MorphoSys AG (MOR) 2006 Q4 法說會逐字稿

It's my pleasure to welcome all of you to our annual conference. My name is Claudia Gutjahr-Loser, and I'm Head of Corporate Communications at MorphoSys. I would like to thank you for your interest and your participation in our conference today. With me are Dr. Simon Moroney, our CEO; and Dave Lemus, our CFO.

Before we start we want to remind you that during this conference we will present and discuss certain forward-looking statements concerning the development of MorphoSys' core technologies, the progress of its current research programs and the initiation of additional programs. Should actual conditions differ from the company's assumptions, actual results and actions may differ from those anticipated. We are therefore cautioned not to place undue reliance on such forward-looking statements which speak only as of the date hereof.

Today we will present you our annual results for the year 2006. We have planned approximately one hour for the presentation. Simon will start with the revenue of the year 2006. Subsequently, Dave will give you an overdue about the financial results of the fiscal year 2006 and present the guidance for 2007. Before we start with the question and answer session, Simon will speak about the outlook for 2007 and beyond. At the end of our presentations we will take questions that this conference audience and those participants listening in on the conference call may have. For the participants of the conference call you can view the slides of our presentation on our corporate website.

I would like now to hand over to Dr. Simon Moroney, CEO, who will start with the summary of the year 2006.

Thank you, Claudia. I'd like to add my welcome to all of you to this, our year end 2006 analyst and press conference. I want to start with an overview of Morphosys' achievements. We exceeded our financial targets for the year, increasing revenue by 58% over 2005 to EUR53 million. We strengthened our core partnered therapeutic antibody discovery business by adding three new partners and expanding three existing alliances.

Overall, our pipeline has advanced considerably. A second HuCAL antibody into clinical trials when Roche took our anti-amyloid beta antibody into the clinic for the treatment of Alzheimer's disease. GPC reported data from their ongoing Phase 1 trial of the HuCAL antibody 1DO9C3. Our partnered pipeline reached 43 compounds and we advanced our proprietary therapeutic antibody programs, MOR103 and MOR202, according to plan.

Regarding our technology, we reported a very important advance with the release of our new RapMAT technology for antibody optimization. And last, but not least, we transformed our research antibody segment from a fledgling business unit to a top 20 player worldwide via the acquisition of Serotec, and are leading the technological transformation of this market.

All in all we had an outstanding year and most importantly, the progress we made puts the company in a strong position to continue its successful development in the future. This was all achieved against the backdrop of some extraordinary developments in our industry. The demand for antibody technologies in the pharmaceutical industry is accelerating. The year 2006 could be remembered as the year the pharmaceutical industry became convinced of the importance of therapeutic antibodies as a class of drugs.

As shown on this slide 6, 2006 witnessed seven acquisitions of antibody based biotech companies by big pharma or big biotech. This is the proof, if it were needed, that the industry is convinced by antibodies as a class of drugs. Other highlights in the sector were the return to the market of Tysabri, Biogen Idec and Elan's innovative antibody based therapy for multiple sclerosis, and the enormously successful launch of Lucentis, Genentech's fab fragment for wet AMD. Together with the ongoing success of many of the existing marketed therapeutic antibodies, the new launches helped total turnover for the year to exceed $15 billion.

These events all underscore the fact that MorphoSys is active in a highly attractive segment of the pharmaceutical industry. Furthermore, we expect interest to continue to be high in the years to come as more and more pharmaceutical and biotech companies look to develop antibody based drugs.

The significance for MorphoSys for these industry developments comes on several levels. First, we find ourselves with less direct competition than several years ago due to the acquisition of key competitors such as Abgenix and Cambridge Antibody Technology. MorphoSys' position as the leading independent recombinant antibody company is now stronger than ever before. Second, the success of antibodies as drugs has catalyzed the development of a new segment of the biotech industry, namely the scaffold field in which antibody-like recombinant proteins of different types are being developed as drugs. This creates a new competitive challenge for us and highlights the need for ongoing technology development in order for us to maintain our current position as the partner of choice for companies seeking to develop protein based therapeutics. Third, interest in therapeutic antibodies in the pharmaceutical industry continues to be strong despite the tragic events associated with the Phase 1 clinical trial of TeGenero's anti-CD28 antibody in March of last year. This unfortunate occurrence did serve to highlight the care that is required during the pre-clinical development of antibodies, particularly those that work by activating components of the immune system.

Looking at our deal flow, 2006 was, once again, a banner year for MorphoSys. We were happy to be able to expand three of our most important partnerships. Our biggest relationship is with Novartis. In June we signed an early amendment which will take our collaboration out to 2011 and which significantly increases the number of programs being pursued. This is a very important alliance for us, but also for Novartis, as evidenced by the fact that one third of their pre-clinical biologics pipeline comprises HuCAL antibodies. We were also able to extend our collaboration with Pfizer. As with the Novartis deal, this agreement still had some time to run, but again, as with Novartis, Pfizer has been so pleased with the progress of the five therapeutic programs running under the original deal that they elected to extend early. This agreement will now run to the end of 2011.

As a result of the expansion the potential value for MorphoSys in research funding and potential development for milestone payments increased to more than $100 million not including royalties. It is worth noting that Pfizer had relationships with both Abgenix and Cambridge Antibody Technology and it is highly like that the fact that those two competitors were both acquired smoothed the way for our expansion with Pfizer.

Hoffman-La Roche added two new cancer programs to our relationship on the back of taking the antibody we made for them for Alzheimer's disease into the clinic. Another development involving two of our longstanding partners was the merger of Bayer and Schering during the year. At the time we announced that this would result in a consolidation of the two agreements. As a first step at the end of last year, Bayer exercised an option to terminate our agreement with them with the intention of proceeding under the ongoing Schering agreement, which was extended until the end of 2007. We continue to work with Bayer-Schering on how best to structure our collaboration going forward.

In addition, we signed up three new partners. Daiichi-Sankyo and Schering-Plough each secured up to five year licenses to apply the HuCAL technology internally and became respectively our 11th and 12th partnerships with top 20 pharma. We also added OncoMed to our roster of partners; OncoMed is a Genentech spinout pursuing target discovery with so-called tumor stem cells. OncoMed's approach is unique and is based on the concept that tumors derive from specialized precursor, or stem cells. OncoMed received a license to use the HuCAL technology in their discovery research for two years.

Partnered therapeutic antibody discover forms the core of our business, providing approximately two thirds of our revenue. But even more importantly it represents substantial future value for MorphoSys, since we will earn royalties on every HuCAL derived drug that comes to market. We therefore place particular emphasis on the progress of our partnered pipeline and 2006 was an outstanding year in this regard. As of today, the total number of active partnered therapeutic antibody programs is 43, an increase of almost 50% over the number at the beginning of last year. The maturity of the pipeline also advanced with currently two programs in the clinic, 14 in pre-clinical development and 27 in research. I'll come back to the importance of the partnered pipeline for our future at the end of the presentation.

