MorphoSys AG (MOR) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Morphosys AG first quarter 2005 results conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to your host today, the Chief Financial Officer 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. The call comes today from our headquarters in Munich, Germany. First we'd like to welcome you to this conference call and thank you for participating. During the call we would like to talk about the Company's financial results for the first quarter of 2005. Simon will begin by giving you an overview of the last quarter and provide you with an update about the psoriasis comparison study within MOR102. Then I'll open the call to reviewing the financial results for the first three months. Afterwards we open the call to your questions.

Before I start I want to remind you that this conference -- 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 at the date hereof. I'd now like to hand over to Simon Moroney.

Thank you Dave and also from me welcome to everyone participating in this call. It has been an extremely busy quarter for us. While taking important steps at the corporate level to help us drive our research antibody business forward, we also reached a significant milestone on the core therapeutic side of the business and as well, entered into new deals for two existing partners, Bristol-Myers Squibb and Boehringer Ingelheim. Intense corporate activity has not been at the expense of operations. As the numbers show the business is performing absolutely in line with the guidance we issued at our annual results conference.

The highlight of the quarter was our acquisition of Biogenesis. This transaction is intended to help us build our research antibody business, giving us recurring revenues from a portfolio of existing products and even more importantly, established marketing channels for new HuCAL derived products.

Since the announcement of the acquisition of January 20, we have focused on linking the business activities of our 3 research antibody sites in Munich, Poole in England and New Hampshire in the United States. We are already seeing the first signs of the positive synergies we expect as customer contacts we've developed out of our HuCAL business for the Biogenesis products and, as we establish new contacts for potential HuCAL business from pre-existing Biogenesis customers.

Approximately 6 weeks after the acquisition we successfully completed a pipe financing raising just over €17m. As a result we are able to report a particularly strong cash position at quarter's end of over €50m. This financing was done with future expansion in mind and will give us much great flexibility to enter and conduct future discussions and negotiations.

On the therapeutic side of the business a landmark event in the Company's history was the entry of the first HuCAL antibody into clinical trials. On February 1, our partners GPC Biotech announced that 1DO-923, a HuCAL antibody against MHC2 had commenced a clinical trial in Switzerland for lymphoma. We will of course follow the -- we will follow the course of this and subsequent trials with great interest.

Other developments on the therapeutic side of the business were deals with Bristol-Myers Squibb and Boehringer Ingelheim. The BMS deal involved switching their existing HuCAL's description from a previous version of the library to the new Gold version. BMS will use HuCAL Gold within their pharmaceutical discovery programs for target characterization and validation as well as for therapeutic and diagnostic antibody product development.

The deal with Boehringer Ingelheim builds on our established relationship, dating from February 2003, under which we are developing 2 therapeutic antibody candidates. The new deal covers installation of the HuCAL Gold technology at a number of BI sites. For example in Vienna, to enable BI to integrate the technology into their research and development activities, we expect additional therapeutic programs to result from this increase in HuCAL based activity at Boehringer Ingelheim.

Both the BMS and BI deal further exemplify our strategy of increasing the penetration of the HuCAL technology into pharmaceutical drug discovery programs. This strategy has a simple premise. Increased utilization of our proprietary technology raises our revenues today but more importantly, increases the number of products based on the technology that will reach the market tomorrow. More products means more milestone and royalty payments to Morphosys and therefore greater value.

The new deals add to the 24 ongoing pilot projects in our pipeline. Although it came after the conclusion of the first quarter, I would like to pick up on our second press release of today regarding our ongoing pre-clinical work with MOR102.

