Real options analysis on strategic partnerships of biotechnological start-ups

Abstract

Since there is a mismatch between long-term basic research and short-term financial markets, the dependency of biotechnology (biotech) start-ups on strategic partnerships with pharmaceutical companies is expanding more than on venture capital. The research objectives are to examine the difference between license-fee elements, try to determine the innovation valuation in strategic partnerships, and minimise the risk in partnership formation for both sides. A key concept is that a biotech start-up is defined as a portfolio of real options based on an entrepreneur's ideas about investment opportunity. Methodologies used are compound options and stochastic optimisation for innovative but risky projects. In conclusion, this paper tries to address a wider scope with a deeper theoretical grounding, by using the real options perspective for the valuation of innovation partnership, through a biotech license-fee case study for simulation. Furthermore, the real option valuation can be expected to improve open innovation from matchmaking to innovation partnership.

Keywords:

• biotech start-up
• strategic partnership
• real options
• stochastic optimisation

Acknowledgements

The author really appreciates the kind and excellent questions and constructive advice from anonymous referees. This paper was supported with Grant-in-Aid for Scientific Research (B) #21330090 by Japan Society for the Promotion of Science.

Notes on contributors

Takao Fujiwara graduated from Aichi University (BA), and from Nagoya University (M.Econ. & D.Econ.), in Japan. He is now a professor of Business Administration, Group of Planning and Management, Institute of Liberal Arts and Sciences, Toyohashi University of Technology. Before April 2014, he was a professor of Business Administration, at Department of Architecture and Civil Engineering, Graduate School of Engineering, Toyohashi University of Technology, and before present institute, an assistant professor, an associate professor, and a professor at Aichi University. His specialty includes management of technology, technological entrepreneurship, and real options.