There are now two HuCAL antibodies in clinical trials. In May of last year Roche initiated a Phase 1 clinical trial with the anti-amyloid beta antibody that we developed for them for the treatment of Alzheimer's disease. Roche is currently running two European Phase 1 studies, both trials are randomized, double-blinded studies in patients. The first trial is a multiple ascending dose study while the second is using a single dose. The trials are now progressing at centers in Denmark, Holland, Sweden and the United Kingdom. As these two trials are being conducted in patients, as opposed to healthy volunteers, it may be possible to observe signs of clinical efficacy.

Roche's Alzheimer's program became the second HuCAL antibody to enter human clinical trials after GPC's 1DO9C3 for cancer. During the year, GPC announced preliminary clinical data from the ongoing Phase 1 trial in relapsed and refractory B cell lymphoma involving three European sites. The antibody appears to be well tolerated and hints of anti-tumor activity were observed. GPC expects to complete the Phase 1 trial in the middle of this year and move into a Phase 2 trial thereafter. The drug has been granted orphan status by the European Commission in chronic lymphocytic leukemia, multiple myeloma and Hodgkin's lymphoma.

I'd like to turn now to our proprietary drug development programs, MOR103 and MOR202, which we advanced during 2006 according to schedule. Our future plans for both of our proprietary programs are being developed with one eye on deals being done in the industry. We've all witnessed the extraordinary sums being paid by big pharma and biotech for interesting drug candidates even in the early stages of development. The industry publication, Invivo, recently published an article entitled The $100 Million IND. The gist of this article was that recent deals prove that pharma is now prepared to pay this amount, $100 million, for compounds at this stage of development. These developments are, of course, to the advantage of the biotech industry and validate, or focus, the strategy of channeling investment into programs that we have initiated ourselves.

For the last 12 months, we've been fully focused on advancing the development of MOR103 and MOR202, according to plan, and have not engaged in any discussions with potential future partners. While we will continue to work on the programs, but once the data packages have advanced, we'll make them a subject of our regular meetings with pharma and biotech companies. In other words, we'll consider offers from partners for the further development of the two compounds. While we feel under no pressure to secure a partner for either program, we want to remain flexible. Our goal is to maximize our return on investment for each program.

Our most advanced program is MOR103, for the treatment of rheumatoid arthritis. There's still a high unmet medial need in rheumatoid arthritis treatment since fewer than 25% of patients are currently well treated. Non-responders and long-term safety concerns associated with the existing anti-TNF therapies provide strong incentives for new treatment options and especially for new mechanisms of action. During 2006, we have continued to investigate the lead antibody that we've made for this program and have become even more convinced that we have a potential drug. These studies have given us the confidence to embark on the critical manufacturing and process development part of the program.

In 2006, we signed a license and manufacturing agreement with Crucell and it's technology partner, DSM Biologics, for production of clinical grade material using the well-established and fully human PER.C6 cell line. This brings together our fully human antibody with production capabilities in a fully human host. Manufacturing human antibodies in such a manner offers several potential advantages over alternative production methods, especially when targeting chronic diseases such as rheumatoid arthritis. Production is proceeding according to schedule, as are our ongoing pre-clinical experiments. We remain on track to file an IND for this program in the second half of this year.

Our second proprietary program is MOR202, the anti-CD38 approach to the treatment of multiple myeloma. Here, we reached our objective of selecting a formal pre-clinical development candidate by year end 2006. The candidate we chose shows good efficacy in vitro and in vivo models, is well produced and behaved. In 2007, we will continue pre-clinical development of this compound.

I want to turn now to technology. The success of all our therapeutic antibody programs, both partnered and proprietary, hinges on the quality of the antibodies that can be made with the HuCAL technology. Key parameters for an antibody drug include not only the obvious ones such as target affinity and specificity, but also disease modifying activity, immunogenicity, solubility, stability, production characteristics and others. One of the great advantages of the HuCAL technology is its ability to deliver high quality antibodies quickly. Precisely these features are at a premium in our industry and we've long recognized the need to do even better here.

This is the logic behind RapMAT, a HuCAL based, or HuCAL related technology for making better antibodies even faster. RapMAT is a new process that exploits the modular design of the HuCAL library to optimize antibodies even faster than is currently possible. Based on our experience to date, the main advantages of this process are two-fold. First, substantial time savings can be made in the optimization of lead antibodies. RapMAT takes up to 30% off the time of the standard selection process that may normally last between six and 12 months. As you can see from the chart on slide 18, a typical improvement in affinity may be by a factor of ten to 40-fold.

Second, the process results in a greater diversity of lead candidates. This is especially important in drug development since the greater the diversity of the leads generated, the high probability that one having drug-like qualities will be obtained. RapMAT is now integrated in our drug discovery programs and we expect it to make our drug discovery even more efficient. We continue to invest in developing the HuCAL technology. The goal is very simple; to make effective and safe therapeutic antibody candidates faster than before. We'll update you on new developments as they come on line.

I'd like to turn now to the second pillar of our business, namely our research antibody segment, AbD Serotec. This unit combines our custom HuCAL antibody generation service with our two acquisitions in the research antibody space, Biogenesis and Serotec. This segment has come a long way in a short time. Having commenced operations less than four years ago, we're now one of the world's top 20 suppliers of research antibodies and we intend to improve this position still further.

The year was very much focused on consolidation and integration of the component pieces of this business. The majority of our staff in this unit is now located in a brand new facility in Kidlington, just north of Oxford in England. This consolidates the former Biogenesis operation from Poole on the south coast of England, with the former Serotec and Oxford Biotechnology operations outside Oxford. Altogether, we have about 80 staff on this site.

In addition to consolidation of the sites in England, we moved our Raleigh in North Carolina sales office to new premises during the year. Operations for the unit, including antibody generation and manufacturing, are in Oxford and at MorphoSys' headquarters in Munich, and we have sales staff at these sites as well as in Raleigh and New Hampshire in the US, Dusseldorf in Germany and Hamar in Norway.

We are delighted that despite the enormous upheaval associated with integrating these organizations, consolidating several teams and establishing two new premises, the AbD Serotec team was able to achieve the ambitious revenue target that we set for them at the beginning of the year. In addition, the unit developed a number of important relationships during 2006. Just to mention a few, we entered a marketing alliance with Chemicon, technology and marketing alliances with Thermo Fisher Group and Chimera Biotech, a discovery collaboration with the Kasuza DNA Research Institute in Japan and a sole source agreement with the US Army Medical Research Institute For Infectious Diseases, or USAMRIID for short.

Over the last couple of months, we've also entered research agreements with the Burnham Institute and with a leading Japanese research institute, both of which were sourced by the AbD Serotec unit. These are of particular significance for the company as a whole and I'll return to this topic in the outlook section of the presentation.

The loss that AbD Serotec recorded arose primarily because of one-off acquisition-related charges and we are confident that, in addition to solid top line growth, AbD Serotec will record a profit this year.

That concludes the review of the year. I now want to hand over to Dave for his presentation of the financial results.

