application of real options valuation to r&d investments in ...

3.1.3 Phase II Clinical Trials ............................................................................. 273.1.4 Phase III Clinical Trials ............................................................................ 283.1.5 FDA approval .......................................................................................... 283.2 real options valuation in pharmaceutical industry ........................................... 293.2.1 Introduction ............................................................................................. 293.2.2 Five variables that determine the value of financial options –analogies toreal R&D options in pharmaceutical companies ................................................ 323.3 Brief summary ............................................................................................... 36Chapter Four— Case Study ....................................................................................374.1 Introduction.................................................................................................... 374.2 Merck Company ............................................................................................. 384.3 Davanrik ........................................................................................................ 394.4 D avanrik’s P otential C ash flow s ..................................................................... 40Phase I .............................................................................................................. 40Phase II ............................................................................................................ 40Phase III ........................................................................................................... 41Chapter Five— Case Study Analysis ......................................................................435.1 NPV ............................................................................................................... 435.2 Option B (Year 7 to year 17) .......................................................................... 465.2.1 Five variables that determine the value of the options .............................. 465.2.2 Valuation of the abandonment option (Option B) ...................................... 485.3 Option A (Year 0 to year 7) ............................................................................. 525.3.1 Five variables that determine the value of the options .............................. 535.3.2 Valuation of the compound option A using simple valuation method ........ 575.3.4 Valuation of the compound option –compound rainbow option ................ 635.4 Sensitivity Analysis and comparison of two methods ...................................... 65Chapter Six— Limitations and conclusion .............................................................676.1 limitations ...................................................................................................... 676.1.1 For Option B ............................................................................................ 676.1.2 For Option A ............................................................................................ 686.2 Conclusion ..................................................................................................... 68References ...............................................................................................................71iii