MorphoSys AG (MOR) 2005 Q2 法說會逐字稿

Good day ladies and gentleman and welcome to the Morphosys AG Second Quarter 2005 Results Conference Call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to your host today, Mr. Dave Lemus, CFO. Please go ahead, sir.

Good morning and welcome. This is Dave Lemus, CFO, MorphoSys, calling from the U.S. this morning. With me on the call this morning is Simon Moroney, our CEO, who is sitting in our headquarters in Munich.

First we'd like to welcome you to this conference call and thank you for participating. During the call we would like to talk about the Company's financial results for the first six months of 2005.

Simon will begin by giving you an overview of the last quarter, then I will review the financial results for the half of 2005. Afterwards we will open the call to your questions.

Before I start I want to remind you that during this conference we will present and discuss certain forward-looking statements concerning the development of MorphoSys 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 now like to hand over to Simon Moroney.

Thank you Dave, and also from me, welcome to everyone participating in this call. The second quarter has again been one of solid performance for MorphoSys. The financial results bear this out at €15m. Revenues are absolutely in line with our revenue target of €30m for the full year. Expenses are well under control and the net result once again highlights the fact that the business is performing strongly.

The Therapeutic side of the business has performed particularly well. The most visible aspect was the extension of our collaboration with ImmunoGen Inc. After 4 successful years ImmunoGen chose to extend their license to the HuCAL technology for a further year and took the opportunity to upgrade to the latest HuCAL Gold version of the library. For us this means additional license revenue and potentially new product programs based on the application of our technology.

What is less visible in the Therapeutics unit is the excellent progress being made in our ongoing partnerships. This is the case because much of the time our partners are not prepared to release any information about the status of ongoing projects. While we understand this position, it does limit what we can say about the programs and certain payments we receive under the collaboration.

What we can say is that our strategy of maximizing the number of partnered programs, based on our technology, is paying off. In Q2 2005 we started another new program with one of our major pharmaceutical partners, which wasn't disclosed separately. There are currently some 25 active partnered programs and as these move forward the frequency and size of milestone payments is increasing. This has a positive impact on our revenues, for example milestone payments made a significant contribution to our revenues in this quarter. Even more importantly, with every milestone that is hit the probability of that antibody becoming a marketed drug goes up.

Partnered programs based on our technology in which we participate through milestone and royalty payments have always been at the heart of the MorphoSys strategy and it is very gratifying to see the positive effects of this strategy reflected in our financial results as well as the burgeoning pipeline of Therapeutic products based on our technology.

Regarding our proprietary drug programs we continue to carry out discussions with potential partners on their further development.

On the Research Antibody side of the business, in the second quarter we completed the integration of the 2 Biogenesis businesses that we acquired in Q1. Revenues for the unit came in a little below our target, to some extent because our attention was focused mostly on integration during the quarter, but demand is robust and we expect to meet our objectives for the full year.

During the quarter we announced the collaboration with ProQinase, a division of KTB Tumorforschungs GmbH, and the Natural and Medical Sciences Institute of the University of Tuebingen to make antibodies against 250 Protein Qinases. This project is being supported by a €2m grant from the German Federal Ministry of Research. Qinases comprise an important class of enzyme, many of which are implicated in diseases. This is an excellent example of the application of our automated HuCAL technology enabling a high throughput approach to the characterization of an important class of proteins.

We made 2 important appointments during the quarter. Dr. Robert Friesen joined us as Director of Pre-Clinical Development. He will help us with the planning and execution of the next steps with our proprietary product candidates and with subsequent molecules that we may choose to pursue. Robert came to us from AM Farmer in Holland where he was VP of Research and Pre-Clinical Development.

The second appointment was of Dr. Bernhard Erning who becomes are Director of Treasury & Corporate Development. Bernhard has many years experience in international investment banking behind him, including positions as Head of Equity Capital Markets for West LB and as Executive Director of Corporate Finance for UBS in London and Frankfurt.

These 2 senior appointments impact areas that are of great importance to the Company and on which we place a high priority.

