Project Valuation Using Real Options - Project Management Seminar

In today’s technology-driven, hyper-competitive, globalized economy, risks with new project investments are extraordinary. Yet the financial and the other intangible returns are exceptional if you are especially the first to bring innovative products to the market place. In no other industries is this risk-return contrast so pronounced than in technology, telecommunications, pharmaceuticals and biotechnology. The challenge for a senior manager involved in making decisions on major project investments is to decide when to choose, expand, contract, defer, or abandon projects to minimize the risks without compromising on the returns. The key lies in navigating your investments through today’s twisted market terrain by making the right decisions at each turn. Whereas the traditional decision tools such as discounted cash flow (DCF) analysis assume a “fixed” path ahead, today’s terrain calls for sophisticated tools such as real options to explore and exercise flexible strategies.

Considered one of the most useful innovations of modern finance, real options approach is based on Nobel-prize winning work by three MIT economists, Fischer Black, Robert Merton, and Myron Scholes. It is a systematic approach that helps you minimize upfront investment risks, exercise flexibility in decision-making, and maximize the returns.

Who Should Attend

This program is developed for senior managers involved in decision making related to major project investments, including:

• CFO’s
• Vice Presidents and Directors of Finance
• Financial Analysts
• Vice Presidents and Directors of Research and Development
• Portfolio and Program Managers
• Product Development Managers
• Planning Directors

What You Will Learn

In this two-day seminar, you will review the theory behind the real options approach, focus on the practical tools and techniques, and learn real world application in pharmaceuticals and biotechnology. This is a highly interactive, hands-on workshop where you will use proprietary spreadsheet-based tools to calculate valuations of various types of options. In this project management seminar, you will learn:

• Why traditional valuation methods such as DCF analysis are no longer effective in today’s uncertain world.
• What are real options and how they are different from financial options.
• Eight types of options that represent most common applications.
• Why you must use real options to achieve strategic alignment of projects and sustainable competitive advantage.
• How real options provide flexibility in decision making.
• A simplified five-step process to apply real options approach to real world projects.
• Valuation of real options that help you decide whether to hold back a new product for a year or introduce it this year.
• Application of chooser, sequential, and abandon options in research and development to exercise maximum flexibility with decision making coupled with minimum investment losses.
• Use of real options in making the right decisions at each juncture of “staged” projects (e.g., drug development; buying radio frequencies - building networks - offering services, etc. in telecommunications).
• How a “virtual” biotech company can negotiate a license with option to launch and a series of options to abandon a product; and how, in a separate license with another party, transfer the options, influence the exercise of these options, or destroy the options with penalties.
• Flexibility options with various applications related to decisions on: purchase of special features in capital equipment, changing the product mix, temporary shutdown and restart of equipment, selecting ingredients of a product or service, etc.
• How to introduce real options approach as a standard technique in the project investment decision-making process in your organization.
• Challenges and pitfalls as well as success stories related to real world application of real options in biotechnology and pharmaceuticals.

Project Management Seminar Outline

Introduction
Risks with 21st century projects
Today’s challenges of biotechnology and pharmaceutical companies
Risks vs. returns
Need for new tools

Traditional Tools
Payback analysis
Rates of return
Discount cash flow (DCF) analysis
Decision trees

Real Options: The Tool
What are real options: Definition
Financial options vs. real options
Types of options
Examples of options

Real Options: The Process
Systematic solution to real options process
Framing the application
Defining the inputs
Developing the base case NPV analysis
Calculation of option values
Interpreting the results

Real Options: The Calculations
Black-Scholes formula
Binomial model
Monte-Carlo simulation
Sensitivity analysis
Verification
The tool box

Real Options: The Challenges
Framing
Input estimates
Adjusting for “leakage”
Sources of uncertainty
Pitfalls

Real Options: The Application
Case studies
Best practices
Real options in portfolio management
Introduction into the organization
Success stories