THE BOTTOM LINE: MorphoSys's Day Of Reckoning Beckons
By ANGELA CULLEN
Of DOW JONES NEWSWIRES
FRANKFURT -- For a biotech company, generating revenues is tough enough. But having done the hard part, Germany's Morphosys AG (G.MPH) is now sacrificing some revenue to pursue a new long-term vision.
Short of a convincing R&D presentation to analysts later Monday, it looks a really tough sell. Investors have been selling Morphosys shares ahead of this presentation, which many have dubbed a day of reckoning for the biotechnology company. Analysts are preparing to re-rate the stock on the basis of the new drug development program Morphosys reveals to them. Simply, the German company has left itself little margin for error.
MorphoSys started out licensing its HuCAL fully human antibodies platform and designing antibodies for further development by its partners. But now, it believes it can go the whole hog and develop its own drugs, at least through Phase II clinical trials. But it has to convince the market that it has the wherewithal and access to the targets it needs to push its goals through.
It faces an uphill struggle. Analysts say MorphoSys is making the jump to drug development much later than its rivals Cambridge Antibody Technology Group (U.CAB), Abgenix Inc (ABGX), Medarex Inc (MEDX) and Genmab AS (K.GEM), and that it wasted opportunities to raise more cash when its stock catapulted after its March 1999 initial public offering.
A larger cash position would make it easier to buy in late-stage targets, thus shortening the time it needs to take drugs to market, but with only EUR38 million in cash, cash equivalents and marketable securities as of end-February 2002, MorphoSys can't afford to make a false move.
"In view of the cash position, nothing can be allowed to go awry," said Thomas Hoeger, biotechnology analyst at DZ Bank in Frankfurt. He cut the stock to accumulate from hold after lower-than-expected first-quarter data in early March.
Adding to the burden on its share price, MorphoSys said in early March that it plans to sacrifice its strong sales growth of the past by swapping revenues due from licenses and services for targets it can use in its proprietary development program - good news for its future pipeline but bad news in terms of mid-term growth.
It's pinning a lot of hope on one source of targets: Austria's Oridis Biomed Forschungs- und Entwicklungs GmbH, a partner that gives MorphoSys preferred access to one of the world's largest human tissue banks.
Perhaps too much hope on one source, said Marcus Wieprecht, Life Science analyst at A&A Actienbank in Frankfurt.
Aside from financing, "a main problem will be access to good quality targets, that's the bottleneck," said Wieprecht. "MorphoSys sees Oridis as the main source of targets," he said.
Making Switch Late, Financing A Question
While financing is a major question analysts want answered, the timing of the company's switch to in-house drug development also casts a cloud.
"In principle, I'm positive on the company, the new orientation is the right direction, but it has come really late," DZ Bank's Hoeger said.
"How MorphoSys plans to finance it all is the most important aspect for me," Hoeger added.
He expects one avenue will be more equity deals such as the one it struck with Schering AG (SHR) last December, in which Schering bought a 10% stake and committed itself to license fees and R&D funding in exchange for antibodies and MorphoSys's co-operation on at least five therapeutic and two diagnostics research projects.
MorphoSys has said it expects to seal at least five such co-operations this year, although not all will necessary involve a transfer of equity.
The Schering agreement was MorphoSys's first equity transaction since its March 1999 IPO, but at low December market prices for biotech stocks, it only generated gross proceeds of around EUR23.9 million from the sale of 357,880 shares to its partner. A year earlier, it could have got three times the amount when its shares traded around EUR190.
In February 2000, its shares were even higher, reaching an all-time peak of EUR444.44. At 0900 GMT Monday, MorphoSys stock was up 0.1%, or EUR0.03, at a lowly EUR33.10, not that far above its EUR25 IPO price.
"It was certainly a mistake" not to tap the capital markets when its share price was higher, said Hoeger, adding that MorphoSys's management has a reputation for being conservative.
"That has its advantages and disadvantages," Hoeger said. "I could imagine more deals like Schering since the capital markets are closed," Hoeger said.
MorphoSys's saving grace is its technology, which many analysts believe is superior to that of its rivals, but which is, as yet, untested in the clinic.
Although antibodies are large molecules that don't cross cell membranes easily, they represent an important new class of drugs because they reduce development time and costs, and can produce more targeted therapies with fewer side effects than small molecule drugs.
Unlike many of its competitors, which produce their antibodies transgenically via mice, MorphoSys produces its antibodies synthetically, which can reduce the risk of rejection by humans and can cut side effects.
Technology Still Has To Prove Itself In Clinic
Like many of his colleagues in the analyst community, A&A Actienbank's Wieprecht believes in MorphoSys's antibody technology, but without details is also skeptical about the company's new strategy.
Wieprecht, who previously worked as a biochemist at a Berlin-based biotechnology company, is the author of a comprehensive report on MorphoSys issued Feb 26, when its shares traded between EUR45.25 and EUR47, closing down 2.4% at EUR45.28.
In that report, Wieprecht described HuCAL as an "excellent technology ideally suited for the generation of research tools and diagnostics" but said it still has to prove its ability to bring therapeutics into the clinic.
While MorphoSys antibodies are being used by its partners in more than 60 potential drug development programs, none of these is in clinical testing and only 10 are in advanced preclinical testing. The company has previously said it expects at least two of these to move into the clinic next year.
But on MorphosSys's own estimates, the clinical development of an antibody drug can take between five and seven years, so market entry for any of its own drugs could be as far off as 2010.
MorphoSys's rivals all have a head-start, with products already in advanced clinical testing. Cambridge Antibody's D2E7 rheumatoid arthritis antibody, which it's developing with Abbott Laboratories (ABT), is in Phase III trials.
"Three or four antibodies, if the targets are of good quality, would be a good step" toward accelerating MorphoSys's drug development business, said DZ Bank's Hoeger.
Retaining his sell recommendation on the stock, Wieprecht said in his February report: "We stay on the sidelines until the R&D day in April without details regarding the buildup of the proprietary pipeline."
He told Dow Jones Newswires that he believes MorphoSys may have "overslept" in terms of maturing its business model.
MorphoSys will roll out its new strategy to analysts on Monday and the media Tuesday.
Company Web site: morphosys.de
-By Angela Cullen, Dow Jones Newswires; 49 69 2972 5500; angela.cullen@dowjones.com |
