MorphoSys AG

Claudia Gutjahr-Löser - IR Simon Moroney - CEO Jens Holstein - CFO

Igor Kim - Close Brothers Seydler Gary Waanders - Nomura Code Securities Gunnar Romer - Deutsche Bank George Zavoico - MLV Victoria English - MedNous Mark Pospisilik - Kempen & Co.

Good afternoon and also good morning and welcome to our Q2 2013 conference call. I am Claudia Gutjahr-Löser, Head of Corporate Communications and Investor Relations of MorphoSys.

Before we start the presentation, I have to remind you that during the conference call, we will present and discuss certain forward-looking statements (inaudible) technologies, the progress of its current research programs and the initiation of additional programs. Should actual conditions differ from the company’s functions actual results and actions may differ from those anticipated.

You are therefore cautioned not to place undue reliance on such forward-looking statements which speaks only as of the date here. With me today are Simon Moroney, our Chief Executive Officer, Jens Holstein our Chief Financial Officer and Arndt Schottelius our Chief Development Officer.

Simon will start by giving you an operational overview of the second quarter. Before we open the call to your questions, Jens will review the financial results of the first six months of 2013.

Afterwards, Simon, Jens and Arndt will be answering questions on these topics. I would now like to hand over to Simon Moroney.

Thank you, Claudia and also from me a warm welcome to the call. To say that Q2 was a great quarter for MorphoSys would be an understatement.

Partnership deals with GSK and Celgene around our proprietary programs MOR103 and MOR202 respectively are of massive importance for us. We believe that each deal has given the respected programs, a much greater chance of successful development and commercialization.

In addition, MorphoSys’ benefits in both cases immediately by our prompt payments as well as in the longer term through milestones and royalties. Recall that the Celgene deal brings the added benefit of an option to co-promote the compound in Europe with a 50% profit share.

Since we talked about the two deals in dedicated conference calls, we will not repeat the details and our summary of the quarter. I will however provide the latest status of each project as I review the portfolio.

We’ll start with programs coming out with our proprietary portfolio commencing with our anti-GM-CSF antibody MOR103. Transfer of the project, GSK is proceeding smoothly.

We assure that you will understand that as the program progresses any communications will be subject to agreement with our partner. We will do our best to inform you of any news, subject to this constraint.

The phase 1B trial in MS is on track and we expect to have patient recruitment completed in Q4 of this year and to have data in the first half of 2014. Moving onto our anti-CD-38 antibody MOR202, we are awaiting anti-trust clearance from the U.S.

authorities for the deal with Celgene. We are hopeful that this will be completed shortly, upon which the deal would become effective.

The immediate consequence of the deal becoming effective is that we would issue EUR46.2 million of equity to Celgene as part of the agreement. Meanwhile the phase one 2A trial with MOR202 and relapsed refractory multiple myeloma patients in Europe continues.

We are working our way up through the dosing schedule and depending on the outcome and our discussions with Celgene; we may present first data at the ASH meeting in December of this year. Turning to more 208, our anti-CD9 antibody for B cells malignancies, during Q2 we commenced two phase 2 clinical trials.

The smaller of these two trials is in B cell acute lymphocytic leukemia and was being conducted at two of the leading sites for this indication in the U.S., namely the MD Anderson Cancer Center and Ohio State University Medical Center. We expect data from this trial in Q4 of next year.

The second trial was in non-Hodgkin’s lymphoma and is being conducted at sites in the U.S. as well as in Europe.

This is a largest study which is designed to look at the four main subtypes of NHL, namely diffused large B cell lymphoma, follicular lymphoma, Mantle cell lymphoma and indolent NHL. Due to the trial design, this one will take longer to read out with data expected in 2015.

Since both trials are open label, we may publish study updates for both during 2014. I will turn now to the partner pipeline.

At the end of Q2, we have a total of 73 active partnered programs ongoing. Of these, one was in a phase 3 clinical trial, seven were in phase 2 and nine were in phase 1 development.

