- identification of best valuation approach
- analysis of a project’s strategic opportunities
- evaluation of operating and growth options
- assessment of all input variables
- valuation report
Originally the NPV algorithm was developed for ‘static’ investments where managerial actions have virtually no impact on value. However, in R&D financial evaluation has to reflect the fundamental and inherent uncertainty, typically characterized by high risk and low probability of success versus high upside potential. In the presence of risk managerial flexibility has value, minimizing the impact of negative outcomes and maximizing the value of a project or portfolio by taking advantage of new internal and external information.
Often R&D projects are undervalued because the option value to use a compound or technology for business opportunities beyond those initially anticipated is not recognized. In addition, the value of abandoning a project early, either when research results are unsatisfactory or when the business environment changes, is not recognized in traditional valuations. In fact, the manner in which projects and portfolios are managed strongly influences their risk structure, their optionality, and their financial value.
There are several ways to calculate the value of real options. Some approaches complement NPV-based valuations, others completely substitute NPV calculations. Bioscience Valuation has pioneered real options valuation in the pharmaceutical and biotech industries and supports clients in identifying and applying the most appropriate approach. This enables our clients to assess a project's strategic opportunities and to evaluate operating as well as growth options.
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