MorphoSys AG (MOR) 2003 Q3 法說會逐字稿

Good day, everyone, and 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, Chief Financial Officer. Please go ahead, Sir.

Good morning and welcome. This is Dave Lemus, CFO, MorphoSys. With me, today, is Simon Moroney, our CEO. We're calling you today from out headquarters in Munich, Germany.

First, we'd like to welcome you to this conference call and thank you for participating. During the call, we'd like to talk about the company's financial results for the first nine months that ended September 30, 2003. Simon will begin by giving you an overview of the last quarter. Then, I will review the financial results for the first nine months. Afterwards, 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 for 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, Dave. I'd 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 for this illustrate again the effectiveness of the measures that we implemented at the end of last year to cut costs. [Creating] expenses for the first three quarters are down by almost half compared to last year and we have reduced our net loss by 59% over the same period. Combined with a stable revenue line which reduced expenditure has resulted in a minimal reduction of our cash position of just €1.3m year-to-date. The business is financially sound.

Q3 was highlighted by significant progress in both our in-house and [partnered] product programs. We released two interim progress announcements during the quarter. The first, from our collaboration with Schering, the second, with Centocor.

The Schering announcement concerns studies conducted with a HuCAL antibody that we had generated against a cancer related target. The result of in vitro efficacy and in vivo localization studies were both positive, which all goes well for the future development of this particular antibody.

The second announcement concerned a predefined milestone that had been hit in an information program ongoing at our collaboration with Centocor. In this case, the objective of the program was the development of an antibody fulfilling no fewer than eight criteria covering affinity, specificity and other properties.

In yet another demonstration of the power of HuCAL, we were able to deliver antibodies fulfilling all criteria. In this case, we received a milestone payment, as set out in the agreement covering our collaboration.

In early October, we announced the first animal data from our proprietary product programs. In these programs, we aim to develop two antibodies designated MOR101 and MOR102 for the treatment of second degree burn and chronic inflammatory disorders respectively. Both antibodies are directed against the same target molecule, ICAM1, and the programs are covered by an exclusive license that we secured from Boehringer Ingleheim earlier this year. Most importantly, Boehringer Ingleheim already observed evidence of efficacy in Phase 2 clinical trials with a mouse antibody called BIRR-1 against this target in secondary burn and with rheumatoid arthritis. Having completed the in vitro profiling of MOR101 and MOR102, both of which were generated from MorphoSys HuCAL GOLD antibody library, we have established that they have potency equivalent to the Boehringer Ingleheim [Muhring] antibody.

Our strategy on the burn indication is to develop a [FAB] fragment. The rationale is that in the acute inflammatory setting treatment with a FAB fragment, which will have a shorter half life than an IGG is sufficient.

Secondly, antibody fragments have significant advantages from the perspective of cost of goods, since they can be manufactured in bacteria. Our first objective has, therefore, been to compare the original Boehringer Ingleheim antibody with the corresponding chimeric FAB fragment in a rabbit model of burn. We used the established rabbit model because BIRR-1 has already been shown to be efficacious in this model.

The results that we announced on October, 9 at a conference in Japan, show that these two compounds behave equivalently in the rabbit model. This result clears the way to the continued development of the HuCAL GOLD derived FAB fragment MOR101.

In the case of MOR102, we announced positive data in a mouse model of psoriasis. This study compared MOR102 with [declamethosone] as a positive control in a skid mouse model of human psoriasis. The data showed that the antibody could improve the typical hallmarks of lesional psoriasis. For example, epidermal thickening a [acamphosis] was reduced by approximately 40%. We're now conducting additional studies in which we compare MOR102 with other biologics, either approved or pending approval, for the treatment of psoriasis.

We are engaged in discussions about [parboring] both of these antibody programs. It's important to point out that we see the indications we have looked as indicators of the activity of MOR101 and MOR102. As has been well established by other anti-inflammatories, such as those that act against TNF, there may well be additional clinical applications. We, therefore, do not rule out the possibility that we may partner these compounds in other indications. Our goal is to find a suitable for one or both of these programs by the middle of next year.

I'd like to finish by looking forward to year end. One of our stated goals for this year is to have clarity on which our partner programs would enter human clinical trials next year. GPC Biotech has recently communicated some of its pre-clinical data of a HuCAL antibody that MorphoSys generated in our collaboration with them and confirmed that that planned to commence clinical trials in 2004.

In addition, Bio has informed us that they hope to take the first antibody from our coloration into the clinic next year. We await information from other partners and hope to be able to add to this list in due course.

Finally, we continue to discuss with an array of potential partners agreements on new therapeutic antibody generation and/or technology collaborations. It is premature to predict the outcome of these discussions, but we are confident that we will have news on new deals in the near future.

