MorphoSys AG (MOR) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the MorphoSys AG third quarter 2005 results conference call. For your information this conference is being recorded. At this time I would like to turn the call over to your host today, Mr. Dave Lemus, CFO. Please go ahead.

Good morning and welcome. This is Dave Lemus, CFO MorphoSys. With me today is Simon Moroney, our CEO. We are calling you 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 nine months of 2005.

Simon will begin by giving you an overview of the last quarter. Then I will review the financial results for the first nine months of 2005, and provide a short summary of the current status of the Biogenesis integration. Afterwards we will open the call up to your questions.

Before I start I will remind you at this conference that 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. We would therefore caution not to place undue reliance on such forward-looking statements which speak only as the date hereof. I would now like to hand over to Simon Moroney.

Thank you Dave. Also from me, welcome to everyone participating in this call. Once again we are delighted to be able to report on a very strong quarter for the Company. The financial results, especially the improved full-year profit guidance, speak for themselves. Indeed for the year as a whole, progress in our core Therapeutic Antibody segment has been especially strong as evidenced by the growing proportion of milestone revenue in our top line.

This is evidence of the depth of our partner's therapeutic pipeline, which is itself a validation of our strategy of entering multiple high quality antibody partnerships. In addition to this strong operational performance we have made considerable progress in the areas that are of strategic importance for the Company, as I will describe.

The highlight of the quarter was our deal with Eli Lilly. This deal came together with full and final settlement of an ongoing dispute with AME, a fully owned subsidiary of Lilly. Under the terms of the deal we have granted Lilly a license to our HuCAL GOLD technology for their in-house R&D activities. This license also comprises options for Lilly to develop a number of HuCAL antibodies as therapeutics, and obviously we hope that this will result in growth in our partnered pipeline.

In addition we have established fixed terms under which Lilly may gain access to research antibodies from our Antibodies by Design unit. In return, we and our partners have freedom to operate under the [Kaufman patent]. We are delighted to have achieved an outcome, which not only provides additional business opportunities for us, and our two main business areas, namely Therapeutic and Research Antibodies, but simultaneously brings to an end the only ongoing litigation that we had.

Our core business based around partnered therapeutic projects continues to perform strongly. Altogether some 28 partnered therapeutic antibody projects are currently ongoing. This is to be compared with the 24 that were active at the start of this year. The expansion of this partnered pipeline is at the heart of our strategy. By delivering optimized fully human antibodies against a range of targets to quality partners, we maximize the probability that product based on our proprietary technology will come to market, and thereby maximize the value we extract from the technology.

Progress was announced from our two biggest partnerships, namely Centocor and Novartis. With Centocor we initiated a new program against an inflammatory target, under the December 2004 extension of our deal. With Novartis we hit the first of what we hope and expect to be many milestones, when we delivered an optimized HuCAL antibody against the cancer-related target molecule.

The deal that we announced with Shionogi marked our first [high double] deal in the Japanese market. Here we are delighted to highlight the contribution of our marketing partner, [Jin Frontier] Corporation, who played a key role in supporting our Business Development team and making the deal a reality. The Shionogi announcement came less than a year after we signed up with Jin Frontier. We hope and believe that this will be the first of a number of business deals in an important Japanese market.

As already announced during the Q2 conference call we appointed Robert Friesen to the position of Director of Pre-Clinical Development. Robert came to us from [break in audio] program and drive the execution of those plans. In this regard we expect in the near future to finalize the plan for the future of the three main programs, MOR102 and MOR103, which are HuCAL antibodies for inflammatory diseases, and MOR202, a HuCAL antibody for cancer.

Our overall strategy with respect to these programs has not changed. Mainly to secure value through the further development with a qualified partner. In this regard discussions are ongoing and I do not want to comment further on these discussions at this stage. We hope to be able to communicate -- to provide a comprehensive update of the proprietary portfolio as a whole, no later than our year-end results conference in February of next year.