Thank you, Simon. In opening, I'm pleased to say that 2006 was another excellent year for MorphoSys, not only operationally, but financially speaking. On this first chart you can see some of the financial highlights of the year. Revenues for the MorphoSys Group increased by 58% to EUR53 million, leading to a net profit of EUR6 million. Removing Serotec from the picture, revenues grew organically by a solid 22%.

In January 2006, we acquired the Serotec Group to further strengthen the research antibodies and Serotec contributed EUR12.3 million of total Group revenues. Our cash position increased to EUR66 million, in part due to a successful private placement in March 2006 as well from very strong positive cash flow from operations of EUR16.3 million.

Last but not least, we were recognized in the annual STEP Award in the category finance, highlighting achievements in that area of our company during the year.

I'd now like to go into more detail of 2006 financial results. Let's start with revenues. The next chart shows where our revenue growth has arisen. Revenues for the MorphoSys Group for the full year 2006 increased by 58% to EUR53 million which slightly exceeded our guidance. Group revenues measured in constant currency would have been about EUR1 million lower than actual, mainly due to the weaker dollar. Revenues from the therapeutic antibody segment increased by EUR5.6 million to EUR34.7 million. As we had no acquisitions on the therapeutic side of our business, the therapeutic antibody segment grew organically by about 19%.

Performance based payments from partners increased to EUR7.5 million, providing 22% of the segment's revenues, an increase of 9% in comparison to the previous year. Payments in 2006 include the clinical Phase 1 milestone from our partner Roche.

While the research antibody segment contributed in 2005, 13% to total company revenues, in 2006 we saw the segment's contribution increase to 35% or EUR18.3 million, mainly as a result of the acquisition of the Serotec Group. As we reported earlier, the Serotec business is now fully integrated within the MorphoSys research antibody segment, named AbD. The organic revenue growth of the segment, that is if you remove the effect of Serotec from our 2006 revenues, would have resulted in organic growth of approximately 40%.

In summary, organic growth for both segments in total was 22% which is in line with our long-term goal to experience annual organic revenue growth in excess of 15% per year.

If we take a look on this next slide where sales arose geographically, 62% of MorphoSys' commercial revenues were generated in Europe and Asia, compared with 56% last year. This reflects the trends that we have seen over the last couple of years where our cooperation partners in Europe, and particularly in Asia, will continue to be very important to us. Looking at the two segment sales in isolation and how they geographically split, revenue geographically mirrors the total company numbers.

I think it's important to highlight the increasing amount of performance based payments. With a partnered pipeline of currently 43 antibody programs ongoing, this is another big picture trend. Namely, we will see that performance based payments will continue to be a larger part of our revenue streams. As you can see from the chart, they have increased in absolute terms over the last couple of years. We anticipate this trend to continue in 2007 also in percentage terms, which is good news to MorphoSys as these payments represent pure profit, an upside for the company.

For 2007 we expect one to three IND filings from our partners and 2008 is expected to generate even more IND filings, which again should help our financial result. Within the scope of MorphoSys' larger antibody partnerships, license payments and research funding still represent the majority of revenues.

The good news here is that many cooperations were extended in the last couple of years, making several of these revenue streams committed over the next several years. That in turn, allows us a higher planning certainty. Driving that point home, at the beginning of 2007 approximately two thirds of the revenues of the therapeutic antibodies segment was already committed and secured.

Let's move to operating expenses. Total operating expenses increased by 72% to EUR46.9 million. The total increase in operating expenses of EUR19.6 million was mainly due to the inclusion of the Serotec Group within the consolidated accounts with an impact of EUR13.8 million. Higher personnel cost in conjunction with new collaboration and increased expenses for proprietary product development also impact expenses. Comparing this against guidance, operating expenses were at the lower end of the range, identical to what we confirmed during our Q3, 2006 conference call.

COGS in our company only arises in the research antibody segment. For the year 2006, total cost rose to EUR8 million compared to EUR2.5 million in the year 2005, which mainly resulted from the inclusion of Serotec COGS in the consolidated Group accounts.

Cost for R&D arise mainly in the therapeutic antibody segment; R&D costs increased by 25% to EUR17.5 million. This increase was mainly the result of the expenses for product and technology development amounting to approximately EUR3 million.

SG&A expenses amounted to EUR21.4 million, an increase of 98% compared to the previous year. The increase is mainly derived from the inclusion of the Serotec Group in the amount of EUR8.3 million. Also driving SG&A cost higher were increased personnel cost at the Munich headquarters and one-off integration cost associated with the integration of acquired companies.

Stock-based compensation in the amount of EUR1.2 million for the year 2006 was recorded as a non-cash charge and this year is an embedded in COGS, SG&A and R&D expenses. Total stock-based compensation changed little in comparison to the previous year.

Let's look at the results by segment. On the therapeutic side, revenues amounted to EUR34.7 million compared to our guidance estimate of EUR34 million, which was influenced by higher levels of performance based payments and by new and expanded collaborations. Operating expenses of the therapeutic antibody segment increased 27% to EUR18.1 million, mainly driven by expenses for proprietary product development and technology development in the amount of EUR3 million. The resulting operating segment result was a very solid EUR16.6 million.

Moving to the research segment, total sales were EUR18.3 million and total expenses of EUR21.7 million, mainly impacted by strong organic growth and the Serotec acquisition, the result a loss of EUR3.4 million with a bid under our expectations and guidance, mainly due to higher and earlier than expected restructuring costs. Cash flow in the unit however, looks a bit better.

In order to get to the cash flow for the unit, in this next chart we removed amortization of approximately EUR1 million, depreciation of EUR900,000 and stock based compensation of EUR200,000 and then subtracted CapEx of EUR1.9 million. The result is a reasonably good proxy for cash flow of the unit. As you can see, once you remove these non-cash items and one-off restructuring cost of EUR1.7 million, the cash usage of the unit was closer to EUR1.5 million. All said and done, we expect and improvement looking ahead, and for 2007 we expect the segment to be both cash positive and have an operational income. More on that in the guidance section.

In our last slide we discuss restructuring costs. On that note, let me add some words to our corporate structure and the successful conclusion of the integration exercise. Shortly after the acquisition of the Serotec Group in 2006, we decided to consolidate some of our sites. Presently we have premises for this unit in Munich, Germany, in Oxford in the UK and in Raleigh in the US. We've also decided to keep a small sales office in Dusseldorf Germany and in New Hampshire in the US and in Norway.

In the UK, several former Biogenesis employees were moved to Oxford and we have decided to close down the site in Poole, which was completed at the end of 2006. We are presently renting the site over the next two years and have divested the equipment in that site to a buyer. At the end of this period, we hope to find another buyer for the building and the land.

Our US activities are now concentrated in the research triangle of North Carolina. We have a sales force sitting there of approximately 20 people which serve the US market. Additionally we keep a smaller satellite sales office in New Hampshire.

