Acquisitions using special purpose acquisition companies (SPACs) have been all the rage in the past couple of years. The size of the deals has been increasing steadily. Earlier this year, SomaLogic entered into a $1.23 billion business combination agreement with CM Life Sciences II—a deal in which Reed Smith advised SomaLogic, a global leader in proteomics technology. It is clear that SPACs are larger, and more impactful.
In simple terms, SPACs are publicly traded companies that exist for the purpose of acquiring private companies, thereby taking private companies public through an alternate route than a traditional IPO.
Advantages of SPACs v. IPOs in Biotech
SPAC acquisitions have several unique advantages over traditional IPOs, including that the valuation can be negotiated between the SPAC sponsors and the target company, instead of in traditional IPOs, where the valuation can fluctuate significantly before the IPO.
In addition, because it is technically a merger rather than an IPO, SPAC sponsors and target companies can communicate their own projections to the public, rather than being subject to limitations in traditional IPOs. SPAC deals also offer more flexibility for the target companies in negotiating the deal terms (e.g., additional PIPE funding, debt, etc.).
SPAC acquisitions have also been popular in the biotechnology sector. New high-profile SPACs are being formed with the purpose of acquiring biotechnology companies in specific sectors. Interestingly, SPAC companies have recently been acquiring several target companies at once.
The benefit of this type of transaction is that the multiple target companies, once acquired, may create synergies among themselves, and having multiple companies together may offer a more attractive outlook for investors, thereby increasing the likelihood of retaining the funds. While there are significant risks associated with such transactions if they fail, it seems that SPAC sponsors find the upsides of such transactions to be much more attractive than potential downsides.
Need for Due Diligence
Despite the increasing popularity, due diligence must not be overlooked. Due diligence is important for any transaction, but it is especially so for biotechnology companies. In particular, due diligence for biotechnology companies is critical because they tend to be highly regulated by multiple government agencies, and the products can directly affect patients’ health and well-being. Without proper due diligence, latent problems could cause issues at any moment, putting the company and its investors’ funds at risk.
Below, we outline several aspects of biotechnology due diligence that we often scrutinize during the due diligence phase of a proposed investment or transaction.
Promotional practices are especially important because promotional materials and statements can determine a product’s intended use, which directly impacts how the Food and Drug Administration regulates the product.
Promotional practices can become the basis for FDA enforcement actions (e.g., off-label promotion, pre-approval promotion) or in some cases, enforcement actions from the Federal Trade Commission. Warning letters from the FDA or FTC can invite scrutiny from investors and other regulators, and unlawful promotional practices may hinder a product sponsor’s ability to receive a marketing authorization from the FDA.
In addition, public and private litigation stemming from potential violations of laws can also result from unlawful promotional practices.
Compliance With Clinical Trial Regulations
Clinical investigations are critical for biotechnology companies. Simply put, for many biotechnology companies, commercial success is not possible without successful clinical investigations.
Thus, it is absolutely critical that companies ensure compliance with FDA regulations for clinical investigations (e.g., good clinical practice, informed consent protections, proper management of financial conflicts of interest, and adherence to institutional review board (IRB) requirements). The FDA may deny approval for therapeutic products whose safety and effectiveness claims are based on data from non-compliant clinical investigations.
Government Registrations and Licenses
Licenses, registrations, or permits are often required when manufacturing or marketing FDA-regulated products. Of course, the FDA requires them but depending on the product, other federal and state regulatory agencies may also require biotechnology companies to obtain certain licenses, registrations, or permits.
Non-compliance could potentially result in enforcement actions, and interruptions to company operations. While early stage biotechnology companies are often not subject to these requirements, we recommend performing thorough diligence to identify the exact requirements applicable to the company and to assess compliance with those requirements.
Recalls, Market Withdrawals, Adverse Events
Finally, proper due diligence must involve an analysis of recalls, market withdrawals, and adverse events. Reviewing the history of such events and perhaps more importantly, how the company responded and addressed such events, often provides insight into the company’s compliance practices and culture.
While early stage biotechnology companies may not have experienced any recalls or market withdrawals, their clinical programs likely have recorded incidents of potential safety events, and at times communications with the FDA regarding such safety events. Such information must be carefully reviewed to minimize potential risks during all transactions, including SPAC deals.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Cori Annapolen Goldberg is a partner in Reed Smith LLP’s Life Sciences Health Industry Group. Her practice focuses on FDA regulatory issues, including regulatory due diligence in transactions.
Ari Edelman is a partner in Reed Smith LLP’s Global Corporate Group. He focuses on capital markets with an emphasis on SPACs.
Sung W. Park is a senior associate in Reed Smith LLP’s Life Sciences Health Industry Group. He focuses on FDA regulatory and compliance issues during pre-market and post-market phases of product life.