Overall, the partnered pipeline continues to be on track. During the quarter we received some news from Janssen on the program CNTO1959, now known as Guselkumab.

As a reminder, this is a HuCAL antibody that is specific to IL23, which is currently in two Phase 2 clinical trials, one in Psoriasis and one in rheumatoid arthritis. Janssen highlighted this program at an Analyst Day in May.

The presentation showed a picture of a Psoriasis patient, who received a single administration of the drug and experienced clear psoriatic blocks within eight weeks. Guselkumab was listed as one of the programs on which Janssen expects to file for approval within the next four years.

This one example illustrates a broader point, but as programs advance, our partners become more likely to talk about them. This in turn provides visibility, which helps the community understand and value the programs.

That concludes my summary of the operational highlights of the quarter. I will hand over to Jen for his presentation of the financial results.

Thank you Simon. Ladies and gentlemen, also from my side, a warm welcome to our Q2 2013 conference call.

Before I present the financial results for the first six months of the year, please let me remind you that with the sale of AbD Serotec, which was completed on January 10, 2013, our financial statements have been adjusted according to the international accounting standard IFRS5. With today publication of the six months reporting 2013, we will no longer report results from AbD Serotec as a separate segment.

Revenues and expenses for this divested business activity are shown under unallocated. Let's now start with an overview about the most important financial figures of the first six months of 2013.

Total group revenues from continuing operations for the first six months nearly doubled to EUR48.2 million compared to EUR24.4 million in the same period of the previous year. This increase was a result of the licensing agreement with GlaxoSmithKline from MorphoSys's clinical antibody program MOR103 as well as a licensing fee relating to the sale of the AbD Serotec business to Bio-Rad.

The disposal of AbD Serotec included the sale of a nonexclusive license for the use of our HuCAL technology in the market for research reagents and diagnostics. Total operating expenses from continuing operations increased by 21% to EUR31.2 million.

In the first six months of 2013, research and development expenses rose by EUR2.5 million to EUR22.7 million. This was first and foremost due to higher cost of personnel and external services, as well as higher material costs.

Compared to the first six months of 2012, sales, general and administrative expenses increased to EUR8.4 million, driven by higher expenses for personnel and for external services. In the first six months of 2013, the EBIT from continuing operations amounted to EUR17.3 million, compared to a negative EBIT of EUR1.3 million for the same period of the previous year.

Continuing operations generated a net profit after taxes of EUR13 million, compared to a net loss of EUR0.3 million in the six months of 2012. With the sale of AbD, MorphoSys has been able to book an additional 6 million profit after tax and as a consequence, the total net profit for the first half of 2013 amounted to EUR19 million.

The fully diluted group earnings per share amounted to $0.81. Let's now have a closer look at our key business segment.

The partnered discovery segment generated revenues in the amount of EUR27.9 million in the first six months of 2013, compared to EUR23.4 million in the previous year. The revenues of the partnered discovery segment comprised EUR27 million from funded research and licensing fees, up from EUR21.5 million in 2012.

Success based payments amounted to EUR0.9 million in the first six months of 2013, compared to EUR1.9 million in the previous year. Operating expenses increased by EUR1.6 million versus the first half of 2012 to EUR12.4 million.

The second EBIT amounted to EUR15.6 million, compared to EUR12.6 million in the same period of the previous year. In the first half of 2013, the Proprietary Development segment achieved revenues of EUR20.3 million compared with EUR0.8 million in the previous year.

This increase was primarily impacted by the reorganization of an upfront payment as part of the out licensing with MOR103 antibody program to GSK. Revenues from funded research and this segment declined to EUR0.1 million as the joint development activities with Novartis has been abandoned.

Operating expenses amounted to EUR12.2 million compared to EUR10.5 million in the first six months of 2012. The segment EBIT amounted to EUR8.2 million, compared to loss of EUR9.6 million during the first six months during the first six months of 2012.