The excellent performance in the Therapeutics area compensates for some lag in our other main area, namely the Research Antibodies unit comprising Antibodies by Design plus the acquired Biogenesis companies. While we continue to see good uptake in our services and products, the growth on that uptake has not been at the rate that we anticipated when we acquired Biogenesis. As Dave will describe shortly, the result for this unit in isolation has come in somewhat short of where we expected. The state of the difference is not enough to make an impact on the Company as a whole.

Most importantly we are encouraged by the increasing awareness of HuCAL in the research and antibodies market, and remain convinced by the logic behind this business unit, and its potential to help maximize the use of our proprietary technology in the life science community.

Before handing over to Dave I am delighted to pick up on a second announcement that we made today, namely the appointment of a new Chief Scientific Officer. Effective November 1, of this year, Dr. Marlies Sproll will join the Vorstand in this position. Marlies has been with us for five years having come from positions at Boehringer Ingelheim and [E] Merck.

In searching for this position we have conducted a comprehensive survey of potential candidates. The survey convinced us that in Marlies we have someone who combines, in an ideal way, a deep understanding of therapeutic antibodies, much of which comes from her time at BI and Merck, conversance with the HuCAL platform and an enormous level of trust and respect both within the Company and from our strategic partners. On behalf of Dave I look forward to Marlies joining the Vorstand of MorphoSys and to working with her in the years ahead.

That concludes my review of the quarter. I'd 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. Revenues grew by 52% in the first nine months of 2005, to €23.8m compared to €15.7m in the same period of last year. Reasons for the increase included new deals signed in 2004, success based payments from existing collaborations in 2005 and the effects of consolidating Biogenesis into our accounts in 2005.

Revenues arising from the Therapeutic Antibody segment accounted for 87% or €20.7m of total revenues for the first nine months of 2005. That compares to €16.4 - sorry that total comprises €16.4m funded research and paid license fees, and €4.3m or 21% of success and/or milestone fees.

The Research Antibody segment comprising MorphoSys’s Antibodies by Design unit, and the Biogenesis Group companies in the U.S. and the U.K., generated 13% or €3.1m of total revenues. The Biogenesis Group contributed €2.2m in revenues or 71% of total segment revenues. Antibodies by Design contributed the remaining third or €0.9m of total Research Antibody segment revenues.

We move on to costs of goods sold. COGS only arise in the Research Antibody segment. COGS rose significantly in 2005 compared to 2004, rising from €0.7m to €1.9m. The main reason for the increase was the inclusion of the Biogenesis Group companies profit consoled in the Group accounts in the current year which amounted to €1.1m of the total.

For the first nine months of 2005 total other operating expenses, including stock-based compensation, increased by 30% to €18.1m. The total increase in operating expense of €4.2m was mainly due to higher personnel-related and material costs, in conjunction with new collaboration as well as increased intangibles expenses. The acquisition of the Biogenesis Group companies had the effect of increasing other operating expenses by €1.2m.

In line with this increase costs for Research and Development increased to €9.9m compared to €8.2m in the same period of the previous year. The increase of €1.7m resulted mainly from higher success-based license fees, as well as the effects of payments due under the Eli Lilly cross-licensing agreements signed in the third quarter of 2005.

Higher personnel costs and materials expenses resulted from new co-operations signed. Sales, general and administrative expenses increased by €2.4m to €7.4m. This resulted mainly from higher personnel costs, due to the contribution of Biogenesis, as well as increased costs for external marketing and legal services. Biogenesis total contribution to sales, general and administrative expenses amounted to €1m for the first nine months of 2005.

Stock-based compensation, in the amount of €0.9m for the first nine months of 2005, remained almost unchanged compared to the previous year. MorphoSys’ investment in plant, property and equipment, or CapEx, amounted to €0.4m for the first nine months of 2005 compared to €1.2m for the same period of the prior year. Last year's CapEx was heavily impacted by investment into the Antibodies by Design automation facilities, which are now largely finished. Hence the reduction of CapEx in 2005.

