MorphoSys AG

Claudia Gutjahr-Löser - Head of Investor Relations Simon Moroney - Chief Executive Officer Jens Holstein - Chief Financial Officer

James Gordon - JPMorgan George Savoicle - John’s Trading

Good afternoon and also good morning and welcome to our Q1 2015 conference call. I’m Claudia Gutjahr-Löser, Head of Corporate Communications and Investor Relations of MorphoSys.

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

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

Simon will start by giving you an operational overview of the first quarter. Before we open the call for your questions, Jens will review the financial results of the first three months of 2015.

Afterwards Simon and Jens will answer 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. The first quarter this year has been dominated by developments in our proprietary portfolio which also had an impact on our financial results.

Jens will explain the effects on top and bottom lines which should not distract us from the fact that our most important value driver, the pipeline continues to make very good progress. As usual, I’ll start the overview with our proprietary portfolio.

Our most advanced program is MOR-208, development of this program is on track and we’re gearing up for a number of additional clinical studies and three times of malignancies namely NHL, CLL and ALL. The initial focus on NHL is on the subtype diffused large B-cell lymphoma for which we have often drug stages in both EU and U.S.

and a fast-track designation to the U.S. We have seen very encouraging single-agent activity with MOR-208 in relapsed or refractory DLBCL patients as reported in ASH last December.

Based on preclinical studies and CD19 and CD20 antibody we expect to combining MOR-208 with another agent should lead to a significant increase in response rates. For this reason, we’re now finalizing plans for two new trials which will look at MOR-208 and combination with lenalidomide and bendamustine in relapsed or refractor DLBCL.

The lenalidomide combo trial will start first within the next six months, details are posted on the website clinicaltrials.gov. This trial will be open-labeled and up to 80 patients with relapsed or refractory DLBCL who will receive infusions of MOR-208 until reduced progression.

We expect to report first stage from this study in 2017. The bendamustine will be larger and will start and produce results later.

In the CLL we also had orphan drug status in both the EU and the U.S. We’re encouraged by the level of activity MOR-208 shows in CLL with the response rate in our Phase 1/2 trial was higher than with any other CD19 or CD20 antibody.

The ongoing investigator-sponsored trial combining MOR-208 with lenalidomide continues and we hope that first clinical data will be reported later this year. Meanwhile we’re planning additional combo trials, the first of which we expect to start around year end.

While we expect the newer agents such as Ibrutinib that dominates CLL regimens in the years ahead, we do believe there will be opportunity for effective antibodies such as MOR-208 in certain settings. The ALL, we decided during the first quarter to discontinue the ongoing Phase 1/2 trial.

Despite some encouraging responses early in the trial, the overall response rate was not sufficient to justify continuing with monotherapy. Development will continue initially in the form of an investigator-sponsored trial in relapsed or refractory pediatric ALL patients.

These children whose immune systems are severely compromised by the prior regimen’s data received, who receive natural killer cell initial transfusions to supplement the activity of MOR-208. We expect this study to start later this year and we’ll update you on the progress.

Moving on to MOR-202, we explained the news of determination of our collaboration with Celgene in the conference call on March 27, we so won’t go over that again here. However, I do want to reiterate three points that we made on that call.

First, development continued as planned with the start of the first limit combination study set to start in the middle of this year. Second, also our publication strategy remains unchanged.

First clinical data from the ongoing Phase 1/2a trial will be presented in the ASCO conference later this month with an update of ASH in December. At ASCO we expect to have data on approximately 30 to 40 patients including safety, pharmacokinetics and proven efficacy.

And third, in our agreement with Celgene means, that our net level of investment in the program this year is unaffected by the termination. Moving on to MOR-103, this is in the hands of GSK, and we don’t expect to be publishing any additional information until the Phase 2b clinical trials of rheumatoid arthritis is completed.

MOR-209, our prostate cancer program with the emergent biosolutions, that is now in an open-labeled Phase 1 clinical trial at sites in the U.S. and Australia.

