Value-Add: An Empirical Study of Idiosyncratic Value in the 2013 Biotech IPO Market

Abstract

This Note examines corporate governance trends in the biotechnology industry through an empirical study of the 39 United States-based biotechnology companies that made initial public offerings (“IPOs”) in 2013.  This study of Form S-1 and Form 4 SEC filings reveals a cohort of newly public, immature biotech firms with highly consolidated corporate control and cash-flow rights by pre-public investors.  On average, pre-public insiders fill 66.2% of the board seats and own 59.8% of the equity in these firms at the time of IPO.  Further, pre-public insiders do not immediately sell their equity positions after the expiration of mandatory lock-up periods.  These data, this Note argues, suggest that entrepreneurs and investors in the biotech industry use concentrated ownership structures to pursue idiosyncratic value that will be, if realized, shared pro rata across all public shareholders.  This Note demonstrates that in an industry with long-term business plans and high levels of uncertainty, value-maximizing agents (e.g., entrepreneurs, pre-public investors) can bundle boardroom control and illiquid equity holdings to pursue idiosyncratic value while mitigating concerns over agency costs.  These findings provide both empirical and theoretical context for guiding policies that seek to facilitate innovative, high-growth industries such as biotechnology.

Many thanks to Professor Robert J. Jackson, Jr. for his invaluable guidance, as well as to Caitlin Mevorach and Jeffrey Cooper for their insightful feedback. Additional thanks to Alan, Lori, and Julie Cooper for their support, and to the outstanding staff and editorial board of the Columbia Business Law Review for their assistance in preparing this Note for publication.