MorphoSys AG (MOR) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to today's MorphoSys presentation of Q1 results, 2006. For your information, this conference is being recorded. At this point, I would like to hand your call over to your host today, Mr. Dave Lemus, CFO.

Please go ahead, sir.

Good morning and welcome. This is Dave Lemus, CFO of MorphoSys. With me today is Simon Moroney, our CEO. We're both calling you from our headquarters in Munich, Germany. First, we'd like to welcome you to the 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 2006. Simon will begin by giving you an overview of the first quarter. Then I will review the financial results for the first three months of 2006.

Afterwards, we'll 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 only speak only as of the date hereof. I would now like to hand over to Simon Moroney.

Thanks, Dave, and also from me a warm welcome to our Q1 2006 conference call. This has been an extremely productive quarter for us, and the numbers that we published today served to underline the achievements that we have made. On acquisitions, the capital increase, three new deals, the second HuCAL antibody IND, all this in the first three months of the year.

In addition, we took important decisions about our own product development efforts. I'll start my review of the quarter with our activities in the therapeutic antibody segment of the business.

In January, we announced that Hoffmann-La Roche had filed an IND application for a HuCAL antibody for the treatment of Alzheimer's disease. This event triggered a milestone payment, which is included in our Q1 results. We expect clinical trials with the antibody to commence shortly. We also announced a new agreement with Roche which takes us beyond the initial collaboration in the field of central nervous system diseases into the all-important oncology indication. The program has as its initial goal the development of HuCAL antibodies against two new targets to be supplied by Roche.

During the quarter, we received a milestone payment from Centocor for successfully delivering a set of antibodies meeting predefined success criteria against a target implicated in inflammatory and autoimmune diseases. The nature of our agreements with our partners usually prevents us from being able to publicize the magnitude and in some cases even the occurrence of these milestone payments.

Indeed, several other milestones were hit during the quarter, which we did not disclose separately. But at least as significant as the payments themselves is the fact that milestones point to positive progress in our therapeutic programs. The number of active, partnered therapeutic programs based on HuCAL has increased from 29 at the end of last year to 34 today.

Most importantly, there is a growing maturity in our partnered pipeline, as seen by the fact that the number of antibodies in phase I has increased from one to two, and the number in preclinical development has gone up from six to eight in the last three months. We are on track to reach our target of at least 36 active partnered therapeutic antibody programs by year end.

Our business developments in Japan continue to bear fruit. Following on from our first-ever Japanese pharmaceutical deal in September of last year with Shionogi, last month we entered into a wide-ranging deal with Daiichi Sankyo. Under the terms of the deal, Daiichi Sankyo receives a license to our HuCAL technology for their in-house R&D.

This license is for an initial two-year period and may be extended for a further three years. In addition, Daiichi Sankyo will support a group here at MorphoSys who will work on a therapeutic antibody project against one of their targets. An extension beyond the initial two-year term may bring additional collaborative therapeutic antibody projects.

With respect to our proprietary in-house programs, we continue to work, as announced in February of this year, on MOR 103 for rheumatoid arthritis and potentially other inflammatory diseases and on MOR 202 for cancer. Both of these programs are on track towards their respective next development stages.

For MOR 103, the filing of an IND in the second half of next year and for MOR 202 the completion of preclinical profiling by the end of this year. As a reminder, we will not communicate individual steps of the development process, but we will keep you updated regarding the overall progress of the programs against these timelines.

Turning to the research antibodies segment, the biggest transaction of the quarter was of course our acquisition of Serotec. This transaction is first and foremost intended to strengthen our ability to commercialize our HuCAL technology and antibodies derived from it in the research market. We have an ambitious objective for this side of the business, none other than to effect a technological transformation in the research market, replacing animal-based methods for antibody generation with a much more efficient in vitro HuCAL technology.

Serotec has brought us, in addition to the all-important established sales channels a profitable business with approximately EUR11 million of revenues. We've made good progress on integrating the Serotec Group into our research antibody unit, now operating under the name "Antibodies Direct," or AbD, for short.

Marketing activities are now merged. The Serotec sales force has been trained in the commercialization of HuCAL antibodies and we've successfully held our first joint trade fair presentations. With respect to the operation, we've decided to consolidate sites in the UK and U.S. In the UK, we plan to make Oxford the site of our UK headquarters.

