Will SPACs Become a Trend Among Behavioral Health Startups?

More than 400 companies across various industries held initial public offerings (IPOs) last year, the most since 2000, even amid the pandemic-led economic downturn. At the same time, many businesses chose to go public by merging with a special purpose acquisition company (SPAC), a maneuver that has gradually gained traction among startups, including the subscription-based therapy company Talkspace.

Often referred to as a “blank check company,” a SPAC is a publicly-traded corporation set up for the purpose of buying a business to take it public, with the combined entity often taking on the purchased company’s name.

There are several reasons businesses might choose to go public through a SPAC. It allows them to skip the long disclosure process that comes with an IPO, and it gives the company financial backing prior to their stock debut — as opposed to them having to do a traditional roadshow to line up investor support.

So far this year, more than 320 companies have gone public by way of SPACs, according to the data and research site SPAC Analytics. That already surpasses last year’s record breaking count of 248, with a number of those companies falling into the health care realm.

Additionally, in January, the SPAC trend made waves in the virtual behavioral health world, when Talkspace announced its plans to go public after having been purchased by the SPAC Hudson Executive Investment Corporation, also known as HEIC (Nasdaq: HECCU). As part of the $1.4 billion deal, the combined company will retain Talkspace as its corporate name and trade on the Nasdaq.

Various finance experts have declared 2021 as the year of SPACs, while others claim that SPAC momentum is bound to fizzle out. But as SPACs for now present themselves as an attractive alternative for some companies to go public, the question becomes: Will more behavioral health companies follow Talkspace’s lead and go public via a SPAC?

SPACs in behavioral health

Currently, there are only a couple of publicly traded behavioral health companies. Those include Acadia Healthcare (Nasdaq: ACHC) and Universal Health Services (NYSE: UHS), with TPG Capital-backed LifeStance Health also recently filing for a $100 million IPO. 

In the future, though, behavioral health companies could flock to SPACs for many of the same reasons other companies do, according to Diego Arias, a health care ventures analyst for the innovation platform Plug and Play Tech Center.

For one, it’s a faster path to going public. Additionally, acquired companies stand to receive a high valuation for their stock by going public through a SPAC as opposed to an IPO, he said. The traditional IPO process has long been dogged by allegations of underwriters routinely and deliberately underpricing shares to prospective investors in order to secure future business.

“SPAC sponsors are not necessarily motivated to achieve the lowest price in acquisition,” Arias told Behavioral Health Business. “The startup [being acquired] can raise the price as long as it’s within the budget of the SPAC, because that money that doesn’t go towards the acquisition will have to be returned to the sponsors.”

Regarding behavioral health startups, Arias said many have become potentially intriguing investment plays given that their service model revolves around virtual care delivery. Arguably the most significant factor driving interest in that has been COVID.

Amid the pandemic, more people have sought behavioral health assistance by virtual means. Additionally, funding for digital behavioral health companies reached all-time highs last year, even with the economic slowdown.

Given these and other considerations, Arias believes it could be an ideal time for some behavioral startups to go public by way of SPACs.

“Behavioral health is something that the pandemic has pushed mostly online,” he said. “As that sector continues to gain visibility, if more companies were to go public via SPAC, I think it would be great for the visibility, not only with behavioral health, but also for … the wider digital health ecosystem.”

Even if behavioral health startups have no desire to go public, the business success they’ve achieved as of late could inspire other entrepreneurs to enter the space to continue tackling the supply-demand gap, according to Jennifer Thomas, a managing director for Plug and Play.

“When it comes to behavioral health, the increase in access that has happened over the last year-plus has really been phenomenal,” Thomas told BHB. “The focus on behavioral health … is really important, and is a very positive sign. That’s not … SPAC-related …, but having [access] as a foundation will really allow for more startups to enter the space and help disrupt and improve patient outcomes in behavioral health.”

UpHealth’s SPAC play

With 2,600 providers treating around 46,000 active members, Talkspace has drawn the most attention in the behavioral health space for its intentions to go public through a SPAC. But the company is not alone in the arena.

Hims & Hers (NYSE: HIMS) and SOC Telemed (Nasdaq: TLMD) — which are not pure-play behavioral health providers like Talkspace — merged with SPAC companies in advance of their stock debut. On top of that, a number of digital behavioral health providers such as Calm, Lyra Health and Modern Health have been making waves for reaching unicorn status with valuations of at least $1 billion, fueling speculation they could also potentially go public.

One company doing behavioral health that will soon join the publicly-traded ranks via SPAC is UpHealth Holdings.

