Analysis of the Theoretical and Practical Issues that are Present and Arising From the Use of rNPV and ROV in Practice for Valuing a Pharmaceutical Product in the R&D Phase with Genmab A/S as Case Company.

Kasper Lundegaard Christensen & Rasmus Pedersen

Student thesis: Master thesis


This thesis will investigate two different valuation methods, which is the Risk Adjusted Net Present Value referred to as rNPV and the Real Option Valuation called ROV. The rNPV method is a static valuation method based on cash flows, while ROV is founded on real options. The main focus of this thesis is to analyze the theoretical and practical issues that are present and arise from the use of these two specific valuation methods in practice for valuing a pharmaceutical product in the R&D phase with Genmab A/S as case company. This perspective is interesting to explore as practitioners often use the rNPV method in practice, although this method does not include the strategic flexibility of the asset in the valuation. For this reason, lots of theorists have written theoretical articles about real options as a method for valuation. However, these articles do not focus on the applicability of the real options as a valuation method, which may be one of the reasons why the method is not often used by practitioners and rNPV still is the most used valuation method to valuing pharma projects. But which theoretical and practical issues arise, when the two method is used? For this reason, this thesis starts by pointing out the relevance of valuation as wells as the characteristics of the two methods. Thereafter, this thesis analyzes the theoretical issues, which are common to the two model, where these theoretical issues are then analyzed specifically for the individual model. After the theoretical issues have been identified and analyzed, the two methods are then used in practice on a pharma project with high risk. The practical valuation start out by choose the case company, which has been Genmab, as they have performed financially well over the past period with a great growth in their revenue. A specific pharma product in phase 1 with the purpose of curing lung cancer has been chosen as the underlying asset for the valuation. In relation to the estimation of the parameters, a strategic analysis has been made to investigate factors that can affect the company and those estimates. Thereafter, the valuation of pharma product has been estimated to DKKm 4,46 by the rNPV method as well as DKKm 12,31 by the ROV model. Finally, the theoretical and practical issues are then discussed, where this focus on the theoretical issues in the form of whether it is best to have few, or many assumptions related to the method as well as the discussion of the number of scenarios. Further, the discussion also focusses on the influence of some of the parameters in the methods.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages121