The derivation of R&D return indicators within a real options framework

Abstract

The purpose of this paper is to rework the building blocks of real option applications and to introduce a basket option framework. We find that the characteristic parameters of the risk neutral density function implied in observed share prices within the real option framework represent a novel category of R&D return indicators. Empirical evidence for a set of 13 US bio-pharmaceutical companies is provided. The novel R&D return indicator can be used to analyse investor's expectations on R&D success of a particular firm. The implications of this indicator on decision making are mainly based on its information content on technological and market risk of the products under development in a particular firm. A proposal for a potential application of the stability index in innovation research is discussed as well. The study thus is at the interface between innovation research and (empirical) finance

A real options perspective on R&D portfolio diversification

“…Multiple assets have been examined by Wörner et al (2002Wörner et al ( , 2003, who describe a rm as a`basket option' that conducts several R&D projects, or as an option on a set of stochastic variables. Yet, as they focus on the value of a single claim that pertains to many random variables, their analysis does not derive results relevant to portfolio management (which inherently deals with the selection between multiple claims).…”

Valuation implications of pharmaceutical companies' R&D regulatory approval notifications

“…A significant proportion of this literature has focused on the extent to which decision makers' intuition is consistent with real-option theory (Busby & Pitts, 1997;Howell & Jägle, 1997;Remer, Ang & Baden-Fuller, 2001;Verbeeten, 2006) and there is general agreement that biotechnology/pharmaceuticals firms' market value can be considered as the value of a basket of real options on their R&D portfolio (Ely et al, 2003;Woerner & Grupp, 2003;Hartman & Hassan, 2006). A theme is this literature is a call for better educated decision makers to realise the benefits of the real-options approach for investment appraisal.…”

“…While it is evident that there is considerable variation in the application and understanding of real-options generally, the biotechnology/pharmaceuticals sector is 16 often cited as an industry where real options analysis is applicable and where firms' market value can be considered as the value of a basket of real options on their R&D portfolio (Ely et al, 2003;Woerner & Grupp, 2003;Hartman & Hassan, 2006). Real-options is also the application of option-pricing to non-financial instruments.…”

A Fuzzy Multiple Criteria Comparison of Technology Valuation Methods for the New Materials Development

“…In particular, these real options are subject to uncertainty, i.e. the value of the options changes as time evolves and new information about the investment project comes in (Wu, Yen 2007;Wörner, Grupp 2003;Jerak, Wagner 2006;Ernst et al 2010;Verdu et al 2012). Three levels of real option thinking can be distinguished (Faulkner 1996;Wu, Yen 2007;Wörner, Grupp 2003;Dissel et al 2005).…”