Options Value in R&D Gregory L. Hamm, PhD Greg Hamm and Associates 933 Taylor Avenue Alameda, CA Phone:

Greg Hamm and Associates 2 Definitions of options vary Presented in white paper - Technologies that do not enter under the most likely scenario, but may enter under others Common - Something you can do Finance (call) - Right but not the obligation to buy a security at a fixed price on a future date Real Options Valuation - Flexibility to adopt future actions after learning

Greg Hamm and Associates 3 The practice of Real Options Valuation has a common set of activities Identify uncertainty (volatility of underlying asset(s) or other expression) Define the learning process Define the flexibility available Calculate outcomes Price the outcomes (replicating portfolio, risk neutral probabilities, discount rates) Calculate expected value

Greg Hamm and Associates 4 The white paper suggests an expected value approach that differs from current practice Current DOE practice implied by white paper - Value the new technology under a most likely scenario Options analysis –Define multiple possible scenarios (should be mutually exclusive and collectively exhaustive) –Assume an option on technology adoption Favorable future, adopt Unfavorable future, do not adopt –Calculate the expected value over the scenarios

Greg Hamm and Associates 5 Transition to this approach may face many difficulties Identifying appropriate scenarios Assigning probabilities to scenarios Assuring credible and unbiased scenarios and probabilities Conflicts between probability and policy New skills for evaluators

Greg Hamm and Associates 6 Adopting a broad view of options would have significant value Valuation is not separable from strategy. Strategy formulation should include a search for options. Undiscovered options are not valued or acted upon Markets provide useful information on value