Yet Another Value Podcast - Caligan Partners' Dave Johnson on MorphoSys' $MOR change from royalty play to traditional biotech

Episode Date: June 16, 2023

Dave Johnson, Managing Partner at Caligan Partners, makes his second appearance to discuss his thesis on MorphoSys AG (FSE: MOR; NASDAQ: MOR), including: history of the company, change in business strategy from a royalty play to traditional biotech, Pelabresib clinical trials for Myelofibrosis indication and more! For more information about Dave Johnson and Caligan Partners, please visit: https://www.caliganpartners.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:47] What is MorphoSys $MOR and why is it so interesting? [9:58] How and why Caligan Partners got involved in $MOR [19:34] What is Pelabresib and why Dave/Caligan are excited about this with regard to $MOR [27:27] Clinical trial enrollment for Pelabresib / Constellation Pharmaceuticals acquisition [33:09] Next steps for Pelabresib [36:04] Dave's thoughts on the timing of Pelabresib being approved (if approved) [38:25] Pressure on biotech management teams from boards to get deals done [40:56] Probability of success of Pelabresib and how do you value $MOR as a result [47:16] Constellation Pharmaceuticals acquisition process [50:25] Buying back convertible bonds and why that was an accretive transaction [52:55] Final thoughts on $MOR Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less

than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. All right, hello, welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot. If you could rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have on for the second time.

Dave Johnson from Caligan. Dave, how's it going? Andrew, how you doing? Thanks again for having us. We really appreciate it. I'm really excited to have you guys on. Let me start this podcast quickly with a quick disclaimer to remind everyone on this podcast that nothing on this podcast is investing advice.

You know, please consult your own advisor. That always applies, but probably particularly true today because, A, we're going to talk at least one stock, maybe a couple stocks in the pharma sector, you know, the pharma sector is famous for your drug gets approved, it goes to 100, your drug gets rejected, it goes to zero. Hopefully none of that happens here, but obviously just extra risk. And then we're going to focus mainly on a stock that trades in the U.S., but it's European listed for the most part. So people should be aware, you know, foreign stocks carry extra risk. But all out of the way, Dave, the company when to talk about is morphicist.

The ticker is M-O-R or trades in Germany. You guys have done a ton of work on it. You guys had a great presentation last week that I really cribbed for the majority of my. background on this, but I'll just turn it over to you. What is morphosis and why is it so interesting? Yeah. I mean, this is a really interesting company. And I think it really gets to the heart of you have a very different investor bases in Europe and the United States. In the United States, you've got investors in biotechnology stocks that like the risk profile, the pipeline products, they know the binary nature of a lot of these molecules, as you said. And the European

kind of investor base, which is, I would say, a little bit more risk-averse and would like the diversity of different shots on goal, a little bit more late stage, a little bit more fee-for-service. And morphosis started out as a German company that was focused on antibody discovery. So if you're a large pharma company and you'd say, I've got this target, I want to go see a library of antibodies that this company morphosis can develop, that can maybe have a higher binding affinity, than anything in my pipeline. And you'd say, Morphosis, can you go find something that works for us, for this target? And Morphosis would go do that.

And they would go, you know, and they would usually do that for a fee of some sort of nominal amount up front and a royalty on the back end. And if you rewind to 2017, Morphosis was 28 partner programs with 14 different pharma companies, basically all antibodies, all biologics. And they had this really diversified way to play, uh, effective. you know, innovation in biopharma, where you were, you had 28 different shots on gold, you had a royalty on each of them that they worked. And, you know, investors loved it. European investors in particular loved it. And at the time, they had one, you know,

and as part of their evolution along the way, they said, hey, we're pretty good at this antibody discovery. Maybe we should consider bringing one of our own along the way. And if it's just kind of one piece of a much larger pie that we don't have a lot of risk on, like, our investors would be okay with it. And they did. And so one of the things that was in their pipeline was an NICD-19 antibody, which eventually becomes Manjuvi. This is the approved product that they have for diffuse large B-cell lymphoma, which is the largest case of non-Hodgkin's lymphoma, cancer out there. And in 2020, they partner with Insight, where they effectively agree to both promote the drug in the U.S. and Insight takes the drug.

drug XUS. And that, for that, Insight paid him $750 million up front and they gave him a billion dollars of milestones. So like pretty good deal. And the other thing I should say is one of the one, one of those 28 programs from 2017 becomes a J&J's drug for psoriasis called Termfaya. And Morphosis owned a 6% royalty on a drug that last year did 2.6 billion. I would say analyst consensus that's somewhere around $4 billion.

So huge amount of money coming toward, you know, to Morphosis from. Like if you looked at January 2020, Morphosis was flush, cash rich, huge portfolio. They just had a product approved. Things are going great. Stocks probably, if I'm looking at, 140 euros a share. And things didn't go so well. So, listen, Manjubia is a great drug. The drug that they got approved, they got partnered with Insight, it gets approved in August 2020.

and listen, what would happen with B-cell lymphoma is the space got a lot more competitive. So instead, when Munguvi was approved, it was the first second-line agent. So after kind of your standard chemotherapy, patients become refractory, if they can't take a stem cell transplant, they need something else. It was the first second-line agent to get approved and I'm going to update myself, probably, definitely at least a decade and perhaps potentially longer. and what's happened in the B-cell lymphoma space is that since Munguvi's approved, five additional therapies have gotten improved, including Karki. And so what looked like kind of open spaces where they were going to have a ton of patients coming on this drug has become a knife fight like in the third line.

