Morphosys is one of the stocks I watch since years. Its business model is split into 3 parts:
- (1) solid cash stream from the proprietary anti-body library
- (2) partnering with pharma companies all over the world using the human anti-bodies technology to develop new pharmaceuticals
- (3) developing own pharmaceuticals
While (1) provides solid cash flows, (2) can be very profitable. If companies like Novartis would develop a new blockbuster with the anti-body-technology, Morphosys would get a percentage of the turnover. And the definition of a pharmaceutical blockbuster is: 1 USD bn turnover a year or more.
Even if those pharmaceuticals would never hit the market, Morphosys is entitled to milestone-payments in the process of development.
Well, I gained a little knowledge on development of pharma products: this is a process, where only a very small number of possible candidates will finally become a product. And it has not only to do with the management quality of the company. Once you have developed the substance, you have to go through several test phases. Demonstrate that the product does no harm; that it has positive effects on the illness you want to treat. Increasing number of participants in the studies. Higher costs with each step. But also increasing likeliness for success. Phase 0, Phase 1 ... and so on - each phase regulated by drug authorities.
And Morphosys would get payments for each development stage achieved by one of its partner companies.
The real leverage is (3), where Morphosys uses the cash from (1) and (2) to develop its own pharma product with its own technology. It will perhaps never be able to market it, like a Pfizer, a Glaxo or a Bayer. But having developed it, it could be sold for a huge number to big pharma.
Downside: as long as there is cash from (1) and (2), Morphosys can go on with R&D. And the cash stream from (1) and (2) is getting higher by the years, Morphosys having set aside USD 100 mn. This alone would be good enough for 5 to 8 years of proprietary development. So there is no downside, as long as they have ideas for further development.
Upside: they hit something big.
On Friday they announced Phase 1b/2a results of their MOR103 project. MOR103 was safe and had no harmful side-effects. The project has the potential to become one of the first drugs against rheumatoid arthritis (NYSE:RA), which is harming millions of people.
Stocks did rise by 15 % on Friday.
MOR103 has a higher chance to fail than to succeed. That's the way it is with drug development. Morphosys has not only one project, but several ... Still the stock is like a lottery ticket. Maybe they hit big - who knows.
Difference to so many BioTech start-ups is: they are funded and will stay funded. Their business model provides cash flow - and you are not getting harmed by stock dilution. So: little downside.
I got my lottery ticket. How about yours?
Thoughts on Money, Finance and Related.Blogspot.de
Disclosure: I am long OTCPK:MPSYF.