MOR - MorphoSys: Positive Pelabresib Data Finally Unlocking Upside

2024-01-18 09:35:24 ET

Summary

• Shares of biotech company MorphoSys have been climbing due to the approval chances of its lead candidate, pelabresib, for the treatment of myelofibrosis.
• MorphoSys co-markets and sells the drug Monjuvi in the US, which is used to treat adult patients with relapsed or refractory diffuse large B-cell lymphoma.
• Despite some mixed data and intense competition, analysts believe pelabresib could reach peak annual sales of over $1.5 billion, which would significantly increase MorphoSys' valuation and share price.
• The Munich based biotech took a substantial risk to acquire Constellation Pharma, developer of Pelabresib, in a $1.7bn deal. After a torrid bear run on the stock, MorphoSys may finally be ready to deliver upside in 2024.

Investment Overview

Shares in the Munich, Germany headquartered biotech company MorphoSys ( MOR ) have been climbing rapidly ever since a late November market sell-off had dropped the price of the company's ADR stock, which trades on the Nasdaq, to a value of ~$4 per share.

The gains are mainly related to the likelihood of its lead clinical candidate, pelabresib, gaining approval to treat myelofibrosis patients in combination with a JAK inhibitor, e.g. Incyte's ( INCY ) Jakafi. Shares have risen to over $11 in value, however I believe that beleaguered shareholders could be celebrating a much higher share price and company valuation within the next couple of years, as MorphoSys' elaborate plans come to fruition.

MorphoSys Overview

MorphoSys co-markets and sells the drug Monjuvi (chemical name: tafasitamab) in the US, where it is approved , in combination with lenalidomide, for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL).

In a pivotal study, the combo achieved a best overall response rate ("ORR') in 71 patients of 55%, with complete responses ("CRs") in 37%, and partial responses ("PRs") in 18% of patients. Lenalidomide is sold by Bristol Myers Squibb ( BMY ) under the brand name Revlimid, earning $12.8bn of revenues in 2021 before key patent expiries and generic competition began to erode sales.

MorphoSys splits revenues from sales of Monjuvi in the US 50/50 with its partner Incyte Corporation, while Incyte has exclusive commercialisation rights ex-US, paying MorphoSys royalties on net sales ex-US in a "mid-teens to mid-twenties percentage range", according to MorphoSys' 2022 20F submission ( annual report ). When the deal was agreed in 2020, Incyte paid MorphoSys $750m upfront, and made a $150m equity investment into MorphoSys' ADR stock.

Despite MorphoSys and Incyte targeting peak sales in the $550-$750 million region, in Q3 2023, the German company reported Monjuvi sales for the quarter of $21.5m - down 1% year-on-year, and year-to-date revenues of $62.6m - up ~4% year-on-year.

Total MorphoSys revenues, which includes royalties on sales of Johnson & Johnson's Tremfya of $63m which are passed directly to Royalty Pharma ( RPRX ) (Incyte licenses rights to the anti-IL-23 monoclonal antibody to Janssen, but has sold the royalty stream to Royalty Pharma), and on Incyte's ex-US sales, of ~$4m, plus other licenses and milestones, of $34.2m, were $179.3m across the first nine months of 2023 - down 9% year-on-year.

This helps to explain why MorphoSys stock - which traded at highs over $30 until late 2021, but endured a horrific bear run in 2022, with shares falling over 80% in value - has been struggling to revive its flagging share price. The company reported revenues of ~$356m in 2020 - although more than half of this was related to the payments from Incyte discussed above, plus ~$46m of Tremfya royalties.

In 2021, revenues fell to $204.4m, and were $298m in 2022. Guidance for 2023 is for Monjuvi sales of $85m-$95m, and remember, this figure includes Incyte's 50% revenue share, a gross margin of ~75%, R&D expenses of ~$300m, and SG&A expenses of ~$150m. Since 2020, when MorphoSys reported net income of $42m, the company has recorded net losses of $(292m), and $(228m), and 2023's figure looks likely to be as substantial, based on the guidance breakdown.

Fortunately, MorphoSys reported a total cash position of $678m as of Q3 2023, and a long term debt position of $256m, therefore we can conclude the company's short-to-medium term financial position is quite strong.

The other big plus points about the company are its potential ability to gain label expansions for Monjuvi, increasing its addressable market, and its late stage pipeline, which includes pelabresib, a potential "blockbuster" drug indicated for myelofibrosis, and a Phase 1/2 stage, solid tumor cancer targeting drug, tulmimetostat.

MorphoSys First Disappoints, Then Seemingly Wows Market With Pivotal Data Readout

MorphoSys gained access to pelabresib as the lead asset in its $1.7bn buyout of Constellation Pharmaceuticals, which completed in June 2021. The transaction was substantially funded through MorphoSys' agreement with Royalty Pharma, by which it received a $1.425bn upfront payment, in exchange for rights to Tremfya royalties, and other products, including pelabresib.

