Options Value in R&D

1. Options Value in R&D Gregory L. Hamm, PhD Greg Hamm and Associates 933 Taylor Avenue Alameda, CA 94501 Phone: 510-918-2016 email: greghamm@attbi.com

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

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

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

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

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