Abstract
- We examine the valuation of biotechnology firms and measure firm value relative to the firms’ drug development pipelines, alliances with other firms, and the varied composition of those firms’ boards of directors. Unsurprisingly, the advancement of drugs in the pipeline is associated with increased valuation, and the failure of drugs in testing is found to have negative impacts. Our findings do not support the notion that companies engaged in partnerships or alliances have better performance. Extending prior research, we find that the presence of medical doctors on the boards of directors is significantly positively associated with price-to-book ratios and firm value. Drug approvals seemed less likely for small cap firms; this outcome is likely the result of small cap firms with more promising prospects being acquired, and exiting “small cap” status. Smaller firms have lower approval rates – they have fewer drugs in the pipeline – and the risk of these smaller firms is diversified when they are combined with larger firms whose research is spread across many more drugs. We observe a higher number of drug approvals for AIDS and cancer. We also discover a modestly higher approval rate alongside a higher proportion of financiers – such as hedge fund managers and investment bankers – on biotechnology boards. The investor might use our discoveries to better project a firm’s success in drug approvals and equity returns; the biotech manager could use our findings to better anticipate market responses to changes in the company’s board or research; the regulator could remember to limit the political influences on drug approvals by recalling the potential “favoring” of one disease over another depending upon the political climate. Thus our findings are important to the investor, the biotechnology manager and the regulator.