Eli Lilly Targets IBD, Takes Calculated Gamble With $3.2bn Morphic Deal
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Summary:
- Eli Lilly and Company is set to acquire Morphic Holding for $3.2bn. Morphic is focused on autoimmune disease drugs.
- Morphic’s MORF-057 has a similar MoA to Takeda’s ~$5bn per annum selling drug entyvio, but it is orally available, unlike the injectable entyvio.
- Study data for MORF-057 has been somewhat mixed, and Wall Street seemed to have lost faith – Lilly, however, is paying an >85% premium to the traded price for Morphic.
- Thanks to the >$50bn per annum revenue promise of its wonder-drug tirzepatide and the double-digit billion potential of Alzheimer’s drug Kisunla, Lilly can afford to make more speculative M&A deals than rival pharmas.
- The Morphic deal strikes me as a calculated gamble that could be unsuccessful or deliver a $5bn per annum drug. In the latter scenario, it would help Lilly’s revenues may exceed $100bn in time and perhaps contribute to a trillion-dollar company valuation.
Makhbubakhon Ismatova
Investment Overview
Eli Lilly and Company (NYSE:LLY), the world’s largest pharmaceutical company by market cap, announced today that it is set to acquire Morphic Holding, Inc. (NASDAQ:MORF), the Waltham, Massachusetts-based, autoimmune disease-focused drug developer, for $57 per share, valuing the deal at $3.2bn.
Indianapolis-based Lilly has seen its stock price rise in value by an astonishing >700% across the past five years, thanks largely to the promise and potential of its Glucagon-like peptide-1 (“GLP-1”) and glucose-dependent insulinotropic polypeptide (“GIP”) dual agonist drug tirzepatide, which has been lauded for its ability to help patients lose weight (a mean of ~27% weight loss at 84 weeks in its pivotal Surmount study), is already approved to treat Type 2 diabetes and obesity, and which analysts believe will generate >$50bn in annual sales at its peak.
With an oral weight loss drug and triple agonist drug (GIP, GLP-1, and glucagon) in its pipeline, Lilly and main rival Novo Nordisk A/S (NVO) look set to dominate a market set to be worth $150 – $200bn per annum for years to come, but that does not mean the company is neglecting the rest of its product portfolio and pipeline.
Lilly’s traditional strength has been the treatment of diabetes – its drugs Trulicity, Jardiance, and Mounjaro – the brand name of tirzepatide in the diabetes indication – earned revenues of $7.1bn, $2.75bn and $5.2bn in 2023 – however, Lilly has a strong oncology division, which earned $5.7bn of revenues last year, immunology division, $3.7bn revenues in 2023, and neuroscience division, £2.4bn revenues in 2023.
The Morphic deal has been done to strengthen the immunology division, which currently consists of just two drugs, Taltz, indicated for psoriasis / psoriatic arthritis, and Olumiant indicated for Rheumatoid Arthritis (“RA”), and alopecia, which earned revenues of $2.76bn and $923m respectively in 2023.
Analysis – Morphic’s Journey To Date With MORF-057 Suggests Lilly Is Taking Calculated Gamble
Morphic IPO’d back in July 2019, raising ~$103.5m via the issuance of 6.9m shares priced at $15 per share. This is how the company describes its work in its Q1 2024 quarterly report / 10-Q submission:
We are a biopharmaceutical company applying our proprietary insights into integrins to discover and develop a pipeline of potentially first-in-class oral small-molecule integrin therapeutics.
Integrins are a target class with multiple approved injectable blockbuster drugs for the treatment of serious chronic diseases, including autoimmune, cardiovascular and metabolic diseases, fibrosis and cancer.
To date, no oral small-molecule integrin therapies have been approved by the U.S. Food and Drug Administration (“FDA”). We believe our unique platform can unlock the potential to reliably generate high-quality oral molecules against specific integrin targets.
Morphic’s lead candidate is MORF-057, “an orally administered α4β7-specific integrin inhibitor affecting inflammation,” which has been developed to treat patients with inflammatory bowel disease (“IBD”).
There are many drugs approved to treat IBD, including the likes of AbbVie Inc.’s (ABBV) >$20bn per annum (until its US patents expired last year) Humira, at least eight generic versions of Humira, AbbVie’s Humira replacement Skyrizi, ~$7bn revenues in 2023, Takeda Pharmaceutical Company Limited’s (TAK) entyvio, which earned ~$4.9bn in 2023, Johnson & Johnson’s (JNJ) Stelara, $11bn of revenues in 2023, and Pfizer Inc.’s (PFE) Velsipity, which was approved last year and is expected to achieve “blockbuster” (>$1bn per annum) sales in the indication of ulcerative colitis.
