Drivers of Biotechnology Initial Public Offering Valuations

Abstract

This study investigates the key drivers of biotech firm valuation at their initial public offering (IPO). Identifying these drivers is important as it informs the decisions of all three players in any IPO: the firm, the investors, and the underwriters. A thorough data set was constructed by combining data from multiple sources, including all biotech firm IPOs from 2002-2022 as well as a basket of relevant financial and non-financial metrics. A multivariate regression relates individual firm market capitalizations at the time of their IPO to a set of financial and non-financial metrics. Separate models were also estimated for pre-revenue and revenue-generating firms, highlighting the specific nature of IPO pricing for firms that have not yet produced revenue. This study concludes that for pre-revenue biotech firms, the key drivers of IPO valuation were research and development expense, total assets, number of issued patents, and number of programs in the pipeline. Robustness checks showed that years from founding to IPO and the pure biotech market condition could be key drivers of IPO valuation for pre-revenue biotech firms as well. For revenue generating firms, the key drivers of IPO valuation were research and development expense and total operating expenses. These findings can guide management teams of biotech firms as they navigate the funding landscape, produce more informed investors, and help underwriters optimize IPO underpricing.