The leadership role of the United States in the biotech and life-science industry has previously been explained by the real option approach to investments.
For high-risk and extensive R&D projects such as those leading to innovative original drugs, the investment approach is staged. These projects were characterized as sequential compound options. Concurrent investment into subsequent stages depends on the level of uncertainty that determines the critical cost to invest. At least two sources of heterogeneity between the U.S. and Europe, so goes the argument of this research, have helped the U.S. to identify and execute real options in the emerging biotech industry while preventing the EU from doing so.
- Regulatory uncertainty, as one key uncertainty in the drug development and approval process, has been higher in Europe than in the U.S., and has elevated the critical threshold to invest in for innovative R&D projects. For one, European drug approval agencies were less structured and slower in the approval rate than the U.S. FDA.
- Further, consumer concerns about the merits of modern biotechnology were much stronger in Europe.
In addition, as the drug development process tends to be a continious one, the rate of investment for the time to build & strengthen option is crucial for the option owner to fully execute all sequential steps of the compounded real options. In the U.S., at least within the early stages of the emerging biotech industry, there was much more capital, and specifically risk capital, available to support these real option owners.
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