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.