Economics of Strategy Nucleon Inc.

Abhimanyu Kakkar 21/248

Anjali Mahajan 21/257
Shyam Dahiwal 21/266
Gauri Patil 21/269
Shagun Parmar 21/293

1. Identify options available for Robert Moore and Nucloen.

The following options are available to Robert Moore:
 Pilot Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)
 Pilot Manufacturing (Phase I & II) + Licensing (Phase III)
 Contract Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)
 Contract Manufacturing (Phase I & II) + Licensing (Phase III)
 Licensing

2. Evaluate all the options

As per the exhibits and the case facts, each of the options can be evaluated for quantitative benefits
as well as risks involved in the venture.
Following assumptions have been considered in each of the calculations performed:
 Discount Rate has been assumed to be 30% (limiting case) as per the current market
sentiments
 Personnel Cost has been attributed to overhead per person variable cost in 1993 (inn
commercial manufacturing). This value has been used to project the future overhead cost.
1993 Overhead Cost- $1204000 for 6 people
Per person Overhead- $1204000/6
Overhead for 20 people- $ (1204000/6)*20

Option-I: Pilot Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)
Economics of Strategy Nucleon Inc. Abhimanyu Kakkar 21/248
Anjali Mahajan 21/257
Shyam Dahiwal 21/266
Gauri Patil 21/269
Shagun Parmar 21/293

Advantages-
1. Enables the firm to develop the nucleus of future large scale in-house manufacturing
capability
2. Scaling would be easier
3. Helps to build competitive advantage as ownership of the product and technology is
retained
Disadvantages-
1. Financial Risk for Phase I and II, though can be hedged based upon the multiple uses the
drug can be employed to.
2. Process Uncertainty as process might not be universal for the upcoming project usages
3. Additional recruitment costs for handling different functions

Option-II: Pilot Manufacturing (Phase I & II) + Licensing (Phase III)

Advantages-
1. The firm would not have to invest the $20 million in a commercial plant. Financial risk is
lessened.

Disadvantages-
1. Financial Risk for Phase I and II, though can be hedged based upon the multiple uses the
drug can be employed to.
2. Process Uncertainty as process might not be universal for the upcoming project usages
3. Lesser Revenues from Royalty payments
Economics of Strategy Nucleon Inc. Abhimanyu Kakkar 21/248
Anjali Mahajan 21/257
Shyam Dahiwal 21/266
Gauri Patil 21/269
Shagun Parmar 21/293

Option-III: Contract Manufacturing (Phase I & II) + Commercial Manufacturing (Phase III)

Advantages-
1. No major capital investments for Phase 1 and 2 trials would be required which reduces the
financial risk. However, commercial manufacturing would become costly.
2. Companies supplying contract manufacturing services had facilities and personnel in place
3. Helps to build competitive advantage as ownership of the product and technology is
retained

Disadvantages-
1. Risk of confidential information disclosure
2. It is risky to commit large quantities material which might not be required if product
specification changed or product was pulled from clinic.
3. Technology transfer and scale up would still take 9 months
4. Financial risk for setting up a commercial plant
5. Additional recruitment costs for handling different functions
Economics of Strategy Nucleon Inc. Abhimanyu Kakkar 21/248
Anjali Mahajan 21/257
Shyam Dahiwal 21/266
Gauri Patil 21/269
Shagun Parmar 21/293

Option-IV: Contract Manufacturing (Phase I & II) + Licensing (Phase III)

Advantages-
1. No major capital investments would be required which reduces the financial risk.
2. Companies supplying contract manufacturing services had facilities and personnel in place

Disadvantages-
1. Risk of confidential information disclosure
2. It was risky to commit large quantities material which might not be required if product
specification changed or product was pulled from clinic.
3. Technology transfer and scale up would still take 9 months

Option-V: Licensing

Advantages-
1. Would generate immediate cash
2. Reduces financial risk as would not have to invest in setting up plant
Economics of Strategy Nucleon Inc. Abhimanyu Kakkar 21/248
Anjali Mahajan 21/257
Shyam Dahiwal 21/266
Gauri Patil 21/269
Shagun Parmar 21/293

3. Can focus on R & D which is the core for Nucleon

Disadvantages-
1. Risk of confidential information disclosure
2. Lesser revenues from Royalty payments

3. What should be the recommendation of Robert Moore?

Based on the above evaluation:
According to Transaction Cost theory, since CRP-1 is a specific asset it would increase transaction
costs and hence it would be better to keep the production in-house. This would help keep
transaction costs low.
According to Resource Based theory, the R&D of Nucleon provides it a competitive advantage and
R&D has to be in-house.
In a highly competitive market like Pharma, it is essential to maintain the competitive advantage
and Nucleon can achieve it only if it keeps the production in-house.
But, if considered in an overall manner, Nucleon is a small company as opposed to other
established players whose competitive advantage lies in the strong contingent of R&D personnel
it possesses. It has no specific know-how of manufacturing related business processes. If the
venture fails, they don’t have deep pockets to support their financial losses as in case of other
major players in market.
Further, the current market is not issuer friendly as far as raising investment is considered. The
investors in pharma sector are becoming more and more risk averse, which makes it a costly
venture (as high as 30% return) for the company to raise debt (or equity). Facing this situation,
best case scenario for Nucleon would be to build on its competitive advantage of R&D, focussing
on expanding its capabilities and gaining a strong foot-hold in the market. Licensing the other
activities, shall help them gain the initial money that would be required to fund their R&D ventures,
as it shall generate cash quickly.
Down the line, if company is able to prove its competence, it shall attract positive sentiments from
the market in their favour. And as a result, probably they can think of expanding their capabilities
where they might start in-house production as well. But, right now, they should focus on leveraging
their strength per say, before expanding into high capital involving investments, which are lucrative
as far as returns are concerned, but at the same time are highly risky as well.
So all in all, though Option-II has higher NPV (Contract + Commercial Manufacturing), but it
involves a high risk of technology and information transfer, which might play against them. Also,
financial risk is high. The second best case is Option-V (Licensing) – It will generate quick cash-
flows (to help fund initial R&D exposures) and information transfer can be checked by placing strict
covenants which are licensor friendly.
Thus, Robert Moore should go for Licensing
Economics of Strategy Nucleon Inc. Abhimanyu Kakkar 21/248
Anjali Mahajan 21/257
Shyam Dahiwal 21/266
Gauri Patil 21/269
Shagun Parmar 21/293

Licensing
Royalty 5% WACC 30%

('000) Phase I & II Phase III FDA approval Sales

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Payment on signing contract 3000

Sales 53700 99500 125000 130000 150000
Royalty from sales 2685 4975 6250 6500 7500
Terminal Value 31500

Cash Flow 3000 0 0 0 0 0 0 0 2685 4975 6250 6500 39000

NPV 6288