Special-purpose acquisition companies (SPACs), once considered the province of scam artists and shady dealers, are the latest trend to hit the public markets and the scientific world as companies seek to go public more quickly and avoid some of the disadvantages of a traditional initial public offering of stock.
The trend has been pronounced in the life sciences genomic tools and diagnostics industries, where initial public offerings aren't as plentiful as some other markets, like biopharma. In February alone, four firms in the tools and molecular diagnostics industries announced that they've decided to go public using the SPAC mechanism.
The question now is whether this trend is likely to continue or if this is just a momentary fad.
SPACs, also commonly referred to as blank-check companies, are shell corporations formed specifically for the purpose of acquiring existing firms and taking them public. They originally existed in the 1970s and 1980s, largely as vehicles for pump-and-dump schemes, forcing the US Securities and Exchange Commission to make regulatory reforms to crack down on them.
In 1993, the SPAC was revived by investment bankers at GKN Securities, which later became EarlyBirdCapital. The new SPACs complied with the stricter regulations, but the mechanism retained some of its earlier bad reputation. It wasn't until the Great Recession of 2007-2008 that investors began to turn to SPACs to bring private companies public as a way of avoiding the brutal market volatility generated by the crash.
SPACs themselves do not make anything or sell anything — they are simply vehicles by which a company can gain access to public markets. In basic terms, a SPAC is formed by a person, a group of people, or an established company such as an investment firm, and then raises money for its own initial public offering. Once the SPAC closes its IPO, it goes public on the New York Stock Exchange or the Nasdaq under an approved ticker symbol.
The money raised by the SPAC through the IPO is then used to acquire a target firm. The firm being acquired then becomes a public company, and the SPAC's name and ticker symbol changes to reflect the newly public firm's name.
The SPAC has a set time limit, usually two years, to make the acquisition. If it doesn't make a deal within that timeframe, then the SPAC is liquidated and the investors get their money back.
In comparison to a traditional IPO, taking a company public through a SPAC has several advantages. For one thing, it's significantly faster — while an IPO can sometimes take a year or two to complete, a company can go public through a SPAC in the space of three of four months. Another advantage is that the private company's executives have the ability to negotiate a set valuation for the firm with the SPAC sponsors without having to worry about the volatility of the market or the whims of investors.
In fact, it's likely that the huge swings in the market in 2020, caused by the COVID-19 pandemic and general political upheaval in the US, drove a higher interest in SPACs. A January report from financial services firm Morningstar noted that "sustained volatility" last year made IPOs and direct listings impractical for many private companies that may have been looking to go public. SPACs were probably a good second option.
"It's hard to say anything definitively, but there were hypotheses that SPACs would become more prominent in an economic downturn because there would be available capital that could be utilized in a period where it might have been difficult to raise capital," Alex Zuluaga, a partner of financial accounting advisory services at Ernst & Young, told GenomeWeb. "There had also been an uptick in SPACs prior to the pandemic, so it would appear that COVID-19 just kick-started their acceptance."
Indeed, online resource SPACInsider.com noted that 59 SPACs went public in 2019, raising a total of $13.60 billion. But that number jumped to 248 SPACs in 2020 for a total of $83.04 billion raised. So far, 186 SPACs have gone public in 2021 with $58.86 billion at their disposal to make acquisitions.
Of these 186 deals were the four acquisitions of prominent life science companies that came within days of each other this month.
On Feb. 4, consumer genetics and ancestry firm 23andMe said it signed an agreement to merge with VG Acquisition Corp., a SPAC sponsored by Virgin Group. Once the transaction is complete, which the partners are estimating will occur in the second quarter, VGAC will change its NYSE ticker symbol and the combined company's shares will trade under the ticker symbol ME.
The merger places 23andMe's enterprise value at approximately $3.5 billion, the company said. The transaction is expected to deliver up to $759 million of gross proceeds through the contribution of up to $509 million of cash held in VG Acquisition's trust account and a concurrent $250 million private placement of common stock. Virgin Group Founder Sir Richard Branson and 23andMe Cofounder Anne Wojcicki are each investing $25 million in the placement.
That announcement was followed by one made by Nautilus Biotechnology on Feb. 8, which said it was merging with a SPAC called Arya Sciences Acquisition Corp III. Nautilus expects to receive $350 million in proceeds from the deal, including a $200 million private investment in public equity (PIPE) transaction.