In this trial up to 130 patients with metastatic castration-resistant prostate cancer will be enrolled. MOR-209 is being administered intravenously once weekly for three months and bi-weekly thereafter until disease progression.

First clinical data from the trial is expected in 2016. The initiation of the clinical trial in March triggered a milestone payment by MorphoSys to emergent.

Looking at the early portfolio, our clinical stage programs MOR-208, MOR-202, MOR-103 and MOR-209 are supplemented by growing numbers of earlier stage programs. This part of the portfolio is also developing as expected.

I’ll turn now to our partnered pipeline, where there has also been good progress during Q1. Starting with Guselkumab the HuCAL IL-23 antibody being developed by Janssen, during the course of the fourth clinical milestone payment was triggered in this program.

The event was the start of the Phase 2 clinical trial in psoriatic arthritis. Guselkumab is now in the five Phase 3 trials and three Phase 2 trials which underlines Janssen’s commitment to the program.

This milestone marked the first of up to six clinical transitions that we expect to see with partners this year including new INDs and progressions from one clinical phase of development to another. Regarding other partnered clinical candidates, it was promising data from civil programs at the recent AACR conference in Philadelphia.

Our OncoMed reported preclinical data from the two HuCAL antibody programs Gantenerumab [ph] and Bimagrumab [ph]. And Novartis reported preclinical data on two programs from our collaboration, namely the anti-HER3 program LJM716 and the novel antibody drug conjugate the targets for FGFR 2 and FGFR 4.

I’ll complete the overview by updating the status on the pipeline as a whole. Overall, we now count 95 programs in our pipeline an increase of one over the end of last year.

Of these, 23 are in clinical development with three in Phase 3, 10 in Phase 2 and 10 in Phase 1. That completes my summary of the operational highlights of the quarter.

I’ll now hand over to Jens for his presentation of the financial results.

Thank you, Simon. Ladies and gentlemen, good morning and good afternoon, and thanks for participating in the call.

Let me start the financial section with an overview of the most important financial figures for the first three months of 2015. The first quarter of 2015 has been an exceptional quarter.

The presented figures are predominantly impacted by the termination agreement with Celgene influencing our revenues and operational results significantly. Let me explain to you the financial implications of the agreement on our profit and loss statement.

Total group revenues amounted to €70.4 million for the first quarter of 2015 compared to €15.9 million in the same period of the previous year. The strong increase was mainly the result of the release of deferred revenues and a final one-time payment that we agreed with Celgene with signed the termination agreement.

With signing of the recent agreement of MOR-202 back in 2013, MorphoSys received an upfront payment of €70.8 million together with €46.2 million capital injection for roughly 3% of MorphoSys. The upfront payment and the premium on the shares were originally planned to be spread over roughly 5.5 years.

The termination of the agreement, the remaining deferred revenues on our balance sheet as related to the Celgene Corporation has now been fully recognized in Q1 of 2015. In addition, we booked the agreed final one-time payment in connection with the termination.

Total operating expenses increased to €17.7 million compared to €14.5 million in Q1 2014. The expenses thereof for research and development amounted to €14.7 million as compared to €11.2 million in the previous year while general and administrative expenses decreased from €3.3 million to €3 million.

Expenses in proprietary product and technology development here in Q1 amounted to €10.4 million as compared to €7.3 million in the previous year. In line with our current guidance, we expect investments in proprietary R&D to further increase over the quarter to year.

In the first three months of 2015, EBIT amounted to €52.8 million compared to €51.4 million in the previous year. The group generated a net profit after taxes of €40.9 million in the first three months of 2015 compared to a net profit of €1.1 million in the first quarter of 2014.

Let’s now have a closer look at our two business segments. In the proprietary development segment, as a result of the terminated corporation with Celgene, the segment achieved revenues of €59.4 million in the first three months of this year compared to €4.1 million in the previous year.

