Real Option Analysis Approach for Pharmaceutical Project Portfolio Optimization Model Considering Multi-project Dependencies

Research and Development (R&D) projects execution in pharmaceutical industries are often failed due to the high technical and commercial risks, which caused project cost and schedule overruns. Internal resource availability also limits the project execution, especially in multi-projects condition. These project risks and limitations should be considered in the process of selecting project candidates and deciding which project to invest. In some multi-project cases, a R&D project can also bring up new potential projects, which makes it becoming higher value than others. In this research, Real Option Analysis (ROA) approach -OptFolio Light (OL) model offered by Nigro, et al (2014) is used as a reference model of project portfolio valuation process. The aim of this research is to develop a valuation and project selection model by considering the mentioned risks, limitations, and the opportunity to achieve the optimum value of the project portfolio. In this model, project cash flows were projected using Monte Carlo simulation by considering market volatility. Case study on five R&D project candidates at one of pharmaceutical industry in Indonesia, BFM, showed that the developed model results in a better valuation than traditional model Net Present Value (NPV). Considering project risks may reduce the project value but it makes the valuation process more rational. Sensitivity analysis of the developed model was also conducted in this research.