And because they exhaust your CD-19, they don't want to put, they want to put Karki before you, it has the same target. So it becomes a knife fight. So August 2020, it launches. And by that point, the market's already starting to see this is not going to be a billion-dollar drug blockbuster. It's going to be a resource intensive and much more modest launch. And so, and listen, investors started to see that and they started to rotate out of the stock. But what really probably put the European investor base over the edge is in 2021 and July 2021, Morphosa says, they took all

of their royalty portfolio. So all of these 28 programs I told you about, and including J&J's like awesome blockbuster drug they've got, they sell it all to a company called royalty pharma, which I'm sure some of your listeners and you are familiar with, they sell it all for $1.4 billion up front. Pretty good. I mean, good, good package. They take all that cash and they buy a U.S. biotech called Constellation Farma with two assets in development and a whole bunch of preclinical stuff. And European investors, European analysts, and everybody said, you've turned this really diversified antibody company into a U.S. style biotech, where you have a commercial product and a pipeline asset. And people just hated it. And they saw massive rotation

in their investor base. Like I think it was 16 of the top 20 shareholders as of the beginning of 2020, all left. All up. 100%. It makes sense, right? You're here, as you said, you're here for royalties. And then the man who says, hey, we were managing a stream of royalties. And now we're, we're going out and we're huge bio, we're huge biotech players, right? Like, it's a very big switch. It's a very big switch. A little bit of a bait and switch. Totally. Totally. Totally. And so you kind of, you fast forward to the company today, and they've got Munchubi, which is consensus is about 90 million bucks of revenue this year. It is marginally profitable in the U.S. If you exclude kind of the research and development costs, now which Insight picks up 55% up, where they're trying to move it into follicular lymphoma and into first-line, B-cell infoma.

And then they have this asset called Pellabressive, which is a bat inhibitor in development for mylofibrosis. which is the disease of the bone marrow where you have this overactive or malignant bone marrow that produces a bunch of bad cells that don't, you know, bad blood cells, bad platelets, and your body can't handle it. And eventually you're not producing enough of good red blood cells, good platelets, and you become highly anemic and it causes a whole lot of comorbid disease and you eventually expire. So that's kind of what morphosis is today is one of fruit product that's sort of, you know, It's a good product, and it definitely fills in on that need, really safe, really great for

kind of older and frail patients that can't take a stem cell transplant, and then they have this, what we think is an incredibly exciting shot on goal, a phase three impellebreastive that's going to, you're going to turn over the data card in December, this year, December 2023. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment

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Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. I want to talk about how you guys kind of got involved and got constructivist because I was flipping through their deck, their annual meeting deck, which happened maybe two weeks ago, I think. And, you know, one of the calls is Calligan, 3% plus shareholder and they talk a little bit out of engagement. I want to get there, but before, I think it might just help to frame this by talking. You've already mentioned their parts, right? Their parts these days are they have net cash,

Min juvie, Monjubi, the milestones, and then the drug. But the stock, as you and I are talking, and again, not investing advice, but as we're talking, trades for about 27 euros over in Germany. And I think it might help people to kind of frame why you got involved, how you got involved as we started thinking about that. If we just quickly did where you see value, right? Like the Some of the parts here. That's super, super helpful. Morphosis, you know, when you, I think everybody kind of talked about there's a lot of negative enterprise value companies and there has been in the biotech space over the last two years. And in starting in December last year, Morphosis was one of those companies.

So it had about a billion euros of cash. They had about 600-ish of kind of net debt. And it was a very, very tiny market gap. trading for nothing, despite the fact that they had this approved asset in the U.S., approved asset in Europe, and a late stage phase three asset in development with Pellabrescent. And so we kind of looked at it and said, okay, you got the net cash, and it's going to cost you, you're going to burn some of that cash to get to this data card for Pellopressa at the end of 2023, but if you account for that, you still have a net cash position at the end of this

year. So this company still has positive, uh, positive cash flow for share at the end of this year. And what we said with Monjubi was, okay, this asset's doing 90 million dollars of revenue today. It's going to grow. You can always take a little bit of price and its penetration and the community setting is a little bit, um, it's still under penetrated to where probably it's going to get to. And one, one thing that was really important to us is that if you looked at, they have to report the separate P&L for Monjubi in the U.S. because, they share it with insight. So they both put the cost in,

and then at the end of the day, they split whatever the profit is. If you looked at 4Q 2022, they'd taken an asset that was losing $20 million a quarter when it started to launch, and they'd massively reset the expense structure such that it was profitable. So when we said, hey,

if you run out the cash loads for this, without assuming massive growth, you can have a positive NPB first share for morphosis shareholders on this asset. And then in MNJubi, which is the name of the drug in Europe, that insight markets, they owe a royalty back to morphosis. And so that's the cash flow stream. There are 16 analysts that over insight. They all projections on MNJUVi.

And so you have a reasonable degree of confidence about what that drug is going to do. And importantly, in Europe, Karki is not as widely available. And so you have, it's less competitive. Minjubi actually sits earlier in the treatment paradigm where you're getting a healthier patient. population. And so I bet you, if I was a betting man, I am, I guess, Minjuvi is probably likely to be a higher peak sales than Manjubi in the U.S. excluding kind of the first line and follicular dynamic, which we can talk about later. And then the third piece that we said, you know, so we decided the fourth piece, I guess, because we have cash, Manjuvi, Minjuvi, royalties. And then these

milestones, one of the things we mentioned, when Insight did the deal with them in January 2020, you had this package of milestones that is not sales based. It's all regulatory based. So if the drug can get approved in these two indications that they're leading it in, which are follicular lymphoma and first client Vietzel lymphoma, Insight owes them up to $535 million. Yep. It's great. It doesn't matter if the drug sells zero or the drug sells a billion. It is what it is. It's just regulatory driven milestone and Insight's paying 55% of the cost. So we ascribe some probability success to that to get to where we thought, you know, a base case value, if we put zero value to pellabresive, which I think is completely unfair, if we put zero value to pellabress, what's

our floor value for morphosis? And that's really where the building blocks is. When we started getting involved, we said, hey, you own this option on a phase three, irrespect of what you think about it. You own this option for nothing. And then as we started digging in, we got very excited that we think that they have a potential first-line drug in myelof fibrosis with blockbuster potential that in December, in January, you were getting for free. You're paying a little bit for it now, but I would still argue that you're getting, you're still getting it for very, at a very, you don't have to describe a high probability of success that I think is going to be a high probability shot on goal for this thing.

