Examples of option values in drug development

The option to stop a project is fundamental in drug development. The majority of drugs do not reach the market. Furthermore, many marketed drugs do not repay their development costs. It is therefore crucial to optimize the value of the option to stop. We formulate two examples of statistical models. One is based on success/failure in a series of trials; the other assumes that the commercial value evolves as a stochastic process as more information becomes available. These models are used to study a number of issues: the number and timing of decision points; value of information; speed of development; and order of trials. The results quantify the value of options. They show that early information that can change key decisions is most valuable. That is, we should nip bad projects in the bud. Modelling is also useful to analyse more complex decisions, for example, weighting the value of decision points against the cost of information or the speed of development. Copyright © 2003 John Wiley & Sons, Ltd.

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