Nucleon Assignment

Read the Nucleon case and have a look at the net present value (NPV) calculations
provided for the following five options through the year 2029:

Phase I/II Production - Phase III Production

a. Nucleon - Nucleon
b. Nucleon - Licensee
c. Contractor - Nucleon
d. Contractor - Licensee
e. Licensee - Licensee

Consider options (a) through (e) and the NPVs, and answer the following questions:

1. Based on your analysis of the NPV and competitive advantage, which option do
you recommend?

Option e, Licensee Licensee, is best suited considering Nucleons strength in R&D,

need for immediate funds, and low appetite for large financial loss.

2. Why did you make that recommendation? Consider the impact on Nucleon's
capabilities if it were to choose each of the five options. Also, comment on the ability
of Nucleon to sustain competitive advantage with each of the five options.

So far, Nucleon hasnt been able to bring a single drug to the market in order to command
any competitive advantage. Trying to expand and vertically integrate early on might keep
it from developing any competitive advantage and jeopardize its long term existence. In
the event the drug fails clinical trials, the partnering pharmaceutical company wont lose
as much since it already has manufacturing facilities in place and enough capital to bear
the financial burden. However, Nucleon wont be able to sustain any financial loss at this
stage and might no longer survive a large scale failure. Moreover, in the event the drug
successfully reaches market, established pharma companies have years of experience and
much better manufacturing resources to produce higher quality drugs and overcome
competition from potential substitute products. This in turn increases likelihood of a
blockbuster drug, which in turn increases Nucleons competitive advantage and
reputation in the market. Building manufacturing capability in-house is too risky and
doesnt fit well with the companys core strength at this point. Contracting and then
licensing, option d, doesnt make sense since it wont see any returns till year 8. Even
though smaller returns, funds now through licensing can help continue work on other
projects that can potentially add towards competitive advantage and help establish the
company as a research intensive institution.

Nucleon-Nucleon:
If Nucleon decides to keep manufacturing in-house, for all phases of clinical trials as well
as commercial manufacturing, it can build certain capabilities early on and use them as
competitive advantage in the longer run. First, by building in-house pilot plant, Nucleon
can firmly control process and quality procedures. This allows Nucleon to build on its
learning experience gained during Phase I & II and apply that during Phase III. This
capability can possibly allow Nucleon to differentiate itself from competition by
producing better quality drugs. Second, scaling up for commercial manufacturing in
Phase III will be much easier and reliable, reducing risk of failure. This is evident from
the fact that duplicating process from one organization to another is fairly difficult and
increases chances of failure exponentially. Third, if there are any changes in
specifications, Nucleon will have greater flexibility to make changes. This capability
will greatly reduce risk of any hold-up opportunity in the event Nucleon contracted to a
third-party biotechnology company. Fourth, since process development requires a great
deal of trial-and-error and close collaboration between research scientists and process
development scientists early on in the project, keeping both functions in-house will
definitely make it easier to co-ordinate and maximize probability of success. Fifth, and
most important in terms of sustaining competitive advantage, if Nucleon keeps Phase III
and commercial manufacturing in-house, it will be the sole supplier for the drug to the
partner pharma company. This clause will not only reduce competition, but also
minimize any hold-up opportunities that partnering pharmaceutical company can
impose. Sixth, Nucleon can continue work on alternate projects. With $26M on hand,
Nucleon can spend $13.4 M in 2011 towards CRP-1 (R&D + New Pilot plant) as well as
additional $12M during 2011 and 2012 for alternate application project and perhaps a
little towards second generation CRP-1 molecules produced in mammalian cells. This is
because, in the event CRP-1 clears pre-clinical trials successfully, the firm can generate
additional funding for Phase I and II clinical trials towards end of 2011/early 2012.I am
assuming the additional funding will include additional $84M required for facility and
development resources during 2013. Success in second generation mammalian cell
project can improve competitive advantage by differentiating its CRP drug having
enhanced characteristics, while success in treating kidney failure will grow the existing
market, both equally important for long term profitability. Finally, developing key-
resources in-house will allow Nucleon to sustain long term competitive advantage and
also leverage these resources and capabilities for future projects.

On the contrary, there are certain disadvantages to keep all manufacturing capabilities in-
house. First, theres a huge risk to the company since historically most drugs that entered
clinical trials didnt make it to market. By putting all eggs in one basket and making huge
investments up-front, Nucleon is relying heavily on the success of just one product.
Second, theres always a possibility that a new process development technology might
replace the existing process. If Nucleon invests in building manufacturing capability in-
house, it faces the risk of upgrading to a new technology that will be vastly different. This
will not only add towards capital investment, but also cause production delays during the
transition phase. Third, in-house manufacturing can distract and move resources away
from R&D, which is currently its core strength. Over here, I am referring to resources
only in terms of human capital - mainly from a management perspective but could also
include research scientists. The companys core strength and capability reside within
R&D, so building manufacturing capability in-house might be a huge undertaking with
potentially higher risk of organizational issues. There doesnt seem to be huge risk to
alternate application project in terms of funding for 2011 and 2012, however, we need
more data to see how much funding is required for second generation CRP-1 molecule
project. Finally, by going against board members preference - keep all financial,
managerial and technical resources focused on R&D Nucleon will put its future
reputation at risk in the event CRP-1 drug fails to launch in the market.