Headquartered in Delray Beach, Florida, UpHealth operates a virtual platform that provides integrated care management, pharmaceutics and telemedical assistance. That includes services like mental health and SUD treatment.

“[We] have been in conversations over many years [about] creating what we imagined to be a next generation digital health company,” Ramesh Balakrishnan, the co-CEO of UpHealth, told BHB. “That would combine some very advanced sophisticated technologies and platforms, along with services that we could plug in to address … [the] dimension of health related to physical health [and] behavioral health medications.”

UpHealth’s platform serves over 1,800 healthcare venues including hospitals, clinics, education facilities and large employers, with its digital pharmacy network consisting of more than 160 behavioral health providers. Last November, the company added to its platform when it merged with fellow digital provider Cloudbreak in a deal arranged by the blank check company GigCapital2 (NYSE: GIX).

UpHealth had different financing options for the company’s future, including private and public funding, but ultimately decided that accessing public markets by way of a SPAC was the best way to achieve growth and scale at a pace that was faster and more to its liking.

“The reason for getting to the public markets in an accelerated fashion was [because] we had … significant opportunities … that we wanted to capitalize on right now,” Balakrishnan said. “We want to be able to take on all of the demand ahead of us as quickly as we can.”

UpHealth and Cloudbreak’s merger with GigCapital2 is scheduled to be finalized in mid-June, at which time the newly combined company will be renamed UpHealth Inc. and trade on the New York Stock Exchange under the ticker symbol UPH.

Balakrishnan said that the infusion of capital coming from the deal will allow the company to expand its virtual behavioral health services. He believes the rise in stress, anxiety and substance use disorder (SUD) since the onset of the pandemic has only served to crystallize the importance of behavioral health treatment going forward.

“What the pandemic has done is brought to the forefront the fact that behavioral health … conditions are widespread, underdiagnosed [and] undermanaged,” Balakrishnan said. “[T]he virtual encounter became essential because there’s been such a shortage of providers and access.”

SPACs’ future in behavioral

The jury is still out as to whether SPACs will become a permanent fixture. In spite of the record number of deals, some companies that have recently gone public via SPACs have experienced significant stock losses.

The SPAC process is also changing, as the U.S. Securities and Exchange Commission (SEC) issued new accounting guidance in April for companies related to warrants, which give investors the option to buy shares by a certain time in the future at specified prices.

Warrants are often used to entice investors to buy into a SPAC when it initially exists as a blank check company. Under the SEC’s revised guidance, warrants must now be categorized as liabilities instead of equity assets on a company’s books.

Around the time the guidance took effect, the number of SPACs that went public decreased dramatically from the prior month. And possibly even more regulatory scrutiny is coming in the future, as the process was initially designed to bypass some of the traditional IPO stipulations.

When it comes to Talkspace, there is no word on if the new regulations somehow affected the timeline of its plans to go public via SPAC.

Initially, the company said it expected the deal with HEIC to close — and for trading to begin — by the end of the first quarter or early in the second quarter of 2021. While that’s yet to happen, HEIC recently announced that its shareholders will hold a June 17 meeting to vote on the merger, which its board of directors has unanimously recommended for approval.

Talkspace initially declined a request by Behavioral Health Business in January to comment on its deal with HEIC. The company also did not respond to a request for comment for this story prior to HEIC’s announcement of the shareholder vote.

Questions, likewise, have arisen as to whether SPACs are good for the public perceptions of companies themselves. One concern is that businesses are choosing to forgo a traditional IPO process because of factors that might otherwise scare off investors, such as weak bottom lines or a lack of products and services available to market.

For his part, Balakrishnan said traditional IPOs have their own issues to contend with, particularly when it comes to profitability after a company’s public debut.

“It’s pretty funny actually, because here we have companies doing IPOs that are losing billions of dollars a year,” he noted. “That idea of an IPO and criteria for an IPO disappeared long ago.”

Balakrishnan said that UpHealth is profitable, and as such, is not worried about any red flags the SPAC process may be perceived to raise.

“We have substantial revenues [and] earnings on an accelerated growth curve,” he noted. “That was never a consideration for us — that this is a way to access public markets because the traditional avenues are not open to us. That was never a factor in this.”

For virtual behavioral health providers looking to potentially follow in UpHealth’s footsteps, Balakrishnan said what truly matters is being able to offer a comprehensive range of services that take into account co-occuring conditions, both behavioral and physical.

“What we don’t need is a proliferation of fragmented interventions that are all disconnected from one another, that, at the end of the day, result in many things falling through the cracks,” he said.