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Identification and Analysis of Risks

In: Business and Management

Submitted By qihailanghuan
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Introduction
This report identified five dimensions of risks that would potentially influence the valuation of the early-stage biotechnology investment. This report then compared and contrasted the real and financial options that could be used in risk management strategies for Wahoo Genomics under certain assumptions. After analyzing the differences and similarities between the real and financial options, the report proposed to set up a coherent risks management strategy under prescribed assumptions.

1. Identification and Analysis of Risks
1.1 Technological Risk
Generally, there are five dimensions of risks that companies face, including technological risk, economic risk, financial risk, performance risk and legal/regulatory risk (Triantis 2000). Among the five dimensions of risks, the technological risk affects the valuation of Wahoo Genomics’ early-stage biotechnology investment most. The technology risk arises often in the R&D stages, especially for companies in the pharmaceutical industry (Triantis 2000). All of the five stages of Wahoo Genomics’ R&D events involve a high level of technological risks. For instance, 95% of new animal drugs are abandoned during the phase of preclinical trial stage. Such high failure rate indicates a high level of R&D outcome risk, and such risk is compensated by potential high returns for investors. Specifically, a high volatility estimate reflects management’s expectations of the probability that the drug can successfully be marketed in April 2007(Shockley et all. 2002). The less the likelihood of success in each stage is, the higher the volatility will be. When the volatility is assumed to be 50%, the value of the project is $17 million; the value increases to $25 million when volatility changes to 150%, holding other factors constant (Shockley et all. 2002). However, the value of the project cannot exceed…...

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