Abstract
This study developed a real option model for valuating clinical development projects being conducted by pharmaceutical companies. The model was especially applied to sequential clinical development projects with technical risk for project failure due to lack of safety/efficacy of a new drug.
Since a pharmaceutical clinical development projects face risk of external events such as competitors' entry to the market and official price reduction by the government, the model considers the impact of such external event on the project value.
The following results were found. First, the impact of external events in terms of probability of event occurrence and/or degree of downside jump on the value of the new drug enlarges critical value for project investment.
This suggests that the company should delay investment in the project until the value of the new drug becomes large enough. Second, when the probability of projict failure is large, the value of the investment option becomes small. Lastly, the model provides methodology for valuing for sequential clinical projects and critical value for theoptimal investment.