This next chart represents our corporate legal structure as per January 2007. It is the result of a streamlining exercise of the corporate structure, undertaken at the end of last year. On the left side, this is our former US subsidiary in Charlotte, MorphoSys USA Inc, which substantially ceased its operations a few years back. The Poole Real Estate Limited is the former Biogenesis Limited which possesses the real estate holdings of the ex-Biogenesis site and is the current landlord of that site. MorphoSys IP GmbH was founded a couple of years ago and holds a substantial portion of the IP rights of MorphoSys AG. MorphoSys UK Limited, formerly known as Serotec Limited, has been renamed recently. It has two affiliates, MorphoSys US Inc, which is the former Serotec Inc, and MorphoSys AbD GmbH, which is the former Serotec GmbH in Dusseldorf here in Germany. Oxford Biotechnology Limited and the Oxford Biomarketing Limited are currently in liquidation.

Moving back to the financial review, I'd like to continue with non-operating items. Profit from operations remained almost unchanged at EUR6.2 million compared to 2005 and is rather close to our guidance given, that we would be on the upper end of the EUR6 million. Earnings before interest, taxes, depreciation and amortization, or EBITDA, amounted to EUR10.3 million compared to EUR8.6 million in the previous year.

Beneath the non-operating section is income tax. We had a benefit from income taxes of EUR700,000. This has resulted from movements of our deferred tax liability in assets, but was also heavily impacted by the establishment of a deferred tax asset of approximately EUR1.2 million relating to our tax loss carry forwards in 2007.

MorphoSys achieved a net profit of EUR6 million under IFRS. The resulted diluted net income per share for the full year 2006 amounted to EUR0.93 per share compared to an EPS of EUR0.83 per share last year.

In 2006, MorphoSys' investment in plant, property and equipment, as well as in intangibles, amounted to EUR4 million resulting in an increase of EUR3.3 million compared to the same period of the prior year. Consolidating the UK's activities into our new corporate headquarters in Oxford contributed EUR1.2 million of the same. We believe the UK CapEx requirements, looking ahead, are substantially fulfilled by this investment. Depreciation of plant, property and equipment for 2006 accounted for EUR1.5 million compared to EUR900,000 in 2005. The increase was mainly due to the Serotec acquisition.

Let's move to the balance sheet. If you look at the balance sheet, you can see the company's current assets increased by about EUR18 million to EUR76.1 million, mainly as the result of the capital increase successfully completed in March 2006. The cash position increased to EUR66 million by the end of the year. Looking at non-current assets, you can see that these have more than doubled to EUR51.7 million, which is mainly the result of consolidating Serotec's hard and soft assets, especially goodwill in our balance sheet.

Let's move to the next slide, liabilities. During the year 2006, current liabilities increased by EUR7 million to EUR18.3 million. This change is mainly as a result of the inclusion of the Serotec entities into the consolidated Group financial statements. The growth in non-current liabilities was significantly impacted by the rise of non-deferred revenues of EUR2.5 million due to payments arising from new contracts signed in 2005 and 2006 and as well, a build up in deferred tax liabilities resulting from the Serotec purchase price accounting exercise.

Looking at changes in share capital during the year, two capital increases were carried out. As part of the Serotec acquisition in January 2006, one third of the purchase price was paid by means of a capital increase. The 208,560 new shares from the capital increase went to the former owners of the Serotec Group and are subject to a graded holding period. In March 2006, MorphoSys successfully placed 6.5 of its outstanding share capital in a private placement to international institutional investors resulting in gross proceeds for MorphoSys of approximately EUR17 million.

Beyond that, 97,000 shares were issued to employees as part of the convertible bonds and options exercises. At year end 2006, the total number of shares issued was approximately 6.7 million shares.

Looking at our shareholder structure, presently, our biggest shareholder is Novartis AG, who owns about 7%, followed by AstraZeneca, who owns approximately 6%. The free float amounted to approximately 87% and includes 3% of shareholdings by the management and supervisory boards. It may be worthwhile mentioning that in the course of 2006, that more than 200 investor meetings were held in ten countries and institutional shareholdings of MorphoSys roughly doubled during that -- during the year and we estimate these shareholdings to be currently at about 40% of share capital.

At the end of 2006, the MorphoSys Group employed 279 employees compared to 172 employees at year end 2005. Of the 279, 158 worked in the therapeutic antibody segment, and 121 in the research antibody segment. Of total employees, 183 worked in Germany, 78 in the UK, and 18 in the US.

That concludes my review for the year 2006. I'd like to briefly continue with the outlook for 2007.

We estimate the revenues for the full year 2007 to range between EUR60 and EUR65 million. We anticipate that approximately two thirds of revenues will be generated by the therapeutic antibody segment. Of that amount, we expect performance-based payments to make up approximately EUR10 million of the total. We expect that the research antibody segment will contribute approximately one third of total revenues.

There are a number of assumptions that have been put into the expense line for 2007. First and foremost, included in our assumptions is approximately EUR5 million worth of investment in proprietary products and roughly EUR1 million in proprietary technology development. Looking at the guidance by segment, in the therapeutic unit, we expect the unit to be profitable as last year as it relates to the AbD segment. We expect, in 2007, an operational profit of somewhere between 5% to 10% of sales.

That concludes the financial analysis of 2006 and the guidance for 2007. I'd now like to hand back to Simon.

Thanks, Dave. To conclude the presentation, I'd like to talk about how we intend to use our current strength for future growth and then finish by presenting our goals for 2007.

Looking to our future, I want to make two key points about our pipeline and our strategy. The first point is that our partnered therapeutic discovery business has now hit critical mass. The six deals that we signed during 2006, together with the other running partnerships, will result in sufficient royalties from HuCAL drugs on the market to secure our long-term future. Our updated projection suggests that the currently active partnerships should result in at least nine HuCAL antibody drugs coming to the market. How do we reach this conclusion? It's based on the number of programs ongoing or pending within our current partnerships and the probability that these programs will result in marketed drugs. The next two slides take you through this calculation.

We currently have 43 active partnered programs. We project at least seven new program starts in 2007, meaning that the number should increase to a total of 50 by the end of this year. Within the scope of the existing ongoing collaborations, we believe a further 40 new programs will be started between 2008 and 2011. This makes a grand total of 90 partnered programs and our internal pipeline projections are based on this number. Note that this calculation relies only on partnerships that are already in place. Every additional partnership we may sign in the future will add to the number of HuCAL antibodies coming to market and I'd like to emphasize here that we do anticipate entering new partnerships, but solely for the purpose of this calculation, we have assumed no addition deals.

The next step of the estimate relies on our experience with generating HuCAL antibodies and industry data on developmental success rates. Our experience has shown that the probability that we can generate in antibody against a particular target, and meet the criteria required to enter formal pre-clinical development, is at least 80%. Our data on pre-clinical development suggests the probability that an antibody will successfully complete this phase is 37.5%.

