De-mystifying the de-SPAC: regulation and risk in life sciences transactions

For the SPAC sponsor, without the benefit of the portfolio risk management of a venture fund, the risk-reward profile for a private biotech acquisition is not for the faint of heart.

By Geoffrey W. Levin, Diane C. McEnroe, Carlo Felizardo

Successful investment in private biotech companies has long been the province of a rarified group of venture capital specialists with the scientific, medical and regulatory expertise to identify, assess and back winning teams and technology. While the risks have not changed, the pace of scientific innovation and the opportunity for financial and social benefit from groundbreaking medical advances have combined to bring new players to the industry with access to capital that was unimaginable just a few years ago.

Geoffrey W. Levin, Sidley Austin LLP

One of those new entrants is the special purpose acquisition company, or SPAC. According to data collected by SpacInsider.com, there have been 16 biotech-focused SPAC acquisitions (or so called “de-SPACs”) announced in the first half of 2021 for an aggregate enterprise value of over $30 billion and there are still at least a dozen SPACs seeking targets in the biotech industry that have more than $2.2 billion in trust. Because a SPAC has already raised capital through its own IPO, and often backstops or supplements that capital through a PIPE or alternative financing, a de-SPAC offers a target the prospect of access to substantially larger amounts of capital at more attractive valuations and on a more accelerated timeline than a traditional IPO. That prospect is particularly enticing for private companies in capital intensive industries like drug development.

For the SPAC sponsor, without the benefit of the portfolio risk management of a venture fund, the risk-reward profile for a private biotech acquisition is not for the faint of heart. With potential single asset risk, SPAC sponsors looking to acquire companies in the life sciences sector need to be particularly diligent in understanding the development and regulatory risks their targets face, and, as fiduciaries to public company shareholders, transaction diligence and execution should be more akin to a traditional private equity buyout than a growth equity or venture investment.

Diane C. McEnroe, Sidley Austin LLP

SPAC targets in the life science space extend across FDA regulated categories of products, including pharmaceutical, biologics, medical device, diagnostic, and digital health companies. Complex and varied frameworks govern the research and development, formulation, production, authorization or approval and marketing of these products. Targets also cross a wide spectrum of stages of development, whether pre-clinical, clinical, or in market with commercialized products. All of these considerations raise different areas of FDA regulatory focus for a SPAC or a company aspiring to go public through a de-SPAC transaction.

Due diligence for commercial-stage companies will be focused on less speculative topics in terms of impact: key issues may include significant recalls, negative inspection reports, warning or untitled letters for inappropriate or off-label promotion, a history of complaints, or labeling changes. For clinical-stage companies, diligence should cover interactions with oversight bodies, study protocols and results, determinations on marketing pathways, and adverse event reports.

Carlo Felizardo, Sidley Austin LLP

A holistic and informed review of FDA correspondence and meeting minutes is essential for evaluating a company’s products or pipeline, particularly for pre-commercial companies. Correspondence may reveal the Agency’s views on study design, the adequacy of collected data, and potential post-marketing or labeling conditions if a product is authorized for marketing. FDA interactions should also be reviewed to verify the use of certain FDA-specific terms often touted by companies, such as fast track, breakthrough therapy designation, priority review, or accelerated approval. Companies consider these developmental product designations – intended by Congress and FDA to provide more transparency to industry – to be highly-valued third party validation of the science, but they do not necessarily always translate into a higher likelihood of marketing authorization.

Finally, diligence will be key to identifying material issues to be disclosed in the public SEC filings required in connection with the de-SPAC process. Investor communications need to be carefully evaluated for accuracy and consistency. Commercial companies routinely disclose product issues with fairly standard language. For novel technologies, however, drafting a condensed summary of complex facts, the science, and the status of the developmental program can be challenging, particularly for earlier-stage or smaller companies that oftentimes lack internal FDA expertise.

In drafting disclosures, sponsors need to be mindful of language that is often a focus of the SEC in comment letters, such as “first,” “best in class,” “well validated,” and “tolerability.” SEC and FDA also frequently discuss filings for FDA-regulated products. Areas of particular FDA interest include pre-approval promotion of products as safe or effective, and implied or express comparisons not supported by appropriate scientific evidence. Staying on top of these comments is essential to being ready to quickly draft a successful and compliant filing in this space.

While the appetite for investment opportunities in private biotech companies is certainly robust, and SPAC sponsors have tapped into that demand, we are still in the early innings of the biotech de-SPAC game, and the success or failure of this experiment is yet to be determined. Even for sophisticated SPAC sponsors who understand the biotech industry and can identify targets with a rich pipeline, innovative technology and a strong leadership team, execution is critical.  That starts with efficient but thorough, value-added diligence and insight from advisers who know the industry and how to navigate the regulatory landscape.

Geoffrey W. Levin is a partner in Sidley Austin LLP’s emerging companies and venture capital group. Diane C. McEnroe is partner in Sidley Austin LLP’s food, drug and medical device regulatory group. Carlo Felizardo is an associate in Sidley Austin LLP’s food, drug and medical device regulatory group.