MorphoSys AG

Jochen Orlowski - Associate Director Corporate Communications and IR Simon Moroney - Chief Executive Officer Jens Holstein - Chief Financial Officer

James Gordon - J.P. Morgan Victoria English - Evernow Publishing Ltd.

Anastasia Karpova - Kempen Michael Reis - Discover Capital

Q1 2017 conference call and webcast. My name is Jochen Orlowski, Associate Director Corporate Communications and Investor Relations at MorphoSys.

On behalf of Anke Linnartz, who unfortunately can’t attend due to illness, I am taking over her role today. With me on the call today are Simon Moroney, our Chief Executive Officer; and Jens Holstein, our Chief Financial Officer.

Before we start, I would like 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 and development programs and 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. In the presentation, Simon will start by giving you an operational review of the first quarter, as well as an outlook for the rest of the year.

After that, Jens will review the financial results of the first three months of 2017 before we will open the call for your questions. You will find the slide deck for this presentation on our corporate website.

I would now like to hand over to Simon Moroney.

Thank you, Jochen, and also from me a warm welcome to our Q1 call. We’ve made a very solid start to the year and seen significant progress both with our own and our partner’s drug candidates during the first quarter.

The more data we see from our two most advanced proprietary programs, MOR208 and MOR202, the more convinced we are of their potential. Amongst our partnered programs, we saw exciting news from two of the most advanced, Janssen’s presentation of new Phase 3 data for guselkumab in psoriasis and Roche’s decision to start two new Phase 3 trials with the HuCAL antibody gantenerumab in Alzheimer’s disease.

We also reported significant news flow from other partnered and proprietary programs, which I will highlight during the call. As of today, our pipeline comprises a total of 113 programs, 29 of which are in clinical development, six out of these 29 programs of that 20% from our Proprietary Development segment.

Across our pipeline, we see a number of programs, which have the potential to transform the treatment of the diseases that they address. I’ll start the review with a look into our Proprietary Development segment.

Our two most advanced programs, MOR208 and MOR202, are progressing well and we are on track to deliver clinical data on both programs during the course of the year. I’ll talk first about MOR208, our Fc-enhanced CD19 antibody, the most advanced of our in-house programs.

As a reminder, we are currently investigating MOR208 in three Phase 2 trials across two indications, namely relapsed/refractory DLBCL and BTK-inhibitor refractory and intolerant CLL and SLL. In our open-label Phase 2 L-MIND trial, we’re testing MOR208 in combination with lenalidomide in patients with relapsed or refractory DLBCL.

This trial is producing very intriguing and promising results. We’ve submitted the poster to the ASCO Conference with data on the first 30 to 40 patients in this study.

Illustrating the level of interest in the program, the poster has been selected for the poster discussion session at ASCO on Monday, June 5th. In our B-MIND trial, kicked off in August last year, we’re comparing MOR208 together with the chemotherapy bendamustine with rituximab plus bendamustine in relapsed/refractory DLBCL.

The study is currently in a safety run-in and given a positive outcome of this part, we’re aiming to transition into a pivotal Phase 3 trial around mid-year. Our third trial with MOR208 named COSMOS was started in late 2016 and is looking at MOR208 in combination with idelalisib in patients with CLL or SLL after discontinuation of the BTK-inhibitor therapy.

We’re experiencing a lot of interest in this trial, which reflects the magnitude of the medical need in the setting. We’re currently preparing to add a second arm to the study, which will combine MOR208 with the venetoclax.

We expect this arm to start shortly. Turning now to MOR202, our anti-CD38 antibody for multiple myeloma.

This trial is on track for completion this year and we’re aiming to present updated data from the monotherapy, lenalidomide and pomalidomide combo cohort at a Medical Conference in mid-year. The data that we’re seeing continue to highlight the potential that we would expect for an antibody in this exciting new target class.

The overall picture that is emerging of the MOR202 has very encouraging efficacy at least comparable to other drugs in this class, plus potentially best-in-class safety and convenience. We look forward to providing updated data from this study in a few weeks time.

In January of this year we were very pleased to announce the start of the Phase 1 trial with MOR107, making it the sixth program from our Proprietary Development segment to enter clinical trials. MOR107 is a lanthipeptide based on our subsidiary Lanthio Pharma’s proprietary technology platform and is the first lanthipeptide in our clinical pipeline.