Finally in my review of the quarter we are very proud to have won ergo Kommunikations Award for Corporate Governance, Best TecDAX Company and Best Biotech Company overall for the second year in a row. We attach great importance to this aspect of Company management and this award is a pleasing recognition of that fact.

That concludes my review of the quarter. I would now like to hand back to Dave for his review of the financials.

Thank you Simon. To begin the financial analysis, I'll start with revenues. Company revenues grew by 73% in the first 6 months of 2005 to €15.4m compared to €8.9m in the same period of last year. Reasons for the increase include significant new collaborations which were signed in 2004, the addition of Biogenesis revenues in our consolidated numbers and success based payments from existing collaborations achieved in the first 6 months of this year.

The MorphoSys Research Antibody segment contributed 1.8m revenues to the consolidated turnover for the first half year. Revenues from our Therapeutic Antibody and Target Research collaborations generated 88% of total revenues while the Research Antibody segment generated 12% of the total.

COGS rose significantly in 2005 compared 2004, rising from €0.4m to €1.1m. The main reason for the increase was inclusion of the Biogenesis Companies costs of goods sold in the group accounts in the current year, which amounted to €0.6m of the total COGS amount.

For the first 6 months in 2005 total other operating expenses increased by 31% to €12.2m. In line with the increase, costs for Research and Development increased to €6.8m compared to €5.2m in the same period the previous year. The increase of €1.6m resulted mainly from higher personnel costs and higher material expense, as a result of new collaborations signed in 2004 as well as increased license fees due to a milestone payment achieved in 2005.

SG&A expenses increased by €1.4m to €4.9m. This resulted mainly from higher personnel costs stemming from the contribution of the Biogenesis Group as well as increased third party advisory fees. In particular marketing expenses.

Stock-based compensation, in the amount of €0.6m for the first 6 months of 2005 was essentially unchanged compared to the previous year.

MorphoSys investment in plant, property and equipment or CapEx amounted to €0.3m for the first 6 months of 2005 compared to €0.7m for the same period last year. Last years CapEx was heavily impacted by investment in the Antibodies by Design Automation facilities which are now largely finished, therefore the reduction in CapEx.

Depreciation for the first 6 months accounted for €0.4m compared to €0.3m in the same period of the previous year.

Non-operating expenses amounted to €0.2m compared to a non-operating loss of €0.5m in the same period of the previous year and arise mainly from foreign exchange losses and interest expense. The amount you see as an income tax benefit in the amount of €0.1m stems from the Biogenesis purchase price allocation, or PPA, which we did in Q2 this year. More specifically it's the amortization of deferred tax liabilities associated with a step up of assets. We will talk a little bit more about the PPA in just a minute.

For the first 6 months of 2005 the Company presented an operating profit in the amount of €2.0m compared to last year's loss of €0.7m. An income of €1.8m resulted for the first half of 2005 compared to a net loss of €1.2m in the first half of 2004.

At June 30 the total number of shares issued were 5.9m compared to 5.4m at December 2004, which reflects the successful capital increase which we conducted in the first quarter of this year. At June 30, 2005 the Company held 49.4m in cash and available for sale - financial assets compared to 37.2m balance at December 31, 2004. The higher cash amount again reflects our cash positive business as well as the capital increase conducted in Q1 of this year.

The only item I'd like to discuss on the balance sheet today are the step up and net assets relating to our purchase price allocation in conjunction with the Biogenesis acquisition. In the financial report we issued today, you'll see our preliminary PPA and summary form and see the total step up and asset values equalled roughly to 0 - to €2.2m. This puts our goodwill as a percentage of the purchase price at roughly 56%.

That concludes the financial analysis.

As is typical in these conference calls, we'd like to take the opportunity to confirm financial guidance. In summary we have no changes to guidance to report this morning. To reiterate the original guidance. We expect revenues in total of €30m thereof €25m from the Therapeutic Antibody segment and €5m from the Research Antibody segment.

