The Myth of Option Pricing
Executive Summary
Given the high costs and risks of research and research alliances, many drug companies have turned from pricing deals and programs with traditional net-present-value methods to option pricing models like Black-Scholes. The problem is that they don't help: Black-Scholes works best for pricing highly liquid assets in situations for which one has a huge database of comparable situations and a good understanding of the volatility of potential returns. Research programs are rarely liquid and biology doesn't permit exact modeling. Traditional NPV methods generally work pretty well, particularly combined with just-in-time decision-making techniques which add into the equations the value of new information.
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