The offer of a massive pile of easily accessible cash has a way of changing people’s minds. Special-purpose acquisition companies have swept up several health tech groups this year despite their targets having other plans.
“There are a lot of Spacs out there at the moment looking for the right story,” says Veronique Ameye, executive vice-president at Lumiradx, a diagnostics company currently reversing into a Spac. The feeding frenzy that has characterised 2021 is arguably a consequence not of start-ups’ need for an exit so much as Spacs’ ardour for targets – and it looks likely to continue for some time.
Lumiradx, maker of tests including rapid assays for Covid-19, is being merged into CA Healthcare Acquisition Corp in a deal valuing it at around $5bn. Ms Ameye says that after filing for a standard IPO the medtech was contacted by a number of Spacs seeking a deal. Its involvement in Covid-19 has seen it scale up sharply over the past year or so, leaving it in need of further funding but also boosting its appeal to these cash-shell companies.
Owlet Baby Care, too, was all set to go the traditional route to the stock market.
“We’d contracted a bank to take us through a pre-IPO round,” says its chief executive, Kurt Workman. “The plan was to go public at the end of this year – we weren’t out looking at Spac sponsors.” But Owlet was approached by the private equity firm Sandbridge Capital, with which it had had a prior connection.
Owlet is working on a cross between a baby monitor and a Fitbit – a sock that measures a baby’s oxygen level and heart rate, which alerts parents when these fall outside pre-set parameters. The Smart Sock is available on a consumer health basis, with parents paying the $299 out of pocket.
The company plans to move to more of a traditional medical device footing, having submitted a US 510(k) application at the end of 2018, seeking approval for the Smart Sock’s use in monitoring babies who have come home from the newborn intensive care unit. This would enable reimbursement, potentially boosting sales.
Owlet was won over to the Spac route partly because Sandbridge took an unusually long-term view.
“There’s an 18-month lockup, unlike other Spac deals where people are cashing out as it goes public,” Mr Workman says. “It felt like the best of both worlds.”
Speedy but "spendy"
Spac deals are said to be faster and carry a lower regulatory burden than IPOs, but they are also more expensive. Costs are estimated at three or four times an IPO, once the merger fees and the cost of the Spac’s own IPO, which will be passed on to the target, are taken into account. Then there are the founder shares, also called the promote, in which the sponsor of the Spac gets up to a quarter of the target company’s equity virtually for free.
Even so, a growing number of health tech groups believe that the price is worth paying. 11 Spac deals in the medical or health technology arena have been arranged so far this year.
|Selected health tech Spac deals of 2021|
|Target||Spac (main backer)||Focus||Date merger announced||Share price since announcement|
|Vicarious Surgical||D8 Holdings Corp (D8 Sponsor LLC)||Robotic surgery||Apr 15||(1%)|
|Better Therapeutics||Mountain Crest Acquisition Corp II (Mountain Crest Capital)||Prescription apps||Apr 7||(0%)|
|LumiraDx||CA Healthcare Acquisition Corp (Covington Associates and Pleasant Bay Capital Partners)||Diagnostics||Apr 7||2%|
|Somalogic||CM Life Sciences II (Casdin Capital and Corvex Management)||Proteomics||Mar 29||10%|
|Humacyte||Alpha Healthcare Acquisition Corp (AHAC Sponsor)||Bioengineered vascular grafts||Feb 17||(4%)|
|Owlet Baby Care||Sandbridge Acquisition Corp (Sandbridge Capital and Pimco)||Digital health||Feb 16||(6%)|
|Sharecare||Falcon Capital Acquisition Corp (Falcon Equity Investors)||Telehealth||Feb 12||(15%)|
|Sema4||CM Life Sciences (Casdin Capital and Corvex Management)||Genomics||Feb 10||(25%)|
|Nautilus Biotechnology||Arya Sciences Acquisition Corp III (Perceptive Advisors)||Proteomics||Feb 8||(10%)|
|23andMe||VG Acquisition Corp (Virgin Group)||Genetic testing||Feb 4||(26%)|
|Talkspace||Hudson Executive Investment Corp (Hudson Executive Capital)||Telehealth||Jan 13||(14%)|
|Source: Spacinsider, company releases.|
It is not as if the IPO market is moribund: witness the wildly successful traditional flotations of the neuromodulation company Neuropace and bunion surgery group Treace Medical Concepts last month. Both priced at the top of their ranges and saw their share prices leap 47% and 50% respectively on their first day.
It seems that the terms offered by Spacs are simply too good to turn down, and a guaranteed amount of cash is big selling point. Mr Workman says that for Owlet the Spac process “wasn’t drastically more expensive” than an IPO might have been, a statement that presumably takes into account the cost of the planned crossover round plus the subsequent flotation.
Interestingly, both of these reverse mergers were announced within four months of the Spacs' IPOs. Spacs generally have two years to get a deal done or face dissolution, and the speed here points to motivation to get deals done.
Ebb and flow
An open question is whether investor enthusiasm for Spacs will be maintained. Mr Workman believes that it will, saying that Spac deals “democratise access” to fast-growing start-ups.
“Generally, this high growth market has only been available to private equity firms and venture capitalists,” he says. “Now, through this process, extending the IPO market upstream, I think everyday people have access to these high-growth opportunities, and hopefully it will be a really great thing.”
The US SEC is not quite so fervent. It has reportedly started to inquire into Spac deals amid concerns that some might not be playing fair with their retail investors. Some Spacs have been accused of keeping shareholders in the dark about aspects of the deals, such as hidden weaknesses and large sponsor payouts.
The pace of these mergers is unlikely to slacken soon. A recent analysis from Rock Health found at least 52 healthcare-focused Spacs seeking targets. One danger is that immature health tech companies are persuaded to come to the public markets too soon, when they are at risk of failing.
Perhaps investors are already considering this possibility. Most of the Spacs in the table above have seen their share prices drift since they announced their deals. If the markets fail to appreciate the new companies on offer, the craze can only burn itself out.