It would be fair to say that the market initially gave these two agreements the thumbs down, as June 2021 essentially marked the beginning of the catastrophic bear run on MorphoSys shares.

Pelabresib is discussed as follows by MorphoSys :

An investigational selective small-molecule therapy aimed at promoting anti-tumor activity. It is designed to inhibit bromodomain and extra-terminal domain ("BET") proteins, which may downregulate genes implicated in blood cancers.

The BET family of proteins, along with the JAK/STAT pathway, have been implicated in the development and progression of myelofibrosis. Both pathways may increase levels of pro-inflammatory cytokines and stimulate production of abnormal blood cell precursors called megakaryocytes. The BET family of proteins is therefore emerging as a promising therapeutic target whose modulation may alter the underlying cause of disease in myelofibrosis, with possible synergistic results alongside JAK inhibition.

Pelabresib is currently being investigated in combination with the JAK inhibitor ruxolitinib compared with placebo plus ruxolitinib in JAK inhibitor-naïve patients with myelofibrosis (those who have not been previously treated with a JAK inhibitor) in the Phase 3 MANIFEST-2 study and in Arm 3 of the Phase 2 MANIFEST study.

Perhaps owing to a key upcoming catalyst in the form of topline data from the potentially pivotal MANIFEST-2 study, MorphoSys stock had begun to rise in the second half of 2023, but when the data did arrive in late November, it initially created a sharp selloff. Shares, which had reached over $8 per share, crashed to under $4.50.

It should be noted that the current state of play within the myelofibrosis treatment can only be described as intensely competitive, with the likes of Pharma giant AbbVie ( ABBV ) and its Bcl-2 inhibitor drug candidate navitoclax, recently approved Ojjaara (momelotinib), marketed and sold by British Pharma GSK ( GSK ), Vonjo, developed by CTI Biopharma and approved to treat myelofibrosis ("MF") in 2022, and even Parsaclisib, a next-generation oral inhibitor of phosphatidylinositol 3-kinase delta ("PI3K?") inhibitor, being developed by MorphoSys' current partner Incyte, all competing for market share, albeit in slightly different subsets of patients.

MorphoSys contends (in a recent presentation given at the JP Morgan Healthcare Conference), that "new therapies are critically needed" to treat MF given that no current treatments "address all four hallmarks" of the disease - enlarged spleen, bone marrow fibrosis, anemia, and disease associated symptoms.

Unfortunately, when management initially shared the top line data from MANIFEST-2 on November 20, although the study met its primary endpoint, with the pelabresib/ ruxolitinib combo nearly doubling the spleen volume reduction ("SVR35") response rate at 24 weeks, to 66%, versus 35% for the ruxolitinib plus placebo arm, the drug could not meet its secondary endpoint of reducing symptoms of MF, undermining management's claims.

The market may have been initially unimpressed, but after slicing and dicing the data, MorphoSys returned with a second press release , in which it announced pelabresib "improves all four hallmarks of Myelofibrosis". The press release points to "a strong numerical improvement for patients receiving pelabresib and ruxolitinib versus placebo plus ruxolitinib" on total symptom score ("TSS"), and also notes "significant improvements in both key secondary endpoints were observed with the pelabresib combination for patients classified as intermediate-risk".

In short, MorphoSys has stressed that it does not believe the secondary endpoint miss will derail a push for commercial approval of its drug, thanks to its strong performance meeting the primary endpoint, demonstrable improvements in anemia and bone marrow fibrosis, and a near miss on TSS. The totality of the data ought to persuade the FDA of the drug's benefit, MorphoSys believes. A statement in the press release reads:

We look forward to meeting with regulatory agencies regarding these data and are diligently preparing regulatory filings with the intention of submitting applications to the U.S. Food and Drug Administration and the European Medicines Agency in the middle of 2024

The market certainly seems to have changed its tune with regard to MANIFEST-2 data, pushing MorphoSys's share price to a value of nearly $9 by the end of last week, before sending it spiking again yesterday, to over $11 per share, its highest price since September 2021.

Looking Ahead - MorphoSys' Market Opportunity

Despite some mixed data, and intense competition, some analysts have suggested pelabresib could go on to break $1.5bn in peak annual sales, and if that were to happen, it's clear that MorphoSys' valuation and share price would rise substantially, perhaps by 2/3x (based on a forward price to sales ratio of 2/3x, which is a little lower than the Pharma sector average) - so long as the drug provides a good source of profitability, and many prescription drugs, especially newly approved drugs with patent protections in place, drive excellent profit margins.

Before considering any investment into MorphoSys, however, we should assess how realistic that peak sales figure truly is. Management's timeline sees them file for approval for pelabresib in the US and Europe by the middle of this year, with the drug approved in mid-2025. 2026 is likely the first year of meaningful revenue contributions from pelabresib, which is coincidentally when the company's funding runway is exhausted. In summary, there is significant pressure on management to succeed with this drug.

