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

Karan Girotra (), Christian Terwiesch () and Karl T. Ulrich ()
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Karan Girotra: INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France
Christian Terwiesch: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Karl T. Ulrich: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Management Science, 2007, vol. 53, issue 9, 1452-1466

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 its properties but also on the other projects being developed by the firm. This is due to interactions with the other projects that address the same consumer need and 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 data set, 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 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (64)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:53:y:2007:i:9:p:1452-1466

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