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Economics of Strategy

Nucleon Inc.

Abhimanyu Kakkar 21/248 Anjali Mahajan 21/257 Shyam Dahiwal 21/266 Gauri Patil 21/269 Shagun Parmar 21/293

1. Identify options available for Robert Moore and Nucloen.

The following options are available to Robert Moore:

Pilot Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)

Pilot Manufacturing (Phase I & II) + Licensing (Phase III)

Contract Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)

Contract Manufacturing (Phase I & II) + Licensing (Phase III)

Licensing

2. Evaluate all the options

As per the exhibits and the case facts, each of the options can be evaluated for quantitative benefits as well as risks involved in the venture.

Following assumptions have been considered in each of the calculations performed:

Discount Rate has been assumed to be 30% (limiting case) as per the current market sentiments

Personnel Cost has been attributed to overhead per person variable cost in 1993 (inn commercial manufacturing). This value has been used to project the future overhead cost.

1993 Overhead Cost- $1204000 for 6 people

Per person Overhead- $1204000/6

Overhead for 20 people- $ (1204000/6)*20

Option-I: Pilot Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)

for 20 people- $ (1204000/6)*20 Option-I: Pilot Manufacturing (Phase I & II) + Commercial Manufacturing (Phase

Economics of Strategy

Nucleon Inc.

Abhimanyu Kakkar 21/248 Anjali Mahajan 21/257 Shyam Dahiwal 21/266 Gauri Patil 21/269 Shagun Parmar 21/293

Advantages-

1. Enables the firm to develop the nucleus of future large scale in-house manufacturing capability

2. Scaling would be easier

3. Helps to build competitive advantage as ownership of the product and technology is retained

Disadvantages-

1. Financial Risk for Phase I and II, though can be hedged based upon the multiple uses the drug can be employed to.

2. Process Uncertainty as process might not be universal for the upcoming project usages

3. Additional recruitment costs for handling different functions

Option-II: Pilot Manufacturing (Phase I & II) + Licensing (Phase III)

Manufacturing (Phase I & II) + Licensing (Phase III) Advantages- 1. The firm would not have

Advantages-

1. The firm would not have to invest the $20 million in a commercial plant. Financial risk is lessened.

Disadvantages-

1. Financial Risk for Phase I and II, though can be hedged based upon the multiple uses the drug can be employed to.

2. Process Uncertainty as process might not be universal for the upcoming project usages

Economics of Strategy

Nucleon Inc.

Abhimanyu Kakkar 21/248 Anjali Mahajan 21/257 Shyam Dahiwal 21/266 Gauri Patil 21/269 Shagun Parmar 21/293

Option-III: Contract Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)

(Phase I & II) + Commercial Manufacturing (Phase III) Advantages- 1. No major capital investments for

Advantages-

1. No major capital investments for Phase 1 and 2 trials would be required which reduces the financial risk. However, commercial manufacturing would become costly.

2. Companies supplying contract manufacturing services had facilities and personnel in place

3. Helps to build competitive advantage as ownership of the product and technology is retained

Disadvantages-

1. Risk of confidential information disclosure

2. It is risky to commit large quantities material which might not be required if product specification changed or product was pulled from clinic.

3. Technology transfer and scale up would still take 9 months

4. Financial risk for setting up a commercial plant

5. Additional recruitment costs for handling different functions

Economics of Strategy

Nucleon Inc.

Abhimanyu Kakkar 21/248 Anjali Mahajan 21/257 Shyam Dahiwal 21/266 Gauri Patil 21/269 Shagun Parmar 21/293

Option-IV: Contract Manufacturing (Phase I & II) + Licensing (Phase III)

Manufacturing (Phase I & II) + Licensing (Phase III) Advantages- 1. No major capital investments would

Advantages-

1. No major capital investments would be required which reduces the financial risk.

2. Companies supplying contract manufacturing services had facilities and personnel in place

Disadvantages-

1. Risk of confidential information disclosure

2. It was risky to commit large quantities material which might not be required if product specification changed or product was pulled from clinic.

3. Technology transfer and scale up would still take 9 months

Option-V: Licensing

and scale up would still take 9 months Option-V: Licensing Advantages- 1. Would generate immediate cash

Advantages-

1. Would generate immediate cash

Economics of Strategy

Nucleon Inc.

Abhimanyu Kakkar 21/248 Anjali Mahajan 21/257 Shyam Dahiwal 21/266 Gauri Patil 21/269 Shagun Parmar 21/293

3. Can focus on R & D which is the core for Nucleon

Disadvantages-

1. Risk of confidential information disclosure

2. Lesser revenues from Royalty payments

3. What should be the recommendation of Robert Moore?

Based on the above evaluation:

According to Transaction Cost theory, since CRP-1 is a specific asset it would increase transaction costs and hence it would be better to keep the production in-house. This would help keep transaction costs low.

According to Resource Based theory, the R&D of Nucleon provides it a competitive advantage and R&D has to be in-house.

In a highly competitive market like Pharma, it is essential to maintain the competitive advantage and Nucleon can achieve it only if it keeps the production in-house.

But, if considered in an overall manner, Nucleon is a small company as opposed to other established players whose competitive advantage lies in the strong contingent of R&D personnel it possesses. It has no specific know-how of manufacturing related business processes. If the venture fails, they don’t have deep pockets to support their financial losses as in case of other major players in market.

Further, the current market is not issuer friendly as far as raising investment is considered. The investors in pharma sector are becoming more and more risk averse, which makes it a costly venture (as high as 30% return) for the company to raise debt (or equity). Facing this situation, best case scenario for Nucleon would be to build on its competitive advantage of R&D, focussing on expanding its capabilities and gaining a strong foot-hold in the market. Licensing the other activities, shall help them gain the initial money that would be required to fund their R&D ventures, as it shall generate cash quickly.

Down the line, if company is able to prove its competence, it shall attract positive sentiments from the market in their favour. And as a result, probably they can think of expanding their capabilities where they might start in-house production as well. But, right now, they should focus on leveraging their strength per say, before expanding into high capital involving investments, which are lucrative as far as returns are concerned, but at the same time are highly risky as well.

So all in all, though Option-II has higher NPV (Contract + Commercial Manufacturing), but it involves a high risk of technology and information transfer, which might play against them. Also, financial risk is high. The second best case is Option-V (Licensing) It will generate quick cash- flows (to help fund initial R&D exposures) and information transfer can be checked by placing strict covenants which are licensor friendly.

Thus, Robert Moore should go for Licensing

Economics of Strategy

Nucleon Inc.

Abhimanyu Kakkar 21/248 Anjali Mahajan 21/257 Shyam Dahiwal 21/266 Gauri Patil 21/269 Shagun Parmar 21/293

Licensing Royalty 5% WACC 30% ('000) Phase I & II Phase III FDA approval Sales
Licensing
Royalty
5%
WACC
30%
('000)
Phase I & II
Phase III
FDA approval
Sales
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Payment on signing contract
3000
Sales
53700
99500
125000
130000
150000
Royalty from sales
2685
4975
6250
6500
7500
Terminal Value
31500
Cash Flow
3000
0
0
0
0
0
0
0
2685
4975
6250
6500
39000
NPV
6288