Before the pandemic and in the early days of the worldwide global health crisis, special purpose acquisition companies were popping up like weeds ready to spread out in the biotech garden. Suddenly, it seemed that every deal in biotech was a SPAC-pact.
But as quickly as the SPAC market sprang up, it seems to be cooling now.
"The pace has definitely slowed, but we have not hit a standstill," Evercore ISI biotech analyst Gavin Clark-Gartner said in an interview with Fierce Biotech. "It's more of a quick crawl, as opposed to a total standstill."
Clark-Gartner thinks the market has actually cooled to a more sustainable and healthy pace after a busy second quarter with eight deals. The average is about four per quarter, with just two so far in the third quarter.
These well-funded shell companies raise money from investors to go public and then snap up a company. SPACs have risen considerably in the past few years, brought mainstream as an alternative to going public via an IPO, due to low interest rates and the ability to raise large amounts of capital, among other reasons.
These deals are much more receptive to companies that are not yet reporting earnings—which is key in biotech when drugs can take years to develop and plenty of cash to conduct clinical research.
Clark-Gartner has put a lot of thought into why the slowdown is happening. A recent report from his firm placed the blame on increasing regulatory scrutiny and the volume of deals tying up the accountants and lawyers needed to conduct them.
But Clark-Gartner also thinks the SPAC companies that have emerged onto the public markets just haven't been trading well. Biotech as a whole hasn't been performing particularly highly either. Many biotechs that emerge via SPACs do not have any revenue yet as they move treatments through the clinic with the ultimate goal of FDA approval.
"Valuations are down across the board and if you have a little extra cash to deploy, you have over 700 options in the public markets for which to choose from," Clark-Gartner said. "If you've already invested a lot in a SPAC, maybe you're not going to go back and buy more."
Emerging SPACs outside of biotech have also reported guidance below expectations, which could be shaking confidence in these deals.
"Normally, ... you want to be a little bit more conservative on guidance out of the gate," Clark-Gartner said.
Meanwhile, dozens of SPACs have yet to select a target, ready to strike on a hot biotech that could be the next big thing. Clark-Gardner estimates that the 21 SPACs that have declared a biotech focus but have not executed a deal have raised about $5.2 billion to shop with.
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This compares to $9 billion raised for traditional IPOs as of mid-July, according to Evercore. A few deals on both sides have trickled in since then, including EQRx’s $1.8 billion deal with CM Life Sciences III on August 6. On the IPO side, Nuvalent raked in $166 million at the end of July while Caribou picked up $305 million a little earlier in the month.
One of the big spenders on the list of open-ended SPACs is a collection of shell companies called Social Capital Suvretta Holdings Corp., numbered one through four and backed by venture investor Chamath Palihapitiya. All raised $256 million in their IPO, according to data compiled by Evercore and they have stated an intent to buy in biotech. Reuters put the total raise for all four at $880 million back in June. Each individual SPAC wants to make a deal in neurology, oncology, organs and immunology.
Frontier Acquisition Corp. is hunting for a biotech focused on therapeutics, diagnostics, R&D tools/tech or data applications with $237 million raised.
Read on for a look at 10 of the biggest SPACs in biotechs over 2020 and 2021.