Once the transaction closes, Arya III will redomicile as a Delaware corporation, be renamed Nautilus Biotechnology, and start trading on the Nasdaq under the ticker symbol NAUT. The deal is expected to close in the second quarter with proceeds from the deal going towards developing the company's proteomics platform, and growing its scientific, engineering, and commercial teams.
Shortly thereafter, on Feb. 10, precision medicine test developer Sema4, which has been compiling a database of millions of integrated genomic profiles and de-identified clinical records from patients, said it had signed an agreement to merge with CM Life Sciences, a SPAC sponsored by affiliates of Casdin Capital and Corvex Management. The merger places Sema4's enterprise value at approximately $2.0 billion, the company said.
The transaction is expected to deliver up to $793 million in gross proceeds, including up to $443 million of cash held in CM Life Sciences' trust account from its IPO in September 2020 and $350 million from committed PIPE funding from a group of institutional and life sciences investors, including funds advised by Casdin Capital and Corvex Management.
And on Feb. 18, proteomics firm Quantum-Si announced a merger with SPAC HighCape Capital Acquisition Corp. Quantum-Si said it expected to receive $425 million via a PIPE transaction from investors, and that the pro forma equity value of the business combination would be $1.46 billion.
"Some considerations you have with a SPAC include the speed of the transaction, the use of projections in public filings, and the ability to understand pricing [and] value, and liquidity earlier in the process than with an IPO," Zuluaga said. "For certain companies, they may also find it advantageous to have access to SPAC sponsors for their expertise in the industry."
Indeed, the four companies said some or all of these factors drove their decisions to go public through SPACs rather than through IPOs.
"For Nautilus, the decision to go public now is largely driven by the potential for greater access to capital in the public markets and the increased visibility we could enjoy as a public company. For us, using a SPAC versus a traditional IPO was primarily about the potential for speed, efficiency, and the ability to deepen our relationship with a strong syndicate of investors, led by Perceptive Advisors," Nautilus CEO Sujal Patel said in an email to GenomeWeb. "In biotech, where speed is a competitive advantage, the ability to achieve this important funding milestone as quickly and efficiently as possible could enable us to focus more of our team's time and energy on accelerating our platform development and establishing meaningful long-term collaborations and partnerships."
Meanwhile, Sema4 CEO and Founder Eric Schadt, as well as a spokesperson from 23andMe, highlighted the importance of gaining access to unique and valuable expertise and partnerships. In an email, Schadt said the merger with CM Life Sciences would be a "unique opportunity to accelerate [Sema4's] development in multiple ways," specifically noting that the SPAC had been formed by Keith Meister and Eli Casdin, who he called "both renowned leaders who appreciate Sema4's vision and share our passion to advance healthcare through data-driven insights."
The deal will help strengthen Sema4's balance sheet, Schadt noted, and it will also give the company access to "several of the leading minds in our industry via the new board members that CM brings to the table, specifically Eli Casdin, Nat Turner and Emily Leproust."
Similarly, 23andMe's spokesperson said that the company's deal with VG Acquisition Corp. not only brings in additional capital that can fuel future growth plans, but it also gives the firm a chance to partner with "a great team" who have "a similar vision of reimagining industries driven through a consumer-centered approach." The statement also specifically highlighted the opportunity to partner with Richard Branson, calling it "extremely attractive, as he was an early investor in 23andMe and shares our vision of empowering consumers and revolutionizing personalized healthcare."
For Quantum-Si Founder and Executive Chairman Jonathan Rothberg, speed and freedom to operate seem to have been two major attractions of the SPAC model. "SPACs provide companies with an accelerated path to the public markets and access to capital," he said in an email. "In our case, the SPAC with HighCape Capital Acquisition Corp. provides us with greater access to capital without forcing us into a box — platform vs. application. We can use the capital to do both and build out our entire vertical value chain that could disrupt an existing addressable $21 billion market of pharmaceutical, academic research, and drug discovery, with the potential to enable new diagnostic applications in healthcare."
The downside of SPACs?
There may be disadvantages to the SPAC model, however. Once a SPAC decides on an acquisition target, SPAC investors have the right to redeem their shares in the SPAC rather than become shareholders of the combined company. According to Zuluaga, one potential disadvantage of the SPAC model over the IPO model is that "too many redemptions… could crater the deal." However, he added, this type of risk is typically mitigated through the use of a PIPE or some other backstop.
