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Emergent BioSolutions (EBS - Analyst Report) inked a deal with MorphoSys, a German biotech company, to co-develop and subsequently market the former’s prostrate cancer candidate ES414 (MOR209/ES414 going forward). The candidate, an antibody to combat prostate cancer, was being developed by Emergent BioSolutions on the basis of its Adaptir platform.

The candidate has performed encouragingly in pre-clinical studies so far. The companies intend to commence a phase I study on the candidate in the metastatic castration-resistant prostate cancer indication within the next six months. The study, whose initial phase will be conducted in the U.S. and Australia, will be sponsored by Emergent BioSolutions.

The Deal

Emergent BioSolutions’ balance sheet will be boosted significantly as a result of this deal. The company will receive an upfront payment worth $20 million in addition to milestone payments of up to $163 million from the German company in exchange of providing the latter with commercialization rights to the candidate in markets apart from the U.S. and Canada. Emergent BioSolutions will be responsible for marketing MOR209/ES414 in these two markets.

Emergent BioSolutions is eligible to receive royalties (low single digit) from MorphoSys on sales of MOR209/ES414 in ex-U.S and ex-Canadian markets following approval. The U.S.-based company will have to make royalty payments (from mid single-digit to up to 20%) to MorphoSys on sales in the U.S. and Canada.

Furthermore, according to the licensing deal, Emergent BioSolutions is responsible for manufacturing and supplying clinical material from its manufacturing bases located in Baltimore, MD. While 64% of the total costs incurred for developing MOR209/ES414, a targeted immunotherapeutic protein, will be borne by MorphoSys, Emergent BioSolutions will bear the rest.

Our Take

We are positive on Emergent BioSolutions’ deal with MorphoSys. We believe that Emergent BioSolutions’ decision to tie up with MorphoSys is a prudent move since the latter is a well known name in the field of therapeutic antibodies.

Though positive on the deal, we believe that investor focus at Emergent BioSolutions will remain on the company’s efforts to expand the label of its anthrax vaccine BioThrax. The company is looking to get BioThrax approved for the post-exposure prophylaxis of anthrax resulting from exposure (suspected or confirmed) to bacillus anthracis. The marketing application for the additional indication will be filed with the FDA by year end.

Emergent BioSolutions carries a Zacks Rank #5 (Strong Sell). The bearish rank is mainly due to the earnings miss in the second quarter of 2014. Better-ranked stocks in the healthcare sector include Celgene Corp. (CELG - Analyst Report), Gilead Sciences (GILD - Analyst Report) and Mallinckrodt (MNK - Snapshot Report). While Celgene holds a Zacks Rank #2 (Buy), Gilead and Mallinckrodt sport Zacks Rank #1 (Strong Buy).

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