An R&D project is not considered an option in itself, but a sequential process of building options, mainly because at the beginning of the project, the company does not yet hold the right to act (produce and sell), which is the very definition of an option.

Here are the detailed arguments explaining this distinction:

1. The absence of an initial “right”

An option is defined as a right (contractual, legal or economic) to make a future decision, such as launching a product. However, at the start of an R&D project, the company does not have this right. It only has one idea or one candidate molecule. Until technological feasibility is proven and regulatory approvals (such as FDA approval for a drug) are obtained, the company does not have the opportunity to commercialize. Therefore, the R&D project serves to build this right, step by step.

2. A process of accumulating information (project reviews)

The project is structured in successive stages, punctuated by project reviews.

• At each stage, the company pays a “premium” (the cost of the research phase) to acquire information and reduce technical or commercial uncertainty.
• This process allows you to decide whether to continue (“Go”) or discontinue (“Stop”) the project. It is a compound option or “revolving” mechanism, where each step gives the right to move on to the next, but does not guarantee final success.

3. The Distinction Between Process and Final Asset

There is an important semantic distinction to clarify this point:

• The Project Option (Process): This is the management of the project itself, which contains optimization options (PORO), mainly the option to abandon if the results are poor. It is a process “in progress”.
• The Built Option (Result): This is the final asset obtained in the event of success (a patent, a validated technology, a marketing authorization). Only then does the company truly hold a growth option (GORO) that it can choose to exercise or not.

4. The final investment as exercise of the option

The theory considers that launching industrial investment (building the factory, launching the product) corresponds to the exercise of the purchase option built by R&D.

• The value of the underlying asset is the sum of the expected cash flows of the product.
• The strike price is the amount of capital invested in industrialization.
• The option is only exercised if the Net Present Value (NPV) is positive, which means that the option is “in the money” then economically exercisable.

In short, the R&D project initially confers only the right to withdraw (not to lose more money). The right to earn money (the launch option) does not exist at the outset; it is the gradual and uncertain result of the work of research.