MorphoSys AG (MOR) 2004 Q4 法說會逐字稿

It's a pleasure to welcome all of you to our yearly press conference. My name is Claudia Gutjahr-Loser, I'm responsible for Corporate Communications at MorphoSys. With me are my colleagues, Dr. Simon Moroney, our CEO, and Dave Lemus, our CFO. Today we will present the Company's annual results for the year 2004, and an outlook for 2005. At the end of our presentation, we will take questions with this conference audience and also participants listening by conference call may have.

For all people listening in by conference call, you can find the slides of our presentation on our corporate website under Events and Conference Calls. We have planned approximately 1 hour for the presentations, afterwards we will answer your questions from the conference call and also from the audience. After the conference we will invite you to a lunch outside, and would be happy if you would stay a little bit longer. There will be also possibility for some more discussions.

Before we start - can you please put the next slide, please Bev. We 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 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 like now to hand over to Dr. Simon Moroney.

Thank you Claudia, and also from me welcome to the 2005 MorphoSys results conference. First of all I'd like to express my thanks for the forgiveness of our German friends here in Frankfurt, that we do this conference as usual in English. The reason we do that is so that we can have an international conference in parallel, and so that everyone hears the same message at exactly the same time. So thank you to the Germans here in Frankfurt.

2004 was an outstanding year for MorphoSys. For the first time, and faster than we expected it, we reached profitability. We entered a major, strategic partnership with Novartis which I'll come on to and describe in some detail. We substantially strengthened our product pipeline.

Prior to the end of 2004, the first HuCAL antibody was approved for administration to man, and that antibody entered the clinic on February 1 of this year. We also obtained and published very promising pre-clinical data on our own cancer program, MOR202. And in addition, and equally importantly, we significantly increased the number of programs ongoing with our partners.

Just after the end of the year, in January of this year, we completed the acquisition of Biogenesis, which is intended to substantially strengthen our antibody -- our research antibody program and business. MorphoSys is therefore well-positioned for further growth going forward.

The Company has 2 areas of strategic focus, both of which are based on our priority technology, HuCAL. On the left hand side of this chart is our main area of focus, namely therapeutic antibodies. On the right hand side is something that grew out of our initiative called Antibodies by Design, and that is the exploration of the HuCAL technology in the research antibodies field. I intend over the next 30 minutes or so, to give you a review of 2004 in respect of each of these areas in turn.

First of all, looking at the therapeutic antibodies side of the business. We've made excellent progress in the therapeutic antibody field during 2004. We further consolidated our position as a technological leader in this space. The partnerships we have speak for themselves.

Companies of the quality of Pfizer, Novartis, Centocor, Schering, Bayer and so on, don't likely choose a technology platform for their future drug development. And the fact that those companies have all chosen HuCAL is a massive vote of confidence in the technology. We now have collaborations with 5 of the world's leading 10 pharmaceutical companies.

As I mentioned, the pipeline of partnered, ongoing projects has grown substantially during 2004. We started the year with 17 active programs, we finished the year with 24 active programs. What that means, of course, is not only research funding today for MorphoSys, but it also means milestones in the near-term and, when products come to market, royalties.

Now this is a point that is always worth emphasizing, that for every single program that's based on a HuCAL antibody, we will gain milestones and royalties as those products come to market. So that, of course, represents significant future upside for the Company, and is the basis for our goal to maximize the number of HuCAL-based therapeutic programs ongoing.

We therefore continue to look for new partners. We continue to encourage our existing partners to start new programs with us. We're looking to build as broad a pipeline of HuCAL-based therapeutic antibodies as we can, and in 2004 we made a great step forwards in that direction.

The partnerships themselves - some of the companies I've mentioned are long-term partnerships, and this chart gives you a sense of how those deals look in terms of their duration. The original deal of this magnitude goes back to 1999 with Bayer, and almost on an annual basis thereafter, we're able to enter additional major, long-term commitments with other leading pharmaceutical companies.

And you can see from this chart the Novartis deal which we signed during 2004, but also the extensions that we entered into with Schering and Centocor.

Want to spend a minute or two talking about Novartis. We cannot underestimate the importance of this deal for MorphoSys. For Novartis this was a major, strategic move to build a therapeutic antibody pipeline of the future. For us it was our largest partnership to date by far. We were very happy to welcome Novartis as a shareholder to MorphoSys. Novartis took a 10% stake in the Company, which really underlines the strategic nature of this collaboration for them.

When the deal was announced, Mark Fishman, the Head of Research at Novartis, made very clear the reason why Novartis had chosen MorphoSys, and I think it's worth reminding ourselves of that quote of his. He talked about our highly differentiated technology. We're often asked what is it about MorphoSys and HuCAL that is so different from other technologies in this space. And I think this external validation, that we have a really unique and differentiated technology, is of utmost importance for us.

To some details of the alliance. The scope is that this should be the basis of Novartis' future therapeutic efforts. The term is initially for 3 years - Novartis has an option to extend it for a further 2 years, making 5 years altogether. Equity - I mentioned that Novartis took an equity stake, they paid €9m for that. In addition to that, there are a number of payments, not all of which we've been able to talk about openly due to the confidentiality of certain terms of the agreement.

What we can tell you is that there is a commitment from Novartis to pay at least $30m, for research support and license payments over the first 3 years of the collaboration. On a per program, that is per therapeutic antibody target that Novartis brings to us, they pay additional fees. License fees, for example, to access the HuCAL technology in respect of that particular target.

For the first time, we granted a partner an option to internalize the technology fully and permanently. So that means that Novartis can come to us at any time over the next 3 years and say, 'Now we would like to have the entire HuCAL technology installed at Novartis permanently'. This is something we have not done in the past because we have felt that we wouldn't be able to extract sufficient value from it.

In this case we could, and although we can't mention precisely the payment that would arise in such a case, it is a significant double digit million payment that we would receive. Importantly, and again to emphasize this, on every HuCAL product that would come to market - either from the initial phase or in the future, if Novartis should use HuCAL in-house to devise antibody products - we would get milestones and royalties on all products.

In addition very late in the year, around Christmas, kind of as usual, we signed additional partnerships - 2 in this case. And these were, in the case of Centocor, a -- an early extension of our existing deal. We were able to agree with Centocor to extend the deal through the end of 2007, and we got a commitment from Centocor to commence at least a further 2 therapeutic antibody programs during the course of 2005.

At the same time Centocor, and I think this is a reflection of their happiness with the collaboration so far, increased the level of R&D funding. So we have a bigger team working on their behalf at MorphoSys now than we did in the past.

Schering had been due to expire at the end of last year. That was initially a 3-year deal which was scheduled to expire at the end of '04, and we were happily able to negotiate an extension to that deal for a further 2 years, to the end of 2006, with again an option for Schering to extend it for a further year. So we could get a further 3-year extension from that deal.

We have granted additional, exclusive licenses to Schering in respect of a number projects that have been ongoing, and Schering have sought and received from us options on exclusive licenses for in vivo diagnostics. You may be aware that in vivo diagnostics for Schering is an important field, and this is something that they specially requested and which we were happy to provide them with.

I mentioned that the first HuCAL antibody has now entered clinical trials. That is, of course, the antibody that we made for GPC Biotech, and that antibody entered a European Phase 1 trial which could be somewhere between 28 and 43 patients. That trial started on February 1 of this year. The trial is in relapsed or refractory B cell lymphoma and, of course, we eagerly await the outcome of that Phase 1 trial.

There is some now very interesting animal data that's been obtained with this antibody, and here we show just 1 example of that. This is a study that a friend of GPC Biotech conducted in combination with Rituxan, the anti-CD20 antibody on the market for lymphoma. And if you look at this data here, you'll see a considerable effect of these 2 antibodies in combination. Basically this is administration of antibody to a mouse model in which a tumor has been established.

