MorphoSys AG (MOR) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome today's Morphosys AG third quarter presentation conference call. For your information today's call is being recorded. At this time for opening I would like to hand the call over to Mr. Dave Lemus, please go-ahead sir.

Good morning and welcome. This is Dave Lemus CFO of Morphosys. With me today is Simon Moroney, our CEO. We are calling today from our head quarters in Munich, Germany. First we like to welcome you to this conference call and thank you for participating. During the call we would like to talk about the companies results for the first 3 quarters of 2004. Simon will begin by giving an over view of the last quarter, and I will give a review of the financial results for the first nine month and discuss the outlook for the next year. Afterwards we will open up the call up to your questions.

Before I start I want 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 the current term research program and the initiation of additional programs, should actual conditions differ from the company's assumption actual results and action may differ from those anticipated. We are therefore caution not to place undue reliance on such forward-looking statements we speak only as of the date here of. I would now like to hand over to Dr. Simon Moroney.

Thank you Dave and also from me, welcome to every one participating in this call. I would like to start my review of the quarter by highlighting the strong operational performance of the company this year as reflected in the financial results, nine months revenues are up 42% over last year, Q3 revenues are up and even more impressive 86% over last year both of the quarter and year to date the company has recorded a profit. This out standing performance is directly attributable to our portfolios of successful commercial alliances within which we are working with some of the world's leading companies to develop innovative antibody base medicines. Most significantly of all we now have enough visibility on next year that we have communicated today that we will be profitable on a net basis in 2005. This is the confirmation of something of something that has been evident now for several months mainly that more process has reached and inflection point in its development please take the trances profitability to mark the start of an exciting year for the company in which the great story continue. As I mentioned our financial performance is currently being driven by our alliances, R&D funding as well as technology and target-related license fees from these partnerships provide the lion's share of our revenues, milestone payments also contribute, although these have been a relatively minor part of total income so far. However, we expect this situation to change over the coming month as HuCAL antibodies start to move into the clinic.

During forward a clinical milestones are hit, the corresponding payments should make up a larger proportion of our revenues. The key part of our strategy is therefore to maximize the number of therapeutic antibody programs based on our HuCAL technology. We are being very successful in executing this part of our strategy. There are currently some 28 active programs ongoing within our 10 therapeutic antibody based partnerships of these programs, nine have reached the stage of pre-clinical development, the remainder being in the research phase.

During the Q3 we added the new program with in our club relation with Beringer Ingleheim . In addition during Q3 center core extended an exclusive license covering lots of programs on going in our collaboration, in this case for a therapeutic antibody in the area of inflammation.

Currently the most advanced HuCAL antibody program is that ongoing SGPC biotech, they have announced the HuCAL derive antibody 1DO9 V3 for the treatment of lymphoma as expected to enter the clinic within the next few months. With respect to other advanced program we have received information from partners that they serve as 2Q tell antibodies should enter the clinic during 2005. While partner programs from the bulk of our HuCAL-based product pipeline, our own program comprise of very important components. During Q3, we were happy to report positive animal data from our more 202 program at the annual Human Antibodies and Hybridomas conference in Dublin. The most (inaudible) program comprises fully human HuCAL antibodies against CD38, which is implicated in a number of cancers. We are looking initially at multiple myeloma a blood born cancer in which CD38 is significantly over expressed. In vitro data showed that several of our antibodies efficiently kill CD38 during cell by antibody dependent cellulitis toxicity or ADCC as well as complement dependent cider toxicity or CDC we therefore conducted a study in which CD38 bearing tumors were established in (inaudible). The antibodies were tested in two different settings, in the first study, we started treatment 14 days after an injection of cancer cells before any tumor was visible. Antibodies were then administered every other day until day 36. And the second study we started treatment with two different antibody concentrations at a time point where the tumor was clearly visible. Antibodies were administered every other day from three and five weeks respectively and the tumor developments was compared to a controlled group with no antibody treatment until the end of the study of day 80, in both settings treatment with more 202 lead to a significant retardation of tumor growth and for subgroups of animals no tumor to be detected at all at the end of the observation period. On the basis of these very promising results we are now entering discussions with potential partners, with regard to more 102, you will recall that we are conducting a comparison study in which this antibody is compared with (inaudible) and a mouth model of psoriasis. We have not counted some delays due to difficulties in sourcing satisfactory human psoriatic skin samples required for the mouth model, and this is slow to steady down somewhat. The expect results from the comparative study by the end of Q1 2005, obviously, the outcome of the study would be a key determinant of our ability to find a development promise for this program. And thinking about the opportunities for a new fire pharmaceutical from its laboratory condition, it is worth noting the recent warning issued by the FDA of increased risks of lymphoma associated with the MPGMF therapies.

