The Value of Pharmaceutical R&D Projects under Uncertainty and Drug Approval Policy

Abstract

Pharmaceutical R&D projects often have the characteristics of irreversibility on investment, flexibility of investment timing, and uncertainty in cash flows. In this thesis, the real options approach is used as the evaluation tool for these projects and three continuous-time investment models are developed. In chapter 4, we discuss the effects of the investment lag and commercialization flexibility on the investment decisions under uncertainty. Chapter 5 examines which organizational structures, the decentralized or centralized pharmaceutical R&D project, are more socially desirable in terms of early investment and higher project value. Chapter 6 considers whether adding a time constraint on the drug development process will increase the investment incentives and how remuneration level will influence the quality of the products, as well as the timing of commercialization