Newamsterdam braves the Spac track

Blank cheque companies might have disappointed, but options are limited right now for private developers in need of big bucks.

Fresh from signing one of this year’s biggest licensing transactions, Newamsterdam Pharma this week unveiled its next step: a deal with a Frazier Healthcare-sponsored Spac that will see the European drug developer float on Nasdaq and, hopefully, bank a couple of hundred million dollars.

The equity markets are out of love with early-stage biopharma so it is surprising that a listing still holds allure for such companies – even before considering the stark stats on Spacs (more on that later). But Newamsterdam is going to burn a lot of cash in the next few years as it completes a large pivotal clinical programme, and private groups in search of big bucks have few options on the table.

Debt is another possible route to raise large sums, but gearing up businesses that are naturally loss-making is a questionable strategy. Many in the sector believe that alternative funding mechanisms are needed for private, late-clinical stage groups. Private equity’s move into the venture world is worth watching here.

Newamsterdam expects to receive around $235m via a Pipe (private investment in public equity) financing that will happen alongside the Spac transaction. This Pipe was originally targeting $100m, so it looks like there was strong demand; Frazier is also co-leading the Pipe, along with Bain Capital, with other new and existing Newamsterdam investors participating.

Notably, the press release was vague about how much money might be received from the Spac’s trust account. A trust account holds the proceeds of a Spac’s IPO, and traditionally this cash represents the carrot that these vehicles wave to attract private companies. The idea is that, once the combination of the two entities is complete, the company banks the cash and takes over the listing – for a fee, of course.

But a Spac’s investors can choose whether to remain shareholders in the ongoing business, and redemption rates have been soaring as the market has cooled on these transactions. According to data supplied to Evaluate Vantage by Spac Research, seven deals between these vehicles and a pure-play drug developer have closed this year, and the average redemption rate has soared to 85%.

When a Spac investor votes against a deal and redeems the shares, they get their money back. This drains the trust account, meaning that financings like Pipes, conducted alongside the Spac transaction, become more crucial to send off the target with a healthy bank balance.

For example Prokidney, which closed its Spac deal earlier this month, banked only $22m from Social Capital Suvretta's trust account after redemptions hit 93%. The company had initially pointed to a $250m pot. Like Newamsterdam, though, Prokidney managed to raise a huge Pipe – $575m – at the same time.

It is worth remembering that Frazier and Bain, which co-led Newamsterdam's Pipe, were enthusiastic crossover investors when the IPO market was hot. These large Pipes essentially fill the same need, and both of these investment firms have raised huge funds in the past few years that need to be placed somewhere.

Work to do 

Still, Pipes are not being seen alongside all Spac transactions in drug development. For small biopharma groups that cannot cannot amass such support, the appeal of the Spac route while the markets are so hostile is hard to understand.

Take Comera Life Sciences. The reformulation specialist saw its Spac’s trust account dwindle from $105m to $7m after 95% redemptions, and is now on Nasdaq defending a $32m market cap.

Overall, the performance of biopharma groups that have arrived on the market via this route has been abysmal, the poor wider market conditions notwithstanding. Of the 32 pure-play developers that have listed via Spac since 2020, only five are trading at an enterprise value above the pro-forma EV proposed at the time their deal was announced. 

All of which means that Newamsterdam has much work to do to convince the Spac doubters. At least it now has the funds to get to the end of its journey, namely to show whether CETP inhibition’s real role lies in LDL reduction, with crucial data readouts due in 2024 and 2026 (Thought CETP inhibition was dead? Think again, April 22, 2022).

In any case, the table below suggests that redemptions are not a good indication of future success. Biopharma will always live or die by their data, but in the current market one thing is certain: a short cash runway is a very bad look. 

The best of Spacs, the worst of Spacs?
Company (Spac sponsor, deal date) Change in enterprise value* Redemption rate  Funds raised (Trust/Pipe)
Going up...
Cerevel (Perceptive Advisors, 2020)  +$2.6bn (+306%) 2% $147m/$370m
Immatics (Perceptive Advisors, 2020) +$81m (+26%) 0% $149m/$104m
Alvotech (Oaktree, 2022) +$106m (+5%) 96% $10m/$175m**
Going down...
Roivant (Patient Square Capital, 2021) -$3.6bn (-67%) 94% $29m/$200m***
Nuvation Bio (EcorR1, 2021) -$1.4bn (-105%) 0% $144m/$502m
Tango Therapeutics (Boxer Capital, 2021)  -$436m (-124%) 7% $156m/$186m
*Calculated from proposed pro-forma EV at deal announcement to EV on Jul 28. **Debt and equity purchase agreements also put in place to replace value of trust account. ***Evaluate Vantage estimate. Source: Spac Research, Pitchbook for current enterprise values. 

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