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The date is December 1990 Nucleon is a small biotechnological company specialized in R&D, no manufacturing capabilities Potential products CRP (cell regulating protein) and 2 other products In order to get to the market the drug must be approved by FDA->successful clinical trials
DILLEMA
Vertically integrate downstream into (pilot) production or buy the production on the market
Biotechnology
Biotechnology a relatively new field Nucleon one of over 200 companies, most of them specialized in R&D. Companies racing to be first to clone a gene (proprietary position) CRP attractive niche
Biotechnology
Strategies of BT companies -> most R&D, some integrated into manufacturing, some also into marketing
Legal framework
Competition was mostly in R&D establishing a strong proprietary position was crucial Risks of establishing a strong proprietary position
New legislation (difficult to predict court rulings) Time demanding to obtain a patent
Most companies could not wait until patent was granted (time lag)
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To get FDA approval drug had to undergo three phases of clinical trials
Phase 1 trials assessed basic safety -adverse reaction (6-12 months) Phase 2 (determining appropriate dosages on a small sample->1-2 years) Phase 3 trials assessed products efficacy (multiple hospitals and large number of patients, 2-5 years)
Financial environment
Poor capital availability (buyers market) Venture capitalists expected returns of 30% Nucleon just about to receive another 6 mil $ 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
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Phase I and II
Pilot plant capacity (~600 m2) would meet Nucleons requirements for Phase I and II Investment outlay can be found in exhibit 3 The pilot facility could however not be used for Phase III (stricter requirements) It was beyond Nucleons financial capability to build such a plant at this time
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Contract manufacturing
Biggest advantage no major capital investment (if CRP failed contract could be easily terminated) Companies offering contract manufacturing had facilities and their personnel in place Contract manufacturing not inexpensive (see exhibit 4) Industry experts believed that excess capacity would accumulate in the future Much time needed to transfer process due to high complexity
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Licensing out-Phase I
Nucleon could license the product immediately (before human clinical trials) Get 3 mio $ cash on hand (immediately) and royalties equivalent to 5% of gross sales (upon FDA approval) Gross sales estimates (exhibit 5)
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Phase III
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Under this option Nucleon could expect to receive 7 mio $ upon FDA approval of the drug and royalties equivalent to 10% of the partners gross sales
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Phase I&II
pilot
license production
contract
license
license
license
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Contract manufacturing
- Requires no capital investments - Little risk (terminate contract) - Contracting companies have facilities and personnel in place - Focus on core competencies - Strategic flexibility -Obtain cash immediately - No further investments are necessary -Company can concentrate on R&D
- Big risk of confidential information disclosure - Still time consuming because of the complexity of process - V.I at Phase III questionable -Asset specificity - Lost ownership of CPR-1 - Much lower potential income - Mortgaging companys future in eyes of its employees
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Licensing out
-Significantly lower income -Smaller risk -Lower possibilities of V.I in the long term
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Calculating NPV: Estimate operating CF (exhibit) Discount factor (30 %) General approach (use different discount factors according to risk of each CF)
NPV calculation
First calculate pilot manufacturing + V.I. Based on NPV calculation make recommendations
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FCF analysis
Alternativa 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 NPV P/P -3350 -1840 -23240 0 0 0 0 26480 39800 50000 52000 312000 16478 P/L -3350 -1840 -2204 0 0 0 0 12370 9950 12500 13000 78000 3596 C/P -250 -1995 -23550 0 0 0 0 26480 39800 50000 52000 312000 19276 C/L -250 -1995 -2550 0 0 0 0 12370 9950 12500 13000 78000 6372 L/L 3000 0 0 0 0 0 0 2685 4975 6250 6500 39000 7275
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pilot
license
3.596 19.276
contract
production
license
license license
6.372
7.275
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