MORF - Morphic Holding: The Price Drop Is Very Interesting

2023-09-28 17:02:15 ET

Summary

• Morphic Holding, Inc.'s stock has dropped 61% in just 2 months, calling into question its $3bn valuation.
• The company's lead asset, MORF-057, targets the integrin ?4?7, but faces tough competition from the biologic drug Vedolizumab.
• Updated data from the EMERALD-1 trial showed lower rates of endoscopic improvement compared to Vedolizumab, causing the stock to plummet.

I covered Morphic Holding, Inc. ( MORF ) in July with a Hold rating, where I said neutral to negative things about the company, and I was especially doubtful about that $3bn valuation. The stock is down 61% with a current market cap of $1bn in just about 2 months, which calls for some comment.

What I said in July was that, basically, phase 2 stage companies should not have a $3bn valuation as a matter of principle. Morphic has a platform called MInT, using which it develops integrin targeted small molecules.

Integrins are a family of cell surface receptors that play a crucial role in cell adhesion and cell signaling. They are transmembrane proteins found on the surface of animal cells, where they mediate interactions between cells and their extracellular environment. The binding of integrins to their ligands is dynamic and can be regulated, allowing cells to respond to changes in their environment. Dysregulation of integrin function is associated with various diseases, including cancer, autoimmune disorders, and cardiovascular diseases.

High value biologics have been made targeting ?4?7, the same integrin that MORF’s lead asset MORF-057 targets. The difference is that MORF-057 is a small molecule, and comes with associated benefits of that class of drugs. I noted then that while the benefits are mainly financial, that competitor, Vedolizumab, branded Entyvio, is a $6bn entrenched blockbuster player in the Ulcerative Colitis market, and price alone is not going to cut it for MORF-057.

As I noted before, MORF-057 did complete a phase 1 and then a phase 2a trial. In the phase 2a open label trial, MORF-057 had a benign safety profile and showed early signs of efficacy, meeting its primary endpoint. As I commented on the results then, comparing them to vedolizumab’s data:

While Entyvio's number was higher, there were 3 factors - one, the baseline RHI was higher in EMERALD-1; two, the time period was 12 weeks against 14 weeks for VARSITY, and three, the percentage of advanced therapy experienced patients was almost double in EMERALD-1. These factors indicate that MORF-057 was non-inferior to Vedolizumab. Only a larger confirmatory trial can demonstrate that adequately, however.

Last week, the stock shed over 50% of its value overnight after the company published updated data from the EMERALD-1 trial, an abstract of which will be presented at an upcoming conference. Reading through the abstract , it is difficult to conclude why the drop happened, until you come to this sentence:

The proportion of patients achieving … endoscopic improvement was achieved in 25.7% of patients at week 12 in EMERALD-1.

Endoscopic improvement refers to the positive changes observed during an endoscopic examination of the colon and rectum in individuals with UC who have undergone treatment. This is an important clinical outcome because it reflects the healing of the intestinal lining and can correlate with clinical improvement in UC symptoms. This was a key outcome measure in vedolizumab’s VARSITY trial. As the company immediately explains:

In the context of ?4?7 inhibitors studied in ulcerative colitis, endoscopic improvement at a much longer timepoint, 52 weeks, was observed in 39.7% of patients receiving vedolizumab in the VARSITY trial, a double-blind, double dummy trial, which enrolled a patient population with less severe and less refractory disease. However comparing the results from different trials may be unreliable due to different protocol designs, trial designs, patient selection and populations, number of patients, trial endpoints, trial objectives and other parameters that may not be the same between trials. Therefore, cross-study comparisons provide very limited information about the efficacy or safety of a drug. Results of a head-to-head comparison may differ significantly from different trial comparisons.

Key differences between the two trials are the much longer duration of treatment for vedolizumab, and the double-blinded design. Thus, while this explanation may be fair, the damage was done, and the stock tanked.

Financials

MORF today has a market cap of $1bn and a cash balance of $731mn. Note the following :

• Morphic strengthened its balance sheet with a total of approximately $345 million in new capital during the second quarter through:

  • $276 million in gross proceeds from a public offering of 6,133,334 shares of its common stock at $45 per share, including full exercise of the underwriters’ overallotment option following the release of the positive and consistent EMERALD-1 Phase 2a topline data in ulcerative colitis

  • ~$69 million in gross proceeds through the use of its ATM facility at a volume-weighted average price of $56.20 per share

Research and development expenses were $35.7 million for the quarter ended June 30, 2023, while general and administrative expenses were $9.6 million. That gives them a cash runway of nearly 4 years.

Bottom Line

Morphic Holding, Inc. used to be highly overvalued at $3bn in July, with a cash balance of $421mn. Right now, they have a market cap of $1bn and an additional $300mn of cash. The data that led to this devaluation is not catastrophic. Those explanations they provided are not to be ignored.

Morphic Holding, Inc.’s problem is a complete lack of a fallback option. All their other assets are in early stages. They have a well-designed phase 2b top-lining in 2025. All things considered, MORF is a risky - but very interesting - bet.

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