UPDATE 1-Morphosys to acquire Constellation Pharma in $1.7 bln deal

(Adds detail, shares)

BERLIN, June 2 (Reuters) - Morphosys on Wednesday said it will acquire U.S. cancer specialist Constellation Pharmaceuticals for $1.7 billion to add an advanced experimental cancer drug and broaden its drug development, prompting a slump in its shares.

To offset the takeover’s financial burden, the German biotech group sold rights, mainly to future royalties on sales of Johnson & Johnson’s psoriasis drug Tremfya, to Royalty Pharma plc for a $1.425 billion upfront payment and future conditional payments.

For Morphosys, the deal marks a bet on Constellation’s work in epigenetics, a field that explores how the genetic code is translated into proteins and characteristics of our body and the role this plays in cancer and other diseases.

Morphosys shares plunged 14% to 62.32 euros to their lowest in 3 1/2 years, while Constellation jumped 67% to 33.72 euros.

Constellation’s most advanced compound, pelabresib, is designed to treat a rare type of bone marrow cancer and is in the third and final stage of testing.

Morphosys Chief Executive Jean-Paul Kress said in an analyst call that the firm had also looked into buying the rights to certain drug development projects, so-called in-licensing.

But it opted for the outright purchase of Constellation with its more than 150 staff partly because of the short time to a potential launch of its lead compound.

“Nothing (in in-licensing) comes really cheap either and you sometimes end up with much earlier stage things,” said Kress. Morphosys will pay $34.00 per share in cash, representing a premium of about 68% on Tuesday’s closing price. The transaction in expected to close in the third quarter, it said.

Under the deal with Royalty Pharma to cash in on some its assets, Morphosys also stands to receive additional payments of up to $150 million contingent on certain development achievements, $350 million in development funding bonds, and $100 million for Royalty’s investment in new Morphosys from a capital increase. (Reporting by Ludwig Burger Additional reporting by Patricia Weiss, Riham Alkousaa, editing by Kirsti Knolle and Christina Fincher)