Market, target, value, risk: what it is and what to do instead

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

• What is the target worth on its own, and what extra could we add?
• Which single input swings that value most?
• Is the price below the value even if the extra does not happen?

Why reaching for it fails in an interview

• It is generic. Market, target, value and risk apply to every deal, so they show nothing about this one.
• It misses the driver that matters. For a biotech with one drug, the chance the drug is approved decides the value, and a four-bucket tour can bury it.
• It sounds rehearsed. Listing synergies before knowing how the target earns money sounds learned.

What to do instead: a worked case

1. 1

   Pin the question

   Decide whether the expected value of the drug to us is above the 2 billion price.

2. 2

   Write the maths of the goal

   • Expected value = chance of approval x value of profits if approved minus cost to finish the trials
   • Deal value to us = expected value minus price
3. 3

   Use what you know about the business

   • In pharma, a biotech with one late-stage drug is worth what that drug is worth, weighted by the chance it is approved.
   • Patent life left decides how many years of strong sales the drug will have.
   • A big buyer's sales force can speed up uptake after launch, which is the real synergy.

   The structure that falls out of it

   • Chance of approval
     • Trial results so far
     • Approval rates for similar drugs
   • Profits if approved
     • Patients
     • Price
     • Years of patent left
     • Faster uptake through our sales force
   • Cost to finish
     • Remaining trial cost

   Hypothesis: The price only works if approval is likely, so the chance of approval is the fact to test first.

4. 4

   Find the facts that decide it

   • Profits if approved are worth 4 billion today; finishing the trials costs 0.3 billion.
   • At a 60% chance of approval: 0.6 x 4 minus 0.3 = 2.1 billion, just above the 2 billion price. At 50%: 0.5 x 4 minus 0.3 = 1.7 billion, below the price.
5. 5

   Say so what

   Buy only if the trial data supports a chance of approval of about 60% or more: at 60% the drug is worth 2.1 billion to us against a 2 billion price, a thin margin, and at 50% the deal loses value. Ask for full trial data and push for part of the price to be paid only on approval. The risk is overpaying for one drug, which a payment on approval would limit.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.