GlobalPharm (M)
Case Link: http://www.mckinsey.com/careers/interviewing/globapharm
Client goal
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.
For the first part of the case prompt, at least three key words should have caught our attention: annual revenue is 10 billion, R&D and sales. Every case in an official case interview is well written and every words count. Although a business could be comprised of multiple parts along the value chain, the case usually has some hints on which parts will be the focus. In this case, R&D and sales seem promissing.
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.
As we hear further about the case prompt, R&D and sales show up again. Moreoever, we get a key piece of objective-related information: this case is about market entry.
If we hear further, we get more information on the objective: this case is about market entry using M&A, or more specifically, a merger. The merger target is located in San Francisco, and this should remind us that the client is located in Germany. The 1 billion market valuation of the target BioFuture should be written down on your note too. Specific numbers in case prompt should always be written down because they can come up later in the case as part of a calculation and the case may not show these numbers to you again.
McKinsey study
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?”
Now this is the last part of the case prompt. We are given a very specific objective, which is "Should GlobaPharm acquire BioFuture". Please note that a general criteria of this evaluation is also given in the case prompt, which is "stratigic fit with GlobaPharm's biologicals strategy". It is important to take note of this on top of writting down the ultimate question of "Should GlobaPharm merge with BioFuture" because this case prompt essentially not only gave you a question but also gave you a metric based on which the answer should be created.
The first step I recommend after hearing the case for the first time is to summarize the case prompt back to the interview. Please note that it's a summary not a repetition. It should be succinct, to the point, and objective-verifying. I probably would say that "Please let me recap the case just to make sure that I understand it correctly. So our client is GlobaPharm, a large pharmaceuticals based in Germany, that wants to acquire a start-up majoring in large molecule drugs that's based in San Francisco. Our goal is to help our client evaluate the strategic fit and determine whether they should make this acquisition. Am I correct?"
I think there are two benefits to recapping the case prompt to the interviewer, the first is to make sure that you get the story correctly, and the second is to give yourself sometime to digest the story better before proceeding to latter parts of the case. I find it very helpful to say the objective out loud so that I actually remember about it throughout the case. It's also very client friendly and reassuring to the interviewer because the least thing a interviewer wants to see is that a candidate misunderstand a case from the very beginning.
Question 1:
What factors should the team consider when evaluating whether GlobaPharm should acquire BioFuture?
For clarifying questions, I probably will ask one about the large molecule drug and another question about whether there is any revenue or profit target when making the strategic evaluation. I would ask about the revenue or proift targets question because in the case prompt the annual revenue of GlobaPharm and the market evaluation of BioFuture both came up and they are hints that this case may have a specific target to meet regarding this acquisition.
For the first question, it's a typical McKinsey's first question, and of course it's a structuring question. Like I mentioned in the case analysis for Super Soda, McKinsey's structuring is about a relatiely MECE list of key factors, and it's also why the question asks for "what FACTORS shouldt eh team consider"
For the structured list of key factors, I usually would bucket and list them in a way that I feel fit to evaluate an acquisition target. To me, an acquisition target would be a good one if it meets three criterias: 1. it should have solid profitablity potential in the large moledule drug market; 2. it should be competitive when evaluated against its close competitors. 3. it should create a positive synergy with our client, or at least, shouldn't bring a negative synergy
And that through flow is exactly how I would state my hypothesis and structure my case, I would say that "Given our goal of evluating the strategic fit of acquiring BioFuture, I would think that it could be a good acquisition target if it meets three criterias: 1. it should have solid profitablity potential in the large moledule drug market; 2. it should be competitive when evaluated against its close competitors. 3. it should create a positive synergy with our client, or at least, shouldn't bring a negative synerg. Therefore, I would examine three main types of key factors: Biofuture's profitability potentials, Biofuture's competitiveness, and Acquisition synergies & dis-synergies"
Regarding the delivery of my structure, I probably would continute to say that "For Biofuture's profitability potentials, I would like to evaluate four areas: (1) Products (2) R&D capabilities (3) Sales and (4) Operations. For products, I'd like to understand what are BioFuture's existing products and how profitable they are. Moreoever, I'd like to know what products BioFuture has in the pipeline and what are their market and profits potential. For R&D capabilities, I'd like to understand how BioFuture could sustain their key capabilities and continue to bring good products to the market and stay compeittive. For sales, I want to understand BioFuture's sales strategy and execution. And for operations, I want to know how drugs are manufactured and how costs are incurred in order to further nail down the cost side of the picture.
For BioFuture's competitiveness, I'd like to examine three areas: (1) General market trend (2) BioFuture's close competitors and (3) (2) BioFuture's competitive strategies. For general market trend, I want to understand where the market is heading regarding large moleculre drugs and whether it favors BioFuture's existing and potential products offerings and its R&D capabilities; for competitors, I want to know what other start-up and established large molucule companies are out there and how they differentiate themselves from BioFuture, and what are the pros and cons of BioFuture compared to them. This is beneficial also because we may identify alternative acquisition target for our client. Lastly, I want to understand how BioFuture prepares to compete with its competitiors in the short and the long run.
