The case with COVID was also taken, as it is the unique illustration of the rapid impact of R&D on the company's value. At the same time, R&D is a significant financial investment whose potential is important for the company to assess. Therefore, the research in the area of the Real Options model construction with the different sources of financing is acute.
The first chapter gives a theoretical overview of the aspects of applying the method of Real Options to the case of R&D expenditure assessment with the study of different methods applied by the researchers. The second chapter is devoted to the theoretical implementation of Real Options theory in assessing R&D expenditure; the industrial R&D expenditure assessment model is introduced.
Theoretical overview
Treating R&D as a real option
What's more, due to the aspect of selling the asset in the market for a limited time frame, the value of the asset can be significantly lower than its real value. With the Market Comparison method, the company evaluates the project that exists on the market and its value from the owner of the project. Real option approach is based on the idea of the right to make a certain business decision (for example investment) after the emergence of some information (Berk & DeMarzo, 2017).
Liquidation price Value is determined on the price of the axes/project in case of immediate sale. Due to the specificity of an asset, a large number of models are proposed.
R&D valuation techniques via real options
- Binary tree single period model
- Compound option model
An in-depth analysis showed that none of the mentioned assumptions is true for the studied industries. The authors defined the performance of the studied companies based on the performance of research and development. The authors demonstrate the quality of the model on the example of the use of new drugs (NDA).
Due to the existence of previous studies on the purpose of NDA with the proposed models, Hauschild B. After developing the model, the authors have applied it to the calculation of R&D in the NDA project.
Industrial specificities
- Sources of financing R&D
- Accounting indicators of R&D
- Non-Accounting indicators of R&D
The importance of debt financing and the flexibility of this financing is one of the main arguments of the research done by (David, O'Brien, & Yoshikawa, 2008). The example of the increase in debt and also capital raised by Pfizer is shown in Figure 4. To identify the most influential or decisive categories for investments in Research and Development, a literature study was made on the topic of performance measurement.
This is one of the main limitations of using operating profit as a possible indicator of R&D. Fixed assets belong to the category of long-term company assets (more than 1 year) that are used for the production of products and services. The company's fixed assets can be an illustrative example of both R&D performance and industry specificity.
According to the research conducted by the author for the S&P 500 companies, the impact of intangibles and R&D on company performance differs from both a reporting perspective and an investor relations perspective. Market value of the company is the estimate of the price of the company's assets from outside stakeholders, based on the available information and expectations. Lee N. (2019) appeals to the importance of R&D in the study of the effect of R&D on the market value of the companies from more than 10 sectors worldwide (agriculture, manufacturing, power, construction, retail, transportation, lodging, communications , information, real estate Estate, Biotech and others) listed on the Korean Stock Exchange.
R&D Elasticity Coefficient seems to be the good example to illustrate the idea of the Real Option approach in the research and development, but the model could not correct. It can be a useful tool for the case analysis and in-depth study of the company, but is not applicable to the industrial study. According to the study of the reported and unbalanced parameters done, the most perspective indicators of the R&D expenses for the model are the Capital expenses and.
Summary
Theoretical implementation
The model for industrial R&D
According to the research done in Chapter 1, capital expenditure is taken as an indicator of the amount of money spent.
Data
The main countries where companies were present are the United States, China, Japan, the United Kingdom, Germany and South Korea. The list of all countries in the sample with risk-free rates is included in the appendix (Appendix 1). The company was considered non-intensive if the intensity was 25% lower than the average industrial intensity.
A summary of industrial statistics is presented below in Table 5, the data are for 2019. Source: Author's calculation based on data from the Thomson Reuters Database and the European Commission. The standard deviation of equity was determined from the volatility of the company's traded shares for 2019.
The standard deviation of debt was determined from the volatility of traded bonds for 2019. Equity and debt values were taken from company annual reports from databases. We determined the correlation between debt and equity from the correlation between stocks and bonds for 2019.
Each company in the sample has its own project or R&D projects of different duration and with different conditions (e.g. some processes are parallel, some are sequential and some are sequential parallel), most of the information about project deadlines is not in company reports, but also in other open sources (exceptionally case studies for specific projects). Given this limitation, it is assumed for the purposes of this study that T can be set equal to 1, as there are no statistics for each company on the duration of the specific R&D project. Such evidence can be considered from the irrecoverable investment point of view - from the time of investment and launch of an R&D project, the funds spent cannot be paid back and invested in other projects.
Empirical validation
To test this, a deep analysis of the companies from some of the industries, for pharmaceuticals and for technology, was carried out. Due to the product specificity (long development and testing process), the timing of the R&D development is crucial for the market players. In addition, the uncertainty of the R&D results and the value is high, and at the same time the costs for the company are high.
The result of investments in R&D of the drug or vaccine in question is usually only visible after 12 years or even longer. Food and Drug Administration accepted the Emergency Use Authorization for the Pfizer vaccine (Pfizer-BioNTech COVID-19 Vaccine, 2020), which was announced on December 11 with the positive market response to the outcome of Pfizer's research and development. A more illustrative example of the opportunity to invest in research and development is the company BioNTech (German biopharmaceutical company, founded in 2008 and went public in 2019), which joined Pfizer in vaccine development.
For such a new company that entered the market in early 2019, BioNTech got the big increase in value thanks to the positive investors. The effect of the R&D COVID-19 vaccine for the BioNTech was found to be the value growth of 156%. Company supported the recovery with new studies on efficiency, but the value fell again in April due to the pause in the vaccine amount negotiations with the British government (Parliamentary questions, 2021).
The company's market value fell by 9% compared to the growth of its competitors. In general, the amount of return on vaccine R&D and its effect on company value are depicted in table 6. As we can see from the table, the investment in vaccine R&D supported the growth of the company's value in general.
Summary
For the assessment it is possible to apply the approach of the single period model, the model of compound option or the simulation of the outcomes of R&D. The model proposed in this paper is applied to cases of assessing the industrial level of R&D expenditures, when an overview of the competitiveness within the industry is needed and there is no internal information. The second chapter of this research described the industrial model for the assessment of the R&D expenses, which is done by applying Real Options theory.
The studies show that the model is applicable for assessing the industrial value of R&D. First, the model can be applied by the manager to estimate the competitiveness of the company compared to the market players and give an overview of whether the company should invest more in the R&D activities. Secondly, the model can be applied by the consultants when carrying out the industrial analysis of the R&D expenditure or of R&D intensity, also to give the client recommendations on the level of investment.
Third, the model can be applied by the individual researcher to identify industrial differences in R&D spending and to identify cycles in the industry, to conduct research on market leaders. By applying the model, Daimler AG managers can predict the value of R&D in the industry and compare it with the budgeted one. Unfortunately, it is not always possible to identify the specific length of the project, as it is part of the organization's competitiveness (how quickly they introduce innovation compared to others).
However, this limitation is removed when managers who are familiar with industry statistics apply the model directly. Evaluating the real potential of renewable energy R&D investment considering the effects of the carbon trading market: the Korean case. Consequences of the absence of monotonicity of the NPV function on the evaluation of the efficiency of investment projects.
Countries in the sample
Sources of financing the R&D expenditures for vaccine production by
Source of the investment in R&D for vaccine production
Return on investments in R&D among companies with middle
