A Model for Evaluating Pharmaceutical R&D Investment Projects under Technical and Economic Uncertainties
2010-02-18
Research Paper
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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
Classifications using
Journal of Economic Literature (JEL) Classification System
- C6 : Mathematical Methods and Programming
- O32 : Management of Technological Innovation and R&D
- M : Business Administration and Business Economics; Marketing; Accounting
- L20 : Firm Objectives, Organization, and Behavior: General
- D21 : Firm Behavior
Automatically Extracted Terms
- option
- value
- project
- compound
- investment
- uncertainty
- compound option
- failure
- model
- project value
- phase
- probability
- process
- r &d project
- price
- exercise
- development
- valuation
- time t 2
- market
