Jeffrey C. Taylor
Nucleon minimizes risk for CRP-1 when risk is highest by contracting production for phases I and II and maximizes profit potential by vertically integrating into commercial manufacturing for phase III. This strategy allows Nucleon to mitigate and afford the CRP-1 development risk during the early stages and take on more risk and therefore more potential profit later when they have phase I and II data regarding the potential success of the drug.
Nucleon has sufficient available funding ($6.5 million) to cover the $4.795 million in contract production for phases I and II. Contracting production for Phases I and II will allow Nucleon to proceed with development without securing hard to find investment capitol. Valuable, rare or costly-to-imitate capabilities in production are not part of Nucleon’s current strengths. Avoiding vertical integration early in the process will provide Nucleon with greater flexibility and potential significant value as the success of phases I and II are unknown.
Vertical integration into manufacturing for phase III provides the highest potential payoff (40% of gross sales) for Nucleon over licensing the manufacturing and marketing rights (10% royalties). Holding off on vertical integration until phase III allows Nucleon to minimize upfront risk and maintain flexibility through phases I & II when the potential outcome is uncertain. If and when phases I and II are successful, Nucleon can take educated risk during phase III for the larger forecasted payoff.
Although phase III has the highest related expenses, the required success of phases I and II before proceeding to III indicate more likely success of the drug prior to the decision concerning vertical integration for phase III. Vertically integrating into manufacturing for phase III represents forward vertical integration by bringing Nucleon closer to the end of the value chain.