Operating expenses in this segment increased from €6.7 million to €9.7 million. The segment EBIT amounted to €49.7 million compared to a loss of €2.6 million in the same period of the previous year.

The Partnered Discovery segment generated revenues in the amount of €11 million in the first three months of 2015 compared to €11.8 million in the previous year. This segment’s revenues included funded research and licensing fees in the amount of €10.5 million and success based payments of €0.5 million.

Operating expenses in this segment increased versus Q1 2014 by €0.4 million to €5.2 million. The segment EBIT amounted to €5.8 million compared to €6.9 million in Q1 2014.

On March 31, 2015, MorphoSys held cash and cash equivalent, marketable securities and other financial assets in the amount of €339.7 million compared to €352.8 million on December 31, 2014. This decrease was mainly the result of the use of cash and cash equivalents for operating activities over the first three months of this year.

A few words on the share buyback program that we executed at the beginning of the second quarter of 2015, in April MorphoSys acquired 88,670 MorphoSys shares from the stock market. The value of the share buyback program amounted to €5.4 million.

The shares will mainly be used for the company’s long-term incentive program. Before we open the call for your questions, we would like to reconfirm our financial guidance for 2015, which was updated at the end of the first quarter in connection with the termination of our agreement with Celgene.

For 2015, MorphoSys anticipates total group revenues between €101 million and €106 million and an EBIT of between €9 million and €16 million. Investments and proprietary product and technology development should be in the range of €56 million to €63 million.

This guidance does not include the cost for any additional development program that may be licensed during the course of the year. Ladies and gentlemen, that concludes my review for the first three months of 2015.

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

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

Hello, thanks for taking my questions; a couple of questions, please. One was about MOR-202.

The question was since ending the partnership, Celgene signed a collaboration agreement with AstraZeneca, the PDL1 for blood cancer. I’m just curious what you think about that approach?

Do you think PD1 or PDL1 is likely to be the future backbone for blood cancer and is that a threat to the approaches that you’re pursing? The other question was just on MOR-208.

The Q1 results have announced they’re discontinuing their CD19 or returning their CD19. Should we see any read-through to your program or are the reasons that that doesn’t read through to your program because there’s significant differences?

Yes, thanks James. So, first of all regarding MOR-202, indeed we saw the announcement between Celgene and AstraZeneca of course.

And based on our understanding of this space, I think it’s just too early to say how much of the role these check-point programs will play in multiple myeloma for example. Having recently attended a conference, in which a number of key opinion leaders in the multiple myeloma space spoke.

The consensus there was that CD38 antibodies are likely to be the main players for the foreseeable future based on the clinical data that’s been seen so far of course. And that was clearly the unanimous view of the people at the conference there.

And I think that would remain our view as well based simply on what’s been seeing in clinical study so far. How these checkpoint programs are playing out remains to be seen.

So I think at this stage it’s a little bit too early to say what kind of role they’re going to play. We’re very happy that we have one of the three CD38 antibodies in clinical development for multiple myeloma.

And we look forward to publishing data at ASCO, first data and continuing the development. Regarding MOR-208 of course we also saw that, it had returned to their CD19 ABC as an antibody drug conjugate that got returned to immunogenic of course.

Same target, different mechanism, and therefore I wouldn’t say there was too much reach into our program from that. We’re very happy with the quality of the data that we’ve generated so far in a monotherapy setting.

So it’s just antibody and nothing else. And we believe that we have the good basis to take that program forward.

So, again here, I wouldn’t really read too much across from that announcement from Sanofi.

Thank you.

Hi, good morning and good afternoon everyone. Thanks for taking my question.

First one, maybe to Jens, I don’t fully understand how by terminating the Celgene agreement, you went from, your guidance went from improved so dramatically from a loss to a rather substantial revenue. Could you go through how - a little bit more detail how that impacted your guidance?

Yes, George, happy to do that. I mean, in general, as I mentioned in my speech, we had received an upfront payment and also a premium.

