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Why This Top Venture Capitalist Is Raising Money With a Biotech SPAC

By Luis Sanchez CFA – Sep 2, 2020 at 8:13AM

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These shell companies allow the businesses they acquire to go public much more quickly than an IPO would. Is it time to buy in?

A special purpose acquisition company (SPAC) is a publicly traded shell company that raises capital with the intent of acquiring a private business. SPACs have become an intriguing alternative for companies that want to go public because they allow that to happen much faster than with an initial public offering (IPO).

FS Development (FSDC) is the latest SPAC to hit the public markets, having completed its IPO on Aug. 14. It's led by Dr. Jim Tananbaum, who has a proven track record as an entrepreneur and investor.

Biotech entrepreneur, venture capitalist, now SPAC investor

A SPAC is a bet on the management team's ability to find an attractive company to acquire and take public. Therefore, leadership is the most important factor to evaluate when considering a SPAC for investment.

Tananbaum, the president and CEO of FS Development, brings scientific and financial expertise to the table. He began his career by founding two life science companies, GelTex Pharmaceuticals (which was acquired by another company in 1999) and Theravance, the latter of which is now split into Innoviva and Theravance Biopharma. The latter two companies currently have a combined market capitalization of $2.5 billion.

Tananbaum founded Foresite Capital in 2011 with an eye toward combining two of his interests: mathematics and algorithms, and biology and healthcare. He was able to achieve his goal by partnering with companies that have revolutionized the life sciences and healthcare industries (think 10x Genomics, a now $11 billion company that designs and manufactures gene-sequencing technology used to analyze cellular structures, and Jazz Pharmaceuticals, which makes blockbuster drugs used to treat narcolepsy and sleep apnea).

The FS Development SPAC will serve as Tananbaum's vehicle for his next big investment. Judging by his track record, investors could make out really well if he successfully identifies the next hot biotech company or pharmaceutical platform.

three scientists working in a laboratory wearing goggles and white coats

Image source: Getty Images.

A new biotech SPAC

FS Development raised $105 million in its IPO in August. In a typical SPAC IPO, investors are offered both shares and warrants. Warrants, which are similar to call options, offer investors more exposure to the upside if the stock performs well.

However, FS Development did not offer warrants in its IPO. Interestingly, this appears to be a trend -- other biotech-focused SPACs, including Therapeutics Acquisition Corp. and Health Sciences Acquisitions Corporation 2, have also not issued warrants.

What kind of company could FS Development take public? The SPAC provided some acquisition criteria in its IPO prospectus. It noted that the target company should be focusing on an unmet medical need, offer a strong risk/reward proposition, and demonstrate proven scientific and clinical leadership. The SPAC does not indicate what specific areas within biotech it is focusing on, but it will be able to leverage Foresite Capital's resources -- including its personnel, network, and investment banking relationships -- as it engages in its search for companies to acquire.

SPACs are rising in popularity

It has been a record-breaking year for SPACs as they have gained popularity among both investors looking to invest in soon-to-be public companies and private companies seeking an alternative to a traditional IPO. So far this year, more than 80 SPACs have IPOed, raising a total of more than $33 billion.Investors interested in getting in early on the next hot biotech stocks should consider investing in SPACs, especially those with solid management teams such as FS Development.

Luis Sanchez CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

FS Development Corp. Stock Quote
FS Development Corp.
FSDC
Jazz Pharmaceuticals Stock Quote
Jazz Pharmaceuticals
JAZZ
$156.36 (1.56%) $2.40
Theravance Biopharma Stock Quote
Theravance Biopharma
TBPH
$10.54 (0.52%) $0.06
Innoviva Common Stock Stock Quote
Innoviva Common Stock
INVA
$12.80 (-0.81%) $0.10
10x Genomics Inc Stock Quote
10x Genomics Inc
TXG
$34.73 (0.03%) $0.01
Therapeutics Acquisition Corp Stock Quote
Therapeutics Acquisition Corp
TXAC

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