We're using cookies, but you can turn them off in your browser settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy

Bridge over ocean
1 May 2000 Financial Analysts Journal Volume 56, Issue 3

Real-Options Valuation for a Biotechnology Company

  1. David Kellogg
  2. John M. Charnes

Many companies in the biotechnology industry have significant valuations despite having no product revenue because their products are in early stages of development. In the past 10–15 years, investors have bid up the stock prices of companies showing promise of developing a blockbuster drug. We explain the decision-tree method and binomial-lattice method (which adds a growth option) and use them to value a biotechnology company, Agouron Pharmaceuticals, as the sum of the values of its drug-development projects. The growth option was added because the development of an initial new molecular entity (NME) is similar to purchasing a call option on the value of a subsequent NME. We compare our computed values of Agouron with actual market values at selected points in time during the development of Agouron's Viracept, a drug used to treat HIV-positive patients.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content