A Model for Evaluating Pharmaceutical R&D Investment Projects under Technical and Economic Uncertainties
This study sets up a compound option approach for evaluating pharmaceutical R&D investment projects in the presence of technical and economic uncertainties. Technical uncertainty is modeled as a Poisson jump that allows for failure and thus abandonment of the drug development. Economic uncertainty is modeled as a standard di¤usion process which incorporates both up-and downward shocks. Practical application of this method is emphasized through a case analysis. We show that both uncertainties have a positive impact on the R&D option value. Moreover, from the sensitivity analysis, we nd that the sensitivity of the option with respect to economic uncertainty and market introduction cost decreases when technical uncertainty increases.
|Keywords||G13, G24, G30, R&D, compound option, jump-discussion process, pharmaceutical industry|
|JEL||C6, Mathematical Methods and Programming (jel), D21, Firm Behavior (jel), L20, Firm Objectives, Organization, and Behavior: General (jel), M, Business Administration and Business Economics; Marketing; Accounting (jel), O32, Management of Technological Innovation and R&D (jel)|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Pennings, H.P.G, & Sereno, L. (2010). A Model for Evaluating Pharmaceutical R&D Investment Projects under Technical and Economic Uncertainties (No. ERS-2010-009-STR). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/18211