Nucleon-License:
This option mainly reduces risk of upfront capital expenditure of $84 M towards facility
and development resources during 2013, in the event CRP-1 drug fails clinical trial
during Phase III. In terms of expenditures, Nucleon will still have to spend $13.4 M in
2011, leaving the same cash on hand, ~$12M, for other projects. After 2011, Nucleon
should be able to raise additional funding once pre-clinical trials are successful. Beside
financial liquidity, Nucleon will also build some experience and resources through in-
house pilot plant. It can leverage this expertise for future projects and possibly
minimize production expenses compared to contracting. Another upside is that
management will have less distractions related to manufacturing during Phase III and
full-scale production, so can focus its attention on other projects within R&D. As
mentioned in first option, this can improve chances of further improving competitive
advantage if some of the other projects are successful. Finally, it can create additional
source of revenue by providing contract manufacturing services for other biotech firms
while the pilot plant is idle.

However, there are some downsides to this option as well. First, since it is very difficult
to duplicate production process, moving production from in-house to another
organization will increase risk of failure. Second, this option has lowest returns, limiting
funding for future projects and making it even more difficult to justify a huge initial
investment in a new pilot plant. Third, the pilot plant could potentially sit idle when
there are no future projects ready for clinical trials, tying up capital without any returns.
This is more likely the case since there are no projects in pipeline that are ready for
clinical for next few years. Moreover, with increasing excess capacity in the industry, it
might be difficult to contract excess manufacturing to external companies. On the other
hand, it reduces Nucleons competitive advantage in the longer run if it doesnt have
manufacturing capability in-house. Finally, it will require time and resources to write
up contracts and manage transaction with partnering pharmaceutical company. This will
take away some resource time in terms of management and administration.

Contractor Nucleon
This option requires a much lower initial investment during 2011. The only upside I can
think of from a financial perspective is that Nucleon will have more liquidity as
compared to option # 1 to spend on other projects. However, since theres enough cash on
hand to continue work on all existing projects for next 2 years, this doesnt seem to
provide any added value - unless you license all rights upfront and minimize spending
and risk. Moreover, contracting is neither inexpensive nor saves any time when compared
to building new pilot plant in-house. It also eliminates capability of in-house pilot plant
that could be leveraged for Phase III and commercial manufacturing. Moreover, it will
increase risk of failure when production is transferred from contract manufacturer to in-
house manufacturing. Nucleon will have less control on quality and procedures during
Phase I and II testing and reduced flexibility of changing specifications during
production. Moreover, it will need additional resources and time to write up contracts and
manage performance during Phase I and II clinical trials.

This option does have all other benefits in terms sole supplier right, maximum revenue,
and other points mentioned under Option # 1. In addition, Nucleon can focus most of its
energy and resources on R&D over next few years. This can possibly increase chances of
success in other alternate projects and add towards it competitive advantage. Moreover,
by avoiding initial spending on pilot plant, Nucelon can stay liquid for longer and
diversify on other projects in the event CRP-1 fails to clear Phase I and II clinical trials. It
gives the company more time to evaluate results from CRP-1 project and delay bigger
commitments for later.

Contractor License
As mentioned under previous option, contracting eliminates capital expenditure of $12M
initially and allows the company to focus on R&D. It allows the company to have more
cash on hand that it can spend on other R&D projects and also allows management to
focus all resources technical and human - towards R&D function. Moreover, licensing
out manufacturing and marketing rights right after Phase II clinical trials reduces
financial risk in the event drug fails to clear Phase III testing or is unable to meet sales
forecast.

This options increases chances of failure since the production will have to be transferred
from contractor to partner pharmaceutical firm. Second, Nucelon will have less control
on quality and procedures during Phase I and II testing at contractor facility. Third,
coordinating between in-house research scientists and contractual process development
scientists might be cumbersome and might reduce efficiency and chances of failure.
Fourth, as mentioned earlier, this option will reduce flexibility of changing specification
during process development and Phase I and II clinical trials. This might cause
unnecessary delays and increase in cost due to potential hold-up opportunities from the
contractor. Moreover, it will need additional resources and time to write up contracts and
manage performance during Phase I and II clinical trials.

License License

Finally, licensing all rights for clinical trial, commercial production, and marketing
upfront, upfront will offer the least risky option for Nucleon. There is lower financial risk
in the event clinical trials fail at any stage. Second, if the company focuses attention
towards other R&D projects alone, it can create future opportunities quicker and increase
chances of building a reputation as a pure R&D and drug discovery research-intensive
company. So far, Nucleon hasnt been able to bring a single drug to the market in order to
command any competitive advantage. Trying to expand and vertically integrate early on
might keep it from developing any competitive advantage and jeopardize its long term
existence. In the event the drug fails clinical trials, the pharmaceutical company wont
lose as much since it already has manufacturing facilities in place and enough capital to
bear the financial burden. Moreover, in the event the drug successfully reaches market,
established pharma companies have years of experience and much better manufacturing
resources to produce higher quality drugs. This overall increases the probability to
produce a blockbuster drug in the market, which in turn increases Nucleons competitive
advantage and reputation in the market.
This option has the lowest return

Lets first analyze from a financial stand point. Nucleon currently has $26M on hand and
needs $13.4 M for 2011 towards CRP-1 and another $12M for alternate application
project during 2011 and 2012. Similar to previous option, Nucleon can continue to work
on both projects with this option and generate additional funding after successfully
clearing pre-clinical trials.

~ $21M ($13.4 M + $7.36M) in the next 2 years. This leaves Nucleon with a little over
$5M to spend towards other projects it is currently working on. However, since the
alternate application project alone needs 2 years and $12M to complete, this option wont
leave enough funding to finish alternate project in time.

on alternate , but also financial resources that can be utilized for other initiatives
including second generation CRP-1 molecules produced in mammalian cells and
exploring alternate applications such as treating acute kidney failures. Success in second
generation mammalian cell project can improve competitive advantage by differentiating
its CRP drug, while success in treating kidney failure will grow the existing market, both
equally important for long term profitability.