The third aspect is clinical development and here we rely on the latest data from the Tuft Center for the study of drug development which is probably the most reliable source of statistics on the development of pharmaceutical products. These data show that the probability that a biotherapeutic drug will move from Phase 1 development to market is about 30%. So we can now apply these probabilities to our partnerships and estimate how many HuCAL antibodies will come to market from the existing partnerships and that number is nine. We should be careful, of course, not to over interpret this analysis; it's based on a number of assumptions and, of course, includes estimates of programs that haven't started yet. However, the estimate gives you a sense of the future potential of our partnered pipeline even assuming that no new deals are signed.

The second point I'd like to make is a strategic one and that is that our AbD Serotec unit is providing the synergy that we believe will be a major source of future value for our therapeutics business. The diagram on slide 46 captures pictorially an important synergy between the two parts of our business. Technology development within the therapeutic antibody segment makes HuCAL a more powerful research tool. This makes the technology more and more attractive for customers of our AbD Serotec unit, and this in turn helps our sales of research antibodies through the AbD Serotec unit. And furthermore it enables us to enter potentially valuable research collaborations which provide access to drug targets that in turn feed the therapeutic antibody segment.

A deal that we recently closed exemplifies this. I refer here to the alliance with the Burnham Institute, one of the leading medically orientated research institutes in the United States. The Burnham Institute is very well funded and ranks fifth among all private US research institutes in terms of NIH funding. It also consistently ranks among the top 20 organizations for the impact of its research publications measured through scientific citations received for publication by the Institute for Scientific Information. Burnham scientists have contributed to at least five approved therapies and several diagnostic tests that are currently in use and another nine innovative therapies are currently in clinical trials. The agreement we have with them gives scientists at the Burnham Institute rapid access to HuCAL antibodies for research purposes on preferred terms. In return, MorphoSys secures rights to develop any antibodies with therapeutic or diagnostic potential against targets investigated by Burham researchers.

The Burnham deal was the first example of such an arrangement. We recently into the second with a leading Japanese research institute in a three-way deal also involving our Japanese commercial partners GeneFrontier Corporation. We aim to forge similar agreements with other research institutes. We're convinced that multiple research based relationships with leading medically focused academic institutes will be a more productive way of accessing the targets of tomorrow than would building our own target discovery infrastructure in-house.

Access to innovative new drug targets will make our business model even more lucrative since it will enable us to offer not only a proprietary antibody technology, but also novel targets to a collaboration. Under this scenario MorphoSys would itself be the initiator of therapeutic antibody programs in contrast to our current model in which the 43 ongoing partner programs were all initiated by our collaboration partners. On a case by case basis we would decide how far to take individual programs before looking for partners for further development. This model offers considerable flexibility as we would be in control of each program.

Both of our business segments are performing extremely well and prospects for continued growth are very attractive. As I've mentioned our current partnerships and the state of developed pipeline mean that our therapeutic antibody segment has reached critical mass. On the research product side of the business attractive strategic synergies are now being realized. Operationally we expect the AbD Serotec segment to grow faster than the market and therefore to increase its market share.

The pharmaceutical industry is facing a severe challenge in filling its development pipeline. MorphoSys' success today is based on its ability to act as a source of antibody drugs. Looking to the future we believe that by continually improving our technology to enable a generation of even better antibody based substances even faster, by proving that HuCAL antibodies are not only effective in pre-clinical assays, but also in the clinic and by leveraging our proprietary technology in the research space to source novel targets that MorphoSys can become an indispensable partner to the pharmaceutical and research communities.

In closing, our goals our goals for this year are as follows. Revenues in 2007 will be in the range of EUR60 to EUR65 million, split roughly two to one therapeutics to research products. This is consistent with our longer-term objective to grow total Group revenues by at least 15% to 20% year-on-year until such a time as HuCAL drugs reach the market in five to six years' time when we would expect that growth to accelerate sharply. For 2007 we project an operating profit of about EUR7 to EUR10 million.

With regard to the development of our therapeutic pipeline we aim to file an IND on MOR103 before year end. Regarding MOR202 we'll continue with pre-clinical development working towards an IND. We anticipate between one and three new INDs from our partnered programs this year. This development reflects the growing maturity of our pipeline and we expect the number of INDs to be even higher next year. We project that the total number active partnered programs will hit 50 in 2007 and will increase steadily thereafter. Although this may sound like a modest increase from the 43 programs currently underway it includes assumed attrition in pre-clinical development.

The number of active programs is a more important parameter than the number of deals we sign with pharma companies. Based on the demand we continue to see in the industry and the number of discussions we are currently engaged in we anticipate an attractive level of deal flow in the years ahead. Predicting timing and scope of such deals is, however, very difficult and we can therefore give no precise guidance on this point.

In the research antibody segment our goal for the AbD Serotec unit is to increase revenues by 20% over last year and to reach profitability. A set of important strategic goals for the unit relate to the growing penetration of the HuCAL technology. To this end we aim to enter at least one new marketing alliance and also focus on increasing the uptake of HuCAL antibodies in the research community.

In closing we look forward to another successful year for the company and to updating you on a regular basis on our progress. Thank you all for your attention.

Thank you very much Simon, Dave. I would like to open now this room for your questions. I suggest that we start with questions coming from the conference call. I see there are no questions at the time, so may I have the first question here from the audience please?

Hello. I have two questions. Hans Kuhlmann from LBBW. One is how sure are you with your projected 40 new programs coming up in 2008 to 2011, what is the basis of those calculations?

And the second, if I look at your guidance for 2007 and the assumption that your AbD unit will be profitable with an EBIT margin about 5% to 10% and more milestones coming up from the therapeutic section, it seems to me that your EBIT estimates are rather conservative, could you comment on that please?

I'll take the first part of that question and Dave will take the second part.

The estimate of 40 programs starting between '08 and 2011 we've taken out of the existing contracts, some of which run to 2011, some of which terminate earlier. In some of those contracts there are precise commitments about how many programs to start year-on-year, in other contracts there are options. And what we've done is we've combined the commitments that some of those partners have made with an estimate, a conservative estimate I might say, from the options and added those together to come to this number of 40. The total potential number of programs that could be started if you add the committed programs plus all of the options, there's actually a lot more than 40, but we have only taken a portion of the option to come up with this number reported. So we actually feel very, very comfortable with that number of 40.

And regarding the conservatism of the 2007 projections, I guess the first thing we have to realize is that we're dealing with ranges. When we talk about milestones of approximately ten, that could either be nine or it could more, same with the EBIT margin. And I think if you do the math and you realize also that we are doubling our investment in product and technology spend from this year's current EUR3 million to approximately EUR6 million next year. We think it's conservative, but not overly conservative.

Daniel Wendorff, WestLB. Three questions if I may? First question regarding the Bayer-Schering situation. You said the Schering deal for Bayer would slip into the Schering deal and that is going to expire at the end of 2007. How confident are you that that can be extended and if it's not going to be extended, what could be the financial impact in terms of a rough guidance?

And two financial questions regarding the CapEx, how do you see that going to develop into 2007? And the profitability in the ABD segment, do you mainly achieve this by increasing your gross margin or how do you see the EBIT margin of 5% to 10% develop?

