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Production of a New Drug: A Sequential Investment ProcessUnder Uncertainty

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  • Marcello Basili
  • Roberto Renò
  • Carlo Zappia

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

Suggested Citation

  • Marcello Basili & Roberto Renò & Carlo Zappia, 2005. "Production of a New Drug: A Sequential Investment ProcessUnder Uncertainty," Department of Economics University of Siena 453, Department of Economics, University of Siena.
    • Handle: RePEc:usi:wpaper:453
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    References listed on IDEAS

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    More about this item

    Keywords

    compound option; real option valuation; net present value; drugs;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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