In this case, the option to expand is valuable and must be considered when quantifying the value of the mine. This investment will provide the option to develop the remainder of the mine when and if market prices change. Consider the valuation of a mine of which, at current commodity prices, only half is economically feasible for development. For example, the option to expand a project is valuable when a firm may want to invest in a negative net present value (NPV) project if it provides the firm the possibility of developing a new project. There are four main types of options associated with investment projects-the option to expand, to postpone, to abandon, and to temporarily suspend an investment. Most investments are subject to options valuation. Whenever possible, real options valuations are aligned with financial market valuations. Uncertainty and the agent's ability to respond to it (flexibility) are the source of value of an option. Options are contingent decisions that provide the opportunity to make a decision after uncertainty unfolds. The real options approach is an extension of financial options theory to options on real/non-financial assets. Two applications of the real options approach are discussed in more detail: the valuation of natural resource investments and the valuation of research and development investments. Recent developments in the valuation of complex American options has allowed progress in the solution of many interesting real option problems. After a general introduction to the subject, numerical procedures to value real options are discussed. Email: paper provides an overview of the real options approach to valuation mainly from the point of view of the author who has worked in this area for over 30 years. ** California Chair in Real Estate and Land Economics Professor of Finance, Anderson School of Management, University of California, Los Angeles. Hay Jin Kim provided valuable assistance. * This lecture was delivered at the 2013 Finance UC Conference in Santiago, Chile. Hence, managers should take caution while valuing the products at early stage.THE REAL OPTIONS APPROACH TO VALUATION: CHALLENGES AND OPPORTUNITIES * The more competitors you have, the more chances are there for having the drug for same indication and more chances that the life of the exclusivity (that you could have enjoyed provided you are the only one developing it) will decrease. In other words, you have limited exclusivity up to a certain period and your option value may be less. In that scenario, you do not have full exclusivity. Assuming your competition also files a patent for the same target. However, the patent does not protect other companies from developing another drug that interacts with the same targeted mechanism via a different pathway. It is obvious that the patent implies that company has the rights to develop the product. So, when are Options really valuable? Let us focus on just one reason todayĮxclusivity: Does your patent provide you exclusivity for the stated period? You might be wondering why such a trivial question. For example- If the drug is at early stage such as under pre-clinical, it has less DCF ( discount rate used will be very high) and higher option value ( due to higher uncertainty) than a drug which has crossed Phase III and is waiting for regulatory approval and registration. A project with very high uncertainty and risk has more an option value and less DCF value and vice versa. Real options are never a substitute of discounted cash flows but rather a complement to it. Should the patent be valued using options, discounted cash flows, or both? Let’s assume that a biotech company has developed a patent for a cancer therapeutic compound that targets a specific apoptotic-inducing mechanism and would like to value the patent. Real Options is still not widely accepted in the Bio-Pharmaceutical Industry for various reasons such as their complexity, novel concept, and inability to be recognized in real-life managerial settings.
0 Comments
Leave a Reply. |