This compound is a selective agonist of the angiotensin II receptor type 2, which has shown promising preclinical data in a number of disease models. We’re excited to see this innovative agent being developed in the clinic and expect to present data from the ongoing healthy volunteer study in the second half of this year.

The bispecific antibody MOR209, also known as ES414 is currently being investigated in the Phase 1 clinical study in patients suffering from metastatic castration-resistant prostate cancer. The study conducted together with our partner Aptevo is going on as planned in line with the trial design, which was adapted last year.

We expect to provide an update on this program later this year. Turning to MOR106, our fully human Ylanthia antibody against IL-17C, which we’re co-developing with our partner Galapagos.

This antibody is currently in a Phase 1 trial in patients with atopic dermatitis. The trial is proceeding according to plan and in line with our previous communications, we expect to report data from the study in the fourth quarter of this year.

Turning to MOR103 or as it is now called GSK3196165, our partner GSK is currently evaluating this Anti-GM-CSF antibody in three clinical trials, Phase 2b study in patients with rheumatoid arthritis, Phase 2a biomarker study in RA and a Phase 2a study in patients suffering from inflammatory hand osteoarthritis. All three trials are scheduled for completion in the course of this year.

Altogether, our Proprietary Development segment comprises 14 therapeutic programs, of which six are in the clinic and one of which MOR103 is out-licensed. I’ll turn now to our Partnered Discovery segment and will briefly summarize the most significant news flow from the quarter, starting with guselkumab, the most advanced program and one that could be the first antibody from our technology platform to reach the market.

In March, Janssen presented positive data from the two Phase 3 clinical studies, VOYAGE 2 and NAVIGATE in patients with moderate to severe plaque psoriasis. Guselkumab showed significant superiority versus HUMIRA, adalimumab and in addition, showed significant superiority to STELARA, ustekinumab in patients with prior inadequate response therapy.

These results further support the data package from Janssen’s Phase 3 VOYAGE 1 trial reported in October last year. We expect a decision by the FDA on Janssen’s BLA filing in the second half of this year.

An approval for guselkumab would be a major event in our company’s history. Not only would it start the transformation of our revenue statement to one based on product sales, it would provide the best possible validation of the power of our technology platform.

Also in March, our partner, Roche, informed us of their decision to conduct a new pivotal Phase 3 program for gantenerumab in patients with prodromal to mild Alzheimer’s disease. Roche expects to initiate two new Phase 3 studies later this year.

The start of these trials shows their ongoing commitment in Alzheimer’s disease and specifically to gantenerumab. In January, we announced that our partner Novartis would be starting a Phase 2 clinical trial with bimagrumab and a new indication namely obese patients with type 2 diabetes.

As a reminder, bimagrumab is also in Phase 2 development in two other indications namely sarcopenia and hip fracture surgery. A further potential highlight this year will certainly be the readout from Bayer’s pivotal Phase 2 study with the HuCAL-based antibody drug conjugate anetumab ravtansine in mesothelioma.

Data are expected in the second half of this year and could support a regulatory filing for potential market introduction in 2019. Bayer is on record as attributing blockbuster potential to this program.

Overall, with a total of 99 programs as of today, 23 of which are in clinical development, our Partnered Discovery pipeline continues to progress nicely both in the number and also the maturity of programs. There’s a lot of potential news flow from the segment this year.

For the remainder of the year results from roughly 27 different clinical trials are due before year end in the Partnered Discovery segment, in addition to the eight expected data readouts in the Proprietary Development segment, which I have outlined before. As always, we have no control over what our partners communicate, but we aim to inform you of progress as soon as we learn about it.

With that, I’ll hand over to Jens for his wrap-up of the financials.

Thank you, Simon. Ladies and gentlemen, also from my side a warm welcome to all of you and thanks for your interest in the company.

Let me start the financial section with an overview of the most important financial figures for the first three months of 2017. Starting with our P&L statement on page 11, in Q1 2017 Group revenues amounted to €11.8 million roughly matching the level of the first quarter of last year.

Total operating expenses increased by 23% to €26.9 million. The expenses thereof for research and development amounted to €23.3 million, as compared to €18.6 million in the previous year.

General and administrative expenses slightly increased to €3.6 million from €3.2 million. In the first three months of 2017, earnings before interest and taxes came in at a minus €14.9 million in comparison to minus €9.7 million in the first quarter 2016.

