SPAC-powered digital health deals rising dramatically

Dive Brief:

  • Digital Health companies are seeing a flurry of activity to take them public, driven primarily by the use of special purpose acquisition companies, better known as SPACs, based on an analysis by Rock Health.
  • “The first three and a half months of 2021 have already seen more completed or announced public exits by digital health companies than in all of 2020. Digital health firms were the target of 13 SPAC-driven mergers since the beginning of last year, with 11 either completed or scheduled for completion this year,” the report notes. That compares to just eight initial public offerings during the same time period. There were two completed SPACs involving digital health firms in 2020 and none in 2019.
  • However, SPAC targets tended to raise significantly less money than the comparable IPOs. Companies were also significantly less developed than those that went public in the traditional manner. Nevertheless, Rock Health predicts the trend will continue and should be a “wake-up call” to larger healthcare firms looking to acquire digital health assets.

Dive Insight:

SPACs have accelerated in the past year as a faster way to raise money than go through a traditional IPO.

The explosion of telehealth during the COVID-19 pandemic has increased demand for digital health services amid the lockdowns. One such recent deal involves Anthem-backed Sharecare, which was recently valued at nearly $4 billion.

But a SPAC tends to lead to a smaller-caliber deal than an IPO. According to Rock Health’s analysis, the digital health SPAC deals that have closed raised $184 million on average. That’s $43 million less than IPOs involving similar companies — a 19% difference.

SPAC-acquired firms are also five years younger on average than digital health companies going through an IPO, meaning their revenue streams and valuations are likely lower as well.

Altogether, Rock Health counts 52 SPACs formed targeting healthcare companies for acquisition. There are also 51 digital health firms with at least $180 million in private funding — meaning that it is likely there will be many more deals to take privately-held digital health firms on the horizon. That could be furthered powered by the record $6.7 billion in venture capital raised by digital health firms in the first quarter of this year.

While SPACs do offer some advantages for companies considering going public, “with no IPO roadshow, there is less time for public investors to rigorously examine opportunities,” Rock Health concluded, suggesting that fraud or other irregular activities could be more likely. “While new paths to liquidity are fundamentally advantageous for private investors, a few sour apples could leave a bad taste for digital health in the public markets.”