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Production of a New Drug: A Sequential Investment ProcessUnder Uncertainty

Marcello Basili (), Roberto Renò and Carlo Zappia ()

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: On the basis of a database of more than 80 thousand records on total retails and production costs of the pharmaceutical industry worldwide we consider four classes of drugs. We evaluate the expected profits of an investment in a new drug in the four classes of pharmaceutical products by considering the standard NPV evaluation. We compare these outcomes with the evaluation of the expected profits of the four new drugs obtained by the real option approach. Interestingly enough quite different outcomes are obtained. These results loom on the capacity of standard methods to give a reliable evaluation of real investment projects that are analogous to compound options

Keywords: compound option; real option valuation; net present value; drugs (search for similar items in EconPapers)
JEL-codes: D92 L65 O3 (search for similar items in EconPapers)
Date: 2005-07
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