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

Thank you, Simon. To begin the financial analysis, I'd like to start with operating revenues. In the first nine months of 2003, company revenues amounted to €10.9 compared to €12.4m in the same period of 2002. A decrease of 13%. Using constant exchange rates to convert our US dollar revenues, sales would have decreased by 9% in this period.

The vast majority of revenues recorded in 2003 relate to annual license fees received from partners. For the first nine months of 2003, total operating expenses, including stock based compensation expense, decreased to €16.3m resulting in an operating loss of €5.4m. A decrease of 69% comparing the same period of the prior year.

In general terms, the reduction [inaudible] of an expense resulted, in part, from the Company's restructuring implemented in Q4 2004, which resulted in lower personnel costs as well as lower product development costs.

The reduction in 2003 was also strongly influenced by the patent licensing agreements and settlements entered into in 2002. More specifically, the [inaudible] and XOMA agreements.

Costs for research and development decreased by €3.7m to €8.5m. The decrease in research and development 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.

Sales, general and administrative expenses amounted to €6.2m compared to €14.3m in the same period of the previous year. The decrease in general and administrative expenses was mainly due to the decrease in patent litigation costs, which arose in large part as a result of the settlement with Cambridge Antibody Technology in December 2002.

Stock base compensation in the amount of €1.6m was recorded for the first nine months of 2003, compared to €3.4m during the first nine months of 2002, and is a non-cash charge resulting from the expensing of options.

The decrease in stock based compensation is mainly due to declining expenses from options and convertible bonds granted in prior periods. Stock based compensation for new grants was also lowered to the reduced stock price of MorphoSys shares underlining the options in convertible bonds programs at the time of grant.

Moving on to capex, during the first nine months of 2003 and 2002, total investment in intangibles amounted to €6.1m and €3.5m respectively. The increase in 2003 was due to licenses for [CAT], which were capitalized upon share issuance in 2003.

For the first nine months of the year, amortization and depreciation amounted to €1.1m and €0.6m, and investment in the property, plant and equipment amounted to 0.5m respectively.

During the third quarter, 588,160 shares were issued to Cambridge Antibody Technology. With the issuance of the shares, MorphoSys has fulfilled its obligation under the two companies' settlement agreement from December 2002.

On a similar note, MorphoSys was able to help XOMA, recipient of the second MorphoSys capital issuance in 2003, to successfully clear its stake of 363,000 shares in MorphoSys, and this was planned.

For the first six months of 2003, the Company posted a net loss of €6.7m, compared to €16.5m in the same period of the previous year. A reduction of, approximately, 59%.

The resulting loss per share for the first nine months 2003 amounted to €1.6 compared to €4.23 for the first nine months of 2002.

On September 30, 2003, there were 4,841,578 ordinary shares outstanding.

On September 30, 2003, the Company had €17.8m in cash and cash equivalent and marketable securities, compared to €19.1m at December 31, 2002. A decrease of only €1.3m. Cash used in operating activities for the nine months 2003, amounted to €1.4m, compared to €7.8m in the first nine months of 2002, demonstrating again our low cash burn resulting from our successfully implemented restructuring.

The financial results we presented today continue to reflect the positive benefits associated with the Company's restructuring moves undertaken in November 2002.

For the time being, we make no change from the guidance given earlier in the year. That being said, we are looking at the possibility of lowering expenses guidance and making changes to the classification of operating versus non-operating items. But we are currently today not in a position to make those changes.

That concludes the financial analysis for the first nine months of 2003.

We'd now like to open the call up to your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you're using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Thank you. We'll take our first question from Thomas Höger with DZ. Please go ahead.

Good morning. I have a question concerning a recent announcement on your web page that you're alluding to antibodies by design. Can you elaborate a little bit on this possibly new business unit?

Yes. This is-- good morning, Thomas.

Good morning.

This is an initiative that we have recently commenced to essentially explore the opportunities for our technology, the HuCAL technology in the antibody re-agent market. I think the key word here is explore. It's very much an exploratory unit that we've created within the company here, to simply investigate this area and to do initial-- some initial sales and marketing activities to see what kind of interest there is and applying our technology to generate antibody re-agents.

Okay. How many people are working on this project?

There's currently ten people in that unit.

Okay. Thank you very much.

And as a reminder, please press star one on your touchtone telephone to ask a question.

Hello.

Yes. Hello.

Hello. This is Thomas [Heikler] speaking from Frankfurt.

Hello Thomas.

I would like to ask a question to Dave Lemus concerning the balance sheet. Could you remind us on the swing of other-- I don't [inaudible] that there is a really remarkable swing between the current data and the year end data on December 20 last year.