Yes, let me take the first question about Bayer-Schering and then Dave will speak to the financial questions. The agreement, the original agreement we had with Schering had a provision in it whereby it could be extended to the end of '07 and that's the agreement that the two, or now the combined Bayer-Schering is now operating under. We're in discussions with them at the moment about going beyond 2007, but at this stage I'm not able or not prepared to comment on the status of those discussions or the likelihood that we could extend that deal or if so, under what terms and conditions. It's an ongoing negotiation and our policy is simply not to comment on ongoing negotiations.

What's the potential financial impact if it's not going to be extended?

I think what we would say to that point is we've seen in the past that if deals don't get extended, that we'd be in a position to replace them with alternative deals that essentially provide cover if you like, for the gap that's made by that missing deal. So let me just say that discussions are ongoing, what the terms could be for a potential extension, we don't know at this stage, but we -- it's not a source of concern for us. Let's put it that way.

As it relates to the question regarding CapEx; this year we had approximately EUR4 million worth of CapEx expenditure. We expect in 2007 that number to be reduced down to approximately EUR3 million. That's mainly the result of the fact that in 2006 we had capital expenditures in the amount of about EUR1.2 million as it relates to the restructuring of the UK Serotec Group.

As it relates to the question increasing the result of Serotec, making it more profitable, or the EBIT segment rather; I think it's a combination of things. Number one, we had restructuring costs of about EUR1.7 million last year. Those restructuring costs are now finished and we expect no further restructuring costs. That will be one effect, another effect of course will be we expect a slight increase in the gross profit and of course we also expect, through optimizing the product portfolio, that the business in total will become more profitable. So not one thing.

Thank you.

Martin Possienke, Equinet. Yes congratulations on therapeutics; I'm sorry that I have to ask again on the other business unit. Restructuring charges of EUR1.7 million, if I remember correctly it's pretty much in line with your guidance communicated last year. Nonetheless the operating result is significantly below your guidance so there must be something on the operating side as well. Maybe you can comment on that?

And then in terms of Serotec on a standalone basis, revenue growth is around 10%. Am I correct there and if I'm correct, why is it below industry growth and what is the trigger to bring it to 20% in 2007?

Okay, maybe I can just start with some general comments about that and Dave will comment on the specific financial questions.

What you can't forget is that the year 2007 was one of massive upheaval for us in that area of the business so we consolidated several different operations, we established brand new premises, we had to relocate our manufacturing into those premises, we had to relocate people from two sites in the UK into those premises in the UK. That involved significant expense. We took the opportunity to upgrade their premises from something that was, we felt, well below current industry standard to something now that is really not only today's standard, but tomorrow's standard. We have a wonderful facility there and we took the opportunity in 2006 to make considerable expense in order to establish that facility and equip it for the future.

So it was really a year of establishing that unit in the best possible way that it could perform in the years ahead. And I think for that reason, what you should really focus in on is the projected performance for this year, which will be growth we project of above 20% which is significantly better than the market. If you look at some of the bigger players in the market, they're actually growing below 10%. Some of the bigger players such as Chemicon, now part of Milipor and some of the other antibody specialists, are growing below 10%. So if we can achieve that goal of growing at over 20%, we'll be growing at twice the rate of the market in this year. So I think those will be my general comments, that last year was a year of consolidation and we're now positioned to perform substantially better than the market in the years ahead, starting this year.

Yes maybe the comment on the restructuring charges; I think the guidance that we gave at the beginning of 2006 was that restructuring charges amount to approximately EUR1 million. They were almost double that in the form of about EUR1.7 million, so that had a big impact on the performance of the unit. Part of that was due to the fact that the expenses that we actually had in 2006 were higher than expected, part of it is also that some of these expenses were pulled forward into 2006 as a result of quicker than anticipated integration, moving into to the building which would then result in the write-offs which we had anticipated back in 2006, to occur in early in 2007.

So from operating point of view everything went as you imagined it at the beginning of the year.

Other than the fact that the restructuring costs were substantially higher, and also that we, in conjunction with those restructuring costs, had -- because of that we had lower gross profit. But it think, as Simon mentioned, we're quite confident that this unit will become profitable this year and without doubt, cash positive.

Just another question on this topic if I may regarding the guidance for 2007? I think we speak about some EUR22 million in terms of revenues for the AbD Serotec segment. So assuming that you keep your COGS and your operating costs stable, corrected for restructuring, we end up around EUR20 million. So all in all you have to keep your COGS and your operating costs stable in absolute terms in order to reach the upper end of your 5% to 10% EBIT guidance. Do you think it's possible to keep the cost level stable and operating costs maybe even declining a bit in absolute terms?

Yes, are we talking COGS as a percentage stable or COGS in absolute terms stable?

To achieve the upper end of your guidance you have to keep it stable in absolute terms.

Okay, it's unlikely that we'll keep COGS stable in absolute terms. We expect, however, that the total cost of the operating unit, not least due to the fact that we've now restructured a number of the units. That chart that we saw there where we went from approximately ten subsidiaries to now the current seven, should also significantly reduce costs. We've substantially streamlined the structure of the Group which should result in substantial cost savings. So we expect the main cost -- we expect some improvement to happen on the gross margin, as I mentioned, and we also expect to see substantial improvement beneath gross margin.

But operating costs will decline in absolute terms, most likely?

We would expect so, yes.

Okay, thanks a lot.

Holger Blum, Deutsche Bank. One question on the SG&A number in the fourth quarter, it seems nearly twice the run rate of previous quarters. Was it due to restructuring and what should we expect there for the future?

The second question, on your guidance, could you maybe talk a little bit more of what is impacting the range, what makes you end up at the lower end versus upper end of the guidance, especially I think you mention that you target EUR10 million of milestone payments into 2007? Does that only imply one or three INDs?

And the third question then would be more longer term maybe on the proprietary pipeline or the fact that you haven't had any partnering talks yet. Might that become a topic over 2007 and maybe over longer term, would you have a maximum spending for that maybe for 2008, 2009?

Maybe I'll start with that question about the [own] pipeline, and then Dave will answer the financial questions. We've deliberately not engaged in the last year and discussions on those programs because we wanted to focus on developing and bringing them forward and generating a strong data package. We feel now that in both cases we have two stories there, around MOR103 and MOR202, which are sufficiently strong and especially given the willingness, or let me say the desperation of pharma to pay big amount of money for interesting, even early stage drug candidates. We feel that it's now worth bringing those two stories into our meetings with pharma and biotech, when we go out and have those meetings.

That said, we don't need to partner either of those compounds during the course of this year. However, as I said during the talk, we want to remain flexible. If someone -- if we have a discussion with a great partner and they indicate that they would be very interested in working together with us to develop one or the other of those compounds, we will entertain that discussion. But our current intentions are to continue with both of those programs for the foreseeable future on our own.

Regarding the Q4 SG&A cost increase. Yes, you're correct that the increase is mainly attributable to the write-offs and the restructuring costs in association with the AbD unit in Q4. We also had a extra performance bonus based on the excellent year that we had -- that we paid in 2006.

