Case 3: Animal Drug I? Relocation McKinsey Qual. Quant. Pharma/drugs Round 2 3 5 Prompt Our client is a U.S. based startup company that has recently obtained FDA approval for their only product, a new steroid hormone for pigs. Research reports have predicted the animal hormone market to be very promising in China in the near future. A generous individual has offered to cover all costs for our client to relocate the entire business to China in 2015. Should they accept the offer? Additional Information (provided on request) + The individual's offer is purely out of generosity; our client will not have to pay back any of the relocation costs + Hormones used on Chinese farms are currently supplied exclusively by domestic producers + Our client's new drug currently sells for $20/kg in the U.S. + The pig hormone market in China is dominated by 3 major players + Our client has a good global reputation and has received several prizes for high product quality Assume that production costs for this drug in China vs. the U.S. are roughly the same Exhibit 1: Pork consumption in China vs. U.S.A, (2012) i ean oe eo Cee eaeeecrveaton bit 3. Priel Chi 3008-2012Case 3: Animal Drug Sample Structure (any reasonable one is acceptable) Relocation? =r [enon [cone [peu] [mage | z —— I fe (oe a= [somo | [5 [Semen] [re] [Pamony] (Sa ] [renin | [PER Analysis Interviewer note: ask the following questions sequentially and provide Exhibits when prompted. 1. What factors should our client consider in deciding whether or not to relocate to China? + Potential market; existing competitors; governmental policies barring entry; more listed in sample structure, and the factors the candidate mentions should be part of her structure 2. What is our client's potential market in China and in the U.S. in 2015? From Exhibit 1, candidate can calculate the following: + Total # pigs in China in 2012: 1.3b*0.4 = 0.52b = 520m + Total # pigs in China in 2015: 520m*1.05° = 602m (assuming constant growth rate) * Total # pigs in U.S.A. in 2012: 300m*0.2 = 60m + Total # pigs in U.S.A. in 2015: 60m*0.95° = 51m (assuming constant growth rate)Case 3: Animal Drug Analysis From Exhibit 2, candidate can calculate the following: + Potential market in China: ~600m*(5%"5% + 70%"10% + 25%"80%) = 163.5m = ~164m + Potential market in USA: ~50m*(10%*0% + 40%*20% + 50%*25%) = 10.25m = ~10m. Candidate can assume that our client will have 25% market share in U.S.A. and 2% in China + Market captured by our client in 2015: + China: 164m*0.02 = ~3.3m ° U: 10m*0.25 = ~2.5m + Client will be able to capture more market in China 3. If our client decides to relocate to China, at what price should they market their drug? From Exhibit 3, candidate can make the following observations: + In 2012, Company A made $15/kg*4,000 kg = $60,000; Company B made $10/kg*11,000 kg = $110,000; Company C made $5/kg"16,000 kg = $80,000. Therefore, Company B's pricing is the most profitable (assuming production costs are similar) Now tell candidate that 0.001 kg of hormone is injected per pig per year. + Our client can sell 3,300 kg in China and 2,500 kg in U.S.A. + At $10/kg, client will make $33,000 in China while in U.S.A. (where price is $20/kg), client will make $50,000. At this price, client will make less profit in China + For the drug to immediately bring more revenue in China than in U.S.A., client will have to sell it for more than 2.5/3.3*$20/kg = $15.15/kg 4. What other options does our client have? + Stay entirely in the U.S.; enter Chinese market but not relocate; joint venture with a Chinese company; any other reasonable suggestionCase 3: Animal Drug Summary This case is rather open-ended and both of the following options are good answers (bonus points if candidate comes up with both): Option 1: | recommend that the client relocates to China in 2015 and targets the state-owned farms as initial customers. The client needs to charge a price of at least $16/kg at the time of market entry for the drug to be immediately more profitable in China than in the U.S.A. Although $16/kg is expensive relative to similar drugs supplied by domestic producers, our client can leverage their reputation and quality guarantee to justify the high price, and should still capture 2% of the market share. Option 2: | recommend that the client does not relocate to China in 2015. Although they can capture a bigger market in China than in the U.S., they will face pressure from Chinese competitors (who sell their drugs at lower prices), and will find it difficult to sell the drug above $16/kg. Government policies in China may also be a barrier. Moreover, the client is already a dominant player in the U.S., and would benefit from focusing on maintaining this position.Case 3: Animal Drug Exhibit ork consumption in China vs. U.S.A. (2012) Country Pigs/person _—_—Population areal China 04 1.3 billion 47 USA 02 300 million 46 ‘Source: www.economist.com Exhibit 2: Treatment of pigs with hormones in China vs. U.S.A. (2012) _ Type of owner % of total pigs aot Pine cunrentty ones China USA China USA Pet owners 5% 10% 5% 0% Family-owned farms. 70% 40% 10% 20% ‘State-owned farms 25% 50% 80% 25%Case 3: Animal Drug | Exhibit 3: Pricing and volume of drugs sold by Chinese companies, 2008-2012 | companys 18 -e-conpany A 2 4 = Company 8 roonpanve = compnay ¢ oud 118000 16000 14000 12000 10000 80 60 40 20 2009 2010 201 2012 2008 2008 2010 2011-2012 Pricelkg (US dolloars) ‘Amount of drug sold (kg) 8888 3 :