And if I just skipped ahead, so obviously you think pellabressive and I'm cheating because I'm looking at some of the stuff you guys have put out on this. But, you know, the stock today is 27. I think the way you guys kind of think about that is at the current price, more than half of that value would be covered by the net cash at the end of this year. So after 200 million plus of cash burn for the remainder of this year. So more than half the share price is covered by that plus Mon Juvie and the milestones. So, you know, you're paying for less than $13 per share net. You're getting pellabressive, which I think you guys think risk adjusted could be worth as much as $45 per share.

Is that kind of how you guys? Yeah, yeah, it's kind of up down. Exactly. So we are going to always look for things that it's kind of three to one up down. And right, so you're paying 13 for something that we think it's worth 45, right? So that's- Risk adjusted, obviously. Like if it hits, it's worth it more. Let me, I want to talk about Pala Bras and dives that because as people just heard,

that's where the majority of the value comes. But I do want to talk about because, again, the company has acknowledged that you guys have talked about how you came to get involved in this, kind of what the, how you guys engage with the company. A, it's interesting, and B, I think how the company responds. You mentioned it was like the best interaction you guys have had with the company who you've engaged with. So I think it's worth talking about that before we dive into Pellabresso.

Yeah, I mean, that's, of course. I mean, we're always happy to talk about it. I mean, that's one of the things that we kind of pitch about ourselves. We are active engagement in life sciences. That's the exposure we give to our investors. And what does that mean a lot of times? And obviously, people have seen that we've had some, you know, more hostile engagements. And sometimes we've had some really friendly engagements where we put pipes into

companies and but it's a lot of that we have a very formulaic way we sit down with companies we have a presentation has three sections have you underperformed here's our reasons why caligan thinks you've underperformed here's what you can do and when we sat down with john paul who's the CEO here we went through section a section B and we came to section C and we said hey the things that we think are uh you know the underperformance was clear the reason why we thought if they'd underperform was obviously we thought that the MNJubi was potentially negative NPB and that they should try to get out of it. We were wrong, but that was born out of D.C.

We thought that they had a convertible note that was creating an overhang on them, that they was trading at a big discount that could be attractive. We thought that the market was giving them credit for the early stage R&D. And, you know, fourth, we said, hey, you're at U.S. biotech in a German shell, right? You're kind of in no man's land between an investor base that's going to appreciate what you are in an investor base that has no idea how to value you. And when we got to Section 4 about how to do things, John Paul was like, agree, disagree, agree.

And it was so, and then he went through with an incredibly detailed rationale, all based on public information about, here's what he said, I'm on juvie, you're missing the milestones. These $535 million, we have a high chance of getting these. We believe in these programs, insights bearing 55% of the cost of those, all the money's in the ground. It's kind of sunk. You're going to turn over those data cards pretty soon.

That's worth a lot of money to us. It's worth more than our market cap. And he's right. And on the convert, we sat down and we said, hey, you're trading a big discount. You get a big cash balance. You can capture some of that discount. It's a low-risk way for you to get value to your shareholders. Six weeks later, they announced that they're tendering for their convert.

They bought back 25% of it at a better price than we thought they could have gotten. So it was super great. A couple days later, after we met him, they'd cut all the, early stage R&D. They basically said, we're going to, we are going to focus all of our resources on our mid to late stage pipeline. And on the U.S. thing, they said, listen, there's some things that you can't, you know, can't appreciate about, you know, tax consequences from moving from one jurisdiction to another. We've got a really great German heritage, but we hear you on, you know, that we are a little bit different than what a normal German-listic company is. And it's been

a fantastic dialogue with us. I mean, one of the things that we always appreciate, our operating partner with us in this investment is Paul Fontaine, a Belgian national. He's had a lot of experience brokering between Germans and French. He's been there with us the whole time, and I think we've had a great engagement with John Paul, and we think he's doing all the right things. And that's one of the things. He might have been doing all these things without us ever showing up and doing the presentation ABC, but that's great. When that happens, that's fantastic. That's like perfect alignment. We got value in the investment and we've got a management team that's doing the right thing. That's great. We're excited about that. It's a lot less work than the other

stuff. It's a lot less work than running a proxy fight and having to yell at them and worried getting the lawyers involved. I absolutely hear that. So let's turn to where you guys think that as people heard from the sum of the parts, the majority of the value here is, right? Like the potential to be worth more the entire market app and that's pellabresid. I guess do you just want to talk what is pellabresive? I have some questions here, but why don't you just walk us through what pellabressive is and why you guys are so excited about it. Right. So let's take a big step back and talk about the disease a little bit first. So mild, my mouth verbose, we'll try to do a really basic. Your bone marrow becomes malignant. You produce a lot of cells. And you

produce a lot of cells that are not helpful to the body, a lot of deformed malignant cells in your body. And your body compensates. And one of the ways that compensate is compensates is your clean, which is another place in your body where cells are made, it begins to overcompensate. It effectively tries to make more platelets. It tries to make healthy red blood cells. And it tries to process all the bad blood cells your bone marrow is making. It tries to try to, you know, this is kind of where the cytosis comes in. They're trying to kill them all, and they try to get them out of your body.