So the orange colored line there is the control, and as you can see, after about 25 days all of the animals in that control group were either paralyzed or dead. So the tumor was fatal in 100% of the cases after 25 days. In the treatment group, the blue line here, you'll see that about a quarter of the animals survived even out to 3.5 months -- sorry, 2.5 months.

So, in other words, we're seeing a significant delay, the blue line has moved to the right compared to the orange line, and we're even seeing a significant improvement in overall survival in this animal study. So these are promising, animal data which give us confidence that the compound should also work in man, and, therefore, we eagerly await the results of this trial.

Altogether, the MorphoSys partnered program pipeline looks something like this. As I mentioned, there are some 24 programs currently ongoing. The GPC antibody 1DO9C3 is the first to enter the clinic, but we now have information from our other partners in respect of a further 3 programs that, by this time next year, could also be in the clinic.

Obviously we can't be 100% sure of that but this is based on feedback from other partners, that an additional 3 of our HuCAL antibodies could be in clinical trials within a year from now, and we're obviously very hopeful that that will be the case. So you can see in total the pipeline is very broad and is now advancing nicely towards clinical development.

Turning now to our own efforts. Everything I've talked about so far have been programs that are ongoing with partners. As you will recall, we have an internal program where we have initiated our own therapeutic antibody development against selected targets. The 2 programs you've heard most about so far, MOR101 and 102 for inflammatory conditions, are both pre-clinical development.

MOR102 - we published some interesting data, a mouse model of cirrhosis, and what we're currently doing is doing a comparative study of MOR102 against the marketed, biological drugs Amevive and Raptiva, also in a cirrhosis model. The data for that study we expect on schedule at the end of this quarter, and we will, of course, report the outcome of that study as soon as that -- those data are available, and we've had a chance to analyze them.

Talking to potential partners about these compounds, we're seeing increasing interest. Of course, people are all awaiting the outcome of this comparative study, but we're hearing more and more the concerns of the anti-TNF approaches. I think there are long-term concerns that mechanisms that rely on inhibition of TNF, may have long-term safety issues. And, therefore, particularly for non-life threatening such as cirrhosis, alternative approaches, alternative modes of action are definitely of interest.

So we arrive -- await the outcome of this comparative study with interest. MOR202 - as I mentioned we published animal data in the third quarter of last year, and I'll come on to that. Being a cancer antibody, it's rather easy to raise interest from potential partners for this compound. Many, many pharma and biotech companies are looking for new cancer compounds with new mechanisms of action, and therefore we're getting good traction in talking to potential partners about this program.

For the first time, I can mention today that we have initiated a fourth program which we call MOR103. This is a program in the area of inflammation. I'm not yet prepared to name the target that we're working on here, suffice to say that we have generated interesting antibodies, and that this is currently in the research phase.

Looking now at just 1 example of the data that we generated for MOR203. We're looking at this compound initially in multiple myeloma, but it definitely has potential in addition in the chronic and acute leukaemias. This study was conducted in a mouse model, established mouse model of multiple myeloma. Essentially what you do, is you administer tumor cells to the mouse. You wait until the tumor has formed to a size that you can detect, and we then administered antibodies.

And what this chart shows you is, it shows you the growth in the volume of the tumor over time. We started treatment after about 30 days, which was the time taken for a tumor to establish and to be detectable. And you see here the blue line which is the control, the tumor continued to grow rapidly thereafter.

The red line is the group of mice treated with MOR202, 1 of the MOR202 series of compounds, and you can see there a significant reduction in the volume of the tumor in that group of animals. Although you don't see the data here, what we have shown is that reduction in tumor volume is dose dependent. Which is good because it says that the compound is working as you predicted. And in this case, 4 out of 9 - it's almost half of the animals - were actually tumor-free when the study was completed.

So not only did we reduce tumor growth but we were actually able to eliminate tumor in this case. These are very promising data and this is -- this set of data and other data are the basis for the discussions that we're having at the moment with potential partners. And the basis for quite some excitement about this compound.

I want to turn now to the second side of our business, namely research antibody. Here again, we made good progress during 2004. The revenues from our Antibodies by Design initiative reached €0.8m during the year. But perhaps more importantly still, we now have 115 active customers ordering HuCAL antibodies through the Antibodies by Design unit in some 17 countries. So we really have spread our marketing reach very successfully in year 1.

One of the things we've had to overcome is, if you like, a lack of knowledge about the technology in this field. In the therapeutic space we're very well-known, and people who develop therapeutic antibodies understand what technological options are available. They understand the importance of human antibodies, they understand the power of our technology.

In this reagent space it's a different challenge for us in educating people what's important. So we've had to really invest in taking our time to explain to people why HuCAL is actually a good technology in the reagent space as well. But we're getting there. We have definitely increasing acceptance amongst customers, that this technology can replace what they're used to, namely the mouse-based antibodies, for research applications.

It also took us somewhat longer than we thought to convince catalog companies, to make new products based on the technology. But towards the end of the year we signed a deal with EMD Biosciences, under which they introduced the first HuCAL-based antibody as a catalog product.

Perhaps the most significant development of all in this space, was our acquisition of Biogenesis, and I'll come on to this and talk about it in a little more detail. But it was an important step for us, towards our goal of establishing HuCAL as the industry standard for research antibodies, as we're well on the way to doing in the therapeutic antibody space.

Looking at the Antibodies by Design business - the unit showed good growth throughout the year. This is a cumulative chart, I'd like to point out, but we saw steady and continuing growth throughout the course of the year. Our expectations for the year, which we communicated during the course of last year, were around €1m of new revenue for the Antibodies by Design unit.

Of course, when you commence a completely new business in virgin territory, it's often difficult to predict how the business is going to develop. And therefore, the fact that we came in about €200,000 short of that goal I don't regard as a major setback, but we learned a lot during this year. For example, if you look at the left hand bar on this chart, you'll see that we expected to do some business with catalog companies. That is EMD Biosciences type companies who would access HuCAL antibodies and sell them through their catalogs.

But we also expected to do company -- business with array companies. We've had many, many discussions with companies making antibody chips for diagnostic and research applications. What turned out, in fact, was that the core business which is the custom business - that is, customers coming to us and ordering HuCAL antibodies that we make in-house - the custom business exceeded our expectations. But actually the catalog and the array businesses were non-existent.

So, as I say, we -- overall we weren't disappointed because the business got off to a start, but we learned a lot about where we would be able to do business in this space.

If you look at what customers need in the research antibody field and you look at, for example, surveys which ask people what's important for you in this space. Here on this chart you'll see some of the issues that customers rate as important. So, for example, if you look at the criteria that people call essential or very important, speed is most important of all for those people.

Other important factors are support, price obviously, and value. Is the antibody in stock? That means can I get it tomorrow or the next day, and what is the variety of antibodies that the supplier can offer? For us, what we can definitely compete on is speed and this is really a key advantage of the HuCAL technology. We're now at the stage where we can routinely turn around orders in 8 weeks. So that means from getting the partners' target to shipping the antibody takes 8 weeks, and we think we can reduce that.

And if you compare that to the 4 to 6 or 9 months that it takes for a conventional mouse antibody, we have a significant advantage in terms of speed. If we just go back for 1 second. Clearly where we are lacking is, do we have the antibodies in stock, and this is what the catalog companies have and which we lack. Although we have the antibodies in the HuCAL collection, we have to fish them out and that takes 8 weeks.

Catalog companies have an advantage that we lack, which is they have a collection of antibodies already in stock, it can be shipped immediately. So that was clearly where we were lacking, and that was 1 of the arguments for us behind the Biogenesis acquisition.

So what is the strategic rationale for our acquisition of Biogenesis? As I mentioned, the uptake of HuCAL by potential catalog partners was slower than we expected, and that it's clear that having a catalog capability is important for potential customers in this field. So therefore we said to ourselves, although we're technologically strong in the market place, in terms of sales and marketing, we're weak. And, therefore, we said what we need is not just a collaboration with a catalog company, we need to acquire a catalog company.

