Correspondence: Sukhvinder S. Johal, Multidisciplinary Assessment of Technology Centre for Healthcare (MATCH) School of Electrical & Electronic Engineering University of Nottingham, University Park, Nottingham NG7 2RD, UK. Tel: +44 (0)115 8468113; Fax:: +44 (0)115 9515616; e-mail: sukhvinder.johal@nottingham.ac.uk

¹is a senior research fellow on the MATCH programme at Nottingham University. He joined the university after three years in industry where he worked in new product development in the high technology sector. His current research interests include real options analysis, decision-making tools and health economics.

²is a University Teacher in Accounting and Finance at the Nottingham University Business School. His research interests include Option theory, Financial derivatives, Real options and Risk and Simulation.

³is Professor of Dermato-Epidemiology and Director of the Centre of Evidence-Based Dermatology at the University of Nottingham. He chairs the UK Dermatology Clinical Trials Network and he directs the Nottingham Clinical Trials Support Unit. His main research interest is health technology assessment.

Received 26 July 2007; Revised 26 July 2007.

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.