nucleon solution 3

7/22/2019 Nucleon Solution 3

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1

NUCLEON

The date is December 1990

Nucleon is a small biotechnological

company specialized in R&D, nomanufacturing capabilities

Potential products CRP (cell regulatingprotein) and 2 other products

In order to get to the market the drug mustbe approved by FDA->successful clinicaltrials



2

Vertically integrate downstream into

(pilot) production or “buy” theproduction on the market

DILLEMA



3

Bio techno logy

Biotechnology a relatively new field

Nucleon one of over 200 companies, mostof them specialized in R&D.

Companies racing to be first to clone agene (proprietary position)

CRP attractive niche

Burn wound treatment Kidney failure



4

Bio techno logy

Strategies of BT companies -> most R&D,some integrated into manufacturing, somealso into marketing



5

Legal framework

Competition was mostly in R&Destablishing a strong proprietary positionwas crucial

Risks of establishing a strong proprietaryposition New legislation (difficult to predict court

rulings)

Time demanding to obtain a patent Most companies could not wait until patent

was granted (time lag)



6

Drug development

process

Drug development process was verycomplex (growing genetically alteredbacteria was very much an „art‟)

Nucleon currently produced quantitieswell below those needed for clinicaltrials (scale up 10x)

Due to complexity of process scalingup was unpredictable



7

Human clinical trials

To get FDA approval drug had toundergo three phases of clinical trials

Phase 1 trials assessed basicsafety -adverse reaction (6-12months)

Phase 2 (determining appropriate

dosages on a small sample->1-2years)

Phase 3 trials assessed product’sefficacy (multiple hospitals and

large number of patients, 2-5 years)



8

Financial environment

Poor capital availability (“buyers‟market”)

Venture capitalists expected returns of30%

Nucleon just about to receive another 6mil $ from its venture capitalist

With additional infusion (6 mil $) and

cash on hand, Nucleon had about 6,5 mil$.

Market analysts expected that situation

on capital market would improve in 1992



9

Manu factur ing op t ions for

c l in ical tr ials

Three different options for Phase I and II

The new pilot plant

Contract manufacturing Licensing product to another company

Two options for Phase III

V. I. into commercial manufacturing

Licensing out manufacturing and marketingrights at Phase III



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Phase I and II – three options

Licensing out

in Phase I

Pilot production inthe new pilot plant

Contract

manufacturing

outside the firm

Phase I and II



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The new p i lo t plan t

Pilot plant capacity (~600 m2) wouldmeet Nucleon‟s requirements for Phase I

and II

Investment outlay can be found in exhibit3

The pilot facility could however not be

used for Phase III (stricter requirements) It was beyond Nucleon‟s financial

capability to build such a plant at this

time



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Contract manu factu r ing

Biggest advantage no major capitalinvestment (if CRP failed contract could beeasily terminated)

Companies offering contract manufacturinghad facilities and their personnel in place

Contract manufacturing not inexpensive(see exhibit 4)

Industry experts believed that excesscapacity would accumulate in the future

Much time needed to transfer process dueto high complexity



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L icens ing ou t-Phase I

Nucleon could license the productimmediately (before human clinical trials)

Get 3 mio $ cash on hand (immediately)and royalties equivalent to 5% of grosssales (upon FDA approval)

Gross sales estimates (exhibit 5)



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Phase III – two opt ions

Licensing out in

Phase III

Phase III

Vertical integration

into manufacturing



15

Vert ical in teg rat ion into

commerc ial manu factur ing

Before Phase III Nucleon could V.Iinto manufacturing

21 Mio $ required to perform scale up(provided by venture capitalist ifintermediary results promising)

If FDA approved the drug Nucleonreceived 5 mio $ upon FDA approvaland royalties equal to 40 % of thepartner‟s gross sales



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L icens ing ou t in Phase III

