The slow death of the medtech Spac deal
The remarkable thing is that these tie-ups are still occurring, so atrocious is their track record.
Two years ago private device makers’ ardour for going public via a merger with a special purpose acquisition company was at fever pitch. As market sentiment sank into despondency over the course of last year, enthusiasm slackened and medtech Spac deals slowed from a flood to a trickle.
The performance of the 26 medtechs that went public via Spac deals over the last two years has been woeful. Only one has seen its enterprise value exceed the figure promised when the Spac merger was announced, and four now trade at a negative enterprise value, indicating that these groups are trading below cash.
Device makers started stepping away from Spac deals in the final quarter of 2021, but signs were already mounting that some investors were getting cold feet. A big signal here is redemption rates. Investors in a pre-merger Spac can redeem their shares, essentially asking for their money back, if they do not like the look of the proposed merger.
Redemptions were almost unknown at the beginning of 2021, but grew swiftly thereafter and remained high throughout 2022, data collected by Spac Research show. One explanation is that Spac shareholders had seen how poorly previous deals had done – as early as the summer of 2021 it was clear that the vast majority of transactions had disappointed – and decided to exit while they could.
Deal with the devil
An analysis of post-Spac medtechs’ enterprise value shows how poor the returns have been.
With one exception, all the medtechs that closed deals with Spacs in 2021 or 2022 have haemorrhaged value. This cohort has seen an average 79% decrease in enterprise value, from the EV that was promised in each company’s merger announcement to their current EV.
These 26 companies are collectively responsible for $29bn in undelivered EV.
|Broken promises: the catastrophic value destruction of medtech Spacs|
|Target||Focus||Closing date||Promised EV ($m)||Current EV ($m)||% EV change|
|Top 5 best performers|
|Seastar Medical||Cell therapy||Oct 2022||122||132||8%|
|Hims & Hers Health||Telehealth||Jan 2021||1,592||1,384||-13%|
|Alpha Tau Medical||Radiology||Mar 2022||660||168.4||-74%|
|Top 5 worst performers|
|Hyperfine||Imaging/patient monitoring||Dec 2021||581||-72||-112%|
|Akili||Digital health||Aug 2022||906||-28||-103%|
|Cardio Diagnostics||Diagnostics||Oct 2022||104||1||-99%|
|Total (26 medtech spacs since 2021)||35,222||6,214||Avg -79%|
|Note: only deals that closed in 2021 and 2022. EV=enterprise value. Source: spacresearch.com & Pitchbook.|
Times are hard, and many high-risk stocks are suffering, not just in the medtech sector. But could the performance of these Spac groups spell the end to these vehicles?
It is not quite time to schedule the post-mortem. Medtechs are still pursuing the blank-cheque route in 2023, with one deal closed so far this year – Orchestra Biomedical's – and two more announced.
But 25 healthcare-focused Spacs are known to have been liquidated, having been unable to find a suitable target by their self-imposed deadline, which is usually set two years after the Spac floats. 21 of these liquidations occurred in the fourth quarter of 2022.
More are on the cards. 39 Spacs are currently shopping for a healthcare-focused company, and 22 of them have less than six months to find one, according to Spac Research. With investors increasingly disillusioned with this mechanism, Spac deals are going to become rare, if not actually extinct.