The Value of a Biotechnology Start-up: Creative Destruction and Real Options Approach

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Cecilia Maya Ochoa


Valuation, Real Options, Biotechnology, Creative Destruction, Jump-only Stochastic Process.


The value of investments in high growth start-up firms is difficult to assess because payments are far in the future and their arrival is uncertain. Some of these firms may seem overvalued according to traditional methods, such as the Net Present Value, which fails to account for three drivers of value for highly innovative industries: intellectual capital as the engine of innovation, market power as the expectation of monopolistic power when innovating, and a growth option which may be exercised in the case of success.

This paper presents a case study on a biotechnology start-up and applies the Creative Destruction – Real Options approach (CD-ROA) (Maya, 2004) which takes into account all three drivers of value and is able to explain the high prices investors pay for shares of a company in this industry. It proves that such prices are not cases of overpricing but of recognition of the large growth potential of firms which are part of highly innovative industries.


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