Spotlight: The Rise of the SPAC in Biotech

What’s a SPAC?

Special Purpose Acquisition Companies have become more popular in recent years despite being around for decades. The company has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.

SPAC founders usually have at least one acquisition target in mind, but they don’t identify that target to avoid extensive disclosures during the IPO process. This is why they are called “blank check companies.” This lack of information often results in SPACs needing to offer warrants in addition to their stock to initial investors. Warrants are securities that entitle the holder to buy more stock of the issuing company at a fixed price at a later date. These securities are often attached to shares of the SPAC as a means of sweetening the pot for initial investors.

Investors in SPACs can range from well-known private equity funds to the general public but both groups must have their money returned to them if the SPAC fails at the IPO more than 2 years after the start of the process.

Recent SPACs

SPACS work as a great way for business owners to have a faster process to go public than a traditional IPO and offer the additional benefit of an experienced partner for the transitioning company. SPACs have become more common in recent years, with their IPO fundraising hitting a record $13.6 billion in 2019—more than four times the $3.2 billion they raised in 2016. They have also attracted big-name underwriters such as Goldman Sachs, Credit Suisse, and Deutsche Bank, as well as retired or semi-retired senior executives looking for a shorter-term opportunity.

In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.

What Does This Mean for Biotech?

According to NASDAQ, SPACs make up just over 1/3^rd of all IPOs across most industries. This dramatic increase in occurrence compared to when SPACS first came about for the biotechnology industry as well.

Chardan Healthcare Acquisition took BiomX (NYSEMKT:PHGE) public in 2019. BiomX was the only Biotech firm to be taken public that year. The company is known for microbiome product discovery and working to produce treatments for inflammatory bowel disease. The success of closing that deal inspired other companies to go this route in 2020. Venture-backed private companies are increasingly considering the SPAC route. For example, SPAC RTW Health Sciences successfully took public Immunovant (NASDAQ:IMVT) and has maintained its stock price so far.

Examples like these show that SPACS can indeed work for Biotech companies. Some possible reasons for this can include advantages such as speed to market and lack of greenshoe options (underwriter options that allow the sale of additional shares that a company plans to issue in an IPO). Greenshoe options can often clash with what is best for the company going public by encouraging them to go to market at a cheaper valuation when compared to what they could get was the underwriter not able to exercise the greenshoe option. This is done by the underwriter taking advantage of the “pop” (extra price above the IPO price on the first day of trading). Banks disregard complaints and price the IPO to allow for a “pop” to compensate early investors who take on more risk. A large “pop” allows banks to issue more shares to stabilize the price. As a result, the company leaves money on the table since they raised capital at a much cheaper valuation. SPACs avoid this problem and are quicker to market.

References

1. https://www.wsj.com/articles/blank-check-boom-gets-boost-from-coronavirus-11594632601

Author

Eduardo Longoria