Risk Assessment with Real Options Method (Case of Pharmaceutical Company)

Uncertainty is one of the main obstacles in taking a decision to develop innovative products, as the markets for such products are highly dynamic. In today's crisis and unstable environment, the uncertainty increases dramatically, and thus increases the probability of deviation of results from the expected values. Therefore, the efficiency analysis and risks assessment of the project is particularly important. Adequate risk assessment is one of the fundamental ideas of the modern investment economy. The use of a variety of risk assessment methods helps to reduce the number of mistakes in taking a decision, increases the rationality of the activity due to the optimal choice. Often the effectiveness of the implementation of a new developed product is negative. Basically, this result is a consequence of applying relatively conservative valuation methods: at the very beginning of the project, the cash flow indicators are determined and are discounted for the entire period of the project implementation. Such methods have significant drawbacks, caused by the inability to fully analyze actually existing scenarios of implementing investment projects. In this regard, a relatively new approach of assessing the company's business activities using the theory of real options is of particular interest. The first chapter of the paper presents theoretical concepts of the risk and uncertainty of the project, as well as the characteristics of the pharmaceutical industry. The second chapter examines methods for assessing the risks of investment projects. The third chapter assesses the effectiveness and riskiness of the implementation of the selected project; The deferral option is considered as an option for improving the efficiency of the project and eliminating it’s some risks. The result of the work is the creation of an algorithm for evaluating similar investment projects. Such an algorithm will allow experts to reduce the percentage of refusal of promising innovative products.