Valuing R&D Projects in a Portfolio: Evidence from the Pharmaceutical Industry

Management Science, Forthcoming

32 Pages Posted: 27 Mar 2010

See all articles by Karan Girotra

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Christian Terwiesch

University of Pennsylvania - Operations & Information Management Department

Karl T. Ulrich

The Wharton School

Date Written: March 18, 2010

Abstract

Understanding the value of a product development project is central to a firm’s choice of project portfolio. The value of a project to a firm depends not only on the project’s properties but also on the other projects being developed by the firm. This is due to interactions with other projects in the portfolio that address the same consumer need and with other projects that require the same development resources. In this study, we empirically investigate the structure and significance of these portfolio-level project interactions. Using a self-developed pharmaceutical industry dataset, we conduct an event study around the failure of phase III clinical trials and their effect on the market valuation of the firm. The study exploits the natural experiment of a product development failure to give us a measure of the value of a drug development project to a firm. We then explain the variance in the value of projects based on interactions with other projects in the firm’s portfolio. We find that the presence of other projects targeting the same market and a build-up of projects that require the same development resources reduce the value of a development project. In addition to providing evidence on the significance and structure of these portfolio-level project interactions, the empirical model estimated in this paper also provides a data-driven approach to valuing projects that may be relevant to licensing transactions.

Keywords: product development, pharmaceuticals, development pipeline, portfolio properties, backup projects, portfolio management

Suggested Citation

Girotra, Karan and Terwiesch, Christian and Ulrich, Karl T., Valuing R&D Projects in a Portfolio: Evidence from the Pharmaceutical Industry (March 18, 2010). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1574132

Karan Girotra (Contact Author)

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

Christian Terwiesch

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Karl T. Ulrich

The Wharton School ( email )

Philadelphia, PA 19104
United States

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