Better Decision Making for Evaluating New Medical Device Projects: A Real Options Approach

Abstract

This paper addresses some of the issues facing new product development in the medical device sector and reviews some of the financial decision-making methods currently used to aid in project selection. The fundamental limitations and deficiencies of these methods are discussed. An alternative, real options (RO)-based approach to project management is proposed as a much better way of managing uncertainties and understanding the relationships between the risk and the opportunities in a product development lifecycle. Although the RO technique is not especially new, its application to the medical device sector is novel. An RO valuation example, using a binomial lattice approach, is given and the implications for project selection and company strategy are discussed.

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