And we have agreed at that point in time to spread those amounts over the course of the expected development time. And therefore if you do this, you then can only allocate certain amounts as revenues out of this total amount of €70.8 million plus the premium I mentioned.

And with the termination of this agreement, there is the opportunity now for us or actually even there is a must that we book everything, which is related to that contract in one goal. And that increases the revenue figure and certainly also increases the profit which then otherwise would have been spread over couple of years.

And that guides our revenue figure up to the €70.4 million figure as well as our EBIT figure to €52.8 million.

So that increase, obviously, that increase follows through for the whole year?

Yes, exactly. In addition, to get that, we got this one-time payment as well.

We have for the development cost for MOR-202 and we got a one-time payment from Celgene, unfortunately I’m not able to give you a detailed figure here because we agreed to not disclose this. And but this goes and also on top of that.

And if you look into our quarterly report you will see a change in the deferred revenues significant one in the short-term as well as long-term and then you can do the math and you’ll come to that sort of figure which I was mentioning.

So you’ve, and you did mention that you were planning to have sort of your expenses for the 202 program this year were relatively unchanged and then you expect maybe towards the end of this year in 2016 that you’ll, assuming it goes forward, you’ll see the expenses start to increase for the 202 program that would have otherwise been expense to Celgene, is that correct?

Yes, indeed. The figure would increase in case that we do not find or look for another partner and I mean, as we know we haven’t decided yet on how we want to move forward in terms of MOR-202.

But what we have decided is that we want to see more data, just as we announced when we terminated the deals with Celgene, we feel it’s not sufficient data to make a call on this compound. We’re optimistic that we’ll see something very interesting going forward and we want to wait until we have seen that data and when we’re seeing the data we make a decision and then we can give also more pure guidance in terms of the R&D spend that will occur in the years to come.

Thanks, Jens and a follow-on question regarding some of the indications. At AACR in Philadelphia, it was dominated a lot by obviously the immuno-oncology space, and I think one of the messages, take home messages was that the checkpoint inhibitors need some combinations to really fully develop their efficacy beyond the relatively low 20% to 40% durable responses that they get.

And this I guess relates a little bit to the prior question to your CD38s. Is, there any plans afoot to look at combinations with checkpoint inhibitors not only with CD38 but perhaps some of your other antibodies as well?

Yes, George, let me take that. So, there is all sorts of thoughts about different combination partners and checkpoints of course being very much to the range at the moment have figured them some of their thinking as well.

There are perhaps one or two other combinations that are more immediately compelling, as we’ve announced we’re about to start combination studies with [indiscernible] generously supported by Celgene to do that. Those are if you like relatively obvious compounds partners but there are others that are less obvious and checkpoints from that list as well.

So these are things that we are considering, as to how best take the MOR-202 program forward. But as I said earlier, we’re delighted that we’re the only one now the outright, in three CD pediatric antibodies in the clinic.

And we’re looking forward to doing the best we possibly can to take this program forward.

Thanks. And finally you mentioned there were some very early stage programs incubating.

Perhaps it’s probably too early to comment on that. You’ll probably comment on that as they come along.

Is that what we can expect?

Yes, I mean, with regard to programs in discovery one in preclinical development formally, that we like a lot but I mean they’re early stage. So, we feel, there is nothing to be gained from your point of view and also frankly from a competitors’ point of view for us in disclosing the targets for those programs directly with you.

Okay, very well. Thank you very much and have a good rest of the day and quarter.

Thanks George.

Thank you. And to complete the presentation I’d just like to remind you the main points to take away.

First, our in-house development activity are MOR-208, MOR-202, MOR-209 continue as planned. The partnered pipeline continues to grow and mature, highlighted by the start of another Phase 3 trial of Guselkumab.

And finally, the higher than usual top and bottom line should not distract us from the fact that overall the programs in our product pipeline continue to make very good progress.

That concludes our call. If any of you would like to follow-up, we’re in the office for the remainder of today.

Thank you for your participation on the call. And goodbye.