SPACs in Healthcare: The Hot Ticket has Cooled off

The hot new healthcare investment vehicle may soon be yesterday’s news, as company underperformance and an increased focus by regulators have decreased interest in special purpose acquisition companies (SPACs).

SPACs grabbed attention as a way for start-ups in healthcare and other industries to go public as an alternative to an initial public offering (IPO). A SPAC or “blank check company” doesn’t make any products or sell anything. Instead, it is formed by investors in order to raise money through an IPO so it can then go out and acquire another company.

The trend took off in healthcare in 2020, marked by deals such as telehealth company Hims & Hers Health’s announced merger with Oaktree Acquisition Corp., and Medicare insurance start-up Clover Health’s announced merger with Social Capital Hedosophia Holdings Corp.

By the first quarter of 2021 there were 40 healthcare and life science IPOs tied to SPACs, raising almost $11 billion, according to S&P Global Market Intelligence data. “It came as a whirlwind,” with impressive activity between December 2020 and April 2021, says Sari Kaganoff, general manager of consulting at Rock Health.

But in the second quarter of 2021 there were just eight SPAC deals in the healthcare and life sciences sector, according to S&P Global Market Intelligence. Now, “many in the life science sector are pursuing IPOs over SPACs because the gloss seems to be wearing off SPACs due to SEC (Security and Exchange Commission) scrutiny, the shareholder dilution that comes with SPACs and the fact companies that have gone public via SPACs have generally underperformed from a stock price perspective,” observes Steve Sapletal, healthcare and life sciences deal advisory and strategy industry leader at KPMG.

Taking off

SPACs took off in healthcare because they provide quickest exit strategy for smaller and start-up companies and are not as tightly regulated as IPOs, Sapletal says. For SPACs, “healthcare has presented opportunities to invest in assets with clear earnings visibility as well as new growth verticals such as digitally enabled healthcare service provisions or healthcare data analytics,” he notes.

Although SPACs have been around for decades, they have taken off as an investment vehicle in recent years. Harvard Business Review reported that just 59 SPACs were created in 2019, with about
$13 billion invested across all industries. The following year, 247 were created, with $80 billion invested. The first quarter of 2021 saw 295 SPACs created, with $96 billion invested. In 2020, SPACs represented more than half of the new publicly listed companies in the United States, according to the Harvard Business Review.

“It’s just another form of access to capital markets,” says Peter Micca, a partner in life sciences and healthcare at Deloitte. But a SPAC merger usually takes less time to complete than an IPO, and the mergers have a fixed value “so there’s no road show to determine the value of the company,” comments Micca.

When a SPAC is created, it typically has 18 to 24 months to acquire a company. If that doesn’t happen, the SPAC must disband and return money to its investors, according to Sapletal. Kaganoff says that they are “very incentivized not to fail in finding a target.”

Demand for digital

Digital health has had a strong appeal to SPACs. In healthcare, “demand for technology is at an all-time high,” Micca says, and the COVID-19 pandemic only accelerated the awareness of digital health options, such as telehealth. Changes in reimbursement, licensing and regulation made it easier for providers to offer telehealth to patients at a time when many have shied away from in-person healthcare, Micca says.

In the first quarter of 2021 there were two completed SPAC mergers involving digital health companies, while nine others were announced, according to a report by Rock Health. The announced mergers included the online therapy company Talkspace and the well-known personal genomics and biotech company 23andMe. The first quarter of 2021 also saw two completed IPOs, Rock Health reported. Digital health companies that were targeted by SPACs during 2020 and the first quarter of 2021 were on average five years younger than those that did an IPO, according to Rock. SPAC targets raised an average of $43 million less in total funding than those that were involved in an IPO.

Coming down to earth

SPACs were going strong until April, when they began attracting more attention from regulators, Kaganoff says. Since the SEC began to issue more regulatory guidance, interest has slowed considerably. “It’s a little bit less wild West than it used to be,” says Kaganoff.

Although they are perhaps less of a hot ticket now, many SPACs were launched before the cooldown. At the end of the third quarter, 458 SPACs were looking for a company to acquire, and almost 70% had less than 18 months to do so, according to a KPMG report. Technology, media and telecom companies were the top targets, with more than one-third of SPACs seeking a company to merge with in those fields. But healthcare and life sciences ranked second, with
59 of those SPACs, or 13%, hunting for companies in that sector, according to KPMG.

From 2018 until the end of the third quarter, 50 mergers in the healthcare and life sciences sector had been completed, KPMG found. The estimated merger value in the sector was, on average, more than $1.5 billion.

But a number of the deals have failed to live up to expectations. Talkspace agreed to go public in January 2021 in a SPAC merger with Hudson Executive Investment Corp. The deal was valued at $1.4 billion. It debuted on the Nasdaq in June, with shares listed at $8.90. As of early January, the stock price was $1.82 per share.

Following its third quarter financial results in November, shares plummeted 35% as the company’s chief financial officer called the company’s net income and net revenue “disappointing.” Talkspace’s co-founders also have left the company. Hims & Hers completed its SPAC merger in January 2021, with stock prices at $17.08 a share. In early January 2022 it was trading at $5.74 a share. And Clover Health stock has sunk over the past year. In January 2021 it was trading at almost $15 a share. A year later it was trading at slightly more than $3 a share.

More recently, the prescription digital therapeutics company Pear Therapeutics began trading on the Nasdaq in December after a merger with SPAC Thimble Point Acquisition Corp. It opened at $9.30 per share and as of early January was trading at less than $6 a share.

Looking ahead

While SPACs will continue to seek out new targets in the new year, deal activity is expected to continue to cool. Going forward, Micca expects “a modulation in all forms of access to the public market in 2022.”

Sapletal expects a substantial drop in the number of SPAC IPOs in 2022 compared with 2021. However, almost 60 SPACs are looking for healthcare and life sciences targets, “and given their finite life, they will be more desperate to make a deal.”

Kaganoff says she doesn’t expect a lot of new SPACs will be created. Even if a company might be a candidate to merge with a SPAC, some prefer doing an IPO or want to be acquired by a larger company, Kaganoff says. There are also limitations, she says, because “there aren’t that many companies that are of the size and scale to go public.” 

Susan Ladika is an independent journalist in Tampa, Florida, who covers business and healthcare.