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

Merck & Co (10%), which gives $2338m, $672m, $4385m respectively.The time to expiration – as the compound is going to go through a 7 year R&Dprocess, and the patent still has17 years of life, the product would have a 10 yearperiod of exclusivity, beginning in 7 years. The time between year 7 and year 17leaves 10 year of time, which can be deemed as suitable for expiration time. Assumeyear 0 is the year 1999, thus for this option, T is the year 2016 and t is the year 2006.Volatility – ten years of Merck & Co‘s stock price has been used to derive thestandard deviation (S.D. = 49.61%) for the time period between year 7 and year 10.Here the historical volatility of Merck & Co is used, rather than the Davanrik, or say,LAB Pharmaceuticals. As will be discussed later that for other period, meaning year 0to year 7, other volatility figure will be used, this is because for the time between year0 and year7, the volatility would be more project-related, especially in terms of LABPharmaceuticals‘ past performance. It is assumed for that period, the volatility wouldbe higher, as the fact that LAB has never passed the process.Page | 47