Real Options and Intellectual Property: Capital Budgeting Under Imperfect Patent Protection

Over the last years, due to intensive competition in the knowledge economy, legal aspects surrounding intellectual property (IP) rights - including litigation and settlement - have continuously gained in importance. Correspondingly, professional IP management has become an indispensable element of successful value-based management (VBM) in research-intensive firms. With this text, the author proposes an integrated approach to patent risk and capital budgeting in pharmaceutical research and development (R and D), developing an option-based view (OBV) of imperfect patent protection, which draws upon contingent-claims analysis, stochastic game theory, as well as novel numerical methods. Bridging a widening gap between recent advances in the theory of financial analysis and current challenges faced by pharmaceutical companies, the text re-initiates a discussion about the contribution of quantitative frameworks to value-based R and D management.