Turning to the balance sheet, on June 30, 2013 MorphoSys cash securities and interest bearing side of the loan as well as other financial instruments and investments amounted to EUR166.3 million compared to EUR135.7 million at the end of 2012. This amount does not yet include the upfront payments from GSK, as the payment was received after the end of the quarter.

Before we open the call for your questions, we would like to reconfirm our financial guidance for 2013, which was updated on June 3, 2013 to reflect the impact of the license agreement with GSK for the future development of MOR103. For 2013, MorphoSys anticipates total group revenues between EUR68 million to EUR 72 million and an EBIT of between minus EUR2 million and plus EUR 2 million.

The licensing agreement with Celgene for MOR202 is still subject to clearance by the U.S. antitrust authorities under Hart-Scott-Rodino Act and will become effective as soon as this condition has been met.

Therefore potential financial implications are not yet reflected under current guidance. Ladies and gentlemen, that concludes my review for the first six months of 2013.

And I’ll now hand back to Claudia for the Q&A session.

Thank you. We will now open the call for your questions.

I have two questions. The first one is regarding your proprietary program MOR208.

You said that you are running two trials in ALL and NHL and also we’re considering to run the trial in CLL indication. Did you consider to do this, and is it realistic to expect in the state for the second half of this year?

And the second question is regarding your expected liquidity for 2013, and as far as I remember during your last conference call regarding agreement with Celgene, you mentioned that your liquidity position will most probably increase up to around EUR300 million. Now, at the end of the second quarter, your liquidity position was approximately EUR166 million and if we take into account potential liquidity contribution from GSK in the amount of about EUR21 million in Celgene, EUR71 million, it come up to figure of EUR266 million, which is not great result, EUR300 million.

Or maybe I misunderstood something or could you shed a bit more light regarding your liquidity expectation. Thank you.

I’ll start with the first part. You asked about 208 and indeed we have these two studies running ALL and NHL.

As you know, the ALL in U.S. NHL, U.S.

and Europe. Concerning CLL, yes, we do still consider we’re seriously starting tinkering in combination therapy, still feasible to see that second half of the year and we will provide update as that has crystallized because it's still in advanced stages of discussion.

And I clarify, try to clarify little bit the cash position here. So as you said it’s correct, it’s EUR166.3 million cash which we have announced having on the books for the end of the quarter.

In this amount EUR22.5 million, the upfront payment is not included. There is a little deviation in comparison to the revenues, because not all the revenues have been booked in the first six months, but only around EUR20 million of this.

But the total cash payment is EUR22.5 million. And then that adds up to somewhere in the range of EUR190 million.

And then on top of the EUR71 million roughly up from payment from Celgene, we also will have a capital increase of EUR46.2 million. And if you add this all up, we are in that ballpark of around EUR300 million.

Just a question on the antitrust process and I was just wondering, when you were looking at potential partners for the program, did you conduct your own antitrust review and are there any specific hurdles that you might be concerned about in that antitrust review under Hart-Scott-Rodino? Thanks.

Thanks Gary. We kind of thought about this, but frankly we really don’t anticipate this being an issue, given that this is a compound that’s in early clinical development.

This is, as its name suggests, an antitrust check, to see whether one company is going to dominate the market as a result of acquiring as asset. And given that this asset is in the first stage of clinical development, we honestly don’t feel that this should be a concern for the antitrust authorities, but as a matter of course, you have to go through this check given the size, the volume of the deal, it crosses a certain threshold in terms of its volume and therefore the check was due.

And of course we have to go through that.

And so how long do you expect the process will take before have the clearance?

So, the rule is apparently that if you have not heard anything within 30 days from the authorities, questions for example that you have clearance. So in the absence of any questions in the remaining, whatever, two weeks, we would be through.

If we do get questions, then that would extend the process, I understand by another 30 days during which time additional questions could come in. So our hope and our expectation is that this should be straight forward that we wouldn’t get any questions and we therefore should be done in the first half of August.

Okay and then, so assuming if the clearance comes through which, I agrees, probably nicely. What is the anticipated impact on your financials?

