Research and Development (R&D) Continuity of Biotech Start-ups in Financial Crisis

Abstract

This chapter examines the applicability of real options in improving the robustness of the research and development (R&D) continuity of biotech start-ups during the valley of deficits or against the systemic risk as the financial crisis, because they have to endure more than 10 years to get an approval of a medicine on the market subject to the resource constrains, if they could raise enough financial resources. The organization of this chapter is consists of four sections excluding introduction and conclusion. The first section mentions an analysis on the present investment environment for R&D continuity of biotech start-ups. The second section examines the existing basic theories on the decision-reserving functions of real options. The third section attempts to figure out the flexibility value of a sequential compound switching option that is designed to select the optimal mode between an assumed drug development process as benchmark and a cooperative development in strategic partnership on the way. The fourth section is trying to map the selective decisions made at the market and cooperative development risks (or potential) based on these data. Moreover, its aim is to support decision making by creating 3-D graphs between the net present value (NPV) and both risks and also among these indices with market volatility.

Appendix

At Dixit model of business entry or exit under risk modeled as random work of value behavior as geometric Brownian motion, respective trigger price derived of business entry and exit is (Dixit 1989):

$${{P}_{H}}=\frac{\rho -\mu }{\rho }\frac{\beta }{\beta -1}{{C}_{I}}$$

$${{P}_{L}}=\frac{\rho -\mu }{\rho }\frac{\alpha }{\alpha +1}{{C}_{A}}$$

$$\begin{array}{l}\beta =\frac{(1-\alpha )+{{[{{(1-\alpha )}^{2}}+4b]}^{1/2}}}{2} \\-\alpha =\frac{(1-\alpha )-{{[{{(1-\alpha )}^{2}}+4b]}^{1/2}}}{2} \\\text{ }\alpha =\frac{2\mu }{{{\sigma }^{2}}},b=\frac{2\mu }{{{\sigma }^{2}}}. \\\end{array}$$

Thus, it can be explained that if volatility is at a risk scale of $\sigma \to 0$, each fraction of α and β approaches 1, then a fraction consisted of risk interest rate ρ and growth rate μ works enough, on the other hand, if $\sigma>0$, each function of fraction α and β expands, then it amplifies the deferment function.