Competition for targets, a tougher stance from regulators and uneven performance are likely to create an uneasy environment for healthcare special purpose acquisition companies in 2022.

SPACs, also known as blank-check companies, allow an operating company to list on the public market through a reverse merger. A total of 107 SPACs that listed parts of the healthcare industry as their intended target went public in 2021, according to S&P Global Market Intelligence data. Deal volume picked up in the last four months of the year, with 23 IPOs in November and December.

That uptick in volume means more competition for healthcare companies that are mature enough to go public. The blank-check companies formed in the second half of 2021 have less firepower than those formed earlier, with only $8.93 billion of the $23.09 billion raised by healthcare SPACs in 2021 generated in the last six months of the year as the U.S. Securities and Exchange Commission pushed for greater regulation of SPACs. Of the SPACs formed from July, 15 listed potential targets in the pharmaceuticals, life sciences or biotechnology sectors, while seven cited healthcare technology or medical technology companies.

"There's a finite number of high-quality targets," Amanda Rose, a partner at law firm Fenwick & West LLP who advises life sciences and technology companies, told Market Intelligence. "We're going to see that market for targets become more competitive."

Healthcare companies may be reluctant to pursue SPAC deals given the stock performance of some blank-check companies that have already gone public through a merger, further reducing the number of available targets.

Faster timelines

A SPAC has 18 to 24 months to acquire a target after it becomes public. As competition intensifies, some healthcare SPACs may try to accelerate their timelines to get a deal done, Michael Cole, a managing director of Alvarez & Marsal's transaction advisory group, said in an interview. However, this speed may put additional pressure on a target company to make a deal before they are ready.

An expedited timeline could also put pressure on diligence checks, so a SPAC may overestimate a target company's readiness to go public, Cole said.

Another potential hurdle facing SPACs in the new year is increased attention from regulators, including recently appointed U.S. Securities and Exchange Commission Chair Gary Gensler. During a speech at the Healthy Markets Association Conference, Gensler said that SPAC investors were not receiving the same protections as they would for traditional IPOs when it comes to disclosures, marketing practices and the gatekeepers who facilitate funding.

"The investing public may not be getting like protections between traditional IPOs and SPACs," Gensler said at the conference Dec. 9. The SEC had asked staff for proposals for better aligning the two, Gensler said.

Gensler's comments were somewhat concerning and the regulatory environment will be a major determinant for the creation of new blank-check companies in 2022, Cole said.

"If the SPAC process becomes more like an IPO, some of those benefits around valuation and speed and timing get [cut] a little bit," Cole said.

Underperforming stocks

The uneven performance of blank-check companies who have already gone public through a merger, known as de-SPAC companies, may deter some potential healthcare targets from taking this route. One indicator of a company's de-SPAC performance is the redemption rate, or the rate at which investors in the SPAC pull out, affecting the company's balance sheet.

After shareholders of Amplitude Healthcare Acquisition Corp. approved its combination with stem cell-focused biotech Jasper Therapeutics Inc. in September, they opted to redeem 9,262,099 shares of Class A common stock, worth a total of $92.7 million, according to a company filing. This gave the de-SPAC company a redemption rate of 92.6%.

Redemption rates can weigh on a healthcare company's decision about whether or not to agree to a SPAC, Rose said.

"It's causing some of the targets to ... really think through the economics of what a de-SPAC transaction looks like for them," Rose said.

Many healthcare companies, particularly in the biotech sector, underperformed in 2021, with the S&P Biotechnology Select Industry Index ending the year down 20.5%. Healthcare companies that have merged with a SPAC are seeing similar return profiles to traditional healthcare IPOs, according to Jonas Grossman, managing partner and president of Chardan Capital Markets.

Zymergen Inc., a biotech that went public via an IPO in April, saw its share price plummet 77.3% by year-end following issues with one of its products, while bioengineered human tissue company Humacyte Inc., which went public via a SPAC in February, dropped 40.6%.

"If you take a step back and look at performance ... by our metric [traditional healthcare] IPOs are looking at a mean return of negative 19% and a median of down 26% year-to-date," Grossman said in a December interview. "That's the backdrop of increased uncertainty in and around the space, a new FDA commissioner, the drying up a little bit of M&A and a few other things that have played through."

Another possible reason for poor post-transaction performance is the nature of the companies themselves, Alvarez & Marsal's Cole said. Two of the most popular healthcare targets for SPACs are biotechs and digital health.

"Those are businesses that can go south very quickly," Cole said. "If you're a biotech drug discovery business and you've got one or two key products seeking FDA approval, and those don't work out or the timeline gets slowed down, the market is not going to react favorably."

'Speed and certainty'

The largest SPAC in the second half was Amsterdam-listed Odyssey Acquisition SA, whose combination with London-based AI drug discovery company BenevolentAI Limited — which has an ongoing collaboration with AstraZeneca PLC — was also the largest European SPAC merger to date at $355.3 million, according to the companies' December press release.

Among SPACs primarily focused on health tech, the largest to go public in the period was AfterNext HealthTech Acquisition Corp. The Texas-based blank-check company is backed by private equity firm TPG Capital LP, which has invested in the likes of immuno-oncology drug developer Allogene Therapeutics Inc., valued at nearly $2 billion, and private healthcare software company WellSky Corp.

DTRT Health Acquisition Corp., a SPAC focused on the healthcare services industry, raised $230 million in its September public offering. The blank-check company is focused on home-delivered healthcare for the U.S.' growing elderly population.

"There are a number of outstanding mid- to larger-size companies ready to become public," CEO and Chairman Mark Heaney told Market Intelligence. "The SPAC alternative offers those companies both speed and certainty toward becoming public, thus benefiting from higher earnings multiples and lower cost public capital for expansion."

The SPAC surge seen in the first quarter of 2021 is likely to be a thing of the past, in part because of the disappointing post-transaction performance of some companies, Rose said.

"For certain companies, a SPAC will always be an attractive potential option," Rose said. "But this sort of frenzy is slowly dying down."

SPACs will have years where they are a larger part of the IPO market and years where they are a little bit less, Grossman said.

"That's okay," Grossman said. "It's an interesting pathway for certain private companies."