I understand that you may recognize the revenue from the upfront payment over a number of years, but is there any guidance from health, how long that period might be?

I think it’s an important question, and of value for everybody. The treatment of this upfront payment is indeed accounting wise quite a challenge and we’re currently still in discussion with our auditors, how to treat that case correctly.

But the likelihood that it has to spread over a number of years is very high, as we are still part of the development activities and that normally requires that you have to spread that upfront payment. Question then in that respect is always how many years?

You have to anticipate here and I would like to refer it to a comment from sales insights just recently made in their quarterly call and they anticipate that the program could make it to the market within four to six years, and I think that is probably something which appears to a relatively realistic timetable, also to assume for a revenue spread.

Good afternoon everyone, it’s Gunnar Romer from Deutsche Bank. First question would be more general one, with regard to your proprietary pipeline strategy going forward and now that you have out-licensed two of your programs, we all know that you have one remaining in the clinic and a couple of really early stage programs.

I was just wondering how you think about your strategy regarding proprietary pipeline projects going forward. Further.

I think you’ve already touched upon potentially broadening development of more tool aids, but how about potentially adding or accelerating discovery programs that you have in-house already or in-licensing of potential compounds. How is your priorities here in this regard?

Then the second question would be on the Celgene deal again, whether you can share anything more with us as compared to your conference call back in June with regard to the costs you would anticipate for co-development of the program and how we should potentially think about the timing of the cost here.

Let me start with the proprietary development strategy. We are very, very conscious that, the two most advanced, or actually not the two most advanced, but two of the most advanced programs, MOR103 and MOR202 have now been partnered and we are very actively and as a priority, looking to strengthen our portfolio, and that includes both in-licensing activity.

So looking at other biotech and even pharmaceutical companies and even essentially academics for interesting programs; that we could bring in, much as we did bring in 208 a couple of years ago and we are also looking at strengthening and accelerating our earlier, sourcing activities, earlier discovery activities. So if you look at our proprietary portfolio we do have a gap now, in kind of pre-clinic, and that pre-clinic close to clinic stage, and we regard it as a priority to try and address that gap by bringing new compounds in and also by starting and accelerating existing discovery programs.

And then Gunner, on your second question in terms of the cost, in general Hart-Scott-Rodino prohibits us to interact with Celgene at this point in time. So to go into details in terms of setting cost estimates for the future.

So unfortunately we cannot give you a clearer guidance today here. In terms of impact for 2013, we certainly, when this transaction is approved, we will then also show some impact here in case that we should adapt our guidance at that point in time and give you at least some insight for the rest of the year, but for the other years it will be a bit challenging at this point in time to give you a clear guidance.

And then maybe one last question on your commercialization of the Lanthio technology. Anything you can share with us on this front?

Nothing new. So we are in discussions, we're looking at some potential opportunities around the exploitation of Lanthio in collaboration with others but there is nothing at this stage that we can tell you, which is basically consistent with our longstanding policy that we don’t talk about ongoing discussions negotiations.

Following on Gunnar’s question regarding broadening your exploratory and discovery operations, could you provide little bit of update to say about the collaboration with haopterus and Lanthio? And in particular with regard to Lanthio, you’re working with cyclopetide, which aren’t really antibodies.

So are you thinking of even broadening your platform away from antibodies kind of like what Amgen has done now, is going to small molecules?

First of all regarding haopterus and Lanthio, there is really nothing that we’re ready or prepared to say about those collaborations other than they are proceeding well. Haopterus, remember is focused on providing (inaudible), against we would generate antibodies using Lanthio technology.

It’s looking promising and we’d like to be able to provide an update to you which we’ll do in due course. Regarding Lanthio Pharma, remember that this is our first venture outside of the antibody space into cyclopetides as you mentioned and it’s really a longer term investment.

The intention here is to establish a new platform that will be ready for use some years down the track. So we don’t anticipate this being commercially viable tomorrow or even next month or may be even next year, it’s really an investment in the longer term.

