MorphoSys AG

Claudia Gutjahr-Löser - Head, Corporate Communications and Investor Relations Simon Moroney - Chief Executive Officer Jens Holstein - Chief Financial Officer

James Quigley - JPMorgan Gunnar Romer - Deutsche Bank George Zavoico - JonesTrading

Good afternoon, and good morning and welcome to our Q3 2015 Conference Call and Webcast. I am Claudia Gutjahr-Löser, Head of Corporate Communications and Investor Relations of MorphoSys.

Before we start some housekeeping remarks, the telephone conference will be broadcast via web. Access to the webcast is via our Investor Relations website.

The webcast where we display the PowerPoint presentation charts related to this call. Some charts are on our website for download.

After the presentation, you may ask questions. For technical reasons, we cannot take any question via e-mail during the conference call.

So dial-in numbers are published on our website. The call and the webcast will be recorded and available for replay later today.

Before we start, I have to remind you that during the 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 third quarter. Before we open the call for your questions, Jens will review the financial results of the first nine months of 2015.

Afterwards, Simon and Jens will answer questions on these topics. Thank you for your patience.

Let’s get started now. Here is Simon Moroney.

Thank you, Claudia and also from me a warm welcome to the call. In Q3, we have continued to advance our pipeline with good progress being made in our proprietary programs as well as those being developed by our partners.

In September, we published a press release, which set out the current status of our proprietary portfolio as well as plans for its further development. This announcement showed how much progress we have made in a short time based on the number of programs we have added and advanced in the last few years.

In this Q3 review, we will update where these programs now stand and what news to expect in the coming months. As there is quite a lot to talk about, I will focus only on the most advanced programs and those for which there was news during the quarter.

The most advanced proprietary program is MOR208, currently in development for NHL, CLL, and ALL. Based on all of the clinical data we have generated so far, we are very optimistic about the prospects for this program.

MOR208 clearly has very encouraging anti-B-cell activity, which bodes well for its developments in a number of indications. Our main focus at the moment is on relapsed or refractory DLBCL, for which there is a large unmet medical need.

Patients who fail first line treatment, which is typically rituximab-based regimen, have a very poor prognosis, particularly those who are ineligible for autologous stem cell transplantation and high-dose chemotherapy. This is the setting that we will pursue in two clinical trials that will start within the next several months.

The first of these, which will start shortly, is a Phase 2 trial, which will investigate MOR208 in combination with lenalidomide in relapsed or refractory DLBCL patients. The second trial in the same setting, which is designed to investigate MOR208 in combination with bendamustine is on track to start in mid-2016.

This trial is designed to start with a phase to evaluate the safety of the combination and then transition to a potentially pivotal international trial comparing MOR208 plus bendamustine with rituximab plus bendamustine. The initial feedback from regulatory authorities supports our plan to assess the safety of the combination in this way and then transition seamlessly into the pivotal part.

The pivotal part of the trial could commence in 2017. We believe that this development plan gives us the best opportunity to get MOR208 to market as quickly as possible.

We see MOR208 as an ideal product for places to commercialize at least in selected territories and we are starting to plan for this, which will involve building a commercial operation within the organization over the coming months and years. Turning to CLL, recall that in the Phase 1/2 monotherapy trial in this indication, MOR208 showed the highest level of single agent activity of any antibodies in relapsed or refractory patients.

Clearly, therefore, MOR208 has great potential in CLL. However, as we look at the competitive landscape, we see a rapid evolution in treatment alternatives.

To make a difference to patients, we need to identify an appropriate setting for MOR208. Our approach is twofold.

First, in collaboration with John Byrd of Ohio State University was supporting an investigator-sponsored trial, which looks at MOR208 in combination with lenalidomide in relapsed or refractory patients and all the patients, ineligible for more toxic treatments. Second, we see a growing need in patients who failed the new class of BTK inhibitor therapy.

Several recent papers have shown that these patients have an extremely poor prognosis and this is likely to become an increasing medical need as the use of these drugs expands. Therefore, we plan to start a study of MOR208 in combination with idelalisib in CLL patients who have failed prior BTK inhibitor therapy in the first quarter of 2016.

In ALL, the planned investigator-sponsored trial in which MOR208 is combined with NK-cell transplantation in pediatric patients is also on track to start in the first half of next year. Moving on to MOR202, in September, we presented updated data from the ongoing Phase 1/2 trial at the 15th International Myeloma Workshop in Rome.

The data confirmed the very good overall safety profile and provided further evidence of efficacy both as monotherapy and in combination with lenalidomide and pomalidomide. Looking at the higher dose monotherapy cohorts, we are already seeing objective response rates in the 30% range without having completed the study.