There is some skepticism. In 2020, investment firm Muddy Waters published a research note calling SPACs "the great present-day money grab." Using one SPAC as an example, the note warned that "egregious mistakes will be made" in the excitement over SPACs, such as oversights in due diligence.
But for the most part, analysts seem to agree that the risks can be managed. The international network of public accounting, tax, consulting and business advisory firms BDO put out a note in December specifically about the increasing attractiveness of SPACs to life science companies.
"For cash-intensive life sciences businesses, SPACs also have the potential to be a larger financing opportunity, which is particularly attractive when commercialization may be years away," BDO said.
The main disadvantage BDO pointed to was the regulatory framework and the paperwork that's involved. SPAC sponsors and target companies have to fulfill a rigid and complex set of requirements, and failure to do so can lead to serious consequences.
"SPACs must comply with recurring SEC filing requirements, despite having little-to-no operations — failure to file on time can affect the historical filing requirements of the future target financials," BDO said, adding that "the list of requirements for target companies is no less daunting."
The requirements certainly aren't impossible to fulfill, the firm said. But the companies have to know what they're getting into and have to have the right paperwork, people, and structures in place and be ready to go.
It also wouldn't hurt to stay as up to date as possible on SEC regulations. "As this is a topic that is getting increased attention in the press and marketplace, it would not be a surprise for regulators to consider whether the regulatory framework continues to function appropriately, given the increased volume of transactions," Zuluaga said.
As to the question of whether the life science industry will be seeing another spate of SPACs, that seems likely. "It appears that now that there has been an acceptance of the vehicle, it will continue to be a way for companies to utilize and access capital," Zuluaga said. "It remains to be seen whether the volume will continue, but it does appear to be a path that can be seen as an alternative to capital decisions."
Also, he added, any industry that can tell "a favorable equity story" is conducive to a SPAC. And given the stock performance of some life science companies in the past year, it's hard to argue that the life science industry doesn't present a favorable equity story.
So, for now, at least, it looks like the industry can expect to see a few more companies go public through SPACs — maybe even in the very near future. On Thursday, two SPACs filed for IPOs as a prelude to making acquisitions that'll take other companies public.
One is Orion Biotech Opportunities, a SPAC formed by MSD Partners and Panacea Venture targeting the biotech and life science sectors. Orion plans to raise up to $200 million in its IPO by offering 20 million units at $10 each. Each unit consists of one share of common stock and one-fifth of a warrant, exercisable at $11.50. The company may raise an additional $20 million at the closing of an acquisition pursuant to a forward purchase agreement with MSD Partners. At the proposed deal size, Orion would command a market value of $250 million.
The company is led by CEO and Director James Huang, who is also the founding managing partner of Panacea Venture; Vice President Chrystyna Stecyk, the cofounder and principal of Griffin Securities; and CFO Mark Kayal, who is currently the senior controller of MSD Partners. The company said it plans to target the biotech and life sciences industries, focusing on healthcare companies in North America, Europe, and Asia that are developing novel therapies or technologies.
The other SPAC that filed for an IPO on Thursday is CM Life Sciences III, the third blank check company formed by Casdin Capital and Corvex Management specifically formed to acquire a life science firm. Casdin's latest SPAC plans to raise up to $400 million by offering 40 million units at $10. Each unit consists of one share of common stock and one-fifth of a warrant, exercisable at $11.50. The company may raise an additional $150 million at the closing of an acquisition pursuant to forward purchase agreements with Casdin Capital and Corvex Management. At the proposed deal size, CM Life Sciences III would have a market value of $500 million.
The company is led by CEO and Director Eli Casdin, founder and CIO of Casdin Capital; and Chairman Keith Meister, the founder, managing partner, and CIO of Corvex Management. They specifically plan to target companies in the life science tools, synthetic biology, and diagnostics fields.
Also on Thursday, CM Life Sciences II, the second SPAC sponsored by affiliates of Casdin Capital and Corvex Management announced it had closed its $276 million IPO. The SPAC had initially filed for a $200 million IPO on Feb. 1, and then upsized the offering to $240 million on Tuesday. The company sold 27.6 million units at $10 each, including 3.6 million units issued pursuant to the exercise in full by the underwriter of its over-allotment option. The units are listed on the Nasdaq under the ticker symbol CMIIU.
The SPAC said it intends to target life science tools, synthetic biology, and diagnostics companies for acquisition. Casdin did not return a request for an interview.
This story first appeared in our sister publication, Genomeweb.