We are somewhat less optimistic about the chances for commercializing more 101, the burn program as a stand alone program, discussion with potential partners have showed that the initial indication of deep journals burn is unlikely to be persuade in isolation from other in inflammatory condition. Our goal therefore is to partner more 101 and more 102 together which in turn concern is dependent on the annual basis for psoriasis, to un-pin both our partners in our own therapeutic anti-body development programs, we placed a high priority on maintaining our technology leadership, accordingly in September we took a license from Crusel (ph) to use their first T-6 selenoid for production for the immunoglobulin. This cell line is becoming widely adopted has it has two advantages, first it is the human cell line meaning the proteins produced using it contains human blood calculation patterns and therefore is likely to be immunogenic in human patient's.

Second it's a high yielding cell line important for the production of the expenses bio-pharmaceuticals, we are now working on establishing the routine production of HuCAL anti-bodies using thirsty-six(ph).

In July we entered the collaboration with Novo Plant a private company based in Berlin who was taking application of HuCAL technology into a completely new direction. Novo Plant is focused on the use of anti-bodies in veterinary applications. They are now using our HuCAL gold library to source anti-bodies against the viruses and bacteria that commonly infect the gastrointestinal tract with poultry, pig and cattle, the anti-bodies will then be added to feed stock to these animals there by obviating the use of anti-biotics. The Morphosys benefits by annual user fees but more importantly by milestones and royalties is and when products are developed and reach the market.

Morphosys retains all rights in therapeutic and diagnostic anti-bodies for applications in human health care, this collaboration exemplifies the breath of opportunities offered by HuCAL taking the technology in new directions that we would not peruse on our own.

Our earned applications for the technology outside the therapeutic area continued, here, our first agency business unit, anti-bodies by design which is active in the custom anti-body market providing HuCAL anti-bodies to life science researches world wide. One of the more interesting geographical markets here is Japan where the government has made a major commitment to industrialize G9 and proteon based research. For this reason we started the marketing relationship with the Japanese organization to help establish more (inaudible) and the HuCAL technology in the potentially very lucrative market. We were delighted therefore to be able to enter in September a marketing partnership with Gene Frontier Corperation. Gene Frontiers is mandate is to help us find customers for anti-bodies by design and also to built relationships to Japanese pharmaceutical companies, several of whom we believe are potential partners for our core therapeutics business.

On the intellectual property front, we very recently received feedback from the judge in Boston who is presiding over our dispute from the (inaudible)case. We learned that the judge was unable to rule with regard of the motion to summary judgment for which we had a recommendation for a positive ruling from the responsible magistrate.

Specifically the judge reported that he would not fulfill his obligation to avoid resulting disputed questions of fact if he is opted to summary judgment motion. He therefore decided first to undertake plain construction, well we had hopes that he would have confirmed the opinion of the magistrate without the need for further process this was not to be, however it is important to stress that this new communication is neither a setback nor a victory for more process that merely prolongs the case. It may still be that summary judgment will be made in our favor or it may in case the judge does not decided in our favor in summary judgment, but the case continues.

We remain confident of the strength of that case, and of the arguments that convince the magistrate to recommend summary judgment in our favor. As usual will keep you posted on any material development in this case.

Finally in early September we announced the departure of Thomas von Rueden our Chief Scientific Officer, to receive several questions in this regard mostly along the lines of whether the step represent will present the change of our strategy. I like to take this opportunity to stress that there is no change in our strategy and no other change in company results ownership of material all rise for any other circumstances relating to this position by the board. As mentioned at the time we thank Thomas for its contribution over the past 6 years and wish him well for the future. That concludes my summary of the quarter and now I would like to hand back to Dave for his review of the numbers.

Thank you Simon, to began the financial analyses, I would like to start with revenues, company revenues grew by 42% in the first 9 months of 2004 with 16.5 million Euro compared to 10.9 million in the same period of the last year. Reasons for the increase include recently signs collaborations with Novartis and Pfizer additionally we achieve various milestones in our existing partnerships.

Revenues from our therapeutic anti-body and target research collaborations generated 97% of revenues for the anti-body by design unit generated 3% of total revenues. So in the expenses for the first 9 months of 2004 cost total operating expenses decrease by 9% to 14.9 million Euros, cost releases in development increased to 8.9 million compared to 8.5 million Euros in the same period of the previous year.

The increase of 400,000 Euros resulted mainly from higher personnel costs corresponding to increased operational activities from new deals as well as higher amortization expense resulting from the cath license acquisition in 2003. Sales general and administrative expenses decrease by 900,000 Euros to 5.3 million. The decrease in the first three quarters of 2004 resulted mainly from reduced legal and advisory fees stemming from capital increases executed with Cath-Enzoma (ph) during the prior year.

