Economics of Strategy

NUCLEON Section B Group 4

Aashis R (300)
Numrata Navada (320)
Praveen Pillai (326)
Rishit Mehta (333)
Shorya Chaplot (344)
Introduction
Case Facts

Date: December 1990 Research Strategy

Chance of achieving dominant proprietary position
Company: Nucleon, Inc.
Large market to justify R&D
Employees: 22 (18 in
R&D) Drug development where no alternative treatments are
available
Product: CRP1 ( Cell
Regulating Protein) Critical information obtained from academic literature but heavy
reliance on in-house research as well

Drug
Drug Development
Development Phases
Phases

Human
Human
Cloning
Cloning && Pre-clinical
Pre-clinical
Research
Research Clinical
Clinical
Purification
Purification Research
Research Trials
Trials
Options
Available Alternatives

Phase 1 and Phase 2 Phase 3

Option 1: Build a Pilot Plant for

phases 1 and 2 + Vertically
Integrate for phase 3
Build
Build aa Pilot
Pilot Plant
Plant
Option 2: Build a Pilot Plant for
phases 1 and 2 + License for Vertically
Vertically Integrate
Integrate
phase 3

Option 3: Contract
manufacturing for phases 1 and 2 Contract
Contract Manufacturing
Manufacturing
+ Vertically Integrate for phase 3

License
License to
to Another
Another Company
Company
Option 4: Contract
manufacturing for phases 1 and 2
+ License for phase 3
License
License to
to Another
Another Company
Company
Option 5: License for all phases 1,
2 and 3
Options
Pros and Cons
Option 1 Option 5
Pros | Cons Pros | Cons

• All the revenues will be • Beyond nucleon’s financial • No investment at all • Low returns
with the firm capabilities • Initial payment which • Mortgaging companies
• in-house manufacturing • Lack functions to operate can be used for other future
capabilities manufacturing plants researches • Not sustainable for long
• Quality and process • Uncertainty of revenues • Less monetary risk terms
control
Option 3
Pros | Cons

• No capital expenditure in • Risk of confidential

Phase I and II information leakage
• Very little monetary risk • High capital cost of
• Large scale manufacturing commercial manufacturing
capabilities • Organizational change

Option 2 Option 4
Pros | Cons Pros | Cons

• In-house manufacturing • Share the confidential • No capital expenditure in • Risk of confidential

capabilities (Pilot plant) information about the phase I and II information leakage
• Less risk, no capital drug • Contracting companies • Low returns
investment later • Significantly lower income have core competencies • Not sustainable for long
term
Cost Benefit Analysis
Phase 3 approved
01
OPTION
NPV : $4.588 Mil

02
OPTION
NPV : $1.406 Mil

03
OPTION
NPV : $6.723 Mil NPV is the second highest for
option 5

04
OPTION
NPV : $2.641 Mil

05
OPTION
NPV : $5.596 Mil Nucleon Data
Sheet
Cost Benefit Analysis
Failure Cases

Phase 1 Failure Phase 2 Failure

-3.665M Pilot Plant -4.668M

Least risk in Licensing if phase 1

-1.373M Contracting -2.553M or phase 2 fails. The risk is
exponentially increased when
phase 3 fails or product
information is leaked.
2.307M 2.307M
Licensing
Recommendations

Licensing for all the phases (Option 5) is

the best option for a start-up like RISKS
Nucleon. Risk due to information
leakage is mitigated by
RETURNS
 Small companies have stretched Risks posed by Option 3
complete Licensing
resources outweighs the Higher
NPV if it succeeds
 Quick funding for R&D

 Possibility of moving to mammalian

cell culture rendering the
Complete
manufacturing facility obsolete
PROFITS
Licensing
 Allows Nucleon to keep its focus on Positive NPV from FUTURE PROOF
the core competency of R&D 1991 unlike Option Licensing for use only
3 which is breaks as Burn treatment.
even in 2002 Further uses still a
 By focusing on R&D can secure property of Nucleon
investor confidence

 Learning curve associated with

manufacturing HIGH FREECASH FLOW
3M cash flow readily
available for improving
research
THANK YOU