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Real Options and Incremental Search in Pharmaceutical R & D Project Portfolio Management
Author(s) -
Magazzini Laura,
Pammolli Fabio,
Riccaboni Massimo
Publication year - 2016
Publication title -
creativity and innovation management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.148
H-Index - 60
eISSN - 1467-8691
pISSN - 0963-1690
DOI - 10.1111/caim.12119
Subject(s) - portfolio , project portfolio management , business , scope (computer science) , flexibility (engineering) , investment (military) , value (mathematics) , discontinuation , reimbursement , actuarial science , economics , microeconomics , marketing , finance , project management , computer science , medicine , management , programming language , health care , surgery , economic growth , politics , political science , law , machine learning
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 .