The valuation of a NDA using a 6-fold compound option

The valuation of a NDA using a 6-fold compound option This paper presents a new methodology for valuing new drug applications (NDA) and the R&D of pharmaceutical companies based on real option models. Traditional valuation models fail to capture the full value created by R&D to pharmaceutical companies, because they do not correctly model the nature of the process of developing a new drug. It is a series of consecutive phases from R&D to commercialisation, where each phase is in fact an option on executing the following phase, i.e. a compound option. For a NDA, the R&D phase can best be presented as a 6-fold compound option on the commercialisation phase. Using a generalisation of Geske’s compound option model, we derive a closed-form solution for a n -fold compound option model, and apply it to calculate the value of a NDA using sector average figures. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Research Policy Elsevier

The valuation of a NDA using a 6-fold compound option

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Publisher
Elsevier
Copyright
Copyright © 2003 Elsevier B.V.
ISSN
0048-7333
DOI
10.1016/S0048-7333(03)00089-1
Publisher site
See Article on Publisher Site

Abstract

This paper presents a new methodology for valuing new drug applications (NDA) and the R&D of pharmaceutical companies based on real option models. Traditional valuation models fail to capture the full value created by R&D to pharmaceutical companies, because they do not correctly model the nature of the process of developing a new drug. It is a series of consecutive phases from R&D to commercialisation, where each phase is in fact an option on executing the following phase, i.e. a compound option. For a NDA, the R&D phase can best be presented as a 6-fold compound option on the commercialisation phase. Using a generalisation of Geske’s compound option model, we derive a closed-form solution for a n -fold compound option model, and apply it to calculate the value of a NDA using sector average figures.

Journal

Research PolicyElsevier

Published: Jan 1, 2004

References

  • The option value of advanced R&D
    Pennings, E.; Lint, O.

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