MOR - MorphoSys: Stable Liquidity Amid Challenging Markets

2023-08-18 09:14:52 ET

Summary

• MorphoSys reported a decrease in Q2 2023 total revenues to $58.0M and an operating loss of $55.0M. Cash and financial assets totaled approximately $733 million.
• Pelabresib, a BET inhibitor, shows promise as a treatment for myelofibrosis. In the MANIFEST study, it achieved high spleen response rates and symptom score reductions.
• Investment Recommendation: "Hold" - MorphoSys' strong liquidity and promising pipeline are encouraging, but investors should await more data on pipeline candidates and cost control efforts.

Introduction

MorphoSys (MOR), headquartered in Germany, is a commercial-stage biopharmaceutical company focused on developing and commercializing innovative cancer therapies. The company has a broad pipeline of product candidates in the hematology/oncology area, including fafasitamab, an immunotherapy targeting CD19, and pelabresib and tulmimetostat, small molecules targeting BET proteins and EZH2/EZH1 enzymes, respectively. MorphoSys also collaborates with partners on further development of several therapeutic antibodies.

The following article discusses MorphoSys' Q2 2023 earnings report, financial position, and promising pipeline candidate pelabresib for treating myelofibrosis. The analysis recommends a "Hold" for investors.

Q2 2023 Earnings

Looking at MorphoSys' most recent earnings report , total revenues for the second quarter of 2023 were $58.0M, a decrease from $64.8M in the same period in 2022, mainly due to lower sales of clinical vials. Cost of sales were $8.4M in Q2 2023, down from $18.8M in 2022, largely because of lower expenses related to sales of clinical vials to Incyte ( INCY ). R&D expenses dropped to $62.1M from $66.4M, as a result of lower expenses for external services. SG&A expenses saw mixed results with selling expenses dropping to $24.0M from $26.2M, while G&A expenses rose to $18.5M from $13.5M, largely due to personnel-related matters. The company reported an operating loss of $55.0M and a consolidated net loss of $80.7M in Q2 2023. As of June 30, 2023, MorphoSys had cash and other financial assets of approximately $733M, compared to $989.9M on December 31, 2022.

Liquidity & Cash Runway

Turning to MorphoSys' balance sheet , the company had $201.1M in cash and cash equivalents and $531.3M in other financial assets, which predominantly comprise marketable securities and investments, as of June 30, 2023. Summing up these assets, the company had total liquid assets of approximately $733M. Based on the company's consolidated net loss of $129.1M for the first half of 2023, its average monthly net burn rate was $21.5M. The company's cash runway, calculated by dividing total liquid assets by average monthly net burn rate, is estimated to be 34 months. Examining the overall liquidity, MorphoSys appears to have sufficient cash to fund its operations for the foreseeable future. In terms of debt, the company has bonds totaling $261.1M and significant financial liabilities from collaborations and future payments to Royalty Pharma. While the company's current liquidity position seems stable, the company's continued high operational expenses, coupled with its financial obligations, may necessitate additional financing, especially if the company does not improve its operating profit. However, these estimates are my own and may differ from other analyses.

(Please note that MorphoSys reports its earnings in Euros. The values provided above have been converted to USD and are approximate.)

Valuation, Growth, & Momentum

According to Seeking Alpha data: MorphoSys has a capital structure with a significant cash position relative to its market capitalization of $1.06B and a small level of debt. The company's enterprise value is $631.81M. In terms of valuation, MorphoSys has a non-GAAP forward P/E of NM (not meaningful), a trailing twelve months P/E of 10.99, and a price-to-book ratio of 30.61. Its EV/Sales is 1.98, and EV/EBITDA is NM. The company has shown mixed growth with a 50.10% YoY revenue growth but a negative 3-year CAGR of -0.04% in revenue. Earnings per share estimates are negative and fluctuating for the coming years, with a YoY change of -446.34% in 2023, +15.18% in 2024, and +76.00% in 2025. In terms of stock momentum, MorphoSys has outperformed the S&P 500 over the 3M, 6M, and 9M periods with a 1-year return of +24.76%.

