MorphoSys AG (MOR) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to today's MorphoSys AG conference call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr Dave Lemus, CFO of MorphoSys AG. Please go ahead, sir.

Good morning. Welcome. This is Dave Lemus, CFO of MorphoSys. With me today is Simon Moroney, our CEO. We're calling you today from our headquarter is Munich, Germany. First, we'd like to welcome you to this conference call and thank you for participating.

During the call, we would like to talk about the company's financial results for the first six months that ended June 30, 2003. Simon will begin by giving you an overview of the last quarter. Then I will review the financial results for the first six months. Afterward, we will open the call to your questions.

Before I start, I want to remind you that during this conference we will present and discuss certain forward-looking statements concerning the development of MorphoSys' core technologies, the progress of 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 of the day hereof.

I would now like to hand over to Simon Moroney.

Thank you, Dave. I would like to add my welcome to those of you joining the conference call today. I want to start my overview of the quarter by highlighting the financial results.

The numbers provide confirmation of what was apparent in Q1, namely that we are on-track to meet our objectives for the year. In Q2, we reduced our operating loss by more than two-thirds. We are very close to break-even on a cash basis. We have roughly the same level of cash as at year-end 2002. We have a three-year cash horizon. The business is financial sound, comprising a steady revenue stream and effective management of expenses.

The [indiscernible] should not obscure the fact that we continue to invest in the application of our technology to proprietary product programs. Our plans call for two new programs to be initiated per year, and this rate is being maintained.

In addition, our partner programs are making good progress. The present balance between partner programs, on which we earn money from day 1, and own programs, where we carry the costs alone, results in the low cash burn just referred to. This mix of partner and proprietary programs lies at the heart of our strategy of maximizing the value we derive from our HuCAL technology through therapeutic antibody development while minimizing our risk exposure.

More than three-fourths of the active therapeutic programs are partner-initiated. Confidentiality obligations prevent us from talking about the details of these programs, such as, for example, naming the targets. From time to time, we are able to announce progress, and this was the case last week regarding a research-stage program ongoing with Schering AG. Outside this [supply] our HuCAL Gold technology to generate an antibody which Schering scientists have now investigated in some detail. Already, the antibody has shown evidence of anti-cancer activity in in vitro essays. It also shows outstanding in vivo specificity, accumulating specifically in a tumor established in a mouse.

This is yet another example of an antibody whose generation was made possible by the unique features of our HuCAL technology. Strict specifications were defined at the outset of the project for the antibody, and our scientists optimized a HuCAL-derived lead candidate to these requirements. From the start of this project to achieving the efficacy and specificity data just mentioned, with the optimized antibody, took one year.

With regard to our proprietary programs, we're still on-track to complete animal experiments with MOR 101 and MOR 102 before the end of the summer. You will recall that MOR 101 is a Fab fragment being developed for the treatment of deep dermal burn, while MOR 102 is a [fore inner] globulant with potential in a number of inflammatory indications, our initial focus being psoriasis. The [indiscernible] experiments are being conducted with external collaborators to determine the most appropriate format of the antibody, for example, to [attach] levels of Fag fragments [with density] to the burn application. Our goal with these two programs is construct compelling packages, comprising targets, which is covered by an exclusive license from Boehringer Ingelheim, proprietary antibody and animal data. Such packages comprise substantial value and dramatically enhance our collaborating opportunities.

Today, we announced that we are winding down our program MOR 201. The reason for this is that we have now generated data in an alternative program that supports the decision to switch our efforts. The new program, which has the designation MOR 202, involves an anti-cancer antibody that we generated some time ago and on which we now have some promising in vitro data. We will not, as yet, reveal the target against which this antibody is directed. I can, however, say that the antibody may have applications in multiple multiple myeloma and other blood-borne cancers.

The rights to the antibody 201 have been returned to ProChon, who will assume responsibility for its further development along the lines of our original agreement with them. As a reminder, ProChon may develop up to four HuCAL antibodies. As usual, MorphoSys will earn milestones and royalties as antibodies move through development to market.

