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Biotech SPACs: A New Route to Going Public

As more firms and investors look to SPACs as an IPO alternative, will this change the way biotech companies access public markets long-term? Our investment banking team goes inside the SPAC boom to explain what companies need to know before choosing their path to going public.

By Noël Brown, Amir Emami, Michael Ventura and Jason Levitz
Published March 12, 2021 | 4 min read
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Key Points

  • On the road to going public, speed to market, sponsor credibility, valuation visibility, and downside protection are all key points of distinction between SPACs and IPOs.
  • A SPAC is not a panacea – if a company isn’t ready to be public, it won't be an attractive SPAC candidate.
  • A tri-path process is now emerging for any company that’s focused on going public, with the option of a traditional IPO, a SPAC, or a direct listing.
  • The SPAC product will evolve and improve with the input of higher-caliber, higher-quality sponsors who will look to reduce some of the friction costs.

One of the biggest stories in today’s IPO markets is the biotech SPAC boom. Until recently SPACs, or Special Purpose Acquisition Companies, existed on the fringes of the financial world. However, their popularity exploded in 2020, resulting in a 320% increase in the number of SPAC IPOs compared to 2019. But what exactly is a SPAC? Why are SPAC IPOs suddenly so popular? And will they forever change the way biotech companies access the public markets?

"Simply put, a SPAC is a blank check company," says Amir Emami, RBC Capital Markets' Co-Head of SPAC Coverage. "It works when a SPAC sponsor group forms an entity to raise capital in the public markets by selling units, which consist of a common share plus some fraction of a warrant, to investors. Typically, a unit sells for $10 per unit. That $10 is then placed into a trust account which is effectively a credit instrument until a deal is announced, giving investors the ability to redeem their shares for a pro rata share of the cash and trust at the time of a deal closing, if they don’t feel that it's right for them."

According to Amir, that unique blend of upside potential and downside protection is one of several key drivers behind today’s SPAC boom in biotech. "It’s certainly one of the reasons SPACs have gained popularity, from the embedded call option from both the warrants, as well as being able to stay in the transaction or redeem your shares for cash."

Advantages of a SPAC vs IPO

"A SPAC offers other distinct advantages," continues Amir. "Technically, it’s a merger. A public SPAC entity is acquiring a private company. When it does that, it files an S-4, which is different to an S-1. In the S-4, you're able to include forward-looking projections that the management team and SPAC sponsor group can communicate to public investors."

"That’s different in a regular-way IPO process, where the management team files an S-1 which has historical-looking financials. They can also provide projections, but only to the research analyst community, who then communicate their own opinions and projections to public investors. So being able to market your own projections is one important difference, particularly for biotech firms."

"Another difference is the point at which you receive valuation certainty," continues Amir. "In a regular-way IPO, you won't know the valuation until after the book building process. In a SPAC transaction, valuation certainty comes much earlier in the process, through negotiating with the SPAC sponsor and having a market check of the valuation when you raise the private investment in public equity."

One further distinction is how a SPAC sponsor group can provide additional market credibility, or a halo effect, because of their reputation in the biotech space. "They might have operational expertise to help the private company accelerate its growth," affirms Amir.

Valuation certainty and validation

Jason Levitz, Head of Healthcare Equity Capital Markets at RBC Capital Markets, flags another benefit – the ability to compress crossover rounds with the IPO into one step, particularly as a considerable amount of biotech-focused SPACs are raised by prominent investors in crossover rounds.

"Roughly 80% of all biotech IPOs have a crossover round ahead of the IPO," explains Jason. "Because of those rounds, there’s a bit more valuation certainty or visibility around the IPO outcome than there might be for an IPO in another sector, without a crossover and a fully-covered book at launch."

Which leads to another point of distinction between a traditional IPO and a SPAC – validation. "If you look at the roughly 30-odd biotech-focused SPACs we’ve seen," says Jason, "it's no coincidence that many are sponsored by those same investors that lead crossover rounds and provide the third-party validation that broader public investors are looking for. So, as you think about the traditional crossover to IPO path versus the SPAC path, one consideration obviously is the sponsor you're working with in the SPAC; their ability to drive a syndicate of demand around a potential PIPE; and providing that third-party validation and valuation visibility that you'll get as well, potentially, through the crossover to IPO path. "

For institutional investors, this can offer a unique opportunity to showcase their specialist expertise, as Michael Ventura, Co-Head of RBC's SPAC coverage, explains. "From an institutional investor standpoint, it’s an exceptionally competitive market right now. There are only so many ways to generate differentiated alpha. SPAC PIPEs are a unique way for institutional investors to do that, to partner with SPAC sponsors and targets via the PIPE process and the tri-party negotiation forum, and to end up pricing a high-quality IPO to a group of 20 or 30 institutional investors. It compares favorably to a regular-way IPO process, where you're competing for those same dollars with hundreds of your competitors."