MorphoSys Highlights Strong Performance and Clinical Milestones

In the most recent earnings call , MorphoSys' management highlighted strong performance in the first half of 2023, with several key priorities achieved. They mentioned the completion of enrollment for the MANIFEST-2 and frontMIND studies, showcasing promising data from their tulmimetostat Phase 1/2 study. They highlighted the potential of pelabresib, a BET inhibitor, for treating myelofibrosis, emphasizing its disease-modifying effect in combination with ruxolitinib. Management also discussed Monjuvi, a CD19 targeting immunotherapy, and its sales growth. They revealed a robust U.S. commercial infrastructure for Monjuvi, with a large overlap in treating physicians of DLBCL and myelofibrosis. MorphoSys also emphasized the progress of their partner programs developed through their legacy antibody technology platform. Finally, they highlighted their strong financial position and their new CFO, Lucy Crabtree. The company aims to drive forward their mid to late stage clinical programs with a strong financial position and a rich set of catalysts from their pivotal studies over the next two years.

Promising Pelabresib Shows Potential for Myelofibrosis Treatment

One of the key highlights in the earnings call was the discussion of pelabresib, a BET inhibitor, and its potential in treating myelofibrosis. In the MANIFEST study, a global phase II trial, pelabresib was used in combination with ruxolitinib in a cohort of JAKi-naïve patients with myelofibrosis. The study found that at 24 weeks, 68% of the patients achieved a spleen volume reduction of ? 35%, significantly higher than the 30%-40% response rates seen with the standard JAK inhibitor therapy. In addition, 56% of the patients achieved a total symptom score reduction of ? 50%, and other benefits included improved hemoglobin levels, improvement in fibrosis, and reduction in JAK2V617F-mutant allele fraction. Importantly, 95% of the study participants continued combination therapy beyond 24 weeks.

Compared to the current standard treatment for myelofibrosis, which has high discontinuation rates and lacks disease modification, pelabresib and ruxolitinib combination therapy shows promising results. The high spleen response rate and continued therapy indicate that it could provide a better alternative for patients. However, it should be noted that some patients in the study experienced high-grade toxicities like anemia, leading to treatment discontinuation.

The positive results from the MANIFEST study indicate a significant market opportunity for pelabresib as an alternative or addition to existing myelofibrosis treatments. Given that the current standard treatment, JAK inhibitors, have limitations in spleen response rates and disease modification, pelabresib could potentially capture a substantial market share in the treatment of myelofibrosis. However, further studies are needed to understand the long-term safety and efficacy of pelabresib.

My Analysis & Recommendation

In summary, MorphoSys' Q2 2023 earnings report presented a mixed bag of results. While revenues have fallen compared to the same quarter in 2022, and the firm has posted an operating loss of $55.0M alongside a consolidated net loss of $80.7M, its liquidity situation seems solid. The company's cash on hand appears adequate to support its operations in the near term, with an estimated cash runway of 34 months, even in the face of high operational costs and financial commitments.

Investors should closely watch the company's operational expenditures and its ability to enhance its operating profitability, particularly given its financial obligations stemming from collaborations and forthcoming payments to Royalty Pharma. At the same time, investors can find cause for optimism in the company's product pipeline, notably pelabresib. The MANIFEST study has indicated its potential as a treatment for myelofibrosis, with significant reductions in spleen volume and symptom scores. Though some patients did experience high-grade toxicities, such as anemia, the high spleen response rate and sustained treatment are encouraging signs.

However, caution is warranted. MorphoSys is navigating a competitive market, and it remains to be seen if the company can secure a significant market share. The long-term success of its pipeline candidates is still an open question, as more research is required to establish their safety and effectiveness over the long haul. These studies will be pivotal in determining the company's future outlook.

Taking these factors into account, I'm cautiously optimistic about MorphoSys' prospects. The company's solid liquidity, encouraging pipeline, and growth potential seem to outweigh the concerns. Therefore, my recommendation for investors would be to "Hold." While the company shows promise for substantial growth, it's premature to make a definitive judgment. It would be wise to await more information on the company's pipeline candidates and its capability to control operational costs and enhance operating profitability.

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