Financial Contracting in Biotech Strategic Alliances

Abstract

We conduct a detailed analysis of 125 strategic alliance contracts, all of which concern early-stage, genomics-based research at small, biotechnology R&D companies. Staged investment is ubiquitous, but solutions to agency problems vary. The cycle of equity participation in alliances resembles what we observe in venture capital contracts: they involve convertible equity and sometimes contain anti-dilution provisions, warrants, and board seats. Contracts contain explicit provisions linking equity participation to subsequent IPOs and contain clauses designed to insulate both parties from multi-tasking problems. Contrary to the standard assumptions of static contract theory, contracts often specify provisions that are unobservable or difficult to verify.

Keywords: Strategic Alliances, Venture Capital, Incomplete Contracts

JEL Classification: G3, L1, L2