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Biotechnology valuation and governance: Drug development and board of directors composition

Chad Houston, J. Edward Graham, Peter Schuhmann


This paper examines the valuation of biotechnology firms and measure firm value relative to the firms’ drug development pipelines, alliances with other firms, and the varied composition of those firms’ boards of directors.  Unsurprisingly, the advancement of drugs in the pipeline is associated with increased valuation, and the failure of drugs in testing is found to have negative impacts.  Findings do not support the notion that companies engaged in partnerships or alliances have better performance. Extending prior research, the study finds that the presence of medical doctors on the boards of directors is significantly positively associated with the price-to-book ratio and firm value. Drug approvals seemed less likely for small cap firms; this outcome is likely the result of small cap firms with more promising prospects being acquired, and exiting “small cap†status. Among other findings, a higher number of drug approvals among such targeted diseases as AIDS and cancer are observed; modestly higher approval rates are observed in concert with a relatively higher proportion of financiers – such as hedge fund managers and investment bankers – on biotechnology boards.  Findings are important to the investor, the biotechnology manager and the regulator.


Valuation; board composition; drug development; governance

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