Title
Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity
Author
Faculty/Department
Faculty of Applied Economics
Institute of Development Policy and Management
Publication type
article
Publication
Westport, Conn. ,
Subject
Economics
Source (journal)
Research management / Industrial Research Institute. - Westport, Conn., 1958 - 1987
Volume/pages
40(2011) :9 , p. 1200-1216
ISSN
0048-7333
ISI
000297092200005
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
The valuation of multi-staged pharmaceutical R&D can be interpreted as a chain of real options. In valuing these compound option models, a crucial problem is how to deal with the different types of risk. Previous models, such as Cassimon et al. (2004), offer a closed-form solution for the valuation of a new drug development using a generalized n-fold compound option model, but implicitly bundle both commercial and technical risk in one risk measure. We extend this model by explicitly incorporating technical risk, while still preserving the closed-form solution of the model. As such, this extended model is better suited to handle real-life valuation cases in the pharmaceutical industry. We document the theoretical model with a real-life project of a major pharmaceutical multinational.
E-info
https://repository.uantwerpen.be/docman/iruaauth/56e668/52cada40b0e.pdf
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