Looking forward, we anticipate a busy second half year. We're already engaging in discussions with parties interested in developing 101 and MOR 102. We will gear up our business development activities in respect of partnering these two compounds as soon as the animal data is available in approximately eight weeks' time. Meanwhile, we continue to discuss and negotiate with companies from the pharmaceutical and biotech sectors, with respect to potential collaborations around HuCAL. We do not want to predict when or if any of these discussions or negotiations may result in signed deals. However, we can say that interest in therapeutic antibodies continues to be high, and that the good news surrounding [Aviston] and XOMA, as well as other antibodies only helps in this regard.

Our focus continues to be on maximizing the number and quality of HuCAL-based programs being pursued by partners, while ensuring that the return we receive properly reflects the value inherent in our HuCAL technology.

That concludes my summary of the quarter. With that, I'd like to hand over to Dave, who will talk about the financial results.

Thank you, Simon. To begin our financial analysis, I'd like to start with operating revenues. In the first six months of 2003, company revenues amounted to €7.2m, compared to €8.7m in the same period of 2002, a decrease of 17%. Revenues arising from therapeutic antibody collaborations accounted for 85% of total revenues, while target research collaborations generated 15% of the total. No milestones revenues are recorded in the second quarter of 2003.

Moving on to operating expenses for the first six months of 2003, total operating expenses, including stock-based compensation, decreased €8.9m to €10.8m, resulting in an operating loss of €3.6m, a decrease of the loss of the same period in the prior year of 67%. In general terms, this reduction in expense resulted mainly from the company's restructuring implemented in Q4 2002, which resulted in lower personnel costs, as well as lower product development costs. The reduction in 2003 was strongly influenced by the patent licensing agreement and settlement entered into in 2002, more specifically the CAT and XOMA agreements.

Costs for R&D decreased by €3.1m to €5.7m. The decrease in R&D expenses resulted predominantly from lower licensing costs related to the XOMA agreement, as well as lower personnel costs and lower product development costs associated with the company's restructuring.

SG&A expenses amounted to €4.1m, compared to €8.7m in the same period of the previous year. The decrease in G&A expenses was mainly due to the decrease in patent litigation costs, which arose in part as a result of the settlement with CAT in December 2002.

Stock-based compensation in the amount of €1.1m in the six months 2003, compared to €2.3m during the first six months of 2002, was recorded as a non-cash charge for the expensing of stock options un US GAAP. The decrease in stock-based compensation is mainly due to a lesser number of employees and convertible bonds granted in 2003, compared to the same period in 2002. Stock-based compensation for new grants was also lowered to the reduced stock price of our [closing] shares, underlying the bonds at the time of grant.

For the first six months of 2003 and 2002, total investment in intangibles amounted €0.02m and €3.3m respectively. The higher amount in 2002 reflects in part the acquisition of the XOMA license.

Amortization, investments in property, plants and equipment, an depreciation, amounted to €0.6m and €0.2m and €0.4m for the first six months of the year respectively, and as such remain unchanged compared to the same period of the previous year.

For the first six months of 2003, the company posted a net loss of €4.9m, compared to €9.7m in the same period of the previous year, a reduction of approximately 50%. The resulting loss per share for the first six months 2003 amounted to €1.22 per share, compared to €2.50 per share for the first six months of 2002. On 30 June 2003, there were 4,253,410 shares outstanding.

Moving on to liquidity and current assets, on 30 June 2003 the company had €18.8m in cash and cash equivalents and marketable securities, compared to €19.1m balanced at 31 December 2002, a decrease of only €300,000. Cash used in operating activities for the first six months of 2003 amounted to €300,000, compared to €7.2m in the first six months of 2002, demonstrating our low cash burn for the first six months of the year.

Moving on to the outlook, the financial results we've presented today continue to reflect the positive benefits associated with the company's restructuring moves undertaken in November 2002. These benefits are in part mirrored by the significant reduction in operating loss, which fell by 68% compared to the previous year's numbers for the same period. Moreover, the cash position also remains robust, as evidenced by the level of cash and marketable securities, which are essentially at the same level as year-end 2002.