What we've gained through acquiring Biogenesis is access to sales channels. Biogenesis has tens of thousands of contacts, there's thousands of active customers. There's a worldwide network of distributors. It has good established contacts and contracts with diagnostics companies.

In addition, they have an existing product portfolio of well over 4,000 antibodies in a catalog, which means they've got customers who are calling on a daily basis looking for new reagents. They also bring to us valuable expertise. They understand this research antibody market. They can provide input on what are the next hot products, and in which direction should we go in developing HuCAL-based reagents.

In addition, we see their know-how in the diagnostics as being invaluable. Diagnostics is, until now, something that we haven't tackled in a major way but we see the potential now, at least to do that with Biogenesis. Biogenesis has bought us a presence in 2 very important markets, through their sites in the UK and in New Hampshire in the US. We now have a presence in 2 of the most important life science markets, and in the US the most important life science market.

So we're delighted to be back in the US, and to have a presence and a sales and marketing force actually on the ground there. They've broadened our customer base. The current Antibodies by Design customer base, as I mentioned, 117 or so customers, spread across between North America, Europe, Asia, the Asia Pacific and Australasia region, and even South Africa. So there we have established contacts already.

But together with Biogenesis, we're much stronger. In Europe, particularly in the UK, in North America, and they also have activities in the Asia and Australasia regions.

Turning to other progress we made during 2004. New markets continue to be important for us, and during the course of the year we entered a collaboration with GeneFrontier Corporation. GeneFrontier is a Japanese company, which is helping us in business development and in marketing of the research antibody capability in Japan.

Japan is a very interesting life science market. The Japanese government recognizes that it missed the boat on the human genenome project, and it's determined not to do that when it comes to proteomics research. And, therefore, research on proteins, research that needs antibodies, is a particular importance and a particular priority Japan. And therefore, we have targeted that as a market that we want to pursue more aggressively, and our colleagues at GeneFrontier are helping us with that.

In addition, we took application of HuCAL into new directions. During the course of 2004 we signed a deal with Novoplant that is a Berlin company, which is developing antibodies for animal feed applications. This is something that we would not have done on our own, but simply highlights the fact that the HuCAL platform can go in various directions. And we're very happy to be able to co-operate with Novoplant in this area.

Importantly for us, MorphoSys retains rights to any diagnostic or therapeutic antibodies that should result from that collaboration. Thirdly, technology - we're not ignoring technological development. We recognize that we're leading in this field through having invested in the technology over the past years. We continue to do so, it's a priority for us.

During the course of 2004 we secured access to 2 human cell lines for the production of therapeutic antibodies. Namely PerC6 which license from Crucell, and HKB11 which is a human cell line that we access through our collaboration with Bayer. These 2 cell lines give us the ability to produce antibodies more efficiently, and also to produce antibodies that are human in their glycosylation patterns, and therefore should be completed indistinguishable from normal human antibodies.

Finally, the last point I'd like to make in reviewing 2004, before I hand over to Dave Lemus for the financial results. On the intellectual property side, we further strengthened our HuCAL estate, through granted patents in the US. And also our core screening technology, CysDisplay, was further protected through the allowance of a patent in the US.

The AME case you recall, which is in litigation, continues. We heard from the judge that the initial, favorable ruling from the magistrate needed further analysis from his perspective. And accordingly there will be a Markman hearing in April of this year on that case. Let me say here that we continue to be confident of our position, vis-a-vis AME in that case.

Finally, a look at the goals that we set ourselves at the beginning of last year, and how well we did against those goals. We set ourselves the goal of reaching profitability on an EBITDA basis. As you've seen, we've exceeded that dramatically by becoming profitable on a net basis. We projected revenue growth of some 20%, we massively exceeded that with revenue growth of over 40%.

We wanted to start at least 5 new partnered programs. As you've seen, we've started 7 new partnered programs. We wanted the first HuCAL antibody to enter the clinic, that we achieved. We wanted to obtain good animal data for our MOR202 program, that we achieved. The only goal that we were unable to achieve during the course of last year, and I think this has a lot to do with delays in the animal studies that we were conducting, was to partner the ICAM-1 program.

As I mentioned, we continue to be excited about that program, and I continue to believe that either that or potentially MOR202 will be partnered during the course of this year.

That concludes my overview of 2004, and with that I'd like to hand over to Dave who will talk you through the financial results.

Many thanks Simon. In opening, I'm very happy to say that financially speaking 2004 was a bell weather year for MorphoSys. The financial success that we had was driven in large part due to operational successes. On the basis of newly signed deals, extension of existing deals, and the achievement of milestones, MorphoSys was able to increase revenues by about 44%, and our cash position increased by over 60% to €37m at year-end.

We had again like last year, a positive EBITDA result and a positive cash flow from operations. New for this, as of course you know, we were profitable on a bottom line basis. These factors ultimately led the Company's entry into the TecDAX in September of 2004. This type of financial performance is not built overnight. If you look at our revenues for the last 6 years we have grown organically, at a rate of a compound annual growth rate of 32%.

Looking ahead, it's an important goal for us to increase revenues and continue down a strong path of growth. As we've said in the past, what we try to achieve is at least 15%, which is what we think is a growth rate consistent with other life science growth companies. As you can see from the graph, however, we have more than doubled that performance over the last 6 years on average.

Also what contributed to this year's excellent financial result was the restructuring efforts that we initiated back in 2002. As you can see, we have significantly reduced our expense base since that time but, nonetheless, been able to stabilize and then grow our top line This against the backdrop of investing in own proprietary product programs.

Also, as mentioned throughout the year 2004, we have switched our accounting standards from US GAAP to IFRS standards for the year-end accounts only. We gave guidance at the beginning of the year in US GAAP, and reported our first 3 quarters according to US GAAP accounting. For the year-end accounts, we prepared our formal accounts in IFRS, but have also provided today a comparison with US GAAP.

As you can see from the table, the differences between US GAAP and IFRS are relatively small. Operating revenues for 2004 were above our latest up guided -- updated guidance given summer of 2004, of €21m. Full year revenue under IFRS and US GAAP was €22m, and as you can see there's no big difference between IFRS and US GAAP, as it relates to revenue accounting.

Operating expenses were somewhat lower than expected at year-end, and amounted to €21.7m under US GAAP, compared to €21.3m under IFRS. The main difference here is that certain of our intangible expenses under US GAAP were capitalized for a longer period than under IFRS, and hence the amortization expense is somewhat higher.

Although I haven't presented a balance sheet here, comparing IFRS versus US GAAP, you would see that this would be the one big item that is different in US GAAP than IFRS. Namely, our intangibles assets are €3.2m less under IFRS than US GAAP. In terms of non-operating items, we had a €600,000 higher result under US GAAP than IFRS.

The result comes -- The gain comes as a result of gains on marketable securities, which are marked up in value under IFRS but not under US GAAP. Under US GAAP they're booked at the lower of cost or market, hence the difference. Claudia?

I'd now like to move on to our full IFRS results for 2004. As I said before, revenues for the full year 2004 increased by 44% to €22m, compared to €15.3m in the prior year. The reasons for the increase relate to new co-operations, extension of existing deals, and the achievement of milestones. So our operating expenses increased by 16% to 22 -- €21.3m, an increase of €2.9m. The increase in expense was driven mainly by higher personnel costs, higher intangibles cost resulting from licenses taken last year.

Comparing this to guidance, as I said, they're somewhat under-guidance due to the fact that certain acquisitions costs, involved with the acquisition of Biogenesis, were capitalized under IFRS and not expensed. Hence, we came in somewhat lower than our analyst guidance that we gave at the beginning of the year. Non-operating loss increased by €0.3m to €0.4m, and was mainly due to higher losses arising from foreign currency transactions, which were only partially offset by the Company's foreign hedging policy.

In 2004, MorphoSys achieved a net income of €0.3m under IFRS. The resulting net income per share for the year amounted to €0.05 per share, compared to a €0.72 loss per share in the prior year.

