BioTransplant, Inc.: Initial Public Offering, January 1996 – Case Solution

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BioTransplant, Inc.: Initial Public Offering, January 1996 Case Answers

This case solution includes an Excel file with calculations.

Question 1: Why does BioTransplant, Inc. need to go public?

The major reason why BioTransplant, Inc. (BT) needs to pursue an IPO is the need for additional funds required for the company’s extensive future research and development expenditures. This need is highlighted by Elliott’s indication that the cash balance of $2.5m (based on year-end 1995) will only suffice until 1998.

However, since BT’s EBIT and operating cash flow are both projected to be negative until 1999, we challenge this estimate. From our calculations in Appendix I, you can see that the cash can be expected to last until early 1997 only, hence increasing the funding need.

Also, in the long run, financing growth in a highly capital-intensive industry like biotechnology purely by operations seems unlikely. The need to raise cash is additionally reinforced by the competitive, dynamic, and uncertain nature of the industry.

At the same time, BT only has a few subordinate alternatives in raising the required cash: the company has previously raised funding from VCs in three consecutive financing rounds and has given up 49.9% of its ownership to HCIC, thereby making itself less attractive for additional VCs.

Moreover, the cash needs of BT seem too large in order to be financed once more by a VC. Institutional investors, while only minimally interfering with management, only provide a limited market and would not offer a high degree of publicity for an IPO.

Lastly, an alliance with a major corporation has already been carried out by BT in the past and is, due to the unlikely prerequisite of BT introducing another interim product, no longer desired by Elliott.

Question 2: What are the advantages and disadvantages of being a public company?

Going public comes with both general and BioTransplant-specific advantages and disadvantages.

First, an IPO increases the company’s presence and public perception. A major financial benefit of IPOs is the ability to accumulate a larger influx of capital (compared to other funding alternatives) from a broader investor base at one time.

Besides obtaining funding, an IPO establishes prestige both toward customers and potential employees, thereby allowing for access to superior personnel.

In addition, by setting up employee compensation plans linked to their own shares, public companies face a greater chance of retaining employees and can furthermore better incentivize them.

An IPO also involves diversification of funding sources and establishes increased financial flexibility for a firm while also possibly reducing its cost of capital.

Finally, after an IPO, a company has a credible valuation, determined by the market rather than by a VC firm. This, in turn, enables a company to conduct M&A activities with shares instead of cash.

For BioTransplant, Inc. specifically, the company currently has low bargaining power against new research partnerships as it is…