Share Dilution

Dx IPOs drop, SPAC market retreats amid macro headwinds

NEW YORK – The diagnostics industry has seen a series of companies go public over the past year, whether through traditional offerings or through mergers with special purpose acquisition companies (SPACs). , but this trend has seen a significant slowdown in 2022.

In the first half by 2021, eight diagnostics companies had already gone public or had filed initial public offerings, and by the end of the year, the tally reached 19with two transactions exceeding $1 billion: Ortho Clinical Diagnostics’ $1.29 billion IPO and Ginkgo Bioworks’ $1.63 billion offer via a SPAC, although Ortho was later acquired by Quidel in a $6 billion deal.

Other major deals in 2021 include SomaLogic $630 million Offer based on SPAC in September, Sema4’s $500 million IPO via SPAC last July, and Sophia Genetics A fundraising of 234 million dollarsalso in July.

So far this year, however, the IPO market has been virtually silent. Two companies have filed for IPO – Cardiac diagnosis through a merger with Mana Capital Acquisition and based in Seoul software company lunit on the Korean Exchange – and Prenetics made its debut on the Nasdaq in May after filing its case last September. Hong Kong-based Prenetics has been valued at $1.25 billion with a combined net worth of $1.7 billion when it announced its merger with Artisan Acquisition, while Cardio Diagnostics is expected to have a post-deal market cap of $175 million. Lunit, meanwhile, expects to raise at least $42 million.

This transaction rate is roughly at the same rate as the six diagnostic IPOs seen in 2020 and shortly before the four IPOs in 2019, indicating that the 2021 diagnostic bubble, which was largely the result of demand for COVID-19 tests driving interest in the space, may have burst.

The diagnostics market in general has taken a back seat to trading, in part due to broader economic concerns such as high inflation, geopolitical strife across the globe, and rising US interest rates. United, but investors are also hesitant to get started. diagnostic companies when post-IPO performance has not always met expectations throughout the pandemic.

Raymond James analyst Andrew Cooper noted that the status of the broader economy at present has been a major deterrent to companies considering going public, as “no one ever wants to go public. in a bear market unless you have to”. Companies are still in need of capital, but as diagnostic industry valuations have deflated from their all-time highs, companies that may have gone public are turning to private financing and mergers and acquisitions instead, he said. he declares. “I think we’re seeing people who, all things being equal, in a better market probably would have gone public, are either looking to stay private and raise money as best they can,” or are looking for merger opportunities and purchases.

“If you have the money to stay private right now, you’re probably not going to be rushing to do anything,” he said. “You will operate, you will execute, [and] you’ll hope you can exit from a position of strength in a much more IPO-friendly market.”

Harry Glorikian, general partner at venture capital fund Scientia Ventures, said the companies he spoke to had been “hesitant” to start the IPO process, regardless of their financial momentum, due to the uncertainty surrounding the broader economy. “If by any chance the economy turns in the next six months, it could be a great opportunity” to go public. “But the problem is you can’t just wake up and say ‘we’re going public tomorrow,'” he said. “It’s a process.”

Companies that have started the IPO process can pursue it, but for those that have not yet, they are “thinking long and hard [about] if they want to go that route right now.”

Deals can also largely depend on where a company works in the diagnostics industry, Cooper said. Players in the oncology market may have more options or opportunities to go public as there has been a lot of investment in the space and many companies are getting closer to bringing their products to market, while that infectious disease companies seeking to go public on the back of COVID-19 testing may have missed their chance as public investor enthusiasm for COVID-19 testing has waned. “Either you made it if you were going…or you’re still very early and not necessarily on your way to trying to make a splash in the public markets,” he said.

Oded Ben-Joseph, chief executive of investment firm Outcome Capital, said most investors have realized the peak of COVID-19 has passed and these earnings are “not sustainable”. They are “heavily discounting all COVID-19 revenue,” which drives down valuations, he said.