Looking ahead, now that we report under IFRS, the reporting guidelines for segment reporting are somewhat more stringent than under US GAAP. Therefore, for 2005 and beyond the Company intends to provide financial segment reporting, for what we presently have identified as 2 segments.

The first segment we call the therapeutic antibody segment, and this segment comprises all activities of MorphoSys where we are involved in creating a drug. In this unit we include the collaborations with all of our 13 active partners. Also in this segment we include our own therapeutic antibody drug programs because it involves making drugs and currently, as you've heard today, that program consists of 10 -- MOR101, 102, 202 and 103.

Going back to the chart again, we do have a second segment and that includes MorphoSys's activities in the non-therapeutic applications of HuCAL, mainly the research antibody field presently. This segment we call the MorphoSys research antibody segment, and includes our current business which we do under the brand of Antibodies by Design. And looking ahead into 2005, it will from now also include the results of the Biogenesis acquisition.

Looking at these segments financially for 2004 under IFRS, you can see that the majority of our revenues was generated in therapeutic antibody segment. Revenues from the antibody research segment amounted to 4% of the total, or about €800,000. As we said before, revenues for the research segment were somewhat at the low end of our expectations. Some of that had to do with shipping delays, a longer than expected anogen expression by our customers.

However, we feel that that business is very interesting. We continue to expect to invest into it, due to the excellent growth potential that we see for that business in the coming years.

Another way to look at our revenues is to see how they're split by geography and by source. The biggest part of revenues in 2004 obviously came from our annual licensing fees with partners such as Novartis, Bayer, Centocor, and so forth. However, milestones revenues gained in importance, not only in relative terms but also in absolute terms compared to the prior year.

For 2004 revenues amounted to €1.4m for the year, or about 6% of total revenues, compared to roughly half that amount in 2003. If you take a look at where sales geographically arose, 55% of MorphoSys's commercial revenues were generated in North America, and 45% in Europe. Revenues in Europe massively increased in relative terms, compared to the prior year - in no small part due to the fact that Novartis, which is a Swiss-based collaboration, had a significant impact on our financial results in 2004.

Let's move on to the operating expenses. For 2004 costs for R&D rose by €3.4m to €12.4m. Higher personnel costs and material costs resulting from the increased co-operations work were the main reason. A revaluation of the CAT license from the prior year in 2003, also made the R&D expense increase appear somewhat higher than it otherwise would have been.

SG&A expenses amounted to €7.5m compared to €7.2m, despite the fact that no headcount in SG&A was increased, although in R&D we significantly increased headcount. Staff-based compensation of €1.1m was recorded as a non-cash charge, as it has been in prior years, and decreased by about €800,000. Lower number of new grants, lower stock price, forfeitures, and declining expenses related to grants of previous years, all contributed to the decrease.

Moving on to the cash. For the last few -- several years in a row MorphoSys has been able to increase its cash position, year-by-year at year-end. This has been mainly the result of improving operational activities, which have been cash positive for the last couple of years. In 2004, we increased the cash position by more than 60%. In addition to cash generated by operating activities, the convertible bonds sold to Novartis just netted the Company almost €9m.

This, combined with strong cash flow, allowed us to finance the Biogenesis acquisition out of cash reserves. Moving on to the rest of the balance sheet. You can see that the Company's current assets increased by €14.2m to €40.4m, mainly the result of the increased cash position. There are no other significant items on the balance sheet that I'd really like to remark on today, so I'd like to move on to the next slide, the liabilities.

During the year, total current liabilities increased by €2.4m. The increase was mainly due to higher accruals for licenses payable, as well as for employee-related benefits. Furthermore, provisions amounting to €600,000 have been made for pending litigation costs. The long-term portion of liabilities amounted to €900,000 and decreased by about €800,000, due in large part to a €1m payment to Cambridge Antibody Technology as part of our settlement agreement that we signed back in 2002.

Moving on to changes in equity. Looking at changes in the share capital over the year, MorphoSys issued a convertible bond in Novartis in 2004. There were 7 mandatory or convertible debentures, which were converted into approximately 490,000 shares of MorphoSys in June 2004. Additionally, roughly 47,000 shares were converted by employees, out of our convertible bonds and stock options program throughout the year. At year-end the total number of shares issued was roughly 5.4m shares.

Since we're on the topic of equity, taking a look at our shareholder structure and how that changed during the year. Presently our biggest shareholder still remains Cambridge Antibody Technology, who owns about 10% of our shares. Now new with Novartis who follows with 9%, and with Schering with just under 7%. The free float according to definition of Deutsche Borse, amounts to roughly 40-- sorry, 74%, and includes roughly 3% of shareholdings by management and the Supervisory Board.

Taking a look at the total number of employees for the year. At the end of the year we employed 132 employees, all of whom were in Munich, compared to 95 which was the number that we had at the beginning of the year. The increase of approximately 40% was all due to increases in R&D headcount. There are no new heads in G&A. Of the 132, 108 worked in R&D and 24 in SG&A.

Looking ahead, with the acquisition of the Biogenesis Group located in the UK and the US, means that the MorphoSys Group presently employs staff of around 160 employees - our highest number ever.

Okay, with that last slide, I'd like to wrap up the prior year results and now move towards some forward-looking numbers. As previously stated, we expect to achieve double digit revenue growth for the next years. We therefore estimate full year revenues for 2005 at €30m, which represents a 36% increase over the prior year. The main part of revenues will come out of the partnered target research segment, with €25m revenues.

Revenues out of the MorphoSys research antibodies unit will amount to roughly €5m, which includes the Biogenesis group in the UK and the US. We estimate total operating expenses for the Company as a whole, at approximately €29m, which means that we expect a net profit at the end of this year of roughly €1m, or roughly a tripling of the profit that we had compared to the prior year.

In closing, I'd like to say that we had an excellent year financially speaking, and as well operationally speaking. Looking ahead, MorphoSys expects to sustain profitability on the basis of strong revenue growth. We believe the Company will continue to grow and exploit different markets, in order to establish its technology as the industry standard. And this, against the backdrop of continuing to invest in own proprietary programs. All-in-all, I think it's a very attractive business proposition and investment case.

That concludes my financial analysis for the year 2004 and the guidance for 2005, and with that I'd like to now hand back to Simon.

Thank you Dave. I'd to turn now over the next few minutes to an outlook for the future for MorphoSys. And again, in doing this I'd like to concentrate separately on our 2 areas of activity, namely therapeutic antibodies and research antibodies. These continue to be lucrative markets.

On the therapeutic antibodies side, the market is currently some $6b. We're seeing very rapid growth continuing of in excess of 30% per annum, and in terms of products, we've seen some amazing breakthroughs. Most recently we've seen Tysabri come to market, an antibody for the treatment of multiple sclerosis. We've seen, of course, last year of Avastin from Genotech for the treatment of cancer, and Xolair from Novartis for the treatment of asthma.

These 3 products exemplify what diverse to these areas antibodies can be applied in. In addition, of course, we have the blockbusters - Remicade and Rituxan - both well over $1b drugs. All these facts together are driving the interest from the pharmaceutical and biotech industries in this class of drugs, and mean for us continued interest and continued demand in the technology.

On the research antibodies side, we have an $800m market. We're seeing good growth here - some 15% to 20% annually, and the customer base here is worldwide, life science researchers. People in labs who need antibodies for particular applications. However, this is a space and a segment that is ripe for technological change.

It's a segment that has relied on animal-based technologies for ever, and which in our view could benefit enormously through faster access to antibodies, higher throughput, and higher quality antibodies. And that's our goal with HuCAL to really change the way people use antibodies in the research segment.

In terms of our growth strategy at MorphoSys, again we think in terms of those 2 areas - the therapeutic area and the research antibody area. In therapeutics what we have done is, over the first several years having established the HuCAL technology, is we have entered technology-driven partnerships. The deals that we have entered in the late 1990s and early 2000s with companies such as Bayer and Centocor, and Schering and so on, have really been technology-driven partnerships.