Oxford offers good infrastructure and a high concentration of both academic and industrial research. Serotec has a long tradition and is well connected in this area. The site and [pool] on the south coast that was the Biogenesis UK facility will be closed no later than the end of this year.

The Biogenesis operations are currently being consolidated with Serotec UK and its subsidiary, Oxford Biotechnology, Limited, at a single site in the Oxford area. In the U.S., the former Serotec site in Raleigh, North Carolina, will be our new U.S. headquarters. But we will also retain a sales office in New England, taking advantage of the presence there of the former Biogenesis operation.

Here in Germany, we're retaining the Dsseldorf sales office of Serotec. Overall, headcount is being reduced by roughly 10 positions across the organization as a whole, mainly due to duplication of certain functions between Biogenesis and Serotec. During the integration, the greatest care has been taken to ensure continuity of business and to avoid any risk of disruption in product supply to customers.

We're particularly pleased that the progress on the integration has not been at the expense of the financial performance of the unit, which, for the first quarter, was right on target.

The transaction that went sent somewhat unnoticed light of the acquisition was our alliance with Chemicon, announced one day prior to the Serotec deal. The logic behind this deal was in many respects the same as the acquisition, to take advantage of existing sales channels to increase the uptake of HuCAL antibodies in the research market.

We believe that Chemicon, being one of the biggest players in the research antibody market is an ideal partner for this purpose.

That concludes my review of the quarter. I'd now like to hand back to Dave for his review of the financial results.

Thank you, Simon. To begin the financial analysis, I'll start with revenues. Group revenues grew by 100% in the first three months of 2006 to EUR14.8 million compared to EUR7.4 million in the same period of last year. The reasons for the increase were success-based payments from existing collaborations, which included clinical, as well as research milestones, and the inclusion of the Serotec Group revenues, contributing 22% of total revenues.

Total organic revenue growth amounted to 56%. The therapeutic segment experienced 56% organic growth and the AbD unit experienced 100% organic growth in the same period. Revenues arising from the therapeutic antibody segment accounted for 67%, or EUR9.9 million of total revenues. This total comprises EUR6 million from [research] and paid license fees and EUR3.9 million success and milestone fees.

You may recall that we predicted for the full year 2006 that performance-based payments in the amount of EUR7 million would occur. Those payments are nearly pure profit for us and in the first quarter we already achieved more than 50% of these planned payments for the year.

That's one of the reasons for the unusually strong net income result in Q1 on the therapeutic side of our business. The AbD segment, comprising MorphoSys Antibodies by Design unit, Biogenesis and Serotec generated EUR4.9 million, or about 33% of total revenues. The Serotec Group contributed 3.2 million in revenues, or 65% of total AbD revenues.

The remaining revenue for the entire segment amounted to EUR1.7 million and came from the brands Biogenesis and Antibodies by Design. For the quarter, the results on the top line for the AbD segment, in particular, for Biogenesis, was stronger than expected.

Let's move to expenses. For the first quarter of 2005, total operating expenses, which now include stock-based compensation, increased by 50% to EUR10.2 million. The total increase in operating expenses of EUR3.4 million was mainly due to the acquisition of the Serotec Group companies and had the effect of increasing operating expenses by EUR2.8 million.

Stock-based compensation expense is for the first time in 2006 now embedded in our [COGS], SG&A and R&D amounts. In previous years, the amounts were shown separately from these items on the face of the financial statements. Stock-based compensation for the first three months of 2006 amounted to EUR300,000, little change in total amount over the previous year.

In general terms, if you extrapolate total expenses for Q1 for the full year, the amounts are lower than guidance, which is due to several reasons. First of all, cost of owned product and technology development, which we predicted for the full year at 4 million was, as planned, very limited in the first quarter. I am, however, assured by our colleagues on the R&D side that this will pick up during the year.

Additionally, a number of items, such as the purchase price allocation, where we amortize intangibles identified from the acquisition, has not yet been done, and hence, none of the related amortization is booked in the first quarter of 2006. Furthermore, restructuring costs, so far minimal in Q1, are expected to increase during the year.

Therefore, there are a number of valid reasons why expenses appear presently under budget but are expected to increase during the year.

