Dauntless Research and Development Investments of Deficit Senior-Star Biotech Firms in the Valley of Death

This paper focuses on “senior-star” biotech firms as the study target instead of the recently designed NASDAQ Junior Biotechnology Index. We are more interested in the limited number of top-performing “star” players in “senior” biotech firms rather than the much younger and promising next-generation firms. In the market capitalization, these senior biotech firms comprise the top-tier elite class in the head part of the Zipf distribution. Some senior negative-profit (N.P.) biotech firms are willing to increase the deficits for more active investment in research and development (R&D). According to the Bayesian Markov chain Monte Carlo analysis applied to the FY2020 US Securities and Exchange Commission dataset of the electronic data-gathering, analysis, and retrieval system, the R&D productivity of the N.P. Biotech firms are higher than their positive-profit counterparts. Thus, for senior-star biotech firms to overcome the valley of death, R&D investment can be considered a call option in real options by regarding the cash-on-hand as an underlying asset and the deficit as a strike price.