By Stacey Doyle
The past few months revealed the role M&A, PIPEs, and SPACs play in making tech and pharma investments increasingly viable. As a result, forecasting the 2023 PIPE market will inevitably include these industries.
Mergers often begin with the need for an infusion of capital to push the company over the top to satisfy the cash closing condition. However, as these investments became riskier in the past year, a more robust approach became necessary.
Sprucing Up the Biotech Market
The buzz about the rebounding biotech market continues into 2023. South San Francisco biotech company Spruce Biosciences raised $53.6 million in a PIPE deal. The cash from investors Armistice Capital, 5AM Ventures, Rock Springs Capital, Abingworth, Novo Holdings A/S, RiverVest Venture Partners, and HealthCap extend its financial runway into 2025.
By that time, Spruce said it will have results from clinical trials of its drug tildacerfont with a possible pivotal study to provide meaningful data to investors. This PIPE represents the first fundraising by the seven-year-old company since it netted $93.4 million in a 2020 IPO priced at $15 per share.
The biotech funding environment changed considerably after the pandemic flurry about treatments and technologies. Nearly 20 biotech companies have closed their doors since that time.
Get Intuitive with a Blank Check Company
Intuitive Machines used a SPAC to go public and start trading on the Nasdaq. The space infrastructure company supplies products and services to support space exploration. Shareholders of the blank check company Inflection Point Acquisition approved the deal. Intuitive Machines will get about $55 million through the SPAC’s trust and a $26 million PIPE deal.
Three days after the SPAC merger, Intuitive Machines’ stock tripled. The company swiftly became the top performer on major U.S. exchanges. In addition, the Intuitive Machines investor presentation revealed the company has NASA contracts and total bookings of around $317 million.
While Intuitive Machines indicated the SPAC trust could add up to nearly $301 million, shareholders redeemed $279.8 million before the transaction closing. Because shareholders are entitled to redeem their shares, a PIPE is often a critical and increasingly common add-on to a SPAC merger for increased operating capital.
Babylon and Falling Through the SPAC Cracks
Babylon Health, a UK company providing digital healthcare access solutions, in October closed a PIPE deal expecting $80 million in proceeds from PIPE subscriptions in the aggregate at the end of 2022. The initial subscribers included two existing Babylon institutional investors. Babylon initially took its stock public in 2021 through a SPAC.
While the SPAC offered 400% growth, it proved costly and left Babylon with few U.S. shareholders. As a result, a PIPE is often added to SPAC mergers to ensure available funds post-closing. However, like any other investment, these ventures also have potential risks. As a result, PIPE deals will almost certainly remain a critical component of the financing package as tech and pharma companies seek funds through M&A and SPAC mergers.
Past Insights into the Current PIPEline
In August, Vigil Neuroscience, a clinical-stage biotech company, completed PIPE financing with gross proceeds of about $75 million. The deal included existing and new investors, with financing to take the company to the first quarter of 2025.
In May 2022, Syros Pharmaceuticals, a gene expression company, acquired TYME Technologies and, concurrent with the merger, announced $130 million in PIPE financing. Last October, Local Bounti entered into a PIPE agreement for $23.3 million with Fidelity Management Research Company, BNP Paribas, and existing investors, including management.
According to the Fierce Biotech news website, the number of biotech IPOs and the value of companies going public by IPO in the second quarter of 2022 were the lowest since 2017. As a result, biotech and pharma companies are more likely to consider SPAC mergers and PIPE deals for a capital raise.
Need to Raise Capital
With a need to raise capital in a depressed market, constantly evolving and R&D-heavy industries like tech, biotech, and pharma require funding to remain relevant and profitable.
The numbers reveal the biotech industry’s need for profitability and growth. In June 2022, 23 biotech companies went public versus 68 at the same time in 2021. Further, just a few biotech companies that went public in the US last year are trading above their debut price.
Researching the companies and investors is crucial when considering the SPAC stakeholders’ right to sell before a merger and the potential consequences of redemptions. PIPEs can provide the necessary capital when trust funds become unavailable.
Looking Down the Pipeline at the 2023 PIPE Market
The trends of the past few months continue today. Maxpro Capital Acquisition just released information about its added PIPE subscriptions of $23.65 million for its merger with Apollomics, a late-stage clinical biopharmaceutical company.
The Global Intelligence heat chart, based on companies tracked by Mergemarket, reveals the most M&A opportunities are in pharma, tech, and industrials. With recent past performance and valuations in mind, growth opportunities exist for lucrative PIPE deals within these industries.
The Morrison Foerster 2022 Tech M&A Survey reported that tech continued to be the top industry for M&A. In forecasting 2023, survey respondents cited AI and machine learning as top choices for dealmaking opportunities, followed by e-commerce and robotic process automation.
Reverse mergers are less stable and are another capital opportunity for private tech companies to gain a majority stake in a publicly held company to absorb it. However, the owners of the formerly private company have a controlling interest.
With all the PIPE and SPAC activity in tech and pharma over the past few months, 2023 promises to offer unique opportunities for investors. Watch for more updates about PIPE deals and SPACs.