There was a question regarding the impact of IND milestones on the approximately EUR10 million worth of projected milestones for the year. What I'm afraid I can't give you today is in that EUR10 million, to tell you whether or not in our planning one or three IND milestones are included, but obviously certainly at least one is, as it was this year, in 2006 we had the IND milestone included from Roche. One could perhaps assume that there is some upside in that guidance if we were to achieve the upper end of the three IND filings.

Maybe I should just add a point to that. Predicting when milestones happen in this industry is enormously difficult. When it comes to clinical programs, filing INDs and so on, recall that we have no influence over this at all and we're simply in the hands of our partners there. So we have an idea, or a feeling or a sense that we have no control at all, and therefore, planning has to have an element of caution in it when we make estimates of when these events can occur.

But what is then causing the range, what are the flexible components in that guidance?

Partially it's the milestones and partially it's operational guidance. The other thing that has a very significant impact on our ability to call revenues mainly on the therapeutic side of the business is the impact of new revenues. That is very, very difficult to determine. And maybe one other point I should make. What we call as performance-based payments, includes, milestones, but is not the only thing that is included in that planning. We have a number, or a range of different types of payments which we consider performance-based payments that can vary. In total, for 2007 we expect them to be EUR10 million, they're certainly not all made of three IND payments. Did that answer you question?

Yes.

[inaudible] Independent Analyst. You talked about 100% about your own company, but I would be interested about the market where you are moving and developing. Can you -- have you some imagination of your market where you are active, the antibody company market, or how could you define it? And do you -- have you some feeling for your market share in this market, how you developed and what is the measure? Is it sales, is it other measures which could give you some feeling that you are outperforming your competitors? Did you move up in your position from, let's say, place 50 to 20, and do you believe that this will go further in the coming years?

When we think about these points, we have to think about the two units separately, the therapeutic antibody segment and the research antibody segment. On the research antibody side, a lot of our competitors are private companies and it's hard to get precise information about their turnover, for example. But as we said during the presentation, we believe, based on the best information we have, that we're in the top 20 worldwide in terms of our position, from point of view of turnover vis-à-vis our competitors. And remember, we started this segment in 2003, so we've gone from nowhere in 2003 to a position in the top 20 in 2006 and we, of course are aiming to move beyond there. And the fact that that segment is growing at faster than the market rate shows you that we're improving our market share in that segment.

On the therapeutic antibody segment, we know the competitive space extremely well. Two of our biggest competitors have been acquired in the last 18 months, that's Cambridge Antibody Technology and Abgenix. The way we measure our performance here is largely by the number of partnerships that we enter, compared with the number of partnerships our competitors enter. And here we know that we are in the top two, possibly three worldwide in that segment. And I think if you look at the top pharma companies, the top 20 pharma companies, we're number one in terms of the number of partnerships we have signed over the last three, four years.

So that's the basis of our claim, that we are the partner of choice for people who are prepared to pay serious money for access to a technology. MorphoSys is the partner of choice. That's a perfectly fair statement based on the deals that we've signed over the last couple of years. Does that answer the question?

One additional question. The antibody technology is one of several technologies to develop new products. Do you feel that this technology will become even more important, or if you look to [inaudible], [CBCI] is not antibody, it's something different, so there are other methods and other technologies, biotechnologies. Do you think the antibody technology will become more important or could lose some importance?

Good question. I'm convinced it will become more important, and the reason why is you just have to look at the level of interest in the pharmaceutical industry. Ten years ago, or 15 years ago, there were no antibody drugs, perhaps one, 15 years ago. Today there are 20. There are well over 100 in clinical trials today and that, of course -- those are the products of tomorrow. So the level of interest in the pharmaceutical industry for this class of drugs, for antibodies of the class, has exploded in the last five years. And based on the discussions and negotiations that we continue to have in the industry, we see that growth going on out into the future.

Whenever we talk to potential partners and of course, our existing partners, the Pfizers, the Novartis, the Roches, the Bayer-Schering, the Centocors, the Lilleys, the Schering-Ploughs, all of these people. We ask them a question that's of great importance for us which is, how much of the future do antibodies and antibody technologies have? Because we worry about that, of course it's important for us. And the answer we always get back from those people is, 15, 20 years and beyond.

This is not something that's going to come to an end tomorrow, this is something that the industry is committed to, that they're putting big investments into. And a proof of that point is the fact that as said in the presentation for Novartis, one third of their pre-clinical biologics pipeline comes out of our technology. That's a bit bet that Novartis is placing on their future portfolio of products which is directly based on our technology. We feel very, very comfortable and confident about the important of our technology and MorphoSys in the future of this industry.

My name is [inaudible]. I just want to ask a question about what the conditions of your pharmaceutical collaborations are in the light of the huge interest of the big pharma companies in antibodies? How does it translate into the conditions of your deals you are doing, and do you see any shift in the mix between upfront payment, milestones and royalties?

Yes, that's a good question, several years ago we had to face the criticism that all this stuff would become a commodity and would be worth nothing. And we've seen that in the case of, for example, combinatorial chemistry libraries, where in the late '90s they were something that you could charge milestones and royalties for and then a few years later, if you'd got a little bit of upfront cash you were very lucky. The criticism that people pointed at us five years ago that our technology would become a commodity has absolutely not panned out at all. And the fact of the matter is although terms and conditions haven't improved, they haven't decreased at all.

So in broad terms the royalties and the milestones that we can demand today are pretty much the same as they were five years ago, meaning that the technology has held its value. There are limits to what you can charge because if you think about royalties, for example, the pharma company does a calculation of how much they can afford to pay in terms of royalties and there is a limit on that number. But I think the fact that we've been able to hold those financial terms stable over that period is proof of the fact that the technology has retained its value and not become commoditized.

Are there any further questions?

Maybe one follow-up question regarding your own antibody development programs. You mentioned that the Burnham Research Institute collaboration could present a sort of precedence for how you might even expand that further. How likely is it that you are going to expand that beyond the two programs within the next one to two years?

Yes, it depends on the targets that we emerging. The reason we believe this that this a better way to source targets is that target discovery is enormously unpredictable. And we've even seen that at our pharma partners that some of them have moved out of target discovery in-house because you cannot predict, if you study 100 targets, how many of them will actually turn into real drug targets. So for us it's very difficult to say that Burnham will supply one or three or five or that any other institute will be a source of a certain number. However, we believe it's a numbers game. The more collaborations you have, the more interesting programs will emerge.

You shouldn't expect that we're suddenly going to be pursuing ten proprietary drug programs within the next year. That's not going to happen. The number will remain modest, but we always hope that we can start additional programs, but it's based on the quality of the target we see finally.

You don't have a limit to the upper end? Say it this way. So if four very interesting targets would turn up you would potentially try to [pursue] one to four.

