Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity

Danny Cassimon, M. De Backer, Peter-Jan Engelen, Martine van Wouwe () and V. Yordanov

Research Policy, 2011, vol. 40, issue 9, 1200-1216

Abstract: The valuation of multi-staged pharmaceutical R&D can be interpreted as a chain of real options. In valuing these compound option models, a crucial problem is how to deal with the different types of risk. Previous models, such as Cassimon et al. (2004), offer a closed-form solution for the valuation of a new drug development using a generalized n-fold compound option model, but implicitly bundle both commercial and technical risk in one risk measure. We extend this model by explicitly incorporating technical risk, while still preserving the closed-form solution of the model. As such, this extended model is better suited to handle real-life valuation cases in the pharmaceutical industry. We document the theoretical model with a real-life project of a major pharmaceutical multinational.

Keywords: Pharmaceutical R&D; Real options; Compound option model; Technical risk; Case study (search for similar items in EconPapers)
JEL-codes: C6 G12 G24 G31 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0048733311001016
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:respol:v:40:y:2011:i:9:p:1200-1216

DOI: 10.1016/j.respol.2011.05.020

Access Statistics for this article

Research Policy is currently edited by M. Bell, B. Martin, W.E. Steinmueller, A. Arora, M. Callon, M. Kenney, S. Kuhlmann, Keun Lee and F. Murray

More articles in Research Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().