Nucleon Case Analysis

Nucleon Inc.

Key facts Nucleon, Inc. •

• • • •

•

Operates in highly competitive and high stake drug industry Leader in Cell regulating factor “Cell regulating protein-1 (CRP-1)” ,its first potential product Specialized in R&D (80% employees engaged in R&D) Raised $6 mn in VC and $0.6 mn as research grant till now Can‟t afford to market its products

CRP-1 •

•

Fundamentally different from traditional drug; produced by genetic engineering Potential uses • Treatment for burns (Phase I trial will beign in Apr‟92) • Kidney failure (2 yrs + $3 mn to start clinical testing) Nucleon Inc.

FDA regulation for human clinical trial Phase I : • Drug testing on healthy volunteers • Requires 6-12 months Phase II • Drug testing on small group of patients for adverse effect • Requires 1-2 years Phase III • Drug testing on large sample of patients • 2-5 years to complete • Most expensive phase

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Challenges Patents • • • •

Extremely difficult to patent process technology Investors want proprietary position before investing Long time for patent application processing High risk in carrying out development before patent was granted

Funding • VC expects 30 % ROI ; Highly selective • Raising fund from public is virtually impossible due to poor condition of public equity market • Unwillingness of potential corporate partner towards early stage funding • Needs $20 mn for research on two new cell regulating factors in next four years

Competitors • Developing drug to cure same disease using alternative technologies

Others • Scaling up the production in 100 litre vessel Nucleon Inc.

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Current Scenario • • • •

CRP-I is under “pre clinical research” phase Need of manufacturing strategy for human clinical trials and post FDA approval stage Available investment (including VC funding) is $6.5 mn R&D lab working on second generation CRP-I molecules (mammalian cells)

Way Ahead : 5 options Phase I/II

Phase III

Alternative 1 (P +CM)

New pilot plant

Commercial manufacturing

Alternative 2 (P+ LM)

New pilot plant

Licensing manufacturing and marketing rights

Alternative 3 (C +CM)

Contract manufacturing

Commercial manufacturing

Alternative 4 (C+ LM)

Contract manufacturing

Licensing manufacturing and marketing rights

Alternative 5 (L)

Licensing the product to an another company

Nucleon Inc.

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Alternative1: Pilot plant(Ph I&II) & Commercial Manufacturing (Ph III]  Develop nucleus of future large scale in house manufacturing facility which is utilized in commercial manufacturing  The whole „sales revenue‟ would be with them

  

Currently lacks manufacturing capabilities & manpower Risk in building Pilot Plant since in future it will be sunk cost if the Phase I& II trials fail Process uncertainty makes the Pilot Plant a liability in future if the process changes

Alternative2: Pilot plant(Ph I&II) & Licensing (Ph III)  Develop nucleus of future large scale in house manufacturing facility  No investment in the commercial manufacturing facility

Nucleon Inc.

 

Will have to share exclusive information about the drug making process to the licensee. Royalty amount is very low

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Alternative3: Contract Manufacturing (Ph I&II) & Commercial Manufacturing(Ph III)   No Major Capital Investment in Phase I&II  Very little risk  Manufacturing experiences gained which is then utilized in commercial manufacturing

 

Risk of confidential information disclosure Estimates of cost & time painstaking with limited information High capital cost required for commercial facility

Alternative4: Contract Manufacturing (Ph I&II) & Licensing (Ph III)  No Major Capital Investment throughout the duration  Very little risk  Manufacturing experiences outsourced



 

Nucleon Inc.

Risk of confidential information disclosure Estimates of cost & time painstaking with limited information Low Returns in form of Royalty

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Alternative5: Licensing (Ph I-III)  No Major Capital Investment throughout  $3m immediate payment which they can invest in R&D for treating kidney failure  No headache of scaling up in future

Nucleon Inc.

 

Lower returns Employees may consider it as „mortgaging‟ company‟s future

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Financial Analysis Assumptions: • Cost data for pilot facility , contract production and sales are assumed to be at the year end • Sales are assumed to grow at 5% after 2002 till perpetuity • Expenses of 20 personnel hired for commercial manufacturing are calculated from the variable production expenses and overhead in new pilot plant facility : (1,204,000/6)*20 = $ 4,013,000 $12,000.00

Net present value

$10,071.03

$10,000.00

Contract manufacturing + Commercial production

$7,935.20

$8,000.00

$6,288.30 $6,000.00

$5,158.72

$4,000.00

$3,023.31

$2,000.00

2

5

1

4

3

Alt 4 (C +LM)

Alt 5 (L)

$0.00 Alt 1 (P + CM)

Nucleon Inc.

Alt 2 ( P + LM)

Alt 3 (C + CM )

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Analysis Alt 1 ( P+ CM)

Alt 2 ( P +LM)

Alt 3 (C + CM)

Alt 4 (C + LM)

2

5

1

4

3

-$18,184.50

-$4,668.87

-$15,409.22

-$2,533.45

$3,000.00

Threat of information leak

Low

Low

High

High

High

Ease of scale (1Easiest)

5

3

4

2

1

Funding for other new project

5

3

4

2

1

NPV (Ranking 1-best) Loss/Gain if patent is not granted

Alt 5 (L)

 Though NPV is highest for Alt 3 (C+CM), but it has high risk if Patent is not granted and risk of information leak is high  Next higher NPV alternative (Alt 1 – P+CM) also has high risk if patent is not granted Nucleon Inc.

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Recommendations Alternative 5 (Licensing the product to another company) is best suitable under current business scenario • Best in case patent is not granted • Upfront inflow of $3 mn cash • Flexibility to work on other research projects like mammalian cells and new cell regulating projects • Can focus on their core competency - R&D

Nucleon Inc.

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Thank You

Nucleon Inc.

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