Incorporating technical risk in compound real option models to value a pharmaceutical R&amp;D licensing opportunity

Cassimon, Danny; Backer, Marianne De; Engelen, Peter‐Jan; Wouwe, Martine Van; Yordanov, Vilimir

doi:10.1016/j.respol.2011.05.020

Cited by 58 publications

(73 citation statements)

References 30 publications

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“…Reducing the number of possible states in each period to two states is a simplification of the (real) valuation problem that comes at the cost of reducing the analysis to only one source of uncertainty. However, a common distinction of sources of uncertainty in the literature on valuation of R&D or new product development (NPD) is the distinction between market uncertainty and technical uncertainty (e.g., Cassimon et al 2011a). Market uncertainty usually resolves over time, whereas technical uncertainty can only be reduced by undertaking the project.…”

Section: Applying Binomial Option Pricing Methodology To Sequential Rmentioning

confidence: 99%

“…Valuing (sequential) R&D projects has thus received much attention in academia and corporate practice (e.g., Amram et al 2006;Cassimon et al 2011a;Nichols 1994). In this regard, it is well acknowledged among researchers and practitioners that R&D investments represent real options to the investing firm (Huchzermeier and Loch 2001;Koussis et al 2013;Pennings and Lint 1997;Perlitz et al 1999).…”

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confidence: 99%

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Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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In this paper, we propose a binomial approach to modeling sequential R&D investments. More specifically, we present a compound real options approach, simplifying the existing valuation methodology. Based upon the same set of assumptions as prior models, we show that the number of computational steps for valuing any compound option can be reduced to a single step. We demonstrate the applicability of our approach using the real-world example of valuing a new drug application. Overall, our work provides a heuristic framework for fostering the adoption of binomial compound option valuation techniques in R&D management.

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Section: Applying Binomial Option Pricing Methodology To Sequential Rmentioning

confidence: 99%

mentioning

confidence: 99%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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“…Moreover, recent studies have introduced the discussion of the inappropriate use of capital budgeting techniques leading to value destruction. That is, both the adoption of projects with low attractiveness, as well as the rejection of projects with the potential to create value are undesirable for the company (Dixit & Pindyck, 1995;Cassimon, Backer, Engelen, Wouwe, & Yordanov, 2011).…”

Section: Discussion and Final Considerationsmentioning

confidence: 99%

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Mendes‐Da‐Silva

Saito

2014

Rev. adm. empres.

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This article compares capital budgeting techniques employed in listed and unlisted companies in Brazil. We surveyed the Chief Financial Officers (CFOs) of 398 listed companies and 300 large unlisted companies, and based on 91 respondents, the results suggest that the CFOs of listed companies tend to use less simplistic methods more often, for example: NPV and CAPM, and that CFOs of unlisted companies are less likely to estimate the cost of equity, despite being large companies. These findings indicate that stock exchange listing may require greater sophistication of the capital budgeting process. KEYWORDS | Capital budgeting, finance survey, financial decisions, corporate finance, financial innovation. RESUMO Este artigo compara técnicas de orçamento de capital empregadas nas empresas listadas e não-listadas no Brasil. Emprega-se um survey dirigido aos Chief Financial Officers (CFOs) de 398 empresas listadas e 300 grandes empresas não-listadas e, com base em 91 respondentes, os resultados sugerem que os CFOs das empresas listadas tendem a usar mais intensamente métodos menos simplistas, e.g. VPL e CAPM, e que CFOs de empresas não-listadas menos provavelmente estimam o custo de capital próprio, mesmo se tratando de empresas de grande porte. Esses achados indicam que a listagem em bolsa pode requerer maior sofisticação do processo de orçamento de capital. PALAVRAS-CLAVE | Orçamento de Capital, survey em finanças, decisões financeiras, finanças corporativas, inovação financeira. RESUMEN El presente artículo compara las técnicas de presupuestación empleadas por las empresas brasileñas cotizadas y no cotizadas. Encuestamos a los Gerentes de Finanzas Corporativos (Chief

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“…Since this first attempt, many scholars have devoted their attention to these closed-form solutions, and they refer to more accurate models such as the compound option model (Geske, 1979). Among these, we can mention the two-fold compound approach (Perlitz et al, 1999) or the generalized n-fold version of this (Cassimon et al, 2004;Cassimon et al, 2011a). Moreover, in order to more realistically evaluate the pharmaceutical process, several authors adopt ''adjusted'' formulae based on the B&S formula (Brach and Paxson, 2001) or on the Geske model (Pennings and Sereno, 2011) The B&S formula and Geske model are based on the assumption of a diffusion process (Brownian motion) for the underlying.…”

Section: Single Pharmaceutical Randd Project Evaluationmentioning

confidence: 99%

Open innovation: A real option to restore value to the biopharmaceutical R&D

Nigro

Morreale

Enea

2014

International Journal of Production Economics

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a b s t r a c tThe pharmaceutical landscape has changed, and new business models, based on alliances, are increasingly being adopted in this industry. Biotechnology advances have pushed this development, and pooling complementary resources coming from incumbents and newcomers is a key skill to succeed: these are the premises for a quick spread of the open innovation (OI) paradigm in this industry. R&D portfolio selection needs R&D project evaluation, and Real Options Analysis (ROA) is acknowledged as a powerful tool to evaluate uncertain projects that have an intrinsic flexibility. The present research aims to foster the use of ROA in the OI field in order to encourage firms to undertake this innovation model; to achieve this goal the authors propose a closed-form model that is easy to implement, to evaluate the OI initiative for selecting an optimal R&D portfolio. The study wants to support managers in optimal R&D portfolio construction in terms of choosing the most promising products, the means by which the related project has to be undertaken (in an open or closed manner; i.e. licensing-in or not) and the self-financing policy. The proposed model can be easily implemented into a spreadsheet, and the inputs needed to run it are usually requested to evaluate projects using the most used net-present-value-based methods. Moreover, some parameters of the model allow strategic aspects to be considered: for example the nature of the project (core/non-core), the impending project phase, and the risk-sharing opportunity.The results of the developed numerical example show that the selected portfolio is well balanced in terms of development stages, core/non-core therapeutic areas and, licensing-in (an inbound open innovation solution), is preferred in the case of products at their early stages of development.

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Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity

Cited by 58 publications

References 30 publications

Modeling sequential R&D investments: a binomial compound option approach

Modeling sequential R&D investments: a binomial compound option approach

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Open innovation: A real option to restore value to the biopharmaceutical R&D

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