VALUATION OF BIOTECHNOLOGY COMPANIES: REAL OPTIONS APPROACH UNDER UNCERTAINTY
Keywords:
Risk, Real options, Valuation, BiotechnologyAbstract
Biotechnology is one of the most intensive industries in the past few decades. Essence of their operations leads to problem of determining the value of biotechnology companies, because in addition to their existing value, future product, market opportunities and intangible assets are difficult to value. Biotech companies dont have a standard format, and simple techniques, such as financial statements analysis or discounted cash flows cannot be applied. Due to the complexity of their work and high levels of risk, alternative method such as real options is applied. The concept of financial options can be extended to the valuation of investment opportunities in commercial companies, especially in biotech. This paper explains how real options provide various perspectives on the project (investment) value in relation to situations in which the project is: delayed, expanded, abandoned, business is contracted, operations are switched, products with multiple applications are grown, and optimal date for the product launch is determined.
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References
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14. Papić-Brankov, T., Lovre, K. (2010): Implikacije svetske ekonomske krize na biotehnološku industriju, Ekonomika poljoprivrede, Naučno društvo agrarnih ekonomista Balkana, Beograd, Institut za ekonomiku poljoprivrede, Beograd, Akademija ekonomskih nauka, Bukurešt, 57(3), str. 369-376, Beograd
15. Pavlović, V., Knežević, G. (2008): Adekvatnost tržišne metode procene kapitala za potrebe privatizacije. Računovodstvo, Računovodstvo D.O.O. i Savez računovođa I revizora Srbije, 52(5-6), pp. 102-115, Beograd.
16. Paxson, D. (1996): Real options in The Blackwell Encyclopedic Dictionary of Finance (ISBN-10: 155786912X), edited by Dean and Douglas Wood, Manchester Business School.
17. Philippe, H. (2005): Real Options: Still looking for Evidence?, Real Options 9thAnnual International Conference, 22-25 June, Paris.
18. Rađenović, T. (2008): Real options. Facta universitatis – series: Economics and Organization, University of Niš, 5(1), pp. 89-92, Niš.
19. Smith, G., Parr, R. (2005): Intellectual Property. Valuation, Exploitation And Infringement Damages (ISBN-10: 047168323X). John Wiley and Sons, New Jersey.
20. Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Z., Salvi, A. (2009): Corporate Finance Theory and Practice (ISBN-10: 0470092254), John Wiley & Sons Ltd, Chichester.
21. Vićentijević, D., Aćimović, L.,Stevanović, S. (2011): Uticaj tehnološkog razvoja na održivi razvoj poljoprivrede i zaštitu životne sredine, Ekonomika poljoprivrede, Naučno društvo agrarnih ekonomista Balkana, Beograd, Institut za ekonomiku poljoprivrede, Beograd, Akademija ekonomskih nauka, Bukurešt,58(2), str. 191-203, Beograd.
2. Black, F., Scholes, M. (1973): The pricing of options and corporate liabilities. Journal of Political Economy, University of Chicago Press, 81, p. 637-654, Chicago.
3. Damodaran, A. (2001): The promise and peril of real options, Research Paper, Stern School of Business, New York, available at http://archive.nyu.edu/bitstream/2451/26802/2/S-DRP-05-02.pdf, last viewed 17.09.2011.
4. Damodaran, A. (2010): The Dark Side of Valuation Valuing Young, Distressed, and Complex Businesses (ISBN-10: 0-13-712689-1). FT Press, New Jersey.
5. Ernst & Young (2011): Beyond borders Global biotechnology report 2011, available at http://www.ey.com/Publication/vwLUAssets/Global_Biotechnology_Report_2011/$FILE/Biotech_BeyondBorders_2011.pdf, last viewed 15.09.2011.
6. Jevons, W. (1888): The theory of political economy (ISBN: 81-224-1278-5). MacMillan and Co, London.
7. Jovanović, S., Matović, D., Petrović, S. (2011): Vrednovanje intelektualne svojine. Industrija, Ekonomski institut, 39(2), pp. 92-117, Beograd.
8. Jovanović, S., Reljić, M., Sikora, S. (2011):Zaštita intelektualne svojine u biotehnologiji. Industrija, Ekonomski institute, 39(4), pp. 209-223, Beograd.
9. Keegan, K. (2008). Biotechnology Valuation (ISBN 978-0-470-51178-7), John Wiley & Sons Ltd, Chichester.
10. Kellog, D., Charnes, J. (2000): Real options valuation for a biotechnology company. Financial Analysis Journal, CFA Institute, 56(3), pp. 76-84, Charlottesville.
11. Krueger, N. (2000): The cognitive infrastructure of opportunity emergence. Entrepreneurship Theory and Practice, The United States Association for Small Business and Entrepreneurship, Spring issue, pp. 5-23, Nashville.
12. Montague, P. (1993): Biotechnology Patents and the Problem of Obviousness. Australian Intellectual Property Journal, The Law Book Company Limited, 4(1), pp. 1-31, Pyrmont.
13. Myers, S., (1984). Financial theory and financial strategy. Interfaces, Informs 14, pp. 126–137, Hanover.
14. Papić-Brankov, T., Lovre, K. (2010): Implikacije svetske ekonomske krize na biotehnološku industriju, Ekonomika poljoprivrede, Naučno društvo agrarnih ekonomista Balkana, Beograd, Institut za ekonomiku poljoprivrede, Beograd, Akademija ekonomskih nauka, Bukurešt, 57(3), str. 369-376, Beograd
15. Pavlović, V., Knežević, G. (2008): Adekvatnost tržišne metode procene kapitala za potrebe privatizacije. Računovodstvo, Računovodstvo D.O.O. i Savez računovođa I revizora Srbije, 52(5-6), pp. 102-115, Beograd.
16. Paxson, D. (1996): Real options in The Blackwell Encyclopedic Dictionary of Finance (ISBN-10: 155786912X), edited by Dean and Douglas Wood, Manchester Business School.
17. Philippe, H. (2005): Real Options: Still looking for Evidence?, Real Options 9thAnnual International Conference, 22-25 June, Paris.
18. Rađenović, T. (2008): Real options. Facta universitatis – series: Economics and Organization, University of Niš, 5(1), pp. 89-92, Niš.
19. Smith, G., Parr, R. (2005): Intellectual Property. Valuation, Exploitation And Infringement Damages (ISBN-10: 047168323X). John Wiley and Sons, New Jersey.
20. Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Z., Salvi, A. (2009): Corporate Finance Theory and Practice (ISBN-10: 0470092254), John Wiley & Sons Ltd, Chichester.
21. Vićentijević, D., Aćimović, L.,Stevanović, S. (2011): Uticaj tehnološkog razvoja na održivi razvoj poljoprivrede i zaštitu životne sredine, Ekonomika poljoprivrede, Naučno društvo agrarnih ekonomista Balkana, Beograd, Institut za ekonomiku poljoprivrede, Beograd, Akademija ekonomskih nauka, Bukurešt,58(2), str. 191-203, Beograd.
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Published
2012-03-31
How to Cite
Ljumović, I., Cvijanović, J., & Lazić, J. (2012). VALUATION OF BIOTECHNOLOGY COMPANIES: REAL OPTIONS APPROACH UNDER UNCERTAINTY. Economics of Agriculture, 59(1), 51–62. Retrieved from https://www.ea.bg.ac.rs/index.php/EA/article/view/594
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Review articles
