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

More documents

Recommendations

Info

Phase II and Phase III, then we can avoid these investments. It is assumed that weonly abandon the project if the phases fail. This situation can be illustrated as below:Figure 5.2: NPV of Davanrik at Merck & Co. 1The present value (PV) of this project is:{{[(1200-250)*.85+0*.15-200]*.1+[(345-100)*.75+0*.25-150]*.15+[(2250-400)*.7+(1200-250)*.15+(345-100)*.5+0*.1-500]*.05+0*.7}-40}*.6+0*.4= {[(807.5-200)*.1 + (183.75-150)*.15 + (1449.75-500)*.05 +0]-40}*0.6+0= (113.3-40)*0.6= 43.98NPV = 43.98 – 30 = $13.98 millionThis result can also be derived from another perspective, which is illustrated in thePage | 44
figure below:Figure 5.3: NPV of Davanrik at Merck & Co. 2Here, ten different outcomes have been analyzed, together with their probabilities.For example, for the first outcome, CF = 1200-250-200-40-30 = 680, while theprobability of this situation is 0.6 * 0.1 * 0.85 = 5.1%, so the PV of this situation isCF * probability = 680 * 5.1% = 34.68.Putting all the possible outcomes together, gives the NPV of $13.98 million.Except the option to abandon described above, there are other possibilities of realoption in this Davanrik case. This will be discussed in detail in the section below. (Itcan also be argued that the options to abandon described above have no value offlexibility, as discussed in Chapter 2).Page | 45
Page 1 and 2: APPLICATION OF REAL OPTIONS VALUATI
Page 3 and 4: Table of ContentsAbstract .........
Page 5 and 6: List of TablesTable 5.1: Value of O
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: Chapter Five— Case Study Analysis
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

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

Create successful ePaper yourself

Delete template?

Save as template?