Dive Insight:

MorphoSys is a prolific developer of antibody-based medicines. Generally, however, the company has chosen to license out the drugs it creates to other pharmaceutical companies, or otherwise partner on clinical testing.

The acquisition of Constellation is meant to help build a pipeline of drugs that MorphoSys will advance to market on its own, even as it’s relying on selling royalties from past licensing deals for funding.

Constellation’s lead drug, called pelabresib, is a targeted treatment for myelofibrosis that’s now in Phase 3 testing. Another, dubbed CPI-0209, is in mid-stage trials for blood and solid tumors. Both are built from Constellation’s research into epigenetics, or changes in gene expression without alteration of the underlying genetic code.

CPI-0209, for example, targets an enzyme known as EZH2 that some cancers can coopt, resulting in abnormal gene expression that aids tumor growth. An EZH2 inhibitor from Epizyme won Food and Drug Administration approval last year.

Morphosys, which is based in Munich, Germany, will pay for the Constellation acquisition in cash, and expects the deal to close in the third quarter. Measured by equity value, MorphoSys’ offer values Constellation at $1.7 billion.

In a separate agreement, MorphoSys will parcel off its royalty revenues from sales of Tremfya to Royalty Pharma, which also gets an 80% cut of royalties on any sales of GlaxoSmithKline’s arthritis drug candidate otilimab and 60% of royalties on any sales of Roche’s experimental Alzheimers’ drug gantenerumab.

Royalty also receives 3% of any future sales of Constellation’s drugs.

Under the deal, Royalty agreed to pay MorphoSys another $150 million should certain milestones be hit, and gave the biotech access to up to $350 million in bonds. Finally, once the deal is completed, Royalty will invest $100 million in MorphoSys.

“We are confident they will be a strong financial partner for years to come, enabling us to fund our growth and — with the addition of Constellation’s innovative pipeline — bring our attractive new candidates to patients,” said MorphoSys CEO Jean-Paul Kress, in a Wednesday statement.

MorphoSys’ royalties on sales of Tremfya totaled 42.5 million euros last year, or about $52 million at current exchange rates. MorphoSys is entitled to tiered “mid-single digit” royalties. J&J earned $1.35 billion from sales of Tremfya last year, $926 million of which was recorded in the U.S.

The German drugmaker also recently won U.S. approval for its lymphoma treatment Monjuvi, which is sold jointly with Incyte in the U.S. Incyte has full responsibility for sales abroad.

MorphoSys shares fell by as much as 16% in early Wednesday morning trading.