Nucleon Inc.

Group 7
{ Bala Meenakshi
Alok Singh
Vamsi Krishna N
Roopali Dhingra
Shwetank Dixit
  Nucleon Inc , a biotechnology firm , developing
a cell regulating protein -1. Before Nucleon
could launch clinical trial , Nucleon had to
decide whether they would manufacture the
molecule in-house or use market ie contract
manufacturing or licensing .

Problems
Industry: Biotechnology Pharmaceuticals
Wide Perceived Difficult to imitate
Variety Customers Valuable Rare Costly to Non-
Imitate Substituta-
of Benefits of ble
market the end
product

R&D CRP-1 Very R & D drives

Generic R & D Expertise drives the Technology enthusiastic the entire
Drug for with contacts entire is new and group of Industry
Burn with academia Industry emerging scientists
motivated
wounds and interested in to develop
cutting-edge new drugs
technology

Nucleon: Core Competency (R &D)

 New Pilot Plant
Vertical Integrate into
Commercial Mfg.

Present (1990) Contract Mfg. Commencement

of Sales

Licensing out to Big

Pharma Giants
Licensing out to Big
Pharma Giants
Present 1990 December 1993

June 1994
January 1998
Option Path/Timeline
 The New Pilot Plant
• Would help meet Phase 1 &
Phase 2 requirements for
CRP 1 trials
• Serves as the nucleus for a
future, in house
manufacturing capability
• Experience gain with
respect to dealing with
technical, maintenance &
regulatory issues
• Scaling up would be easier
• Complete control over
process & quality
procedures
Alternatives
• Cannot be used for Phase 3
trials
• High investment of about
$7.3 Million
• Process Uncertainty exists :
Plant only designed for
products with bacterial
fermentation; cannot be
used for mammalian cells
• May lead to distraction from
the main mission of using
its scientific capabilities for
drug discovery
 New Pilot Plant
Vertical Integrate into
Commercial Mfg.

Present (1990) Contract Mfg. Commencement

of Sales

Licensing out to Big

Pharma Giants
Licensing out to Big
Pharma Giants
Present 1990 December 1993

June 1994
January 1998
Option Path/Timeline
 Contract Manufacturing
• Requires no major capital
investment
• Easy termination of
contract, with small
penalties
• Contract Manufacturing
companies have facilities &
personnel in place already
• Easy Availability of such
facilities at least for the next
few years
Alternatives
• Confidential information
disclosure, risking their only
product ready for trials
• Reaching an agreement
would take substantial time
• Contracts are typically for
fixed quantities
• Higher price for short term
contracts & higher risk
committing for long term
large quantities
 New Pilot Plant
Vertical Integrate into
Commercial Mfg.

Present (1990) Contract Mfg. Commencement

of Sales

Licensing out to Big

Pharma Giants
Licensing out to Big
Pharma Giants
Present 1990 December 1993

June 1994
January 1998
Option Path/Timeline
 Licensing the product to another
company

• Would generate cash

immediately, future
royalties + immediate fixed • Annual royalty payments
payment of $3 million limited to 5% of gross sales,
• No large investments far lower revenues than if it
required made all these investments
• More focus on its core itself
competency : R&D • Viewed as “mortgaging
• Nucleon would retain away” the company’s future
rights to develop CRP-1
further for other
therapeutic applications
• Could help procuring more
capital, if successful

Alternatives
 New Pilot Plant
Vertical Integrate into
Commercial Mfg.

Present (1990) Contract Mfg. Commencement

of Sales

Licensing out to Big

Pharma Giants
Licensing out to Big
Pharma Giants
Present 1990 December 1993

June 1994
January 1998
Option Path/Timeline
 Vertically integrate into Commercial Mfg.

• Sole producer of CRP-1 • Extremely high investment of

• High returns of about $5
million upon FDA approval +
40% of gross product sales
• Complete process control
$21 million
• May lose focus on R&D
• Higher risks, if trials are not
successful/ patent does not get
approved in time

License out Manufacturing &

Marketing

• Focus on core competency i.e.

R&D
• Lesser initial investment,
which can in turn be used for
other products in pipeline
• Lesser risk, incase CRP-1 fails
• Lack of process control
• Insufficient development of
manufacturing capabilities

Alternatives (Stage-3)
 Option Cost and Benefit
Pilot Facility Cost is 4174.3
Contract Manufacturing Cost is 3196.7

Licensing Before Stage 2 Benefit is 14115.1

Vertical Integrate into Benefit is 79282.3
commercial manufacturing
Licensing Out manufacturing Benefit is 24427.64
and marketing

Assuming Cost of capital is 18 % , considering 4.85 %as risk free

rate industry beta as 1.1 and risk adjusted market premium as 14 %

Financial outcome
 No Use of
No No Market
1. Are there
significant
relationship
1. Do external specific
manufactures provide assets ?- Yes Is common
economies of scale that Is detailed ownership is
an in-house unit could 2. Are there
contracting needed to
not attain ? – Yes significant Vertical
2. Do external
infeasible or mitigate
coordination too costly - contracting Market
manufactures possess Yes
manufacturing Yes problems Yes Yes problem - Yes
capabilities that are in involved in No
house would not ? - Yes leakage of
private No
information -
Yes

Alliances , JV,
or other close
No knit
Yes
arrangement
Would intermediate
arrangement suffice
Vertical
No Integration
 Vertical
Integrate into Recommended Path :
Commercial
Mfg
According to make Vs
New Pilot buy framework ,
Plant Licensing Nucleon Should use
out to Big market , ie should go for
Pharma
Giants licensing for phase 3
trials and further.
Vertical Contract Manufacturing
Contract Integrate into
 Nucleon
Nucleon Commercial
is not recommended
Option Mfg. Mfg owing to leakage of
proprietary research and
Licensing lack of control over
out to Big
Pharma
sensitive process .
Giants However , we
Licensing recommend the new
Licensing pilot plant installation
out to Big
Pharma
as it would be used in
Giants the manufacturing of
different molecules in
future
Decision Tree: Final outcome
 Threat of new
entrants: LOW
Jockeying among
Threat of existing players:
Substitutes: HIGH HIGH

Attractiveness
of the industry:
HIGH

Bargaining power Bargaining power

of customers: of suppliers:
LOW LOW

Porter’s Five Force: Pharma Mfg.