MorphoSys has agreed to acquire Constellation Pharmaceuticals for $1.7 billion cash, the companies said today, in a deal that grows the buyer’s presence in blood cancer treatments and expands it into solid tumors.

Headquartered in Cambridge, MA, Constellation focuses on discovering and developing novel therapeutics for various forms of cancer that selectively reprogram gene expression by targeting the writer, reader, and eraser classes of epigenetic regulators, which the company reasons is a promising therapeutic approach not only to induce cancer cell killing but also to enhance anti-tumor immunity.

Constellation’s pipeline candidates target classes of epigenetic regulators used by many cancer cells to promote growth, suppress an anti-tumor immune response, and/or advance inflammatory disorders. Those classes include bromodomain and extra-terminal (BET) proteins, epigenetic “readers” which bind to chromatin and enhance target gene expression; Enhancer of zeste homolog 2 (EZH2), an epigenetic “writer” enzyme that suppresses target gene expression by adding modifications to chromatin; and lysine-specific demethylase 1A (LSD1), an epigenetic “eraser” enzyme that suppresses target gene expression by removing modifications from chromatin.

One of Constellation’s two lead candidates, pelabresib (CPI-0610), is a potentially first-in-class BET inhibitor now in Phase III clinical trials for myelofibrosis. The other lead candidate, CPI-0209, a second-generation EZH2 inhibitor, is currently in Phase II with best-in-class potential for treating hematological and solid tumors. Constellation’s pipeline also includes numerous preclinical compounds.

“Both pelabresib and CPI-0209 have broad potential and we look forward to unlocking their full benefits for cancer patients,” MorphoSys CEO Jean-Paul Kress, MD, said in a statement. “With Constellation’s high-potential product candidates, complementary R&D capabilities, and outstanding team, we can further advance our mission in the fight against cancer.”

Debating the deal

The companies asserted that the acquisition would benefit them by:

  • Accelerating MorphoSys’ strategy of growing through proprietary drug development and commercializatio
  • Augmenting MorphoSys’ existing pipeline in blood cancers and expanding into potential therapies for solid tumors through Constellation’s pipeline of early- to late-stage cancer candidates.
  • Combining MorphoSys’ expertise in biologics with Constellation’s expertise in epigenetics and small molecule discovery platforms.

Investors in Constellation roared their approval of the acquisition with a buying surge that sent the company’s shares surging 67% in morning trading, to $33.74 as of 10:49 a.m. from yesterday’s close of $20.24.

However, investors in MorphoSys appeared less enthusiastic about the deal. Shares of MorphoSys fell 11% in early morning trading on the Nasdaq Global Select Market, to $19.55, from yesterday’s closing share price of $22.08.

“Market doesn’t like this because it looks desperate,” Brad Loncar, CEO of Loncar Investments, tweeted this morning.

In an earlier tweet today, Loncar added: “MorphoSys used to be a great drug discovery company. The idea that they today need to buy development stage assets (actually a good move given the state of its current pipeline) says a lot.”

Up to $2.025B in financing

To finance the Constellation transaction and development of the combined pipeline, MorphoSys said, it entered into a long-term strategic funding partnership with Royalty Pharma, through which Royalty will pay MorphoSys $1.425 billion upfront; access to up to $350 million in Development Funding Bonds with flexibility to draw over a one-year period; and up to $150 million in payments tied to achieving clinical, regulatory and commercial milestones for pelabresib and two MorphoSys pipeline candidates.

After completion of the transaction,Royalty Pharma is expected to invest $100 million in a cash capital increase of MorphoSys under an authorization to exclude subscription rights of existing shareholders. The new MorphoSys shares will be listed on the Frankfurt Stock Exchange.

The two MorphoSys pipeline candidates are:

  • Otilimab (MOR103/GSK3196165), a GlaxoSmithKline (GSK) co-developed fully human monoclonal antibody designed to inhibit granulocyte-macrophage colony-stimulating factor (GMCSF). Otilimab is in a Phase III trial (NCT04333147) for rheumatoid arthritis and Phase II trial (NCT04376684) for severe pulmonary COVID-19 related disease.
  • Gantenerumab, a Roche-partnered anti-amyloid-beta monoclonal antibody in Phase III trials for Early Alzheimer’s disease (NCT03444870), Mild Alzheimer’s disease (NCT02051608), Prodromal Alzheimer’s disease (NCT01224106 , and a rollover study on long-term administration (NCT04339413).

Under its financing agreement with MorphoSys, Royalty gained rights to receive 80% of future royalties and 100% of future milestone payments on otilimab, 60% of future royalties on gantenerumab, and 3% on future net sales of pelabresib and CPI-0209.

Royalty also gained rights to 100% of MorphoSys’ royalties on net sales of Janssen’s Tremfya® (guselkumab), an anti interleukin (IL)-23, approved for the treatment of adults living with moderate to severe plaque psoriasis, and for adults with active psoriatic arthritis and is also in clinical development for ulcerative colitis and Crohn’s disease. Last year, Tremfya generated sales of $1.347 billion.

MorphoSys agreed to pay $34 per share in cash for Constellation—72% above the company’s closing share price yesterday of $19.81, and approximately 70% above Constellation’s volume-weighted average price for the last five trading days.

The management board (Vorstand) and the supervisory board (Aufsichtsrat) of MorphoSys, as well as the Board of Directors of Constellation, have all unanimously approved the acquisition deal.

The transaction is expected to close in the third quarter of 2021 subject to conditions that include a minimum tender of at least a majority of outstanding Constellation shares, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and the receipt of any approvals or clearances required to be obtained under the applicable antitrust laws, and other customary conditions.

Upon completion of the deal, MorphoSys said, it will remain headquartered in Munich, Germany, but will maintain a “significant” commercial and R&D presence in Cambridge.

“Becoming part of MorphoSys creates an industry leader with commercial capabilities, a deep R&D pipeline and complementary small molecule and biologics discovery and translational capabilities, as well as the financial strength to compete to win,” stated Jigar Raythatha, president and CEO of Constellation.

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