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which gives the salvage value of $1600m in year 9. And eventually, in year 17, thereis no salvage value as the patent expires.Here, in the lowest case for the year 15, V= max {{exp(-rh)*[pVu+(1-p)Vd]}, (X-S)}= max [0, (400-141.3)] = 258.7. As {exp(-rh)*[pVu+(1-p)Vd]} < (X-S), the option isearly exercised.The result of the binomial tree shows that the value of the abandonment option is$245.67m, so the PV * (PV+O) = PV + Option value = 2338.46 + 245.67 =$2584.13m.Figure 5.6: Valuation of Option B (underlying: Weight loss)In the case that the compound is found to be useful to weight loss only and have a PVPage | 50
of $345m at year 0 (which is $672.31m at year 7), it is assumed that the patent wouldworth $600m in Year 7. And the salvage value would drop by $120m every two years.Similar as the situation above, the abandonment option adds a value of $81.78m to thepresent value, which gives PV * (PV+O) = 672.31 + 81.78 = $754.09m.Figure 5.7: Valuation of Option B (underlying: Both)In the case that the compound is found to be useful to both depression and weight loss,while the PV is $2250m at year 0 (which is $4384.61m at year 7), it is assumed thatthe patent would worth $4000m in Year 7, and the salvage value would drop by$800m every two years.Page | 51
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 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: approval and other issues. Therefor
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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