Moving on to cost of goods sold, cost of goods sold is composed of the AbD segment cost of goods sold. COGS rose significantly to EUR2.1 million in Q1 2006, compared to EUR500,000 in the same period of the prior year. The main reason for the increase was the inclusion of the Serotec Group company's COGS.

Compared to the same period last year, gross margins of the AbD segment improved significantly in Q1, raising from 39% in 2005 to 57% in the first three months of this year. The increase is attributable not only to the inclusion of Serotec, but also an improvement in margins in general of the non-Serotec AbD business.

The cost for research and development increased by 100,000 to EUR3.8 million and remained relatively unchanged compared to the same period in the prior year. Expenses for product and technology development amounted to only 300,000 and were included in research and development expenses, having started somewhat slowly in Q1. As I said before, we expect to pick up an expense on the R&D side in the next three quarters to come, as we mentioned during the guidance speech at the beginning of the year, the total EUR4 million for the full year.

SG&A expenses amounted to EUR4.2 million compared to EUR2.6 in the same period the previous year. This resulted mainly from higher personnel and other operating expenses, partly stemming from the contribution and integration of the Serotec Group of EUR1.5 million.

Looking ahead, also on the SG&A side, we expect a pickup of expenses in the next three quarters relating to restructuring and the other costs I mentioned earlier.

MorphoSys' investments in plant, property and equipment amounted to 200,000 for the first three months of 2006, compared to 100,000 for the same period of the prior year. Depreciation of plant, property and equipment for the first quarter of 2006 accounted for 300,000, compared to 200,000 the same period of the previous year.

Amortization of intangibles amounted to 500,000 and remained unchanged to the same period of the prior year. Nonoperating income summed to 200,000 income, compared to a nonoperating expense, or loss, of 200,000 in the same period of 2005. This was mainly caused by a gain on securities which were so far shown in he equity statement as unrealized gains and which were sold, and thereby realized, in the first quarter, in connection with raising financing for the acquisition of the Serotec Group.

For the first three months of 2006, the company presented an operating profit in the amount of EUR4.7 million, compared to an operating profit of 600,000 the first quarter of 2005. A net income of EUR4.9 million resulted for the first three months of 2006, compared to a net profit of 500,000 in the same period of the previous year.

The resulting diluted net profit per share for the entire MorphoSys group for the first three months, ended March 31st, 2006, amounted to $0.78 per share compared to $0.08 per share in 2005.

As mentioned before, the level of profits experienced in Q1 - sorry. The level of profits experienced in Q1 2006 is expected to substantially decrease during the year, as Q1 was characterized by strong revenues and lower levels of expenses, which I outlined previously.

At March 31st, 2006, the total number of shares issued was 6.2 million shares, compared to approximately 6 million shares at December 31st, 2005. The increase arose from the issuance of approximately 208,000 shares in connection with the capital increase as consideration for the Serotec acquisition.

An additional increase of approximately 33,000 shares resulted from the conversion of bonds issued to employees, as well as exercised options. The successful issuance of approximately 380,000 shares stemming from the capital increase in March 2006 was not presented on the balance sheet due to the accounting treatment of share capital unpaid under IFRS accounting rules.

However, on April 4th, 2006, the date of the cash settlement, the shares amounted to approximately 6.6 million shares.

On March 31st, 2006, MorphoSys' liquid funds comprised EUR43.5 million. Not included in this amount, as I just mentioned, were cash items due from the capital increase of EUR17.1 million successfully concluded in March, which was not included in the quarterly statement.

On December 31st, 2005, MorphoSys had cash, cash equivalents and available for sale financial assets of 53.6 million. That concludes the financial analysis.

As is typical during our conference calls, we'd like to take the opportunity to update our financial guidance. I would like to confirm our full-year guidance. Against the background of the strong financial results of the first quarter of 2006, we still expect a net profit of approximately EUR1 million. As I mentioned previously, there were a number of what appeared to be one-time effects, both on the revenue side and on the expense side, which resulted in a strong quarter, which we experienced in Q1.

This very much mirrors our comments, which we made at our year-end press conference several weeks ago, where we stated that the MorphoSys financial results can be volatile in any given quarter and that results in one quarter may not be indicative of the entire year's results. Taking this one step further, for us to achieve guidance this year implies that we will have a loss in at least one further quarter and we wanted in advance to alert you to this fact.

