Nucleon Case
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Background
Nucleon is a small biotechnology start-up company focused on developing biotechnological pharmaceutical products based on a class of proteins known as cell regulating factors. The company has been in the market for five years, and currently, they are in the process of human trials for their first potential product, “cell regulating protein-1” (CRP-1). Overcoming these phases, Nucleon has to decide among several alternatives on producing CRP-1. Knowing that the process involved a tremendous amount of time and money, Nucleon has to choose the right decision for their long-term survival in the intensively competitive and high-stakes drug industry.
Problem Analysis
Before a drug is launched to the market, it has to pass human trials to get approval from the FDA. There are three phases on human trials: (I) basic safety assessment, where the drug was administered to healthy volunteers to find out any adverse reactions. This phase would require 6-12 months and if there is no serious side effect, the product then (II) administered to patients having disease the drug was presumed to treat to find out whether the patients’ condition improved or suffered by any adverse side effects. This phase would require 1-2 years and then, (III) the product’s efficacy is assessed with a relatively large sample of patients on statically rigorous basis that involved multiple hospitals and required 2-5 years. It would take around 8 years to complete these trials and would cost around 30-100 million.
While the drug is promising, Nucleon could not get enough funding for their growth (current capital $6.5 million) and having only 22 workers available within the company would not help either. At this stage of its development, it is crucial to compare and see the risks and advantages of each manufacturing alternative.
Options Analysis
There are three options available for phase I and II. Table 1 lists each of their advantages and disadvantages.
PHASE I & II
ADVANTAGES
DISADVANTAGES
THE NEW PILOT PLANT
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Enable the firm for future larger-scale development
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Possibility to gain experience in manufacturing before hands-on commercial productions
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Have control over process and quality procedures
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First step towards vertical integration
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Costly: $7,394,000
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Time consuming in hiring technicians with manufacturing experience
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Possibility of having an idle plant
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Loss of focus from R&D activities
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Process uncertainty: shifting fermentation procedure (from bacterial to mammalian cells)
CONTRACT MANUFACTURING
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No major capital investment compare to Pilot Plant
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Less risk
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Companies supplying contract manufacturing services had facilities and personnel in place
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Risky disclosure of confidential information
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Contractor does not provide reliable time and cost estimates because of the limited information of the product
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Time consuming negotiations (take many months)
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Long technology transfers (9 months)
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Difficult to estimate contract quantities per period
LICENSING TO OTHER COMPANY
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No expenditures
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Receive a fixed licensing fee upon signing the contract
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Royalties on gross sales (5%)
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Allow Nucleon to concentrate on R&D activities
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Highly reduction of revenues
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If CRP-1 succeed, there is possibility to regret the shift of responsibility
Table 1.
Each of this options constitute large amount of money, table 2 differentiate the costs and revenues of each of these phase I and II options. Although licensing will cost nothing to Nucleon, the revenues it will earn are relatively low compare to the other options. However, the fact that the licensed partner will substitute them in marketing the product, licensing option had the chief benefit of generating cash immediately.
Options
Costs ($000)
Revenues
Pilot Plant
7,394
Cost Manufacturing
4,795
License
$3,000 licensing fee + 5% of gross sales
Table 2. Estimated cost and revenues for phase I and II
For phase III, there are two options available. Table 3 below list the options along with its advantages and disadvantages.
PHASE III
ADVANTAGES
DISADVANTAGES
VERTICALLY INTEGRATE TO COMMERCIAL MANUFACTURING