NUCLEON, INC.

June 28th, 2019 – Group 5 – Bishwadeep | Gulshan | Mitali | Raghavi

AGENDA

Case Summary

Company Analysis

Alternatives – Phases I & II

Alternatives – Phase III

Determinants – Licensing in Phase III and Commercialization

Determinants – In-house Manufacturing in Phase III and Commercialization

Analysis of Collaborative Abilities

Financial Analysis of Options

Appendix
CASE SUMMARY
Nucleon, Inc. is looking for a manufacturing strategy to commercialize its first molecule CRP-1 in an high-growth but risky and
specialized industry

COMPANY INDUSTRY

Young biotechnology start-up with initial focus on R&D that has produced Biotechnology is a young, attractive field for many large and small
CRP-1 as its first promising product pharmaceutical companies albeit characterized by uncertainties:

 R&D: Strong competence in R&D with over 80% of workforce engaged
in product development
 MANUFACTURING: In need of a manufacturing strategy pre and post
human clinical trials for commercialization of the final drug
 MARKETING & DISTRIBUTION: Lacks financial and non-financial
resources (networks etc.) to market its own products – to link up with
bigger pharmaceutical companies
 ASSETS: Best in class workforce in the form of renowned scientists and
staff from leading research labs; strong patent position for CRP-1
molecule
 MARKET
 Potential solutions have longer ingestion period before they reach
market – every firm trying to create entry barriers via FMA
 TECHNOLOGY
 Proprietary position via patents – on molecules, on sequences, on
processes
 Presence of alternative technologies to develop drugs
 REGULATORY
 Slow regulation due to lack of precedent
 Highest form of standards to be met to be certified ‘clinical grade’

RESEARCH PRE-CLINICAL TRIALS PHASES I & II PHASE III

Drug
CONSUMER
Development
Process CLONING AND PURIFICATION HUMAN IN-HOUSE or IN-HOUSE or
CLINICAL SUBCONTRACT LICENSE
TRIALS
LICENSE PRODUCT ENTIRELY
 COMPANY ANALYSIS
H

Uncertainty CONSTRAINTS
H
Nucleon faces the following constraints driving its decision regarding
IN-HOUSE (LARGE manufacturing:
SCALE) Asset Specificity
MANUFACTURING  LACK OF COMPETENCE: Having been an R&D-focused firm, Nucleon
focuses on drug discovery rather than production
 LACK OF SCALE: Nucleon can currently produce CRP-1 upto 10L – not
enough for clinical trials and commercial production where upto 100L
H L
needed
Appropriability
 LACK OF HUMAN RESOURCES: Creating a manufacturing competency
will not only involve capital expenditure but hiring of production staff as well
LICENSED  LACK OF AVAILABLE FINANCES: Nucleon lacks finances to build a full-
MANUFACTURING scale facility needed for Phase III clinical trials (~$20M)

L
ALTERNATIVES – PHASES I & II
Internal Pilot Manufacturing
Pros Cons

Scalability : Easier to Scale up in Future Cost : High Financial Liability

Quality Control : Provides Complete control over quality and process Recruitment : Need to recruit people for manufacturing

Learning : Firm gains knowledge about the manufacturing process Risk : Loss of Core competency of R&D

Contract Manufacturing
Pros Cons

Investments : Small capital investments required Time Requirement : Similar time as setting up a pilot plant

Speed : Readily Available for production Quality Control : Not much control on quality of drug

Risk : Small termination penalty Risk : Sharing of drug formula with partners

Licensing
Pros Cons

Investments : No capital investments required Employee Satisfaction : Employees are against this option

Revenue : Immediate cash inflow Revenue : Lower revenues as compared to other options

Usage Rights : Can use the formulation for treating other diseases Usage Rights : Main usage right given to other company
ALTERNATIVES – PHASE III

Vertically Integrate into Commercial Manufacturing

Pros Cons

Quality Control : Nucleon has complete control over the manufacturing Investment Required : High Investment required which can be raised contingent
process to CRP-1 clearing Phase – II Trials
Future Revenue : Large fixed revenue and royalty Recruitment: Need to recruit people for manufacturing

Learning : Nucleon gains knowledge about the manufacturing process which Risk: Loss of Core competency of R&D
can be leveraged with future solutions regarding CRP-1

Licensing Out Manufacturing and Marketing Rights at Phase III

Pros Cons

Investments : No capital investments required Employee Satisfaction: Employees are against this option

Future Revenue : Higher fixed revenue but lower royalty Revenue: Lower lifetime revenue as compared to manufacturing on their own