In short, autoimmune markets are vast, and although none of the above-mentioned drugs earn all of their revenues from IBD alone, the huge revenue figures illustrate how valuable the market is, while the number of drugs approved illustrates how competitive the market is.
Most approved drugs, including all those mentioned above bar Velsipity, are injectables, however, Morphic’s drug is orally available. In its press release announcing the acquisition, Lilly’s Chief Scientific Officer Daniel Skovronsky stated:
oral therapies could open up new possibilities for earlier intervention in diseases like ulcerative colitis, and also provide the potential for combination therapy to help patients with more severe disease.
Praveen Tipirneni, M.D., CEO of Morphic Therapeutic, commented:
We built the Morphic Integrin Technology platform to realize the vast opportunity of integrin therapeutics. MORF-057 is a tremendous example of those efforts, an oral small molecule α4β7 inhibitor with the potential to be well tolerated and efficacious, attributes that could unlock new possibilities in IBD treatment.
In terms of its mechanism of action (“MoA”), MORF-057 most closely resembles Entyvio, which is also a small molecule inhibitor of α4β7, albeit an injectable one.
The evidence that MORF-057 may be approvable, with the ability to challenge or even exceed the efficacy and safety credentials of current standards of care (“SoC”), has been collected in preclinical and clinical studies, the latest stage being the Phase 2a EMERALD I study – according to Morphic:
Patients enrolled in the EMERALD-1 study are being treated with 100 mg BID at sites in the United States and Poland. The primary endpoint of the trial was the change in Robarts Histopathology Index (“RHI”), a validated instrument that measures histological disease activity in UC at 12 weeks compared to baseline.
In April 2023, we announced topline results from the main cohort of the EMERALD-1 Phase 2a clinical trial of MORF-057, which met the primary endpoint and demonstrated a statistically significant reduction of 6.4 points (p=0.002) from baseline at week 12 in the RHI score.
In the study, 25.7% of patients achieved clinical remission by mMCS. MORF-057 was generally well tolerated at the dose of 100 mg BID with no serious adverse events (“SAEs”) and no safety signal observed
The company is now running a Phase 2b study, EMERALD-2 – according to Morphic:
Patients enrolled in the EMERALD-2 study are randomized to receive one of three active doses or a placebo: 100 mg BID, 200 mg BID, QD (once daily), or a placebo that will cross over to MORF-057 after the 12-week induction phase.
The primary endpoint of the trial is the clinical remission rate as measured by the mMCS at 12 weeks. The secondary endpoints include the change in RHI, PK, and PD measures, as well as safety parameters.
We believe that we will achieve a complete analysis of the data for the primary endpoint from the EMERALD-2 Phase 2b trial of MORF-057 in patients with moderate to severe UC in the first half of 2025.
There is also a Phase 2b GARNET study that has just begun enrolling patients with Crohn’s Disease (“CD”), its primary endpoint being a proportion of participants in endoscopic response (>=50% reduction) at week 14 as determined using Simple Endoscopic Score for Crohn’s Disease (“SES-CD”).
Morphic’s volatile share price reflects Wall Street’s initial enthusiasm for, and subsequent scepticism about the fate of MORF-057. After the EMERALD-1 results were released in April last year, Morphic stock hit highs of $60 per share, however, when an abstract paper was released in September with a more complete review of the data, showing that rates of clinical remission and particularly, endoscopic improvements were lower than comparable clinical studies of Entyvio, Humira, and a candidate developed by Protagonist Therapeutics, Inc. (PTGX) that was subsequently shelved, Wall Street sent the stock plummeting to ~$20 per share almost overnight.
The share price did recover to trade ~$40 in early 2024, but traded ~$30 prior to Lilly’s takeover announcement. As such, we can make the case that Lilly may have taken a calculated gamble, buying at a deflated price, and hoping that the data due in 2025 will make a stronger case for approval and “best-in-class” status than the data released in September did.
Looking Ahead – How Soon Could Morphic Deal Be Value Accretive?
With its market cap of >$875bn at the time of writing, it’s clear that the deal for Morphic is not going to have too much of a material effect on Lilly’s share price, however, in my view, it is good housekeeping on the part of Lilly to want to keep competing in as many disease indications as possible, and keep challenging for SoC status.
Paying $3.2bn based primarily on the promise of MORF-057, which has delivered some mixed results in clinical studies, and paying a >85% premium to the last closing price, may seem like a questionable strategy, but Lilly will doubtless have done its homework and concluded that the deal was worth completing, perhaps due to the fact that, if approved with a safety and efficacy profile comparable to Entyvio’s, the drug would be almost guaranteed revenues in the multi-billions.
There are apparently two rival drugs in development with the same mechanism of action, being developed by Gilead Sciences, Inc. (GILD), and Japan-based Ensho Therapeutics, but both are behind in the development race, with Phase 2 studies still to negotiate.