For the synergies and dis-synergies, I would like to examine four parts: (1) R&D synergies (2) Sales synergies (3) Operation synergies and (4) Other synergies. For R&D synergies, I wonder if our existing researchers can cooperate well with BioFuture's researchers. The potential barriers may include language difference, background difference regarding small and large molecules, geographical and timezone differences, and incentive structures as well as other organizational differences. With regards to sales, I want to know wether sales resource and network can be merged and create positive synergies, for example, cross sell large molecule drugs to small moleculre customers, better utilization of sales force and channels. For operation synergies, I want to know if procurement, manufacturing and distribution infrastructures could be shared and be better utilized. Lastly, there may be other synergies we can explore, for example, marketing synergies, as well as management and backoffice functions. It's useful to add that dis-synergies could be present too, so when I talk about synergies, my underlying hypotehsis is that the synergy could be positive or negative. "
I gave the above suggested structure without looking at the sample answers from McKinsey. If you cross compare, there are surely differences, but both will work and from my point of view, both are adequate.
Question 2:
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?
The second question is an evaluation question and it asked "what issues", which to me, is exactly the same with asking "what key factors" like in Question 1. So the approach I suggest to take for Question 2 is exactly the same with Question 1 but with a different objective. However, before I begin to structure, I probably would verify a few things first: (1) what does pipeline mean, does it include existing drugs only or does it also include drugs that are being developed or clinically tested and drugs that are waiting for approval? (2) When we say value, do we mean the lifetime discounted sum of profitability?
Then I probably would structure the answer of Question 2 this way :"By each product line, I would like to evaluate the revenue and cost for the expected lifetime of the drugs. The key issue related to revenue include (1) the general market outlook of the demand for a drug, which are driven by the population, their disease-specific trends, related government regulations and insurance provisions; (2) potential competitions and how much market share they are expected to take; (3) success rate for drugs that are not yet fully clinically tested and FDA approved; (4) planned marketing and sales strategies. The key issues related to cost include (1) development cost (2) clinical trial cost (3) approval cost (4) Manufacturing cost (5) marketing, sales and distribution (6) other back office costs"
The general principle for answering questions of this type is (1) be very structured (I generally follow my problem solving thought-flow) (2) when explaining key factors or issues, tailor them to the case rather than being generic (3) have priority if there is apparent priority to take (for this question, I didn't prioritize certain issues over others)
Question 3:
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?
Question 3 is a quantitative question. This question involves some probability and expectation related concepts and I find that candidates with no quantitative background tend to have more problems with these kind of calculation. My suggestion is to familiarize yourself with these computations because they appear fairly frequently in cases.
If you remember, I suggested once in the calculation of Break Even quantity, including an unknown in your calculation is not very client friendly. But I also said that in some scenarios, including an unknown is acceptable. Question 3 is a case where I think it's acceptable to do so.
What I would say will be something like: "The expected value of the a drug is given by the product of the success rates of all phases and the value of the drug once succesfully developed and marketed. Therefore, what I plan to do is to calculate the expcted value of a drug assuming the success rates of all phases remain the same, and assming Phase II success rate has changed, respectively, using an unkown denoting Phase II's success rate after change. To break event, the two expected value should have a difference of 150 million dollars. Therefore, I can use this difference to solve my only unknown: the changed Phase II success rate."
"If you don't mind, I plant to write down the equation and solve for the changed Phase II success rate". The equation will be "0.7*X*0.5*0.9*1200-0.7*0.4＊0.5*0.9*1200=150" Solving this equation gives me an X value of 80%, which is two times the current Phase II success rate.
As McKinsey sample answer suggested, "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." In this case, it's pretty obvious that an increase from 40% to 80%, which is a doubling of current success rate, could be challenging. You can probe a little more by saying that if you have more information on how Phase II is conducted, and have some industrial averaged to bench mark against to, you will be able to have a more solid conclusion. However, based on current evidence, you tend to lean towards the conclusion that the investment won't pay off easily.
I am posting a mock recording where there are two quantitative questions that are fairly complex and requires fast interpretation and quick calculation. If you are raw on the quantitative sections, it might be good to listen to the recording and solve the case yourself.
Question 4:
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?
The last question, Question 4, is a brainstorming question. As always, a structured answer is expected because it relfects logical thinking and organized communication, both of which are critical to a successful client interaction in management consulting.
Innovative ideas in brainstorming sections are always welcome and definitely serve as a plus. But the top priority is structure.
When it comes to brainstorming, I usually just let ideas quickly run through my head and categorize them before presenting. You can ask for a few sec to organize your answer for sure. I will probably say that "I see there could be four major types of risks. Scientistis capabilities, organizational structure, logistics, and merger related risks"
"For scientists capabilities, I'm thinking whether the knowledge base and skill sets of small and large molecule researchers overlap or can actually be brought together and create synergies. For organizational structure, I'm thinking wether the newly merged entity has the necessary organizational texture to allow the two teams to work together. For example, the start-up may have very flat stucture where scientists take a free style in how they conduct research and create ideas, where GlobaPharm may exhibits charactersitics of established bigger firms. For logistics, the apparent risks include lanuages and time zone differences. For acquisition related risks, I'm thinking cultural differences, as well as the risk of the smaller start-up's scientists exiting the firm after the acquisition is complete."