We're now today entering a new phase in the Company's growth, and that is as the pipeline develops and matures, we can expect to see an increasing news flow in terms of clinical events, and of course, the related milestone payments that come along with those events.

In the future we will, of course, see compounds coming to market. And as those compounds come to market, as I emphasized, we will gain royalties, and those royalties will depend on how heavily we were involved in the programs. The partnered programs - the royalties are at a mid single digit level, and that is 1 of the main reasons why we're interested in pursuing our own programs. Where, when they are finally partnered and finally come to market, will generate a much higher level of royalty income.

So we see 3 distinct phases in the development of the Company on the therapeutic antibodies side, and we clearly now, with the entry of the GPC antibody into the clinic, have progressed to the second phase.

For reagents, the research business, our initial goal here was to establish a beachhead for HuCAL in the marketplace. As I mentioned before, there's been an education challenge for us convincing people that this technology also works for them on the research side of the business. I think we've done that most effectively. The second phase for us is to expand our market reach by acquisitions, and the Biogenesis deal was the first of these.

This clearly brings us the potential to grow at a much faster rate than we would be able to without such an acquisition. Our goal ultimately is to establish HuCAL as the industry standard by which research antibodies are made, which we believe can drive growth even further.

In terms of the revenue characteristics, and in adopting this 2-leggged strategy, this was very important for us. In looking at the types of revenue we could expect from each side, and they're quite different. The therapeutic business - the deals with the Pfizers, the Novartis and so on, is immediately profitable for us. We get a team of researchers paid by the partner. We get license fees for indirect or direct access to the technology and, of course, we then get the milestones and the royalties which are very profitable for us.

The upside is very large because we're talking about potential blockbuster drugs coming to market in the future, but it's some way off admittedly. The other feature about it is that we're dependent on partners, of course. We're dependent on being able to go out and find new pharma deals, or biotech deals, with new partners. We're dependent on those partners continuing to be convinced that antibodies are an attractive class of drugs, and we're not always able precisely to predict when such deals will come along.

We're very dependent on the willingness of those partners to adopt an antibody -- a therapeutic antibody strategy. As I've mentioned, currently and for the foreseeable future, that looks extremely attractive but we are dependent on partners. So that's been 1 of the reasons why we have looked to diversify by moving into the research business.

Yes, it's a smaller market size but the margins are very attractive in that space. And most importantly by having our own products, our own research products, our own catalog products, we have the business completely under our control. We're not dependent on the strategic decisions of large partners.

So together the 2 types of business activity complement each other, and we believe because they are based on a common technology platform, are very attractive to have running alongside each other. And what that will contribute to as we go forward, is a diversification of our revenue base.

Today, as we've seen, our revenues are dominated by the payments we receive from our therapeutic partners, in the dark blue on the left of this chart. And a rather smaller amount comes from milestones, from those therapeutic programs, and an even smaller part from the reagents, the research business.

Looking into the future, that mix will change substantially. So there will be new contributors that come to that, mainly proprietary products and royalties, and those will start to reduce the relative importance of partner revenue and the milestone revenue. So what we're doing here is we're derisking and reducing our reliance on 1 particular source of revenue, and therefore putting the Company on a more stable footing for future growth.

Turning to our precise objectives for this year on the therapeutics side. As I've mentioned already, we aim and intend to secure a partner for 1 or other of our therapeutic antibody programs - MOR101, 102 and 202. And it's important to mention here that we aim to secure a co-development option. That is, we want to have the possibility to work together, jointly with the partner. Share the cost going forward and share the upside more equally than we would do if we simply out-license the compound for a royalty.

As I also mentioned, we've had information from a couple of our partners that additional antibodies could enter the clinic. We hope to see at least a further 1 antibody enter the clinic this year. We intend to enter new programs with new partners. We're often asked with whom, how many, when? We can't precisely predict that but we -- based on ongoing discussions and negotiations, we're confident that we'll be able to add new names to our roster and new programs to our pipeline.

We also expect to reach milestones in the ongoing 24 programs. Of course, the more programs that are ongoing, the more likelihood it is that milestones will be reached and that the corresponding payments will be triggered. Again, I don't want to quantify that precisely but we're very confident that that will be achieved.

And finally on the therapeutic side, we want to uphold our leading technology position. We got to where we are today by being technologically leading, we don't intend to surrender that advantage. We continue to invest in technology development.

In terms of the research antibodies side of the business, which is being shaped very much by the acquisition of Biogenesis, clearly during the course of this year we intend to complete the integration of the 2 organizations. We clearly intend to keep both sites. The presence in the UK and the US are important strategic aspects of this transaction for us.

We intend to leverage what we've gained in sales channels, in market presence, in distribution network, to increase our access to customers for the HuCAL customer service. We also are now planning a wave of HuCAL products which can be marketed through the Biogenesis sales and marketing apparatus, and we're looking for cross-selling synergies. Having the established Biogenesis people selling HuCAL services, and having our sales and marketing people increase the reach of the Biogenesis offering.

As I mentioned, Biogenesis brings us some interesting business in the diagnostic space and we hope to benefit from that, and look to sell the HuCAL concept to potential diagnostics customers. Altogether, as we mentioned when we announced the deal back on January 21, please don't expect fireworks in terms of bottom line performance from the research side of the business in this year.

It's a consolidation year, it's an integration year, and it's a year to create a platform from which we can grow attractively in the future. And I'm sure that if we do the planning and do the integration properly and correctly in this year, we can look forward to very exciting growth rates going forward.

Summarizing all that in Company goals for the year, on the therapeutics side - partner for the own program; additional HuCAL antibody in the clinic; new partnered programs. On the research business side - integrate the 2 organizations A-by-D and Biogenesis; reaching that important target of €5m on the revenue side; and perhaps more importantly, establish a platform for solid growth from 2006 and beyond.

Company-wide, as you've seen in the guidance, we're aiming for double digit revenue growth and, again, profit on a net basis in this year.

Finally, to conclude, I'd like to close by saying 2004 is without question the most successful year in the Company's history. MorphoSys finished the year in a stronger position than we've ever been before, but even more important we have taken steps, achieved operational objectives, and positioned MorphoSys for continuing further attractive growth in the future. And we look forward to continuing to report to you on that growth. Thank you very much.

Thank you Simon. Thanks for your patience. I would like to open the floor now for questions, and since we are also conducting a conference call, I would like to start with asking those participants listening by conference call. And I would like to ask the operator if there are any questions?

[OPERATOR INSTRUCTIONS]. Our first question comes from Daniel Wendorff with WestLB AG. Please go ahead.

Yes, good morning. Thanks for taking my question. I actually have 3 questions, 2 relating to the Antibodies by Design unit. You said that you think you can achieve attractive margins in that business. Can you give a bit further spice to that, if that's possible? And also, if I'm right and you have segment reporting in that division, you have to report like cost of sales. Can you give us an indication what the gross margin might be?

And my third question would be, you said that you expect a second HuCAL generated antibody in the clinic. Is that 1 of the 3 potential projects which you mentioned at the beginning, could enter the clinic by Q1 2006? Thank you.

Okay. I think I'll handle the first 2 questions, because I believe they're the same question of what are the margins, or what is the cost of sales that we imagine for the business which we do in the antibodies research segment? Here I'd said that we expect margins somewhere between 60% and 75%, and hence the cost of sales of around 25%.

Okay, and on the operating side?

Bottom line operating, you mean?

Yes, operating profit line.

Okay. Bottom line operating from the Biogenesis unit, what we've seen historically is a rate of around 10%, sometimes a little bit lower, sometimes a bit higher. So that we think we can improve over time, obviously with the synergies that are possible with doing business with MorphoSys AG. In terms of the segment itself for next -- for 2005, we expect roughly a breakeven. And I think 1 of the reasons why we don't expect, as Simon said, financial fireworks as it relates to that particular segment in 2005, is that it is an integration year.

