What happened
Shares of MorphoSys (MOR 0.45%) sank 11.5% this week as of the market close on Thursday. The decline stemmed from the German drugmaker's announcement on Wednesday that it plans to acquire Constellation Pharmaceuticals (CNST) for $1.7 billion. MorphoSys also said that it entered into a long-term strategic funding partnership with Royalty Pharma (RPRX) in connection with its purchase of Constellation.
So what
Investors could be concerned that MorphoSys is overpaying for Constellation. The price tag of the deal represents a steep premium to the previous trading level for the small biotech stock.
There's also some risk involved with the transaction. Constellation's lead pipeline candidate is in phase 3 testing, while its only other pipeline program is in phase 2 testing. It's possible that these clinical studies won't be as successful as MorphoSys is counting on.
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On the other hand, some investors might not like MorphoSys' deal with Royalty Pharma. MorphoSys will receive an upfront payment of $1.425 billion and can access another $350 million in development funding bonds. Combined, that's enough to fund its acquisition of Constellation.
However, in exchange, MorphoSys will hand over its rights to royalties on sales of Tremfya, a drug approved for treating plaque psoriasis and psoriatic arthritis that's marketed by Johnson & Johnson. Royalty Pharma will also receive 80% of MorphoSys' future royalties and 100% of its future milestone payments related to otilimab, which was licensed to GlaxoSmithKline.
That's not all. MorphoSys also will assign to Royalty Pharma 60% of its future royalties on gantenerumab, an experimental Alzheimer's disease drug licensed to Roche. And Royalty Pharma will claim 3% of any future net sales of Constellation's two clinical programs -- pelabresib and CPI-0209.
Now what
MorphoSys thinks that its acquisition of Constellation will close in the third quarter of 2021. Once the deal is finalized, Royalty Pharma will make an equity investment of $100 million in the German drugmaker.