Depreciation for the first nine months of 2005 accounted for €0.6m compared to €0.5m in the same period of the previous year. Non-operating expenses summed to zero compared to a non-operating loss of €0.2m in the same period of the previous year.

The interim short-term investments in the amount of €0.5m and tax benefits in the amount of €0.2m were offset by losses from foreign exchange in the amount of €0.5m and interest expenses from the category in the amount of €0.2m.

For the first nine months of 2005 the Company presented an operating profit in the amount of €3.8m compared to an operating profit of €1.2m for the first nine months of 2004. A net income of €3.9m resulted for the first nine months of 2005, compared to €1.0m in the same period of the previous year. The resulting diluted net profit per share for the entire MorphoSys Group for the first nine months ended September 30, 2005, amounted to €0.67 per share, compared to €0.18 per share in the same period of the previous year.

At September 30, 2005 the total amount of shares issued was approximately 6 million shares compared to 5.4 million at December 31, 2004 but [inaudible] the capital increases in the first quarter of this year, approximately 68,000 shares created as a result of exercises out of equity incentive schemes.

In terms of liquidity at September 30, 2005, the Company held €50m in cash and cash equivalents, compared to €37.2m at December 31, 2004. That concludes the financial analysis.

Now before I move on to the financial outlook for the remaining year, I would like to spend just one minute talking about the integration of the Biogenesis Group, acquired in January of this year.

We are happy to announce that by the end of the third quarter 2005, substantially all integration related to the acquisition of Biogenesis has now been accomplished. A few examples. Biogenesis' Antibodies by Design have now merged all marketing and commercial activities into each other. Importantly the combined companies have now been included -- have now been organized along three market segments. These three segments include the Custom Monoclonal Antibody market, Custom Monoclonal antibodies are generated in Munich by Antibodies by Design, using HuCAL, the global clients of both companies. In the second segment Biogenesis provide a comprehensive catalogue of antibody products. This serves as a potential portal for other segments of the business, not to mention as a business in its own right.

The factor in the last months the combined companies have started in-house catalogue projects against novel targets. For example in the area of bone metabolism. A first set of HuCAL derived antibodies were very recently added to the Biogenesis catalogue, and are presently being tested with industrial customers.

Last, but certainly not least, is a contract manufacturing business, where antibodies are produced and scaled from 10mg to 10g on behalf of customers.

The bottom line about any integration is financial impact. On this note, to date, the merger has allowed Biogenesis to secure more than €200,000 of business revenue-related synergies using HuCAL already in 2005, and added numerous new customers to the MorphoSys research antibody customer roster, which have the potential to provide future revenue growth for the combined businesses. In upcoming calls we hope to update you regarding further developments about how the combined unit is progressing.

Now to the outlook. As is typical during our conference calls, we like to take the opportunity to update our financial guidance. At the beginning of this year we estimated that revenues would come in at roughly €30m. This number remains our best estimate of annual revenues for this year. That being said, we see potential upside to the numbers if certain milestones take place before the year end. However, as these milestone events are not in our control, and past experience has shown that these -- timing around these milestones is very difficult to estimate, we choose to remain with our €30m target revenue for the year until we have more clear visibility on these events.

Relating to segment revenues, we expect to see a slight out-performance of sales on the Therapeutic Antibody segment, but more specifically we see approximately €26m versus the original €25m as likely.

This over-performance is balanced however by the slight underperformance of expectations on the Research Antibody segment side of the business, which we now expect to come in at roughly between €4 and €4.5m below the originally planned €5m which we set as a target for the segment at the year’s beginning.

On this note, we had originally hoped, shortly after the acquisition at the beginning of the year, that the entire unit would break even for the year prior to corporate allocations. On the back of the unit's performance to date, and the inclusion of amortization related to the purchase price allocation performed in the summer, we have to scale this ambitious target back to an operating loss of approximately €1.25m for the full year.

