Our client is GlobaPharm, a major pharmaceutical company (pharmaco) with $10 billion a year in revenue. Its corporate headquarters and primary research and development (R&D) centers are in Germany, with regional sales offices worldwide.
Description of situation
GlobaPharm has a long, successful tradition in researching, developing, and selling “small molecule” drugs. This class of drugs represents the vast majority of drugs today, including aspirin and most blood-pressure or cholesterol medications. GlobaPharm is interested in entering a new, rapidly growing segment of drugs called “biologicals.” These are often proteins or other large, complex molecules that can treat conditions not addressable by traditional drugs.
R&D for biologicals is vastly different from small-molecule R&D. To gain these capabilities, pharmacos have three options: they can build them from scratch, partner with existing start-ups, or acquire the start-ups. Since its competitors are already several years ahead of GlobaPharm, GlobaPharm wants to jumpstart its biologicals program by acquiring BioFuture, a leading biologicals start-up based in the San Francisco area. BioFuture was founded 12 years ago by several prominent scientists and now employs 200 people. It is publicly traded and at its current share price the company is worth about $1 billion in total.
GlobaPharm has engaged McKinsey to evaluate the BioFuture acquisition and to advise on its strategic fit with GlobaPharm’s biologicals strategy. Our overall question today, therefore, is “Should GlobaPharm acquire BioFuture?”
- Write down important information.
- Feel free to ask the interviewer for an explanation of any point that is not clear to you.
- Remember that calculators are not allowed – you may write out your calculations on paper during the interviews.
What factors should the team consider when evaluating whether GlobaPharm should acquire BioFuture?
- Take time to organize your thoughts before answering. This tells the interviewer that you think about the problem in a logical way.
- Develop overall approach before diving into details.
A good answer would include the following:
- The value of BioFuture’s drug pipeline, number of drugs currently in development, quality of drugs (likelihood of success), potential revenues and profits
- BioFuture’s R&D capabilities (future drug pipeline), scientific talent, intellectual property (for example, patents, proprietary processes or know-how for biologicals research), and buildings, equipment, and other items that allow BioFuture’s R&D to operate.
- BioFuture’s marketing or sales capabilities. Especially how promotional messages will be delivered, for example, relationships with key opinion leaders that can promote biologicals; key opinion leaders can come from the academic arena, like prominent medical school professors, or from the public arena, like heads of regulatory bodies or prominent telejournalists.
- Acquisition price.
A very good answer might also include multiple additional key factors GlobaPharm should consider:
- BioFuture’s existing partnerships or other relationships with pharmacos.
- GlobaPharm’s capability gaps in biologicals, R&D, sales and marketing, etc.
- GlobaPharm’s alternatives to this acquisition. Alternative companies GlobaPharm could acquire. Other strategies for entering biological segment, for example, entering partnerships rather than acquiring, and pursuing other strategies than entering the biological segment
The team wants to explore BioFuture’s current drug pipeline. The team decides to focus first on evaluating the value of BioFuture’s current drug portfolio. What issues should the team consider when evaluating the value of BioFuture’s existing drug pipeline?
- Be sure to mention a range of potential issues to explore instead of immediately diving very deep into one issue. Then ask your interviewer if he or she wants to go deeper on any of them specifically
A good answer would include the following:
- Further cost of R&D until each drug is ready to be sold.
- Potential value of selling each drug.
- Market size, for example, size of patient population, pricing
- Market share, for example, number of competitive drugs in R&D or on the market; different side effects, convenient dosing schedule (that is, patients are prescribed to take a drug at regular intervals that are easy to remember such as once a day or every 12 hours)
- Costs to manufacture and sell, for example, marketing, distribution
- Press about these drugs, for instance, have famous doctors called for this kind of drug? Is it only slightly improving on what is on the market already?
A very good answer would also include the following:
- Risk level
- Likelihood clinical trials of a drug will prove effective
- Likelihood that a drug will win regulatory approval
- Side effects and potential legal exposure, for example, potential law suits due to unexpected side effects
- Emergence of substitutes: are competitors working on substitutes already? Is it about speed and does BioFuture have enough researchers working on the respective drugs?
- Strength of underlying patents, that is, how likely is it that a competitor can successfully copy BioFuture’s drug?
Below is a description of expected probability of success, by stage, in the Pharma R&D pipeline.
Note: “Filing” is the process of submitting all of the clinical and safety evidence from Phase I, II, and III trials, and asking for regulatory approval to actually sell the drug.
GlobaPharm believes that the likelihood of success of BioFuture’s primary drug candidate can be improved by investing an additional $150 million in a larger Phase II trial. The hope is that this investment would raise the success rate in Phase II, meaning that more candidate drugs successfully make it to Phase III and beyond. By how much would the Phase II success rate need to increase in order for this investment to break even?
The interviewer would tell you to assume that if the drug is successfully marketed and sold, it would be worth $1.2 billion (that is, the present value of all future profits from selling the drug is $1.2 billion).
- Ask for clarification of information if necessary.
- Take notes of the numbers.
- Take time to plan out how to approach the calculation.
- Describe your approach and talk the interviewer through your calculation.
A very good answer would include the following.
Investment would need to increase the probability of success in Phase II from 40 to 80 percent (that is, increase of 40 percentage points). There are multiple ways to approach this calculation. One method is shown here:
- If a candidate drug passes Phase II, then it has a 50% x 90% = 45% chance of being successfully marketed and sold. Since a successful candidate drug is worth $1.2 billion, a candidate drug that passes Phase II is worth 45% x $1.2 billion = $540 million.
- To break even (that is, to make the $150 million investment worthwhile), the value of the candidate drug that passes Phase II would need to increase to $540 million + $150 million = $690 million. This means, the probability of combined success in Phase I and II would need to increase by (150/540) = 28 percentage points.
- So the current probability of Phase I and II, that is, 70% x 40% = 28% would have to increase by 28 percentage points, to 56%. In order to come up to 56%, Phase II probability would have to increase from 40% to 80% (70% x 80% = 56%).
- This seems like a very big challenge, as an increase by 40 percentage points means that the current probability of 40% needs to double.
- It is always good to provide a “sanity check” on your numbers and to provide common-sense commentary and insights on the implication of your calculations.
Next, the team explores the potential setup with BioFuture after the acquisition. Although BioFuture’s existing drug pipeline is relatively limited, GlobaPharm is highly interested in its ability to serve as a biological research “engine” that, when combined with GlobaPharm’s existing R&D assets, will produce many candidate drugs over the next 10 years.
What are your hypotheses on the major risks of integrating the R&D functions of BioFuture and GlobaPharm?
A very good answer would include the following:
- Scientists do not have overlapping disease (therapeutic area) interests or expertise and are unable to materially collaborate.
- Integration into the process-driven GlobaPharm culture kills the entrepreneurial culture at BioFuture that has been key to its success.
- Language barriers severely hinder communication and sharing of information.
- Poor management and sense of community as a result of R&D operations that might come with a time difference of 9 hours.
- Key scientific talent leaving BioFuture after the acquisition – either because acquisition makes them independently wealthy or because they don’t want to be a part of the new big GlobaPharm pharmaco.
- Recognize the “human element” of organizational change is always a key component of our work. Don’t forget to include these types of insights in your answers.