Going public: Comparing the timelines

Another key factor in any public offering is the timeline. Are companies saving themselves any time or market risk with a SPAC compared to a traditional IPO?

"From a timeline perspective", says Amir, "if the starting point is the stage where a company is about to start its S-1 drafting and launch a process to identify a SPAC to go public with, then the SPAC and IPO timelines will be pretty much in sync, right up to closing the transaction. The difference is, in the SPAC process, you'll get to a point of valuation certainty much faster, perhaps in as little as two to three months. In a regular-way IPO, that valuation certainty isn't achieved until after you launch the IPO."

That raises another contrast. Through the traditional IPO, a multi-day bookbuild generated with orders from hundreds of investors leads up to the ultimate pricing. With a SPAC, is the objective to ensure everyone stays engaged once the deal closes?

"Yes, with one added twist in the biotech space", explains Amir. "SPACs that aren’t biotech-focused have a variety of investors. Some might be a natural fit for whatever company the SPAC eventually acquires, some might not. With biotech SPACs, it's different. From day one, you know a biotech SPAC is going to acquire biotech assets, so you know you have investors with a high level of engagement in that space."

It’s an interesting dynamic, particularly as the momentum in today’s biotech IPO market creates a limited opportunity set for institutional investors to gain ownership in size. "Biotech IPOs tend to be smaller deals with concentrated groups of institutional investors who, by and large, get allocated crossover or anchor positions in those IPOs," says Michael. "And because the wall-cross process limits the number of institutional investors you'll engage with, it gives a higher hit ratio for anchor ownership to those who do manage to get wall-crossed and be part of that PIPE process. So, that unique aspect of the SPAC valuation process – marketing to a select group of investors in the PIPE rather than to a broader group in an IPO process – can have a fundamental effect on the outcome."

Is a SPAC a silver bullet to going public?

A common question for many management teams in today’s markets is what does it take to be a successful IPO candidate compared to a successful SPAC candidate? For Jason Levitz, it’s important to disabuse people of the notion that the bar might be lower on the SPAC side.

"If a company isn’t ready to be public, it won't be an attractive SPAC candidate – the best candidates will be good IPO candidates as well," says Jason. "That’s particularly true in biotech, where it's less about public market viability and more about quality of science, path to proof of concept, ultimate market opportunity, and third-party validation."

Michael Ventura agrees. "A common refrain that you'll hear from the team here at RBC Capital Markets is that ‘a SPAC is not a panacea’. Companies need be ready for the public markets in most aspects of their business, regardless of the path they choose."

"A common refrain that you'll hear from the team here at RBC Capital Markets is that ‘a SPAC is not a panacea’. Companies need be ready for the public markets in most aspects of their business, regardless of the path they choose."

Michael Ventura, Co-Head of SPAC Coverage

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SPACs may not be silver bullets, but they have created a new fork on the road for biotech firms going public. Are they here to stay, or is this a flash in the pan?

"It’s a product that's going to continue to evolve," says Amir Emami. "We're going to have higher-caliber, higher-quality sponsors continue to come out and want to improve it and reduce some of the friction costs, so I think it's going to stay. In the last two years we’ve issued more SPAC IPO volume on a dollar basis than in the history of the market combined. In the first six weeks of this year, we've averaged roughly $1 billion of SPAC IPOs a day. 88% of those are less than six months old and have 24 months within which to make an acquisition – which is also happening more rapidly than ever before."

"In the last two years we’ve issued more SPAC IPO volume on a dollar basis than in the history of the market combined. In the first six weeks of this year, we've averaged roughly $1 billion of SPAC IPOs a day."

Amir Emami, Co-Head of SPAC Coverage

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A final key question for analysts, investors and companies is can the tremendous pace of today’s SPAC IPOs be sustained? "I think the pace of new life sciences SPAC formation will probably slow a bit as the year progresses," says Jason Levitz. "We do expect the IPO calendar to be very heavy, so that balance will likely change as the year progresses. But it feels like there's still a good deal of interest on the investor side around new SPACs."

"The transactions we're seeing on the back end, up to this point, seem to be very well-received with successful PIPEs, so we expect activity will continue to be busy on all fronts in the near term."

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