As you can see from the cash flow statement, the net cash used in operations for the first six months of 2002 was also very close to cash break-even. That being said, for the time being, we make no change from the guidance given earlier this year.

That concludes my financial analysis for the first half of 2003. I'd now like to open up the call to your questions.

Thank you, sir. Today's Q&A session will be conducted electronically. If you'd like to ask a question, please press the * key, followed by the digit 1 on your telephone keypad. We will take questions in the order received, and will take as many as time permits. Once again, please press * 1 now on your telephone keypad to ask a question. We'll pause for a moment to assemble the roster. Our first question comes from Thomas Hoger with DZ Bank. Please go ahead, sir.

Good morning. I have a question concerning the stop of program on FGFR-3. Could you elaborate a little bit on the reasons behind this termination of this project?

Hi Thomas. Because of the obligation of confidentiality we have with our partner, ProChon, we're not at liberty to speak openly about the results that were generated in the program or the reasons for stopping the program. Suffice it to say that, as we evaluate our pipeline and our proprietary programs that are ongoing in the year, we continue to evaluate the merits and data that we have on various antibodies. As such time as we deem is appropriate to switch our efforts and our focus from one program to another, we will do that. That is the case with this particular program. The program, MOR 202, we felt represented a better place to focus our efforts. Therefore, we chose to switch.

It also, I would say, reflects our philosophy, which is also inherent in the HuCAL technology, which is we are great believers in taking care to make a high-quality antibody and make sure that we have the right programs early on. This, if you like, is a reflection of that philosophy: we have taken an opportunity relatively early in the game, in this case, to switch our efforts from one to what we feel is a more promising program.

Thank you.

Ladies and gentlemen, as a reminder, if you want to ask a question, please press * 1 on your telephone keypad now. Again, please press * 1 now on your telephone keypad if you want to ask a question. We now more to Mr Martin Possienke with Equinet. Please go ahead, sir.

Yes, good morning everybody. I missed the beginning of the call, so I'm sure if you explained it already, but I was a little bit surprised because of your financial results and the interest expense of €0.8m in the second quarter. Maybe you can explain it again.

Sure. No problem. At the beginning of this year, we gave guidance that our interest expense would be approximately €1.2m for the year. Now the €0.8m basically arises out of two postings. One posting relates to the agreement that we had with XOMA. This agreement we had with XOMA, we had an option of paying with cash or shares. And according to US GAAP accounting, when we actually raised the shares for XOMA, we would have to recognize what in essence is a king of interest expense related to this conversion, which in this case amounted to roughly €600,000 or so. And that's a non-cash charge on the income statement, which again relates only to the raising of shares to XOMA and will not reoccur. Again, I want to stress that it's non-cash.

The other piece of the €0.8m, approximately €0.2m relates to the agreement that we have with CAT. As you may recall, we had approximately €5m which was booked as part of the settlement agreement last year with CAT, that we have to pay them over the next five years at the rate of €1m per year. And how we booked that liability was that we booked it at a net present value, which means that every year we have to amortize, effectively, what is this loan to CAT on this outstanding liability. So, what you see in there is an interest-related charge on that liability, which is not in addition to the €1m, but is inside the €1m that we pay them every year.

Okay. Thank you. And do we have to expect another €400,000 for the second half of the year?

No. Approximately another-- So, it was approximately €200,000 in the first half of the year. For the entire year, it will be about €400,000.

Okay. Thanks a lot.

Going forth, of course, that amount will go down every year.

Okay.

Ladies and gentlemen, as a final reminder, if you'd like to ask a question in today's Q&A session, please press the * key, followed by the digit 1 on your telephone keypad. We now move to Mr Richard Parks with ING. Please go ahead, sir.