And the spleen basically starts to work overtime. And the spleen is kind of right here. And so you see these patients, the biggest thing that they present with is spenomegaly, where their spleen is enlarged massively. So you'll see a person, they've got, you know, huge profusion of like what looks like their stomach or on their side of their spleen, it's just enlarged to massive volume. If people are watching the YouTube, they can see me. I keep looking right, because you've got the, you've got the photo in the, you've got the

photo in your deck. And it's not a, you can tell there's something going on there. It looks like it's a man and it looks like he's almost pregnant. His stomach is, it's not terrible. Terrible. And right, and the thing that you see, so these patients, they don't have enough red blood cells, they become anemic, they become fatigued very quickly. They've got fibotic activity in their bone marrow, which is kind of permanent scarring. Eventually, they're not going to produce enough healthy cells to sustain their life.

And the other thing that happens is because of spleen enlarges, it starts pushing against the stomach. And so your stomach starts to shrink or you feel like they're full more quickly. So these patients lose, despite the fact they're spleen and your point, like it looks like they're completely enlarged or they can look like you're a press. is that you start to lose a lot of weight. The person, and it looks quite emaciated, yeah. It's a terrible disease. And right, like a high risk, this is 18,000 patients in the U.S. you have, like, most of these rare diseases, unfortunately, like, it's awful.

Every time I look at one of these, I'm always just like, oh, my God, I'm so glad I don't have, it's terrible. You feel awful for that this happens. That it happens. And so they have this, you know, a high risk patient, you know, which generally kind of presents in the early 60s, if it presents, you know, a high risk patient. some of who's got other comorbidities, you're probably looking at a year and a half of life expectancy. For some of the younger patients that have it, because it's always a spectrum, you know, if you can manage it,

and you can tolerate some of the treatment, you can get out to five, five-ish years. But it's not, it's a terminal disease. You can't, there isn't, it's not curative. You're not able to, you're not able to stop. Nothing's been able to show to date. You can stop and have anti-fibriotic activity in the bone marrow that can reverse what's happening, which is you've got bone marrow producing bad cells. And so the way that this disease is treated today is with a jack inhibitor called Jackify

from insight. And what Jackify does is a monotherapy. So your eye come in as a newly diagnosed patient. We've got a big spleen volume. You know, we've got all these symptoms of fatigue. We're tired. We're anemic. We've got really screwed up blood.

You know, sometimes we have thrombosis. because we don't have enough platelets that have knocked down. So you come in, or thromestopinia, sorry, and you come in and what do they do? They give you this jackafi and they say, what's it going to do? Well, in 40% of patients, it's going to shrink your spleen volume by about 35% in about 24 weeks. 45, 40, it's somewhere in that range. And if you have a baseline symptom score of this fatigue, anemia, you know, headaches, all that stuff, It's going to try, in about 40% of those patients, it's going to take it down by about half in the 24-week period.

So it helps. It's a good drug. It helps. Most of the patients stay anemic. Some of the patients have thromacitopinia, so it does knock down your platelet count a little bit more. It does require a lot of dose reductions because people can't tolerate the higher dose, which is obviously you're going to get a better therapeutic window at that higher dose, and they've got to go down no more suboptimal dose. But it's a good treatment. It's a good drug.

It's front line. And it does, this year, across a different number of mild proliferative neoplasms, majority of which is myelopherbrosis, it does about $2 billion, $2,24 in that range. U.S. and then there's European partners. So, sorry, just to go back into the disease, that's the treatment. So all the drugs that are being tested in myelofabrosis are all add-ons to this. this drug Jackify. Yep.

And what they're all trying to do is to try to do what Jackify does better. Help Jackify and you want synergistic activity between the two molecules because it's important. No matter what, because it's an approved standard of care, patients are going to get put on Jackify immediately when they get diagnosed. So all you can do is try to do better than what Jackify does alone. So what did Pelobresib is a bet inhibitor. And the vet proteins are implicated in a lot of the fibrodic activity. associated with myelofibrosis, and so it blocks that pathway and hopefully alleviates,

it allows the body to better control this abnormal cell production and to basically relieve these symptoms of anemia and thromacetopinia. So in a large phase two, about 84 patients, they gave pellabressive plus, jackify to for newly diagnosed patients and what it showed was about 68 instead of that 40% that rucksill or jackify does alone 68% of them got their spleen volume shrunk by 35% in 24 weeks so you know almost two third you know almost a third more patients got a more better response on spleen volume than just with jackify alone and on the symptom score instead of that 40% of patients getting that symptom score down in half it had about 56%

So meaningful improvement on the efficacy side, but then you always add when you, when you do these combination trials, how much toxicity you're adding by giving them another drug? And the answer was basically not any. So when you looked at the anemia, it was actually better. The patients became less anemic than they are on jackafi alone. And from a thrombocytopinia, which is your platelet levels, didn't have any effect. And that's one of the things that's kind of limited inhibition development for Big Pharma previously. So if I could just add there, so look, improved efficacy and no increase toxicity.