There will be some streamlining activities, and there will be integration costs which we can't exactly quantify today. Hence we conservatively give ourselves a target of breakeven in that entire research unit for this year.

Okay. With respect to the HuCAL antibody which we think will enter the clinic, yes. As I said, we've had information from our partners that 3 -- a further 3 antibodies could enter the clinic before the end of Q1 next year, and 1 of those 3 should make it in this calendar year.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. We have no further questions at this time.

Thanks a lot, and we are moving on to questions here from the floor. I would like to ask you to use the microphone, that the people listening in the conference call can also follow your questions. I think there's the first question over there.

Thomas Hoger, DZ Bank. Given the very successful year 2004, I was a little bit surprised if I look at the compensation for the management board, which was lower in 2004 when compared to 2003. Why is this, and could you give some more details about the objectives by which your performance is measured?

Yes, sure. So compensation in 2004 contains a component which is a bonus in respect of performance in 2003, and obviously that bonus is determined by the executive's performance in 2003. Which the Board, the [indiscernible] deemed -- obviously because 2003 was not a very successful year as 2004 was - so accordingly adjusted downwards.

The way Vorstandt(ph) compensation works is rather simple. We receive a salary and we receive a performance-related bonus, which is a combination of individual performance and overall Company performance, and those 2 elements together comprise the Vorstandt compensation.

Sorry, but the Company performance, this is measured by some margins or by the stock performance?

The Company performance is based on the Company goals, and the Company goals for 2005, the ones I just showed for example, and for each year we have such a set of Company goals which is agreed with the Board of Directors at the beginning of the year. And the Board of Directors at the end of the year then assesses how we've performed against those goals. So those goals are in the public domain and we can be measured against those goals.

Thomas Richter from Equity. I would like to have some more flavor on your aims concerning the diagnostic business you would like to aim on. Is it more opportunistic to enter this year of clients, or is it strategic move of -- as a quantum leap? Thank you.

The answer is at this stage we are not making a concerted move into that area. You'll recall that we do have some ongoing diagnostic projects with, for example, Schering, for whom in vivo diagnostics is important. So, it's not as if we have not done anything in the diagnostics sector at all.

Biogenesis has -- quite a significant chunk of its income comes from supplying particular antibodies to diagnostic companies. So that it is companies that prepare -- that manufacture and sell diagnostic kits. And, therefore, since that is an important part of the Biogenesis business, we see the opportunity to use their contacts and their established business, as a platform on which to seek to increase the reach of HuCAL into that diagnostic space.

It's something -- As Dave and I have mentioned, we see this as very much a consolidation year, and it's something that we in turn intend to learn about during the course of this year. But it's not something that we intend to make a major thrust of the business, at least not certainly this year.

Hilmar Platz, Kayenburg AG. A couple of questions regarding Biogenesis. Could you give us a bit impression regarding what kind of integration steps have to be done this year with Biogenesis? What differences are regarding the IT platform, of the kind and the way Biogenesis managed its business in the past? And can we expect a further increase in personnel to achieve the €5m sales revenue? Thanks.

Okay, let me -- We'll split that. I'll take some of that and Dave will take some of that. There's actually not a huge amount of integration to be done. The 2 organizations are pretty complementary. Biogenesis is a very tightly run organization. There is not a lot of overhead or infrastructure and so, for example, on the administrative side there's very little overlap, in fact. And certainly, in terms of their operating activities, it's really complementary to what we're doing.

They have a business based on, as I said, a catalog antibody business. They use a technology, namely animal-based technologies, to source their antibodies and that's -- those products are something that in time we see being replaced by HuCAL antibodies. Obviously, that's not going to happen overnight but our goal is, in the long-term, that more and more -- a higher and higher percentage of their products are HuCAL-based antibodies.

So, you won't see essentially any change in headcount. We don't anticipate having to hire new people, and we don't see much reduction in headcount if at all. And therefore, at least from an operating point of view, we thought - and it's been confirmed for us now - that the integration is actually less problematic than it could be with some other organizations.

It's a rather small organization, a rather tightly held and tightly run organization, and therefore relatively easy for us to integrate. In terms of thinks like IT platforms and so on, perhaps Dave can talk to that point.

Yes, I think as Simon said, it's a relatively small company. I think the 1 distinguishing feature in the business is that they are a brand-based business. Biogenesis has a brand, it's a catalog company, it's a catalog antibody company. And hence, the web, the website that they have plays a much more important role in prosecuting their business as it does compared to our business.

The 1 area in the IT area where we could imagine to invest would be, actually, a combined or better integrated website between the 2 companies. But in terms of the other IT infrastructure that will depend, of course, on how we decide to invest further; which site we decide to invest further in; where our production will take place for the 2 units, and so forth. So it's a bit early to talk about what exactly what we're going to do beyond the website at this point.

Thomas Hoger again. 2 questions. What of -- What is the reason for the net loss in Q4 2004? And second question is, that now that AME, the litigation is ongoing, do we expect here also higher cost on this side?

Okay. In terms of the AME cost we have built in certain costs in our budget this year, when we expect the cost to increase for AME-related litigation as compared to the prior year. As to the loss in the fourth quarter, an answer doesn't come to mind immediately but it you give me 2 minutes, I'll come back to you and answer that.

Are there more questions?

Thomas Richter once again. A question for the number crunchers. On page 44 in the Geschesbild(ph), the segment report. Dave, could you please shed a little bit more light on the allocation of costs and revenues? There is, unfortunately, a huge amount of cost non-allocated so, yes, give us a little bit more light on that please? Thank you.

Sure. I guess you -- It's probably pretty clear from the chart on what the direct costs associated with these segments, so I won't go into that further. We do have a certain amount of unallocated costs, and as you rightly pointed out they are not small. And part of that has to do with the fact that it's not terribly simply, at least at this point, to make an extremely accurate split of those costs.

A lot of those costs are the cost of renting the entire building; the cost of a stock market listing; the stock -- the cost of an IRTR department. So a lot of general costs where we don't have an obvious allocation key to split between the part of our target research business, and the reagent business.

Now we've talked it over with our auditors and they feel that, in the absence of having such a key, that it is acceptable, at least as a first step, to keep that relatively large, unallocated amount in there. That being said, we could imagine that the bulk of those costs would be associated with the bulk of the revenue, mainly the target -- the partnered target research segment.

[inaudible - microphone inaccessible] share with us the unallocated the fact(ph) those [inaudible - microphone inaccessible] major role as well.

It may do. Obviously we'll look at ways to find good allocation keys which are reasonable, so that we can make that split. But if we're not forced to do it we won't but, obviously for the sake of financial transparency, we will try to do that going forward. But our auditors felt comfortable with the way that we've presented here.

Okay, thanks. And a question to Simon if I may. Would you like to use the foothold of Biogenesis in the US to emphasize your strengths in the US market of your original business as well?

We don't need to. We're -- on the therapeutic side of the business, we're sufficiently well-known in the US and everywhere actually. So we don't see that Biogenesis presence in the US is helping on the therapeutic side of the business. But we do see it as an important foothold for building our research antibodies business in the US.

Therapeutics we know, and we know everyone who's active and they know us. So it's really to -- as a foothold and a means of strengthening our research antibodies presence in the US that's attractive.

I've just heard there's another question from the conference call, so I would like to ask the operator for the question.

Thank you. Our next question comes from Nick Turner with Jefferies International Limited. Please go ahead.

Hello Simon, Dave. I just wondered if you could give me some ideas to what Biogenesis sales were in 2004? And also what you anticipate the price differential to be between catalog antibodies form -- sourced from animals, and those sourced from HuCAL? I assume, as you said, that you would hope to see at least some of this switched to HuCAL in the future, and I just wondered what that might result in terms of sales growth and margin development there?

