LifeSci Acquisition (NASDAQ:LSACU) announced terms Friday for its upcoming IPO. According to the Nasdaq, the special purpose acquisition company or SPAC plans to raise $50 million by selling 5 million shares at $10 piece which will give it a market value of $63 million. New York investment bank Chardan Capital Markets is the sole bookrunner for this deal.
SPACs have continued to grow more popular over the past few years, and LifeSci’s IPO represents a good opportunity to understand what these investment vehicles. While SPACs carry significant downsides, there is a reason why they become more popular and investors need to understand them to judge LifeSci’s value.
The Rise of SPACs
A SPAC is a special company that has no business of its own, though it can be compared to a holding company. Instead, LifeSci Acquisition will use the raised $50 million to acquire a company. As the name might suggest, LifeSci Acquisition states in its SEC report that “it is our intention to pursue prospective targets that are focused on healthcare innovation.”
LifeSci Acquisition will have two years to find a suitable company and merge with them. If the company fails to do so, capital will be returned to the investors. This approach lets the target company go public without going through the entire IPO process including a roadshow, while investors will hope that LifeSci will acquire a great health company that can continue to appreciate.SPACs were popular in the early 2000s, yet interest collapsed after the 2008 crash and only 1 SPAC went public in 2009 according to Barron’s. But starting from 2016, the number of SPACs has rapidly risen from 13 to 59 in 2019. Some major recent SPACs include DraftKings, which was acquired by Diamond Eagle Acquisition Corp (NASDAQ:DEAC), and Virgin Galactic (NYSE:SPCE) which merged with Social Capital Hedosophia .
Private equity markets have boomed and created more IPOs and unicorns than ever before. But disappointing performances by major unicorns like Uber (NYSE:UBER) have made private investors more wary of the IPO process. Dealing with a SPAC, who can help pay down the acquired company’s debt faster and which does not have to handle as much paperwork, has some advantages.
But there are also serious disadvantages which are why SPACs have been so rare. Most SPACs are unsuccessful and end up trading below their market value, as they either fail to acquire a company or make a bad decision acquiring one. And from an investor perspective, a SPAC is riskier than a traditional IPO. There is less information to go on, and the SPAC could acquire a company that you have no interest in. SPAC shareholders can sometimes scrap such a deal with their votes, but that still means your investments will not be going to a useful company.
Understanding LifeSci Acquistion
SPACs are thus becoming more popular for a variety of reasons, but what about LifeSci Acquisition? Is this a SPAC that should be invested in?
LifeSci will be looking for a target in the “biopharma, medical technology, digital health, and healthcare services sectors,” and it is true that those sectors are poised for major growth in the upcoming years. According to Business Insider, 76 healthcare companies went public in 2019, with some delivering more than 50% on their initial return. Increased spending and interest will continue to keep demand high, as LifeSci points out that “total healthcare expenditures are thus expected rise to 19.9 percent of the US Gross Domestic Product.”
Since LifeSci has no business to speak of, we have to more strongly consider its leadership and its underwriter. This is much harder to analyze than the financial statements and market opportunities of a specific IPO, but what we see so far looks quite good. While investors may be concerned about LifeSci having a single underwriter, Chardan is a leading bank when it comes to SPACs. This bank has underwritten past SPACs such as Newborn Acquisition Corp and Catalyst Biosciences.
Chardan president Jonas Grossman is a member of LifeSci’s board, and its three main leaders in Andrew McDonald, Michael Rice, and David Dobkin all have substantial experience managing healthcare funds. This is a positive sign that these men and this company can make the right decision on who to acquire.
Final Thoughts
For a SPAC, LifeSci is a pretty good one. It is underwritten by a bank that has been a major proponent of SPACs and has leadership with a solid healthcare background. And it is moving forward to acquire a company in a growing and critical industry.
But while SPACs have merits compared to a traditional IPO for a company that wishes to go public, they are worse than normal IPOs for investors. Investors could be giving money only for LifeSci to acquire a company they have no interest in and will have a harder time doing their due diligence for that company. SPACs will likely continue to stay popular as long as there is this much money in private equity markets, but investors should feel better dealing with traditional IPOs instead.