The use of NPV in a multiyear, multiphase new product development process: Case study evidence from the pharmaceutical industry
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School of Business |
Master's thesis
Ask about the availability of the thesis by sending email to the Aalto University Learning Centre oppimiskeskus@aalto.fi
Authors
Date
2015
Major/Subject
Accounting
Laskentatoimi
Laskentatoimi
Mcode
Degree programme
Language
en
Pages
80
Series
Abstract
OBJECTIVE OF THE STUDY: The main objective of this study is to examine the potentially versatile use of the net present value (NPV) investment calculation in the context of pharmaceutical new product development (NPD) process. The objective of the study is to illustrate how the NPV can be used managerially in alternate ways to complement the most commonly presented view in the literature. As little earlier evidence on the how question on management accounting techniques in the context of NPD can be found, the respective gap in the literature is partly filled with a detailed look on the selected problem. DATA AND METHODOLOGY: The study method to be used is a qualitative in-depth case study. The empirical data used in the study consists of 27 semi-structured interviews with selected managers in a European pharmaceutical company, as well as other company related public or internal material. The interviewed managers held a variety of positions within the company, including Senior Vice President of R&D, CFO, Business Controllers, Vice Presidents of Business Units, and other Directors. The data was gathered between June of 2013 and September 2014. MAIN FINDINGS: Findings on the study indicate a more versatile use of NPV during pharmaceutical NPD in several dimensions. The high uncertainties of pharmaceutical NPD set several implications on the uses of NPV in the process. First, as the NPV is prepared several times during the process due to product or process related requirements, its significance in terms of decision-making can be seen to increase gradually until conducting the most expensive trials, decreasing afterwards with a focus shift from profitability towards modelling revenue streams. Second, while most NPD and capital budgeting literature promote the project selection function and the decision-making roles for NPV, this study evidence suggests a more versatile role for the calculation as a management tool. Additional benefits of NPV in NPD are extracted from its ability to facilitate communication across organizational boundaries, while also serving as a coordination and monitoring tool, and a mechanism to legitimate decisions.Description
Keywords
new product development, capital budgeting, net present value, drug development, investment appraisal