Biotechnology Valuation Using Real Options: The Acquisition of Alder BioPharmaceuticals Inc. by H. Lundbeck A/S

Gerrit Martin Jungen

Student thesis: Master thesis

Abstract

Traditional discounted cash flow methods face inherent weaknesses when confronted with multi-staged uncertainty such as drug development. Real options valuation holds promise but is in practice rarely adopted. Meanwhile, big pharma continues to spend large sums on acquiring small biotechnology firms in the quest to create shareholder value. One recent example is H. Lundbeck A/S buying out Alder BioPharmaceuticals Inc. This thesis investigates if Lundbeck has created value and how a real options approach to valuation could help understand if Lundbeck paid ‘fair value’. The migraine prevention market is discussed and modelled as an input for a risk-adjusted discounted cash flow analysis of Alder’s lead asset Eptinezumab while an epidemiology model is paired with a real options approach to value Alder’s early-stage asset ALD1910. A verdict is reached after an event study is performed on Lundbeck’s share price reaction on the announcement day.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages111