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The valuation of a NDA using a 6-fold compound option |
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| Authors: | D Cassimon L Thomassen |
| Institution: | a University of Antwerp, Institute for Development Policy and Management, Middelheimlaan 1, B-2020 Antwerpen, Belgium b Utrecht School of Economics, Utrecht University, Vredenburg 138, 3511 BG Utrecht, The Netherlands c University of Antwerp, Faculty of Applied Economics, Prinsstraat 13, B-2000 Antwerpen, Belgium |
| 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. |
| Keywords: | C6 G12 G24 G31 |
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