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

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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)

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.

Suggested Citation

  • Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2007. "Valuing R& D Projects in a Portfolio: Evidence from the Pharmaceutical Industry," Management Science, INFORMS, vol. 53(9), pages 1452-1466, September.
  • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:9:p:1452-1466
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    File URL: http://dx.doi.org/10.1287/mnsc.1070.0703
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    References listed on IDEAS

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    Cited by:

    1. Sam Ransbotham & Sabyasachi Mitra, 2010. "Target Age and the Acquisition of Innovation in High-Technology Industries," Management Science, INFORMS, vol. 56(11), pages 2076-2093, November.
    2. repec:eee:ejores:v:267:y:2018:i:3:p:835-848 is not listed on IDEAS
    3. Kartik Kalaignanam & Tarun Kushwaha & Jan-Benedict E. M. Steenkamp & Kapil R. Tuli, 2013. "The Effect of CRM Outsourcing on Shareholder Value: A Contingency Perspective," Management Science, INFORMS, vol. 59(3), pages 748-769, July.
    4. Crama, Pascale & De Reyck, Bert & Degraeve, Zeger, 2013. "Step by step. The benefits of stage-based R&D licensing contracts," European Journal of Operational Research, Elsevier, vol. 224(3), pages 572-582.
    5. González, Paula & Macho-Stadler, Inés & Pérez-Castrillo, David, 2016. "Private versus social incentives for pharmaceutical innovation," Journal of Health Economics, Elsevier, vol. 50(C), pages 286-297.
    6. Martin Backfisch, 2017. "Have Pharmaceutical R&D Project Success Rates Decreased? A Critical Review and New Empirical Results," MAGKS Papers on Economics 201746, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    7. Sofka, Wolfgang & Aschhoff, Birgit, 2008. "Successful Patterns of Scientific Knowledge Sourcing: Mix and Match," ZEW Discussion Papers 08-033, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. repec:eee:proeco:v:200:y:2018:i:c:p:329-342 is not listed on IDEAS
    9. Sternitzke, Christian, 2013. "An exploratory analysis of patent fencing in pharmaceuticals: The case of PDE5 inhibitors," Research Policy, Elsevier, vol. 42(2), pages 542-551.
    10. repec:eee:respol:v:46:y:2017:i:9:p:1629-1643 is not listed on IDEAS
    11. Chondrakis, George, 2016. "Unique synergies in technology acquisitions," Research Policy, Elsevier, vol. 45(9), pages 1873-1889.
    12. Zapata, Juan C. & Reklaitis, Gintaras V., 2010. "Valuation of project portfolios: An endogenously discounted method," European Journal of Operational Research, Elsevier, vol. 206(3), pages 653-666, November.
    13. Guodong (Gordon) Gao & Lorin M. Hitt, 2012. "Information Technology and Trademarks: Implications for Product Variety," Management Science, INFORMS, vol. 58(6), pages 1211-1226, June.
    14. Pankaj C. Patel & Marko Kohtamäki & Vinit Parida & Joakim Wincent, 2015. "Entrepreneurial orientation-as-experimentation and firm performance: The enabling role of absorptive capacity," Strategic Management Journal, Wiley Blackwell, vol. 36(11), pages 1739-1749, November.
    15. Poonam Khanna & Lemaro Thompson & Michael Mcdonald, 2015. "Research On Venture Capital Firms’ ‘Investment Behavior A Review’," Working Papers 0197mgt, College of Business, University of Texas at San Antonio.
    16. Francis, Bill & Hasan, Iftekhar & Sharma, Zenu, 2011. "Incentives and innovation : evidence from CEO compensation contracts," Research Discussion Papers 17/2011, Bank of Finland.
    17. Keith M. Drake & Martha A. Starr & Thomas McGuire, 2014. "Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay?," NBER Working Papers 20292, National Bureau of Economic Research, Inc.
    18. Korkeamäki, Timo & Takalo, Tuomas, 2010. "Valuation of innovation: The case of iPhone," MPRA Paper 28042, University Library of Munich, Germany.
    19. Sriram Thirumalai & Kingshuk K. Sinha, 2011. "Product Recalls in the Medical Device Industry: An Empirical Exploration of the Sources and Financial Consequences," Management Science, INFORMS, vol. 57(2), pages 376-392, February.

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