Option games analysis on biotech open innovation mediated by start-ups

Abstract

Biotech start-ups are superior at speed, cost, and risk-control to big pharmaceutical firms. But since the valley of negative profits is long and deep, their financial sustainability is under the influence of uncertainty and competitiveness. The following research questions have been posed: How can competitiveness make an impact on biotech start-up's flexibility for irreversible investment under uncertainty? What is a guideline for optimal timing on their exclusive period between business entry and strategic partnership for their survival? And, what is the optimal decision with imperfect information at in-license competition before business starts? As one of the keywords, biotech start-up is defined as a portfolio of real options. Secondary, biotech open innovation is an ecosystem of start-ups for biotech technology transfer. Methodology is option games analysis or strategic option by integrating between real options and game theory. The objective is to examine the potential of option games for biotech start-ups, which are critical meditators in biotech open innovation, to continue the promising but risky projects. In particular we consider the optimal period between business entry and strategic partnership under uncertainty and competition, the optimal timing for in-license at pre-competition, and the value estimation of in-license based on the information disclosed from rivals under imperfect information competition. Finally we confirm the catalytic function of biotech start-up as a risk taking networker between universities and pharmaceutical companies at a case of PeptiDream.