Hello, gentlemen. I'd just like to apologize because I too missed part of the conference call. And I just wanted to check with the discontinuation of MOR 201. Have you given any potential timelines for when you'd expect to license your remaining proprietary antibody programs, and whether you'd be initiating any programs with a target?

Richard, what we said-- You may have missed this earlier on in the call, was are waiting animal data on both MOR 101 and MOR 102, which is expected late in the summer, on the back of which we will ramp up our business development as it's around there. We're really in the context of discussions with a number of companies who have expressed interest in those two programs. We will obviously pick up those discussions on the back of the animal data.

We don't want to give predictions about the timing of when we would sign one or more deals in respect of those compounds because, as you know, it's always very difficult to predict, but it's certainly one of our priorities to partner those two programs as soon as we possibly and reasonably can, given that we can secure the terms that we're looking for.

In respect of the other programs, as we've said, and I don't know whether you heard the answer or not, we've simply elected to switch from one program into what we feel is a more promising program, which is-- It's premature at this stage to say at what stage that program would be ready for partnering. But what we also have said consistently and repeated again today is that we're looking to initiate two new programs per year. We continue to maintain that rate. So, we're able to source targets that we think are sufficiently promising to support HuCAL discovery programs for our own account. That will continue, and that is planned and budgeted for the foreseeable future.

Okay. When will we know what these new targets are that you're working with?

We treat the publication of these targets, or the naming of these targets, on a case-by-case basis. The ICAM target that underlies MOR 101 and MOR 102, because it's subject to an exclusive license agreement with Boehringer Ingelheim, we were quite happy to name that target. In situations where we feel that naming the target would put us at a competitive disadvantage, with respect to other companies that may be interested in a program, we will not name the target. That is the case with this new program, MOR 202. We're not yet naming the target, other than to say that it's a cancer-relevant target. At such stage in the future as we feel that we have a sufficient reason to name the target, we will do so. But as I said, we are treating that very much on a case-by-case basis.

Okay. Thanks very much.

We now have a follow-up question from Mr Thomas Hoger with DZ Bank. Please go ahead, sir.

Hello. This is Patrick Focks, a colleague of Thomas Hoger. I have a question concerning the average share number that you are calculating for the full year 2003. [indiscernible].

I assume you're talking about the weighted average number of shares outstanding. For the way that's calculated, as I'm sure you are aware, is under US GAAP they take a weighting of the number of shares which have actually been outstanding during the year. In the June number, we have one or two months' weighting worth of XOMA shares inside that number. And what we'll see is an increase in that number toward the end of the year, where we raised 588,000 shares which we are owing to CAT. And when that exactly will occur is not clear, but obviously it will happen before the end of the year. Our guess is sometime at the end of Q3, perhaps beginning of Q4, in which case, obviously when those shares are raised, they'll have an impact on the weighted average number of shares outstanding. So, can I give you an exact number today of what the expected weighted average number of shares will be at the end of the year? No. But if you take the June number and you assume that the shares from CAT, the 588,000 shares for CAT, will be raised at the end of September, that will probably give you a pretty good estimate of what the weighted average of shares should be at the end of the year.

Okay. Thank you.

If there are no further questions remaining in the queue, I would like to turn the call back over to Dr Moroney for closing remarks.

Thank you very much. Again, if there are no further questions, I would just like to remind you of the key messages to take away before we complete the call.

First, both proprietary and partner therapeutic antibody programs are progressing. The recent announcement from our collaboration with Schering exemplifies the progress that we're making in our active partner therapeutic antibody programs.

We continue to invest in proprietary programs and the expected rate, and have optimized our portfolio by switching our attention from MOR 201 to a different anti-cancer antibody, designated MOR 202. Meanwhile, MOR 101 and MOR 102 continue on-track.

Finally, and most importantly, this quarter's numbers confirm the business is on a solid course. Losses are significantly down on the previous year, revenue is stable, and our cash position has hardly changed over the last six months. We remain confident of meeting our goals for this year.

That concludes the call. Dave and I are in the office for the rest of the day, if any of you would like to follow up with us directly. Thank you again and goodbye.