MorphoSys Biotechnology Success Offers European Blueprint

MorphoSys AG is succeeding where other European biotechnology companies have struggled, offering a blueprint to start-ups seeking funding.

After two decades in business, the Martinsried, Germany-based company in June sold the rights to two experimental drugs, in two of this year’s biggest European licensing deals. MorphoSys’s stock has almost doubled in 2013, giving the company a 1.37 billion-euro ($1.82 billion) market value.

Biotechnology companies have struggled for financing in Europe, and the region has failed to produce companies the size of Amgen Inc. or Gilead Sciences Inc. of the U.S., which have market values of more than $80 billion. To surmount financial hurdles, MorphoSys used a slow-and-steady approach: It first hired out its expertise -- finding new medicines based on antibodies, protein particles that are part of the immune system -- to drugmakers before working on its own products.

“This is a model that can be very flexible, and at the end of the day, you can make excellent money,” said Siegfried Bialojan, who heads Ernst & Young LLP’s Life Science Center in Mannheim, Germany.

European biotechnology startups have face a lack of ready money since the bursting of the late-1990s stock market bubble scared investors away from riskier investments. While risk appetites rebounded in the U.S., they haven’t in Europe.

‘Reluctant’ Investors

For example, venture-capital funds raised in Germany fell 40 percent to 207 million euros last year from 350 million euros in 2006, according to an Ernst & Young report. There hasn’t been a single biotechnology IPO in Germany since 2006, according to data compiled by Bloomberg. Europewide, there were 10 biotech IPOs in 2005 versus three so far this year.

“A lot of people got burned, and have been reluctant to get back into the market,” Joachim Rothe, a partner at Life Sciences Partners, a Munich-based venture-capital fund, said in a telephone interview. “The first million is easy to get. But a million euros is nothing in drug development.”

The key to MorphoSys’s success: Not relying on a single product or on investor money, Jens Holstein, the company’s chief financial officer, said in an interview. “You have to go around gathering money, a commodity that tends to be in short supply,” he said.

MorphoSys shares have gained 97 percent this year, closing yesterday at 57.79 euros. MorphoSys’s market value makes it Germany’s biggest biotechnology drugmaker, yet it wouldn’t even rank in the U.S.’s top 20, according to data compiled by Bloomberg.

Antibody Library

MorphoSys built an income stream by charging fees to use its library of antibodies to help big-name companies such as Novartis AG and Roche Holding AG find candidates to be developed into medicines. MorphoSys also will get royalties if the drugs - - it created Roche’s much-watched experimental Alzheimer’s treatment gantenerumab -- reach the market.

“They’ve been making this work for some years now, and it’s starting to pay off,” Timo Kuerschner, an analyst with Landesbank Baden-Wuerttemberg in Stuttgart, Germany, said in an interview.

As the company added clients, it started working on its own portfolio of drugs. The first, a treatment for rheumatoid arthritis and other inflammatory ailments called MOR103, was bought by GlaxoSmithKline Plc in early June for as much as 445 million euros and a share of any potential revenue.

‘Real Scoop’

While the MOR103 deal established MorphoSys as a drug developer, the deal that followed may turn it into a drug marketer as well. At the end of June, the company sold the rights to its MOR202 multiple myeloma treatment to Celgene Corp. for as much as 628 million euros. MorphoSys held on to marketing rights in Europe, giving it a toehold in drug distribution.

“They obviously did a super job, especially on the second deal,” said Markus Manns, who owns MorphoSys shares in a health-care fund at Union Investment in Frankfurt. “It was a real scoop to get a deal for such an early-stage project. That really speaks to the strength of the management and the strength of the molecule.”

The company’s third drug MOR208, is used to treat cancers such as non-Hodgkin’s lymphoma and acute lymphoblastic lymphoma, and MorphoSys has said it may be more widely used than Roche’s Rituxan, a drug with 2012 sales of 6.7 billion Swiss francs ($7.2 billion) last year.

To be sure, MorphoSys may need to invest in areas outside of antibodies to keep the growth going. The company said this month it plans to spend part of its almost 190 million euros in cash to expand into therapies that harness the immune system to fight diseases such as cancer.

Should the drug-development successes continue, the company may attract takeover bids. Moroney has said he’s not interested in selling at this point.

“I’ve think we’ve shown we can manage quite well by ourselves,” said Holstein, the CFO. “We don’t have to be acquired. We still have a lot of potential in our pipeline.”

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