The increase reflects our intensified activities in the clinical development of our proprietary drug candidates. We have now six proprietary clinical programs ongoing, up from four at the end of Q1 last year.

Main drivers for the R&D spending were the initiation of preclinical combination studies with MOR208 in selected blood cancer indications during 2016, L-MIND in DLBCL in Q2, B-MIND in DLBCL in Q3 and COSMOS in CLL/SLL in Q4 of 2016. In addition, we have started first clinical activities with MOR106 last year and with MOR107 in January of this year.

Our consolidated results after taxes in Q1 2017 amounted to minus €15 million, compared to minus €7.2 million in Q1 2016. The diluted net result per share of Q1 2017 was minus €0.52 after minus €0.28 in Q1 of 2016.

Let’s move to our segment reporting on page 12 of the presentation. For the newcomers in this call in our Proprietary Development segment we focus on the research and clinical development of our own drug candidates in the fields of cancer and inflammation.

Our current focus in this segment is on advancing our own compounds in the clinic and in Q1 of 2017 this segment recorded revenues of €0.2 million after €0.1 million in the corresponding quarter for last year. In line with our guidance, we increased expenses for our proprietary R&D activities, including ongoing technology development improvements by 32%, compared to the previous year to €19.2 million.

Consequently, the Proprietary Development segment reported an EBIT of minus €18.9 million after minus €14.3 million in Q1 of 2016. In the Partnered Discovery segment, we apply our proprietary technology to discover new antibodies for third-parties.

Thus we benefit from our partners’ development advancements through license fees, success-based milestone payments and royalties. In Q1 of 2017, revenues in this segment reached €11.6 million being in the same ballpark as last year with reported revenues of €12 million.

Correspondingly, the EBIT in the Partnered Discovery segment came in at €7.3 million for the first three months of 2017 versus €7.7 million in Q1 2016. Let’s move on to the balance sheet on slide 13.

As of March 31, 2017, we recorded total assets of €453.9 million after €463.6 million at the year-end 2016. At the end of Q1, we had a cash position of €349.9 million, compared to €359.5 million on December 31, 2016.

As a reminder for those of you who do not know us that well yet, on the balance sheet this cash position is reported on the following items; cash and cash equivalents, available for sale financial assets, bonds available for sale and current and non-current financial assets classified as loans and receivables. The number of shares issued remained unchanged compared to the end of 2016 and totaled 29,159,770 at the end of Q1 2017.

Well, before we open the call for your questions, we would like to re-confirm our financial guidance for 2017, which was first published in March in connection with the presentation of our 2016 annual report. For 2017, we anticipate total Group revenues in the range of €46 million to €51 million and EBIT in the range of minus €75 million to minus €85 million.

Proprietary R&D expenses in 2017 are anticipated in the corridor of €85 million to €95 million. As previously communicated and as reflected in our guidance for 2017, the collaboration with Novartis will conclude at the end of November 2017 in accordance with the contract.

Before I hand back to my colleagues, I would like to reiterate that MorphoSys’ portfolio is nicely growing and most importantly maturing year-over-year. At the same time, our very solid financial resources of nearly €350 million at the end of the first quarter 2017 enable us to invest in the development of our own drug candidates going forward to grow the company’s value without losing sight of our prudent and efficient use of resources.

We believe to have a very promising time in front of us and are looking forward to report more news on the development of our compounds in 2017 and beyond. Ladies and gentlemen, that concludes my review of the first three months of 2017.

I will now hand back to Jochen for the Q&A session.

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

Hello. Thanks for taking the question.

James Gordon from J.P. Morgan.

My question was about CD38 combined in with PD-1 and PD-L1 therapies for solid tumors. Well, there is two parts to the question.

One is just bring you in discussions about these products and potential partnering? Two, what extent is it about blood cancer use now versus the excitement that was around this class in solid tumors and also just ahead of partnering, I know you’ve had some encouraging preclinical data, but would you consider starting your own clinical studies with this therapy for solid tumors, what is the thoughts around undoing that?

Yeah. Thanks, James.

Let me take that. Yeah.

I think the picture around CD38 has really changed a lot in literally the last year, whereas it had been thought of this multiple myeloma drug almost exclusively with perhaps some application in other hematological cancers particularly AML, for example. Now more and more in the discussions that we’re having, it’s being seen as a part of a tool box, so a component that can be combined with other anti-cancer drugs in different settings.