Total operating expenses prepared to the beginning for the MorphoSys Group are €29m. Assuming a revenue level of €30m, we believe that there is scope for reducing our total operating expense estimate today down by €1m, so that a total operating expense at €28m for the year will result.

Reasons for the decrease in expense are various, and include among other reasons 2004 legal provisions being higher than the 2005 actuals. Lower stock-based compensation expense estimates due to forfeitures of stock options and lower product development expenses. The impact of this change is that we would estimate year-end profitability to rise by €1m to €2m. Although we show profit of over €3m in the first nine-month figure, we allow ourselves room in Q4 for expense provisions related to further proprietary product development expenses as well as possible M&A expenses.

Additionally, as I mentioned before, the Q4 numbers have a high proportion of success-based payments from partners compared to other quarters. Should these activities I just mentioned not materialize as we plan on the expense side, and revenues attain the level we expect for the quarter, then there may be further scope for expense reductions beyond that which we have announced today.

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

Thank you. Ladies and gentlemen the question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. Our first question comes from Thomas Schiessle with Equities GmbH, please go ahead.

Yes, this is Thomas Schiessle from Equities GmbH, hi gentlemen.

Good morning. Hi Thomas.

Ah wonderful, so the line is open. Good morning Dave, good morning Simon. One question on the Antibody by Design, what has been the reason for this lack in dynamism in the overall business with this Antibody business? Is the question of integration the main issue? Or is it the overall market? Thank you.

Okay, when you talk about lack of dynamism, it's important to bear in mind that this is all relative. Especially if you look at the core customs Antibodies by Design segment itself, that business is currently growing at 80%. So for any business that is growing that fast, it's not that easy to be precise in making projections about how fast it's going to grow in a particular time period.

Our original estimates have turned out to be somewhat higher than reality, and that's the reason for the discrepancy. However, we still see very strong growth, very rapid growth, and as I've mentioned importantly, increasing awareness in the market place for this new technology which is only just getting a foothold remember. This is a completely new technology in a well established marketplace. So the issue is really nothing to do with integration of Biogenesis, which we feel has been successfully accomplished, but much more to do with, a little bit the unpredictability of forecasting a very rapidly growing business segment.

Yes -- my record work is correct. Antibody by Design has the run rate of approximately 300,000 per quarter, will there be an uptake in activity with this business unit in the future? Or is this the run rate we should put into our spreadsheets for the quarters to come?

We expect it to grow. If you look at this year it will, we believe, come in at about 1.3 for the year as a whole. Remember it was at about 800,000 last year. We are seeing rapid growth here and we are seeing no reason why that growth should diminish in the years ahead. The challenge for us always is to estimate as precisely as we can how fast that growth will be, but we still see it as being a very attractive and a very rapidly growing segment of the business.

Maybe if I could just add to that, I would fully support Simon's comments that for the year ahead and the years ahead that it will grow dynamically, but Thomas your question may have been for the next quarter, if I understood your question correctly, should you expect a similar run rate, and the answer there is yes. At the next quarter we would predict a similar run rate to what we've seen in previous quarters.

The automation activity is within this business unit are completed right now, so there is the room for more business to come?

Sorry, was that automation did you say?

Yes, automation.

Yes, we have the capacity to grow that business now that the automation is in place. Of the orders that we get, not all of them can be handled on the automation, most of them can, something like 80% of them can be handled on the automation facilities we have. There is always a proportion, roughly 20% currently that can’t, but we certainly, now that the automation is in place, have the scope to increase the number of routine projects, shall we say, that we run there.

Okay, thank you [for the call].

We will now take questions from Martin Possienke from Equinet.

Good morning. Okay I have got a couple of questions I would say. The first one maybe to the Therapeutic Antibody field. If I understood you correctly, the figure was 28 antibodies in development, then maybe you can give me the figure how many of these 28 antibodies can reach the clinic within the next 12 months I would say. I think you gave guidance a couple of quarters ago that three antibodies will reach the clinic in Q1 '06, is this still correct?

