R&D Sustainability of Biotech Start-ups in Financial Risk

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.

Figure 1 Call option and intrinsic value

Figure 2 Balance sheet and equity as call option

Figure 3 FY2008 net income and R&D expenses

Figure 4 2008 negative profits biotech companies’ net income and R&D expenses

Figure 5 Total stockholders’ equity and cash & equivalents

Figure 6 FY2016 R&D expenses and market cap

Figure 7 Shift of total stockholders’ equity between FY2008 and FY2016

Figure 8 Revenues and total stockholders’ equity

Figure 9 FY2016 trace-plot of intercept

Figure 10 FY2016 fit-summary of intercept

Figure 11 FY2016 trace-plot of slope

Figure 12 FY2016 fit-summary of slope

Figure 13 FY2008 trace-plot of intercept

Figure 15 FY2008 trace-plot of slope

Figure 16 FY2016 fit-summary of slope

Figure 14 FY2008 fit-summary of intercept

Table 1 Data of biotech companies

Table 2 Data of large pharmaceutical companies

Table 4 FY2008 print (fit)

Table 3 FY2016 print (fit)