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Politecnico Di Torino POLITECNICO DI TORINO Corso di Laurea Magistrale in Engineering and Management Tesi di Laurea Magistrale Analysis of Biotech IPOs and underpricing changes as opposed to traditional IPOs Relatore Candidato Prof. Riccardo Calcagno Giulia Giletta Anno accademico 2020/2021 Analysis of Biotech IPOs and underpricing changes as opposed to traditional IPOs Abstract This thesis work aims to analyze in depth the peculiarities that characterize the initial public offering of a Biotech company, a world currently little explored. To do this, the focus is first on the IPO process. Subsequently, all the theories present in the literature regarding the underpricing of traditional companies are analyzed in detail. Then the focus shifts to the valuation methods of traditional companies and then to those used for biotech companies to which, due to their structural differences, traditional methods are not suitable. The thesis aims to empirically find which factors best explain the underpricing of biotech companies, starting from the theories analyzed in the theoretical chapters, related to traditional companies. In order to do so, several regression models are studied, each to thoroughly analyze a characteristic that distinguishes the biotech world. The sample illustrates 75 biotech companies that undertook the IPO process between 2017 and 2020. Index Abstract ................................................................................................................................................... 3 1. A general overview of IPOs ............................................................................................................. 1 1.1. Raising funds ........................................................................................................................... 1 1.2. Definition of IPO and types of offerings .................................................................................. 2 1.3. Markets ................................................................................................................................... 3 1.3.1. Sarbanes-Oxley Act of 2002 ............................................................................................ 4 1.3.2. IPO cyclicality ................................................................................................................... 5 1.4. Types of investors .................................................................................................................... 6 1.5. Reasons for going public ......................................................................................................... 8 1.6. The IPO process ..................................................................................................................... 18 1.6.1. Steps to follow ............................................................................................................... 18 1.6.2. Team selection .............................................................................................................. 19 1.6.3. Agreements ................................................................................................................... 19 1.6.4. A preliminary and final prospectus ............................................................................... 20 1.6.5. Roadshow ...................................................................................................................... 21 1.6.6. Price setting ................................................................................................................... 22 1.6.7. Managing the aftermarket risk ...................................................................................... 25 1.7. Underpricing .......................................................................................................................... 26 1.8. Costs of going public and being public .................................................................................. 26 1.8.1. Costs of going public ...................................................................................................... 27 1.8.2. Costs of being public ..................................................................................................... 30 2. Literature theories ............................................................................................................................. 33 2.1. Theories behind underpricing .................................................................................................... 33 2.1.1. Asymmetric information theories ....................................................................................... 33 2.1.2. Institutional explanations .................................................................................................... 40 2.1.3. Ownership and control ........................................................................................................ 42 2.1.4. Behavioral explanations: ..................................................................................................... 43 2.2. Theories behind hot issue markets ............................................................................................ 46 3. Overview of valuation methods ........................................................................................................ 49 3.1. Market approach ........................................................................................................................ 50 3.1.1. Multiples .............................................................................................................................. 51 3.2. Income approach ........................................................................................................................ 57 3.2.1. DCF – Discounted Cash Flow ............................................................................................... 57 3.2.2. DDM – Discounted Dividend Model .................................................................................... 64 3.2.3. Total payout model ............................................................................................................. 67 3.3. Net Asset Value or Sum-of-the-parts Method ........................................................................... 68 3.4. Valuation methods comparison ................................................................................................. 69 4. Overview of Biotech valuation .......................................................................................................... 72 4.1. Biotech companies ..................................................................................................................... 72 4.1.1. Trends .................................................................................................................................. 73 4.1.2. Differences .......................................................................................................................... 77 4.1.2. The Market .......................................................................................................................... 82 4.2. Overview of biotech valuation methods .................................................................................... 89 4.2.1. NPV and rNPV ...................................................................................................................... 90 4.2.2. Comparable method ........................................................................................................... 93 4.2.3. Venture capital method ...................................................................................................... 93 4.2.4. Real options ......................................................................................................................... 94 4.2.5. Valuation of intangible assets ............................................................................................. 99 4.3. Conclusions ............................................................................................................................... 104 4.3.1. Comparisons between the methods ................................................................................. 104 4.3.2. Risk and rewards ............................................................................................................... 106 5. Analysis ............................................................................................................................................ 108 5.1. Underpricing in the Biotech industry ....................................................................................... 108 5.1. Description of the dataset & descriptive analysis .................................................................... 108 5.2. Underpricing ............................................................................................................................. 109 5.2.1. Underwriters characteristics ............................................................................................. 110 5.2.2. Underwriters quality ......................................................................................................... 110 5.2.3. Number of underwriters ................................................................................................... 114 5.2.4. Venture Capital .................................................................................................................. 115 5.2.5. Age ....................................................................................................................................
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