MorphoSys AG

Claudia Gutjahr-Löser - Head of Corporate Communications and IR Simon Moroney - Chief Executive Officer Jens Holstein - Chief Financial Officer

Olav Zilian - Helvea George Zavoico - Jones Trading Gunnar Romer - Deutsche Bank Mark Pospisilik - Kempen & Co

Good afternoon and good morning. And welcome to our Q2 2015 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 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 second quarter.

Before we open the call for your questions, Jens will review the financial results of the first six 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. Q2 2015 was dominated by events in connection with our proprietary drug portfolio.

For each of our most advanced oncology programs, MOR208 and MOR202, we presented promising data at ASCO. With the acquisition of Lanthio Pharma, we added several innovative therapeutic peptide programs to our portfolio, including a pre-clinical candidate, MOR107.

Overall, our pipeline is at record levels. For the first time, our total pipeline, comprising both proprietary and partnered programs, exceeds 100, of which 24 are in clinical development.

This points to the successful execution of our strategy to build sustainable value via a combination of partner and proprietary R&D. I’ll start the detailed operational review with our proprietary portfolio.

Our most advanced proprietary program is MOR208. For this program, we presented updated data from the Phase 2 trial in diffuse large B-cell lymphoma and follicular lymphoma at both the ASCO and EHA conferences.

Without going into these data again, the key messages were that MOR208 shows very promising activity, including a number of complete responses and led to long lasting anti-tumor responses. This is encouraging, particularly for a single, essentially unmodified antibody, especially considering that the trial was in patients who were refractory to, or had relapsed on, standard rituxan-containing regimens.

The findings are consistent with the view that in these patients, where expression of CD20 is often lost or reduced, targeting CD19 may be a superior approach. MOR208 is being moved forwards on a broad front.

We are preparing further trials the first of which will be in DLBCL. Here we plan to investigate combinations of MOR208 and lenalidomide, and of MOR208 and bendamustine, in relapsed or refractory patients.

These trials are planned to start in the second half of the year. Behind these studies, we are working on plans for further trials in CLL and follicular lymphoma, details of which we will communicate in due course.

In addition, a trial of MOR208 in pediatric patients in combination with NK cells is being set up as an investigator sponsored trial to be run at St. Jude’s Children’s Research Hospital in Memphis.

Turning to MOR208/MOR202, the ongoing Phase 1/2a trial in relapsed or refractory multiple myeloma is continuing as planned. First clinical data from this trial were published at ASCO.

These data provided evidence that MOR202 is safe and tolerable when dosed either weekly or biweekly, with potentially best-in-class infusion tolerability and administration. Very importantly, we saw early signs of clinical activity, and cases of long-lasting tumor control.

Altogether, what we have seen, points towards a balanced and potentially best-in-class safety/efficacy profile. The current status is that we are dosing the last cohort of the monotherapy arm of the study at 16 mg/kg, and have started the two combination arms, combining MOR202 with lenalidomide and pomalidomide.

We aim to give a further update on the program with first data from these new cohorts at ASH in December. MOR209 is our co-development program with Emergent BioSolutions, a bi-specific antibody for prostate cancer.

This program is currently in a Phase 1 study, being run by Emergent in the U.S. and Australia.

The program is proceeding according to plan and first clinical data are expected to be released next year. Turning to MOR103, just a few days ago, our partner GlaxoSmithKline published the design of the Phase 2b trial of MOR103 which is now called GSK3196165, on the website clinicaltrials.gov.

Without going into details, the phase 2b is substantially larger than the Phase 1b/2a we had conducted with the drug. It uses a subcutaneous formulation of MOR103 and features a much longer treatment period than that used in the previous trial.

We are extremely pleased to see progress with this compound at GSK and are looking forward to see results from this comprehensive study. Moving on to our early-stage portfolio, the most significant news in Q2 was our acquisition of Lanthio Pharma.

This transaction brings four lanthipeptide programs into our proprietary portfolio, including lead compound LP2, re-named MOR107, a novel agonist of the angiotensin II type 2 receptor, which is being developed for diabetic nephropathy and fibrotic diseases. The acquisition also secured for us all remaining technology and know-how related to Lanthio Pharma’s lanthipeptide capabilities.

This new class of constrained peptides offers high target selectivity and improved drug-like properties and complements very nicely our existing antibody platform. MOR107 is currently in late pre-clinical development and should enter clinical trials in 2016.