I mean, that's great, right? But the two things I wanted to add there, and I'm stealing this from you. I'm looking at your slides. But number one, you know, yes, improved efficacy is great. But the most important thing is that to me, the lower bound of the confidence interval on it is actually higher. You know, if the other drug did 40%, the lower bound of this confidence interval, I think it was 57%. It's higher than that. So, you know, that's it's not just that it was a little higher.

it's not that, hey, this was a little bit of luck, one or two patients, like, there's a confidence interval here, and statistically, you're well over the improving efficacy, even at the lower bound of that confidence interval. I don't know if you want to add anything there. You said it better than I did. I don't know about that. But the other thing, and this might be jumping a little bit ahead, but, you know, the stock has gone up a good bit over the past couple weeks, and I was talking to someone on your team. I was like, oh, man, wish we talked about this, you know, two weeks ago when it was a little lower or something, it was like, yeah, you know, obviously you'd love to

get in as low as humanly possible, and that's nice, but we're actually more positive. And again, you can tell me if I'm putting words in you or your team's mess, we're more positive and we think the market is actually underappreciating that they've really enrolled the next trial for Pella Brescent really quickly. And we think, I'm a generalist, right? We think journalists don't understand when you enroll a trial this quickly, it's because doctors, the company, everyone is seeing really great results and they really want to get their patients in there. So, again, I don't want to put any words into your mouth, but if you just want to talk about the dynamics of the trial.

Yeah. I mean, so when morphosis acquired Constellation, where Pellabrescent came from in July 2021, Constellation was originally going to try to enroll 300 patients. And they launched that in, I want to say, the end of 2020, like November-ish. And at the same time, you had Abb-Bee, who's running another compound called Nabidoclax in combination with Jackify. And they said, they started their trial in September 2020, and they said, we're going to enroll 250 patients. And what Morphosis did when they acquired constellation, it's going back to your point about confidence intervals, they said, we don't want to take any risk. So we're going to increase our enrollment from 300 to 400 patients to make sure that we have the highest degree of success in that.

symptom score reduction, so we make sure that we really make sure we overpower this study to make sure we don't, we kind of eliminate that left part of the tail in the confidence interval, if we can, or reduce the amount of times that you might actually end up in there. So we're going to increase the patients to make sure we see that. So we're going to go for 400 patients, I mean, up a third in terms. And so you have these two drugs out there competing for patients, right? Everybody's trying to get a clinical trial enrolled. There's COVID going on.

And they complete enrollment six months early. Morphosis does. Abbe completes enrollment on time. So Abbey recruited 250 patients in more time than it took Pellagraph to recruit 430 patients. They ended up actually getting more demand than the 400 and they didn't want to take to, Docs were still trying to put patients in the trial. And they said, we only did for 400, but like they didn't want to tell a doc, you couldn't put your patient on this drug.

because obviously it's got great, it's got a great profile from the phase two in terms of that risk benefit, how much efficacy you adding versus how much toxicity you adding. So that was an incredibly positive sign in the community, on the KOL community, especially there's a lot of excitement for this drug. And in what one of the docs, when we were doing our KOL calls, one of the docs told us is, you know, like, I know what a Ruxphilitin a patient looks like. Ruxphillotin has been, or a Jackified patient looked like. I know they come in, they're fatigued, they're anemic, and I can't tell you that I know exactly who's getting placebo in this trial and who's getting pellabressive, but I can tell you that I know there's a certain degree of patients that look different. So I can't tell you if they're

the placebo arm or they're the ones, but I've seen what Jackify patients look like. So, you know, we've been, you know, incredibly enthused when we've talked to KOLs about this mechanism. And the other thing that was really interesting is that You know, when the phase two ended, it was a 24-week study. So as soon as you got the 24-week, they're like, here's the top-line data, here's it going to go. But they let patients continue. And you've got patients on this drug now for three, four years that are having symptoms controlled and their spleen volume is reduced and they're living not normal life, but much better life.

And that's that durability. It tells you how active the drug is. And that was really impressive to us because every, there's these two big hematology conferences. Eha, the summer, and then Aston in December, and every time they update it, every time they update their data, they say, hey, here's our phase two, here's how our patients are doing. And patients are staying in the trial and staying on drug, and they're having great control of those two kind of efficacy endpoints we mentioned. And that to us gives us, you know, it's another layer of confidence into, we think this

has got a really high probability of success. I remember in a prior life, I did some healthcare stuff. And one time I was looking at a drug, and I was like, hey, like, all this. the patients are dying after five years like is there something wrong with this uh is there something wrong with the drug like what the heck's going on and like dude the the average uh life's life expectancy of somebody with this disease is nine months like if all the patients are dying after five years you're looking at like the greatest invention in the history and like just listening to the numbers you said hey you know some people have been on this drug for three or four years after the trial

it's like that's it's not just that they've been on for three or four years and the drug isn't like really harming them it's that they're alive after three or four years seems to be the big thing because as we said a lot of the people the life expects this here is a year if you get it when you're younger maybe four or five years but these guys have been on it three four years like that that's pretty incredible yeah they they purposely went after that high risk patient group so I think in the phase two I'm gonna have to go back and look at the exact notes but I thought it was about almost here we go let me pull it right up the phase two yeah half their patients with a high risk half those patients that they

took in their phase two were patients that were otherwise. have basically been dead in about a year and a third. All right. So I mean, obviously that's all awesome, but so I might have been misremembering the acceleration of the patient count. I guess let's talk next steps for Pell Abrissip, right? So here we are. I think they complete the enrollment of the phase three,

top line of results expected end of 23, if I remember correctly. So like, how do you see this playing out going forward? Yeah. So the one thing you always got to take about is in our reviews in biopharma is you're taking two kinds of risk. Taking a risk that your drug works and it's going to continue you to work and you're taking risk that competitors' drugs maybe work better than yours. So between now and November, December, when their trial is going to read out, you're going to have one data point from a competitor, Abbe, that we mentioned, this drug and a bit of clax. And that should come out

