GSK to Assess Malaria Vaccine Market in South Africa

Case Type: market entry; business competition, competitive response.
Consulting Firm: ClearView Healthcare Partners first round full time job interview.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences; government, public sector.

Case Interview Question #01308: South Africa is an emerging market country in Africa. It is the 25th-largest country in the world by land area and, with close to 60 million people, is the world’s 24th-most populous nation as of 2018. The World Bank classifies South Africa as an upper-middle-income economy, and a newly industrialized country. Its economy is the second largest in Africa, and the 34th-largest in the world.

Our client GlaxoSmithKline plc (GSK) is a global pharmaceutical company headquartered in Brentford, London, United Kingdom. Established in 2000 by a merger of Glaxo Wellcome and SmithKline Beecham, GSK is the world’s sixth largest pharmaceutical company as of 2018, after Pfizer, Novartis, Merck, Hoffmann-La Roche and Sanofi.

The government of South Africa has recently approached our client GSK to apply to manufacture a malaria vaccine for their citizens. To win the bid, the government of South Africa requires that the vaccine be manufactured in their country. The government will not decide which pharmaceutical company wins the contract until after all bidders have an in-country plant. Should our client GSK make the investment to build a manufacturing plant in South Africa?

Additional Information: (provide only if corresponding questions are asked)

* What is the primary objective for the client GSK?

– To maximize profit, though other considerations may be important.

* What other products does our client have? / Is the vaccine our client’s only product?

– Currently GSK’s major product is an older product with declining sales in developed markets.

* Who are our client GSK’s competitors for this bid?

– GSK has two primary competitors for this particular bid:

(a) Competitor A’s malaria vaccine product is a new innovation, which costs more to produce and is currently of lower quality than GSK’s product.

(b) Competitor B’s malaria vaccine product is similar in product lifecycle, price, manufacturing cost, etc. to GSK’s product. Competitor B also has comparable size, scale and brand recognition.

Possible Answers:

1. Suggested Framework / Structure

A good framework for this case could include:

I. Investment decision

* Revenues
– Number eligible for vaccine, market penetration, any potential substitutes, growth of customer base.
– Price to customers.

* Costs
– Vaccine production — raw materials, labor, etc.

* Plant investment cost

II. Likelihood of winning bid

* Selection criteria

* Competitors
– Likelihood to enter bid
– Performance against criteria

* GSK performance against criteria

III. GSK Capabilities

* International operating experience?
* Financial situation — is GSK able to take on risk of project and up-front investment?
* Company brand.

2. Detailed Analysis

Question #1: What would you advise the client GSK in an absence of competition (certainty of winning bid)

Possible Answer:

The candidate should immediately recognize that this is a net present value (NPV) analysis — prompt him/her if not.

Additional Information to be provided (if asked):

* One-time plant investment: USD $50M
* South Africa’s population: 60 million, assume zero population growth.
– Assume life expectancy of 60 years and the population is evenly distributed across age groups.
– Malaria vaccine is given one time to children at age 2; requires 3 doses for immunity.
* Guaranteed price: $4/dose
* All-in cost to produce: $1/dose
* Assuming the client GSK gets the contract, they are guaranteed a lifetime patent.
* The client company uses a 10% discount rate in perpetuity.

Calculation:

* 60M total population across 60-year life expectancy = 1M children age 2 receiving vaccines each year.
* Revenue = 1M vaccines * 3 doses / vaccine * $4/dose = $12M revenue per year
* Cost = 1M vaccines * 3 doses/ vaccine * $1/dose = $3M cost per year
* Profit = $12M – $3M = $9M per year
* Perpetuity value = $9/10% = $90M
* NPV = $90M – $50M one-time investment = $40M

Conclusion: If the client GSK is guaranteed to receive the contract, they’re expected to have a positive NPV of $40M for this project.

Question #2: Given competitive landscape, is the investment still attractive?

Possible Answer:

Additional Information:

The interviewer should share that the South African government will make a decision based on
(1) the bidder’s ability to meet the $4 per dose price guidance, and
(2) quality of malaria vaccine product.

After revelation of this information, the candidate should recognize that competitor A’s higher-cost, lower-quality product is not competitive in the bidding process.

Therefore, the candidate should focus on competitor B — provide the information that competitor B has just announced the intention to bid and, because they have similar quality product and economics to the client GSK, they have a 50% chance of winning the bid.

At this point, the candidate should realize that GSK’s NPV is now negative, given the $50M required investment and 50% chance of winning the bid.
* $90M value * 50% chance of winning = $45M expected value
* NPV = $45M – $50M investment cost = -$5M

This can be set up as a prisoner’s dilemma!

Additional Insights:

* If the client GSK can manage their costs, they can make the investment decision more attractive.
– The candidate should recognize and explain this; the interviewer can then share that it is not possible for the client to achieve a better NPV situation through managing costs.

* Or, if there is a way to see whether Competitor B is going to make a bid before committing, the client can act accordingly.

The candidate could communicate NPV for each player in the different bid scenarios using a 2×2 matrix:

Question #3: What recommendation should we give GSK?

Possible Answer:

The candidate can provide any recommendation as long as it is backed up with data and logic.

Sample recommendation:

* The client GSK should not enter the market of South African and should not bid.

– With a 50% chance of winning bid, the contract will have a negative NPV of -$5M.
– Only if competitor B chose not to bid, NPV will be $40M with an investment of $50M.

Risks:

– Not entering a bid allows competitor to lock in the full $40M NPV.
– If competitor B also chooses not to bid, profit is left on the table.
– GSK will lose opportunity to enter a new emerging market, potentially expand to other products — this value is not included in NPV analysis.

Next steps:

– The client should explore risks further, particularly strategic importance of this market.
– This malaria vaccine seems to have value; the client may consider looking for similar emerging markets while Competitor B is working on this bid.