Moving on to the partnered pipeline, we have seen a number of positive developments. Most recently, just after the quarter closed, we announced that our partner Novartis had taken yet another antibody from our collaboration into clinical development.

This program, which addresses certain blood disorders, becomes the eleventh clinical program from our collaboration with Novartis. This speaks to the productivity of the alliance and provides further diversification of our pipeline from an indication perspective.

This IND marks the second of up to six clinical milestone events we expect to see with partners this year. Also after the end of the quarter, there was significant news around Alzheimer’s disease emerging from the AAIC conference in Washington.

Announcements on antibody programs targeting amyloid-beta add to growing confidence in the industry that this approach could lead to disease-modifying drugs. Our partner Roche has expressed renewed confidence in their Alzheimer’s programs, including our HuCAL, anti-amyloid antibody gantenerumab.

Data presented by Roche at AAIC show that gantenerumab treatment was associated with dose-dependent reductions in brain amyloid, consistent with amyloid clearance and an effect on downstream markers of neurodegeneration. Roche has stated that they are evaluating proceeding with clinical trials of gantenerumab at a higher dose than has been used so far.

We look forward to further news from this important program. That concludes 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, also from my side, good morning and good afternoon, and thanks for joining us in today’s call.

I would like to kick off the financial section confirming that our six months results are fully in line with our expectations for the full year 2015 guidance. We are very pleased with the financial performance for the first half of this year and the development of our compounds that dominate, as you know, our R&D expenses.

Let me start the financial review with the income statement. The financial results for the first six months of 2015 have been predominantly impacted by the termination agreement with Celgene, influencing our revenues and operational result significantly.

Total Group revenues amounted to €82.6 million for the first six months of 2015, compared to €30.5 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 when we signed the termination agreement.

In the same period, total operating expenses increased to €40.9 million compared to €30.1 million. The expenses thereof for research and development amounted to €33.9 million as compared to €23.4 million in the previous year, while general and administrative expenses increased from €6.7 million to €7 million.

Expenses in proprietary product and technology development during H1 amounted to €25.3 million as compared to €14.9 million in the previous year. In line with our current guidance, we expect expenses in proprietary R&D to further increase over the course of the year.

The EBIT of the first six months of 2015 amounted to €46.1 million, in comparison to €0.4 million in the previous year. The Group generated a net profit after taxes of €36.5 million in the first six months of 2015, compared to a net profit of €0.6 million in the first half 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 cooperation with Celgene, the segment achieved revenues of €59.6 million, compared to €7.7 million in the first half of the previous year.

Operating expenses in this segment increased from €13.6 million to €24 million. The segment EBIT amounted to €40.2 million, compared to minus €5.9 million in the same period of the previous year.

The Partnered Discovery segment generated revenues in the amount of €23 million in the first six months of 2015, compared to €22.8 million in the previous year. The segment’s revenues included funded research and license fees in the amount of €21 million and success-based payments of €2 million, including the Phase 1 milestone payment from Novartis, which we announced last week.

Operating expenses in this segment increased versus the first half of 2014 to €10.6 million. The segment EBIT amounted to €12.5 million, unchanged to the previous year.

Turning to the balance sheet. On June 30, 2015, MorphoSys held cash and cash equivalents, marketable securities and other financial assets in the amount of €324.9 million, compared to €352.8 million on December 31, 2014.

In May of this year, we acquired the Dutch biopharmaceutical company Lanthio Pharma. Simon has already explained the acquisition; let me shortly discuss the financial implications.

Prior to the acquisition, MorphoSys held already 19.98% of Lanthio Pharma. The purchase price for the remaining outstanding shares of Lanthio Pharma amounted to €20 million.

As of May 7, 2015, Lanthio Pharma is included in the MorphoSys Group’s scope of consolidation for the first time and therefore had already an effect on these interim financial statements. All income and expenses were included in the Proprietary Development segment and the payment of €20 million reflected in our cash position of €324.9 million as well.

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. The recent acquisition of Lanthio Pharma is not expected to have a material impact on our guidance.

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

This guidance certainly does not include the costs for any additional development program that may be in-licensed during the course of the year. Ladies and gentlemen, that concludes my review for the first six months of 2015, 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 would like to post, respond the question which is about MOR202. So, do you have any plans to test the antibody also with some carfilzomib call it from Amgen?

