Healthcare- and biotech-focused blank-check firms, or special purpose acquisition companies, are increasing in number thanks to the bullish stock market and the pandemic, but market saturation lurks around the corner, an expert told Crain's.
SPACs are shell companies that are publicly listed on stock exchanges for the purposes of acquiring a firm. Investors fund these entities and typically expect them to make an acquisition within two years of being listed in order to receive a speedy return on their investment. The investors then become shareholders in the acquired company. Many SPACs have specific industries they mine for acquirable firms.
The challenge for these companies is finding an industry focus that is attractive to investors now and will remain so a year or two down the line, said David Feldman, a securities lawyer at Hiller PC.
Healthcare has been popular for a while, but its profile has certainly been elevated recently, Feldman noted. The overall strong IPO market has boosted all sectors, however. October was a record month for the number of SPACs that went public, with 50 companies raising nearly $17.5 billion, according to a Bloomberg Law report in November.
The pandemic has accelerated trends within the healthcare space, especially for telemedicine and virtual health firms.
"These companies are now a standard for treatment after having faced restrictions for years, and many are now attractive for acquisition," Feldman said.
Locally, healthcare–focused SPACs have seen a bunch of recent activity. In July Midtown-based Healthcare Merger Corp. acquired Reston, Va., acute care telemedicine provider SOC Telemed for $720 million, and Midtown-based KBL Merger Corp. raised $115 million to merge with Palo Alto, Calif., pharmaceutical company CannBioRx, renamed 180 Life Sciences.
July also saw Midtown-based Churchill Capital Corp. III merging with Flatiron District–based healthcare cost-management solutions provider Multiplan for $11 billion, one of the biggest to date. On Nov. 19 Midtown-based Longview Acquisition Corp. acquired Guilford, Conn., medical imaging company Butterfly Network for $1.5 billion.
Multibillion-dollar deals tend to be outliers, though, and most SPACs aim to raise in the sweet spot of up to a couple hundred million, Feldman said.
World Trade Center–based 10X Capital Venture Acquisition on Nov. 24 announced its $175 million IPO. It intends to acquire a firm in the healthcare, consumer internet, e-commerce, software or financial services industry. Princeton, N.J.-based Consonance-HFW Acquisition Corp. on Nov. 18 priced its $80 million offering and will focus on the healthcare industry, particularly the biotechnology sector in developed countries.
It is commonly accepted by investors that SPACs should acquire a company with a valuation that is 80% of the amount raised from investors. This has led to blank-check companies becoming more modest in the amount they aim to take in.
"After all, there are only so many billion-dollar companies to be acquired," Feldman said.
Although SPACs will continue to pop up for some time, the market is facing saturation, he noted. "They're starting to fight for deals with each other."
As blank-check companies are not beholden to their industry focus, any SPAC can acquire healthcare and biotech companies as long as investors sign off on the deal, he said. This adds to competition.
For example, cannabis-focused SPACs have raised billions in the past year or so, and for some, their time limit for acquiring a company is nearly up, Feldman said. These SPACs could look into acquiring in the biotech firm space instead, which traditionally has deals amounting to hundreds of millions of dollars, he noted. According to a report from cannabis investment firm Viridian Capital Advisors, there are nearly $2.6 billion in IPO proceeds from 10 cannabis SPACs that need to be used in the next 15 months.
"At some point, there is such a thing as too many SPACs," Feldman said.
"Health-related blank-check firms boom during pandemic" originally appeared in Crain's New York Business.