An user friendly Real Options based Model to Optimize Pharmaceutical R&D Portfolio

Pharmaceutical industry pays great attention to its R&D process because it is a long, dynamic, very expensive, and uncertain process. On the other hand this process can be modelled as a step-wise process and each stage allows to achieve better information and generally lower uncertainty. In order to build up the best portfolio a tool able to capture the intrinsic flexible nature of the process should be selected: real options analysis has this characteristic but as widely demonstrated in literature, is narrowed to very limited cases because its perceived complexity. Basing on OptFolio, a model available in literature, this paper proposes an user friendly programming model based on Real Options Analysis fitted to the pharmaceutical R&D process able to support managers in the selection of the best partially self-financing portfolio. So we propose a new closed-form model of low complexity in order to obtain a financially balanced portfolio; finally, a numerical example is used to illustrate the proposed approach.