Lilly itself acquired an α4β7 drug as a result of its $2.4bn acquisition of Dice Therapeutics last June, although the drug was not one of Dice’s lead assets, and it is unclear if this program is still in development.
Lilly’s immunology division may be small at present, but the company is pushing for approval of two other assets, Lebrikizumab and Mirikizumab, respectively, indicated for Atopic Dermatitis and Ulcerative Colitis.
Lebrikizumab, an IL-13 inhibitor (IL-13 is a type of protein that can help regulate inflammation), has been rejected once by the FDA, due to manufacturing issues, but is likely to secure approval at the second time of asking, with “blockbuster” peak sales forecasts. Mirikizumab has also been rejected once by the FDA, again due to manufacturing issues, and is another likely blockbuster, its IL-23 blocking MoA similar to AbbVie’s Skyrizi.
The approval setbacks and relatively low peak sales expectations may hint at the fact Lilly is less experienced, or successful in the field of immunology than rivals such as AbbVie, which generated >$26bn from its three approved assets last year, or, e.g., Sanofi (SNY), whose Dupixent has been pegged for >$15bn in peak annual sales, or Johnson & Johnson (JNJ), which markets and sell the “blockbusters” Simponi, Remicade, and Tremfya alongside >$10bn per annum selling Stelara.
If we assume that Lilly is able to bring MORF-057, Lebrikizumab and Mirikizumab to market by 2025, or early 2026 in the case of MORF-057, it could add >$5bn to the company’s top line revenues before the end of the decade, although with Olumiant and Taltz both facing patent expiries early next decade, more work may need to be done before the company can boast of a double-digit billion revenue immunology division.
Concluding Thoughts – An Important Deal For Diversification Of Revenues Sources, But Approval May Still Be In Balance
Unlike many of its Big Pharma rivals, Lilly has not been an especially acquisition-hungry company – the luxury of having potentially the world’s selling drug ever in its portfolio means it has not had to invest in M&A to guarantee growth or pay over the odds for a late-stage drug candidate with “blockbuster” potential.
Instead, Lilly’s strategy has been to make a series of relatively small deals, such as the Dice deal, today’s deal for Morphic, a $1.4bn deal for antibody-drug conjugate (“ADC”) specialist Point BioPharma, and a ~$2bn deal for Versanis Bio and its lead asset bimagrumab, that it is trialling alongside tirzepatide in cardiometabolic indications.
As mentioned, Lilly’s overwhelming strength is weight loss/diabetes, plus any other indications it can secure approvals for tirzepatide – the drug is so promising, that it could win many more.
Within its neuroscience division, the recent approval of Kisunla (donanemab), which has successfully targeted amyloid beta and could be a >$5bn selling drug, and potential approval of another AD drug, Remternetug, suggests a ~$2bn per annum business segment could grow into a >$10bn per annum division by the end of the decade.
My forecasts suggest that Lilly could be a $100bn per annum revenue business by 2030, and in that context, these small M&A deals may seem minor, however Lilly’s strength is such that it can afford to take calculated gambles, buying companies whose candidates are not fully derisked, but, if successful, could be major revenue drivers, and shrug off any disappointments – the Dice deal, for example, does not seem to have yielded much in the way of positive developments.
Regarding today’s announcement, Morphic’s lead asset will read out critical data this year and next, so we will not have to wait long to discover if MORF-057 is approvable, with a best-in-class profile, or as Wall Street suspects, may not be able to beat current SoCs on efficacy.
Ultimately, this deal looks to have been done at a good price for Lilly and for Morphic, reflecting the risk – for context, Pfizer recently paid >$7bn to acquire Arena Pharmaceuticals and its drug etrasimod, now approved as velsipity – and the potential reward should MORF-057 prove to be a winner.
Morphic does have other drugs in Investigational New Drug (“IND”) enabling studies also, targeting pulmonary hypertensive disorders, and myelofibrosis, a type of blood cancer, so long-term, Lilly may even be able to bolster its ~$6bn per annum oncology division also.
Essentially, Lilly is probably not in the market for M&A deals that deliver de-risked assets with single-digit billion revenue potential, as it is primarily focused on making tirzepatide the most successful drug in history, and delivering on the promise of Kisunla and Remternetug.
In that sense, the strategy of investing a few billion here and there on drugs that carry a higher chance of failure, but could disrupt major markets such as immunology and oncology and renergise these divisions for Lilly, looks to be a sensible one.
Such investments may make the difference between Lilly being a $100bn revenue company by early next decade, or not, and if the Pharma does achieve that psychologically important milestone, my suspicion is that it will become the world’s first trillion-dollar market cap company, meaning Lilly today could be as much as 15% undervalued, my calculations suggest, provided the company can brush up on its manufacturing and get at least two more immunology drugs approved by the end of 2026.
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