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R&D spending and sources of funding of private US biopharmaceutical firms seeking to go public

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Abstract:

This study analyzes the relationship between the amount of research and development (R&D) spending in private US biopharmaceutical firms before they go public and whether or not these firms tap into external sources of funding for investment before an initial public offering. We focus our study on three specific sources of funding (venture capital investors, biopharmaceutical firm investors and strategic alliance partners) for two different time periods (one year prior to firms going public and cumulative years prior to going public). We found an increase in R&D spending over the course of the study and a positive relationship between R&D spending in the year prior to its going public and venture capital involvement. We also found a positive relationship between the cumulative amount spent on R&D and venture capital involvement and ownership by other biopharmaceutical firms. We use the literature on tradable assets and signaling theory to interpret the implications of our findings. For managers, the results suggest that if their goal is to send signals to future investors by way of spending greater amounts on R&D in the year prior to going public, then venture capital investors are more likely to be associated with this type of activity.

Document Type: Research Article

DOI: http://dx.doi.org/10.1057/jcb.2010.12

Publication date: October 1, 2010

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