Capturing Value from Optionality in Pharma R&D
Over the past decade, option theory has received a great deal of attention from both academia and business. Avinash K. Dixit (Professor of Economics at Princeton University) and Robert S. Pindyck (Mitsubishi Bank Professor of Applied Economics in the School of Management at the Massachusetts Institute of Technology) have asserted that “in order to make intelligent investment choices, managers need to consider the value of options.” Judy Lewent, CFO at Merck & Company, has suggested that “all business opportunities are real options.” A number of strong performers in the pharmaceutical industry – including Merck – now view their investment opportunities as real options. They manage their options proactively to create value and take advantage of the inherent flexibility of options when resolving uncertainties. But other companies still live in a static world of planning based on discounted cash flow. These companies do not recognize that the rigid execution of a plan can destroy value when funding is committed in full up front.
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