Equity Financing and External Contracting at Biotech Firms: Evidence from PIPEs

We investigate young public biotechnology companies that raise additional capital utilizing offerings of private investments in public equity–so-called PIPE deals. Among 110 biotech firms that raise $5.5 billion in IPO proceeds during 1996 to 2004, 61 firms raise an additional $9.5 billion from 200 PIPE deals by the end of 2006. We study the timing and terms of such private placements in relation to biotech firms’ external contracting activity. We hypothesize that firms raise new capital following good news such as advancement of clinical trials, signing of external contracts, and strong stock performance. We find that issuing firms with greater dollar volume of external contracting obtain better terms as manifested by lower offer discounts in PIPE deals involving common equity. These results suggest that investors incorporate information on external contracting activity when pricing and providing equity capital to cash-hungry biotech firms.