So just the whole way that people are thinking about antibodies against CD38 has evolved enormously in a short space of time and I think that’s really exciting for the classes and certainly for MOR202. Would we -- to the second of your question, would we consider initiating our own clinical studies in a setting such as that?

Potentially, a decision hasn’t been taken on that yet, but there is a number of new avenues opening up and that’s something that we certainly wouldn’t rule out, as I said, not something that a decision is being taken on yet at this stage.

Thank you.

Yes. Simon, I was interested in your comments, your brief comments about the partnered deal with Bayer the antibody drug conjugate.

Is this a therapy modality that interests you again on a proprietary basis, I suppose it depends on the outcome of some of the Bayer trials, but anyway?

So if your question, Victoria, is are we interested in general in ADCs?

Yeah.

Antibody drug conjugates as a modality. It’s actually not something that we are currently pursuing ourselves in-house.

It’s an area that we have followed closely, of course, given the amount of effort that’s gone into this field in the cancer area and we have simply taken a strategic decision that is not something that we want to engage. We have different formats that we think are relevant for cancer, notably bispecific formats of different types, that we’ve taken a fundamental decision that ADCs are not something that we would like to pursue at this stage in-house.

Hi. It’s Anastasia dialing in for Jean-Paul.

One question if I may regarding the B-MIND study. I do understand that the Phase 2 is mainly a safety part, but do you have a specific efficacy threshold to advance into Phase 3 stage and if you can share it with us especially given that the recent, I’d say, thresholds that were made public with other candidates in non-Hodgkin’s lymphoma and DLBCL, specifically?

Yeah. Thanks for the question.

The answer is no. So the regulator simply wanted to see the safety run-in part.

It’s really just a precursor to the Phase 3 trial, if you like, since MOR208 hadn’t been tested in man in combination with bendamustine before, they require that we do the safety run-in. So this is a few patients being treated with MOR208 plus bendamustine and a few patients being treated with rituximab and bendamustine and it’s certainly not enough for us to draw any efficacy conclusions and there is no threshold, which would need to be met in order for us to switch into the pivotal part of the trail.

And as a follow-up, would you envisage presenting the data separately from the Phase 2 trial…

I believe…

… of the combination?

Yeah. I believe 99%, I’m sure, we’re right in saying this is that that data will be part of the pivotal trial, and therefore, it will not be presented separately.

Thank you for taking all questions.

Hello. Yeah.

I just have a question about your library. Do you receive more interest from different customers, because, yeah, your partnership with Novartis will end in November this year and maybe now more interested parties are coming or if it’s just as did last two years or three years?

Let me start the answer to that question by saying that we are deliberately not looking to do the kinds of deals that we did in the past where we made antibodies for partners on demand, so to speak. The model now is in which we’re looking to retain more of what comes out of these deals in the sense of better economics and potentially co-development and that’s exemplified by deal that we did with LEO Pharma last year, where there are strategic components that are more interest to us.

Having said that, we do still have companies coming to us and looking to collaborate and access not only the technology, but also our expertise in the antibody field and so discussions of that type do take place from time to time. As always, we give no guidance on what kind of deals may or may not come out of those discussions but there is certainly interest out there.

Okay. But the deal with Novartis could be extended from Novartis, is that right?

Yeah. Remember that we have and I think we re-confirmed that during the presentation just now that that deal will end at the end of November this year as scheduled.

Okay. So they don’t have option anymore?

They had an option. There was an option built into the deal for them to extend.

That option will be not executed.

Okay. Thanks a lot.

Thank you. 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, MOR106 and now MOR107 is proceeding according to plan. We look forward to especially presenting data on MOR208 and MOR202 around midyear.

You should also expect clinical data updates on the others, including MOR103, which is on track to complete an important Phase 2b study in RA at our partner GSK later this year. Our partnered pipeline continues to progress well.

Keep an eye on particular on guselkumab, gantenerumab, bimagrumab and anetumab ravtansine. Overall, we expect 2017 to be a year of multiple data readouts from our proprietary and our product pipeline and potentially a major inflection point for MorphoSys.

This concludes the call. If any of you would like to follow up, we’re in the office for the remainder of the day.

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