Financing decisions of biotech ventures: An empirical study of private and public markets

This dissertation is a study of the financing patterns of a panel of 323 Biotech initial public offerings (IPOs) from 1970 to 1999. It investigates the panel's financing activity through four (4) stages of the firms' lifecycle: pre-IPO, IPO, Lock-up and post Lock-up periods. The study analyzes public and private financings activity for the industry and this panel. Additionally, the study reviews the impact of venture capital participation and their effect on firm financing patterns and long-term performance. Because the study is longitudinal for the panel it also evaluates pre- and post-issue performance under the constraints of asymmetric information theory.; The following are some findings of this study: (1) There are several Biotech HOT and COLD public periods that coincide with those HOT and COLD periods for the general market. However, there are HOT and COLD periods that are unique to the Biotech industry. (2) Within the Biotech industry, public and private financing cycles principally coincide. However, the Biotech private transitions from HOT to COLD states are slower than the Biotech public markets. We label this our “Redeployment theory of Capital”. (3) In the aggregate, VC behavior in HOT markets are similar to patterns in COLD period exceptions in the number of shares offered and firm offer pricing. However, when the VC segment is partitioned based on when their last investment occurs in relative to the firm's IPO date, there are statistically different behavior patterns. Those firms whose last VC investment occurs after the IPO: are smaller and younger at IPO, underperform in the short-run, have larger syndications and are more likely to be merged or acquired in the long-run than firms whose final VC investment precedes the IPO date. (4) There is a significant difference in the behavior of non-VC backed firms between HOT and COLD periods. (5) Firm size as measured by the log (total assets) in the quarter prior to IPO is significantly and positively related to first day underpricing, offer price and IPO proceeds. (6) Consistent with other studies (Hanley 1993; Loughran and Ritter 2002), the information gained during the registration period and reflected in the partial adjustment of the offer price is significantly positively related to the level of underpricing. (7) Pre-issue stock run-up has a dampening effect on the size of issue and extends the time between financings. (8) There is informational value in successful private issues after negative prior stock performance.; Using the SDC Database from Thomson Financial, Compustat, CRSP, BIOSCAN and Gales Company Resources Databases, a panel of 323 IPOs was selected between 1970 and 1999. For this panel, we obtained available daily stock pricing and trading volume data from CRSP and quarterly financial statement information from Compustat and Primark Disclosure databases. Additionally, pre-IPO and venture capital data was acquired from SDC-Venture Expert (Venture Capital financings), SEC S-1 databases and Bioscan. Company statistics were cross-validated with information on the Bioscan and Gales Company Resources databases. We are thankful for financial support provided for databases by the Severino Center and Center for Financial Technology at Rensselaer Polytechnic Institute.