And secondly maybe coming to the Research Antibody unit, can you quantify the integration costs of the first three quarters of this year? And then if it looks like you need approximately €6m in the revenues in order to break even. Can we be confident that you can reach a figure of this kind on '06? Okay and now I'm with the guidance somehow.

And thirdly regarding your guidance for 2005, in comparing your guidance with the figure of €3.9m reached after nine months, what could be the reason or what explanation can I give to my clients for net loss of more than a €1m in Q4?

And, okay it is a question I should not ask because you will not answer, but regarding the outlook '06, is there any reason to believe that you will be less profitable than in '05?

Okay, let me start Martin on the Therapeutic Antibody program. We have said indeed that we expect an additional three antibodies to go to the clinic in the foreseeable future, beyond the one that's already in the clinic, that's the GPC antibody. And very recently we have received advice from one of the partners that we think will be responsible for two of those additional three, that they foresee a delay. This is not because of any lack of interest in the program or any fundamental problems, but simply the kind of technical issues that can arise during pre-clinical and manufacturing development of any compound.

So the current situation, our best estimate, and remember that these are things that are not under out control, they are purely under the control of our partners. But our best current estimate is that yes, indeed there will -- we do have visibility on those three additional antibodies entering the clinic.

One of them we still believe will be before the end of Q1 next year, but another two will be delayed beyond that. And that delay could be of the order of 12 months, or possibly as much as 18 months.

Okay. So actually it will be one antibody to move into the clinic in '06?

I want to emphasize again, this is based on information we have from our partners and our best current estimate, we believe there could be one within the first quarter of 2006. We believe that there could be another two within 12 months from now, so that would still fall next year, but that that could be up to 18 months which, in the worst case, would take it into 2007 of course.

Okay. Just to clarify. It's a delay -- it's not a delay of 12 months but the period is 12 months starting today?

Correct, 12 to 18 months from today. We're talking roughly about the end of next year to the early part of 2007 for those two. The one still seems to be on track for Q1 of next year.

Okay.

Okay there was a pair of questions relating to 2006 guidance which unfortunately I won't comment on.

I thought so.

What I can however say is, and I think it's important to stress this so that expectations are in line with what we project for next year. MorphoSys is a profitable company currently, has been profitable since last year. That being said, we do not run this company on an EPS cent per basis. We think that profit is important it's important to remain independent of capital markets and that's the reason we run it profitably, however we are not currently running the company as a growth company. We'll run it so that it has a few extra cents per share EPS. So I think that's important to stress so that we all have expectations that people are not calculating a certain rise in EPS. It may be higher, it may be lower, but again the point is, that we don't run it on an EPS basis.

In terms of a question related to the Q4 of 2005. There was the remark that for us to come in €2m we would have to make a loss in the final quarter of slightly over €1m. In my speech I feel I addressed that point, which is we have budgeted in the fourth quarter a certain amount of product development expenses related to our proprietary product development portfolio, and as well potentially M&A expenses.

As I mentioned if those things happen as budgeted, then we believe that expenses would land in as we project them. However, if they don't occur then there may be some room for additional scope of lowering estimates at the end of the year on the expense side. But again I can't say that at this point.

There was one final question related to MRA integration costs, and there we can say that the integration costs have been absolutely minimal. The costs which we can directly identify are certainly less than €150,000 in terms of the integration costs.

So my calculation is correct that you need approximately €6m in revenues in order to break even?

Not necessarily. It depends on how you define break even. What you see in the financial reports are amounts for the segments after corporate allocations. We mentioned today that the loss for antibodies for design prior to allocations would be €1.3m. So I think it would therefore be a mistake to add the €1.8m which you see in Q3, and add that to the €4.2m revenue guidance which we gave to give a €6m. I think the unit could break even prior to corporate allocations at a lower amount of revenues than that. And we are of course, on the back of the results that we see today, taking action to reduce our cost base in the RBU sector to improve profitability there.

