How to manage risk better

Abstract

Risk management practices in the R&D departments of many chemical and pharmaceutical companies lack much of the rigor and sophistication of the equivalent corporation in the financial sector. For instance investment decisions on research projects are guided by techno-economic indicators that do not reflect changes in the financial framework of the project such as the prevailing interest rate structure, or the risk of “project default” as a result of termination. Although much has been achieved over the last ten years in improving the returns from R&D through the implementation of quality assurance processes such as the stage-gate methodology, considerable potential still exists for improving the management of investment risk and ensuring a return for shareholders. The Jarrow and Turnbull model for credit-risky bond pricing can help to calculate the internal rate of return (IRR) spread or hurdle rate that should be applied at each stage research project.