Why 2021 could be the year of healthcare SPAC deals and the unicorns ripe to go public

Healthcare unicorn exit activity including IPOs and mergers and acquisitions reached record levels in 2020.

Last year, there were seven healthcare unicorns or private companies valued at or above $1 billion, that exited—a clear uptick from the two exits in 2018 and four in 2019, according to market intelligence company CB Insights.

These exits include primary care startup One Medical (January 2020), biopharma company CureVac (August 2020), and cancer liquid biopsy startup Grail (September 2020).

Since 2016, there have been 19 healthcare companies with valuations of $1 billion that have exited the private market, from GoodRx's $12.7 billion public offering to Illumina's massive $8 billion purchase of Grail.

Globally, there are 51 healthcare unicorns that have an aggregate valuation of $118.1 billion, CB Insights reported.

RELATED: Ambulnz latest medical startup to ride the SPAC wave to go public

Based on healthcare investment trends in 2021 to date, CB Insights is projecting that digital health exits are on pace to reach new heights in 2021. Exits could rise 60% quarter-over-quarter, with both IPOs and M&A deals rising to new highs (19 and 60, respectively), in the quarter, the firm said. That compares to 10 digital health IPOs in 2020 and 40 M&A deals, according to CB Insights data.

So far this year, unicorns like 23andMe and Talkspace have announced their exits.

What's driving this uptick in digital health exit activity?

"One word: SPACs. Quarter-to-date, as of Feb. 25, we’ve seen seven digital health SPACs. For context, that’s more than double the number seen in the fourth quarter of 2020 and equal to the amount seen in all of 2020. Before 2020, digital health SPACs were rare," CB Insights senior intelligence analyst Marissa Schlueter told Fierce Healthcare.

As COVID-19 created uncertainty in public markets, 2020 saw a surge in the formation of special purpose acquisition companies (SPACs)—“blank check” shell corporations designed to take companies public without going through the lengthy traditional IPO process.

Since 2020, five late-stage (Series D+) healthcare unicorns—including Butterfly Network23andMe, and Hims—have looked to SPACs as a way to go public, with the potential benefit of a faster, more reliable exit pathway.

"Valuations seem to be at all-time highs for digital health companies given the need to shift to digital solutions during the pandemic, including telehealth, remote patient monitoring, and connected medical devices, and even extending to healthcare software that helps to streamline healthcare administration to make it more efficient and cost-effective," Schlueter said.

RELATED: 23andMe going public at $3.5B via merger with Branson's blank check company

SPAC deals represent a great alternative for some companies that may be less mature in order to navigate to the public markets without a lengthy IPO process, she noted.

Across all industries, SPAC deals outpaced traditional IPOs, according to data from Goldman Sachs. In mid-December, the investment bank reported that 219 SPACS raised $73 billion, representing a year-over-year jump of 462% and outpacing traditional IPOs by $6 billion. IPOs raised $67 billion in 2020, according to Goldman Sachs.

So far in 2021, there have been 145 SPAC deals that have raised more than $44.5 billion, according to data from SPAC Insider. That compares with 55 traditional IPOs that have raised $21.7 billion so far this year, per data from IPO research firm Renaissance Capital.

All signs point to 2021 being the year of healthcare SPACs, Schlueter said, citing CB Insights data. 

With about 53 SPACs actively searching for target companies across the healthcare and life sciences industries according to SPAC Track, the industry could see more startups choose to go public via this exit pathway throughout 2021.

Just this week, another medical startup, Ambulnz, a company that offers medical mobility and transportation services, announced plans to go public through a merger with a blank check company in a deal that will value the combined entity at $1.1 billion.

Based on year-to-date activity, healthcare IPOs could be up 10% in 2021, M&A activity could rise by 35% and reverse mergers, which include SPAC deals, could jump 47% this year, Schlueter said.

Acquisition activity has been particularly robust in the healthcare space, outpacing mergers by more than 10-fold, she said.

"IoT-connected devices have been a notable focal point for manufacturers looking to lean more heavily into remote monitoring—with major players like Boston Scientific, Hill-Rom, and Stryker all making deals in the space. We’ve also seen a lot of activity in healthcare administration and provider workflow automation, a segment experiencing heightened demand right now as healthcare organizations seek ways to radically improve their efficiency and reduce costs," she said.

RELATED: Lyra Health now worth $2.3B on heels of massive funding round

Unicorns to watch

The industry should expect to see more healthcare unicorn exits in the near term. About two-thirds (67%) of the current healthcare unicorns are late-stage and many of these companies will likely look to raise capital from public investors, according to CB Insights.

Overall, across the broader health tech market, there are numerous mature companies with investors seeking exits.

There are several hotly anticipated IPOs this year, including drug development company Atai Life Sciences that aims to make psychedelic drugs to treat mental health disorders. The startup is backed by Peter Thiel and investors plan to take Atai public this year at a valuation of between $1 and $2 billion, according to a CNBC report, citing an industry source that asked to remain anonymous due to the nature of the discussions.

Digital health companies with high valuations that could be in SPAC crosshairs include Babylon Health, K Health, Modern Health, Lyra Health, Virta Health and Hinge Health, Schlueter said.

Babylon offers a digital healthcare app for AI-powered diagnosis and video appointments. The company was last valued at $2 billion during a fundraise in 2019 and has raised more than $600 million to date.

Hinge Health, which launched in late 2014, offers a digital platform that uses wearable sensors and one-on-one health coaching to deliver in-home musculoskeletal therapy. With its latest $300 million funding round, it's considered one of the most valuable startups in digital health.

The company has raised $426 million to date, according to Crunchbase. The latest funding deal values Hinge Health at $3 billion, according to the company. The startup is eyeing a potential initial public offering in 2022.

K Health, which provides patients remote access to health care services through their smartphones, has raised $271 million to date. The startup is valued at $1.5 billion, according to TechCrunch.

Spurred by the demand for mental health services during the pandemic, Lyra Health is now worth more than $2 billion. The startup has raised close to half a billion, or $462 million, to date.

Modern Health is one of the fastest entirely women-founded companies in the U.S. to reach unicorn status, the company claims. Riding the wave of investor interest in virtual behavioral health startups, Modern Health has secured $170 million in less than two years and its valuation hit $1.17 billion.

However, Modern Health is in the midst of a messy breakup between the two co-founders. Co-founder Erica Johnson was terminated from the company after she raised ethical, legal, and liability concerns to a member of the board from Kleiner Perkins. Johnson is now suing both Modern Health and co-founder Alyson Friedensohn for breach of contract, wrongful termination, relation, and defamation.