MOR - MorphoSys: Buying Constellation Was A Desperate Measure

2023-11-20 13:26:45 ET

Summary

• MorphoSys AG has faced disappointments with some of its programs not performing well in trials and in the market.
• The company's recent acquisition of Constellation Pharma is seen as a desperate measure by analysts.
• The upcoming release of topline data for myelofibrosis drug pelabresib could provide a potential positive outcome for MorphoSys.

I have been covering MorphoSys AG ( MOR ) for years. In 2019, I began coverage of the U.S. IPO-ed company, noting the extensive pipeline, the strong research prowess, and the major partnering deals of this emerging European giant. However, over the years, MorphoSys has disappointed - it is still a major R&D powerhouse, and it has major deals with big pharma - but some of its programs have not done well in trials, and those that did well and went to the market did not do so well there. The company appears rudderless, and its recent acquisition of Constellation Pharma looks like a desperate measure. That, in a nutshell, is the MorphoSys story from my point of view.

Before it IPO-ed, MorphoSys was an R&D powerhouse, with its 3 platform technologies responsible for over 100 approved products, starting with Janssen’s (JNJ) blockbuster TREMFAYA, MorphoSys’ first approved product. Before it IPO-ed, MorphoSys also had a long-tailed pipeline of self-owned drug candidates. Its business model was to take a molecule through the trial process, and license it out in later stages.

That business model suffered a setback after multiple late stage failures and market performance failures. In 2019, lead asset was Tafasitamab, which was approved next year as MorphoSys’ first approved self-owned product, and branded Monjuvi. However, monjuvi did not do well in the market. Thus, in July last year, I note the following poor performance:

• Preliminary Monjuvi (tafasitamab-cxix) U.S. Net Product Sales stood at $23.3M (€21.7 million) for Q2 of 2022 and $41.9M (€38.3M) for 1H22. For FY22, MorphoSys now expects Monjuvi U.S. Net Product Sales in the range of $90 to $110M (previously: $110 to $135M).

Just the following quarter, citing "increased competitive activity,” the company again lowered Monjuvi revenue guidance. This led to a ratings downgrade from Deutsche, from hold to sell, and one more from Kempen. Kempen actually called Monjuvi a “commercial flop.” Although the company guided for a 5% surge in Monjuvi sales this past October, the damage seems to have been done.

The same period saw the failure of a phase 3 trial of otilimab, which GSK had licensed from MorphoSys way back in 2013. While the trials were able to meet their endpoints, the data wasn’t good enough for GSK to want to continue with commercialization. The very next month, Roche’s gantenerumab, an Alzheimer’s molecule it discovered using MorphoSys’ platforms, failed a phase 3 trial. This was a major trial with a large trial population, and on its success was rising a lot of MorphoSys’ future.

Instead of working to regroup its R&D efforts, this company chose to buy another company’s pipeline. According to many Wall Street analysts, this was a disastrous decision all round. First, pelabrasib, the lead asset which motivated their purchase, may have had its sales guidance overblown; and two, the company sold royalty rights of tremfaya to Royalty Pharma to finance the purchase. As one analyst put it tritely :

It is worrying when a company once known for in-house development apparently has to resort to buying in late-stage development candidates - and perhaps more so when it raises the cash to do so by pawning the family silver.

There were other major changes, like the company shifting its entire R&D work from the U.S. back to Germany, and also abandoning the discovery stage assets of Constellation. Moreover, even for the most promising candidate, there was new competition. As I noted before:

The primary reason for buying Constellation was the BET inhibitor pelabresib. However, Sierra's January data for its own MF drug momelotinib has brought in fresh competition for MorphoSys. Sierra was recently acquired by GlaxoSmithKline ( GSK ), making the competition even more robust.

The only silver lining right now is that myelofibrosis drug pelabresib is going to produce top line data by the end of this year. The timeline has been pushed forward by a few months, however, the situation is still difficult for MorphoSys. As to the data timeline, the company noted in the earnings call:

We are very excited that the top-line results from our Phase 3 MANIFEST-2 study of pelabresib in combination with ruxolitinib in first-line myelofibrosis will be available by the end of November.

This data drop is a few days away, and it could well be a positive trial. However, like I noted, increasing competition and poor performance of legacy assets has hurt MorphoSys, and a comeback seems difficult to achieve in the near term.

Financials

MOR today has a market cap of $822mn and a cash balance of EUR642.2 million. Total revenues in the third quarter of 2023 were EUR63.8 million, with Monjuvi sales being $23.4 million. There is a large decrease in licensing revenue. R&D expenses in the third quarter of 2023 decreased to EUR63.2 million, while selling expenses were EUR19.9 million. The company calculates that at that rate, they have “a cash runway into 2025, which is more than 12 months beyond the pivotal readout for pelabresib.”

Bottom Line

When I first covered it, MorphoSys used to be an R&D powerhouse. Multiple trial and market failures forced it to look outside for an escape hatch, and it found Constellation. This was, from all angles, a desperate measure, and I doubt it will help the company regain lost ground. However, if the upcoming MorphoSys AG data is any good, there may yet be a quick spike for this depressed stock. However, I do not like to buy otherwise poor companies simply on the basis of a “quick spike,” because they offer no fallback option.

For further details see: