BioWorld International Correspondent

During the first half of 2008, Morphosys AG plans to set out the shape of its future drug development strategy, following its mega-scale antibody discovery and development deal with Novartis AG, which the company estimates will deliver $1 billion in cash over the next 10 years.

The options available to Martinsried, Germany-based Morphosys are in one sense narrower, given its agreement - unveiled Monday - to align itself with Basel, Switzerland-based Novartis.

But in another sense, they also have widened, as the company now will bank a guaranteed free cash flow of about $30 million every year over the lifetime of the deal, to add to the €105 million (US$155 million) it had on its balance sheet on Sept. 30.

The broadly based alliance includes a committed cash element of $600 million, about half of which comprises research funding and half of which comprises technology access fees associated with its HuCal human antibody platform.

The company also said it expects to earn more than $400 million in milestones associated with the successful development of multiple products in multiple indications. These have been probability-weighted, using industry drug development norms, to take account of likely product failures along the way. The company also would receive single-digit royalties on eventual product sales.

Morphosys now has three broad pathways open to it, Chief Financial Officer Dave Lemus told BioWorld International. It could use the income from Novartis to invest back into programs emanating from the alliance. As part of the agreement, the company said, it has "certain co-development rights for selected programs as well as rights to co-detail the resulting products in specific territories through creation of its own sales force." Profits would be shared in the same ratio as development costs. That option would require the establishment of little additional infrastructure, Lemus said.

It also could focus its resources on its existing internal drug development programs, which comprise MOR103, an antibody against an undisclosed target, which is in development for rheumatoid arthritis, and MOR202, an anti-CD38 antibody in development for multiple myeloma.

Alternatively, it could decide to pursue a proprietary drug development strategy that was independent of Novartis, Lemus said, although that would require additional infrastructure and the development of a target-picking strategy. The company's future strategy may, of course, consist of a blend of all three. The priority it will attach to each of them will become clearer next year.

Novartis has had an ongoing relationship with Morphosys since 2004 and is its biggest shareholder, with a stake of about 7 percent.

The current deal does not include any additional equity component, and Morphosys is maintaining its independence of Novartis at the board level. "We retain our ability to build Morphosys outside of the deal," Morphosys CEO Simon Moroney said on a conference call Monday.

However, that ability is subject to certain constraints. "Really the only thing that the Novartis agreement precludes is our ability to take on new partners when we do fee-for-service antibody generation," Lemus said. The company will continue to cooperate with its current partners, some of whom have options to renew existing agreements out to 2011 and 2012. "We [also] have the ability to co-develop [new drugs] with other biotechnology companies - subject to certain limitations," he said.

The area of infectious disease and Morphosys' existing research antibody business, which accounts for about one-third of its revenues, are also outside the scope of the alliance. The research antibody business "still remains an interesting business proposition in its own right," Lemus said. And it helps the company to extend its academic network and potentially gain access to new drug targets.

Shares in the company (Frankfurt:MOR) rose by around 23 percent to close at €51.27 Monday, but the stock shed some of those gains during trading on Tuesday. It closed yesterday at €48.39, down €2.88, which values the company at just under €357 million.

The deal failed to lift the company above its 52-week high of €59.49, which it reached during the first quarter. "There was a capital increase in between. It was just 10 percent, but you should keep it in mind," Martin Possienke, analyst at Equinet Institutional Services AG in Frankfurt, told BioWorld International. Nevertheless, the company is still barely valued above its existing and guaranteed free cash, he said. "At least to me, it does not make sense, the valuation," he added. Possienke's target price on the stock was €75 before the Novartis deal, and he has yet to derive a new figure.

Asked if the stock was undervalued, a second analyst, who preferred to remain anonymous, said "massively so." The Germany biotechnology sector has registered several late-stage disappointments this year, which has fostered investor uncertainty, the analyst said, on top of the wider global uncertainty in the public equity markets. Moreover, the Morphosys pipeline is still very early stage - just four of its 48 partnered projects have entered a Phase I clinical trial so far. "From a long-term perspective, the outlook is very positive," the analyst said.