Stock base compensation in the amount of 800,000 Euros is recorded for the first 9 months of 2004 as a non-cash charge, the decrease in stock base compensation was namely due to declining amortization expenses from options in comfortable bonds branded in prior periods as well as slower numbers of options in comfortable bonds granted in 2004, investment in property and equipment amounted to 1.3 million Euros for the first 9 months period ended December 30th 2004 comparative 500,000 for the same period of the previous year, its increase in CapEx resulted mainly from the automation needs of the anti-body by design units as well as replacement and maintenance of equipment use in other areas of the accompanied business.

Accordingly depreciation increase for the first two quarters of 2004 and account to 700,000 Euro compared to 600,000 Euro in the same period of last year. Non-operating income amounted to 700,000 Euro compared to a non-operating loss of 1.3 million Euros on September 30th 2003. a better performance in the current year stems from the absent of extraordinary interest charges in 2003 relating to the beneficial conversion of almost share issue and transaction as well as gains on further sale of marketable securities in the first 9 months of 2004.

Higher interest income as a result of higher cash balances also served to improve the result in the first 9 months of 2004. Following the positive trend establish in 2003, the company achieved net profitability for the first 9 months of 2004 in the amount of 1.3 million Euro compared to a net loss of 6.7 million Euro in the first 9 months of 2003. This represents the second quarter this year that Morphosys was bottom line profitable, taking that that analyses one step further is one created a fiscal year which included the last four quarters starting in Q4 2003 for those has been bottom line profitable on a cumulative basis for the last 12 months, with almost a 90% bottom line income return on sales, coming back to Q3 2004 positive EBITA that is EBITA not including stock base compensation amounted to 4.3 million Euro compared to a negative 2.6 million Euro loss in the same period 2003.

The resulting earnings per share for the 9 months ended in 2004 amount of $0.24 per share compared to a loss per share of 1.6 Euro in the same period of the previous year. Moving on to the balance sheet of September 30th 2004, the total number of shares issued was 5.4 million compared to 4.9 million on December 31 2003. The increase arose from conversion of the convertible bond issued to Novartis in connection with the collaboration agreement signed in May of this year. Conversion took place in June into 490,000 shares of Morphosys. On September 30th 2004, the company held 31.8 million Euro in cash, cash equipment's and marketable securities compared to 23.2 million in December 31st 2003. Before going to the guidance session I would like to again repeat today what we mentioned throughout the which is that we are publishing our year end audit results for this year according to IFRS or international accounting standards, naturally, we will also publish a reconciliation in US GAAP for consistency and comparative purposes and not least because our guidance for the year is also set in US GAAP. That being said the differences between the two sets of accounting standards is not large. To give you a flavor of what our results look light in Q3 under IFRS, we reconciled our Q3 numbers into IFRS and they look and follows.

Revenues for the first nine months of 2004 under IFRS would have been 15.7 million euro, expenses would have been 14.6 million euro, non-operating items will been a 100,000 euro loss leaving a total income of 1 million euro which is roughly 300,000 less than the result of the US GAAP looking ahead between the North East large differences between higher forays and US GAAP results as it relates to our numbers.

Now its typical during our conference call, I would treat the opportunity to confirmed financial guidance. During our last conference call we increased the revenue guidance from an original 19 million euro revenue to 21 million euro, which I would like to re-confirm again today. We still feel comfortable with 21 million euro.

Expense guidance we expect to remain constant at 23 million as estimated at the beginning of the year. Looking ahead into 2005, we believe that for fiscal year 2005, on the basis of continued operational success get more policies should be able to achieve bottom line profitability for the year. We expect revenues in line with expectations for lifetime based growth company to increase by at least 15% year-on-year. All other details are waiting to our P&L and balance sheet for 2005 would like to differ until next year as we do each year at our annual press conference when we took guidance for the year.

The last item I would like to mention today is our inclusion to tech dash index, which we are very peaceful now in September. It represents the first time we have been included in this index since it was found in last year. That concludes the financial analysis for the first nine months of 2004. We would now like to open to call up your questions.

Thank you very much sir). [Operator Instructions]. Our first question will be coming from Hans Frohnmyer (ph) of LBBW, please go-ahead sir.

Good morning congratulations to yourself. I have two questions, one is could you give us an update on your patent conflict with AME and the second is could you give this more ideas about the more 101, 102 and 202 program it seems to be now the results seems to be finished in 2005 only.

Thank you.

Again hello Frohnmyer, first of all regarding AME, the situation is as was stated during the presentation and is not much detail I can add to that as we indicated we received feedback from the judge, its ruling on the basis of recommendations from the magistrate and whereas the magistrate has recommended a ruling in our favor in summary judgment the judge is not able-- to feel able to confirm that, because there was still disputed facts and therefore has requested additional information. So as I said the during the presentation this simply represents a prolongation of the case when can not be certain by negative or positive for us which simply means a further delay before final conclusion is reached.