Under this option Nucleon couldexpect to receive 7 mio $ upon FDA

approval of the drug and royaltiesequivalent to 10% of the partner‟s

gross sales



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Back to the case:

Methodo logy

Use decision tree for determining possiblescenarios

Number of factors has to be considered:

Qualitative arguments (pros and cons ofevery alternative)

• Organizational change• Technology transfer costs and risks

• Long term strategic options• Other

Quantitative arguments (Financial returns-NPV)



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Study quest ion 1

(work in groups o f 4)

Develop a proper decision tree



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license

license

license

license

contract

production

production

pilot

Phase I&II Phase III



20

Study quest ion 2


Develop a table with pros. and

cons. for Phase I&II and

Phase III



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Pros and cons (Phase I and II)

Alternative

Pros Cons

Build pilot plant - Future options (other products)- Higher profits- Learning economies- Possibilities for economies ofscope (Kidney failure treatment)-More control over process

-high asset specificity

- Organizational change- Large investment (capitalavailability)- Process uncertainty (scale up)- time consuming

Contractmanufacturing

- Requires no capital investments- Little risk (terminate contract)- Contracting companies havefacilities and personnel in place

- Focus on core competencies- Strategic flexibility

- Big risk of confidentialinformation disclosure- Still time consuming because ofthe complexity of process

- V.I at Phase III questionable-Asset specificity

License theproduct

-Obtain cash immediately- No further investments arenecessary-Company can concentrate on

R&D

- Lost ownership of CPR-1- Much lower potential income- “Mortgaging company’s future”

in eyes of its employees



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Pros and Cons (Phase III)

Option Pros Cons

Vertical

integrationofproduction

-Lower risk

-Good possibilities ofraising needed funds- Possibilities otherproducts- Large potentialincome

- Large investment of

$21 million-Organizational change-Could get lost inproduction

Licensingout

- no furtherinvestments- No organizationalchange- Could focus on R&D

-Significantly lowerincome-Smaller risk-Lower possibilities ofV.I in the long term



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Study quest ion 3


Based on the NPV makerecommendations

Calculating NPV: Estimate operating CF

(exhibit)

Discount factor (30 %)

General approach (usedifferent discountfactors according torisk of each CF)

Assumptions:•Discount factor 30 %•Gross sales represent after taxcash flows•Sales after 2002 grow constantlyat 5%•Depreciation tax shield CF andPhase III cost are approximatelyequal

•How do you feel about theseassumptions?



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NPV calculation

First calculate pilot manufacturing + V.I.

Based on NPV calculation makerecommendations



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Example of NPV calculation –

pilot manufacturing + V.I.Costs of pilotprotuctionand testing

Additional:costs of plant

21 mio

40% salesrevenue

Additional:payment $ 5mio

Additonal: PVof future sales

Sales

revenue Cash flow

Present value

(1991)

1991 -3350 -3350

1992 -1840 -14151993 -23204 -13730

1994 0 0

1995 0 0

1996 0 0

1997 0 0

1998 53700 26480 42201999 99500 39800 4879

2000 125000 50000 4715

2001 130000 52000 3772

2002 780000 312000 13392

NPV 12483



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FCF analysis

Alternativa P/P P/L C/P C/L L/L 1991 -3350 -3350 -250 -250 3000 1992 -1840 -1840 -1995 -1995 0 1993 -23240 -2204 -23550 -2550 0

1994 0 0 0 0 0 1995 0 0 0 0 0 1996 0 0 0 0 0 1997 0 0 0 0 0 1998 26480 12370 26480 12370 2685 1999 39800 9950 39800 9950 4975 2000 50000 12500 50000 12500 6250 2001 52000 13000 52000 13000 6500 2002 312000 78000 312000 78000 39000 NPV 16478 3596 19276 6372 7275



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NPV of “branches” on the decision

tree

license

license

license

license

contract

production

production

pilot

Phase I&II Phase III

16.487

3.596

19.276

6.372

7.275

nucleon solution 3

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