Open innovation: A real option to restore value to the biopharmaceutical R&D

• Published in: International journal of production economics 2014-03, Vol.149, p.183-193
• Main Authors: Lo Nigro, Giovanna, Morreale, Azzurra, Enea, Gianluca
• Format: Article
• Language: English
• Subjects: Biopharmaceutical industry; Biotechnology; Biotechnology industry; Business; Business models; Exact solutions; Flexibility; Landscapes; Licensing; Mathematical analysis; Open innovation; Operations research; Optimization; Project evaluation; Project management; R&D; R&D portfolio; Real options analysis; Research & development; Spreadsheets; Studies
• ISSN: 0925-5273; 1873-7579
• DOI: 10.1016/j.ijpe.2013.02.004

The pharmaceutical landscape has changed, and new business models, based on alliances, are increasingly being adopted in this industry. Biotechnology advances have pushed this development, and pooling complementary resources coming from incumbents and newcomers is a key skill to succeed: these are the premises for a quick spread of the open innovation (OI) paradigm in this industry. R&D portfolio selection needs R&D project evaluation, and Real Options Analysis (ROA) is acknowledged as a powerful tool to evaluate uncertain projects that have an intrinsic flexibility. The present research aims to foster the use of ROA in the OI field in order to encourage firms to undertake this innovation model; to achieve this goal the authors propose a closed-form model that is easy to implement, to evaluate the OI initiative for selecting an optimal R&D portfolio. The study wants to support managers in optimal R&D portfolio construction in terms of choosing the most promising products, the means by which the related project has to be undertaken (in an open or closed manner; i.e. licensing-in or not) and the self-financing policy. The proposed model can be easily implemented into a spreadsheet, and the inputs needed to run it are usually requested to evaluate projects using the most used net-present-value-based methods. Moreover, some parameters of the model allow strategic aspects to be considered: for example the nature of the project (core/non-core), the impending project phase, and the risk-sharing opportunity. The results of the developed numerical example show that the selected portfolio is well balanced in terms of development stages, core/non-core therapeutic areas and, licensing-in (an inbound open innovation solution), is preferred in the case of products at their early stages of development. ► The paper focuses on the R&D portfolio selection in the biopharmaceutical industry. ► It proposes a mathematical model (OOL) based on ROA to select the best portfolio. ► OOL allows to choice the best products, the means to develop them (open or closed innovation) and the self-financing policy. ► OOL is very user-friendly and it can be implemented also in a spreadsheet. ► A numerical example has been developed to compare OOL with the main models available in literature.