The performance of some companies that went public last year on the back of their COVID-19 testing activities has also been lacking. Talis Biomedical, which went public for $254 million in February 2021, debuted on the Nasdaq at $16 per share. As of Monday’s market close, the company’s stock price was $0.86 per share, giving the company a paltry market capitalization of around $23 million.

Lucira Health, another COVID-19 focused company that went public in February 2021, IPO price at $17 per share. Its stock closed Monday at $2.43 per share and the company’s market capitalization sits at just under $100 million. And Cue Health, a major player in the point-of-care COVID-19 testing space, saw its stock price drop $16 per share when it went public in September at $3.28 at Monday’s market close.

The craze for SPACs is fading

An important element of last year’s booming IPO market was the ability to go public via a merger with a SPAC – a route with far fewer restrictions than a traditional IPO that also provided access in the capial. SPACs are shell companies created for the express purpose of acquiring existing companies and taking them public, and they have some key advantages over regular IPOs. According to Ben-Joseph, there is less risk for sponsors to invest in a company through SPAC, because they are less subject to market volatility, and for the companies themselves, the process is shorter, cheaper and has a guaranteed financial result compared to a regular investment. IPO, he says.

Paul Mieyal, another CEO of Outcome, said the main impetus for SPAC deals in 2020 and 2021 is that traditional IPOs “weren’t really an option” with most of the world and the economy. closed due to the pandemic. Companies were still trying to go public and raise money, and investors were still looking to spend their money, so SPACs “filled a need to bring private companies together with public money,” he said. he declares. Early SPAC transactions were more attractive than they have been because they “effectively replace the IPO market,” Mieyal added.

Although SPACs have “become trendy over the years”, the most recent trend is a bit of a “new phenomenon” – Mieyal said that SPACs have traditionally not focused on pre-revenue stage businesses like many of them in the diagnostics industry.

And while SPACs were once the province of sleazy sellers, once “household names” and “credible healthcare investment funds” entered the market, investors jumped on board and the opportunity for “efficiently prefunded IPOs” was wide open, says Mieyal.

However, the pendulum has swung and SPACs are “not at all the kind of hype” they were in 2021, said Cooper of Raymond James. Part of the problem has been oversaturation, with too many SPACs and not enough companies ready to go public, but there has also been regulatory attention directed at SPACs that could have played a role in cooling the market.

In March, the United States Securities and Exchange Commission proposed rules improve disclosure and investor protection by applying traditional IPO standards to SPAC transactions. The rules would require additional disclosures about SPAC sponsors, conflicts of interest and sources of dilution, as well as information about business combination transactions between SPACs and private operating companies.

Ben-Joseph and Mieyal also noted the oversaturation, with Ben-Joseph saying there’s “such a proliferation of SPACs, and they’re all fighting for the same assets, so it’s become a very crowded space.” SPACs also have a set deadline for when they have to make an acquisition, so there’s a level of desperation – if there’s no deal done within that window, the money has to be returned to the investors .

“The lower fruits were picked up pretty quickly,” Mieyal said, and now many SPACs “are still on hold” as there are fewer attractive businesses to acquire. He noted that there’s likely still a lot of trading going on that hasn’t been made public yet, because SPACs “still have to do the same kind of due diligence” as with a traditional IPO — the only one. difference is that everyone knows how much money will be available at the end.

Although Mieyal declined to mention which companies might be targets for a SPAC merger, “I guarantee the guys with the check in hand are looking for” targets, he said.

Although there are currently “too many SPACs suing too few companies”, a biotech company that fits the SPAC profile of the industry has “some clout”, as multiple SPACs can bid and be open. to negotiations for better terms of agreement, he said.

As the world has begun to reopen after the pandemic, there will likely be a “return” to traditional IPOs, but not in the short term due to economic pressures holding back transactions of all kinds, he said. declared. With the overall economy in its current state, the slowdown in IPOs this year is not unexpected, he added. Even removing the overhang of the COVID-19 pandemic and the recent SPAC phenomenon, “whenever the markets are in turmoil, interest rates are skyrocketing and there is a lot of volatility in the market , it’s really difficult to do an IPO”.