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Decomposing the Value of a Pharmaceutical Firm

International Journal of Pharmaceutical Medicine, Vol. 20, No. 2, pp. 87-97, 2006

11 Pages Posted: 12 Dec 2012 Last revised: 5 Mar 2013

Danny Cassimon

University of Antwerp - Institute for Development Policy and Management

Peter-Jan Engelen

Utrecht University - Utrecht University School of Economics

Vilimir Yordanov

Independent

Date Written: July 1, 2005

Abstract

Traditional valuation tools such as discounted cash flow (DCF) models fail in valuing research and development (R&D)-intensive pharmaceutical firms adequately because most of the market value of the firm is embedded in unexercised real options whose future value is uncertain at this moment. From this basic insight, it follows that the (value of the) firm should optimally be characterised as a portfolio of real options, and also that compound option models should optimally be used to value the firm's 'products' based on the typical development process of new drugs. The overall market value of a pharmaceutical company can then be decomposed taking into account the firm's specific portfolio of 'products' being at different stages of the drug development process. In this paper, we develop the general structure and apply that framework to a stylised real-life example.

Keywords: R&D, real options, compound option model, pharmaceutical, value decomposition

JEL Classification: C6, G12, G24, G31

Suggested Citation

Cassimon, Danny and Engelen, Peter-Jan and Yordanov, Vilimir, Decomposing the Value of a Pharmaceutical Firm (July 1, 2005). International Journal of Pharmaceutical Medicine, Vol. 20, No. 2, pp. 87-97, 2006. Available at SSRN: https://ssrn.com/abstract=2187990

Danny Cassimon

University of Antwerp - Institute for Development Policy and Management ( email )

Prinsstraat 13
Antwerpen, B-2000
Belgium

Peter-Jan Engelen (Contact Author)

Utrecht University - Utrecht University School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Vilimir Yordanov

Independent ( email )

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