any day now. Their trial stopped in April. Abbe is a big organization. You've got to clean the data. You got to make sure you're doing the right thing, but it should be any day now. And it's really interesting. When we dug into Navidoclax, Neviticlax was a drug that was on the shelf at Abbey for 20-plus years. And the reason was it targets as a dual targeting mechanism. And one of the on-target effects of the mechanism is that it knocks down your platelets. So I think we talked about before patients already have low blood cell, red blood cells, in the myelopharbosis, they also, a lot of them have low platelet counts because they've got

a lot of, again, the bone marrow, they produce cells, they produce them all badly. It's not just like they produce bad blood cells. And so Abby was running a phase three in combination with Jackify on top of basically a 32 patient phase two study. And what that 32 patient phase two studies showed was they were able to get a better spleen volume reduction or 35% reduction in more patients than in jacify alone but they didn't really have any improvement on the symptom score and though if you looked at the combination of the low platelet count between both studies almost a third of the patients had grade 3-4 thromacetopinia and an abidiclac study which i mean docs are going to say these patients have enough problems as it is do i really

want to add that toxicity. So what we expect for that is it probably is going to show some benefit on spleen volume reduction. The 50% symptom reduction, I mean, that's no better than a coin flip if they're going to show any benefit on that. And the toxicity is an on target effect. So we think from a product profile perspective, Abbie's drug is not going to be as clean a benefit to risk profile is Pellabressive. And that's what we expect. So even though they might be able to announce this phase three results, they might be able to apply for kind of an early 2024 launch, we think that from a product profile

perspective, Pellabressive is going to be better. So that is Pellaggressive being better than their competitor. But what about Pellaggressive getting approved and launching? What do you think the timing on that is? Yeah. So, again, we're very positive into some really great top line results, benefit on in volume, benefit on symptoms score, you know, low toxicity addition to Jackify alone. And so if they showed good top line results in December, then you're talking about from

then end of year 24 when they're getting approved. Now, what I would tell you is one of the things we've talked about a lot with all of our LPs, and one of the reasons we love the sector is the evolutionary food chain in the sector. And right now, one of the things we would tell you is if you looked at Big Pharma today, $140 billion of revenue is going to come off patent in the back half of the decade. And Big Pharma is desperate to replace it. And their internal pipelines aren't going to do it all. And so when you've got assets that have billion, $2 billion plus potential and they're de-rifts scientifically, that's an attractive asset. So we think that, listen, I think if morphosis has great data like we think, they've got a viable

standalone strategy and they're going to be able to do great things as morphosis, but we also think that there's a lot of strategic optionality. Once you've got a de-risk asset that everybody says it's synergistic with the standard of care and it leads to a lot better patient outcome, that's going to be very valuable. I think, so what you're saying there is, hey, look, the phase three data, and I don't think we've just explicitly said it. I think, they'll announce the phase three data early 2024 is when they'll announce this. No, it's that it's before, it's my, based on where we think, it's the late, late November, early December.

And then what you're saying is they would, they could and are prepared to launch standalone towards the end of 2024 if they have to. But, you know, as you said, the most likely is you do this. And then if you've got to de-risk, hey, the phase three data was great. It makes sense for all parties, right? Hey, Morphosis, you can either go build out an entirely new sales force, get on the insurance pricing, start grabbing up, like burn a lot of cash along the way doing that, or you can sell to Pfizer over there who's already got that. All they need to do is write a check

and then they can plug it in and they can scale this up in a second. It actually does make sense for everyone. You know, I just wanted on the call that you did, you were mentioning, you were talking to a banker and they were talking about how the evolution of discussing deals and failed deals with boards have gone for Big Pharma. Do you want to give that story? I can jog your memory a little bit more if you don't remember. Oh, no, no, no. Yeah, I mean, it was interesting right before in a um the patent clip has become much more acute in the last couple years and you know everybody knows you mirror from abbey's coming off that's like the biggest blockbuster drug ever you know you've got keep true to the end of the decade all this stuff and

there is such pressure on these companies and management teams that whereas before you know you never management teams didn't have to go they went to board to say can we get this deal approved can we do this, now they're having to go to their boards and say, this is the reason why we lost this deal. This is the reason why we didn't bid on this deal. This is why we don't think the science is that great, or we think our competitor made a mistake. They're having to justify not doing deals instead of doing deals. And that's a big change. It's a big change in the mindset. And the one thing I think we should mention, so when you're saying that more opposed to that to go it alone, well, they do already have infrastructure in hematology, oncology with Manjubi.

right? They got that in the U.S. They don't want to be in Europe and I think they admit that and they may not be, you know, having it in Europe may not be the best decision in the world. But the one thing we talked about at the beginning is that they've got this partnership with Insight. And Insight owns half of Manjuvinae. They own all of Manjuvi in Europe. And Insight is markets jackify. The drug that it's being used in combination, that fellow has been used in combination with that, oh, by the way, goes off patent in 2028. So the major blockbuster for Jackify, right, that the center of insight valuation goes off patent in 20208, they don't have anything in their armamentarium to replace it yet. And you've got this de-risk asset over here with a company you're already partnered with

that is an additive onto your current drug. So we and you owe them $535 million of milestones if they're successful with Manjubi that you pay 55% for. So there's a lot of reasons why if this is successful, Insights should, I would say strategically, people would look at this and say from Insight shareholders would say, that's a good deal. That's a good idea. It's a deal that just makes sense for everyone, as you're saying. Let's talk real quickly. So I think we've talked a little bit of the science. You've talked the pipeline and everything.