As we announced, there was also our most recent study, which was intended to compare the efficacy of MOR102 with the approved biologics for Raptiva and Aloveve were inconclusive. The reason for this is that the established model which we had used successfully in earlier work to establish the efficacy of MOR102, behaved less well than expected in this study. In particular we observed such a high level of spontaneous remissions in the contract arm that we were unable to draw any conclusions regarding the performance of MOR102 relative to the 2 approved treatments. Notwithstanding this inconclusive outcome, we remain optimistic for the future development of MOR102 for 2 reasons. First, the compounds did show clear evidence of efficacy in the earlier study, the result of which will shortly be published in a [indiscernible] scientific journal. And second, dermatologists continue to look for new treatment alternatives since the existing medications currently approved for the syndication do not work in all cases.

Regarding both this and our cancer program MOR202, discussions with potential partners are ongoing and we remain committed to our announced objective, of finding a development partner for one or both compounds before year end.

Finally, a brief review of the remainder of the year. We are upbeat regarding both our core therapeutics business and the new research antibody activities of antibodies by design and Biogenesis.

We continue to see good demand for our technology. The deals that we announced in Q1 with Bristol-Myers Squibb and Boehringer Ingelheim, we expect to be the first of several important alliances that we will report during the course of this year.

Our pipeline continues to develop. We are on track to meet all of our objectives for this year. That concludes my summary of the quarter and I would now like to hand back to Dave, for us his review of the numbers.

Thank you Simon. We prepared our financial results for the first quarter 2005 according to IFRS standards. Most of you recall that we switched our accounts over to IFRS already in Q4 last year. Therefore, I won't go into the differences between US GAAP and IFRS in our report this morning. And by the way, the numbers are consolidated numbers which means they include the newly acquire Biogenesis group of companies.

To begin the financial analysis I'd like to start with revenues. Company revenues grew by 72% in the first three months of 2005, to €7.4m compared to €4.3m in the same period of last year. Reasons for the increase include new corroborations signed last year, the addition of Biogenesis revenues in our consolidated numbers and the I and B milestone from GPC which happened in January of this year.

To give you a clear look for the impact of Biogenesis on our numbers, the Biogenesis group of companies contributed €0.5m for the first quarter turnover. Stripping out the effect of Biogenesis, Morphosys grew organically by more than 60% in the first quarter of 2005.

Revenues from our therapeutic antibody and target research collaborations generated 89% of total revenues, while the research antibody segment, which includes Morphosys antibodies by design unit and really acquired Biogenesis group of companies in the USA and the UK, generated 11% of the total.

The antibody design -- the antibody by design unit contributed 39% of the total research antibody segment revenues while 61% of segment revenues are just from the Biogenesis group companies.

If you look at our income statement you will see a new line representing cost of goods sold. Cost of goods sold is made up of the research antibody segment, cost of goods sold during the first quarter for both the antibody by design unit as well as for the Biogenesis group of companies. Costs rose significantly in 2005, compared to 2004, rising from €0.2m to €0.5m. The main reason for the increase was the inclusion of the Biogenesis group of companies cost of goods sold into group accounts in the current year, which represented €0.2m of the total cost amount.

And for the first three months of 2005, total operating expenses increased by 54% to €6.3m. Costs for research and development increased to €3.6m compared to €2.4m in the same period of the previous year. The increase of €1.2m resulted mainly from higher personnel related costs and higher material expense as a result of new co-operations signed during 2004, as well as increased license fees interim milestone payment achieved in 2005.

So general and administrative expenses increased by €1m to €2.4m. This is mainly from higher personnel costs extending from the contribution of the Biogenesis group as well as increased advisory fees.

The total operating expenses for the Biogenesis group, the total operating -- to the consolidated operating expense was €0.3m.

Moving on to capital expenditure. Morphosys investment in plant, property and equipment was modest during the first quarter and amounted to €0.1m for the first three months of 2005 compared to €0.5m for the same period of the prior year. Substantially all investments were accomplished in Germany.

Depreciation for the first three months of 2005 came to €0.2m and remained unchanged compared to Q1 2004.

Following the positive trend established in 2004, the Company is presenting an operating profit for the first three months of 2005 in the amount of €0.6m compared to a break even zero in the same period of the previous year. A net income of €0.5m resulted for the first quarter in 2005, compared to a net loss of €0.1m in March 2004.

