SPAC madness in healthcare has cooled off

A wave of shell company-led acquisitions of medical companies has subsided as valuations have fallen and funding has dried up.

Special purpose acquisition companies experienced a meteoric rise in 2020 as more medical companies approached these companies with a blank check as an alternative to holding their own initial public offerings. SPACs, which raise money through IPOs and use it to acquire other companies and list them, were involved in 119 deals across all sectors in the third quarter of 2020, totaling $40 billion, according to Bloomberg data analysis by consulting firm RSM.

SPAC led 25 deals worth $4.1 billion so far this quarter, up from 437 deals worth $129.6 billion in the first quarter of 2021.

“The SPAC hype has really died down, but it has still attracted public equity markets to healthcare,” said Matt Wolf, director and senior healthcare analyst at RSM. “We’re seeing an upsurge in SPAC activity, so to speak, but it’s not going away.”

SPACs have attracted biotech, digital healthcare, and provider organizations that want to go public faster while maintaining business share and gaining access to liquidity. Traditional IPOs require companies to make commercial presentations to a multitude of potential investors, while SPAC-related transactions require only one party to be persuaded.

According to some financial experts who question the transparency of the SPAC, due diligence on the SPAC process is not as rigorous as a traditional IPO.

Companies can miss out on networking opportunities if they go the SPAC route. According to Cody Powers, director of ZS Associates, there is also additional due diligence in the IPO process.

“This verification process in terms of equity value means you’re less likely to see supply plummet. The company is worth what SPAC says it’s worth — there’s not a lot of data sampling,” he said.

Senior primary care provider Cano Health, for example, was valued at $4.4 billion when it went public last year through SPAC. Since then, its value on the public markets has more than halved, with the stock trading for less than $6 on Friday, compared to $15 in June.

SOC Telemed, the emergency telemedicine company, will go private again after Patient Square Capital completes the acquisition it announced last month. It went public through a merger with SPAC in 2020.

“Healthcare is not immune to the poor performance of many post-acquisition SPACs – the market has had mixed reactions to some of these deals, including Cano,” Wolf said.

According to the data, the SPAC market in all sectors has cooled down. Jeffreys data.

About three-quarters of the nearly 100 deals announced in the first quarter of 2021 were valued at more than $1 billion. Only one of the nine SPAC deals announced in February was priced like that, according to Jeffreys.

Analysts note that for months, tech company valuations have been declining and funding has dwindled.

SPAC cancellations have skyrocketed in recent months, with more than 20 from the third quarter of last year to mid-February, according to Jefferies.

“This means that these companies do not have all the funding needed for clinical trials. It can have a stigmatizing effect,” Powers said. “Perhaps this made more investors wary, which was reflected in the drop in transaction volumes.”

The SPAC market is expected to recover, but deal numbers and valuations will be below 2020 peaks, analysts said.

Biote, which helps bring patients’ hormone levels back to normal, has decided to go public through Haymaker Acquisition Corp. III after meeting with about 35 SPACs last year.

While the path to the public markets through SPAC has not been faster or easier, Biote’s leadership and operational experience led to Biote’s decision to partner with Haymaker, said Mark Beer, Chairman of Biote.

“We did not accept the highest offer – we had (a letter of intent) a couple of million more. We wanted the best partner to build the company,” he said. “Haymaker management knows more about consumer scaling than we do at the company.”

Beer has been bullish in the healthcare SPAC market, but only for the right company.

“If a company views the SPAC process as a lower bar for going public than through a traditional S-1, I think they will feel headwinds and capital market issues after they get through the SEC gauntlet,” he said.

Approximately 52 SPACs plan to make an acquisition in the healthcare industry, according to RSM’s analysis of public offering applications.

Big privately-backed vendor platforms, including some in behavioral health, may be interested in a SPAC-sponsored public offering, Wolf said.

“Healthcare is a $4.1 trillion industry that consumes 20% of US GDP and is highly fragmented,” he said. “The pandemic has brought about incredible changes and restructuring in healthcare – investors want access to that. Once a private equity-backed platform generates $300 million to $500 million in revenue, someone starts talking about a SPAC or a traditional IPO. “

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