Magazine Article | January 31, 2014

Surfing The Peaks And Troughs Of The Biotech Ocean

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By Suzanne Elvidge, contributing editor

Since its founding 20 years ago, German biotech MorphoSys has come from a tough start as a company fighting patent battles and struggling to get funding to success as a profitable, fee-for-service organization. Today, MorphoSys is well on its way to becoming a fully integrated biotechnology company, primed to take its own products from concept to patient.

So how has the company survived through some of the most turbulent economic times the industry has seen and succeeded where many others have failed? To find out, let’s start at the beginning.

MorphoSys was founded in Martinsried, Germany, in 1992 as a fee-for-service antibody company, and its team of founders included the current CEO, Simon Moroney, Ph.D. The company is based on its proprietary technology HuCAL, its human combinatorial antibody library containing several billion fully human antibodies, and a proprietary phage display technology, which it describes as “the most successful antibody library technology in the pharmaceutical industry.” In 1997, the company signed its first commercial partnership, with Pharmacia-Upjohn, and followed this up in 1999 with an ongoing collaboration with Bayer.

Getting Through The Tough Times
As many companies soon realize, early successes don’t always equate to ongoing triumphs. MorphoSys and Cambridge Antibody Technology (CAT, now part of AstraZeneca) both developed antibody platforms based on phage display. In 1999, MorphoSys filed a lawsuit against CAT seeking to invalidate one of CAT’s patents. In 2001, CAT filed a number of lawsuits against MorphoSys, claiming infringement of a patent covering antibody expression libraries and their generation.

After a lot of legal wrangling, claims, and counterclaims, the two companies agreed to settle in 2002. The agreement gave MorphoSys the freedom to develop and commercialize its HuCAL technologies. Under the agreed terms, CAT received an annual payment of €1 million (about $1.4 million) a year over five years, along with milestone and royalty payments for products developed using the HuCAL libraries, and an equity stake in MorphoSys.

Around this time, MorphoSys was also trying for the first time to develop its own proprietary pipeline, but was struggling to raise the funds it needed. These two endeavors combined to have a devastating impact on the company, resulting in a need to restructure. The company cut its spending on its own pipeline and changed its business plan to partner proprietary products before it moved into clinical development. It also had to reduce headcount from 120 to 91 employees. These spending cuts assured that the company could continuously operate for at least three years. As Moroney’s goal had always been to develop the company’s own products, this was a tough decision to make, but it allowed the company to get through the tough times.

“We went back to our core skills and refocused the company on fee-for-service. We had to downsize, unfortunately, but this meant we could work our way through the difficult times and survive. It took two to three years to get back on our feet, but I think we emerged stronger,” says Moroney. “We had to accept that morale would suffer. It’s important to know how to manage it. The best way to handle the situation is to be honest and explain what is going on, why it’s happening, and what people should expect. When people see things play out as predicted, it restores faith and confidence.”

Rebuilding And Validation
This refocusing, under Moroney’s leadership, helped MorphoSys to move to where it is now — a company with a strong financial position that’s able to fund its own internal development activities and still remain profitable. This rather enviable position is not one that many development-stage biopharma companies can match. The first significant step was the deal signed with Novartis in 2004 to discover and develop therapeutic antibodies using HuCAL technology. This included a €9 million (around $12.3 million) investment in MorphoSys and more than $30 million in R&D funding license fees over three years. In 2006, Novartis extended the deal until May 2011. Other partners included Boehringer Ingelheim, Daiichi Sankyo, GlaxoSmithKline, Janssen Biotech, Merck, Pfizer, and Roche.

In December 2007, the two companies announced the deal that would create new opportunities for MorphoSys by reducing its reliance on fee-for-service deals for ongoing income and freeing it up to allocate more investment into proprietary drug development. The 2007 deal, which made MorphoSys Novartis’ main technology collaborator in the area of antibody discovery and development, also allowed the biotech to gain experience in drug discovery and development within the security of an alliance.

Moving Toward Full Integration
It was deal making again, this time in June 2013, that allowed MorphoSys to set itself firmly on the route to becoming a drug development company rather than a service provider. In the firstannounced deal, validating its in-house pipeline of clinical-stage proprietary antibodies, MorphoSys signed an agreement licensing MOR103 to GSK. MOR103 is a fully human HuCAL antibody directed against GM-CSF (granulocyte macrophage-colony stimulating factor). It has completed a Phase 1b/2a in rheumatoid arthritis and is the first anti-GM-CSF antibody to have shown clinical efficacy in this disease. Based on promising preclinical data, MOR103 also has moved into a Phase 1b trial in multiple sclerosis.

Under the terms of the agreement, MorphoSys will receive an upfront payment of €22.5 million (around $29.2 million) in a deal that could be worth up to €445 million (around $578.2 million), as well as tiered double-digit royalties. GSK will assume responsibility for all subsequent development and commercialization of MOR103.