The resulting profit per share for the first three months in 2005 remains at €0.08 per share compared to a net loss per share of €0.01 per share in the same quarter of the previous year.

At March 31st, 2005 the total number of shares increased to approximately 5.95m compared to 5.3m shares at December 31st, 2004, mainly reflecting the Company's private placement successfully executed during the first quarter of 2005.

At March 31st, 2005, which is post-private placement, the Company held 51.1m in cash, cash equivalents in marketable securities, compared to a €37.2m balance at the end of last year.

As is typical during our conference call we'd like to take the opportunity to confirm financial guidance.

In summary, we have no changes to guidance to report this morning. Therefore, we reiterate our original guidance.

We expect revenues in total of €30m, whereof €25m from the therapeutic antibody segment and €5m from the research antibody segment.

Expenses are expected to increase in line with revenues and we expect for the full year expenses of €29m.

On the basis of these estimates Morphosys expects to achieve a net profit of €1m for the full year 2005.

That concludes the financial analysis for the first quarter of 2005. We would now like to open the call up to your questions.

Thank you Sir. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] The first question is from Thomas Hoger, DZ Bank. Please go ahead Sir. Mr.Hoger, if you would like to re-signal? Please go ahead Mr.Hoger.

Okay, good.

Mr.Hoger? Once again, if you could please re-signal. Mr.Hoger? If you could please re-signal? Mr.Hoger please go ahead, your line is open.

Okay good finally, third try. Can you hear me now?

Yes.

Okay fine good. So I have a question concerning all the pre-clinical antibodies by Morphosys. When do you expect the first pharma of macrobiotic deals to be closed concerning the further advance to these antibodies?

Thomas hi, this is Simon. Just to confirm again what we said during the call and also what we said at the beginning of this year, that our goal is to partner at least one of these compounds during the course of this year. Precisely when that would be I obviously can't say but that's certainly a stated and maintained goal for 2005.

Okay, so this is after the date of -- after today more likely the cancer antibody, I assume?

No, I really wouldn't want to predict which one of those two it will be. Discussions around both programs continue. In an ideal world we would indeed partner both compounds however our stated goal is that we will partner at least one of them and I wouldn't frankly want to say today which one it will be see. We see chances to partner either of them.

Okay, fair enough and all the best from [indiscernible].

Thank you.

We will take our next question from Dr. Markus Metzger of the Bank Vontobel. Please go ahead Sir.

Hi everybody, Markus Metzger from Bank Vontobel. I have a question on the new collaborations you suggested to close during 2005. Are those already reflected in your financial guidance or is actually the whole batch is covered by existing partnerships?

And then secondly, can you tell us anything about the timing of clinical studies for let's say partner antibodies in-house development you have been involved?

And then maybe you can give us some more flavor on how, let's say the discussion is going about the CD38 project, to see how the interest from potential partners is on that side?

And also maybe share some news about other pre-clinical projects than the CD38 and the MOR102? Thanks very much.

[indiscernible] good morning. I'll start with the financial question. There are some new deals and vision for this year and they are included in our budget and our prognosis for this year of the €30m turnover. Also included in that prognosis obviously is the antibodies by design and Biogenesis group revenues. Should those deals be had at this point we are not willing to say that that would increase the total amount of revenues that we would achieve for the year under the current circumstances we believe that should those deals be had, we would still come in at €30m.

To give you a flavor for the level of firmness of those revenues, more than two-thirds of those revenues are already wrapped up in terms of -- or committed in terms of existing partnerships.

Markus hi. I'll talk to the other questions you had. First of all with respect to the clinical milestones, the GPC program, we know probably as much as you do, which is that the information that GPC has put in the public domain, that they expect data from their phase 1 study of 1DO-923 in the second half of this year. More than that we don't know.

