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Title
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Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity
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Author
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Abstract
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| 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. |
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Language
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English
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Source (journal)
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Research policy. - Amsterdam, 1971, currens
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Publication
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Amsterdam
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2011
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ISSN
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0048-7333
[print]
1873-7625
[online]
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DOI
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10.1016/J.RESPOL.2011.05.020
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Volume/pages
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40
:9
(2011)
, p. 1200-1216
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ISI
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000297092200005
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Full text (Publisher's DOI)
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Full text (publisher's version - intranet only)
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