We regard this as a very encouraging level of efficacy, especially since we know that full target saturation has probably not yet been reached. The final monotherapy cohort 16 weeks per kg is now being dosed as well as additional patients in the lenalidomide and pomalidomide combo cohorts.

We provide an update on data from this trial at ASH in December. I will move on now to programs being developed by our alliance partners, including some news that came after the end of the quarter.

Yesterday at its R&D Day, GSK presented a brief update on MOR103, also now known as GSK3196165. This program is currently in a Phase 2b study in rheumatoid arthritis called BAROQUE.

We have shown in our Phase 1b/2a trial in rheumatoid arthritis patients that MOR103 has an encouraging level of efficacy with a fast onset of action and a long duration of effect post-treatment. GSK’s Phase 2b study builds on this and aims to evaluate the most appropriate dose of MOR103 for Phase 3 studies and investigate the ability of MOR103 to induce remission.

The initial clinical readout is expected in 2016. Additionally, GSK reported yesterday its intention to initiate a second Phase 2 trial in osteoarthritis in 2016.

GSK plans a clinical development path for disease modification and analgesic activity in hand osteoarthritis. We are very pleased that GSK is broadening the development plan for MOR103 into a second inflammatory disease.

Last Friday, we announced that Bayer had started clinical development of a HuCAL antibody in hemophilia. The active part of the collaboration with Bayer was ended in 2007.

But this example illustrates that antibodies discovered jointly continue in development also after the active part of the collaboration ends. The license agreements remain in place and we stand to receive milestones and royalties if products are developed successfully and come to market.

On October 22, during its Q3 investor conference, our partner Roche gave an update on gantenerumab. Both Phase 3 studies of gantenerumab, SCarlet RoAD in prodromal Alzheimer’s disease patients and Marguerite RoAD in patients with a mild form of the disease will continue as open label studies.

The goal of both is to explore higher doses of the antibody. We understand that this is linked to the view that gantenerumab appears to be very similar in its properties to aducanumab, which has shown signs of efficacy at higher doses.

We think that this is very encouraging news for the program. Regarding our earlier stage activities two deals that we closed during this quarter are aimed at strengthening our discovery portfolio.

G7 Therapeutics is a small biotech company with a very innovative technology for producing G-protein coupled receptors. These important therapeutic targets have always been challenging when it comes to making antibodies against them.

It’s an area where we have made great progress and our alliance with G7 adds to our strengths here. Our deal with Immatics Biotechnologies opens up a new class of intracellular targets that are presented as peptides on the cell surface in the context of the human leukocyte antigen, or HLA.

In a feasibility study, we have shown that we can generate antibodies against this HLA peptide complex. This is the setting in which our Ylanthia technology has particular advantages over other methods of generating antibodies.

We expect this collaboration to lead to very interesting new therapeutic antibody approaches to treating cancer. In summary, at the end of the third quarter of 2015, MorphoSys’ overall product pipeline comprised a total of 104 therapeutic antibody programs, of which 25 are now in clinical development, 26 in pre-clinic and 43 in discovery.

Of the 25 clinical programs, 3 are in Phase 3, 11 are in Phase 2 and 11 are in Phase 1. Looking ahead to the very near future, tomorrow the abstracts for the ASH conference in December will be published.

We are looking forward to presenting updated preclinical and clinical data for MOR202 and 208 in five posters at the conference and we also hope to see some updates from our partners. Beyond that, you should expect to see increased development activities, more studies and preparations for our first Phase 3 study with MOR208.

In 2016, we expect Phase 3 readouts and potential BLAs for two of our product programs, namely bimagrumab and guselkumab. With that, I would like to hand over to Jens for his financial review.

Thank you, Simon. Ladies and gentlemen, good afternoon to everyone in Europe and good morning to those joining from the U.S.

Now that, Simon gave you some insight in the operational development of our business, I would like to focus on the financial aspects. And now on Slide 10, I would like to begin with an overview of our financial performance over the first nine months of 2015.

As explained in previous quarters, the financial results in 2015 have been predominantly impacted by the termination agreement with Celgene influencing our revenues and operational results significantly. Total group revenues doubled to €93.9 million.

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. Total operating expenses increased by 24% to €63.6 million.

Expenses for research and development increased by 30% to €53.1 million mainly driven by higher cost for the company’s proprietary development activities. General and administrative expenses increased only slightly from €10.3 million to €10.6 million.

