What happened

Shares of MorphoSys (MOR -0.57%) 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 -2.28%) 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.

Two people shaking hands.

Image source: Getty Images.

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.