SPAC Mergers Are Viable Funding Tools, But The Test Is Yet To Come

Dozens of health care-focused special purpose acquisition corporations have gone public during the past two years but many biopharma firms that have merged with SPACs have not performed well to date, raising the question of how long the SPAC boom will last.

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Mergers with special purpose acquisition corporations (SPACs) have become lucrative financial transactions for biopharmaceutical firms because they can raise significant capital and become publicly traded companies in a single transaction, bypassing the traditional initial public offering path. However, the performance of drug developers that have taken the SPAC route to date has been largely negative, raising the question of how much longer these transactions will be viable financing options.

There also is the question of whether there are enough biopharma firms available to meet SPAC demands. Dozens of SPACs focused on health care and life science opportunities have gone public in the US since the start of 2020 and each one has a limited amount of time to complete a transaction – usually about two years. But with drug developer IPOs in the US occurring in record numbers and big pharma firms on the hunt for innovative companies, SPACs have a lot of competition for deals.

SPACs, otherwise known as blank check companies, launch IPOs to raise money that they hold in trust until they merge with another entity. The target company uses the SPAC’s cash to fund its ongoing operations and takes over the blank check firm’s stock market listing, going public without having to execute an IPO of its own. Companies often close private investment in public equity (PIPE) financings concurrent with the SPAC deal, increasing the cash consideration of these transactions.

Matt Toole, director of deals intelligence at financial data provider Refinitiv, said SPACs last became popular in 2007, at the height of the bull market in the 2000s. Increased mergers and acquisitions alongside a boom in IPO activity, and at a time when private equity and other investors are flush with cash – as has been seen in 2020 and 2021 – tended to boost SPAC activity, Toole explained.

“We also have seen many of the acquisitions taking place in some of the more niche or experimental sectors – so biotech, but also sustainability,” he said. “For a SPAC who has industry expertise or has the know-how potentially to take on some of these names, you might see some more of that activity.”

SPAC Merger As An Alternative To An IPO

Experts who have taken SPACs public, who have advised companies considering a SPAC merger and who track SPAC activity agree that this path to the stock market offers an attractive financing alternative for relatively high-risk companies – for example, firms with novel technology that may be years away from generating revenue, like companies involved in drug development or sustainable energy. These companies, despite raising venture capital successfully in the past, may have a hard time enticing traditional IPO investors.

“We think SPACs are a very innovative and flexible instrument for private companies to go public,” Jonas Grossman, managing partner and president at the investment bank Chardan, told In vivo.

Chardan has underwritten more than 90 SPACs, advised both SPACs and companies considering a merger, and sponsored multiple SPACs. Grossman was president and chair of Chardan Healthcare Acquisition 2 Corp. until the SPAC closed its merger with Renovacor Inc. in September 2021. The deal raised $95.1m for Renovacor’s gene therapy development programs.  (Also see "Finance Watch: Prepare For September IPOs To Rebound From August Slowdown" - Scrip, 3 Sep, 2021.)

Are You Ready To SPAC?

Vasilios Kofitsas of Back Bay Life Science Advisors said he runs through several key questions with biopharma clients considering a SPAC deal:

• Does the company have a good story to tell about its technology platform or drug candidates?

• Does the firm want to be a public company, which has a different structure and financial reporting requirements?

• Are the executives ready to lead a public company and be accountable to stock market investors?

• Will the company have a consistent flow of news coming over the next 12 to 18 months and through the next three years to keep investors interested?

• Can the company effectively deploy the large amount of capital it may raise in a SPAC deal in a reasonable amount of time?

“Going in at a high valuation is great,” he said. “Are you able to sustain it, is a whole different question.”

Vasilios Kofitsas, managing director in the investment banking group at Back Bay Life Science Advisors, said almost every financing discussion he has had with a private company board of directors during the past year and a half has included an evaluation of SPAC opportunities. The speed of a SPAC versus an IPO process is compelling, and the combination of cash held in trust by the SPAC plus a concurrent PIPE financing is attractive as well. “All of a sudden it’s not out of the question to have $200m to $300m in the bank coming out of the deal,” he said.

Grossman said there had been very little innovation in the typical IPO for decades, SPAC deals gave companies an alternative route to the stock market with potentially less downside. “It's a risky proposition for private companies [to launch an IPO]; they spend a lot of money and they are at the vagaries of the market,” he said.

Valuations Are In Flux, But SPACs Still Are Active

Biotech company valuations have fluctuated wildly in 2021 with the Nasdaq Biotechnology Index up as much as 15% year-to-date at different points in February, August and September but down as much as 3% from the start of the year in February, March and May. The NBI was up 1.5% year-to-date as of 19 November.

Similarly, the average return for biopharma companies that launched IPOs in the US in 2021 has fallen from 11% for the 32 firms that went public in the first quarter to 1.1% for the 62 drug developers that priced IPOs through the second quarter. The average return turned negative for the 88 companies that went public through the end of the third quarter at -4%. (Also see "IPO Update: Average Return Turns Negative For Newly Public Biopharma Firms" - Scrip, 4 Oct, 2021.)

Nevertheless, SPACs continue to go public in the US, including health care-focused blank check companies. SPAC Track, an online database that founder Nick Gershenhorn began putting together in 2020 to track the SPAC market, reported that as of 19 November there were 662 active SPACs that had raised a total of $183.1bn in their IPOs. That includes 85 active SPACs that have raised a total of $20.9bn and have listed health care as at least one industry in which they are pursuing a deal.

Among the active health care SPACs, 69 are searching for a merger target and 16 have announced a definitive merger. Another 34 health care SPACs are in the pre-IPO stage.