Having said that, we have an excellent quarter behind us. I also do not want to exclude the possibility of an out performance on net income should our financial expectations for the business be exceeded during the year.

That concludes the financial analysis for the first three months of 2006. We'd now like to open the call up to your questions.

Thank you. [OPERATOR INSTRUCTIONS].

Our first comes from Mr. Patrick Fuchs with DZ Bank.

Hello, this is Patrick Fuchs, DZ Bank. I have a question regarding the Antibodies Direct business, which is 4.9 million. I would say disproportionately to what you would expect of 18 million throughout the year. I mean, are there seasonality effects, one-time effects that this quarter is quite nice, or could there an upside in the revenues, expectations, of 18 million that you have for the year.

The second question is you mentioned Roche IND filed, and mentioned that the clinical development then starts soon. Does this figure further milestones? And the last question on that is the unallocated costs, where 2.9 in the full year 2005, and now 1.4, and just if you can give what these unallocated costs are and rankly what you expect there in terms of the figure in 2005? Thanks.

Hello, Patrick.

Hello.

So let me first answer the question about the Roche IND and then Dave will take the question about the AbD revenue in Q1 and the unallocated expenses. We'd love to be able to get a milestone payment for the filing of an IND and then a second one for the start of the phase I clinical trials.

Unfortunately, we haven't been able to achieve that as yet. And in this case, as in I believe all of the other cases that we have, the milestone is payable on filing of the IND application, so there won't be a second payment when the first treatment is administered to patients, which we expect I believe in the next couple of weeks.

Okay, there was a question regarding whether or not there was a seasonality factor relating to ...

One-off, maybe a Chemicon return or revenue that you're ...

In principle, no, however, we do realize that there were certain customers that we had in the first quarter which had unusually strong quarters. And, hence, we think that the first quarter for AbD was very strong. It is possible that it continues, but our expectations for the full year is that that strength perhaps may not continue, and hence at this point we think it's just too early to raise guidance as it relates to the AbD business.

So, yes, we acknowledge that it was very strong, and that if you multiply the results out by four, it comes to 19.5 million as opposed to the 18 million, but it's too early to call that. And we do see certain items in Q1 that were perhaps one off.

They could continue. We don't exclude that they could continue, but we do recognize that they were unusually strong. Regarding the unallocated cost question, so, basically, the unallocated costs represent all the costs which can't be directly allocated to either of the two segments that we have.

This, for example, could involve everything from the cost of public relations, which has no obvious link to the segment's operating capacities to certain headquarters functions, which, again, have no link to the individual segments per se.

We haven't given guidance for the full year. Currently, 14.5% of total expenses were not allocated at MorphoSys. That compares very similarly to the experience that we had in 2004. In 2005, the amount was slightly lower. I haven't yet given guidance on it, but that being said we did take a look at how other companies are doing it and we noted that in Germany for example we saw one company with segments that had unallocated cost of 4%, another one that had close to 15, and when we look at comparable company in the U.S., for example, in [Vitrogen], they have close to 30% unallocated costs.

So the numbers are kind of all around the place, but my guess at this point is that unallocated costs for the year will come in around where it currently is at the quarter.

Okay, thanks.

Our next question comes from Martin Possienke with Equinet. Please go ahead, sir.

Hello. Good morning, everybody. I guess maybe firstly congratulations to an outstanding quarter, and then a couple of questions, if I may. I assume that you do not want to discuss your financial guidance, so maybe another one.

If I remember correctly, you gave guidance for the partnered therapeutic antibodies by year end to be around 36 and now we are at 34. So maybe you can give an update there. And then, to these financials, or exactly to the financial result, I think it was minus 16,000 in the first quarter, and given the fact that in 2004 and 2005 you had negative financial results as well, despite a significant cash position, maybe you can give a brief explanation again there.

So, Martin, we didn't catch that question, the second question that you gave. We ...

It's about your financial result. Actually, it has always been negative. It was negative in 2004, it was negative in 2005. It's negative in the first quarter, and despite a significant cash position, so maybe just a brief explanation again there. I know that you already explained it once, but I forgot it.

This is which category of expense?

Financial result, interest expenses.

Interest expense, okay.