Perhaps more significantly, MorphoSys also announced a joint development deal with Celgene for MOR202, a fully human HuCAL antibody directed against CD38. This is in a Phase 1/2a in patients with relapsed or refractory myeloma, and also has potential in leukemias.

MorphoSys and Celgene will collaborate on the development of MOR202 in multiple myeloma and other indications, with Celgene covering two-thirds of the development costs. Under the terms of the agreement, MorphoSys will receive an up-front license fee of €70.8 million ($92 million), and Celgene invested €46.2 million ($60 million) in MorphoSys. MorphoSys may also receive additional development, regulatory, and sales milestones, as well as a 50/50 profit share in its co-promotion territory and tiered double-digit royalties outside this area. The deal could be worth up to €628 million ($818 million).

“These deals were turning points for us; they provided us with income and convinced our investors that we have the capabilities to develop our own pipeline of drugs, allowing us to raise the funding we needed,” says Moroney. “Though we don’t plan to initiate any new partnered programs, we will continue with our commitments to the existing projects, and these will continue to generate royalties for us. Our plan is to work with future partners as codevelopers rather than licensing out products completely.”

Finding And Creating Funding
In September 2013, MorphoSys raised around €84 million, which it will use to fund the clinical development of MOR208, a humanized monoclonal antibody that targets CD19 and is in Phase 2 trials for the treatment of B-cell acute lymphoblastic leukemia (B-ALL) and non- Hodgkin’s lymphoma. Licensed from Xencor, MOR208 (then known as XmAb5574) also has potential in other B-cell malignancies and in autoimmune disease.

The money is also earmarked for further development of MOR202 and to move other proprietary pipeline candidates into further preclinical and clinical development.

As a sign of its success, MorphoSys created a new funding initiative last year. Under this initiative, MorphoSys provides innovation capital and collaborative support for promising start-ups in protein design, generation, and screening, including technologies, targets, and compounds. In exchange, MorphoSys will seek access to innovative development candidates or technologies.

As an example of this, MorphoSys made an equity investment in Dutch biopharma company Lanthio Pharma in November 2012. MorphoSys and Lanthio Pharma are collaborating to use their technologies to create and screen libraries of lantipeptides — therapeutics with high-target selectivity and improved drug-like properties. MorphoSys has the option for an exclusive license covering Lanthio Pharma’s LanthioPep technology for drug discovery.

Secrets Of Success
Drug development is a high-risk endeavor, with high rates of attrition between concept and market. MorphoSys’ approach to reducing this risk has been to maximize the number of products and therapeutic areas in its development portfolio, which currently includes 81 products across a variety of different diseases, including oncology, autoimmune and inflammatory disease, musculoskeletal disorders, cardiovascular disease, and others. Of these, 21 are in clinical trials, with the rest in discovery and preclinical studies. While the majority of the compounds are part of partnered programs, the company’s in-house proprietary projects are gaining strength. MorphoSys also has access to a number of proprietary technologies in addition to HuCAL: Slonomics, an automated process for generating doublestranded DNA triplets to create diverse combinatorial gene libraries; arYla, a platform that generates combinatorial libraries for antibody optimization; and Ylanthia, MorphoSys’ largest and most recent Fab (fragment-antigen binding region) library.

Another of the secrets of MorphoSys’ success is the fact that the company is, perhaps unusually, still led by one of its cofounders. After 20+ years, Moroney still displays infectious enthusiasm for what he does. “Why am I still here? It’s interesting and exciting, and I feel that I can contribute,” says Moroney. “Developing differentiated drugs is an exciting challenge.”

Good internal communication has been a key strand of MorphoSys’ story, through the good times and the bad, as well as being prepared to tackle problems head on.

“With the Novartis deal, this changed how the company worked — we switched from fee-for-service to drug development as a result of this one single big deal, and moving the company’s focus brought challenges. We needed to bring people onboard with new skills and different mindsets, and the integration wasn’t always easy,” says Moroney. “For example, drug development requires a higher spend than other parts of the company, which caused some internal questions. It’s about communicating internally and executing the research. We needed to work hard to bring everyone on board and to dovetail the new project into our existing structure. But once people understood the motivation behind the change, they rallied.”

Looking back, Moroney says he has changed how he has done things over the years. However, he doesn’t feel he would have done many things differently.

“There are always small things that I would change — for example, clauses in contracts — but you always have to accept some compromises in negotiation. My advice to my old self would be to do everything that we have done, but sooner,” says Moroney. “It’s a very exciting time for us. We have a lot of compounds approaching proof-of-concept in the clinic, and we are not far off from reaching the market. We have the opportunity to build and grow, and it has never felt more positive.

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