Financing development stage biotechnology companies: RMs vs. IPOs.

We examine reverse mergers (RMs) in the biotechnology industry and find that, when compared to initial public offerings (IPOs), RMs are smaller, have significantly lower market valuations relative to size, and generally invest less. We also find that RMs exhibit positive abnormal returns on the announcement date and throughout the first year after the RM event. In looking at liquidity measures, we find that RMs tend to be less liquid than IPOs and that illiquidity is greater during the six-month lock-up period following the RM event. Thus, RMs may be an appropriate alternative financing vehicle in capital intensive, high-risk biotechnology companies which require accessing deeper and larger pools of investors in public capital markets across multiple milestone periods in a "pay for progress" environment.