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BREAKOUT SESSION A
PROMPT
Our client wants to acquire O’Care (OC), a small
biotech company. Most of OC’s products are in
development in the preclinical phase, but OC
does have a single revenue stream. This
revenue is from sales of OC1, the only FDA
approved orphan drug to treat Disease X.
Disease X is an inherited disease that affects
1/20000 among children at the age of 9 and
younger. Negotiations with OC have led to a
price of $60M. The client hires you to assess
whether they should acquire OC or not.
Q1.
WHAT FACTORS SHOULD BE
CONSIDERED?
SAMPLE ISSUE TREE
Q2.
WHAT CAN BE INTERPRETED FROM
EXHIBIT 1?
EXHIBIT 1
Q3.
WHAT ARE POTENTIAL SYNERGIES
FOR THIS DEAL? HOW WOULD YOU
ANALYZE?
Q4.
AFTER INVESTIGATING FURTHER,
YOUR TEAM ESTIMATES THAT
DISTRIBUTION COST OF OC1 COULD
BE CUT BY 50% AND PRODUCTION
COSTS COULD BE REDUCED 80%.
WHAT WILL BE THE COST SAVINGS
AND RESULTING NET PROFIT ON OC1
IN DOLLAR AMOUNTS?
PROFITABILITY COMPARISON
Pre Synergy Post Synergy
R/D 15%
Production 25%
Distribution 30%
Net Profit 30%
PROFITABILITY COMPARISON
Pre synergy Post Synergy
R/D 15% = $1.5M $1.5M
Production 25% = $2.5M 20% = $0.5M
Distribution 30% = $3.0M 50% = $1.5M
Net Profit 30% = $3.0M 3.0M + 3.5 M = $6.5M
Over 5 years, net
profitability is
$32.5M
Post Synergy
Profit
Production $2.0M
Distribution $1.5M
Total Profit $3.5M
Cost
Q5.
YOU’VE EXPLORED THE COST SIDE OF
THE PROFITABILITY QUESTION, HOW
WOULD YOU EXPAND THE REVENUE
SIDE?
SAMPLE MARKET PENETRATION
 Number of patients using OC’s treatment
(Revenue) / (average price/patient) =
($10M) / ($40K/patient) = 0.25K patients (or 250 patients)
 Percent of market OC captured
Number of patients with Disease X
(US population / Life Expectancy) * (10 years) * (Incidence of X) =
(320M people / 80 years) * (10 years) (1/20K) = 2K people with X
Market penetration for OC
(# of patients using OC’s treatment) / (# of patients with Disease X) *
100% =
(0.25K) / (2K) * 100% = 12.5% market captured for OC
Q6. WHY DO YOU THINK MARKET
PENETRATION IS SO LOW?
Q6.
TEAM HAS PERFORMED PRICE
SENSITIVITY ANALYSIS. WHAT CAN BE
INTERPRETED FROM EXHIBIT 2?
EXHIBIT 2
Q7.
OUR CLIENT’S CEO WANT TO
INCREASE PENETRATION TO 40%. A
TOTAL OF $1M/
YEAR ADDITIONAL INVESTMENT IN
PRODUCTION AND DISTRIBUTION
WOULD COVER THE ADDITIONAL 550
PATIENTS. R&D COST WILL STAY THE
SAME.
COULD THIS CHANGE MEET THE
FINANCIAL GOAL?
POST PRICE CHANGE
PROFITABILITY
Post Synergy
Cost
Post Price Change
Cost
R/D $1.5M
Production $0.5M
Distribution $1.5M
Net Cost $3.5M
POST SYNERGY PROFITABILITY
Post Synergy
Cost
Post Price Change
Cost
R/D $1.5M $1.5M
Production $0.5M $0.5M + $1M
Distribution $1.5M $1.5M
Net Cost $3.5M $4.5M
Post Price Change Revenue:
(Price/patient/year) * (# of treated patients/year) =
Revenue
($30K) * (250+550) = ($30K) * (800) = $24M/year
Net Annual Profit:
Revenue – Cost = Profit
$24M/year - $4.5M/year = $19.5M/year
Over 5 years, net
profitability is
$97.5M
Q8. SHOULD OUR CLIENT
PURCHASE O’CARE?
RECOMMENDATION
Yes. O Care can be greatly improved by 1)
synergies with our client’s existing operations 2)
modifying the pricing for this drug to increase
penetration. This would allow for annual net
profits of $19.5M, much higher than needed for
the board’s approval. This would additionally
provide our client with an expansion into the
orphan drug market.
RISKS
 Acquisition logistics: The client needs to consider how to
reorganize O Care to adopt this altered operations pipeline
from an implementation standpoint. Specific points of
concern are corporate culture fit, management adjustment,
and financing the deal.
 Competitive Response: Although OC1 is the only treatment
currently approved, treatment of this disease is lucrative so
other companies may consider entering this market.
 Regulatory: The length of the patent on OC1 should be
considered because this drug has been on the market.
Expiration of the patent would allow new generic
competitors to enter the market at a much lower price point.
NEXT STEPS
 Examine Disease X Patient Population: With only
40% market penetration even after cutting the
price in half, there must be other factors that could
be examined that would encourage usage of OC1
and thus increase units sold.
 Expansion to International Markets: The analysis
for this case mainly focused on a US population,
but other countries may have similar or even
higher prevalence rates. These represent entirely
unexplored opportunities.
QUESTIONS?