Yes. Okay. So, you're probably, I'm guessing, talking about the licensing amount of approximately €8.9m. No. The reason that's changed is because shortly afterward quarter end in Q2, we were able to rate the CAT shares related to the licensing agreement. Up to that point, we hadn't capitalized from an asset for the CAT licensing agreement. According to US GAAP, we can only do that once the shares were actually raised, and once we raised those shares you see the corresponding, I guess, approximately almost €6m asset there, which didn't existed year end, obviously. But that's related to the amount of license that we have received from CAT, which was capitalized once we raised the shares in July

Okay. Thank you.

As another reminder, to ask a question, please press star one on your touchtone telephone. And we'll take a follow up question from Thomas Höger. Please go ahead, Sir.

Thomas Höger: Okay. Thanks. So, given-- given the reduced cash loan rate and assuming that the [state] of MorphoSys will, say, increase by 10% or 15% next year, will it be possible to reach breakeven next year?

We don't exclude the possibility that we could achieve breakeven next year. As we've done this, we prefer to give the guidance either later this year or at our annual press conference next year. We don't exclude it, but, at this point, it would be premature for us to give guidance for next year. There are still a number things which, obviously, we want to take a look at towards the end of the year to make statements like that.

Thomas Höger: Sure. Does it mainly depend on the sales increase, or does it more or less depend on, say, hiring new people or increasing the expenses?

Again, I really don't want to give detail on-- what assumptions or what things need to happen by end of the year or by the time of annual press conference. I think, at this point, I think we'd like to just say that it is possible, we don't exclude it and we will, accordingly, give that guidance to the market once we're in a position to do so. Today, we're not in that position.

And, Thomas, maybe just to supplement that. As I mentioned in my presentation, we have information for GPC and Bio that they expect to take compounds into the clinic next year. Obviously, those decisions area associated with milestone payments, but they're also completely out of our control. Should either of those companies not do that, for whatever reason, either strategic or developmental or whatever, then obviously that would have an impact on the kind of revenues we could expect next year. So, that's simply a result of the nature of the business where increasingly milestone decisions are taken out of our hands.

Thomas Höger: Okay. Thank you.

Thank you, another reminder. To ask a question please press star one on your touchtone telephone. And we'll take the next question from Mr Dr. Martin Possienke with Equinet. Please go ahead.

Yes. Good morning, everybody. After some [inaudible] shares in Q3, maybe you are aware what CAT plans to do with its participation in MorphoSys and in this context, just for clarification, Schering's do owns its 358,000 shares in MorphoSys so, or maybe you can confirm that? And, so, I calculated a [inaudible] of around 80%? Maybe you can confirm this too? And then maybe you can comment on Schering aim to combine [Netigen] with a European biotech active in the antibody field?

Yeah. I'll take the share questions-- the share related question. So, as it relates to Schering, according to our information, they haven't sold, but, again, perhaps to get the latest information you may have to discuss that with Schering. but, according to what we know, they haven't sold.

As it related to XOMA, actually XOMA didn't sell all of it Q3. They had been selling throughout the year, but cleared their position in Q3.

As it relates to CAT, we know and we have communicated to the market, that they are subject to a lock-up agreement and, obviously, that's confidential to the Settlement Agreement which we signed last year. So, we can't tell you when that lock-up runs off and, I guess, to determine what exactly CAT wants to do with our shares, over what time, probably, CAT would be the best people to ask.

That being said, we know when we took-- when we made the capital increase to XOMA, we suspected, very strongly, based on what they communicated to us, that they would eventually clear the position. So, we were entirely aware that, at some point, they would clear their position and they hadn't taken a strategic interest in the company. As to whether or not that applies to CAT, again, perhaps CAT would be in a better position to answer.

As a free float it's around 80% now.

Yes. Okay. Thank you.

I'll take the Schering question. I assume that you're referring to an announcement that appeared earlier this week by Herr [Spikercherter] referring to their intentions regarding Netigen.

Yes, on Monday.

We also saw that announcement and our knowledge about that announcement is probably as much as your knowledge is about that announcement is, it's limited to what stood in the announcement itself.

Okay. As a comment. Okay. Thank you.

Thank you. As there are no further questions remaining in queue, I'd like to hand it over yourselves, Mr Moroney and Mr Lemus.

Thank you very much. If there are no further questions, I'd like to remind you of the key messages to take away before we complete the call.

Once again, the financial results for this quarter illustrate our effective costs control and our low cash burn. The progress that we announced in our collaborations with Schering and Centocor again exemplify our success in our applying our HuCAL technology in drug development.

Finally, the first pre-clinical data in respect of our MOR101 and MOR102 programs is very promising and will strengthen our efforts to find a strong development path for these compounds.

We're continuing our studies to bolster the data packages we've already assembled.

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

Thank you, again, and goodbye.

That will now conclude today's conference call. Thanks for joining us.