Do the Math on a SPAC or Just Follow the Leaders?
(Bloomberg Opinion) -- It’s tempting to copy someone else’s homework. That also applies to investors behind special purpose acquisition companies.
Shareholders in Amsterdam-listed Odyssey Acquisition SA must decide whether to support the blank-check firm’s merger with U.K.-based BenevolentAI. Assessing whether the biotech is worth its mooted 1 billion-euros ($1.1 billion) enterprise value is an unusually tough job.
Odyssey was set up by investment-banker brothers Michael and Yoel Zaoui to buy a European healthcare or tech company. Benevolent is a bit of both. It uses artificial intelligence to identify the parts of a cell a drug might target, and to develop the drug chemistry, too. (The firm came to prominence as a portfolio company of Neil Woodford, the fund manager ignominiously forced to shutter his funds in 2019.)
Benevolent was clearly heading for a fundraising. It has no significant revenue. Cash in the bank wouldn’t cover even a year of operating costs, currently 85 million euros and rising. A merger with Odyssey provides access to the SPAC’s 300 million euros cash pile. In addition, so-called PIPE investors (who jump in once a SPAC finds its target) have agreed to inject a further 135 million euros into Odyssey. The terms give the SPAC shareholders and follow-on PIPE investors a combined 29% of the merged company, implying an equity value of 1.5 billion euros with the new money.
These financial resources are neither cheap nor certain. Benevolent pays 46 million euros in fees and hands an initial 3% stake to the Zaoui team. Current Odyssey investors have the right to pull out. If they do, Benevolent would have to use its newly gained listing to tap the equity market sooner rather than later.
The many ifs and buts to the valuation may given them pause. Start with the projects closest to generating revenue. The main one is a cream for mild-to-moderate atopic dermatitis (often eczema). If phase-one trials reporting next year go well, it could secure a commercial partner. The presence of the former boss of Sanofi on Odyssey’s team could help find one. The French pharma giant’s Dupixent drug for more severe dermatitis is generating billions of dollars in sales.
Typical upfront payments on such collaborations are about $80 million, with $325 million for milestones thereafter, Benevolent points out. The increased confidence in commercial viability would be worth more.
Then there’s a potential pill for ulcerative colitis. This could be more palatable than current injected treatments for inflammatory bowel disease. Yet trials aren’t scheduled to start till 2023. Benevolent has also identified a way of attacking chronic kidney disease. AstraZeneca Plc is working on the associated drug and would make payments if it succeeds.
These potential money-spinners need discounting for the risk of failure and the distant payback. The rest of the pipeline is even further away from trials. That said, analysts at Goldman Sachs Group Inc. have previously valued the tech platforms of similar biotechs at $100 million to $1 billion.
Of course, SPACs exist to provide access to early-stage investments usually reserved for private capital. The experts among Odyssey’s shareholders may be able to make confident predictions for Benevolent’s risk-adjusted revenue. Others may just trust that the SPAC founders and new investors have found a bargain. The PIPE crowd includes Singapore wealth fund Temasek Holdings Pte (an existing Benevolent shareholder), AstraZeneca, two private-equity firms, the Zaouis and others. But the investment may be small change for some of them, strategic for others.
Odyssey is very different from U.S. SPACs fronted by athletes and entertainers. Still, this transaction relies pretty heavily on big-name endorsements, too.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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