Why Biotechnology Research is so Valuable–Empirical and Theoretical Evidence to Aid with Decision Support

Standard quantitative tools to assess the value of high-risk, high-reward R&D do not currently exist, this leads to undervaluing biotechnology R&D and R&D intensive biotechnology firms. Most financial techniques – including Net Present Value and Real Options Pricing models – assume that commercial value is always expressed according to a Gaussian distribution. This poster considers 287 R&D intensive small biotechnology firms and finds that a Real Option Pricing (ROP) technique can better explain the underlying value of Biotech R&D, if a distribution that takes into consideration large price fluctuations and thick tails is used. By recognizing the unusual large upside and downside risk associated with Biotechnology R&D, it is possible to better understand and manage biotechnology research projects and portfolios. We also see that as the upside risk overcompensates for the downside risk, biotechnology R&D is more valuable than other options investments which may appear to offer a similar combination of risk and return.