Of course there are all sorts of thoughts and ideas about potential future trials that we may want to run. At this stage, the focus is on completing the monotherapy which means MOR202 plus DEX of course and also these initial iMiD arms with pomalidomide and lenalidomide.

But in the backgrounds, we are thinking about all sorts of different combination partners, carfilzomib being just one potential that one can think about. But step-by-step, we really want to get to the completion of the ongoing trials first before we embark on anything like that.

Specific to this trial, where are you before increasing the dose of the antibody?

Sorry, could you just repeat that? I missed that.

Confirming the dose increase so to get to a maximum tolerated dose and where are you there currently?

We anticipate that the 16 mg/kg dose which is now ongoing will be the effective dose that we go forward with.

And that enrollment for this dose would be completed by when?

It's ongoing at the moment; we hope that that cohort will be complete before the end of this year. And we hope to have data, if not final data, but certainly an update at ASH in December of this year.

So, combining the antibody with the other individual drugs, you have mentioned before on the call, when would you start them?

That has started already. But the lenalidomide and pomalidomide combos with 202 have started.

So then if you consider combining the antibody based on molecule drug or maybe whatever biologic; would this require new trials or could you simply add another arm to the existing trial?

That’s something we’re looking at the moment as to how that would be done exactly and it's premature to say exactly how that could look in terms of what are the partner or partners could be and how the trial design would look. But it's something that we are analyzing as we speak.

Before getting back into the row, what are your feedbacks from potential partners on this antibody?

I think as we mentioned previously, there is interest out there which is encouraging. This is any one of the three anti-CD38 antibodies in the clinic right now.

And as usual, we don’t comment on any ongoing discussions or timelines or potential deal scenarios. Suffice it to say that there is interest and I think people are following closely the progress of the clinical development of MOR202.

First question is regard to Lanthio. Your pipeline had been heavily weighted in favor of oncology targets and the Lanthio seem to be moving away from that focus.

Is that an emerging trend that we’re going to see going forward?

I think it’s -- you shouldn't read too much into this, other than we’d really very much like to have a second leg beyond oncology. We see our focus is being primarily on oncology which has a lot of attraction of course, particularly these days given all the progress that’s being made here.

But we’re also keen to have a second area of focus and Lanthio does that not only from an indication perspective but also if you like from a molecular point of view, given that this is a different class of drug compared to the antibodies and potentially opens up new target opportunities for us whether it would be intracellular targets for example or perhaps targets in general that are not well-hit by antibodies. So, it's a second leg that we see is very much complimentary to the capability that we already have in place with the antibody platform.

You mentioned four proprietary candidates that came in, only one of which is identified, the other three, you won't disclose now or are some of them oncology targets as well, if you can say that?

They are earlier stage at this point and therefore a little bit premature to talk about them. The main focus is certainly on the most advanced of the four which is LP2 or MOR107 as we now call it which is in the area of fibrotic diseases.

And we’re happy to talk about the others when they are sufficiently far down the track form sense.

And regards to Lanthio, you intend to maintain the operations in the Netherlands or how kind of integration if any more, how you are going to do default into the MorphoSys structure?

It's a small operation, which means that integration is relatively straight forward, but we also at the stage leaving them relatively alone. We don't want to suffocate them.

So, it's a small creative, innovative unit there. And for the moment at least, we want to leave them to be as creative and productive as they can be without too much dominance from headquarters here in Munich.

And then speaking of small creative units, you didn't mention anything on the call today about the G protein program that you’ve partnered with the UK company. Can you highlight anything about that in the last quarter that may have happened?

You are talking about Heptares, I assume the Heptares collaboration?

Yes.

This is a collaboration that’s been going on couple of years now in which we access their StaRs technology in order to make antibodies against G protein-coupled receptors and our experience so far has been very positive, I have to say. Although again the program is early stage and nothing is sufficiently filed on the track that we could -- that we feel it's ready to talk about it public.

But the experience, certainly the experience in terms of combining their while making and presenting GPCRs with our ability to make antibodies, the experience so far has been very good.

The first one would be with regard to MOR103. I was wondering whether you can share anything on top of what is publically released in terms of the timelines of the program, when we can expect updates or how should we think about updates on that program going forward?

And secondly on the revaluation gain you've booked in connection with the Lanthio acquisition, and maybe this question goes to Jens. I was just wondering how that corresponds with you guidance and whether you have thought about adjusting your guidance or what has held you back in that regard?