I want to quickly ask how, you know, we threw out, hey, we think the risk. adjusted value of this is about, of Pellegressive is about $45 per share. How do you come up with that number? So the way that we kind of got there was if you, and pricing is kind of for these drugs, it's kind of all in the multiple teams of thousands of dollars per month. But if you attach, and we think it's conservative, but if you said, Because we talked about at the beginning, you can add this drug to a patient that's going to get Jackify and improve their efficacy without any, you know, increased toxicity. Why wouldn't a doc do it?

But we said, hey, what if they only get half the patients that they're newly diagnosed in? And what if we only get the same duration of response that they get with ruxillitinib? So usually your discontinuation rate with Jackify is about 30% in the first year. and then it kind of falls off 20% in the second year, and then it kind of falls off a cliff after that, or 50% about the second year, and so it's going to fall to a cliff. And so if we only get the same duration of response,

we're not able to improve how long these patients stay on drug, which our phase two data would say, oh, yeah, you can, that you get to about a billion one of peak sales in both the U.S. and Europe. And when you look at the precedent transactions, and we've got four of them in myelofibrosis in the last, three, four years where we can look at that the average pizza sales multiple that companies paid was about two times. And then we put that on a probability of success and divide that by the shares

outstanding. So we put about a 78% chance of success, which, as you said, you went back to, hey, 95% of the time, if you replicate your phase two, you're going to do better. Or actually, 97.5, right? Because there's a two and a half on either side. So 97.5% of the time, you're going to do, if you do, if you replicate your phase two, you're going to be better than ruxillitinid, but we're saying, hey, let's do 78%, then that times that, times the peak sales, time two over shares outstanding, times probably success

equals 45. So on that probability of success. So you guys, again, y'all have a slide up here with one, two, three, four, five, about eight different banks who cover and estimate odds of Pellibrissib, and none of them are below 50% odds that this gets approved, but none of them, only one of them is. above 70%. Most of them are at 50 or 60%. So just want to ask, you know, you said, hey, we're doing 77, 78%, and we actually think the odds are higher based on the base rate and the data and everything. What are you seeing, I guess more, what are they missing when they throw 50 to

60% out there versus what you guys are seeing or what the base rate says? Listen, that's a good question. And, you know, we tried to talk to some of these analysts. And I think one of the, and again, I think the analysts, you know, generally self-side analysts do a great job and I don't want to pick on anybody in particular. But I think in general, the coverage of morphosis from that diversified antibody is pretty much the same. So if you were the analyst to cover the diversified antibody and you cover other kind of European pharma services companies and now you're looking at this U.S. biotech, you know, it's a very different, it's a very different risk structure and profile than what you're typically used to evaluating.

And what I would tell you is, if you just think logically, right, they all put 50% probability success on there, they all have a peak sales that's not like crazily off ours, right? I mean, somewhere around a billion. Yours is right in line with the average. There are one or two who, I think we mentioned about a billion to 1.1 billion. That's about where a lot of more, there are some people who go up close to 2 billion. But yeah, they are all pretty. But if you just took the same math that we did about how we got to our value for share,

the value per share of Pellabressive is higher than their price target. That's exactly what I was going to. I saw with, I had a big position in Twitter when Elon Musk was trying to buy it and backed out. And you know, you could talk to some analysts and they would say, you'd say, hey, you've got a 60% chance of Twitter winning. How do you come out up with that? And they'd talk a lot. But if you really put truth to them in, they'd be like, hey, we think Twitter's probably, like 90% to win. But if we put 90%, like the price target looks ridiculous versus the current

share price, right? And I think you have the same thing because I'm just looking, you know, to grab one who's right in the middle, Commerce Bank has 50% chance of success, a billion in peak sales. So they come out with about 18 or 20 euros per share for Pellibrasum. That's about the share price. So you get everything else for free. And if they put anything else, then they've got to start saying like, hey, here's why we're going out on a limb and it looks crazy. And guess what? If you're at 50 or 60% in the drugs approved, you can probably take a victory lap anyway. just kind of like there's no incentive to go any higher is kind of how I would think about it. Yeah. And I think, you know, UBS just initiated coverage end of May. And they put a 40,

they were a little bit more intellectually honest. So they came out and said, hey, we think you're getting Pellabressive for free. They put a 47 euro price target on it. So we think, you know, listen, I think people are starting to wake up because it's, you know, the one thing people always talk about, like, what do you not like about the sector is you have companies that kind of go into this catalyst desert, right? You report something great. And listen, everybody was like, you report something great, and all they want is, like, instantaneous, like, it's going to translate to revenue. And that's just not how drug development works, right?

You report something great, and then you're going to go test it in a larger sample size. And then you're going to go out, and then you've got to go talk to the FDA and the EMA. And so morphosis, they had this horrible transition in the shareholder base post-constallation, and then they kind of went into this not a quiet period, but it sort of was there wasn't a lot of catalyst. They're just focused on enrolling the study, getting the right patients in, getting them on drug, recording the results. And that's what we are. But now you're starting to wake up.

Hey, we're six months from data. Like, okay, people start to wake up, right? I mean, that's the, you definitely see it in the U.S., right? Especially when you're a month from data, all of a sudden the stock starts, the volume picks up and, you know, the zero-day options traders start buying it. I want to ask one more quick question because, obviously, they got this drug from buying Constellation, and there's just one thing I think is worth noting. the Constellation sales process, obviously Constellation had to file a,

obviously there was a proxy involved and everything. And I just wanted you to speak to the Constellation's sales process. Look, it was back in April 2021. So obviously, there's a lot has happened since then. But I do think you can learn something from the Constellation process if you want to talk at all about that. Yeah, I mean, we went back through and looked. It was competitive. I mean, there were four betters.