Okay. So it could be a target to be profitable in '06 for this unit?

Certainly could be.

Okay. Thank you.

Ladies and gentlemen, we will now take a question from Thomas Hoger with DZ Bank.

Good morning. I have two questions right now. First of all, the payments to Lilly and also the payments to the pharmacy [indiscernible] have they been booked under R&D or SG&A? And will there be additional payments to Lilly?

And secondly, do you also plan to license CD38 antibody this year to a pharma partner?

I'll take the first part of the question. The payments for [Dr. Van Ruden] have been booked under SG&A, the payments for Lilly have been booked under R&D.

With respect to the MOR202 program Thomas that you mentioned which is the CD38 program. As I mentioned in the talk, we don't want to comment on ongoing discussions for obvious reasons. It falls into the category of negotiations, and for that reason we don't want to talk about it at that stage. I think our objective and our goal for this program was made clear earlier in the year, that we intend to find a good partner for it, and we're continuing to work towards that end. More than that I can't say at this stage.

Okay. Thanks. One little question concerning Lilly. Am I right in assuming that there will be no additional payments in Q4 to Lilly?

I think what we can say, we're not allowed to comment on the details of the financials, but I think we can definitively say that the size and scope of payments in Q3 versus Q4, the Q3 payment will be significantly larger than anything that will paid under the agreement in Q4.

Thank you.

We will now take a question from Daniel Wendorff with West LB.

Good morning everybody. And my questions have all been answered, so I have no additional question at this time.

We will move to the next question from Markus Metzger from Bank Vontobel.

Hi everybody. I just wonder whether you remain committed to bring your own antibodies through quickly to development? And if not, would we have to expect a much lower R&D cost line by next year? Thanks.

The answer's yes, we do remain committed, that's one of the reasons we just hired a director of pre-clinical development, and I don't want to say anything that relates to guidance for next year, but we fully intend to budget an amount of money that enables us to fulfill that commitment to our own proprietory antibodies.

Okay. Thanks.

[OPERATOR INSTRUCTIONS]. Our next question comes from [Lennin Gi] with Viscardi.

Hi Simon, hi Dave. Just a quick question concerning the success base for licensing fees. [Just mentioning] Q3 especially the first nine months were a higher success base than licensing fees. What does that mean? Does that mean the higher revenue will be [inaudible] proportional to the actual revenue because actually there was an increase in proportion to the actual revenue?

Okay, we've just got to make sure we understand your question. Was your question that the percentage of success-based revenues in Q4 will be higher than the previous three quarters? Did we misunderstand that?

Essentially it is higher in Q3 compared to previous quarters the success fees that [inaudible] highest proportion?

I believe so yes.

Okay.

Our next question comes from Hanns Frohnmeyer with LBW.

Good morning. As I understood it right a reason for your very conservative guidance for the full year, is that you might get some additional M&A expenses. Could you elaborate a bit about M&A activities you plan in the near future?

I think the only comment we can make around M&A is comments that we've made previously to the public, which are that in regard to M&A or potential M&A targets we continue to look at acquisitions on the research antibody segment side. Beyond that, I think it is our policy not to comment on whether or not we are in discussions with anybody at this particular point. If we're shown that we are usually throughout the year in discussions with somebody or the other, but obviously at this point we're not at liberty to discuss where we are with that and who we are in discussions with. Does that answer your question?

No.

As there are no further questions at this time, I would like to hand the call over to you today for any additional or closing remarks.

Before closing the call I'd like to remind you of the main points to take away. Overall business is performing particularly well, especially on the therapeutic side excellent progress and ongoing partner project have made a significant contribution to the strong financial results for the quarter. The strong performance has contributed to us being able to raise bottom line guidance for the year as a whole.

That concludes the call, should any of you wish to follow up with us directly, Dave and I are both available in the office here in Munich for the rest of the day. Thank you again for participating and goodbye.

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