And then thirdly, on the taxation of the first quarter, actually, there was no taxation, so maybe some words there and what we can expect for the full year as tax rate or taxation or whatever. And then, fourthly, a follow-up on Patrick's question.

Is it fair to assume that the first quarter was the first quarter without restructuring-related costs and amortization for AbD?

Let me start, Martin, with the number of programs that you asked about. Indeed, we've seen a nice increase in Q1 from 29 at the end of last year to 34 now and we're conscious that we projected a total of 36 by year end. We actually said at least 36. This is rather unpredictable. It's in the hands of our partners to decide when and on what targets they initiate new programs, so it's a little bit hard for us to predict. And we were a little bit surprised, quite honestly, with the number of new starts we had on the first quarter, and we expected those to be a little bit more spread out during the rest of the year.

We believe, and we have reason to believe, that there will be certainly another two, but beyond that it's a little bit hard to say, so I think it would be certainly premature at this stage to say that that number is going to be more than 36 by year end. But we're certainly very confident that we will hit that 36.

Okay, with regards to the financial questions, the interest expense that we show, you are correct. We don't have any long-term debt or bonds that we pay interest on. This results out of the transaction we did back in 2002 with CAT. As you may recall, part of the settlement with CAT back in 2002 was that we needed to - how do you say - to pay cash over five years, 1 million per year. And as the way you book that under IFRS is that you have to book a present value of that and attribute a certain amount of interest expense to that 1 million payment that we make each year.

Actually, I believe the last payment is coming up next year, so that interest expense line should fall off next year.

Okay.

Regarding the taxation, the taxation is null for the first quarter, as you rightly pointed out. That very much has to do with the fact that, again, we do stick by our present expectations for the full year of EUR1 million profit. And if and when the profit does land at that level at the end of the year, we do of course have net operating less carry forwards, which would eliminate those gains, not having us to pay taxes.

So, for the time being, we do stick by guidance, and that's kind of backed up by the fact that we haven't built any deferred tax assets.

Sorry to interrupt you there. But let's say for example for the United States, I assume that Serotec is profitable. Normally, you should pay taxes there and let's say the deferred tax assets, they should be in euros.

Okay, we - obviously, the creation of deferred tax assets and so forth in the U.S. is a very complex exercise, and we actually do it on a group level. So, at this point, we've just made payments for the end of the year. I think at this point the tax position such in the U.S. and in the UK was that, yes, we are in tax-paying positions, but the tax-paying positions are not that great that we need to currently build reserves for them, at least in the first quarter.

That might change in the second quarter and the third quarter, but for the time being, the profits in Q1 in both of those areas were not significant enough for us to warrant building tax expense reserves for them.

Okay.

And the third question was relating to amortization and restructuring. You are correct. There are no amortizations from the PPA reflected in Q1 and the amount of restructuring costs related to the AbD segment are also very minimal in Q1. Again, those are expected to pick up when we do our PPA exercise later in the year and when the restructuring costs and the restructuring efforts come full bloom.

Okay, thanks a lot.

[OPERATOR INSTRUCTIONS].

We will now take a question from Daniel Wendorff with WestLB. Please go ahead, sir.

Yes, good morning. Daniel Wendorff from WestLB. I have two questions, one also a follow-up regarding the Antibodies Direct business. If we would assume that the development goes forward over the next quarters as we saw that in Q1, do you think it's prudent to assume that even with higher amortizations and restructuring charges you could generate an operating profit there? So that just under the assumption that this continues as we saw it in the first quarter?

And, regarding the therapeutic antibodies business, let's say how many items of the revenue line you saw in Q1 were completely unexpected by you? If it's possible at all to say that, so it was not in your planning? Thank you.

Okay, first question regarding the inclusion of amortization relating to the PPA and whether or not - if we included that and we continued to have strong quarters, could we theoretically be profitable? So, at the year-end press conference, you might recall that we had included roughly an estimate of EUR2 million worth of PPA amortization, which would have given us an additional expense if you prorated it per quarter of 500,000 for the quarter.

I believe if you add that then to the result of the segment that we actually experienced, which was I think in the neighborhood of the odd 300,000 or so, we would have had a slight loss for the quarter. Yes, about 400,000. So we would have had a slight loss for the quarter. So I think that maybe answers your first question.

Okay.

