Decision analysis and drug development portfolio management: uncovering the real options value of your projects

Abstract

Project selection and portfolio management are particularly challenging in the pharmaceutical industry due to the high risk – high stake nature of the drug development process. In the recent years, scholars and industry experts have agreed that traditional Net-Present-Value evaluation of the projects fails to capture the value of managerial flexibility, and encouraged adopting a real options approach to recover the missed value. In this paper, we take a closer look at the drug development process and at the indices currently used to rank projects. We discuss the economic value of information and of real options arising in drug development and present decision analysis as an ideal framework for the implementation of real options valuation.

• decision analysis
• managerial flexibility
• portfolio management
• project prioritization
• ranking indices
• real options
• R&D costs
• staged investments
• value of information