SPAC Activity Should Be Monitored Amid Corporatization of Healthcare

Amid the ongoing corporatization of healthcare, activity involving special purpose acquisition companies, or SPACs, in the U.S. needs to be monitored, according to commentary published in the New England Journal of Medicine.

Though there has been scrutiny of private equity acquisitions in healthcare, “the back end of corporate acquisitions — the exit strategy — has remained largely ignored, despite arguably being more important in the long run,” wrote Nishant Uppal, MD, MBA, of Brigham and Women’s Hospital, and Zirui Song, MD, PhD, of Harvard Medical School and Massachusetts General Hospital, all in Boston.

Private equity firms tend to sell their acquired entities to another private company within several years, Uppal and Song noted. However, a different strategy has emerged in healthcare — going public.

“Going public has typically involved listing shares of the acquired entity on a stock exchange,” they wrote. “But a new approach — which entails establishing so-called special purpose acquisition companies (SPACs) — is increasingly being used to enable private healthcare companies to be publicly listed.”

In 2021 alone, 107 SPACs listing healthcare companies as their intended targets went public, raising a total of $23 billion, Uppal and Song noted.

The process starts with a SPAC being created by a sponsor — such as a private equity fund or large company — which raises capital through an initial public offering (IPO), they said. Once an acquisition target is found, the SPAC merges with the target, bringing it public through a reverse merger. Prior to the merger, initial shareholders may sell their shares back to the SPAC. These shares are often purchased by other private equity firms.

“SPACs represent a new phase in the corporatization of medicine,” Uppal and Song wrote. “Private equity acquisitions have been linked to increases in prices, utilization, and adverse clinical events. By enabling more healthcare entities, including those owned by private equity firms, to go public, SPACs may facilitate for-profit ownership.”

As for what may be driving interest from healthcare companies, they may find SPACs more favorable than the traditional IPO, according to Uppal and Song.

Healthcare companies that “wouldn’t have been taken public on the basis of financial performance targets (revenue, profitability, or market capitalization) set by underwriters still have a path to public markets by means of SPACs,” they noted.

And underwriters may charge lower fees “primarily because SPACs may be less likely to be targeted by shareholder lawsuits than companies that undergo traditional IPOs,” they explained. Also “some executives believe that share prices are more accurate when a SPAC is used because private equity firms often help fund the reverse merger and are given confidential information, whereas the traditional IPO process relies heavily on appealing to institutional investors.”

And while there are real concerns, some argue in support of SPACs.

SPACs provide healthcare entities with access to capital through public investors, and public entities are often required to be more transparent than their private counterparts, Uppal and Song noted.

Regardless, “[i]nstitutions and members of the public could increasingly hold financial interests in SPACs by means of personal investments in public equities, mutual funds, pension plans, and retirement accounts,” Uppal and Song concluded. “Policymakers and regulators, in turn, are confronted with both increasing healthcare corporatization and an emerging need to identify potentially undesirable SPAC activity.”