Second question was related to the unexpected items. So, I think, again, when we gave guidance back in February, we know that Q1 was going to be strong and that there were going to be several milestones in our planning and that we also cautioned at that time not to draw too much conclusion from the results of one quarter, knowing that Q1 would be strong.

That being said, Q1 was slightly above our expectations, not only on the therapeutic side, but also on the AbD side. But, again, we do see some one-off items in the results, which, again, make us cautious to raise guidance this early in the year. If they continue, we may come back and revisit that, but that's I think just too early to do that at this point.

Daniel, this goes back to what I said before, which is the timing of some of these therapeutic events, the hitting of milestones and so on, which depend on events in the lab, are somewhat difficult to predict. And, certainly, when the decision lies in the hands of the partner at what time to start a new project or at what time to complete an experiment on a project, those are things that are really out of our hands completely and may fall in one quarter or may easily fall in the second quarter.

So, we were lucky to some extent that a number of those things happened in the first quarter, but it's very difficult to predict whether those will persist going forward.

Okay, and one question regarding the EUR400,000 you said on the Antibodies Direct business. So this is basically the [sigma] EBIT of the Antibodies Direct business, which was in Q1.

Not really. You'd have to add back the amortization related to the PPA of Biogenesis, plus depreciation of the segment, and that roughly is about 0.25 million.

So the EBITDA of the segment is actually higher to the tune of about EUR250,000.

Okay, thanks.

We will now take a question from Mr. [Rudolf Bezoff] with [FG Securities]. Please go ahead, sir.

Yes, good morning. Two questions. First, on your deal with Schering, could you give us an update on that in the context of the acquisition of Schering AG buy a Bayer. But have you met already people at Bayer about that, or do you plan to meet them in the future?

The second question is on the - I know you don't want to give some detail about milestones, but at least could you give us an idea of a numerical number of milestones that were received in the first quarter. And the last question maybe on gross margin for AbD. It sounds like it was around 57% for the first quarter. Is it something which is sustainable, adjusted for exceptional items that we will see in the future quarters?

Okay, let me start with the Schering Bayer thing. Obviously, we're following very closely the developments in the Schering Bayer transaction. All I can say at this stage is both of those collaborations are running very well. You'll recall that we extended our Bayer collaboration at the end of last year and we extended our Schering collaboration in December of the prior year, and they're both running very well.

What I can't say at this stage is what impact the combination of those two companies, when it finally takes place, will have. And it's simply too early for us to speculate as to what impact that could potentially have on our collaborations with the two companies.

Okay, maybe I'll take the two financial questions. The first question was what was the amount of performance-based milestone payments which we received in the quarter? That was in total EUR3.9 million, which is actually slightly in excess of 50% of the entire projected milestones that we had planned for this year and which is included in our guidance, which is somewhere between 6 and EUR7 of performance-based or success-based payments. And this, again, is something that we mentioned at the beginning of this year when we gave guidance.

Actually, my question was the numerical number of milestones that you received. So how many partners paid you some milestones during the quarter?

I think what we can say is it was less than five. Beyond that, I think we'd prefer not to comment at this point.

Okay, thank you.

Regarding the sustainability of the profit. So, first of all, I assume you talked about the gross profit or the gross margin.

Yes.

And there we think that those margins are sustainable and that we don't expect a significant decrease in those margins or a significant betterment. Of course, we are seeing that there is room for improvement on the margin. We hope that the margin continues to go upwards. The benchmark for us, I would say, in this segment is to push our margins to 60%.

Thank you very much.

We will now take a question from Mr. Thomas Schiessle from Equities.

Please go ahead, sir.

Yes, thank you for taking my question. First of all, congratulations for the exceptional quarter. Two questions, if I may. One is on currency impact on the group level. You are receiving more and more revenues out of the Euro zone, so what is your guidance on this? And the second is if it comes to the Serotec integration, Simon, you mentioned that there is some first actions done already, consolidation of sites and is the decision made yet concerning the headquarters. What will be the next steps to take to put all the of the horsepowers on the street for the new entity.

Thank you [so far].

Okay, let me start with the second question, Thomas. We've made a good start on the integration. Maybe you misheard me during the talk. I didn't say that the consolidation of the sites had yet been completed. I said that we're decided on where those sites will be, and the predominant site will be just outside of Oxford in the UK, where the bulk of the employees will be. We'll also retain sales offices elsewhere. For example, in the U.S., although the main site in the U.S. will be the Raleigh, North Carolina site, and we'll retain a sales office in the New England area, and we'll maintain a sales office in Dsseldorf that came for the Serotec acquisition.

