Dispute putting a price on biotech

In a letter to the editor of Nat. Biotech. (Nat. Biotech. 2002; 20:223), Harrison and Lerer responded to the paper of Stewart et al. and described that in their view the risk-adjusted Net Present Value (rNPV) model has two shortcomings that can put a biotechnology venture at a disadvantage in funding negotiations. First the rNPV model does not take into consideration the fact that at every step of the development process, a biotechnology company has the option to modify a project on the basis of improved information and diminish uncertainty.  Second, the rNPV model uses point estimates of future revenues and market share, variables that are best seen as having an estimable probability distribution. As an alternative Harrison and Lerer propose the use of Real Option Analysis (ROA) for determining the valuation of the product, since ROA takes flexibility at each stage of the development into account. The reply of Stewart to the letter to the editor is published in the same issue.