Fresh from the Department of Whistling Past the Graveyard in today’s VentureWire:
Back in the real world, seven life-science IPOs have gone down in flames so far this year. An eighth startup, robotic-surgery maker MAKO Surgical, just slashed its offering price.
Life-science IPOs may be hitting the wall — so far this year, seven biotech and medical-device startups have yanked their offerings — but one part of the IPO market is booming. That’s the field of “special-purpose acquisition corporations,” or SPACs, which are essentially blank-check companies that raise money through initial offerings specifically for the purpose of acquiring other companies.
At Renaissance Capital’s IPOhome news page (partial screenshot here, as the flow of news will probably throw off the numbers), fully one-third of the IPO-related items involve SPACs filing, pricing or completing IPOs. Throwing things into an even starker light is the fact that most of the other items — 11 out of 27, to be exact — are all about IPO withdrawals or postponements.
SPACs can buy any target they can afford, but some have shown interest in private companies. In fact, a few have already been active in the life-sciences venture sector, and odds are good they won’t be the last. In December, a SPAC took out Precision Therapeutics, a maker of cancer diagnostics that looked shaky to me when it first filed for an IPO. Then just last week, a different SPAC bought up specialty pharma Dynogen Pharmaceuticals.
These sorts of transactions are often a pretty good deal for the startups involved, as they provide an easy route to the public market and, often enough, an infusion of capital on favorable terms. Conceptually, these deals are similar to reverse mergers, in which a listed shell company — often with few or no assets — “acquires” a startup for a minimal sum, then assumes the target’s name and carries on business without a hitch.
Another factor working in startups’ favor is the fact that most SPACs have only a limited time to make an acquisition. If it fails to close a deal within 18 to 24 months, a SPAC usually has to return its capital, minus expenses, to its investors and disband. That sort of deadline can definitely play to the advantage of entrepreneurs and VCs looking to get the best possible return on their investment. In fact, that’s exactly what the good folks at the In Vivo blog think probably happened in the Precision Thera case, which was a deal that didn’t seem to make a lot of sense on the surface.
There’s no easy way to tell how many SPACs may be prowling around the life sciences — although some are formed specifically to make acquisitions in particular sectors, many others are general-acquisition vehicles. I’m not aware of much SPAC activity in other venture sectors such as technology or cleantech, but I wouldn’t be surprised to find blank-check companies nosing around there for deals as well.
Coincidentally enough, Andrew Ross Sorkin has a good piece on SPACs in today’s NYT. He doesn’t touch on the venture-startup angle, but it’s a helpful primer on how these oddball vehicles work and the perverse incentives that favor doing a deal — even a bad one — over the alternative. In that sense, in fact, a burst of enthusiasm for SPACs looks like nothing so much as the last gasp of the stock-market bubble.
Last year was a tough one for IPOs, as Matt noted earlier, and so far this year looks even worse. Aptamer-drug maker Archemix today became the third life-science startup this month to withdraw or postpone an IPO, and the sixth so far this year. We take a closer look at the worsening IPO climate and the contrast with still-bullish venture funding in the sector, over at VentureBeat Life Sciences.
TODAY’S HEADLINES:
Essex Woodlands raising $1.25B for life-scences fund — Essex Woodlands Health Ventures, a Palo Alto, Calif., VC firm, is in the process of raising a new $1.25 billion fund for life-sciences investments, VentureWire reports. The fund could close as early as this month, but might slip into early 2008, according to the newswire.
The fund, Essex Woodlands’ eighth, would be double the size of the firm’s previous $600 million fund. It would also be the largest such healthcare-focused fund ever raised, dwarfing a $900 million fund MPM Capital pulled together in 2002.
With such a large fund in hand, Essex is likely to favor later-stage investments, which typically require far larger commitments, as well as venture investments in public companies. The firm has recently bolstered its investment team and expanded its geographical reach, having recently closed its first two deals in China.
SCP VitaLife raises $122M for life sciences — SCP Vitalife, a life-sciences fund formed by the U.S. investment firm SCP Partners and the Israeli VC firm Vitalife, has secured $122 million toward an expected $150 million life-science fund, VentureWire reports. The firm currently believes the fund will exceed its target, but won’t go above its “hard cap” of $200 million.
A pre-existing partnership between the late-stage U.S. VC firm and its early-to-mid stage counterpart has already produced two successful investments — Sightline Technologies, a startup developing endoscopic diagnostic systems, which was acquired in March 2006, and Can-Fite BioPharma, which listed on the Tel Aviv stock exchange in 2005. The firms then decided to raise the current fund together.
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