SPACs After the Boom: Are Special Purpose Acquisition Companies Still the Best Fit for Biotechs?

Written by: Paul Cashman

This time last year, Special Purpose Acquisition Companies (SPACs) were the fastest-rising trend in American biotech, and Europe looked ready to follow suit. One hundred billion dollars of US stock had been issued through SPACs between January and May, with life sciences’ rapid innovation and quick time-to-market potential making it one of the hottest sectors. Just $3.9 billion was issued in Europe over the same period. Change seemed imminent, however, as that number represented a phenomenal 780% increase overall in 2020. This new way to go public looked set to become the future of biotech.

Then biotech lost momentum. On both continents, share prices fell 20-40%. Companies that had gone public through SPACs performed slightly worse on average than those relying on traditional IPOs. At present, interest in SPACs is dropping, prominent deals are falling through, and there’s speculation we might see a complete return to standard IPOs.

Our view is that this is unlikely, for two reasons. First, investor interest has fallen across the market; the downturn is more about correcting overvaluations from the COVID-19 pandemic than it is about SPACs themselves. New deals are coming slowly but company creation remains strong, and well-positioned enterprises should have no trouble riding out the headwinds. Total sector investment in the UK, despite the end-of-year slowdown, was up 60% YoY. We believe that The drop in SPAC activity stems from the same factors behind the drop in IPOs – companies are choosing to stay private, focus on product development, and wait for market conditions to stabilize before going public. As a result, we’re seeing SPAC sponsors raise money only to find themselves unable to secure an acquisition target.

The second reason SPACs are likely to stay on the scene is their significant advantages over other routes to public trading and the liquidity that can offer. Investors and executives have become much more experienced at using them, and so better at identifying when they are the right choice.

When to Use SPACs

Although the differences between SPACs and traditional IPOs are nuanced and complex – and vary substantially between markets – the general reasons for using them are clear.

First, going public through a special purpose acquisition company is useful when a company needs faster access to public markets. Standard IPOs typically take 8 months or more, but the acquisition and de-SPAC process can happen as quickly as 3 months. This is especially useful for smaller companies that may benefit from being publicly traded but lack the resources, connections, or positioning to successfully navigate an IPO.

Second, a SPAC gives access to a deep pool of outside expertise in navigating capital markets. The SPAC’s sponsors – investors and industry experts responsible for its fundraising, launch, and target search – are closely involved in negotiating the acquisition and preparing the company for public trading. Typically they become significant shareholders, and they can even step into leadership roles where warranted. The analysis sponsors carry out is less intensive than what underwriters do in a traditional IPO, but their expertise is more general and far more useful for planning ahead. The target company’s leadership can stay focused on development while sponsors handle funding, whereas a traditional IPO demands they invest a great deal of their time in the roadshow.

Last, a SPAC is almost always appropriate where a company’s internal growth and development projections – or other information they are prohibited from sharing with potential investors during an IPO – are critical to assessing its value. These projections can be shared with SPAC sponsors and used as the cornerstone of acquisition negotiations. Founders thus retain much more control over their valuation.

We predict the sector’s use of these adaptable, powerful tools will keep evolving. They may come to sit alongside acquisition by major pharmaceuticals as an exit option for startups. Existing SPACs that have yet to find a target will allow some companies to go public instead of waiting for a rising market to return. And, more generally, their speed and flexibility make them a strategic tool with enduring value.

To discuss this topic further, we invite you to reach out to Paul Cashman!