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Spurred by the COVID-19 pandemic and the virtual care boom, special purpose acquisition companies have been on a red-hot streak, triggering a whirlwind of public exit activity for healthcare and digital health startups.
SPACs, also known as blank-check companies, allow an operating company to list on the public market through a reverse merger.
As COVID-19 created uncertainty in public markets, 2020 saw a surge of new shell corporations designed to take companies public without going through the lengthy process of a traditional IPO. SPACs can offer a quick way to lock in valuation and deal size, experts say.
The craze hit a peak of 40 healthcare and life science IPOs for the first quarter of 2021—raising a combined total of $11 billion—before dropping to eight in the second quarter, according to S&P Global Market Intelligence data.
And these SPAC-powered deals are pumping a lot of cash into the market. Healthcare SPACs raised $11.1 billion in 2020, excluding additional financing from private investment in public equity (PIPEs) upon deal announcement or closing, according to a report from Evercore.
In 2021 so far, SPAC companies raised $12.7 billion in the first quarter and $3 billion in the second quarter, Evercore reports—a record-setting total of $15.7 billion.
This compares to $500 million, $600 million and $1.8 billion raised by healthcare SPACs in all of 2017, 2018 and 2019. The average healthcare SPAC raises $250 million.
SPAC frenzy quiets—a bit
SPACs will likely remain a popular financing vehicle for the biotech and digital health sectors. There are more than 60 healthcare SPACs still looking for targets, Evercore reports.
And those 60-plus SPACs have a time limit. A SPAC must typically acquire its target within a two-year window, or it's forced to return money to its investors. So, the market should expect a significant number of healthcare and biotech SPAC mergers in the next two years, Evercore ISI biotech analyst Gavin Clark-Gardner told Fierce Biotech in an interview.
"I'd say about a third of the biotech SPACs out there looking for targets now launched in the latter half of 2020 and the other two-thirds launched throughout 2021. There's still a couple of years before a lot of these, at least in biotech and healthcare, hit their deadlines," he said.
Still, even though there is a large amount of capital locked up in SPACs, it's yet to be determined whether there are enough solid targets, Evercore noted.
Already the pace of SPAC mergers has slowed from the first-quarter boom. Clark-Gardner's firm blamed increasing regulatory scrutiny and a lack of accountants and lawyers needed to make the mergers happen. The huge bolus of Q1 deals has a lot of that talent tied up.
Experts also have attributed the drop-off to a rebalancing of the market after over-saturation in the first quarter.
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Digital health is a SPAC magnet
In the digital health market specifically, SPACs are officially a “hot” exit vehicle. The first three and a half months of 2021 have already seen more completed or announced public exits by digital health companies than in all of 2020, Rock Health reports. Digital health companies have been the target of 13 completed or announced SPAC mergers over the past 15 months, with 11 of these completed or set to close in 2021.
"The SPAC surge is just one component in accelerating demand for the digitization of health. SPACs are just one form of financing transactions. There is a growing awareness around telehealth and technologies. The horse is out of the barn, so to speak," Peter Micca, national health tech leader at Deloitte told Fierce Healthcare.
"We’re also seeing increasing M&A activity, private equity investment, an increase in corporate venture capital, as well as alliances amongst well-established healthcare organizations and acquisitions involving non-traditional market participants and emerging growth companies," he said.
The common denominator in the healthcare SPAC craze is technology, Micca said, accelerated by the digitization of healthcare.
SPACs under the microscope
SPACs have been marketed as a way to go public more quickly and easily, but these deals also are attracting increased scrutiny.
Shareholder lawsuits against post-merger SPACs rose to 19 through the first half of 2021, tripling from just five in all of 2020, according to data from Woodruff Sawyer, the Wall Street Journal reported. The legal action targets blank-check companies whose deals have gone south or which may have violated investment regulations.
Tech-enabled health insurance company Clover Health and healthcare services firm MultiPlan have both been hit with class-action lawsuits by investors after going public. The investors allege that inadequate disclosures led to an overvalued transaction in those deals.
But 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 the industry, according to S&P Global Market Intelligence.
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