Returns to R&D Investment
Weaknesses of Standard Approach
- Discounted Cash Flow Analysis
- Assumes future cash flows can be estimated
- Assigns high discount rate to risky projects.
- Implies negative NPV.
- Fails to capture strategic value of investment.
- Failure to invest may mean lock-out of new paradigm.
- Example: Pharmaceuticals
- 1 in 10,000 explored chemicals become drug
- Development cost $350 million, time 10 years
- 7 out of 10 drugs fail in market