Real Options and Incremental Search in Pharmaceutical R&D Project Portfolio Management

11 Pages Posted: 20 May 2016

See all articles by Laura Magazzini

Laura Magazzini

University of Verona - Department of Economics

Fabio Pammolli

IMT Institute for Advanced Studies

Massimo Riccaboni

IMT Institute for Advanced Studies

Date Written: June 2016

Abstract

This paper investigates the role of real options reasoning in R&D project portfolio management and investment decisions of pharmaceutical firms. We analyse a unique dataset that integrates information on initiation and termination of clinical trials at the level of specific medical indications. Consistent with existing literature, we find a positive relationship between market size and firm entry in clinical trials. We also show that the option value of R&D investments, as proxied by the scope of R&D projects, affects the selection of target markets. Moreover, high‐risk research areas attract more entry, in line with the predictions of real options theory. However, we also find that more flexibility in project duration and delayed project discontinuation attract higher rates of entry. Departures from pure real options reasoning are motivated by the presence of incremental learning in pharmaceutical R&D.

Suggested Citation

Magazzini, Laura and Pammolli, Fabio and Riccaboni, Massimo, Real Options and Incremental Search in Pharmaceutical R&D Project Portfolio Management (June 2016). Creativity and Innovation Management, Vol. 25, Issue 2, pp. 292-302, 2016, Available at SSRN: https://ssrn.com/abstract=2782181 or http://dx.doi.org/10.1111/caim.12119

Laura Magazzini (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

Fabio Pammolli

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Massimo Riccaboni

IMT Institute for Advanced Studies ( email )

Piazza San Ponziano 6
Lucca, 55100
Italy

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