With its unique mechanism of action and ability to work alongside ruxolitinib, marketed and sold by Incyte under the brand name Jakafi, and expected to earn over $2.5bn in 2023, analysts forecasts for +$1bn in peak revenues is understandable, but that ought to be balanced against other factors, such as the approval of GSK's Ojjaara.

Theoretically, as a JAK inhibitor, Ojjaara could be used in combo with pelabresib, if approved, but GSK is developing a BET inhibitor of its own, which it obtained via its ~$2bn buyout of Sierra Oncology, alongside momelotinib / Ojjaara. As such, if Ojjaara ends up taking market share away from Jakafi, it could be bad news for MorphoSys and pelabresib, also.

We should also consider Navitoclax, a more direct competitor of pelabresib, designed to complement a JAK inhibitor, whose data to date has been comparable to pelabresib's. With the might of AbbVie's R&D resources behind it, Navitoclax would provide tough competition in the marketplace.

We must also consider that physicians, patients, and health insurers all need to be convinced of the additional value offered by pelabresib to MF patients, in order to justify the (presumably higher) costs of using two medicines rather than one. Another competitor pelabresib may encounter is Geron Corporation's imetelstat, developed to treat anemia in blood cancer patients, as well as CTI Biopharma's Vonjo, and Incyte's candidate, which the company would clearly wish to partner with jakafi ahead of pelabresib.

Whilst myelofibrosis is a disease with high unmet need treatment wise, when reviewing the current treatment landscape, and bearing in mind MF is most likely a market worth less than $5bn across all therapies, it seems likely that one or two therapies currently being positioned for "blockbuster" sales in this market may not live up to expectations.

This could be either a positive - if its safety and efficacy profile proves to be best-in-class - or a negative - pelabresib is not favoured by physicians/patients - situation for MorphoSys, but at this juncture, it is hard to say which may be the more likely scenario. On balance, I am leaning towards pelabresib proving to be a strong "all rounder" drug, that makes a persuasive case around improving the overall quality of life of many MF patients.

Concluding Thoughts - Is MorphoSys A "Buy", "Sell" or "Hold" Today?

Personally, I have been holding stock in MorphoSys since before the Constellation deal was done, and have watched its value sink to very low levels, so I am grateful for the positive pelabresib data, and the growing share price.

It is also worth noting that there will be a key data readout from tafasitamab / Monjuvi in 2024, with topline data from a pivotal study of the drug in follicular lymphoma ("FL") and marginal zone lymphoma ("MZL"), which could open up an intriguing new revenue opportunity for a drug struggling to make its mark commercially.

Of greater value may be the opportunity to treat newly diagnosed DLBCL patients - MorphoSys has a Phase 3 study underway, alongside lenalidomide, testing the combo, alongside a standard R-CHOP (rituximab, cyclophosphamide, doxorubicin, vincristine, prednisone) regime, with data expected mid-2025. If successful, a label expansion into first line DLBCL treatment could see Monjuvi finally show some blockbuster revenue potential.

Ultimately, as a MorphoSys shareholder (albeit a small holding) I have a choice. I could express disappointment over the Constellation buyout, sacrificing the Tremfya royalty stream in the process (Tremfya is a +$3bn per annum selling drug), and the lack of an absolutely clear and compelling value proposition for pelabresib within a market that was once barren, but now looks almost crowded. Alternatively, I could pin my hopes on management securing an against-the-odds approval for the drug it took pains to acquire, and establishing it as an integral element of MF treatment regimes.

The decision to acquire Constellation certainly seems to be part of the reason for MorphoSys' poor performance share price wise, but now, it is responsible for some significant gains, even if MorphoSys' current valuation remains substantially discounted to former highs.

There are clearly some significant hurdles that still need to be overcome before pelabresib can be said to be "odds on" for an approval, but analysts' high expectations over potential peak revenues ought to keep the market interested in the outcome of this process, and ultimately, I believe, drive the share price higher in 2024.

The performance of Monjuvi will also be intriguing - a spike in sales would be a very welcome turn of events for shareholders, although my expectation would be that a win with follicular lymphoma ("FL") and marginal zone lymphoma ("MZL"), and a potential label expansion, could be an important milestone on this drug's commercial journey.

Overall, my positive take on MorphoSys is derived from the fact I view it as a company that is prepared to take risks, innovate, and make strategic M&A deals to expand its product offerings and increase its revenues. Arguably, the deal for Constellation was well put together, with the Royalty Pharma aspect derisking it from a financial perspective.

If management has guessed right with pelabresib - and it is not a perfect drug, as the data has shown us, but an apparently strong all-rounder, and potentially even a best-in-class one - then MorphoSys shareholders ought to be well rewarded in the years ahead, with a potential triple-digit percentage rise in MorphoSys' valuation based on the peak revenue opportunity not out of the question by any means.

Investors should be under no illusions about the risks involved, however, given how much work still needs to be done to guide pelabresib to an approval circa mid-2025, and with Monjuvi not quite taking in its chosen markets at the present time.

For further details see: