A Real Options Valuation of Bavarian Nordic’s smallpox vaccine IMVAMUNE

Gitte Jul Christensen

Student thesis: Master thesis


The purpose of this thesis has been to investigate the value of IMVAMUNE, a vaccine under development. To answer this, a sub research question was composed to investigate how real options theory could be applied to do the valuation. A working hypothesis was developed, stating that I expected the value of IMVAMUNE to constitute more than 30% of the total company value. Bavarian Nordic has a contract with the National Institute of Health to develop IMVAMUNE as a safer smallpox vaccine than the current alternatives. The company is due to deliver 20 million doses of the vaccine starting in 2010. During 2010, the company will initiate the phase III IMVAMUNE clinical trials, which are expected to be concluded in 2014. A decision tree was created to identify which real options Bavarian Nordic would face in the future. This shows that Bavarian Nordic has an option to invest and an option to abandon in 2010, as well as an option to invest and an option to abandon in 2014 if the 2010 decision is to invest, otherwise known as a sequential compound option. The 2010 option concerns the decision to invest in phase III studies or abandon IMVAMUNE, whereas the 2014 option concerns the decision to apply for a license with the FDA or abandon the project. The expected future cash flows and the WACC has been estimated and shows that the present value of future cash flows is 2.616 million DKK. Using the present value estimate, the binomial lattice for the IMVAMUNE project was created. Based on this lattice, the option lattice for the 2014 options was calculated. This lattice was then used to valuate the compound option since the value of the 2010 options are dependant on the value of the 2014 options. A sensitivity analysis showed that the project value was most sensitive to changes in the WACC, the exchange rate and the market size. The total value of the project was estimated at 786 million DKK or 50% of the market value of the company, which, at the valuation date, was 1.583 million DKK, thereby validating the hypothesis that IMVAMUNE constitutes the main part of the value of Bavarian Nordic.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2010
Number of pages81