MorphoSys AG

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

James Gordon - J.P. Morgan Cazenove Victoria English - MedNous Mick Cooper - Trinity Delta

Good afternoon and also good morning, and welcome to our Q1 2016 conference call. I’m Claudia Gutjahr-Löser, Head of Corporate Communications and Investor Relations of MorphoSys.

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 2016. Afterwards, Simon and Jens will answer questions on these topics.

For those on the conference call, you will find the slide deck for this presentation on our corporate website. 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.

I would now like to hand over to Simon Moroney.

Thank you, Claudia, and also from me a warm welcome to our Q1 call. For the biotech sector as a whole, Q1 2016 will not be fondly remembered with the major indices down substantially as a result of massive fund outflows.

MorphoSys was also affected by this trend, which was not company-specific. Indeed, we made significant progress in our pipeline during the first quarter, which I’ll cover in my operational review.

The news about bimagrumab after the quarter ended was obviously disappointing. And I also covered this in selected other partner discovery programs.

As usual, I’ll start with the proprietary portfolio, beginning with MOR208. During Q1, we initiated the first phase 2 combo-trial of MOR208.

We’ve named this trial L-MIND, an abbreviation for lenalidomide plus MOR208 in DLBCL. The trial is based on the extremely promising data we generated in relapsed or refractory DLBCL with MOR208 monotherapy.

The trial is an open label study and aims to evaluate safety and efficacy of the combination of lenalidomide plus MOR208 in 80 patients who have received one or two prior therapies and who are ineligible for autologous stem cell transplantation. The primary endpoint is objective response rate with progression-free survival and overall survival amongst the secondary endpoints.

We expect to report first data from this trial next year. A second phase 2 combo trial of MOR208 will also start this year.

This is the so called B-MIND trial which will look at from this trial next year. The second phase 2 combi trial with MOR208 will also start this year, this is so called B-MIND trials, which will look at bendamustine plus MOR208 and DLBCL.

We are in the late planning stages for this trial, which should start around mid-year. While, the patient sitting at the same as for L-MIND, this trial is set up differently, but this part will be in a small number of patients to assist safety of the bendamustine, MOR208 combination.

This should lead directly into the pivotal phase 2b part of the study next year. The third intended phase 2 trial from MOR208, which we’ve named COSMOS, which was planned in chronic lymphocytic leukemia, in particularly a prudent of the refractory CLL.

Our original plan was to investigate the combination of idelalisib plus MOR208 in the setting. These plans will be impacted by the discontinuation of several idelalisib combo studies by Gilead, and the imposition of clinical holds by the regulatory authorities in Europe and U.S.

As a result of this development, we currently reworking our plans as we await feedback from the authorities, which may bear on trials involving idelalisib. We hope to be able to update you and our plans to COSMOS in our Q2 call.

Turning to MOR202 on Slide 5 of the presentation. The phase 1/2a trial in relapsed/refractory multiple myeloma continues according to plan and on track to present updated clinical data mid-year.

As a remainder, this study is looking at increasing doses of MOR202 up to 16 mg/kg in 3-arms, antibody alone, antibody plus lenalidomide, and antibody plus pomalidomide. At ASCO, we will present data on patients, who receive the highest dose of MOR202 alone, and the co-works comprising 8 mg/kg of antibody plus len, and plus pom.

The post that were selected for the post discussion session on Monday, June 6. Turning to MOR209, we have amended that clinical study design and received green light from the authorities to restart the phase 1 trial, we are on track to enroll the next patients by mid-year.

In Q1, we announced the entry into the clinic at MOR106, this program is being developed within our lines with Galapagos. MOR106 is the first antibody from our new Ylanthia platform into clinical trials and it’s directed against the target that is involved in inflammatory indications.

We provide more information on this program later this year as soon as the clinical study moves into the second stage and starts to treat patients. To round out the overview of clinical programs out of our proprietary development segment, shortly after the quarter ended our partner GSK announced the start of the new phase 2a clinical study with MOR103, now named GSK3196165.

This trial is designed to investigate the effectiveness and safety of this HuCAL antibody against GM-CSF, and patients with inflammatory and Osteoarthritis. Meanwhile, with phase 2b study of the same antibody and rheumatoid arthritis continues.

We expect data from the phase 2b RA study next year. All together our proprietary development segment comprises 14 therapeutic programs, one of which MOR103 is out-licensed.

Of these 14, five are in clinical development, one is in preclinical development and 8 are in the discovery stage. I’ll turn now to our partner discovery segment.

In January, we announced that our partner Bayer commenced the phase 2 clinical study of the antibody drug conjugate Anetumab Ravtansine. This study is design to support registration of Anetumab Ravtansine as a potential new treatment for mesothelioma.

After the quarter concluded, we learn from our partner Novartis to the phase 2b/3 study of Bimagrumab in sporadic inclusion body myositis did not meet its primary endpoint. Data are currently being reviewed and will inform decisions on the bimagrumab development program.

Ongoing clinical trials are being continued at this time. In addition to inclusion body myositis, Bimagrumab is in phase 2 studies in Sarcopenia and in patients recovering from hip fracture surgery.

