Evaluating pharmaceutical R&amp;D under technical and economic uncertainty

Pennings, Enrico; Sereno, Luigi

doi:10.1016/j.ejor.2011.01.055

Cited by 77 publications

(55 citation statements)

References 19 publications

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“…On the methodological level, this implies that simply adding up the isolated values of the option rights inherent in a single R&D project can result in significant misevaluation (Trigeorgis 1993). Instead, sequential R&D investment projects comprising a series of more than just two payments have to be valued as compound real options, that is, options on options (Cassimon et al 2004;Lee et al 2008;Pennings and Sereno 2011). We focus exclusively on compound call options as they mirror the iterative multistage R&D management decision process (Crama et al 2013;Ghosh and Marvin 2012;Kort et al 2010) and are thus the most appropriate for modeling sequential R&D investments.…”

Section: Applying Binomial Option Pricing Methodology To Sequential Rmentioning

confidence: 99%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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In this paper, we propose a binomial approach to modeling sequential R&D investments. More specifically, we present a compound real options approach, simplifying the existing valuation methodology. Based upon the same set of assumptions as prior models, we show that the number of computational steps for valuing any compound option can be reduced to a single step. We demonstrate the applicability of our approach using the real-world example of valuing a new drug application. Overall, our work provides a heuristic framework for fostering the adoption of binomial compound option valuation techniques in R&D management.

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Section: Applying Binomial Option Pricing Methodology To Sequential Rmentioning

confidence: 99%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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“…Among these, we can mention the two-fold compound approach (Perlitz et al, 1999) or the generalized n-fold version of this (Cassimon et al, 2004;Cassimon et al, 2011a). Moreover, in order to more realistically evaluate the pharmaceutical process, several authors adopt ''adjusted'' formulae based on the B&S formula (Brach and Paxson, 2001) or on the Geske model (Pennings and Sereno, 2011) The B&S formula and Geske model are based on the assumption of a diffusion process (Brownian motion) for the underlying. This implies a continuous arrival of information that changes the underlying value, but in a research environment information tends to arise at discrete points of time.…”

Section: Single Pharmaceutical Randd Project Evaluationmentioning

confidence: 99%

Open innovation: A real option to restore value to the biopharmaceutical R&D

Nigro

Morreale

Enea

2014

International Journal of Production Economics

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a b s t r a c tThe pharmaceutical landscape has changed, and new business models, based on alliances, are increasingly being adopted in this industry. Biotechnology advances have pushed this development, and pooling complementary resources coming from incumbents and newcomers is a key skill to succeed: these are the premises for a quick spread of the open innovation (OI) paradigm in this industry. R&D portfolio selection needs R&D project evaluation, and Real Options Analysis (ROA) is acknowledged as a powerful tool to evaluate uncertain projects that have an intrinsic flexibility. The present research aims to foster the use of ROA in the OI field in order to encourage firms to undertake this innovation model; to achieve this goal the authors propose a closed-form model that is easy to implement, to evaluate the OI initiative for selecting an optimal R&D portfolio. The study wants to support managers in optimal R&D portfolio construction in terms of choosing the most promising products, the means by which the related project has to be undertaken (in an open or closed manner; i.e. licensing-in or not) and the self-financing policy. The proposed model can be easily implemented into a spreadsheet, and the inputs needed to run it are usually requested to evaluate projects using the most used net-present-value-based methods. Moreover, some parameters of the model allow strategic aspects to be considered: for example the nature of the project (core/non-core), the impending project phase, and the risk-sharing opportunity.The results of the developed numerical example show that the selected portfolio is well balanced in terms of development stages, core/non-core therapeutic areas and, licensing-in (an inbound open innovation solution), is preferred in the case of products at their early stages of development.

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“…Several studies have demonstrated that a R&D project can be evaluated through a real options analysis. For example, Pennings and Sereno [11] presented a compound option approach for evaluating pharmaceutical R&D investments projects in the presence of technical and economic uncertainties. Lee [12] established a real option analysis approach to value renewable energy investments, concretely, a wind energy technology.…”

Section: Characterization Of a Randd Projectmentioning

confidence: 99%

“…After successful completion, a new drug application is submitted to the agency for marketing approval. If the drug is approved it becomes available for patients [11,22].…”

Section: Dynamic Programming Model Of Huchzermeier and Loch (2001)mentioning

confidence: 99%

A Dynamic Programming approach for evaluating a portfolio of R&D projects with a budget

Costa

Paixão

2014

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Abstract:The Real Options approach has proved to be a suitable methodology for capturing the flexibility in the investment decision process. This is very useful for the financial evaluation of R&D projects where there are several possible decisions concerning to the investment -delaying, improving or abandoning. Since the risk of an R&D project is usually due to singular characteristics of the project and is uncorrelated with the financial markets, the contingent claims analysis may be not adequate to value R&D projects. Based on a dynamic programming evaluation model, presented in Huchzermeier and Loch [1], we propose an approach to valuing a portfolio of R&D projects with a budget. Specifically, considering a budget constraint, we make an extension of the model mentioned above for assessing the projects in the portfolio simultaneously. To test the proposed evaluation procedure, we generated several R&D portfolios with different dimensions and characteristics. According to our computational experience, the main conclusions are presented.

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Evaluating pharmaceutical R&D under technical and economic uncertainty

Cited by 77 publications

References 19 publications

Modeling sequential R&D investments: a binomial compound option approach

Modeling sequential R&D investments: a binomial compound option approach

Open innovation: A real option to restore value to the biopharmaceutical R&D

A Dynamic Programming approach for evaluating a portfolio of R&D projects with a budget

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