Værdiansættelse af biotekvirksomheder via realoptioner: Praktisk guide

Benjamin Moes Højsbo & Steffen Wulff Petersen

Student thesis: Master thesis


The main theme of this thesis concerns real options within the biotech industry. The literature concerning the real options paradigm is extensive, and has continuously been developed during the past 20 years. To understand why practitioners have not kept up the pace set by the academics within the area of real options, the authors examine two main questions: 1) is the real options approach to valuation theoretically valid? and 2) is this approach meaningful from an operational perspective? The characteristic of these two questions naturally divide the thesis into a theoretical part and a practical part. The theoretical part examines the characteristics of the biotech industry, and concludes that this is a very suitable area for use of real options. This is mainly due to the project oriented structure, the large R&D costs that can be saved by abandoning a project and the typically high volatility of such projects. Subsequently the theory concerning real options is identified, including the different types of real options and the various methods of solving these real options. Finally, the authors evaluate the main areas of critique towards the use of real options, and conclude that as well as solving problems of other models, real options also create issues which must be kept in mind when using the approach. None of these issues however, qualifies for discarding the use of real options. The practical part seeks to develop a practical guide for the implementation of real options approach in valuating an entire biotech company. The guide is constructed based on the knowledge gained from the theoretical part. The guide comprises 10 steps which ultimately lead to the value of the company’s equity. After the guide is constructed, it is used in valuing the Danish listed biotech company, NeuroSearch. The company is comprised by a number of R&D projects in different clinical and preclinical phases and has no current cash flows which makes is appropriate for the real options analysis. Furthermore, NeuroSearch was established in 1989 and has not yet been able to bring any products to the market. This has a number of implications on the situation of NeuroSearch, which enables further interesting aspects in the analysis of the company. It is concluded that the use of the real options approach is acceptable on a theoretical basis, while still being manageable from an operational point of view. The modeling of real options is heavier than traditional models, but the level of information retrieved from the real options analysis is worth the extra trouble. According to the real options analysis, the stock price of NeuroSearch is estimated at 182 DKK. More interesting is, that without the contributing value from the real options analysis, two out of seven R&D projects should have been terminated, based on the traditional DCF analysis. The real options approach thus offers very important insights in terms of managing the biotech pipeline.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2009
Number of pages182