Orange County’s third largest medical diagnostics and testing company is being acquired by a fast-growing Chicago-based firm using artificial intelligence for precision medicine.
Aliso Viejo-based Ambry Genetics Corp. on Nov. 4 announced an agreement to be acquired for $600 million by Tempus AI Inc.
“They’ve achieved one of the rare things in our space where you actually have a genomics business that has significant growth and a proprietary business model but is also making money,” Tempus Chief Executive Eric Lefkofsky told analysts on a conference call after announcing the acquisition.
Lefkofsky’s comment reflects concerns about the testing industry. One of Ambry’s main competitors, Invitae Corp., filed for Chapter 11 bankruptcy protection in February.
The acquisition ends Tokyo-based Konica Minolta’s pivot into what it calls precision medicine. In 2017, it acquired Ambry for an estimated $1 billion and put it in a unit along with Invicro LLC, a drug discovery support company.
When Konica announced the sale last week, it said it was exiting the industry because Ambry “will need ongoing investment in research and development to realize further acceleration of its growth.”
Ambry CEO Tom Schoenherr also said it needed a new partner for growth.
“Over the last few years, while other laboratories in our industry suffered from challenging market conditions, Ambry experienced record growth due to our focused initiatives in operational excellence, fiscal responsibility and strategic portfolio management,” Schoenherr said in a letter to employees.
“We recognize that to continue our growth trajectory and deliver on the many patient-first initiatives in our pipeline, we need to be part of a larger, like-minded organization. After an extensive search and consideration of suitors, we are thrilled to be joining Tempus.”
Ambry’s Secret Sauce
Ambry Genetics, founded in 1999 by Charles Dunlop, became known for several innovations, such as the first lab to offer full gene sequencing of the cystic fibrosis gene, multi-gene panels for intellectual disability and hereditary cancer, as well as diagnostic exome sequencing on a clinical basis.
In 2014, Dunlop won a famous case involving breast cancer tests where competitor Myriad Genetics claimed it could patent genes.
In 2017, the Business Journal named Dunlop as its Businessperson of the Year in the healthcare space. Earlier this year, Dunlop donated $50 million to University of California, Irvine, which has named its School of Biological Sciences after him.
Schoenherr, who has decades of experience in the testing industry, first joined as chief commercial officer in 2017 and became CEO in 2021, saying he envisioned creating a diagnostics company that would be a major global healthcare entity.
The industry has about 75,000 genetic tests representing 10,000 different test types. There are three types of genetic testing companies, including those that provide recreational testing such as Ancestry.com and then firms that generally just test DNA. Ambry is in the category of “the highest clinical grade testing” utilized by academic centers and cancer institutions.
While a typical DNA test will analyze five to 25 base pairs of genes, Ambry compares the DNA test with RNA that provides a much wider variety of abnormalities among thousands of pairs.
Ambry’s “secret sauce” is its interpretation of the results, finding abnormalities that no other lab can find. The company touted a 2022 study that said its testing detected elusive pathogenic variants in one of every 950 patients that were missed by DNA testing alone.
About half of Ambry’s tests are for patients who have cancer while the remaining 50% are in a high-risk category, such as patients with relatives who have cancer. Ambry is expanding into areas like women’s health, large health systems and international work, where there is a lack of standardization. Last year, the company performed hereditary cancer testing for over 300,000 patients.
Ambry ranks No. 3 on the Business Journal’s annual list of Medical Diagnostics and Testing Companies based in Orange County with about 384 local employees working at its 65,000 square foot lab; it has 783 employees companywide.
The company ran into snags during the COVID-19 pandemic, which caused a shortage in both testing recipients and healthcare personnel, leading Ambry’s revenue to fall “significantly below the initial expectations,” Konica said.
Sales appear to be accelerating, up 12% to $221 million in fiscal 2023 and then 14% to $240 million for the fiscal year ended March 31, 2024. Konica said Ambry’s operating losses have fallen from $86 million in fiscal 2022 to $8 million in fiscal 2024.
Konica added that Ambry Genetics’ recent financial results have been “favorable and further growth is expected.”
Doubts About 25%+ Growth
When Tempus announced the acquisition, Lefkofsky said growth was “north of 25% a year and it generates meaningful EBITDA and cash flow.”
Analysts on the conference call expressed skepticism about sustaining the 25% growth rate.
“Ambry, in particular, seems to be taking market share from others,” Lefkofsky responded.
“We don’t see any signs that that’s going to slow down even though the law of big numbers does tend to bring down growth rates.”
Lefkofsky, who started Tempus in 2015, is best known as the co-founder of the ecommerce company Groupon Inc.
After taking Tempus public in June at $37 each, shares reached as high as $77 in September. In the trading session after announcing the acquisition and third quarter results, the shares fell 10% to $44.50 and a $6.9 billion market cap.
It reported third quarter revenue climbed 33% to $180.9 million while its adjusted EBITDA narrowed to a $21.8 million loss, compared to a $36.2 million loss in the same period a year ago (Nasdaq: TEM).
Last week, the company reiterated its annual forecast that its sales would grow by about 32% to $700 million, and its adjusted loss would be $105 million.
Tempus will pay $375 million in cash and $225 million in shares at closing of Ambry, of which $100 million will be subject to a lock-up agreement until one-year, post-transaction close.
Lefkofsky said Ambry broadens Tempus’ testing portfolio, expands disease coverage and enhances the types of products it offers biotech and pharmaceutical firms.
Another advantage is that Ambry’s primary call point is genetic counselors while Tempus primarily deals with oncologists. Ambry also is primarily an in-network lab, meaning it’s easier to get reimbursed while Tempus is mostly out of network lab.
Tempus executives said they are hoping Ambry will strengthen its position with the hospitals.
Tempus is paying about 1.9 times current revenue and roughly 15 times EBITDA.
“We feel like we are buying the business at an attractive price,” Lefkofsky said. “The transaction is not materially dilutive at all to our equity.”
The acquisition is expected to close in the first quarter.
