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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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 %

9. 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)

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