When will we start to see SPACs in Orthopedics?

Below is an easy to read article about SPACs and their use in Medtech investments.

Blank Check Companies’ Hunt For Innovative Medtech Start-Ups To Heat Up Further, Experts Predict (MedTech Insight)

Executive Summary

As the SPAC boom continues, innovative medtechs are expected to become acquisition targets.

January kicked off with a flurry of SPACs, or special-purpose acquisition companies, and financial experts believe that these financing vehicles will continue to gain steam, with some targeting medtech.

Jonas Grossman, president and managing partner of Chardan Investment Bank, which focuses on disruption and innovation in the health care technology space, said that 2020 was a banner year for SPACs – or “blank check companies” as SPACs are often called – because they are formed specifically to find a start-up, buy it and take it public. While the majority of SPACs looking for a health care target were focused on biotech in 2020, Grossman foresees that in 2021: “We’ll see more medtech deals.”

According to Chardan’s statistics, as of 27 January, 40 health care-focused SPACs with $7.2bn to deploy were actively looking for a company to merge with.

About half are focused on biotech with the other half looking at other areas including medtech, digital health and general health care. However, with more SPACs looking for disruptive growth opportunities, the medtech sector has become an attractive target.

“I would predict that for 2021, we’ll see a number of pure medtech announcements, and we’ll also see a number of medtech-focused SPACs particularly looking at that space.” – Jonas Grossman

“I would predict that for 2021, we’ll see a number of pure medtech announcements, and we’ll also see a number of medtech-focused SPACs particularly looking at that space,” Grossman told Medtech Insight.

“Medtechs are often undervalued in the market, but I think if you look at their risk profile, they are usually less risky than biotech companies because you usually have a product,” Hernandez told Medtech Insight.

Blue Water Acquisition announced on 15 December it raised $50m by offering 5 million units at $10. Each unit consists of one share of common stock and one warrant exercisable at $11.50. The underwriter, Maxime Group, exercised its over-allotment option, resulting in $57.5m raised.

“We have been a free-trading company for a little bit over 30 days and I can tell you we’ve seen a large number of deals – in excess of 40 deals we’ve looked at [at] this point – and continue to get deal flow here on a daily basis,” Hernandez said. Though he feels that the smaller size of the SPAC, which puts it at an acquisition target range of roughly $75-$240m, puts it in the “sweet spot.”

“There’s not a lot of players in this acquisition spectrum,” he said. The majority of deals have been on the larger side, where there are more SPACs competing for the same private companies.

Karim Anani, EY Americas Transactions Accounting Advisory Leader and EY Capital Markets Partner advising companies on strategic transactions, also expects the SPACs craze to continue ramping up in 2021.

“We’re also starting to see increased deal sizes, so the valuations and the size of the companies that SPACs are looking to merge with in the medtech space are increasing as we progress through 2020 and go into 2021,” Anani told Medtech Insight. “The amount of capital, if you consider general SPACs and what is identified for this industry, is probably $10-$14bn – it just depends how you want to cut the data.”

A recent example is Compute Health Acquisition Corp., launched by former Medtronic plc CEO Omar Ishrak, which plans to raise $750m to acquire a company within the health technology sector, according to a SEC filing from 19 January.

Compute Health plans to sell 75 million units for $10 a share, one unit being one share of Compute Health and one quarter of a redeemable warrant, the filing said. Medtronic plans to acquire 1.5 million units in the offering, according to the filing.

Another example is Longview Acquisition Corp, which announced in November it merged with Butterfly Network Health at a value of $1.5bn. This transaction is expected to close at the end of March, when the company will start trading on the New York Stock Exchange. (Also see “Butterfly Network’s CEO Sees Blank Check Deal As Path To ‘Democratize’ Portable Imaging Platform” – Medtech Insight, 1 Dec, 2020.)

