Orphan Drug Designations as valuable Intangible assets for IPO Investors in Pharma-Biotech Companies

Diego Useche and Philippe Gorry

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Abstract: Orphan Drug (OD) legislation has been implemented with regulatory and financial incentives to encourage the development of drugs to treat rare diseases. This study aims to test whether OD Designations (ODD) granted by the Food and Drug Administration (FDA) to pharma-biotech start-up companies may be considered as relevant signals in, attracting entrepreneurial finance and increasing the amount invested at the time of the Initial Public Offering (IPO) in the US stock markets. We attempt to take into account for endogeneity of ODD prior to IPO by considering the simultaneous relationship between the firm innovative outputs and IPO performance. Endogeneity occurs when the firm characteristics affecting the firm's decision to apply for ODD before going public also determine the amount of cash collected at IPO. Furthermore, ODD before going public may also influence the access to other relevant resources for start-ups companies as for instance venture capital investments, collaborative revenues and employees prior to IPO. We found that the signaling power of ODD is positively and statistically significant for IPO investors in stock markets: an ODD prior to an IPO increase the IPO proceeds by about 37,5%. Regression results also suggest that ODD are stronger than patents applications to attract IPO investors and other valuable resources before that the company goes public. Scholar and policy implications are discussed in the light of the signaling theory and drug development policies.

Keywords: Orphan Drug; Patents; Initial Public Offering; Venture Capital; Innovation; Biotechnology (search for similar items in EconPapers)
Date: 2016-06-13
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Published in DRUID Society Conf., Jun 2016, Copenhague, Denmark

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Related works:
Chapter: Orphan Drug Designations as Valuable Intangible Assets for IPO Investors in Pharma-Biotech Companies (2018)
Working Paper: Orphan Drug Designations as Valuable Intangible Assets for IPO Investors in Pharma-Biotech Companies (2017)
Working Paper: Orphan Drug Designations as Valuable intangible assets for Ipo Investors in Pharma-biotech companies (2015)
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