And then a question really on MOR101. Have you finished all of the pre-clinical studies with that particular agent? I seem to remember that there was a burn study with an animal model planned for that drug and I -- in 2004, and I just wondered if that study's been done, and if you can tell us what the results were?

Okay. Maybe just to handle the financial question real quickly. Although the full year accounts have not yet been audited, and in fact we've started the process of doing an audit of the full year results. The Biogenesis financial calendar is on an April to April cycle as opposed to a calendar year. So the number I give here is not audited but we suspect that the number for 2004 was slightly under €3m for the Biogenesis Group.

And maybe to answer -- sorry, if I could just use the opportunity to answer Thomas Hoger's question previously. I think there was no 1 huge reason associated with it but, if I have to point 1 reason, it would probably be in stock-based compensation. You see that half of the year is stock-based compensation expense under US GAAP was actually incurred in the fourth quarter, which is probably the reason why we went into slight loss in that quarter.

Okay, coming back to the other questions, Nick. MOR101 - recall that we actually have done an animal study in burn, in a rabbit model, in collaboration with a leading group in the burn area. Which concerned data that Boehringer Ingelheim had produced with a mouse antibody against the same target, and indeed showed that either a fab fragment or a full IGG could be effective -- equally effective in treating burn in that particular model.

I think we mentioned on an earlier conference call that our experience in looking for a partner for this, has not been as encouraging as it has for the other compounds. Burn is very much a niche market and I think it's fair to say, and I'm happy to be open about this, that we haven't been getting quite the traction on this 1 that we have on the other 2 - 102 and 202. And therefore, our willingness to invest further in this program is tempered accordingly.

However, we continue to look and to talk to people, and if we find a partner for that compound then we will partner it. But we don't plan major investment, at least in that program going forward.

Thanks.

Are there other questions from the conference call?

We've no questions at the moment.

Okay. Well, I give back here to the audience. Mr. Hoger?

Additional 2 questions. First of all, concerning the Novartis option. You mentioned that Novartis can exercise the option any time during the first 3 years. Would the revenue stemming from the exercise of such an option would be booked immediately? And is there somehow a time dependency that they, say, have to pay more if they exercise the option in third year?

And second question is, the currency exposure of your revenues. Could you comment on this please, Dave?

Okay. As it relates to the first question, the Novartis option for the sake of informing perhaps the others who may not realize the magnitude of that payment. That payment is a double digit million payment should it come. Under US GAAP we looked at how that would be booked. Should it be booked, it would be spread out over time, most likely be our guess. We haven't yet done the analysis under IFRS but my guess would be -- similarly be that wouldn't be booked all in 1 year. It would be spread out over years.

Your second question was related to FX. We have approximately €7m worth of turnover which is directly denominated in US dollar. We hedge that fully. We do have 1 of the other contract, however, which -- where we share the FX risk and hence, although we can hedge 100% of the exposure which we have with our other contracts, with 1 of the other contracts it's not possible to completely hedge it. Because there's some kind of sharing arrangement built within the contract.

Okay. There's another question. I think Mr. Platz is first.

Regarding -- 2 quick questions regarding the Antibodies by Design business. What timeframe would be necessary to transform the -- that business from [indiscernible] to antibodies to the HuCAL, that there's a majority developed by HuCAL technology? Can you intercount(ph) Biogenesis? And regarding the market volume of about, well $800m, what kind of share would satisfy the management?

First of all, regarding the switching of Biogenesis products to HuCAL. The fastest growth is clearly on the customer side of the business. So we believe that the customs side, which is the old A-by-D side, could grow at a triple digit rate this year. And clearly that's the best opportunity to generate new products. As you'll see from the business as it is as the moment, it's not profitable for us to denovo(ph) make a new product and sell it via catalog.

We're only do that when we're convinced that the product can be big enough to repay the investment on making the antibody. And if you look at catalog products, there are some catalog products that sell maybe €5,000 a year, a big catalog product sells €20,000 to €50,000 a year.

So that's why I said, we're in the process of very carefully assessing in which cases should we make HuCAL antibodies, and they'll be many cases where it's simply not worth it. So our intention is not simply to say, 'Let's switch the whole catalog to HuCAL'. It wouldn't make sense but certainly new product acquisitions, where those products are attractive, will be HuCAL ones.

You asked me what sort of share of the market management would be happy with? Management is very ambitious and, therefore, believe -- I believe that in time no-one will make antibodies with animals anymore. Is that 5 years? Is that 10 years? I really can't say. There are so many advantages to making antibodies with an in vitro technology like HuCAL - speed, flexibility, the ability to tune the antibody to a particular application.

Not to mention the fact that millions of mice are killed per year to satisfy the monoclonal market. I believe that in 5 or 10 years that won't be done anymore. Now will we dominate that market completely? That's our goal. Our goal is for HuCAL to be the predominant technology in that space as well.

I think there was a question in the back.

I have a question to the stock price, which anticipates already much more than the earnings level you expect for 2005. So your earnings in the long-term, or the earnings expectations in the long-term are, without any question, playing a big role in the stock price movement in the past. In this respect, I would like to know how the structure of your sales will develop in the future?

The sales of the last year are very much a matter of milestone payings and [indiscernible] payings. What is the typical sample of the sales structure for a product which comes to the market, could be a big blockbuster? How big is the percentage of the milestone payings and [indiscernible] at the beginning? And the percentage of sales you get from the product, being entered in the market and being successful?

Let me just make -- maybe make a general comment to that, and then perhaps Dave may want to make a more specific comment. If we think about a Novartis or a Pfizer - companies like that don't pursue a drug project unless annual sales will be at least $500m, otherwise it's not worth it. All of these big pharmaceutical companies have a threshold, a sales threshold, typically around $500m.

If we look at a compound then that is a $500m or a $1b seller in 7, 8, 9, 10 years from now, we would be earning a mid single digit royalty on such a compound. So let's just pick a number and say 5% for the ease of calculation. I'm not saying that 5% is what we get in every case but for ease of calculation. A $1b drug would bring us $50m in annual revenues which is profit, that's pure profit for MorphoSys.

And that in -- as you construct your models and so on about the future, what you have to do is you have to think 'Okay, how many of such projects will reach the market, will be successful at that level?', and therefore make an estimate of what kind of revenues we could expect in that 5, 6, 7, 8 year timeframe from now.

And maybe just to add some color to that last comment. You've seen today that we have approximately 20 -- 24 projects, and using industry standards for what is the probability or likelihood of these things coming to the market. One can roughly take a number of -- what we've seen are numbers of around 15% to 20%. So based on our current pipeline, we could imagine that somewhere in the neighborhood of 4 drugs will make it to market at some point, again using industry standard probabilities.

You asked the question earlier what is our make-up in terms of revenues look like? This year we said that the milestones were 6%, or roughly double what they were last year. If the business continues as it will, as it is today, the milestones proportion as a total would increase. That being said, if we further expand the antibodies research sector, if we further expand licensing deals, that might influence the relative amount.

But in terms of absolute numbers, we expect milestones revenues to increase. Simply because, as these collaborations get older, the projects get further and further and start to move towards the clinic, and get into the clinic, which triggers milestones.

And maybe just 1 more point from me on this, and I think this is a really important point. As you look at MorphoSys, MorphoSys is a company that it is not just profitable today. We're profitable today, yes, but we're building future value through increasing the number of compounds in development, every 1 of which we participate in through the form of milestones and royalties.

So you're getting your cake and eating it. You're having a profitable business today, and your participating in the future value of drugs being developed by major pharmaceutical companies. That's why I think MorphoSys is an attractive proposition.

Okay. I think the next question was --

[Huber Becker, Life Sicon]. Simon, a question relating to the use of antibody in the Phase 1. Could you please comment on the efficacy of either antibody alone in this particular indication?

The -- Are you referring to the GPC antibodies?

Yes, to the combination clinical study with Rituxan and 1D09C3.

