Biotech-Pharmaceutical Alliances as aSignal of Asset and Firm Quality*

We examine the determinants of biotech-pharmaceutical alliance prices to determine whether the market for alliances is characterized by asymmetric information. We find that inexperienced biotech companies receive substantially discounted payments when forming their first alliance. A jointly developed drug is more likely to advance in clinical trials than a drug developed by a single company, so the first- deal discount is not consistent with the drug’s subsequent performance. Biotech companies receive substantially higher valuations from venture capitalists and the public equity market after forming their first alliance, which implies that alliances send a positive signal to prospective investors.