And it was, the process was accelerated. And morphosis was helped. helped that along. And they'd had a lot of, they'd had a lot of partnering discussions their Constellation had that turned into offers. And so I think, you know, when we combine that with you look at all the other transaction in the space, whether it be soapy buying CTIC, GFK, buying Fierre Oncology, Merck buying Amago, there's a lot of, there's a lot of interest in the space from larger pharmaceutical companies because there's unmet need. I mean, people real recognize the Jackify is great, but if it only works for 40% of patients to help their symptoms

score and help their spleen volume, there's 60% of patients out there that aren't having disease control. That's why. You know, I have not done a lot of jackfied, but it is kind of crazy, like you've got an approved drug first line that is, hey, it only works for 40% of patients, right? Because 40% that's great. But it's kind of like, when I think of a drug, like, oh, yeah, it works for 85% of patients. Like, it's crazy that there's a first line that's only 40% of patients. Well, I mean, but to be fair, right, Ketruda is probably, which is one of that, I mean, that's going to be on page to be the best drug ever, probably one works about a third. Yeah. Two, 34, right?

So, I mean, that's, I mean, again, when we're all trying to discover more, right? And that's a great part about the industry. It's trying to elevate, it's trying to elevate standard of care for these patients. And they keep iterating on it. And I think the next immunotherapy will be better. And I think telegressive will be great in terms of, you know, an add-on. Like, I mean, that's great. That's that thing, you can improve.

We've got a lot of room for improvement. and people will pay for that, right? It's good for payers, good for patients, it's good for shareholders. That's the triumvirate all wins. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search

technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. I want to just before we wrap up, we'll talk real quickly.

You mentioned one of the first things you told them to do when you kind of started where you said, hey, we should tender for the convert bonds outstanding. And they went and did that pretty quickly. I think you said at a price better than what you said. Just want to talk about the convert bonds that they took out, why this was such an accretive transaction. And there's a story about some of the holdouts that I think might be interesting to people as well. Yeah. So they had a zero, basically a zero coupon bond outstanding that they had issued when

capital markets were frothy. It was great. Good transaction, good for them. Look, I might still my peloton, uh, I hurt my back. So I've only been able to bike a little bit recently. And I might only be riding my peloton right now because they issued some zero coupon bonds in like February 2021. They might be gone without that. That's awesome. Um, yeah, so Morphosis that, uh, they had issued a convertible note, kind of a zero coupon. And it traded down. It's, you know, it was, you know, probably about 120 euro conversion price. And so as the stock of tanked, it had all kind of gone down. So, you know, we're trading in about in the low 60s.

And so what we said is like, hey, if you buy it back at, I think we said if you buy it back at 72, you'd realize a 22% IRA by relative to just letting the bond outfending, right? Because you bought it back that discount, you amortize it over that discount over the maturity of the bond, the time of maturity of the bond. And, you know, like, that's, that's a good use of capital, right? Like, 22% IRAs are good IRAs, right? Like, that's great. And they ended up buying about a quarter of their bonds back for 64 euros.

And when they went out to try to get more, they had some convert holders who told them, no, we actually think you might get back to 120. So, I mean, because, I mean, the one thing we didn't talk about is, like, some of those 28 programs, they still have partnered those out. I mean, there's value that we're not ascribing anything to. And maybe like, listen, that's fair. That's not what we do. It's not how we think about things.

But there's options in their portfolio that we're not, you know, are not baked into our forecast. If you're a convert bond and you're like bond holder and you say, hey, I've got this thing. Yeah, it has to 6x to get in the money. But do I want to hold out for a 6x and get a 22% IRA to par value? Or do I want to tender this company? Like, look, it's not guaranteed, right? It's not a AAA. Everything can come out bust.

they could do some, they could burn a lot of cash, but, you know, it's, it's always hard to give up that 22% plus a kicker bond is my guess. But yeah, cool. Like, Dave, I think we've done a really nice job covering most of more posts this year. And anything else you think we should be talking about or that listeners should be thinking about here? No, I mean, we're, no, I think it's, listen, I think we've got a good company, good asset, good price, good management team, really disciplined management team that's doing the right things. And that's what, that's one thing that we think is really important. And give them credit to all the kudos in the world, they got to execute.

They got to flip the data card over, but they're doing everything right. And that's important to us. Awesome. Well, this has been great. This is a really fascinating story. It's cool to see, it's a cool drug. It's cool to see a drug that seems to be doing a lot of good that could create a lot of value for shareholders too.

I really enjoyed having you on where one day there's a company you're on the board of that I'm very, very interested in that I don't think you can talk. about now, but one day we're going to have you on and talk fully about that company, because you want to talk about near-term, it's not data, but near-term things that could happen there. Listeners can look it up. They'll know what I'm talking about if they do a little diligence. But, Dave, I really appreciate you coming on.

This has been super helpful. You know, anybody wants to reach out on this. There's ways to find you and looking forward to have you on for the third time. Hey, thanks so much for having us. We love doing it. We love all the diligence you do on prep for these things. It's a lot of work, and we really appreciate it. It's really great to talk to somebody who's so informed.

informed about it and got great questions. Well, this time, it was mainly because you guys gave me everything to do before, but it was awesome. Dave, we'll chat to you, buddy. Do well. Thanks, Andrew. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.