Valuation of Compound Real Options for Investments in Innovative Projects in Pharmaceutical Industry

Баранов, А. О.; Muzyko, Elena

doi:10.1016/s2212-5671(15)00980-6

Cited by 16 publications

(8 citation statements)

References 10 publications

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“…In equation ( 1), when S < X e (out-of-the-money), there is no loss to abandon the options; when S > X e (in-the-money), the return is S − X e when exercising options. e integral result is derived by substituting (1) into ( 9); then the pricing model of the European call options for no-dividend paying stocks V(S, t) is obtained by equation (10), that is, the famous B-S model:…”

Section: Ds(t) S(t)mentioning

confidence: 99%

“…Table 2 shows some results calculated by using financial option pricing model (10) and real option pricing model (12). We set the salvage value in upfront investment at different levels.…”

Section: Real Option Value With Salvage Value Could Be Morementioning

confidence: 99%

“…Ample evidence that real options play an important role in initiating or terminating investment by enterprises [3][4][5] has led to advancement of the theory of real options in the last several decades [6][7][8][9]. In addition, many papers and books on the application of real options have been published in a wide range of subjects including evaluating the value of R&D projects in the pharmaceutical enterprises [10][11][12] and the value of public policies in encouraging private investment [13], in land use [14], in financial analysis [15], in assessing the value of agricultural projects [16], and in corporate mergers and acquisitions ( [17,18]; chapter 9). e commonly used real option pricing methods include risk-adjusted net present value method ( is method requires a knowledge of the value of the probability of cash flows and the cost of capital.…”

Section: Introductionmentioning

confidence: 99%

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The Sunk Cost and the Real Option Pricing Model

Zhang

Wang

2021

Complexity

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Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options.

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Section: Ds(t) S(t)mentioning

confidence: 99%

“…Table 2 shows some results calculated by using financial option pricing model (10) and real option pricing model (12). We set the salvage value in upfront investment at different levels.…”

Section: Real Option Value With Salvage Value Could Be Morementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Sunk Cost and the Real Option Pricing Model

Zhang

Wang

2021

Complexity

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“…However, until now the valuation of technology in the field of space has never been done in Indonesia. Technology/intellectual property valuation has been carried out by several parties such as: Modeling and Designing of Patent Oriented Technology Valuation Systems in the Bogor Agricultural University (IPB) by (Dharmawan, 2006); "Model for the Evaluation of a Technology Established in a Manufacturing System" by (Schuh et al, 2012); and "Valuation of Compound Real Options for Investments in Innovative Projects in Pharmaceutical Industry" by (Baranov & Muzyko, 2015). This study uses the Intellectual capital theory as described by (Stewart, 1997), and analyzed using Business Process Analysis, SWOT Analysis, and Soft System Management (SSM).…”

Section: Introductionmentioning

confidence: 99%

Valuation of Aeronautics and Space Technology at Lapan

Simanjuntak

Wasistha

2019

AEFR

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New challenges arises for government institutions engaged in research and engineering to continuously innovate and develop technologies that have competitive advantages and provide income for the country through royalty from licensed technology. This research carried out to valuate the aeronautics and space technology. The objective of the study is to develop appropriate intellectual property valuation methods. This research is a case study utilizing sequential mix method which is the combination of quantitative and qualitative research. By using intellectual capital theory, this research-broaden the literatures on the technology valuation in the field of aeronautics and space. This study fills research gap on the existing technology valuation method that is still partially conducted by government research and development. This study discusses the value of intangible assets and licenses from intellectual property that are calculated through three valuation approaches, such as cost-based approach, income-based approach, and market-based approach. The results of the study show that the most appropriate intellectual property valuation method are the cost-based approach and income-based approach.JEL Classification: O30, O31, O33Keywords: Cost Based Approach, Income Based Approach, Intellectual Property, Market Based Approach, Sequential Mix Method

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“…The second classification solves the problem by closed-form models. The twofold Geske (1979) model is frequently applied to consider an R&D project (Perlitz et al, 1999;Jensen and Warren, 2001;Baranov and Muzyko, 2015). However, the generalized n-fold compound option model of Cassimon et al (2004) can properly capture the real options value of a multi-phase project.…”

Section: Introductionmentioning

confidence: 99%

A robust algorithm for project portfolio selection problem using real options valuation

Montajabiha

Khamseh

Afshar-Nadjafi

2017

IJMPB

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Purpose The principal concern of organization managers in the global rivalry of commerce environment is how to select the project portfolio among available projects. In this matter, organizations should consider the uncertainty intrinsic in the projects regarding an appropriate valuation technique within an optimization framework. In this research, the purpose of this paper is to formulate using a robust optimization algorithm to deal with the complexities and uncertainty inherent in the construction of the project portfolio. Design/methodology/approach First, a general mathematical formulation is presented, which in compound real options valuation is highlighted. This formulation gives managerial flexibility by correcting the deficiency of traditional discounted cash flow technique that excludes any form of flexibility. Then, considering a limitation on budget of the organization, an integer programming formulation to maximize the n-fold compound options for project portfolio selection is proposed. Finally, a robust optimization model is developed along with the robust combinatorial optimization algorithm, which is effective for solving problems under uncertainty. Findings Sensitivity analysis showed that projects in later phases of development, having survived several phases of pre-clinical and clinical tests, are worth more because they are more likely to pertain to business. However, the investment costs related to each project during development phases limit the number of projects that a company can bring to their final portfolio. Additionally, the analysis of conservatism level represented how project managers can quite easily determine their risk attitude and the corresponding portfolio composition. From a managerial point of view, the proposed framework is very useful because it requires only financial estimates. Hence, the proposed decision support tool can assist research and development (R&D) project managers in the pharmaceutical industry for making decisions. Originality/value The first is the application of the n-fold compound options on portfolio of R&D projects and the employment of compound options value of a project portfolio as an objective function. The second one is a mathematical formulation of these concepts and solving it by the robust combinatorial optimization algorithm. The literature is lacking in the application of the robust combinatorial optimization algorithm to R&D project portfolio selection based on the generalized n-fold compound option model of Cassimon et al. (2004). Every framework from calculation of the n-fold compound option to solving robust combinatorial algorithm is programmed in Matlab software, since it can be used as a business support tool.

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Valuation of Compound Real Options for Investments in Innovative Projects in Pharmaceutical Industry

Cited by 16 publications

References 10 publications

The Sunk Cost and the Real Option Pricing Model

The Sunk Cost and the Real Option Pricing Model

Valuation of Aeronautics and Space Technology at Lapan

A robust algorithm for project portfolio selection problem using real options valuation

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