Lilly to buy Morphic in $3B bet on inflammation drug

Eli Lilly plans to spend $3.2 billion acquiring a Massachusetts-based biotechnology company and its experimental pill for inflammatory bowel disease.

Announced Monday, the all-cash deal has Lilly buying all the outstanding shares of Morphic Therapeutics for $57 apiece — a nearly 80% premium to the stock’s closing price on Friday. The companies expect their deal to close by the end of September.

Morphic formed in 2015, built around discoveries from the lab of Timothy Springer, an immunologist and Harvard University professor who was also a founding investor in Moderna. Morphic’s aim has been to develop oral drugs that inhibit “integrins,” a type of protein involved with a variety of important body processes, including inflammation.

The biotech got off the ground with money from Springer, the software developer Schrödinger, and life science investors Polaris Partners and ShangPharma Investment Group. By mid-2016, it had completed a $52 million fundraising round that involved the venture firms SR One and Omega Funds, as well as the venture arms of Pfizer and AbbVie. Morphic went public three years later, amassing another $90 million in the process.

Since then, Morphic’s most advanced drug, code-named MORF-057, has entered human testing. Three mid-stage studies are now evaluating it as a potential treatment for the two conditions that are collectively termed inflammatory bowel disease: ulcerative colitis and Crohn’s disease.

Of the studies, the two largest aim to enroll between 200 and 300 participants and produce data in 2025 or 2026. The third, much smaller trial remains ongoing, but has already generated positive results in moderate-to-severe ulcerative colitis.

Morphic’s drug works like Entyvio, the top-selling medicine at Japan-based Takeda Pharmaceutical. During Takeda’s last fiscal year, which ends March 31, Entyvio sales reached 801 billion yen, or roughly $5 billion.

Both drugs target an integrin that facilitates inflammation in the intestines. They’re administered in different ways, however, with MORF-057 taken orally while Entyvio is given as an intravenous infusion or an under-the-skin shot.

Analysts have argued that, as a pill, Morphic’s drug would be more convenient for patients, and therefore could steal market share from Entyvio if it ultimately gains approval.

Michael Yee, a Jefferies analyst who has a “buy” rating on Morphic, highlighted in a note to clients that MORF-057 also achieved a “strong” clinical remission rate of about 26% in that small ulcerative colitis trial. Notably, the trial is not placebo-controlled.

Yee called the Lilly acquisition a “good outcome” for Morphic investors, as the company now doesn’t have to lead the large, expensive studies that would likely be needed for its drug to secure approval. He also guessed there could be other potential buyers, given that many big pharmaceutical firms have recently shown an interest in immunology assets.

Lilly itself has been on a bit of a dealmaking tear, acquiring over the past couple of years three biotechs involved, respectively, in cancer, immune system and rare disease research. The company’s $2.4 billion purchase of Dice Therapeutics had some parallels to the Morphic deal, as Dice had just disclosed data from an early-stage study evaluating its oral drug against psoriasis.

Though Lilly did just secure approval for another ulcerative colitis drug, analysts at Jefferies and the investment bank Stifel say they don’t expect the Federal Trade Commission to take issue with the proposed Morphic acquisition. They note how that new drug, branded as Omvoh, regulates the immune system differently than MORF-057.

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