R&D Investment of Biotech Start-up at ‘Death Valley’

Abstract

With many need-pull innovations, a type of rare basic-research-push innovations is biopharmaceutical development. In reflecting a next generation innovation, NASDAQ Biotechnology Index (NBI) is actually moving stronger in comparison to other indicators. From the industry,’s high dependence on basic research, biotech start-up, which is more excellent in combing a breakthrough technology and a niche market than the mass market and low risk-oriented large pharmaceutical companies is expected as a major driver of innovation chain. However, from the prolonging period of pharmaceutical development, expansion of necessary investment, low possibility of success, and severe resource constraints, drug discovery-based biotech start-up must endure the ‘Death Valley’ as a long-term deficit state in addition to the high bankruptcy rate. Why can biotech start-up that suffers from long-term deficit even in the financial crisis continue the research and development investment? If so, what kind of criteria of the investment can be utilized? Biotech start-up is defined as the portfolio of real options. As methodologies, this paper applies the real options concept to the assessment of the stockholders’ equity as technological potential and Bayesian MCMC to the parameter estimation between the net income, shareholders’ equity value, and R&D costs of representative 30 companies in the NBI.