Case study ---- Aquionics

Prepared by Chia-Yin Lee

David Dai
 Overview
* A biotech company

* Developed technology for treatment of glaucom

a
----- Already tested its product on animal, but h
as yet to conduct the human-subject clinical

* Trade – off
• Protecting the value of the intellectual property
• Limiting the costs and risk of developing the pro
duct for commercial use
 Alternatives
* Commercial development of the product would o
ccur in two stages.
1. human clinical testing
2. commercial manufacturing

* Three approaches
1. Construct a laboratory facility
2. Sub- contract to an existing laboratory
3. License the technology to an existing firm
First approach---- Construct a laboratory facility
* Advantage:
1. sufficient for carrying out the manufacturing

and testing procedures

2. It would be also available for clinical testing
of related applications of the technology

* Cost : PV $ 5 million
Second approach---
Sub- contract the clinical testing to an existing lab
oratory

* Advantage: Low cost

* Risk: losing control of the technology is

increased

* Cost: PV$ 2 million

Notes: 1. Both alternatives need additional $ 6

million for production facilities
2. PV of cash flow is $ 20 million
Third approach---
License the technology for treatment of glaucom
a to an existing firm

*Advantage:
1. Conducting both the human clinical testing and
commercial manufacturing and marketing of th
e product.
2. An initial license fee of $ 2 million and a 5 perc
ent royalty on future sales
3. The PV of royalties from licensing manufacturin
g and marking is $12 million

* Risk : Jeopardize the value of related products it

could develop
Three Scenarios
1. The product is a success, and the success a
ffords opportunities to develop a number of
related products
------- Probability 30 %

Alternative Value of related product

Construct a laboratory facility $ 5 million
Sub- contract to an existing laboratory $ 2.5 million
License the technology to an existing firm $ 1 million
Three Scenarios -cont.

2. The clinical testing is a success, but

related applications are not found
---- Probability is 40 %
---- The value of related product is zero

3. The clinical testing will fail ---- 30%

Decision Tree For Three Approaches
-(5 M + 6M) + 20M +5M=14M
Scenario 1(30%)

Scenario 2(40%) -(5 M + 6M) +20M=9M

Construct -(5 M + 6M) =-11M (Fail)
Scenario 3(30%)
-(2 M + 6M) + 20M +2.5M=14.5M
Scenario 1(30%)
-(2 M + 6M) +20M =12M
Scenario 2(40%)
Sub-Contract
-(2 M + 6M) =-8M (Fail)
Scenario 3(30%)

2 M + 12M +1M=15M
Scenario 1(30%)
2 M +12M=14M
Licensing Scenario 2(40%)
2 M =2M (Fail)
Scenario 3(30%)
Decision Tree For Three Approaches

Weighted Expected NPV(1)= [0.3X14+0.4X9+0.3X(-11)]=4.5M

Weighted Expected NPV1(2)=[0.3X14.5+0.4X12+0.3X(-8)]=6.75M
Weighted Expected NPV1(3)=(0.3X15+0.4X14+0.3X2)=10.7M