Guselkumab, the antibody which is being developed by our partner Janssen for the treatment of Psoriasis is on track to deliver phase 3 data in the second half of this year. We are currently six phase 3 studies ongoing, of which three have the primary completion date this year.

All together the pipeline emerging from our partner discovery activities now comprises 90 programs, 21 in the clinic, of which three are in phase 3, nine are in phase 2 and nine are in phase 1 development. At the end of the first quarter, our overall product pipeline comprised total of 104 therapeutic antibodies, 26 of which were in clinical development.

That concludes my operational overview. I’ll now hand over to Jens for the financial update.

Yeah. Thank you Simon.

Ladies and gentlemen good morning and good afternoon and thanks for participating in the call. Before I start my overview of the most important financial figures for the quarter we’d like to shortly mention the new format of presenting our quarterly results.

Due to the recently introduced adoptions [ph] in the financial reporting requirement for German listed companies, we will publish interim statements rather than quarterly reports for the first and third quarter for each financial year. Those interim statements allow MorphoSys to present the key operational events and the financial results in a condensed form focusing on the key events in a less formalistic manner.

For the half year though we will continue to publish a half year report as it’s been used to in the past according to the requirements. Let me now start the financial section with an overview of the most important financial figures for the first three months of 2016.

Please turn to slide 8, the income statement here you see the total group revenues declined by €58.3 million to €12.1 million for the first quarter of 2016. However, please be aware that revenues in the comparable period of 2015 contained a one-off effect in the amount of about €59 million from the termination of a participation with Celgene.

Total operating expenses increased by 24% to €21.9 million. The expenses thereof for research and development amounted to €18.6 million as compared to €14.7 million in the previous year.

General and administrative expenses increased to €3.2 million. In line with our current guidance expenses and proprietary product and technology development increased by roughly 40% compared to the previous year and amounted to €14.6 million.

In the first three months of 2016, the EBITDA amounted to minus €9.7 million in comparison to €52.8 million in the previous year. The group presents a net loss after taxes of €7.2 million in the first three months of 2016 compared to a net profit of €40.9 million in the first quarter of 2015.

The decline in EBITDA net profit is mainly driven by the one-off effect in 2015 as I explained before. Turning to slide 9, the segment reporting.

The proprietary development segment achieved revenues of €0.1 million compared to €59.4 million in Q1 2015 as a result of a terminated cooperation with Celgene. Operating expenses in this segment increased to €14.6 million.

The segment EBITDA amounted to minus €14.3 million compared to €49.7 million in the same period of the previous year. The partnered discovery segment generated revenues in the amount of €12 million in the first three months of 2016, an increase of roughly 8% compared to the previous year.

Operating expenses in this segment declined versus Q1 2015 to €4.3 million. The segment EBITDA amounted to €7.7 million compared to €5.8 million in Q1 2015.

Turning to the balance sheet on slide 10. On March 31, 2016, the group’s liquidity position equals €287 million compared to €298.4 million on December 31, 2015.

This decrease was mainly the result of the use of cash flow operating activities during the first three months of this year and for the repurchase of shares for the group’s long-term incentive plan. We have executed the share buyback program in March of 2016.

MorphoSys acquired 52,295 MorphoSys shares from the stock market. Many of the share buyback program amounted to €2.2 million.

The shares will mainly be used for the company’s long-term incentive program as mentioned. Let’s now turn to slide 11.

Before we open the call for your questions, we would like to reconfirm our financial guidance for 2016 which was first published in March in connection with the presentation of our 2015 annual report. For 2016, MorphoSys anticipates total group revenues in the range of €47 million to €52 million and an EBIT in the range of minus €58 million to minus €68 million.

Proprietary R&D expenses are expected to rise to €76 million to €83 million. Ladies and gentlemen, that concludes my revenue of the first three month of 2016.

I’ll now hand 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. Two questions please on partnered products, the first one was about Guselkumab, which seems to be the next key catalyst coming up in terms of the partnered products.

Could you talk about why you think the product might be differentiated versus therapies like Cosentyx, the IL-17 and I think this product would also hit IL-17 downstream. Is there something you’re excited about mechanistically beyond IL-17?

And just when the data comes out, would you hope that to show a better passi [ph] benefit than the products already available. What can be the differentiation there and the second question be on bimagrumab.

So we saw the sIBM is negative, but I know there are other trials going in Sarcopenia and in hip fracture patients. Are there reasons why the mechanism might be more effective there than it has been in the trial that’s already reported that mean that we should still be optimistic there?

Thanks James. I’ll take those two.

Guselkumab in terms of differentiation just as a reminder so it hits and a specific for IL-23 which as you pointed is a upstream of IL-17 in the pathway. If you look at the Phase 2b data that Janssen published, it actually looks better than the IL-17.

The efficacy data is as good as it gets for a biologic to what extent that slightly, let’s say superiority will make a commercial difference is quite hard to estimate at this stage. I think, where there is a clear opportunity for differentiation is in the frequency of the administration, where again in the Phase 2b trial Janssen looked at dosages every two and indeed every three months which is much less frequent than the IL-17 Cosentyx for example, is dosed.

