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

This study examines R&D-alliances in the biotech sector, where they are particularly prevalent. A novel typology is offered of different alliance types, based on a twodimensional distinction between partners, by their value-chain position, and the direction of alliance deliverables. Using a unique dataset covering all firms specialised in Drug Discovery (DDFs) in Denmark and Sweden in the 1997 to 2004 timeframe, we measure financial performance by the value achieved by the DDF in the financing round immediately subsequent to alliance formation and find divergent effects on financial performance across alliance types. Prior literature has given particular attention to those alliances with large pharmaceutical partners which DDFs enter to collaborate on and to out-license projects from their pipeline. Based on property rights arguments prior studies 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 pharma alliances are brought to higher levels of value. Concurrently, as financial resources approach exhaustion, the DDF must attract the interest of a pharma-partner with requisite needs. These requirements translate into a complex alignment of burn rates, research achievements and search for best match amongst potential pharma partners. Therefore the capability of a Top Management Team (TMT) to produce this alignment at the right time is exposed to investors more clearly as an attribute of 3 alliances subject to capital scarcity. The resultant increase in investor confidence in the TMT is an additional factor behind the comparatively higher valuations produced by alliances entered under conditions of scarcity.