The Evaluation Of New Drug Investment Based On Fuzzy Real Options Approach

With the increasing competitive and globalized marketplace, innovation is one of theimportant strategies for high technology firms to survive. In the pharmaceutical industry,the evaluation of new drug investment plays a significant role in the process ofaccelerating technology innovation, improving enterprises’s ability and contributing tothe whole pharmaceutical industry’s development.The paper takes the evaluation of new drug investment as study background,following the theoretical analysis and case study supplement each other, achieving thecombination of qualitative analysis and quantitative research. In consideration of themulti-stages, flexibility and high uncertainty in the course of the new drug investment,pointing out the defects of the traditional evaluation method NPV. Meanwhile the paperintroduces the real option theory, showing clearly that the real option is more reasonablethan NPV in dealing with high uncertainty and management flexibility in the new druginvestment. With a view to the multi-stages, the paper builds a new framework of multi-phases real options applying to the new drug investment. To improve the rigidity of thetraditional evaluation method, and to discovery the value of project to the fullest extent,the combination of the flexibility of fuzzy theory and real option valuation is available.Firstly optimizing the real option’s parameters according to the principle of trapezoidfuzzy number, then deduces the fuzzy Geske real option model.From the traditional evaluation method NPV, traditional real option method to thefuzzy real option method, the specific case “The Evaluation of New Drug A Investment”through the whole paper. With the specific data further demonstrates that the fuzzyGeske real option model is more scientific and more effective. And also it verifies thatthe fuzzy real option could evaluate the new drug investment better, and it can improvethe accuracy of the evaluation, helping the deciders to make the rightinvestment decisions. The real options as a new concept, which puts a new idea for thedevelopment of Chinese pharmaceutical industry.