OBJECTIVES Cost-effectiveness analyses (CEA) of new drugs facilitate reimbursement decisions, thereby influencing the drug’s commercial value. The application of CEA to support early-stage investment decisions for drug candidates has been limited. The study developed a value-based real options pricing (VB-ROP) model to commercially value a phase II somatostatin receptor type-2 antagonist (SSTR2a) that prevents hypoglycemia for insulin-dependent type 1 diabetes patients. METHODS A VB-ROP model was constructed through consultation with industry players and investors. The model was developed in two stages: the first was a probabilistic Markov model with inputs informed through literature review; the second was a binomial lattice option pricing model to inform go/no-go decisions. The CEA assumed the SSTR2a to deliver a 50% clinical improvement relative to standard of care (basal-bolus insulin). The estimated annual value-based price using headroom analysis assumed a willingness to pay (WTP) of $50,000 USD per quality-adjusted life year (QALY) using a discount rate of 1.5%, which was incorporated into the real options model with inputs informed through market data and industry papers. RESULTS The annualized value-based price was $5,106 [95% CI $4160, $6071] USD with a 50% probability of being cost-effective at $50,000 USD/QALY. The real option value of investing in the phase II development of the SSTR2a was $6.55 million USD upon positive phase I results, which suggests exercising the option to invest in the technology. Sensitive model parameters include discount rate, market share, WTP, quality-of-life utilities, and the relative risk of non-severe hypoglycemia. Real options for phase III development should not be exercised if the phase II results for the SSTR2a are weak. CONCLUSIONS The VB-ROP model can be used to collectively evaluate clinical, economic, industry data to develop commercialization strategies for early-stage drug candidates using a value-based framework.