Of course we do have a limit because it comes back to R&D investment. But it's again, it's our preparedness to invest in these programs is based on the quality of the target. If we identify targets that are extremely interesting we're going to be more inclined to invest in those than if we don't do that. So it really depends on the quality of the targets that are fed into the process.

And maybe if I could just add some color to that, of course, we're also constrained financially by what we can afford and I think as we've stated before, it's not our intention to go back into loss.

Okay, thank you.

Thomas Schiessle. Gentlemen I'm here in the back row. Not in the [Cadillac] but, question on the regional structure of your business. You are active in the Norwegian region, I think it's not a hot spot of antibody business, isn't it, but you aren't in Japan. Could you please give us some color on your next steps in the Asian region and what this Hamar business is about? This is the one.

The other one is an additional question to the Burnham Institute. Is this really the new strategy to get in touch with new targets, validated targets, to fill the internal pipeline from Novartis as in the latter part of the last three years? Thank you.

So, first of all Thomas, thank you for that question. Regarding Hamar in Norway; the sales office there is a Scandinavian sales office. It happens to be in Hamar because the principal happens to live in Hamar. It's not because that's the centre of Norwegian research activity, it's a Scandinavian sales office.

With respect to the other regions of the world, we feel that we are very well served by a series of distributor relationships, particularly in the Japanese market where direct selling to the customer is essentially unknown. That in contrast to Europe and the US, where you can sell direct to the customer, in Japan the traditional structure is that you have to go through a distributor. Universities and research institutes will have established relationships with distributors and you basically cannot sell direct to the institute researcher, you have to go through the distributor. So it makes sense to stick with that system.

Regarding the Burnham, maybe just to give all of you a bit more color on this. Some of the most exciting feedback we have received from pharma companies in the last few months has been based on our relationship with the Burnham Institute. Pharma companies themselves struggle to find interesting new targets. There is a belief in the industry that the new targets are being discovered in academia, and therefore for us to have a preferred relationship with a leading institute like this where we have traded access to HuCAL technology for rights to targets they discover, pharma companies have spotted this and have been extremely interested in the relationship, because that's the kind of thing that they think is going to source the targets of tomorrow. And we're looking to do more of these as I said. It won't be 100, because we're looking to do it in a very targeted way, where we identify medically focused researched institutes with whom we'll do such relationships.

We signed a second one with a Japanese research institute that for confidentiality reasons we're not allowed to name and we're currently in further discussions. So we think that that's an extremely interesting potential source of new targets for ourselves.

[inaudible -- microphone inaccessible]

The question was how many targets can we digest. The work -- the discovery work is not being done at MorphoSys, it's being done at the research institutes. And our initial role in this is supportive and observing what goes on there. And when we see interesting projects that we feel that we want to bring in-house and start to develop therapeutic antibodies against those targets we can do so. As we said to Daniel before, this is not something at this stage we want to put a concrete number on, but certainly in the earlier stages it's cheaper, obviously, we can pursue rather more programs. As programs move forward and it gets more expensive then we have to look at how much we are prepared to invest.

A question over there, then we'll take a question from the conference call.

Thank you. Karl-Heinz Scheunemann from Bankhaus Metzler. I have a couple of questions concerning MOR103. Unfortunately we could learn from the presentation that you again will not share with us the biological target of the molecule. Could you give us a reason for this, or at least when will we learn some more info or get some more information on the characteristics of the molecule?

And the last one is, would I be completely wrong if I would assume it's not a anti-TNF project?

Okay, in the -- let me start by answering the second question. We actually, in this room one year ago answered that question when we said that the target was not TNF. So that's no new news; that news is one year old now. The other question is, why are we not naming it and when will we name it? I would love to tell you about it because we think it's a great target, we think it's been overlooked and we're very excited about it. But there are competitive reasons why we don't do that and we don't want to awaken potential competitors and have them jump on the same target. So although we'd love to share it with you, we don't want to run the risk that our competitors could find out what this program is. As soon as we feel comfortable with that competitive issue we'll tell you because it's -- we would like to communicate it because we think it's a great story, but we have to be careful of our competitor situation.

[inaudible] thank you.

It was just as a follow-up, to your knowledge, is there anybody else working on this target?

We can't rule it out because we don't know what other people are doing either.

So you know about no-one who is working on it?

It may be, as I said. I would be very surprised if no-one else was working on it. I would be very surprised about that because this is not a leap in the dark for us, this is not some totally new gene that someone has just identified for which there is no evidence that it could be a rheumatoid arthritis treatment. There is evidence available and given that is the case, it's highly likely that there is at least one other party working against that target.

Okay, thanks.

Simon, please could you update us on your IP position and your efforts to strengthen it and to make it more a VIP position of MorphoSys and the efforts to be more powerful in the future?

Do you mean in general terms around the technology or specific programs or -- ?

In general and the IP position concerning HuCAL, HuCAL Gold and expiring date and so on and so forth. Thank you.

Yes, the underlying patent on the HuCAL technology will run until 2015 or so. But in all of the areas, whether it's technology or whether it's specific products, either partnered products or own products, we routinely look to create new intellectual property through patent filings. Just to give you an example, in many of our partnerships many of the targets that we're working on are public domain targets. So the partners, whether it be, whoever it be, are pursuing those targets even though those targets have no patent protection on the target itself. In almost all of those cases we're able to create a proprietary position around the program even though the target may be a public domain target by patenting some future of the antibody, for example, its epitope specificity or some surprising future that emerges during the development of the program.

We have an in-house patent department that's actually headed by an American patent attorney and I would say in general we've become much more aggressive in pursuing patent protection for technologies and product candidates than we were in the past.

Are there any further questions?

Once again, me. If it comes to production of antibodies do you -- I guess you have a collaboration with Crucell for clinical quantities and there is some development partnership with Wacker Chemie, I guess? But that's not for testing quantities it's for commercial quantities, isn't it? And what is the status of the partnerships?

The Crucell relationship is kind of a triangular relationship which also involves DSM and is based on a research agreement we signed with Crucell a couple of years ago to test their PER.C6 cell line, this human cell line. And we're now using that cell line at DSM to produce clinical material for MOR103 clinical -- Phase 1 clinical trial. Some of you may have seen that Crucell put out a press release recently that they reached 10 grams per liter of antibody produced using the PER.C6 system, so we think that that system is very attractive for two reasons. One is that you get human glycosylation patterns on your antibody and the second and perhaps even more interesting is that the yields are enormous, so that's a very attractive aspect to the system.

The Wacker relationship is more of a discovery or research relationship to test systems mainly for the production of fragments, antibody fragments, and that is primarily aimed at the AVD side of the business, trying to look for improved systems with better efficiency for making antibodies for the research community. And as I said, it's primarily a research and investigative study that we're carrying out with them at this stage.

Okay. If there are no further questions or no further questions from the conference call, then I would like to conclude our today conference. We thank you all for your participation. We would like to invite you now to a small lunch outside. We will be around for further questions and further discussions here. Thank you for coming and goodbye.

Ladies and gentlemen that concludes today's conference call. You may now disconnect.