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ISSN : 2287-1608
R&D Sustainability of Biotech Start-ups in Financial Risk
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Abstract
This paper’s objective is to draw a decision guideline to continue research and development (R&D) investments in biotech start-ups facing the “Valley of Death” syndrome ¬- a long negative profit period during a financial crisis. The data include financial indices as Net income, Revenues, Total stockholders’ equity, Cash & equivalents, and R&D expenses of 18 major biotech companies (nine in negative profit and nine positive, in FY2008) and 15 major pharmaceutical corporations as benchmarks both in FY2008 and in FY2016 derived from the US SEC Database, EDGAR. A first methodology dealing with real options analysis assumes Total stockholders’ equity as a growth option. And a second methodology, Bayesian Markov chain Monte Carlo (MCMC) analysis, is applied to test the probability relationship between the Total stockholders’ equity and the R&D expenses in these three groups. This study confirms that Total stockholders’ equity can play the role of a call option to support continuing R&D investments even in negative profits.
- keywords
- Biotech start-ups, valley-of-death, R&D sustainability, Bayesian MCMC, financial crisis
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