So that is an obvious I think, advantage that we’ve seen so far is much less frequent administration. And that on top of the slightly that efficacy that we’ve seen in the trial so far, we think could be an interesting advantage for Guselkumab over the other compounds.

Regarding bimagrumab, as we announced of course the primary endpoint in the inclusion body myositis trial was not hit. There is a lot of kind of anecdotal data out there that may be the six minute walking test which was the primary endpoint is perhaps not the best endpoint in this particular setting.

But any conclusions on whether it has an opportunity to be developed and be successful in the inclusion what body myositis or not will await Novartis analysis data obviously. So what we can conclude at this stage is that the primary endpoint was not hit.

We await to see a more detailed analysis of the data which looks at a number of other metrics as well. In terms of Sarcopenia and hip fracture surgery, if you think of those patient populations one thing that’s obvious is these are essentially healthy people.

Sarcopenia or some of the older people of hip fracture surgery patients or people who suffered hip fracture obviously and it maybe that again the speculation that the drug works better in patients who have fundamentally healthy muscles as opposed to inclusion body myositis which is obviously a disease, a wasting disease of the musculature. Speculation but that is a clear differentiation, or a clear difference between the clinical trials that are being run with that compound.

I think the main point about bimagrumab is of course, we disappointed that the primary endpoint wasn’t hit in inclusion body myositis, but I think there is a lot of water to flow under the bridge here with this program. And I would not write it off too soon by any means.

Thank you.

Yes. Thank you for taking my question.

Simon in the past, you talked about in-licensing opportunities in terms of building up your proprietary portfolio. Could you update us on what the company’s attitude is towards that and secondly, is there anything if you can just say at this stage about Gantenerumab?

Yeah. Thanks Victoria.

So regarding in-licensing and we’re always on the lookout for programs to add and remember that MOR208 for example was a program that was sourced through an in-licensing deal. So we’ve done it before and we’ll probably do it again.

Right at the minute, we have our hands very full. I must say, by the end of this year we should have five proprietary programs in the clinic.

So there is a lot going on quite frankly. So although we’re always interested and we’re always looking, it’s not absolutely top of our priority list right now.

Top is executing on what’s in front of us, because we feel very good about the programs that are in the clinic and that are coming into the clinic. So that’s really the focus at the moment.

Regarding your second question, that was Gantenerumab, right, the Alzheimer’s antibody you are asking about?

Yes.

Yes, so, again, this is a little bit like bimagrumab actually. This is something that I think a lot of people wrote off a year-and-a-half now when the prodromal trial was stopped for futility.

Since then, what emerged as obviously the Biogen data on aducanumab and the realization that Gantenerumab is actually rather similar in terms of its properties to aducanumab, and I think this has led Roche to re-look at the program and perhaps conclude that it hadn’t been dose time-out in the trials that have been done so far. So what’s happening right now is that both the prodromal and the mild phase 3 trials have been converted to open-label studies, in which higher doses of Gantenerumab are being investigated.

And we haven’t seen anything yet, but we’re hopeful that perhaps a higher dose can be established and that trials can then continue at that higher dose which the feeling is, the hope is, could perhaps be effective and could represent the future for that program. So again, not to be written off by any means, is alive and well at the moment.

Thank you.

Hi, good afternoon. Just two quick questions for me, which I suspect I know the answer to both of them.

First of all, with MOR208, given AstraZeneca’s announcement with regard to their CD19 product and developing it in neuromyelitis optica, are you looking at any inflammatory disease yourself? And secondly, given the share price weakness, are you tempted to expand your share buyback program?

Thanks, Mick. Let me take the first one of those two and then Jens will comment on the second one.

So with 208, right at the moment, we’re very busy and very full with the B-cell malignancies and that is the core focus here. Obviously, we’re well aware that an anti-CD19 antibody has opportunities in a variety of other diseases.

A whole stack actually. But for us at the moment, because of the compelling data that we have in DLBCL, because of the very encouraging data and the opportunity in CLL, let alone follicular lymphoma where we also have good data, the focus at the moment is on those B-cell malignancies.

And then, Mick, regarding your second question on the share buyback program, here, clearly we have current plans to extend that program and buy back shares to do something for the share price. I think we need the financial resources and we plan to use those financial resources to allocate the money into programs that has a much higher implication on the value creation on the developed market share price, then short-term share buyback program in our view.

So there are currently no plans to do something like this.

Thanks.

To conclude the call, I’d like to remind you of the main points to take away. First, clinical development of our proprietary programs MOR208, MOR202, MOR209, and now, MOR106 is proceeding according to plan.

MOR103 out-licensed to GSK is into clinical development in the second indication. Our partner, Bayer, has advanced one of our antibodies into a phase 2 trial.

And finally, after the quarter was completed, we learnt that bimagrumab did not meet its primary endpoint in the lead indication, although ongoing clinical trials will continue.

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

Thank you for your participation on the call and goodbye.