Risks : Low Risk as Phase – III trial to be conducted by partner Learning: Nucleon doesn’t develop manufacturing capabilities
DETERMINANTS – LICENSING IN PHASE III AND
COMMERCIALISATION

Divisions Components Impact Reasoning

Production Cost Production cost of drugs Low No investment in setup

The facility is set up specifically for

Asset Specificity High CRP-1 production so there is scope for
opportunistic behaviour
It is a competitive market which will
Market High
increase the complexity of contracting

Transaction Cost The probability of achieving technically

Technological High success during scale up is not 100%
Uncertainty making contracting complex
The patent law was new and
uncertain. Difficult to patent process
Regulatory High
technology. Risk is transferred to the
licensing company
The nature of the resource is
Resources Drug rights Negative intangible and soft. Hence there is
difficulty in transferring.
Knowledge of the drug production process of Scope for learning regarding large
Knowledge Negative
CRP-1 (highly-codified) scale manufacturing is lost
Loss of control over the production
Others Loss of Control High
process
DETERMINANTS – IN HOUSE IN PHASE III AND
COMMERCIALISATION

Divisions Components Impact Reasoning

Production Cost Setup Cost High ~21M to be invested upfront in setup

The facility is set up in-house so little

Asset Specificity Low
scope for opportunistic behaviour
The risk of changing market dynamics
Market Low
rests on Nucleon
Transaction Cost
Since scaling up is done in house,
Uncertainty Technological Low
there is no impact on TC.
Risk is on Nucleon regarding patent
Regulatory Low
and proprietary rights
The nature of the resource will not be
Resources Drug rights None
a problem
In house will provide learning
opportunities. These insights could be
Knowledge of the production process (highly-
Knowledge Positive used in future drug research and
codified)
production (e.g. regarding CRP-1 for
kidney problems)
Better control due to vertical
Others Loss of Control Low
integration
ANALYSIS OF COLLABORATIVE ABILITIES
Synergies Highly synchronized and easy transfer of information is required. In – House Manufacturing

Nature of High level of technical know for initial development stage and designing of
Resource manufacturing unit. In – House Manufacturing

Extend of No redundant resources as the area of specialization of both parties are

Redundant entirely different – R&D and Manufacturing.
Resources License to Third Party

Very high market uncertainties with high failure rate of testing drug , uneven
Degree of availability of CRP host cells for large scale manufacturing and changing
Market License to Third Party
regulations rules affecting patent approval.
Uncertainties

Degree of Intellectual resource and patent approval is a crucial resource which are rare.
Competition Hence high level of competition in the market. License to Third Party
for Resources
FINANCIAL ANALYSIS OF OPTIONS
Fig. 1: Expected NPV from alternatives ALTERNATIVES
$12,000
$10,071  Alt 1 (P+CM): Phase I & II – Pilot Plant; Phase III onwards – Commercial
$10,000 Manufacturing/Vertical Integration
$7,935
$8,000
$6,288  Alt 2 (P+LM): Phase I & II – Pilot Plant; Phase III onwards – Licensed
$6,000 $5,159
Manufacturing and Marketing
$4,000 $3,023
$2,000  Alt 3 (C+CM): Phase I & II – Subcontracted Manufacturing; Phase III
onwards – Commercial Manufacturing/Vertical Integration
$0
Alt 1 (P + CM) Alt 2 ( P + LM) Alt 3 (C + CM ) Alt 4 (C +LM) Alt 5 (L)
 Alt 4 (C+LM): Phase I & II – Subcontracted Manufacturing; Phase III
Net present value
onwards – Licensed Manufacturing and Marketing

Fig. 2: Expected Loss if approval is not granted  Alt 5 (L): Phase I, II & III onwards – Licensed manufacturing and
Alt 1 (P + CM) Alt 2 ( P + LM) Alt 3 (C + CM ) Alt 4 (C +LM) Alt 5 (L) marketing
$5,000 $3,000

$-
ASSUMPTIONS & LIMITATIONS

$(5,000) $(2,533)  WACC for the project is taken as the cost of capital required by the venture
$(4,669) capitalists at 30%
$(10,000)  Cost data for pilot facility , contract production and sales are assumed to
be at the year end
$(15,000)
 Calculated expected profits and loss separately due to lack of success
$(15,409)
$(20,000) probabilities
$(18,184)
 Personnel cost and overhead expenses for 20 new employees
Probable Gain (Loss)
extrapolated from that of 6 employees ($1.2M in 1993)
THANK YOU
APPENDIX – FINANCIAL ANALYSIS

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