As you can see, we have included the split of R&D expense in the slide. Expenses for proprietary product and technology development amounted to €39.9 million, an increase of 53% in comparison to previous year.

This is in line with our guidance for 2015 and we expect it to further ramp up in the last quarter of the year. Moving down the income statement, the EBIT for the first nine months of 2015 amounted to €34.7 million in comparison to minus €3.7 million by the end of September 2014.

The Group generated net profit after tax of €28.2 million in the first nine months. That translates into diluted earnings per share of €1.07.

Let’s now have a closer look at our two segments. The effects of the termination of the Celgene agreement are most visible in the Proprietary Development segment.

The segment achieved revenues of €59.9 million. Operating expenses in this segment increased to €38 million.

Segment EBIT amounted to €26.5 million. The Partnered Discovery segment generated revenues in the amount of €34 million in the first nine months of 2015.

The segment’s revenues included funded research and licensing fees in the amount of €31.5 million and success-based payments of €2.5 million. Not reflected in these numbers is the recent IND milestone from Bayer that was announced last week.

Operating expenses in this segment decreased versus the first nine months of 2014 to €15.9 million. The segment EBIT amounted to €18.1 million and EBIT margin of 53% roughly the same as in 2014.

Moving to Slide 12, here you have an update on our balance sheet for the first nine months of the year. On September 30, 2015, MorphoSys held cash and cash equivalents, marketable securities and other financial assets in the amount of €317.7 million compared to €352.8 million as of December 31, 2014.

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 2015, MorphoSys anticipates total group revenues between €101 million and €106 million and an EBIT of between €9 million and €16 million.

Expenses in proprietary product and technology development are expected to be in the range of €56 million to €63 million. Ladies and gentlemen, that concludes my review for the first nine months of 2015.

Before I hand back to Claudia for the Q&A session, let me shortly comment on today’s share price development. As announced today, our Q4 results are fully in line with our expectations for the full year and we reconfirmed our guidance for 2015.

As Simon pointed out, the pipeline is making good progress and we think we are on track to achieve our goals we have set ourselves for full year. With that, I would like to hand back to Claudia for the Q&A session.

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

Hello. Just a couple of questions from me.

The first one, could you give us an update on MOR202 and the product partnering there? And secondly with the positive guselkumab data that Roche showed in MS that attributes, would you consider MOR202 in the MorphoSys growth, is it in that setting given the same target or different target but there would be a selection?

Thank you.

Thanks, James. Let me start with the first question.

So, as we mentioned during the presentation, we tend to present updated clinical data on MOR202 at ASH this year. As we have also mentioned in the past, there is certainly a lot of interest in the program.

It’s one of only three anti-CD38 antibodies in the clinic for multiple myeloma. And we know that there is a lot of interest from interested parties out there biotech and pharma companies.

We continue to talk to people about MOR202, but for us, in the meantime at least, the focus is very much on completing the ongoing Phase 1/2 trial, which means completing the monotherapy cohorts and the two combo cohorts, lenalidomide and pomalidomide and we will continue to do that. We expect to have mature data sometime next year.

And in the meantime, we will of course engage in discussions with potential partners about how to take the program forward beyond that. As usual, we don’t comment at all regarding the status of any current discussions or make any predictions about what might result from those discussions.

That’s standard company policy. Regarding other potential uses for MOR202, other indications, there are some ideas associated with the mechanism.

As you can imagine, you highlighted one. There are actually a number of others beyond that that we are looking at and looking at generating some preclinical data initially.

But I think it’s premature at this stage to identify which of those indications could be of sufficient interest that we would want to just perceive clinically with them. But definitely through it’s mode of action that definitely has potential on other indications beyond multiple myeloma.

Thank you.

Yes, good afternoon everyone. Gunnar Romer, Deutsche Bank.

Thanks for taking my question. The first one would be with regard to MOR208 also here I would appreciate whether you could comment just generally on your thinking around potential partnering and how it relates to the ongoing trials and when if at all you would be willing to partner a compound?

That would be much appreciated. And then secondly I noticed, cash spend was relatively low in the third quarter, any reasons behind that?

And also Jens, maybe if you can shed some light on where you would expect the cash at the year end? And then finally, I appreciate that you will guide on 2016 when we are in February next year, but nonetheless, could you just broadly frame your thinking around the potential uptake in R&D spending for next year?

Thank you.

Thanks, Gunnar. Let me start with the first question and then hand over to Jens for the financial ones.

As I mentioned during the presentation, MOR208, we see as an ideal program to be our first own commercial product and that doesn’t mean that we will do everything worldwide on our own, but we can certainly envisage commercializing MOR208 in a territory, Europe, for example. So from our perspective, there is no hurry to partner this program.

