Nucleon Case Study

Memorandum

To: Jeff Hurst, CEO of Nucleon, Inc.

From:  Chitrangada Chouhan, Swetha Parasurama Moorthy, Synthia Srinivasan & Vidhya Anand

Re: Recommendations for CPR-1 Manufacturing Strategy

Nucleon is at the brink of a breakthrough discovery with respect to Cell Regulating Proteins. The true test to the future of the company lies in the series of clinical trials and ultimately the production and market release.

Recommendation

Based on the presented choices for Phase I and Phase II, we recommend that Nucleon should choose the option of setting up a pilot plant to supply the demands generated by the clinical trials.

As for Phase III, we recommend that Nucleon considers the possibility of licensing out the manufacturing and commercialization to a third-party biotechnology/pharmaceutical company.

Support for the cause

Nucleon’s greatest strength lies in its R&D department with its rich, resourceful employee set while its greatest weakness lies in its financial position. Taking these factors into consideration, the manufacturing strategy which would give Nucleon an optimal level of R&D effort along with maximal profits is the Pilot plant for Phase I & II and Licensing for Phase III.  A few pointers mentioned below strengthen the viability of our recommendation.

Firstly, the total quantity of production at a plant plays a very important role in determining the average fixed cost of a single unit of the product. During Phase I and II, it would be beneficial for Nucleon to keep the manufacturing in house as the decision for the quantity to be produced will be in its hands. Moreover, when initially designing the plant, Nucleon could determine the

estimated quantity requirements and build a Minimum Efficient Scale plant based on the estimations.

Secondly, Nucleon’s R&D game needs to be phenomenal in order to keep it alive in such a competitive environment. But, Nucleon needs an influx of financial aid in pursuance of R&D (which is evidently the backbone of Nucleon). The current funds that Nucleon has are in the form of Venture Capital Investments and Government Grants (Exhibit I). Using those funds for the Pilot Plant, we would not have enough capital to start the R&D for the CRP-1 involving Kidney Treatment.  Nucleon can invest the funds for phase I&II, and then assign the revenue from this licensing towards R&D for kidney treatment project. (Exhibit 2).

Thirdly, there is no opportunity costs associated with our recommendation. One might argue that the time and capital spent in the pilot plant for manufacturing could be put to better use in R&D. It is true that the above case does present a significant opportunity cost. But, consider the case in which we license out during the initial phases itself. At that time, the revenue would be $5 million and the royalty would only be 5% of the gross sales. But, if we license out during Phase III, we stand to get $7 million in revenue along with a royalty of 10% of gross sales. We believe that the increase in revenue from licensing out only during Phase III ($2 million + 5% increase in royalty) will help cancel out the opportunity costs associated with the decision to adopt the Pilot Plant approach in Phase I & II.