It's really in terms of, as you said, getting feet on the street, so to speak getting the sales effort running, that's really got off to a great start. And I think that's evidenced by the fact that the numbers for Q1, despite the fact that we're essentially integrating three operations, have been right on target.

So we've been really delighted with the way it's worked out so far, and we've been delighted by the way the Serotec folks have embraced the concept of HuCAL. And what we've heard from their salespeople, for example, is that they've been welcoming this kind of opportunity for a long time, because in the past Serotec hasn't offered antibody generation de novo, and they're now able to say to their customers, not only can we provide you with existing antibodies, but we can also make antibodies for you de novo.

So the entire sales force is really embracing HuCAL as something to offer and we're very happy with the way that our offering on that side of the business has become much stronger and much broader and given us a significant advantage, we believe, over certain of our competition in that space. So it's really now an ongoing effort of education and marketing to simply amplify that message and increasingly spread that message out to potential customers.

Did that answer your question?

Yes, thank you. Thank you.

Yes, Thomas, regarding the question on the FX, obviously, this is something we do monitor and look at every month, and I think probably the best thing to give you would be percentage of which revenues we believe are UK denominated, which are U.S. dollar denominated, and then give you assumptions as to what we budgeted those at. Unfortunately, I don't have those at my fingertips right now. However, we'll make sure that we have it for a future call.

Okay, so thank you [so far].

[OPERATOR INSTRUCTIONS]. Our next question is a follow-up question from Mr. Patrick Fuchs with DZ Bank.

Yes, Patrick Fuchs, DZ Bank. I have a question regarding the costs that you had for your internal track development program, internal antibody programs compared to Q1 '05 and '06, as I am aware that - or I remember that - in 2005 you had quite some costs regarding the implementation of the psoriasis model or something like that. Just roughly which amount, or which costs did you have for internal track development compared to this quarter's? Quarter one '05 and '06, if you can compare that)

I'm a little bit doing this by the hip. I know the numbers for there full year. I know the numbers for the full year in 2005 on product development, and technology development, was definitely minimal. This year, in comparison, we projected a full year of roughly 4 million. Less than 400,000 of that was spent in the first quarter. So I don't know what the quarter by quarter comparison is. I do know that the total spend in 2005 was actually minimal.

Okay, but minimal, you have certain people working, that have been working on these antibody projects? At least you decided, for example, to give up the ICAM projects and, I mean, just telling minimal means for me nothing. Minimal means for me below 1 million for the year and that I really cannot believe, that for internal antibody development programs, regarding your therapeutic elements, the drug development efforts, just 500,000 throughout the year. That seems not plausible, I think.

You're now referring to last year, Patrick.

Yes, exactly.

You'll recall that actually last year, the focus of our activities there was more on commercialization, so actually the biggest chunk of the effort last year was spent by our business development team, running around and talking to potential partners for the programs that we'd got. And it was on the back of the feedback that we got from them that was a large part of the decision that we would discontinue MOR 101 and 102 around the ICAM program.

As Dave says, the pure development spend last year, as opposed to the commercialization spend, was really - when you say less than 1 million, I think the answer is substantially less than a million, and therefore not to be compared at all with the number this year that we communicated at the year-end results conference in February, which, combined with technology development, will be on the order of 4 million.

Okay, just to clearly state, if I got that right, for all your internal antibody programs, 101, 102, 201 and so on, substantially less than 1 million was spent on development efforts in 2005, yes?

Correct.

I can confirm that.

Thank you.

As there are no further questions remaining in the queue, that will conclude today's question and answer session.

Mr. Moroney, I would like to turn the call back over to you for any additional or closing remarks.

Thank you very much. Before ending the call, I'd just like to remind you of the main points to take away. First, the therapeutics division is performing particularly well, as seen by the excellent deal and milestone flow, which in turn has given us a strong first quarter in terms of financial performance.

Secondly, the acquisition of Serotec is a major step forward in our plan to build the research antibody side of our business, and integration here is progressing well.

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.

Thank you for your participation. You may now disconnect.