As is well known of course the more data and the more compelling package that can be produced the more value can be generated for the company. And we are intent on generating that valuable data package before we were partnered.

I think ultimately to make the most out of the program we will need a partner for worldwide commercialization. But from our perspective, there is no hurry and we are intent on maximizing the value before we would secure a partner for joint commercialization.

Yes, Gunnar. Thanks for your question.

I will take the next two. On the cash burn indeed, the cash burn has been rather limited in the third quarter.

I think working capital management had some – or supported that sort of positive cash position towards end of September. Overall, we have guided the cash position being $280 million to $290 million by the year end after we have acquired Lanthio Pharma.

To give you a little bit of an update, our expectation now is rather that the amount will be at the upper end of that guidance around $290 million, I would assume in cash position that should be in case if we are not in licensing anything by yearend, but that sort of $290 million I think is a fair sort of number you can assume for your model. Jumping to your question regarding R&D spend for 2016, you know that we are pretty restrictive in that respect to give guidance already now for next year, we generally do that in our February, March calls.

But I mean to highlight the situation, it’s certainly – we expect to increase our spending beyond the current level of 2015. If you have heard, we are really upbeat on the compounds that we have in our proprietary portfolio.

We think 208 and 202 specifically are great compounds and we plan to kick off as pointed out further trials by Simon – further trials this year and then to a greater extent we will see the financial impact next year. We are convinced that we have great compounds here.

We want to support them and bring them closer to the market, bring in partners at the right point in time, that’s all in our plans and we are willing to perceive that. I think it’s in the interest of every shareholder that we do this.

It’s not in the interest we believe to keep the money in the bank if you have good compounds and we believe we have good compounds. So, we are planning to proceed with our strategy to invest and we will see that then in 2016 again in terms of R&D spending.

Thank you very much. Maybe just one follow-up regarding MOR202, I appreciate your comments Simon from earlier.

I was wondering whether you would be willing to invest in further clinical trials beyond the ones currently ongoing without having a partner or would that be a prerequisite for you continue investing, let’s say, once you have the data from the ongoing trials mid of next year or end of next year?

Yes, the answer to that really depends on the quality of data we can generate. We have identified a path to market for 202 and whether it is justified for us to follow that path on our own or best with the partner really depends on the quality of the data that comes out of the ongoing studies.

So, we are prepared to take a look at that data as it emerges and make that call based on the quality of that data whether it’s sensible to proceed on our own or whether it makes more sense to do that together with the partner. I think ultimately as with 208, we could imagine commercializing 208 in a territory, but not on our own in worldwide setting.

And for that reason ultimately we would need a partner. But again, much like 208, it’s not something that we need in the very near term.

Thank you very much.

Hi, good afternoon and good morning. Thank you for the update.

Just a pretty quick question regarding your deal flow or the deals that you made with a G protein-coupled receptor company and the peptide HLA company, I am presuming – first part of the question, I am presuming this is mainly for target discovery that will feed into your antibody, Ylanthia and HuCAL programs, number one. And number two, in light of the new target discovery that might come out of this, are you also considering potential antibody drug conjugate for some of these targets?

And would that be with your emergent partner or is the emergent partnership really just to that one prostate cancer compound?

Thanks, George. You are indeed right that those deals with G7 and Immatics are designed to give us access to new targets against which we can direct primarily antibodies.

We have, if you recall, in-house access to bio-specific formats, for example. Our preference at this stage is not to pursue ADCs, that’s a format that we have decided is something that we don’t want to follow up on, but we have access to formats that we like very much, couple of bio-specific formats.

So, if we need effective functions, we will prefer to the bio-specific format as the way to go. The Emergent deal currently relates solely to MOR209, the program which is in Phase 1 for prostate cancer and not to any other molecules based on that same format.

But as I mentioned, we have formats that we think can work for us against those new targets that we would discover.

Okay, great. Thank you very much.

Thank you. And to conclude the call, I just like to remind you of the main points to takeaway.

Good progress is being made in our pipeline. Plans for several trials of our most advanced proprietary program, MOR208, are on track.

MOR202 continues to produce encouraging clinical data, which will be updated in ASH and we have seen some positive developments from selected partner programs. With 25 programs in which we have a financial interest now in clinical development, our product pipeline is stronger than it has ever been.

That concludes our call. If any one of you want to follow-up with us, please feel free to contact us directly.

We are all in the office for the remainder of the day. Thank you very much and goodbye.