It is true that the DCF Valuations is not always the best way to value early stage products for the simple reason that it does not take into account the flexibility inherent in the different stages of the investment.

Besides, there might be options embedded in the investments when you would like to :

  • Delay the investment because you think that waiting for couple of years might make the product/technology more valuable due to various changing regulations etc
  • Expand into new markets if you think you could enjoy certain exclusivity in a particular country due to your strong relationship with the government, distributors or other stake holders that could play an important part in the expansion in that country
  • Abandon your investments because of the poor results of the product or other reasons

In other words, valuation by real options imply a premium on the top of the intrinsic value.

However, before we start to apply real option valuations, we at Farmantra answer the following set of questions:

  • Is there any option embedded in the product/asset?
  • Does it have significant economic value?
  • Can we find that value using option pricing models?

After getting satisfactory answers of these questions, we value the asset by real options.

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