Optimal timing of strategic partnership for biotechnology start-ups

Investment in biotechnology start-ups has recently created `Virtual Biotechnology Start-up´ model due to venture capital´s reluctance and hardness for established pharmaceutical companies as licensees facing with patent cliff of blockbuster drugs and competition against generic drugs since Lehman Shock. VBS model is a call option because a predetermined pharmaceutical firm has an exclusive right to buy the start-up, if they succeeded in proof of concept. A research question is what the optimal irreversible timing is for biotechnology start-ups respectively to invest in R&D and then out-license forward established pharmaceutical firms in order to survive. Biotechnology start-up is defined as a portfolio of real options. Option-games approach is an integrated methodology between real options and game theory for the optimal trade-off between flexibility in irreversible investment under uncertainty and preemptive commitment in competitiveness. Treated is a continual-time duopolistic sequential-investment game model. An objective is to analyze the pioneer´s maximum Net Present Value in monopolistic period between a biotechnology start-up´s and a pharmaceutical firm´s entrance thresholds into a market regarding demand index as a random variable. As conclusion findings, the cost advantage is a critical competitive factor even at higher volatility for a biotechnology start-up to expand the monopolistic period and NPV.