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LEFT_ON_C'N_ PRELIMS_EL_DORADO_2024.pptxLEFT_ON_C'N_ PRELIMS_EL_DORADO_2024.pptx
LEFT_ON_C'N_ PRELIMS_EL_DORADO_2024.pptx
 

2017 Case Workshop III - Breakout Session A

  • 2. PROMPT Our client wants to acquire O’Care (OC), a small biotech company. Most of OC’s products are in development in the preclinical phase, but OC does have a single revenue stream. This revenue is from sales of OC1, the only FDA approved orphan drug to treat Disease X. Disease X is an inherited disease that affects 1/20000 among children at the age of 9 and younger. Negotiations with OC have led to a price of $60M. The client hires you to assess whether they should acquire OC or not.
  • 3. Q1. WHAT FACTORS SHOULD BE CONSIDERED?
  • 5. Q2. WHAT CAN BE INTERPRETED FROM EXHIBIT 1?
  • 7. Q3. WHAT ARE POTENTIAL SYNERGIES FOR THIS DEAL? HOW WOULD YOU ANALYZE?
  • 8. Q4. AFTER INVESTIGATING FURTHER, YOUR TEAM ESTIMATES THAT DISTRIBUTION COST OF OC1 COULD BE CUT BY 50% AND PRODUCTION COSTS COULD BE REDUCED 80%. WHAT WILL BE THE COST SAVINGS AND RESULTING NET PROFIT ON OC1 IN DOLLAR AMOUNTS?
  • 9. PROFITABILITY COMPARISON Pre Synergy Post Synergy R/D 15% Production 25% Distribution 30% Net Profit 30%
  • 10. PROFITABILITY COMPARISON Pre synergy Post Synergy R/D 15% = $1.5M $1.5M Production 25% = $2.5M 20% = $0.5M Distribution 30% = $3.0M 50% = $1.5M Net Profit 30% = $3.0M 3.0M + 3.5 M = $6.5M Over 5 years, net profitability is $32.5M Post Synergy Profit Production $2.0M Distribution $1.5M Total Profit $3.5M Cost
  • 11. Q5. YOU’VE EXPLORED THE COST SIDE OF THE PROFITABILITY QUESTION, HOW WOULD YOU EXPAND THE REVENUE SIDE?
  • 12. SAMPLE MARKET PENETRATION  Number of patients using OC’s treatment (Revenue) / (average price/patient) = ($10M) / ($40K/patient) = 0.25K patients (or 250 patients)  Percent of market OC captured Number of patients with Disease X (US population / Life Expectancy) * (10 years) * (Incidence of X) = (320M people / 80 years) * (10 years) (1/20K) = 2K people with X Market penetration for OC (# of patients using OC’s treatment) / (# of patients with Disease X) * 100% = (0.25K) / (2K) * 100% = 12.5% market captured for OC
  • 13. Q6. WHY DO YOU THINK MARKET PENETRATION IS SO LOW?
  • 14. Q6. TEAM HAS PERFORMED PRICE SENSITIVITY ANALYSIS. WHAT CAN BE INTERPRETED FROM EXHIBIT 2?
  • 16. Q7. OUR CLIENT’S CEO WANT TO INCREASE PENETRATION TO 40%. A TOTAL OF $1M/ YEAR ADDITIONAL INVESTMENT IN PRODUCTION AND DISTRIBUTION WOULD COVER THE ADDITIONAL 550 PATIENTS. R&D COST WILL STAY THE SAME. COULD THIS CHANGE MEET THE FINANCIAL GOAL?
  • 17. POST PRICE CHANGE PROFITABILITY Post Synergy Cost Post Price Change Cost R/D $1.5M Production $0.5M Distribution $1.5M Net Cost $3.5M
  • 18. POST SYNERGY PROFITABILITY Post Synergy Cost Post Price Change Cost R/D $1.5M $1.5M Production $0.5M $0.5M + $1M Distribution $1.5M $1.5M Net Cost $3.5M $4.5M Post Price Change Revenue: (Price/patient/year) * (# of treated patients/year) = Revenue ($30K) * (250+550) = ($30K) * (800) = $24M/year Net Annual Profit: Revenue – Cost = Profit $24M/year - $4.5M/year = $19.5M/year Over 5 years, net profitability is $97.5M
  • 19. Q8. SHOULD OUR CLIENT PURCHASE O’CARE?
