next step could reference the additional value the Phase II improvement would provide for other drugs.

[javierescandell]

Not very clear (1, 2*0, 9) = 1, 08 * 0, 5= 0.54 + 0, 15 = 0, 69 *0, 8 = 0.55 * 0, 7 = 386, 4 millions is the profit if the product arrives to the market with an investment of 1, 2 billions? is that correct?

[ellobo]

Hi - what about the fact the new company is in a different country? US has different regulations from the EU (Germany) especially when it comes to drugs. Would they even be able to be sold in the European market? Would it make sense to include that in the market bucket?

[hosyb]

i dont understand the argument why the 150M paid needed to be justified over the increase in success rate of clinical trial. i was thinking biofuture revenue should be projected, then valuated using dcf model. and the 150M would mean how many % of share, and how much return given every year and so on. pls advise

[pinkcap]

Great work. You just forgot to mention a very important factor under synergies bucket in the first question, and thats Cultural Synergies, meaning will the two companies mesh well

[stefantijink]

How do we break even if the expected value at the beginning of phase III increases by exactly $150 million? We have to invest the $150 million during phase 2 but we still have a chance that the trial does not pass phase II. Hence, I would think that our expected value after phase II (and thus at the start of phase III) needs to increase by more than $150 million to offset the risk of failing the project during phase II. Instead, I would argue that the expected value at the beginning of phase II (rather than III) has to increase by $150 million, to offset the investment of $150 million made at that point in time. Or am I overlooking something here?

[lucaMMXI]

What a weird Exercise 3 to begin with, whose solution is also all sorts of wrong:

Error 1: the $150 investment is done at Phase II, not Phase III (as others have picked up here)
Error 2: even if the $150 million investment was done at Phase III, we would have to divide the $690 million ($150 + $540) by $1.08 billion at Filing to get to the minimum new expected value at Phase III, resulting in a minimum increase of 64% (up from of 50%).

[hemanthpalle]

how is the drug worth related to the probability of success??

[elenafridman]

Cool case, especially the calculation part.

[GandlesSandles]

@7m30 can anyone explain how 50% of $1.08 Billion is $540 Million? Is it not $504 Million?

[seankim]

In Q3. How come an increase of 28% in expected value results in an increase in 28% for the probability of getting to phase III? If the expected value for the drug needs to be 690M in phase III doesn't that mean it needs to have a 57.5% (690M/1.2B) chance of getting to market?