The first-quarter SPAC boom for the healthcare industry may be over, but special purpose acquisition companies will likely remain a popular financing vehicle for the biotech and digital health sectors.
SPACs, also known as blank-check companies, allow an operating company to list on the public market through a reverse merger. Though they have been around for years, an excess of capital has fueled a recent surge in SPAC activity across multiple sectors. Healthcare has been particularly busy on the SPAC front. The craze hit a peak of 40 healthcare and life science IPOs for the first quarter of 2021 — raising a combined total of $10.93 billion — before dropping to eight in the second quarter, according to S&P Global Market Intelligence data.
Experts attributed the drop-off to a rebalancing of the market after over-saturation in the first quarter but predicted that the attractiveness of SPACs as a source of ready capital for both the high-risk biotech sector and cutting-edge digital health companies means the funding model will continue to play a role in healthcare.
Jonas Grossman, president and managing partner at Chardan Capital Markets, noted that the second-quarter drop in SPACs — which not only impacted healthcare but other industries such as media and financial technology — was inevitable.
"At the end of the day it's supply and demand; the market can only accept and support so many SPACs," Grossman said. "I think that's healthy." The blank checks' rapid rise will likely be followed by the private equity market settling into a "comfortable median" with a balance between blank-check and traditional IPOs, Grossman added.
With increasing popularity has come unwanted attention from regulators. In April, the U.S. Securities and Exchange Commission issued a warning to SPACs that warrants as part of their IPOs should, in certain circumstances, be listed as liabilities rather than equities, adding that some would have to refile financial statements with the regulator.
While this additional scrutiny contributed to the second-quarter slowdown of healthcare SPACs, it was already occurring as a consequence of the first quarter boom, Grossman said.
The pullback will likely be good for the market as SPAC investors will be looking for high-quality healthcare companies, Joshua Samek, co-chair of Corporate Practice at law firm DLA Piper, said in an interview.
"One of the more unique aspects of the SPAC that has been helpful to healthcare companies is the ability to tell somewhat of a more complicated story than you may be otherwise able to tell in a traditional IPO, as well as the ability to use projections and especially
Traditional IPOs have become less common for middle-tier healthcare companies due to uncertainty in the market and shifting valuations in a volatile space, Samek said. Fewer than one in five drugs in early-stage development ever make it to market, with many falling at regulatory hurdles or failing to prove they are effective in clinical trials. This means it is vital that these companies can find reliable investors who are not put off by the near-term risks.
"The biggest benefit of the SPAC market is for these [healthcare] companies to have the certainty of knowing the valuation and the pricing [so] that they're willing to go out and do a deal," Samek said. "And they can incorporate that into all of these negotiations and how they want to structure the deal for their side."
Biotech and digital health among targets
SPACs were once focused on the healthcare services industry, but biotechs are now in fashion with blank-check sponsors. By Grossman's count, there were two biotech-focused SPAC IPOs in 2018 and only one in 2019, before the number bloomed to 23 in 2020 and 25 so far in 2021.
A June 21 report by consulting firm PriceWaterhouseCoopers also found that biotechs accounted for the majority of healthcare SPAC deals for the first half of 2021. "The continued influx of capital has increased valuations and options for biotechs, causing Big Pharma to look for more creative approaches to deal-making and partnerships," the report's authors wrote.
Venture capitalist Chamath Palihapitiya, founder and CEO of Social Capital, has launched six SPACs across multiple industries and, notably, helped space tourism company Virgin Galactic Holdings Inc. go public in 2019. In June, Palihapitiya filed paperwork for four different SPACs, each set to raise $200 million through a different biotechnology focus: neurology, oncology, organ and immunology.
Some biotechs, such as Cerevel Therapeutics Holdings Inc., which completed a transaction with blank-check company ARYA Sciences Acquisition Corp II in October 2020, have experienced growth since listing. Bolstered by positive early-stage clinical trial results for schizophrenia treatment CVL-231, Cerevel's share price has more than doubled since it first started trading, reaching $25.04 by Aug. 2.
Others, such as Gemini Therapeutics Inc., have been less successful with investors. The precision medicine company's share price had dropped 65.5% to $4.18 as of Aug. 2 after early clinical trial results for an eye disease treatment did not meet some investors' expectations.
Meanwhile, as the COVID-19 pandemic accelerated changes in consumer habits, digital health has become increasingly attractive to SPAC investors. Ten of the SPACs that have gone public
For digital health companies, SPACs are a great way to capitalize on the popularity they have gained during the pandemic. Chris Guiffre, CFO of Pear Therapeutics, said that "a number" of SPACs approached the Boston-based company — which has three prescription software products authorized by the U.S. Food and Drug Administration for patients struggling with drug use disorders or insomnia — before it announced June 22 that it would merge with Thimble Point Acquisition Corp. The combination, which is set to close in the second half of 2021, was "preferable" to a traditional IPO, Guiffre said.
"[Thimble Point's] purpose was to find a high-growth company sitting at the intersection of healthcare and tech. And we fit that perfectly for them, so we were an attractive target," Guiffre said. Pear Therapeutics was likewise attracted to Thimble Point's cash held in its trust, as well as its proposed $125 million private investment in public equity, or PIPE, Guiffre added.
SPACs' search continues
After a SPAC goes public, the company has 18 to 24 months to acquire a target. This means there are several healthcare-focused SPACs still searching for their perfect partner, sometimes with an eye on cutting-edge developments in the sector.
Among these is former Medtronic PLC CEO Omar Ishrak's $750 million blank-check vehicle Compute Health Acquisition Corp., which is targeting companies that utilize both computation, such as artificial intelligence, and healthcare. Another is Health Assurance Acquisition Corp., whose board includes former Livongo CEO and current Transcarent Inc. CEO Glen Tullman, which is looking to acquire a target "at the intersection between technology and healthcare" after completing a $500 million IPO in November 2020.
"I do think that SPACs are here to stay in ... a sizable percentage of the overall IPO pathway," Grossman added. "I think that there's a lot of reasons why [representation in the SPAC market] would continue in particular in healthcare, just because there is so much innovation and a need for capital that SPACs can be helpful avenues for."
