RESEARCH SEMINAR

- with Finn Valentin, Research Centre on Biotech Business, presenting a joint paper with Henrich Dahlgren

Title

Alliances of Scandinavian Biotech Start-Ups and their Effects on Financial Performance

Abstract

This study examines R&D-alliances in the biotech sector, where they are particularly prevalent. First we present a statistical description covering alliances in the 1997 to 2004 timeframe entered by Danish and Swedish biotech firms specialised in Drug Discovery (DDFs). Using multivariate regressions the second part of the paper studies effects of alliances on the financial performance of these firms. A novel distinction is offered between different alliance types, based on a two-dimensional typology of partners (by their value-chain position relative to focal firm) and the direction of alliance deliverables. Measuring financial performance by the valuation achieved by the DDF in the financing round immediately subsequent to alliance formation we find divergent effects on financial performance across alliance types.

Prior literature has given particular attention to alliances with large pharmaceu-tical partners focused on projects from the DDF’s pipeline. Based on property rights arguments Lerner et al (2003) found that such alliances entered by DDFs subject to capital scarcity detract from their value. We find capital scarcity to have the opposite effect, and offer the explanation that each advance in a drug development project notably increases its value, hence incentivizing the DDF to strain its financial resources to take the project as far as possible before out-licensing it to a pharma partner. For this reason, capital scarcity emerges as the condition, under which a DDF maximizes the profitability of a subsequent pharma alliance. Concurrently with financial resources approaching exhaustion, the DDF must attract the interest of a pharma-partner with requisite needs. Together these requirements translate into an exceedingly complex alignment of burn rates, research achievements and search for best match amongst potential pharma partners. This confluence of diverse challenges, requiring highly coordinated management, resembles the uncertain processes relying on improvisation, real-time experience, and flexibility addressed e.g. by Eisenberg and Tabrizi (1995). Positive valuation in the subsequent financing round, we submit, is best explained by the confidence in the top management team (TMT) by which investors respond to its achievement of this alignment.

Paper is available on request from Henrich Dahlgren.

No prior registration needed.

The seminar is organized in collaboration with the Department of Industrial Economics and Strategy.