Grossman says the SPACs boom has been building for years – noting that 20-25% of the IPO market has been SPACs in the last four years. The market has accelerated during the pandemic. Grossman was behind the first major bio/pharma SPAC merger in 2019 when Chardan Healthcare Acquisition Corp. and Biotech BiomX Ltd merged, creating BiomX Inc. then valued at $248m.

According to the Wall Street Journal, some venture capitalists and tech companies saw SPACS as a way to raise money without being exposed to volatile markets.

Equally, some investors see SPACs as a big opportunity and a more efficient way for companies to go public, but critics say that they also leave the door open for backdoor deals.

SPACs Versus Traditional IPO

Anani defines SPACs as a hybrid between a capital markets transaction and mergers and acquisitions transaction.

“It’s not quite an IPO, it’s not quite an M&A transaction,” he said. “The only difference between a SPAC IPO is that there is no history for the SPAC, there is no operations.”

“It’s not quite an IPO, it’s not quite an M&A transaction. The only difference between a SPAC IPO is that there is no history for the SPAC, there is no operations.” – Karim Anani

A SPAC is created by a sponsoring investor that is looking to raise capital to put in a trust. It exists solely to find a private company to take public.

“The amount of capital raised by SPACs varies: on the small side from $50-$60m, all the way up to $4bn at the IPO date,” Anani explained.

Typically, before the acquisition, SPACs sell units that include a $10 share of the company and warrants, conferring the right to buy shares at a certain price by a certain time.

The vast majority of the proceeds come from hedge funds and other institutional investors that move early. SPACs then have two years to search for a private company to merge with and take public. Investors backing the SPAC put up their money before an acquisition target is identified, which means they need to trust the sponsors to find a good target company.

If the SPAC fails to find a suitable company during the two-year time frame, it dissolves. The investors get their money back with interest and the sponsors lose whatever money they have put in. If the SPAC finds a company to merge with, the investors can withdraw their funds with interest if they don’t like the deal.

When the SPAC merges with a private company, the SPAC typically transforms into the target company and takes on the acquired company’s name. When the deal closes, investors who own shares in the SPAC become owners of the new entity.

SPAC sponsors can emerge as big winners, by putting up small amount to cover expenses before a SPAC goes public and then typically compensating themselves with a “promote,” consisting of shares equal to 25% of the SPACs IPO proceeds, or the equivalent of 20% of post-IPO equity, according to a paper on SPACs by law professors Michael Ohlrogge of New York University and Michael Klausner of Stanford, and management consultant Emily Ruan. This allows for returns at several times the original investment.

Scott Platshon, partner at EcoR1 Capital, LLC, a biotech-focused investment advisory firm, said earlier this month that there is now a trend in the health care sector toward “novel” SPAC structuring, where SPACs, for instance, issue common shares, but no warrants.

Another trend is that instead of the SPAC founders receiving 20% of post-IPO equity, the promote is “more associated with the success of the company and tied to the stock price,” Platshon said. Platshon made the comment on a panel discussion on “IPOs and the coming age of SPACs,” during the virtual Biotech Showcase sponsored by Informa that ran parallel to the J.P. Morgan Healthcare conference. In other cases, SPACs sponsors take less of a promote” – “we’ve seen some with 10% instead of 40%,” he said.

Unlike in a traditional IPO, SPACs do not undergo the same regulatory scrutiny as traditional IPOs.