Expenses are anticipated to increase in line with revenues and we expect for the full year 2005 €29m of expense. On the basis of these estimates MorphoSys expects to achieve a net profit of €1m for the full year. Although we currently show a net profit of €1.8m, there is a ramp up of expenditure expected in the second half of this year. Additionally the first half was impacted by success-based payment revenues, happened earlier in the year than expected, resulting therefore in somewhat higher profit margins for the first half of the year.

Hence it would be premature to conclude our level of profitability will continue for the year and therefore we stick with our original guidance of €1m profit for the full year.

That concludes the financial analysis for the first half of 2005. We'd now like to open up the call to your questions.

Thank you Sir. [OPERATOR INSTRUCTIONS] We will now take our first question from Thomas [Visler] of Equities GmbH. Please go ahead.

Hello, this is Thomas [Visler] from Equities in Frankfurt speaking. Thank you for taking my question. My first question is concerning the very good result of the first half of the year. You mentioned it right now that there is better than expected revenue stream in the first half and the second half should be an increase in expenditures. Could you please be a little bit more specific on that? Also concerning a more expenses to be seen in the second half, that is the one question.

The other question is on the PPA procedure. Did I understand you correctly that the allocation on assets is fixed right now so that we will not see any changes in goodwill amortization and so on and so forth in the second half of the year? Thank you.

Thomas, hi and welcome to the call. Simon here. We mentioned at the outset that we're sitting in different cities on sides of the Atlantic so we'll try and coordinate the answers to the questions as well as possible. I think on these two points I would ask Dave, regarding expenses in the second half of the year and the PPA, to comment.

Okay, I'll start with the PPA. As we all understand under IFRS, under the international accounting standards, the PPA is preliminary in it's' nature, meaning that we have 12 months from the date of acquisition to make changes. That being said, we have now booked the preliminary PPA and we do not expect any significant changes within the next 12 months. That being said we do leave it open that there may be minor adjustments to the PPA in the coming quarters but we don't expect anything significant.

As it relates to your first question on profitability, as I mentioned in the call our profitability was impacted, for example, by one of the milestones which we achieved during the quarter. As we've said for many years when milestones start to flow that will significantly positively increase our result. In the second half of the year we don't expect milestones to flow in the same level that they did in the first half, hence profitability will lower somewhat. Additionally as I said in the call our expenses will ramp. Some of those expenses will ramp, for example, in the pre-clinical development area. Beyond that I think I can't exactly comment where the expenses will be or define it to a particular block, I think the biggest block we can say is the development of pre-clinical compounds in the second half of the year.

May I take an additional question on that?

Yes.

You indicated in the management report concerning the R&D expenses that you are moving out of the - that you are using the cost of external lab funding. Is this a trend and is this meaning that you will do more lab work internally in the future than in the past? Thank you.

Sure, no. No, I think that would be a wrong conclusion to draw. I think the reduced cost relating to external lab funding have more to do with timing of these expenditures rather than a shift from external to internal.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We will now take our next question from Martin Possienke of Equinet. Please go ahead Sir.

A very good morning. It's Martin Possienke from Equinet. Firstly, with regard to Research Antibodies, I think I thought correctly you had a loss of €1.4m in the first 6 months and you spoke before about break even for the full year. Is this reachable?

And then secondly with regard to your tax loss carried forward I assume you must have something like €20m or so. Will there be a certain point in time where you have to capitalize these tax loss carried forward?

And then thirdly maybe you can briefly remind me of the terms of the Novatis collaboration, maybe in particular with regard to options of Novatis to obtain full access to MorphoSys technology?

Okay Martin I'll take part of that. And with respect to the Research Antibodies Unit I will comment on the qualitative development of that business, Dave may want to add something with respect to the financial result there. As I said during the presentation, we certainly spent some time focusing on integration during the first 6 months, but the underlying demand and the underlying growth is strong and for example, on the customs side of the business where this would be the original antibodies by design business where we make custom antibodies for people on demand, we are continuing to see really rapid growth there, so, at a rate of 80 to 90% year on year. So that fundamental underlying growth is what's driving the business and that's why we're able to reiterate what we said at the outset which is that we still expect to reach the target of 5m revenues and 5m expenses for the year as a whole for that unit.