We have no reason to deviate from information that we communicated earlier this year that we have good reason to believe that a further three compounds from partners could enter the clinic by the end of Q1 next year. One of those could make it in this calendar year, but as I said, our current information is still that there could be an additional 3 over and above 1DO-923 in the clinic by the end of Q1 in 2006.

With respect to the CD38 program that you mentioned, that is of course MOR202. All I would say at this stage is that discussions with potential partners are ongoing and as I said in respect to Thomas Hoger's question, we expect and aim to partner either that or MOR102, the anti-ICAM program or in an ideal world both, prior to the end of this year.

You also asked about any other pre-clinical programs, as we announced today at our year-end results conference, we have a new program ongoing called MOR103, which is an inflammation program against a target that we haven't yet disclosed. That program is somewhat early still in the research phase and therefore it's really premature to say anything meaningful or anything of any value about that program and we'd prefer to withhold any substantive comments about that until we generate data that we feel is really meaningful from a commercial perspective.

Thanks very much.

We will take out next question from Dr. Hans Frohnmyer. Please go ahead Sir.

Good morning. There are 3 questions. One is, what are your expectations for the tax rate in the full year?

And the second is, your cost of goods sold, can we expect a similar rise than in Q1 for the full year?

And the third one is, for your Biogenesis business, from the Q1 results it seems to be that you got 0.5m since end of January, does this sit through your full year expectations in the antibody by design business? Thank you.

Okay, I'll take that. Good morning. The first question regarding the tax rate, we actually have the potential of paying tax in 3 various jurisdictions. One in the US through Biogenesis US, one from Biogenesis in the UK and there we expect to pay the statutory tax rates which are in effect in both the US and the UK.

With regard to Morphosys AG in Germany, we have given a projection of €1m profit under IFRS. That will look slightly different to our tax books. We could imagine that for example that the tax books would show somewhat less of a profit and hence since we have tax loss carry-forwards, we don't intend -- or we don't expect at this point to pay any taxes in Germany.

The second question was the COGS, we expect to see -- or what you saw you in Q1 was the effect of adding not only the Biogenesis group sales but also the Biogenesis group COGS and what we saw was that the COGS -- the gross profit margins of Biogenesis were slightly in excess of 50% during the first quarter. We expect that to rise. We felt that the gross margin on the antibodies by design business was slightly under-performing in Q1. We expect that also to rise. So we expect COGS as a percentage of sales for the reagent antibodies until to reduce. That is, the gross margins should improve throughout the year as sales pick up.

And the last question -- I'm sorry could you remind me again what that was?

Yes, just the development of your Biogenesis business. Since end of January, you obviously made €0.5m in revenues, so do you stick to your full year guidance, I think that was €3m for the full year, for the Biogenesis business?

Yes, we expect that roughly it would be roughly €3m. Now I think I would like to move away from giving individual targets to each unit and just say for the unit as a whole, the research antibody unit, which includes Munich Antibodies by Design plus Biogenesis UK and Biogenesis US, we expect for the entire until revenues of roughly €5m.

Okay.

And we still have no reason to believe that that shouldn't happen by the end of this year. That is, we expect a pick up of sales.

Thank you.

[OPERATOR INSTRUCTIONS] We will take our next question from Mr. Nick Turner of Jeffries International. Please go ahead Sir.

Hello. Thanks for taking the question. Could you perhaps tell me whether or not there's been any progress with MOR101 in burn? Whether there are discussions on this partnering ongoing and whether there's been any interest or whether effectively it's a program that's very much on the back burner?

In addition, with MOR102 in psoriasis, could you tell me how you intend to move this program forward and as to whether or not the inconclusive study that you reported today, in fact was a study that was contracted out. And if so, does this give you a feeling that perhaps you ought to be expanding in-house or indeed to be able to do such studies yourself?

And maybe on -- a final point would be, perhaps you could discuss briefly the approach that Morphosys has to the development of in-house partnering candidates and whether the approach that you have is purely opportunistic or whether or not you're building up an R&D business driven by novel proprietary targets?

