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Avance Christmas Valuation Riddle

Win a book "Valuation in Life Sciences"!

Valuation is often much more complicated than it appears at first sight. In quantitative finance hedge funds make big wins (or losses) from mispriced assets (a method called arbitrage). In the real economy the data points are less obeservable, more fuzzy than in quantitative finance. But that's no excuse to content oneself with an imperfect valuation.

In case you have some spare time these holidays (or if you rather want to spend the time on a brainteaser than with your in-laws) we have a riddle for you. The first correct solution is worth a book "Valuation in Life Sciences. A Practical Guide", 3rd edition (next to honour and glory, of course).

Value Milestone Payments

Assume the following license collaboration

  • 3 compounds.
  • They are all based on the same technology and therefore are correlated (rho=50%).
  • Each compound has a 30% probability to get to the market.
  • Compound 1 would reach the market in 3 years,
  • compound 2 in 4 years, and
  • compound 3 in 5 years.
  • For the first approved project (on market) you get USD 30 mn,
  • for the second approved project you get USD 20 mn,
  • for the third approved project you get USD 10 mn.
  • We use a discount rate of 15%.

Easy, right? Such milestone definitions appear in every second collaboration agreement (it also works with indications instead of projects). Can you attribute the correct value to the milestone payments?

Our Newsletter #26 early next year will treat this topic in detail. But maybe you are ahead of the crowd and know the solution already now?

Responses to santa.claus@avance.ch or on linkedIn.

Merry Christmas and a Happy New Year!


Valuation Book

Valuation in Life Sciences 3rd Edition
"Valuation in Life Sciences. A Practical Guide" has become the industry reference book. It has now been released already in its 3rd edition.

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