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.

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Erasmus Research Institute of Management
hdl.handle.net/1765/18211
ERIM Report Series Research in Management
ERIM report series research in management Erasmus Research Institute of Management
Erasmus Research Institute of Management

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. Retrieved from http://hdl.handle.net/1765/18211