While I'm at it, I'll also pick up on your question with respect to Novatis and then hand over to Dave for the tax loss carried forward question. Recall that the agreement with Novatis is intended to run for 5 years although it may only last 3 years. We don't know yet whether that option to extend for the additional 2 years will be exercised. Novatis has committed some approximately 30m over the first 3 years and for the first time we've granted an option for Novatis in this case to internalize the entire technology platform. Novatis may exercise that option any time within the first 3 years, exercise will trigger a payment, a significant payment from Novatis which we've not publicized and are not able to publicize. No decision on there part has been made yet whether they will or will not exercise that option.

It was in the first 3 years?

Yes.

Okay, thank you.

So then I would propose to hand over to Dave for the tax loss carried forward question.

Okay. Regarding the tax loss carried forward, the amount that we have in terms of tax loss carried forward, which we think are applicable for use going forward, the amount is slightly in excess of €25m and yes, we will start to think as we become more and more profitable how we will think about turning some of those tax loss carried forward into tax benefit assets. But yes that is an issue, perhaps less for this year but certainly perhaps, for example, if we're going to be profitable next year, one for next year.

Related to your question on the Research Antibody segment. Operating results, if one looks at the operating results the Biogenesis Group was actually slightly cash positive and profitable and hence the bulk of the loss occurred on the Antibodies by Design side, which led the entire unit into loss for the first 6 months. Some of that has to do with the fact that we have allocated now more of the infrastructure and administrative costs to the Antibodies by Design unit in Munich.

Previously if you had looked at these allocations, not as much administrative costs or infrastructure costs had been allocated to that unit. In terms of the prognosis for the full year, we still are trying to achieve break-even for that unit at the [indiscernible] Committee [indiscernible] or above. That being said that could be impacted by how we ultimately allocate expenses from the headquarter from the Therapeutic Antibody Unit into the Research Antibody Unit so that it could be also slightly minus, but we are targeting break-even still.

But at least we can assume that, let's say, starting Q3 the Research Antibody Unit will be profitable on a quarterly basis?

That is the target.

Okay, thank you.

[OPERATOR INSTRUCTIONS] We now have a follow-up question from Thomas Visler of Equities GmbH. Please go ahead.

Thank you for taking the question. Thomas Visler once again. [indiscernible] concerning the more 102 procedure. Is there any new action in site concerning some new tests and so on and so forth to proceed in this the project? Thank you.

There's no new news at this state Thomas. As I mentioned during the presentation we've hired Robert Friesen to help us plan and execute the further development of those compounds. At such time as we have new information we will bring it to your attention. At this stage we have nothing new to say about that. I want to emphasize something though that we said on the last call on the back of the inconclusive animal study we did. We remain committed to our own proprietary product programs and that's one of those programs, so don't interpret our silence on this matter to mean that we're losing interest, that's certainly not the case.

Until today you don't have any new signs from your partners concerning entering their project into clinical phase 1?

Again, earlier this year I believe at the Year End Results Conference Call, we said that we had information from partners that an additional 3 compounds were expected to enter the clinic until the end of Q1 next year.

Indeed.

And we have no information that would lead us to alter that projection at this stage. In other words we're still expecting a further 3 compounds to be in the clinic, making a total of 4 of course including the 1D09C3 being developed by GPC, that would make a total of 4 by the end of Q1 next year.

Okay, thank you.

It appears that there are no further questions at this time. Dr. Simon Moroney, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you. Before closing the call I would like to remind you all of the main points to take away.

First, the Therapeutics part of our business is performing particularly well. Excellent progress in ongoing partner projects has made a significant contribution to the strong financial results for the quarter.

Second, the integration of Biogenesis is complete. Overall we're on track to reach all of our goals for this year.

That concludes the call. Should any of you wish to follow up with us directly, then I at least am available in the office here in Munich for the rest of the day. Thank you again for participating and goodbye.

Ladies and gentlemen, this will conclude today's telephone conference. Thank you for your participation, you may now disconnect.