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The practice of building corporate alliances to carry out bio-pharmaceutical research related to new drug development has become more widespread in recent years. Typically the reasons for alliances lie in the hunt for efficiency improvements and cutting costs in the research process and on securing a future product pipeline for the pharmaceutical companies involved. In this research we are interested in analyzing the game situation in the context of bio-pharmaceutical research business and for this purpose we study the situation, where two biotech (research) companies exist on the markets and compete to sign an alliance with a pharmaceutical company – a three player game. We expect our results to show how availability of information affects the decision to ally in the context of the bio-pharmaceutical research industry and to shed light on how the use of different types of processes for modeling the valuation of the underlying research portfolio affect the same.
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Modeling bio-pharmaceutical alliance games:
Studying the effect of information availability
on decision-making
Mariia Kozlova, Azzurra Morreale, Mikael Collan
School of Business and Management
Lappeenranta University of Technology
Lappeenranta, Finland
mariia.kozlova@lut.fi
Giovanna Lo Nigro
University of Palermo, Italy
The practice of building corporate alliances to carry out
bio-pharmaceutical research related to new drug development
has become more widespread in recent years. Typically the
reasons for alliances lie in the hunt for efficiency
improvements and cutting costs in the research process and on
securing a future product pipeline for the pharmaceutical
companies involved. When alliances are built they are often
exclusive, either allied party can no longer ally with any other
party later on. The exclusivity on the other hand and the
prospect of locking in a partner on the other create a game
environment for companies active in the markets for bio-
pharmaceutical research and development.
In this research we are interested in analyzing the game
situation in the context of bio-pharmaceutical research business
and for this purpose we study the situation, where two biotech
(research) companies exist on the markets and compete to sign
an alliance with a pharmaceutical company – a three player
game. We posit that the pay-offs of each player are influenced
by the actions of the other players. The game set-up is such that
the first-moving biotech company (B1) is first offered a
mutually exclusive alliance (AB1) by and with the
pharmaceutical company (the pharmaceutical company will
only ally with one biotech-company) and if an alliance is not
contracted the remaining second biotech company (B2) is
offered a similar deal (AB2). If no alliance is settled during the
first time-step the offers are repeated in the following time-
steps, the game set-up is visible in Figure 1. This kind of a set-
up has been observed to exist on the bio-pharmaceutical
research markets [1]
In case one biotech-company allies with the pharmaceutical
company the remaining biotech-company can (will) continue
research and development (R&D) and reach the markets of a
ready product on its own. In such a case the benefits will
naturally befall on the single company.
Our specific focus in this three-player bio-pharmaceutical
game is on analyzing the effect that the availability of
information has on the outcome of the game. For the purposes
of the analysis we have adopted the general architecture of the
model previously presented in [2] and constructed an initial
three-player game-model simulation with Matlab to study the
effect of different (amounts of) available information on the
game by way of simulation. The constructed model allows
many further developments to the initial model that include the
addition of more players, the integration of expert judgment
into the model structure and into the stochastic processes used
in the simulation, and the study of the effect of decision-
making biases.
Fig. 1. The game setup
We assume that the biotech-companies consider and try to
maximize their expected pay-offs, when deciding on whether
to ally with the pharmaceutical company. The pay-offs are
assumed to depend on the market value of the project under
development that is expected, in vein with [2] to follow a
geometric Brownian motion (GBM). The constructed Matlab-
model allows the easy testing of how other (stochastic)
processes, including processes that include expert judgment,
affect the results. The players´ payoffs are also assumed to
depend on other parameters that include the initial investment
cost, market share, alliance-related royalties, up-front
Proceedings of ROW17 - Real Options Workshop. Lappeenranta, Finland 4.-5.10.2017
4
payments, the market amplification factor, and obviously
whether or not an alliance is made or not. In sum, at each point
of time the biotech-company compares the expected pay-off
from operating in an alliance and solo and decides whether to
ally or not.
This research continues in the footsteps of the wide game-
theoretic literature on industrial collaboration and alliances (the
review of which is omitted here for the sake of brevity).
Following this extended abstract, we will soon present the
results demonstrating the influence of the different levels of
information availability on the decision-making process and
the overall outcome of the game.
We expect our results to show how availability of
information affects the decision to ally in the context of the
bio-pharmaceutical research industry and to shed light on how
the use of different types of processes for modeling the
valuation of the underlying research portfolio affect the same.
Further research will introduce the real options approach to
incorporate flexibility of delaying alliance decisions by the
players in an uncertain market and study behavioral aspects of
this decision-making process.
REFERENCES
[1] S. Wakeman, Contracting and intellectual property issues in biotech
commercialization strategy. Ph.D. dissertation, University of California
at Berkeley, USA, 2007.
[2] A. Morreale, S. Robba, G. L. Nigro, and P. Roma, A real options game
of alliance timing decisions in biopharmaceutical research and
development. European Journal of Operational Research, 261(3), 2017,
pp. 1189-1202.
Proceedings of ROW17 - Real Options Workshop. Lappeenranta, Finland 4.-5.10.2017
5
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Article
In this article we examine the alliance timing trade-off facing both pharmaceutical and biotech firms in a stochastic and competitive environment. Specifically, we introduce a real options game (ROG), where a pharmaceutical company can choose between two competing biotech firms by sequentially offering a licensing deal early or late in the new drug development process. We find that, when the alliance raises the drug market value significantly, the agreement is signed late in the drug development process. This suggests that the postponement effect implied by the use of real options prevails over the biotech firms’ competition effect, which would instead play in favor of an early agreement for pre-emption reasons. When the alliance does not raise the drug market value significantly, the optimal timing depends on the level of royalties retained by the pharmaceutical company. In particular, an early agreement is signed in the presence of a low level of royalties. In this case, indeed, the competition effect becomes predominant because the pharmaceutical company can substantially reduce the upfront payment and thus the potential loss incurred if the biotech partner does not exercise her option to continue the new drug development process. We also show that the alliance timing outcomes of our real options game considerably differ from those obtained when both parties use the net present value (NPV) to assess their payoffs.
Contracting and intellectual property issues in biotech commercialization strategy
  • S Wakeman
S. Wakeman, Contracting and intellectual property issues in biotech commercialization strategy. Ph.D. dissertation, University of California at Berkeley, USA, 2007.