AMAM - Johnson & Johnson's Acquisition Of Ambrx Biopharma: Hold Through It

2024-01-10 23:19:52 ET

Summary

• Ambrx Biopharma is a biotech company with an advanced approach to antibody-drug conjugates (ADCs) for oncology.
• Their proprietary platform for expanded genetic code technology creates ADCs for prostate and breast cancer treatment.
• The recent acquisition announcement by Johnson & Johnson shifted AMAM's investment profile to an M&A arbitrage play.
• I believe the stock is a "hold" because it trades at a negligible discount to the proposed acquisition price.
• However, I reckon the stage is set for a potential hike in the acquisition price, though that ventures into highly speculative territory.

Ambrx Biopharma Inc. ( AMAM ) stands out among biotech companies due to its advanced approach to antibody-drug conjugates (ADCs) applied to oncology. AMAM's proprietary platform for expanded genetic code technology creates ADCs such as ARX517, which targets prostate cancer cells, and ARX788, which aims to treat HER2+ breast cancer. ARX517 won the Fast Track designation by the FDA. On the other hand, ARX788 is on the path to being approved for commercialization in China. However, after the recent acquisition announcement, I believe AMAM’s investment profile shifted into an M&A arbitrage play, away from a pure biotech investment. Given that AMAM’s price per share currently trades closely in line with the proposed deal’s terms, I believe the appropriate rating, for now, is a “hold.” However, I think there’s a non-zero chance that the deal’s price might be revised higher than $28.00 per share, given the initial reactions to the acquisition announcement.

A Promising Platform: Business Overview

Ambrx Biopharma Inc. is a clinical-stage biopharmaceutical company founded in 2003 with an IPO on the NYSE in June 2021. In March 2023, AMAM changed trading from NYSE to NASDAQ with the same ticker name, modifying the company domicile from the Cayman Islands to Delaware.

AMAM focuses on antibody-drug conjugates (ADs) to modulate the immune system applied to the generation of therapies for various types of cancer. The company has developed an expanded genetic code technology platform to produce the next-generation ADCs with an engineered precision biological approach. AMAM collaborates with partners to develop drug candidates using its proprietary platform to generate bio-conjugates for animal health. AMAM also teams with Beigene , a Chinese biotech company, to create next-generation biologics.

AMAM technology provides a targeted therapy that attacks cancer cells while sparing healthy cells, combining the action of monoclonal antibodies [mAbs] with chemotherapy. The mAbs-chemotherapy compound attaches to the cancer cell to release the drug that destroys it. This approach reduces side effects by limiting the exposure of healthy cells to the chemotherapy drug. The field of research on ADCs has a high-value potential for innovative, effective cancer therapies. This is why many of AMAM’s competitors are jumping into this trend with significant improvements. For instance, Gilead ( GILD ) acquired Immunomedics for $21 billion. Additionally, the Daiichi Sankyo and AstraZeneca collaboration exemplified how competitors see potential in this field of research. Nevertheless, I believe AMAM's Expanded Genetic Code platform is a " golden egg " for its advancements in ADC technology, and its IP shouldn’t be underestimated.

ARX517 and ARX788: Prostate and Breast Cancer Treatments

One of AMAM's lead drug candidates is ARX517 , an ADC for prostate-specific membrane antigen (PSMA). AMAM technology uses synthetic amino acids [SAA] engineered to have particular chemical properties attached to defined sites on the antibody, ensuring the drug's attachment in an optimal location for better delivery and efficacy. This technology allows control over the conjugation process, which constitutes an important advancement for cancer treatments. Moreover, in July 2023, the FDA granted Fast Track status to AMAM's ARX517.

In October, the market reacted negatively to the announcement of the results for phase 1/2 clinical trials of ARX517, maybe due to high expectations of the drug's efficacy. In the trials, the outcomes appeared positive, but the population of patients was relatively small. In November, AMAM updated the study with a dose escalation. The results showed no dose-limiting toxicities, encouraging the continued evaluation of ARX517 at higher doses because the treatment is proven to kill tumor cells, minimizing toxicity.

ARX788 is another lead drug candidate. This fully humanized monoclonal antibody focused on breast cancer treatment uses the same technology. It is indicated for patients with HER2-positive disease who underwent a previous ENHERTU therapy with another ADC that targets the protein HER2, which promotes cancer cell growth. Fully humanized antibodies are designed to minimize immune responses against non-human antibodies. As part of a partnership with NovoCodex, ARX788 is in Phase 3 clinical trials in China. It is progressing to marketing approval after the trials have delivered positive results because the application of the drug presented better survival rates than the control group.