SPAC Track’s Gershenhorn said that, ideally, a SPAC should merge with a company that did not really need the deal or the money but wanted to access the SPAC team’s specialized expertise.

“You really – especially in health care, which is so specialized – do want folks [in the SPAC] that know what they're doing and have done several health care deals and can be effective partners to this target company that they're merging with,” he said. “Because then you really know that you have someone in there that's experienced and knowledgeable, that will be there, helping them grow and realize the business plan that they laid out in the investor materials.”

Depending on the quality of the SPAC sponsor there were plenty of merger targets available, Gershenhorn said. However, he added, “The issue is being able to identify them or come up with other innovative ways to make it work. Because if we were just looking at the US alone, for instance, of private companies, then I would say maybe there isn't enough to accommodate the demand … But when you factor in the international opportunity, there's tons of great companies from tech to health care in Latin America, Asia, Europe, so there's a lot of opportunity there.”

Spinouts, where large corporations divest divisions or subsidiaries that are underappreciated under the parent company, also have been a source of SPAC deals. “You need quality sponsors to be able to effectively carry that out,” Gershenhorn noted.

Grossman said there likely were plenty of biotech opportunities to choose from for those with a focus on drug developers or device and diagnostic firms. He estimated that there were more than 100 and maybe as many as 200 later-stage biotech companies that could be a good fit for a SPAC deal, but agreed that a SPAC’s search for a merger target may have to extend outside of the US.

Biotech SPAC Deals Still Need To Show Their Worth

In addition to finding interesting companies at compelling valuations to make a SPAC merger work, Grossman said the space also needed a longer track record of post-merger stock performance for biotech companies that had gone public through a SPAC merger. “They do need to come up with good data and start trading well, and then that'll be a driver of renewed interest,” he said.

Only seven of the 24 biopharma companies that have completed SPAC mergers were trading above the SPAC’s stock price when the deal closed as of 19 November, according to In Vivo’s analysis, resulting in an average return of -12.3% (see Exhibit 1). Some companies that have gone public via SPAC have had setbacks contributing to their valuation declines.

For instance, Gemini Therapeutics, Inc. announced a corporate restructuring on 5 October, and its stock was down 74.5% as of 19 November versus Gemini’s stock price when it merged with a SPAC known as FS Development Corp. in February. The company shut down its R&D operations except for employees working on the late-stage development of GEM103, a complement regulator for the treatment of geographic atrophy in genetically defined age-related macular degeneration.

The volatility in biotech stock values is making some SPACs reevaluate their deals in the space. Valo Health LLC, which is using human-centric data and artificial intelligence to power its drug discovery and development platform, and Khosla Ventures Acquisition Co. (KVSA), a SPAC sponsored by affiliates of Khosla Ventures LLC, revealed on 15 November that they had mutually agreed to terminate their merger, which had been announced back in June. (Also see "Finance Watch: Janux Offering Makes 47 Biopharma IPOs In 2021, So Far" - Scrip, 12 Jun, 2021.)

Valo and KVSA ended the deal, they said, “based on current market conditions, particularly in the biotechnology arena.” KVSA plans to reinitiate its search for a merger target across a range of industries.

“There are some very prolific SPAC issuers that might have more of a track record that maybe they are able to get deals done where some of the other kind of one-offs, maybe they're not able to do so,” Refinitiv’s Toole said. “A lot of times you will see SPACs kind of changing strategy. They might say that they're after a certain type of acquisition but then it makes a totally different one in a different sector.”

Valo, which would have brought in up to $501.5m through the SPAC merger, is sticking with its plan to launch its first Phase II clinical trial this year and a second Phase II trial in the first half of 2022. The company has a strong balance sheet without the SPAC deal after closing a $300m series B venture capital round in March. (Also see "Finance Watch: Cell And Gene Therapy Firms Raised Nearly $20bn In 2020" - Scrip, 17 Mar, 2021.)

Gelesis Sees Value Beyond Cash In Pending SPAC Deal

In another reassessment of a SPAC transaction, Capstar Special Purpose Acquisition Corp. announced on 10 November that the implied equity value of its merger target
Gelesis, Inc.. had been reduced from $900m to $675m. The terms of the $366m transaction have not changed; Gelesis still is expected to receive $276m in cash held in trust by Capstar and $90m from a concurrent PIPE financing. (Also see "Finance Watch: The Bigger The Better? Erasca, Imago Rise After IPOs" - Scrip, 19 Jul, 2021.) Gelesis will use the cash to fund the launch of its US FDA-cleared weight loss aid Plenity.  (Also see "Gelesis's Obesity Product FDA Acceptance Gives Boost To PureTech's Portfolio " - Scrip, 15 Apr, 2019.)

“In our assessment, the true value of a SPAC comes from working closely with a partner whose expertise aligns with the needs of the business,” Gelesis CEO and founder Yishai Zohar told In Vivo. “We are a biotech company building a consumer brand with Plenity, which is a completely new approach to weight management. We are doing things very differently and we wanted a partner that could complement our areas of expertise. Going public via SPAC allowed us to benefit from the Capstar team’s unique consumer brand-building expertise in an intimate way, which simply would not have been possible with an IPO or another fundraising vehicle.”

Zohar said Gelesis will use the capital from its SPAC merger to fund the commercial launch of Plenity and expand manufacturing capacity to meet consumer demand. More than 60,000 customers tried Plenity in a beta product launch last year and Gelesis had been selling out of the weight loss aid as quickly as the company could manufacture it, he noted.

Exhibit 1.