Template-Type: ReDIF-Paper 1.0
Author-Name: Pennings, H.P.G.
Author-Name-Last: Pennings
Author-Name-First: Enrico
Author-Person: ppe274
Author-Name: Sereno, L.
Author-Name-Last: Sereno
Author-Name-First: Luigi
Title: A Model for Evaluating Pharmaceutical R&D Investment Projects under Technical and Economic Uncertainties
Abstract: 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.
Creation-Date: 2010-02-18
File-URL: https://repub.eur.nl/pub/18211/ERS-2010-009-STR.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2010-009-STR
Classification-JEL: C6, D21, L20, M, O32
Keywords: G13, G24, G30, R&D, compound option, jump-discussion process, pharmaceutical industry
Handle: RePEc:ems:eureri:18211