And then last but not least, on bimagrumab as well as on guselkumab, I was wondering when you would be in a position to potentially share more details around the royalties of those programs?

Let me start with the 103 question. At this stage, as you know, the program is fully in GSK's hands and so I'm afraid you'll have to direct any questions on timing or future strategy to them.

All we can do at the moment is direct you to the entry on clinicaltrials.gov where there is a certain amount of information on the program, the trial design and so on. But we’re unable to comment beyond that at this point.

Going on to second question, regarding the revaluation gain, indeed as you have seen pointed out, we made a profit on that transaction which sounds a little bit strange but it's following the IFRS accounting rules. Some of this profit you should be aware of comes from the fact that we had preferred terms in terms of our investment beforehand.

So due to the fact that we have negotiated something good for the company, somewhat this is reflected in their profit. Overall in connection with the guidance, I think it's fair to say that certainly that had a positive implication on our profitability towards the full year; on the other hand, we should also keep in mind that we will invest further money into specifically MOR107, formerly to LP2.

So, there is some sort of neutralization between the two parts. And therefore, we didn’t expect any implication really for the guidance.

And I am going to finish off the question about the bimagrumab and guselkumab royalty rates. At this stage, we don’t have an agreement with the two parties, Novartis and Janssen to disclose what those royalty rates are.

Would like to be able to do so in advance of this coming to market, to give you guys some more details in order to be able to work within creating models and so on and would aim to do that, but at this stage we don’t have that clearance and therefore we can’t do so. However, we appreciate and like the question because like you we’re also anticipating these two products coming to market.

Just two on the earlier stage proprietary candidates; on the 107, is there anything else you can tell us and sort of what sort of fibrotic disease might be the focus or what you like once the target essentially out of the I guess for all preclinical candidates that were Lanthio, why you like this one the most or taking forward first? And then 208, just if there is any comment or color you can provide on its positioning versus the CAR T therapies in related indications there?

Thanks.

107, out of four programs from Lanthio, it’s simply the most -- furthest a long and as I said on the -- during the speech, we expect it to be ready for -- to start clinical testing probably next year. In terms of the science, we’re happy to get you more information off the core.

As I said, it’s an agonist of angiotensin II type 2, receptor. We like the approach, we like the target and the fact that it's in agonist also points a little bit to be advantage of having a second platform besides antibodies, not that easy to make agonist like antibodies as you know.

So, it's a little bit of different flavor if you like for us in terms of mechanism of action and also indication unit. It looks to be to have broad potential based on the preclinical data we’ve seen so far in fibrotic diseases.

The initial indication that we’re looking at diabetic neuropathy, but it could also broaden out into other perhaps even lung fibrosis beyond that initial focus. So these are the spectrum of diseases where it could be developed; it’s something that we’re studying at the moment, but the initial focus is probably in diabetic neuropathy.

Regarding 208, remember 208 is essentially to all intense and purpose an unmodified antibody. It has the small modification, the Fc portion to amino acid change which dramatically increases recruitment of effector cells and therefore killing of target of B-cells.

I think if you look at any other therapeutics out there that are targeting CD19, they are all more complicated in some regard; either they are antibody derivatives of some sort, so bi-specifics for example ABCs or kind of all the way to the most complicated CD19 variant if you like, which is the CAR T approach. So, we think that MOR208 has a very manageable safety profile, the efficacy data that we’ve seen so far looks very encouraging and we haven’t really seen yet its full potential which we think will emerge in some of the combination studies that we’re now starting.

So, the picture that we would like to imagine from MOR208 is a drug that is very easy to use, that’s very manageable from a safety perspective, that has very, very competitive efficacy and ultimately perhaps not the efficacy that we’ve seen in one or two sittings with CAR T particularly ALL, where CAR T seems to have done extremely well but we feel ultimately could be a much more widely used and usable drug just given its convenience and the ease of use. So that’s the perspective and the potential we see from MOR208 and why we really, really very much like this product.

Thanks you. And to conclude the call, I’d just like to remind you of the main take-home messages.

First, development of our proprietary portfolio is proceeding according to plan, with important clinical trials of MOR208, MOR202 and MOR209 ongoing. Second, our partners continue to make good progress with all of the most advanced programs in the pipeline.

And finally overall, our drug pipeline is bigger and more advanced than ever before with over 100 programs altogether and 24 in the clinic. We’re excited about many of these programs and look forward to seeing and sharing with you an increasing stream of clinical data in the months ahead.

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

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