Rituxan, yes. The clinical study is not a combination study. The clinical -- The Phase 1 study is a Phase 1 trial with 1D09C3 on its own.

Yes, I see but the table you show is the animal study, which shows the efficacy of the combined antibody therapy with the animal. And what other result of the animal studies for either antibody alone?

Yes. We -- For the purpose of simplicity, we took those lines out of that chart but let me tell you that, if you look at either 1D09C3 or Rituxan on its own, they're roughly similar. So the line is between the control line and the combination line on that chart. In other words, the 2 together seem to work synergistically, in a model that is CD20 positive. So in other words, it is a Rituxan sensitive model.

There seems to be a synergy between the 2 compounds which is understandable because they're acting through different mechanisms. 1D09C3 is an MHD2 targeted compound which acts by apoptosis. Rituxan is a CD20 targeted compound which acts by ADCC(ph). So together they seem to be synergistic, individually they're comparable in terms of their efficacy in the mouse model.

Is there another question?

Could you please remind us when milestones are triggered along with clinical development?

Sure. There is some slight variation, it depends what you negotiate with the partner. But typically we expect a milestone when we deliver an antibody that meets certain pre-agreed success criteria. The next 1 typically is start of Phase 1, and there there's also some variation. Some filing of an IND - an investigation on new drug application. Some times it's when the antibody is administered to a patient, as in the GCP case just now.

Occasionally there may be a Phase 2 milestone but typically not. Always there is a Phase 3 milestone. There may be a NDA filing application - that is a new drug application when that is filed, and certainly when the antibody comes to market.

Thank you.

[Karsten Klobe] with HVS(ph). This is just for clarification. Did I understand you correctly in 1 of the last charts of your presentation that it's safe to assume that, apart from the Biogenesis deal, on the research side of your business there will be further acquisitions in the future?

Yes. We see this as being a particularly attractive opportunity, and I'm going to ask Dave to comment on this as well, as he did the bulk of the work on the Biogenesis acquisition. This is an extremely fragmented market. There are many smaller companies present in the market, and in order to gain presence in key markets such as the US the best, fastest, most effective way we believe to do that is through acquisition.

So, yes, you could see further developments in that area. Do you want to add anything?

Nothing other than the fact that Simon stressed the word 'could', and that is not a definite goal for the year. But I completely agree with Simon's, that is we've come to the conclusion that it's cheaper to buy than make our own, as it relates to this business.

Are you looking on the company [inaudible - microphone inaccessible]. Are you looking at specific companies already?

I think in terms of looking at specific companies, I think we have this question every year - 'Are you in merger talks of some type?', and the answer is always yes. We're always looking at companies. Last year we were successful, this year we may or may not be successful. I'm afraid it's not our policy to comment on the specific progress of any particular talk.

Karl-Heinz Scheunemann, Metzier. A few questions concerning the R&D part of MorphoSys. How many people from the R&D staff are working on MorphoSys projects alone or pure, or given equivalent? Another question concerning R&D, where -- what's the origin of your targets, for instance, for the inflammation project? And the last 1 - I think not, I leave it.

Okay. In terms of how many people are working on our own programs, let me just -- it varies. Let me characterize it as saying it's less than a dozen. Also very important aspect of these studies is external collaborations. For example, the burn study I referred to in answer to a question was done with an external collaborator. The cirrhosis study is being done with an external collaborator. The mouse data we showed for MOR202 was done with a contract research organization together.

So a chunk of our investment there is not only internal R&D, it's also external R&D. The question about access to targets. We don't have an in-house target discovery program. The targets that we have, we have either in-licensed or identified through literature research essentially. In every case we have a priority as identifying whether we can create an intellectual property position around the program.

In the case of ICAM we in-licensed the target from Boehringer Ingelheim. So we have a propriety position on the target, and we have a patented applications on the antibody against that target. So we have a good IP position there.

In terms of MOR202, the target is a public domain target. In principle anyone could pursue that target. We have created IP associated with our antibodies against that target. It seems that the antibody works by recognizing a particular epitope on CD38, and that seems to give rise to its effect, and we've been able to file IP accordingly.

So the short answer is we don't have a proprietary, guaranteed source of targets, we find targets where we can. Sometimes in-licensing or sometimes from the public domain, where we think we can create a patent position.

Add-on question on that. So I do understand, you're right that you're optimistic if it comes to new targets, and building up your own research pipeline. So it's not a question whether your are, or you feel fine in inflammation or in oncology. If there is something out in the woods of more importance you grab at it.

Yes and no. We wouldn't move into an area that we have no familiarity with. We wouldn't pursue a C&S(ph). In order to do this stuff you need to have some expertise in the disease of -- in the disease area concerned. And we have in-house expertise in cancer and we have some in-house expertise in inflammation. It's highly unlikely that we would go beyond those 2 areas.

But you do have a collaboration with Roche, targeting Alzheimer's target, isn't it?

Yes, we do and that's exactly the way --

But you don't know how it works or?

No, we do have a collaboration with Roche and C&S. We also have collaborations with other companies in other -- completely other areas - infectious diseases for example. But we rely on their expertise. That means that we're not building up a team in-house with expertise in C&S, or expertise in infectious diseases.

In order for a small biotech company to be expert in multiple indications, it's not realistic. And there are enough opportunities in cancer and inflammation, that we feel we will confine our activities to those 2 areas.

Thank you.

Another question?

I'll stand, it's easier. Just to stay with your R&D in-house, you mentioned MOR102 today. I appreciate your can't tell us your target yet but can you give us some idea on the development pipeline? Because the other products are pretty much ready to go out, the out-license. I imagine you're going to aggressively move this forward as well. Can you just tell us a little bit more about this?

Yes. I don't want to over-emphasize this. We mentioned it to share with you exactly what we're doing in the own therapeutic area. I want to emphasize that it's a research stage project, which means it's very hard to predict how it will go forward. And therefore I wouldn't like, at this stage, to put a defined timeline on it. And accordingly we won't be talking about it, until it reaches such stage as we believe that it is a realistic candidate for out-licensing.

It's a research project. It needs to go through further research before it moves into the pre-clinic, and therefore I really wouldn't like to put a timeline on when it could be a partnerable project.

Are there any more questions?

Do you see any danger that a big client from you or a big pharmaceutical company could try to take you over, to get closer to your know-how and to get rid of competitors getting your know-how?

Yes. I think that what you've seen is, we've actually been very successful in forming partnerships with pharmaceuticals, which allow them to get access to the technology. And the deals are structured in such a way that they can get the access to what they need, and yet we are sufficiently protected that we can do those deals multiple times.

And I think as long as a pharmaceutical company is satisfied that the access it gets through a collaboration is fine, is okay, then there's probably no need for that company to want to acquire MorphoSys.

I think maybe what I add would add to that is, the other thing you have to realize is that the assets of MorphoSys are in no small part related to the people. So the people that come in to work every day and leave at whatever time they leave every evening. So most of the people who come to a small biotech like MorphoSys came because they want to work in a biotech company, and not a larger pharmaceutical company.

So, we could imagine that if a larger pharmaceutical company took over a small biotech company, there could be an exodus out of the company. And hence, that's why we think that's probably more likely that these companies would tend to access technology through collaboration, as opposed to takeover. But, of course, you can never exclude that.

If somebody in the field says there's only 4 companies, or 5 companies, in the world that can make fully human antibodies, and MorphoSys is the best in the world. And we want this technology, and we want it for ourselves, then that could be. We couldn't exclude that.

Are there more questions over on the conference call?

We have no questions at this time.

Thank you. Then I would like to end the conference -- the conference today. I would like to thank you for attending, for your participation. We would like to invite you to a lunch which will be served outside in the next room. We would like -- We would be happy if you would stay a little bit longer. There will be also a chance for some proper discussions, going through further questions.

Thanks a lot again for coming and have a good day and a nice weekend. Thanks a lot.