A gene to drug venture: Poisson options analysis

We provide a Poisson real option model of a gene-to-drug venture. First we describe a general new drug discovery programme as well as a specific secretory protein research programme. Then we model both the candidate secretory gene and the 'hot' gene discoveries as Poisson processes. Gene deal value sizes are modeled as lognormal distributions. Then we calculate the expected R&D value (EV) of the Poisson discoveries times the value distributions, for both stages. Finally, for generic collaborating-funding arrangements, we show the Merton (1976) standard mixed diffusion-jump option value, compared to a risk neutral 'intrinsic' value. Under simple assumptions, the real option value is substantial, even if there is no intrinsic value.