Spotlight: Warrantless and Organ-Centric Biotech


Spotlight: Warrantless and Organ-Centric Biotech

Welcome to SPACInsider’s Spotlight series! With this, we will seek to illuminate a particular trend in SPACs that deserves a greater focus. This week, we will be continuing to look at Chamath Palihapitya’s biotech SPACs. In this case, that takes us to Social Capital Suvretta III (NYSE:DNAC) and the organ therapeutics market, with research compiled by SPACInsider contributor Anthony Sozzi.

The biotech space can be difficult to evaluate in purely financial terms. Luckily, Chamath Palihapitya’s last four SPACs have conveniently provided us both a prism to look through the space and also an interesting financial experiment to observe. We looked at some potential targets for Social Capital Suvretta I (NASDAQ:DNAA) in our Top 3 Neurology a few weeks back. We then examined the changing technological approaches Social Capital Suvretta II (NASDAQ:DNAB) may be parsing in its search for an oncology target in our inaugural Spotlight.

Each of the four Social Capital Suvretta SPACs raised the same amount at IPO – $250 million – and each is targeting a different treatment market within biotech. Given the similarities between their teams and investment approaches, the performance of the four companies they combine with will naturally be compared fairly or unfairly for years to come.

More relevant to our interests, the deals themselves will be interesting to compare thanks to the common factors they share albeit in sectors of biotech research that hold different market dynamics and development timelines. Another commonality these SPACs share is that none issued warrants along with shares in their IPOs. This is more common among biotech SPACs but rare in general across the asset class.

As we found in our 1H-2021 Report, warrantless SPACs that completed deals in the first half of the year ended up with the second best share performance for their de-SPAC’d targets, which traded at an average price of $16.21 to finish the half. This was only slightly beaten out by SPACs with ¾ warrants with an average price of $16.26, but this represented just two deals as compared to four warrantless deals hitting the open market during that period.

This performance is perhaps less skewed by the value of the SPAC units themselves than by the value of the teams that are able to bargain their way to such a structure. Outside of biotech, typically only well-funded and prestigious teams can get all the way to an IPO with a warrantless SPAC. As such, these stronger teams tend to end up with better deals, or at least transactions that are more trusted by the market.

But, the lack of a warrant is something that turns off potential IPO investors looking at arbitrage plays and inherently reduces the value of what the SPAC is shopping at IPO, meaning the target better end up being good. At the same time, highly sought-after targets may prefer to deal with warrantless SPACs as they do not bring that extra overhang of uncertainty in the form of the unexercised warrants.

To warrant or not to warrant; that is the question. But, among biotech SPACs in the current down market, the answer is a bit muddled. As of July 27’s close, the six warrantless biotech SPACs that had announced deals were trading at an average price of $9.93, below the $10.01 average price of biotech SPACs with warrants that had signed definitive agreements. On median price, warrantless SPACs slipped to a slight lead at $9.91 versus $9.90 for biotech SPACs with warrants, but that is hardly conclusive.

Among completed deals this year, it looks less promising for warrantless SPACs, although there are much fewer data points to choose from. The three warrantless biotech SPACs that completed deals year-to-date saw their de-SPAC’d targets – PNT, NAUT and GMTX – trade at an average price of $7.09 at midweek and a median of $8.10.

The 19 biotech SPACs completing deals with warrants in their units faired better with an average share price of their de-SPACs of $10.13 and a median of $9.27. These SPACs also hunted much bigger game with an average target enterprise value of about $1.2 billion versus $603 million for the three warrantless SPACs. Again, the sample sizes have large effects here and the median for SPACs with warrants was not far above the warrantless cohort at $769 million.

Some of the largest biotech deals among SPACs with warrants have also seen shares perform the worst among the overall sector as well, with ShareCare (NASDAQ:SHCR) and its $3.9 billion enterprise value (EV) envisioned in its SPAC deal closing Thursday at $7.10 and GigCapital2’s three-way combination with UpHealth (NYSE:UPH) struck at an EV of $1.35 billion finishing the session yesterday at $6.25.

Much of these waters are muddied by the current market conditions, but the status quo does show that neither a warrantless structure nor big game hunting in the biotech and healthcare sectors are a guarantee of SPAC success. On the contrary, trading behavior has, at the current moment in time, broadly rewarded biotech SPACs with smaller targets and warrants in their units.

Which brings us back to Palihapitiya and DNAC. With $250 million in trust, it is, like its sister SPACs, larger than both the average and median of biotech SPACs that have either announced or completed deals so far this year. And, assuming it aims to follow the typical SPAC structure of claiming roughly a 25% stake in its target, it will likely be fishing for a company that would fit in the top 10 of deals for the sector by EV on the year.

But, its focus on the “organ space” leaves many paths to follow. Heart disease continues to be the top killer of Americans and is therefore an obvious adversary to take on. Social Capital Suvretta III Board member Marc Semigran also has expertise in this arena. He has served as the medical director at Massachusetts General Hospital, leading its heart failure unit, and is the medical officer of Renovacor, a cardiovascular biotech firm that has a pending merger with Chardan Healthcare 2 (NYSE:CHAQ).

Heart problems are also good business with revenue Bristol-Myers Squibb (NYSE:BMY)’s cardiovascular drugs growing at a CAGR of 45% from $1.9 billion in 2015 to $7.9 billion in 2019. They are also estimated to be north of $10 billion in 2021. All other major pharmaceutical players have exposure to this market, but of course all are subject to potential regulatory and legislative changes.

Given the breadth of the heart space, there are also plenty of targets to choose from. Among the candidates perhaps most ready for a SPAC deal are V-Wave and Arbor Pharmaceuticals. V-Wave has raised $132.5 million in outside funding to date and Arbor was valued at around $1 billion in deal talks in April, according to Pitchbook.

The overlap of medical device companies with consumer-facing APIs also seems like the sort of market that would fit Palihapitya’s tastes. In that regard, is likely on his radar. It leverages smartphones to perform a wide variety of diagnostics for people seeking to check in on their health at home.

Its app-based urine tests can detect chronic kidney disease, urinary tract infections (UTI) and also perform prenatal monitoring and digital wound-monitoring functions in concert with connected doctors. Several other kidney-focused companies could potentially attract attention, including Virta Health and Pendulum Therapeutics.

Diabetes is also a broad treatment market open to a company that could provide care with a shiny consumer-focused face. The CDC estimated that about 30.3 million Americans suffer from diabetes in 2017, and they are served by a mix of insulin drugs, as well as glucose inhibitors that an enterprising company could work to combine into a single, more friendly package.

For a starting point in this endeavor, a SPAC, whether Palihapitya-led or not, may look at a relisting of Lipin (NSE:LUPIN), which is currently listed in Mumbai. It is one of the largest producers of generic pharmaceuticals worldwide and, among its portfolio, produces many therapeutics that help end-stage kidney disease patients on dialysis who have high phosphate levels. There is a baseline business there in medication that could be boosted with more developmental projects on the back of SPAC cash.