In respect of our propitiatory portfolio, the kind of compounds we’re interested in, oddly speaking, those are antibodies, of course, but also other types of proteins, I would characterize it about that. The likelihood that we’d be interested in small molecules, a completely different molecular class is extremely remote.

So we’re focusing our search for new compounds really on antibodies or other types of recombinant proteins.

Simon, I’m wondering whether there is anything that you can say a total about the Gantenerumab trial, the Phase 3 trial that Roche is conducting or the work that’s going on in the U.S. at the Washington University School of Medicine, in which the same antibodies is being used in a prevention trial that has U.S.

government support?

Thanks Victoria. So, the second part of your question, you referring to this Dyan (ph) network that is predominantly inherited Alzheimer’s network study.

But the answer is actually the same regarding both studies that we don’t have news in either case. Those are both blinded studies as you recall and therefore, we’re not aware of simply and I’m sure no one is aware of any data from those studies that one can meaningfully talk about.

The only thing I would say is that Roche had always said that they intended to conduct an interim safety analysis of the Gantenerumab study during 2013. We haven’t heard anything about that.

So we’ve assumed it’s still outstanding, still to be done. And if there is news that can be shared about that when it’s done we would of course share it with you.

It could well be that if and when they conduct it, and assuming the outcome is favorable i.e. that they are no safety problems, that they would just roll forward and carry on with the trial that we may not hear anything about it, which would be kind of no news is good news in that case.

But that’s the only potential piece of news we’re aware of regarding Gantenerumab, that could emerge during this year still.

Just two brief questions from my side. Could you provide just little extra color on the higher SG&A costs that still arise largely from long term incentives plans?

Is this indicative of higher run rate or is it more of a one off or occasionally once a year? Just little bit more detail there would be much appreciated.

And then on the mechanics of the Celgene equity investment, when it was originally announced there was a minimum 15% premium to the share price. Obviously we’re well beyond that.

Would it be wrong to proceed on the assumption that such an investment would likely take place close to whatever the current share price is?

Yeah, I’m happy to give answers on the two questions. Coming to the first one, the SG&A expenses, it's correct what you said that there was a big impact in the ITI program.

There have been some legal changes in Germany that required us to change the accounting methodology. The effect is that at the beginning of certain program we have higher costs and lower cost at the end of the program.

That has to a great extent a negative impact for this year. It will smoothen a little bit in the years to come.

So I wouldn't say that the whole thing is a one-time effect, but to a great extent that's really driven by this one-time thing. In terms of the equity, we have several arrangements in terms of the share price and what happens if the share price reaches a certain level.

Indeed the sort of percentage which you can expect Celgene will have after approval from the authorities is rather in the ballpark of the price, which you currently have seen, then the price which was calculated with the 15% premium when we signed the deal.

Maybe just one clarification. Is the 15% minimum premium more or less the only mechanism there?

We have three mechanisms. And probably it's too complicated to explain that in the detail here.

But the premium is changing depending on the level of the share price and the premium which we will expect is a lower one than the 15% after the share price went up to this level. So we have different amount of premium to expect than the one you had in mind when we signed the deal.

We will explain the details really when the Hart-Scott-Rodino Act approval is announced as being taken place and then you will see the details.

Jens, maybe just to be helpful can we get some sort of guidance as to the expected state that Celgene would finish on having in MorphoSys, if the deal was to be done today for example?

To do that math in the ballpark between.3.5% and 4% I would assume.

To conclude the call, I would like to remind you the main points to take away. First the deals we closed in June with GSK for MOR103 and Celgene for MOR202 are of huge importance for MorphoSys.

They provide both immediate and substantial cash inflows as well as increasing the prospects for the two programs, and therefore our upside. Second the partnered pipeline continues to progress with another program being highlighted.

And finally we had an excellent quarter financially and are well on track to achieving all our objectives for this year.

That concludes our call. If any of you would like to follow up with us, we are in the office for the remainder of the day.

Thank you for your participation on the call and good bye.