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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
List of TablesTable 5.1: Value of Option B ....................................................................................52Table 5.2: Time value of investment cost ..................................................................55Table 5.3: Exercise Price of Option A (Year 0-7) ......................................................56Table 5.4 ENPV .......................................................................................................62Table 5.5: Calculation for option value with different volatility ................................64iv
Page 1 and 2: APPLICATION OF REAL OPTIONS VALUATI
Page 3: Table of ContentsAbstract .........
Page 7 and 8: Chapter One— IntroductionAs one o
Page 9 and 10: Then, in Chapter 4, the case study
Page 11 and 12: and we will have the right to take
Page 13 and 14: project, to get its salvage value,
Page 15 and 16: The option to switch:If assets have
Page 17 and 18: 2.2 Advantages of Real Option Valua
Page 19 and 20: In the case of pharmaceutical R&D,
Page 21 and 22: delayed in time. Undertaking one pr
Page 23 and 24: Figure 2.2: Advantages and disadvan
Page 25 and 26: smallest possible payoff of zero, w
Page 27 and 28: options applications is the binomia
Page 29 and 30: t: years to expirationr: annual ris
Page 31 and 32: Chapter Three— Apply Real options
Page 33 and 34: on Howell et al (2001).3.1.1 Precli
Page 35 and 36: approved.3.2 real options valuation
Page 37 and 38: Figure 3.3: Comparison of a call op
Page 39 and 40: applying the principals of activity
Page 41 and 42: that has occurred in the past. Depe
Page 43 and 44: Chapter Four— Case StudyFor this
Page 45 and 46: 4.3 DavanrikLAB Pharmaceuticals ori
Page 47 and 48: efficacious for depression only, a
Page 49 and 50: Chapter Five— Case Study Analysis
Page 51 and 52: figure below:Figure 5.3: NPV of Dav
Page 53 and 54: Merck & Co (10%), which gives $2338
Page 55 and 56:
approval and other issues. Therefor
Page 57 and 58:
of $345m at year 0 (which is $672.3
Page 59 and 60:
project turns out to be unprofitabl
Page 61 and 62:
these three options, the risk-free
Page 63 and 64:
ewrite as, noting all the costs (in
Page 65 and 66:
Figure 5.10: Valuation of Option A
Page 67 and 68:
Figure 5.12: Valuation of Option A
Page 69 and 70:
Figure 5.13 Valuation of Compound r
Page 71 and 72:
$ in millionmillion to $113.97 mill
Page 73 and 74:
Chapter Six— Limitations and conc
Page 75 and 76:
discovery projects, arrives in a di
Page 77 and 78:
References1. Amram M & Kulatilaka N
Page 79 and 80:
31/08/2006, available at: http://ho
Page 81 and 82:
46. T rigeorgis L . (1995), ―M et
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