Healthcare SPAC Mergers – Overview

SPAC First Trade DateGross Size ($m)StructureIndustry FocusSponsor
Alpha Healthcare09/18/2020$1001 common plus 1/2 warrantBiotechAHAC Sponsor LLC
Amplitude Healthcare11/22/2019$1001 common plus 1/2 warrantHealth Care Technology/Health Care ServicesMetalmark Capital, Avego Healthcare Capital
Arya Sciences III08/07/2020$1501 commonBiotechPerceptive Advisors
Athlon01/12/2021$2761 common plus 1/2 warrantHealth WellnessAAC HoldCo, LLC
BCLS10/22/2020$1441 commonBiotechBain Capital Life Sciences
BCTG09/03/2020$1671 commonBiotechBoxer Capital (Tavistock)
Big Cypress01/12/2021$1001 common plus 1/2 warrantBiotechBig Cypress Holdings LLC
Biotech Acquisition01/26/2021$2001 common plus 1/2 warrantBiotechSPRIM Global
Blue Water12/15/2020$581 common plus 1 warrantGeneral Health CareBlue Water Sponsor LLC
Chardan Healthcare 204/24/2020$861 common plus 1 warrant (1/2)BiotechChardan
CM Life Sciences09/02/2020$4431 common plus 1/3 warrantBiotechCasdin Capital/Corvex Management
Consonance-HFW11/19/2020$801 common plus 1/3 warrantBiotechConsonance Capital Management
DFP Healthcare03/11/2020$2301 common plus 1/4 warrantGeneral Health CareDeerfield Management
Edoc11/10/2020$901 common plus 1 warrant (1/2) plus 1 rightHealth Care ServicesAmerican Physicians LLC
Eucrates10/23/2020$1051 common plus 1/3 warrantBiotechVedanta Management
FoxWayne01/20/2021$501 common plus one warrantBiotechFoxWayne Enterprises Acquisition Sponsor LLC
Frazier Lifesciences12/09/2020$1381 common plus 1/3 warrantBiotechFrazier Healthcare
Health Assurance11/13/2020$5251 common plus 1/4 warrantHealth Care TechnologyHealth Assurance Economy Foundation
Health Sciences II08/04/2020$1601 commonBiotechRTW Investments
Healthcare Capital01/15/2021$2401 common plus 1/2 warrantGeneral Health CareHealthcare Capital Sponsor LLC
Healthcare Services12/23/2020$3311 common plus 1/2 warrantHealthcare ServicesHealthcare Services Acquisitions Holdings LLC
Helix10/20/2020$1151 commonBiotechCormorant Asset Management, LP
HighCape09/04/2020$1151 common plus 1/3 warrantBiotechHighCape
HumanCo12/09/2020$2881 common plus 1/2 warrantHealth WellnessCAVU Venture Partners
Jiya11/19/2020$1041 commonBiotechSamsara BioCapital
KL01/08/2021$2881 common plus 1/3 warrantGeneral Health CareKennedy Lewis
LifeSci II11/20/2020$801 commonBiotechLifeSci Advisors
Locust Walk01/08/2021$1751 common plus 1/3 warrantBiotechLocust Walk Partners
Lux Health Tech10/27/2020$3451 common plus 1/3 warrantHealth Care TechnologyLux Ventures
MedTech12/18/2020$2501 common plus 1/3 warrantMedical TechnologyMedTech Acquisition Sponsor LLC
Montes Archimedes10/07/2020$4111 common plus 1/2 warrantGeneral Health CarePatient Square Capital LLC
Omega Alpha01/07/2021$1381 commonBiotechOmega Funds
Petra10/08/2020$731 common plus 1 warrantBiotechPetra Investment Holdings, LLC
Population Health11/18/2020$1731 common plus 1/3 warrantBiotechPopulation Health Investment Holding, Inc.
Sarissa10/21/2020$2001 common plus 1/3 warrantBiotechSarissa Capital Management
SCP & CO Healthcare01/22/2021$2001 common plus 1/2 warrantHealth Care TechnologySCP & CO Sponsor, LLC
Therapeutics07/08/2020$1361 commonBiotechRA Capital
Total40 SPACS$7,242
Turmeric10/16/2020$981 common plus 1/3 warrantBiotechMPM Capital
Viveon Health12/23/2020$2011 common plus 1 warrant (1/2) plus 1 right (1/20th)Orthopedic/Regenerative MedicineViveon Sponsor