In 2023, AMAM was undergoing a period of strategic realignment. On December 14, 2023, AMAM was added to the NASDAQ Biotechnology Index (NBI). The NBI is a modified market capitalization-weighted index that includes stocks of biotechnology and pharmaceutical companies listed in NASDAQ. This inclusion in the NBI shows AMAM's growth in the health sector. However, in Q4 of 2023, news started moving quickly for AMAM, and as we’ll soon discuss, major news broke as I was writing this article.

Johnson & Johnson Acquisition: Valuation Analysis

Just as I was about to submit this article, Johnson & Johnson ( JNJ ) announced that it would acquire all the outstanding shares of AMAM at $28.00 per share. This is an all-cash deal, and they anticipate the deal will be fully consummated in the first half of 2024, pending regulatory approvals. Naturally, AMAM’s board of directors has to sign off on the deal before it goes through. AMAM’s investment profile has shifted from a speculative biotech company into an M&A play, likely better suited for merger arbitrage experts.

Looking at the company's financials , the company held roughly $225.3 million in cash at the latest report against a small total debt of $10.5 million. However, even though shareholders' equity stands at $242.4 million, the current valuation of about $2 billion does imply a P/B ratio of approximately 8.25. This valuation multiple implies a somewhat hefty premium over the sector's P/B median multiple of 2.77. This would indicate that AMAM shareholders might be getting a good deal here.

Nevertheless, at the time of this writing, the shares have rocketed higher in reaction to this announcement by roughly 100% and now trade at about $27.50 per share. Judging by the market’s response, the investors seem optimistic about the deal’s completion because the shares trade at a slight discount from the $28.00 per share offered by JNJ. JNJ’s board approved the deal, but AMAM’s investors and board could still theoretically provide a counteroffer. It isn’t easy to speculate on that particular scenario, but in my view, there seems to be little to do with investors. Naturally, we could reassess this stance if there are any updates regarding the deal and AMAM’s BoD’s reactions. However, for now, AMAM is fairly valued. Most of the upside has already been realized, and it’ll now become more of an arbitrage play than a biotech investment.

Valuing AMAM as a standalone company is tricky, however. We would need a precise estimate of the company's peak sales, which is inherently speculative at this stage. It all comes down to how potentially valuable AMAM's proprietary synthetic biology platform is. It's reasonable to assume that it'll be more useful under JNJ than AMAM simply because the former has more resources and a larger scale. Thus, AMAM's price was attractive before the acquisition because I saw great potential in AMAM's tech. But, at the current acquisition price, the valuation seems fair after we include the potential synergies of AMAM's tech under JNJ's larger umbrella. Moreover, biotech acquisitions tend to carry hefty premiums. Even though I couldn't find a more recent source, in 2020, biotech acquisition premiums had, on average, roughly a 100% deal premium. So, overall, AMAM's deal appears relatively fair.

As a final thought, I think it’s worth mentioning that AMAM’s shareholders could theoretically bid up the shares above $28.00. At the current valuation, AMAM is still effectively under $2 billion (net of cash), which does seem cheap in light of AMAM’s potential. The law firm Wohl & Fruchter LLP announced it’s investigating whether or not the deal is fair for AMAM’s shareholders. This law firm claims that some Wall Street analysts have set price targets on AMAM stock that are much higher than $28.00 per share, prompting questions on whether or not this deal fully represents shareholders’ interests. Therefore, I think the stage is set for a controversial reaction to this deal, and I wouldn’t rule out the possibility of the shares going higher than $28, pressuring AMAM’s board into haggling for a higher price.

However, I think it's vital for investors willing to hold the shares at this juncture to realize that there are M&A risks involved now. AMAM's shares could plummet if the deal fails and the embedded premium disappears. As previously mentioned, such a deal premium is likely substantial, so the downside is significant if this risk materializes. Personally, I think it's a negligible risk at this point, and looking at the market's reaction, it appears that's the consensus as well. Hence, summing up the valuation analysis, it's fair that shareholders got a reasonably good deal. However, AMAM doesn't appear compelling for new investors at these levels post-deal announcement.

Conclusion

Overall, AMAM is a fantastic company with a promising biotech. It’s no wonder that JNJ decided to fold them into their portfolio of companies. With their added support and vast resources, great technological developments should be in 2024. However, from an investment perspective, this announcement shifts AMAM from a biotech bet into an M&A arbitrage play. I think the current deal values AMAM under $2 billion, which seems puzzling, especially in light of the vast potential of AMAM’s proprietary synthetic biology platform. Also, AMAM’s portfolio of ADCs alone could be worth much more than the proposed price by JNJ. Naturally, these are speculative observations, but looking at the immediate announcement by Wohl & Fruchter of looking into the deal’s fairness, I’d argue that there’s a non-zero chance of the deal’s price being revised higher in the future. Yet, for now, I believe it is prudent to rate AMAM a “hold” because it’s already essentially at par with the terms of the proposed deal.

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