  • 20. RECOMMENDATION Yes. O Care can be greatly improved by 1) synergies with our client’s existing operations 2) modifying the pricing for this drug to increase penetration. This would allow for annual net profits of $19.5M, much higher than needed for the board’s approval. This would additionally provide our client with an expansion into the orphan drug market.
  • 21. RISKS  Acquisition logistics: The client needs to consider how to reorganize O Care to adopt this altered operations pipeline from an implementation standpoint. Specific points of concern are corporate culture fit, management adjustment, and financing the deal.  Competitive Response: Although OC1 is the only treatment currently approved, treatment of this disease is lucrative so other companies may consider entering this market.  Regulatory: The length of the patent on OC1 should be considered because this drug has been on the market. Expiration of the patent would allow new generic competitors to enter the market at a much lower price point.
  • 22. NEXT STEPS  Examine Disease X Patient Population: With only 40% market penetration even after cutting the price in half, there must be other factors that could be examined that would encourage usage of OC1 and thus increase units sold.  Expansion to International Markets: The analysis for this case mainly focused on a US population, but other countries may have similar or even higher prevalence rates. These represent entirely unexplored opportunities.

Editor's Notes

  1. Client Goal (Interviewer should emphasize this) - The board will approve the deal only if the acquisition can breakeven in 5 years. OC Business Model: - OC develops orphan drugs in house, but OC1 is the sole revenue stream. Other preclinical drugs can be considered mainly R&D cost within the 5 years. - Contracts with a third party for OC1 manufacturing and distribution/sales/marketing. Client Business Model: - Develops several classes of pharmaceuticals in house, but wants to expand to orphan drugs. Manufactures all drugs in house. Same external distribution/sales/marketing channels as OC.
  2. The R&D costs are very comparable, but our client’s in house production is a large cost savings over OC’s approach. Our client also seems to have lower costs for distribution even though they operate through the same third party.
  3. Potential synergies: - In house production by our client of OC1. - Marketing/distribution/sales via the same channel could be renegotiated to lower costs Streamline administration in management. How analyze? Direct comparison of production/distribution/administrative costs
  4. 10M revenue per year
  5. 10M revenue per year Breakeven over 5 years, is below the $60M goal. At this point, do you think we should go with the deal? No. Even with cost reductions from synergy, the net profit over 5 years will add up to $32.5M, $27.5M short of the goal set by the board.
  6. Revenue -Volume -Market Size -Share / Penetration -Competition -Price
  7. Candidate needs patients’ annual expense for OC1: $40K/patient If candidate did not ask, can remind Disease X affects 1/20k in children under 10
  8. Lowering of prices should allow for a larger capture of market share
  9. After 5 years, this is ~97.5M, more than the 60M acquisition cost