Is Morphic Holding a Buy?

On March 1, Morphic Holding's (NASDAQ: MORF) stock more than doubled after the company announced interim phase 1 data on its experimental therapy, MORF-057. That's a pretty significant pop for an under-the-radar biotech, especially based on data that comes from so early in a drug's clinical trial process.

Since then, the stock has sold off by nearly 33% from its highs. Can investors trust this biotech, which has no products on the market?

Man taking medication for chronic illness.

Image source: Getty Images.

What Morphic has to offer

Morphic is investigating oral integrin-targeting therapies for treating severe chronic diseases. Integrins are small molecules that are responsible for cellular adhesion and signaling. There are already six injectable integrin biologics that have been approved by the U.S. Food and Drug Administration. However, no oral-use variants of this treatment type have made it to market. Morphic is looking to change that.

With no product revenue, a $45 million net loss in 2020, and a $2.1 billion market cap, Morphic is a clear example of a company valued solely on its intangible assets. Investors are expecting some of its experimental drugs will make it to approval and generate substantial cash flow in the future.

Right now, most of the company's candidates are in the preclinical stages of development. Morphic has advanced just MORF-057 into phase 1 clinical studies for treating inflammatory bowel diseases such as ulcerative colitis. MORF-057 targets the α4β7 integrin receptor and blocks its reaction with a ligand that activates T-cells to target both inflamed and non-inflamed areas of the intestine, which cause the chronic condition.

In the ongoing study, healthy volunteers who received MORF-057 witnessed at least 70% to 95% α4β7 receptor occupancy with no safety concerns. This is good news based on the precedent set by Takeda's Entyvio, which is an approved integrin biologic and α4β7 antagonist used to treat ulcerative colitis. During clinical studies, patients who took Entyvio had fully saturated α4β7 receptor occupancy and witnessed substantial mucosal healing in their gastrointestinal tracts. Takeda Pharmaceuticals (NYSE: TAK) manufactures and sells that drug, which brings about $3 billion per year in revenue.

These are just the interim results. Morphic expects to release the entire dataset by the end of this quarter. Even though the company is still in the early stages of drug development, it has attracted big-name partners like Johnson & Johnson's (NYSE: JNJ) Janssen subsidiary and AbbVie (NYSE: ABBV). Morphic receives up to $45 million each year in collaboration revenue.

What's the verdict?

While I wouldn't view Morphic as a safe bet, it does have several strengths. First, the company is developing a drug based on an already proven mechanism of action. Second, the interim data results are similar to those of approved remedies, even if the similarities are just between surrogate metrics. Lastly, it has the backing of big brand pharma to vouch for its science.

Right now, Morphic has $228 million in cash, no debt, and has only lost $143 million since its inception. The company also secured $245 million via an equity capital raise after its stock rally in March. It is undoubtedly targeting a blockbuster drug development opportunity with a good chance of success. I think this is a solid biotech stock for investors with a high-risk, high-reward mindset.

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Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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