Real options analysis on strategic partnership dealing of biotech start-ups

Biotech start-ups have the competitive advantages of quicker and lower-cost at combing the innovative technologies and the niche markets, in comparing with big pharmaceutical companies. However they are facing with the short-term financing fluctuations from venture capital and initial public offering markets since this time's financial crisis, while universities' long-term basic research activities are continually producing life-science findings as their innovative resources. Then strategic partnerships with big pharmaceutical companies are becoming more important fundraising sources for biotech start-ups. Thus, how can such innovative but small start-ups equally negotiate their deal-structures with the resource-rich but innovation starving big pharmaceutical companies? For the research question above, a promising methodology seems the more objective metrics or analytics on the value of decision-making rather than traditional means like the comparison with similar cases or the subjective judgment based on past experience suitable for incremental improvement. Therefore this paper discusses on the opportunities and challenges of each application of the Monte Carlo simulation to cash flow forecasting of research and development investment, the rainbow sequential compound option to risk-hedge, and the stochastic optimization to negotiating the portfolio of license-fee elements. © 2013 Global Institute of Flexible Systems Management.