Nick hi. I'll take that. I don't know whether the pun was intended, to say that MOR101 was being put on the back burner but

Not really, I'm sorry, it was a bad choice of word.

The answer to that is, in the discussions that we're having around MOR102, burn is always part of the discussion and we kind of see those programs together and you will recall that the original data that Boehringer Ingelheim generated that burn was indeed with the IgG, the full IgG, and the only difference between MOR101 and 102 is [indiscernible] versus IgG. So it could indeed be that the deal we do may be primarily around the IgG, but could be a focus on psoriasis as well as burn. So in a sense, it's -- that's a little bit misleading to see those as really separate programs. They are really related since they are essentially the same molecule in two different formats. They're essentially related and they're all kind of rolled into one discussion. So I guess we don't see really any chance of partnering them separately but they would be part of a single deal.

With respect to psoriasis study, in answer to your question, yes indeed that was an externally conducted study. We used a group here in Germany to do the work and the fact that the study was inconclusive, I don't want in any way to reflect on them. What we've learnt is that these types of studies, where we use [Skip Morris] on to which psoriac skin from donors is grafted, are rather unpredictable and that's one of the reasons why the partners that we're talking to, who are knowledgeable about this stuff, are actually somewhat relaxed that the study was indeed inconclusive.

We haven't yet decided precisely what additional work we will do in this area. That's something that we are currently looking at, but we are currently considering some organizational steps that we think will strengthen our ability in this area and it would be premature for me to say anything about those yet, but in the coming weeks we hope to be able to talk about that in more detail.

With respect to the partner programs, we see that really as the rolls-royce part of our business if you like. We really have an extremely good reputation in the pharmaceutical industry for our partnering activities. You talk to any of our current partners about how we perform in those partnerships and I'm sure that the feedback will be uniformly positive and as I said during the presentation, we continue to see excellent demand out there for our technology and for our work. And so, we don't really see that as an opportunistic business, the way you said. There is genuine demand from potential partners out there and we continue to try and fulfill that demand.

With respect to whether we would initiate our own programs in order to look to out-license those then, that will continue as we've said in the past, to be ad hoc, in the sense that as and when we identify interesting targets where we think we can generate added value with the HuCAL base program, we will do that. That doesn't mean that we are committing to a certain number at a certain time, but we will continue as resources allow to initiate own programs and to seek to partner those programs.

Okay, thanks very much. And from the opportunistic point of view I was referring primarily to your in-house programs as to have you -- what the approach is within Morphosys's R&D let's call, for research in terms of the choice of potential target and what to move forward with and I think that you answered that.

Yes, the MOR103 is a good example there. That was an opportunity that was identified by one of our scientists where we saw a good opportunity to add value with -- and optimize HuCAL antibody and therefore we have chosen to pursue it.

Thanks.

[OPERATOR INSTRUCTIONS] Gentlemen it appears we have no further questions and I would like to turn the call back over to you for any closing remarks. Please go ahead.

Thank you. Before we conclude I'd like to remind you all of the key messages to take away from this call. First the acquisition of Biogenesis and the subsequent €17m pipe gives us much greater flexibility as we focus on growing our business. Second, the core therapeutics business continues to perform well as illustrated by the deals with Bristol-Myers Squibb and Boehringer Ingelheim. And finally, the commencement by GPC of clinical trials with the HuCAL antibody 1do-923 signals we hope, the first of a series of antibodies derived from our proprietary technology, which will reach the clinic in the months and years to come and is therefore a landmark event for Morphosys.

That concludes the Morphosys Q1 2005 conference call. Should any of you have any additional questions, Dave and I are both in the office for the rest of the day and would be happy to talk to you one on one. Thank you again for your participation and good bye.

Ladies and gentlemen that will conclude today's conference. Thank you for your participation and have a good day.