Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
477040 | European Journal of Operational Research | 2011 | 12 Pages |
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 diffusion 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 find that the sensitivity of the option with respect to economic uncertainty and market introduction cost decreases when technical uncertainty increases.
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Physical Sciences and Engineering
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Authors
Enrico Pennings, Luigi Sereno,