RXDX - Morphic Holding: Potentially The Next Prometheus Biosciences

2023-04-18 01:41:44 ET

Summary

• Morphic Holding is developing innovative oral integrin therapies with lead candidate MORF-057 in phase 2.
• MORF-057 targets ?4?7, a highly validated mechanism of action similar to Entyvio, which generated ~4 in sales during 2021.
• MORF-057's oral administration and favorable safety profile could make it an alternative to IV Entyvio, increasing market opportunities.
• We initiate with a speculative buy rating based on the potential for big pharma M&A after robust phase 2 data for MORF-057.

Introduction

Morphic Holding ( MORF ) is a clinical -stage biotechnology company developing innovative first-in-class oral small molecule integrin therapies. The company's lead candidate is MORF-057, an ?4?7-inhibitor, currently going through phase 2, where we expect phase 2a data to be released in Q2 2023. We expect a positive phase 2a data may drive up the stock price 50-100% or/and lead to a big pharma merger as we have seen with Merck & Co ( MRK ) and Prometheus Biosciences' $10.8 Bn deal .

The company's lead candidate MORF-057 has a highly validated target, a 4?7-specific integrin inhibition, which is the same target Takeda's (TAK) Entyvio targets. Of note, Takeda's Entyvio received the FDA's stamp of approval for ulcerative colitis ((UC)) and Crohn's disease ((CD)), which generated ~$4Bn in sales during 2021. The fact that more than >150k patients already took Entyvio and that regulators already approved and validated the target de-risks the company's candidate in terms of mechanism of action.

We highlight that Entyvio is an intravenous-delivered therapeutic, unlike MORF-057, an oral drug. The intravenous dosing is a time-consuming and annoying process for both physicians and patients, as patients need to visit a clinic and sit down for 30 minutes and also it comes with unwanted side effects such as infusion site reaction and increases the risk of infection. Therefore, if approved, we believe MORF-057's compelling safety profile with favorable PK/PD properties and advantage around the route of administration will allow MORF-057 to become an alternative to IV Entyvio and commend a big chunk of the multibillion-dollar sales that Entyvio is currently capturing.

MORF-057's phase 1 results showed that the drug has a clean safety profile with predictable PK/PD parameters, and the drug is currently going through a phase 2a trial for UC.

The company expects to release top-line data from the ongoing Phase IIa EMERALD-1 study data in 2Q23, which we expect will include a) Roberts Histopathological Index ((RHI)), the primary endpoint, b) key secondary endpoints, and c) safety and PK/PD markers. Furthermore, management noted that the phase 2a UC trial would guide the company's decision to expand into Crohn's disease, which is another multi-billion dollar indication.

If the data is positive, we believe the drug will enter a larger phase 2b or 3 trial that will take 1-2 years with 300-600 patients. Like what we have seen previously with Arena Pharma and Prometheus, big pharma acquirers will likely acquire the candidate after they see strong phase 2 data with a high premium, which we believe is the key catalyst that many market participants are hoping for.

Financials

MORF has a very strong cash balance; as of December 31, 2022, the company had cash and cash equivalents of $348M. Furthermore, we note that the company has raised an additional $100M through a private placement during February 2023. Management was confident that the current cash reserves are enough cash runway until the 2H of 2026, which is a very strong cash runway that de-risks potential dilution risk in the near future.

Risks

1. Clinical trial delays could occur, potentially extending the clinical timelines and resulting in a delay in potential marketing approval for MORF-057, representing a risk to the company's current valuation.
2. Regulatory approval for MORF's product candidates may face enhanced regulatory scrutiny, given the challenges seen with other oral integrin programs, which could result in longer-than-anticipated timeliness or failure to gain approval, representing a material risk to the company's valuation.
3. The indications that MORF is pursuing, UC and CD, are highly competitive, with many established products already on the market and more in development. Greater-than-anticipated competition could limit the market opportunities for MORF, representing a potential downside risk to the company's valuation.
4. Recruiting patients into MORF's studies may prove more difficult than anticipated, potentially extending clinical timelines, with results coming later than anticipated, representing a risk to the company's current valuation.

Conclusion

We are initiating MORF stock with a speculative buy rating based on a) a clear catalyst: phase 2a UC data (EMERALD-1) expected in 2Q 23, b) de-risked mechanism of action (with Entyvio's approval and success targeting both UC and CD), and a compelling oral route of administration, and iii) strong balance sheet with enough cash runway until 2026. We believe the ideal outcome for the stock would be a big pharma M&A, which may happen after that phase 2 data if it is robust, considering the thinning of oral IBD late-stage assets that are available for big pharma M&A.

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