This Article Full Text (PDF) e-companion References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Girotra, K. Articles by Ulrich, K. T. Search for Related Content

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

INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
karan.girotra{at}insead.edu
terwiesch{at}wharton.upenn.edu
ulrich{at}wharton.upenn.edu

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.

Key Words: product development; pharmaceuticals; development pipeline; portfolio properties; backup projects; portfolio management
History: Received: January 25, 2005;

This article has been cited by other articles:

				K. B. Hendricks and V. R. Singhal The Effect of Product Introduction Delays on Operating Performance Management Science, May 1, 2008; 54(5): 878 - 892. [Abstract] [PDF]