The information that we gave during the presentation is really as complete as can be and there is really not further information that we can provide at this point. With respect to the proprietary programs as I said more 101 based on the basis we have embraced on the discussions we have had, we feel is only going to be commercializable in a package with more 102 together you will recall that, those are two different formats against the same target, so perhaps it is not terribly surprising that a company would look to commercialized both together and would not be interested in one isolation. With regards to more 102, also as I said during the presentation the delay is due to difficulty in sourcing appropriate skin samples to imagine how this work one has to find psoriatic patients who have plaque which can be taken off the skin and transplanted on these mites of the appropriate size and thickness and so on what you tend to find in summer is that the incidents of such patients goes down since ultraviolet light is beneficial for this condition, so it is not surprising that it is some more hard to find patient's during the summer month than it is during the winter and hence the delay.

However as of indicated we do expect to have sufficient samples to be able to conduct the study over the coming months and therefore to have a conclusion in the first quarter of next year. And finally with respect to the 202. it is again as we indicated in the presentation that we have now what we feel a very good and very compelling mouth pager on the basis of which we are no having discussions with potential partners.

OK, thank you.

Thank you Mr. Frohnmyer. [Operator Instructions]. Our next question will be coming from Mr. Helmar Plats (ph) from Kleinberg (ph), please go-ahead sir

Thanks congratulations for the result excellent, some questions regarding the quarterly development if we calculate for example shift for 2003 there must have been significant high number for R&D expenses can we expected the development for Q4 2004.

Yes good morning and thank you for the comments. I think if you took a linear expert miscalculation of our expenses going forward, yes it would fall somewhat short of the 23 million that we have projected for the year, there are events both on the R&D side and the SG&A side which we believe could take place prior to the end of the year, essentially like to like to keep guidance as it is of course I am not at liberty at th9is point to discuss exactly what those events are, but we still standby our expense guidance for 2003 and obviously to make that expense guidance both R&D and GNA expenses we would have to increase in Q4 we review the current quarter.

OK fine, I had one question regarding the antibodies (inaudible)could you give us a little bit of labour regarding the contracts you could get and how you estimate the development

Yes its developing largely as we expected so in the number of way to this business works is that the custom service in which researchers basically send in their targets their antigens and the antibodies by designed unit generate antibodies against them and then essentially shift them to the customer within a two-month period.

So for the revenue recognition what's crucial here is the speed at which the customer can deliver the antigen and this was found to be somewhat unpredictable often when people are working with new team, new molecules it takes them longer to make the molecule should do to and then we have to submissively (ph) expect to this. There is a potential source of delay and in some cases we would actually seen than. From our point of view obviously in order to book the revenue we need to be able to invoice the customer which means that we need to shift the antibody in a seasonal period of time and it found that we are now pretty good of shipping well within that two months target that we initially set up though indeed we have a target of reducing that time even further so later some of the key parameters in that business deal. Obviously sourcing the customers the customer's ability to deliver their antigen and our ability consistently to make antibodies and ship it within the expected time frames.

OK . Am I right, if I assume that it is an e-commerce based basis.

Its not e-commerce, no because remember that you know we have to get physical materials in our hands that we have to get the targets physically sent to us and we can make antibody and physically send it back to the customer. So although we use the channels in order to market this service. You wouldn't really call it an e-commerce business.

OK, Thanks very much.

Welcome.

Thank you very much Mr. Plats. Our next question will be coming from Mr. Thomas Urga (ph) of (inaudible) Bank. Please go ahead sir.

We are not hearing you Thomas.

Do you hear me now.

Now we do, yes.

OK, my question was actually already asked by Helmar Plats (ph) so I have to withdraw my question, but also a concern of the Q4 expenses.

OK.

Sorry thank you.

[Operator Instructions] Dr. Moroney I would like to turn the conference back over to you for any additional or closure remarks.

Thank you very much, if there are indeed any further questions I would like to close by reminding you that the key message to take away from this call first the company's outstanding financial performance is based on our excellent operational performance, strong partnerships and a record number of on going therapeutic antibody program make a very good financial performance today and even more importantly very well the future growth an incretion of value. Our technology works it is being applied in high quality partnerships and we are convinced that it will lead to important new medicines for the treatment of intractable diseases in which will face will have a significant participation, second clues from operations Q3 2004 conference call should any of you have any additional questions Dave and I are both in the office for the reminder of the day and would be happy to talk to you one on one, thank you again to your participation and good bye.

That will conclude this conference, we thank you for your participation and wish you good day.