Case study ---- Aquionics

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Presentation transcript:

Case study ---- Aquionics Prepared by Chia-Yin Lee David Dai

Overview * A biotech company * Developed technology for treatment of glaucoma ----- Already tested its product on animal, but has yet to conduct the human-subject clinical * Trade – off Protecting the value of the intellectual property Limiting the costs and risk of developing the product for commercial use

Alternatives * Commercial development of the product would occur in two stages. 1. human clinical testing 2. commercial manufacturing * Three approaches 1. Construct a laboratory facility 2. Sub- contract to an existing laboratory 3. License the technology to an existing firm

First approach---- Construct a laboratory facility * Advantage: 1. sufficient for carrying out the manufacturing and testing procedures 2. It would be also available for clinical testing of related applications of the technology * Cost : PV $ 5 million

Second approach--- Sub- contract the clinical testing to an existing laboratory * Advantage: Low cost * Risk: losing control of the technology is increased * Cost: PV$ 2 million Notes: 1. Both alternatives need additional $ 6 million for production facilities 2. PV of cash flow is $ 20 million

Third approach--- License the technology for treatment of glaucoma to an existing firm *Advantage: Conducting both the human clinical testing and commercial manufacturing and marketing of the product. An initial license fee of $ 2 million and a 5 percent royalty on future sales The PV of royalties from licensing manufacturing and marking is $12 million * Risk : Jeopardize the value of related products it could develop

Three Scenarios 1. The product is a success, and the success affords opportunities to develop a number of related products ------- Probability 30 % Alternative Value of related product Construct a laboratory facility $ 5 million Sub- contract to an existing laboratory $ 2.5 million License the technology to an existing firm $ 1 million

Three Scenarios -cont. 2. The clinical testing is a success, but related applications are not found ---- Probability is 40 % ---- The value of related product is zero 3. The clinical testing will fail ---- 30%

Decision Tree For Three Approaches Construct Sub-Contract Licensing Scenario 1(30%) Scenario 2(40%) Scenario 3(30%) -(5 M + 6M) + 20M +5M=14M -(5 M + 6M) +20M=9M -(5 M + 6M) =-11M (Fail) -(2 M + 6M) + 20M +2.5M=14.5M -(2 M + 6M) +20M =12M -(2 M + 6M) =-8M (Fail) 2 M + 12M +1M=15M 2 M +12M=14M 2 M =2M (Fail)

Decision Tree For Three Approaches Weighted Expected NPV(1)= [0.3X14+0.4X9+0.3X(-11)]=4.5M Weighted Expected NPV1(2)=[0.3X14.5+0.4X12+0.3X(-8)]=6.75M Weighted Expected NPV1(3)=(0.3X15+0.4X14+0.3X2)=10.7M