MorphoSys AG (MOR) 2007 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to today's Morphosys AG Q1 report 2007 conference call. For your information this conference is being recorded. At this time, I would like to hand the call over to your host today, Mr. Dave Lemus. Please go ahead sir.

Thank you and good morning and welcome. This is Dave Lemus, CFO of Morphosys. With me on the line today is Simon Moroney, our CEO. First we'd like to welcome you to this conference call and thank you for participating. During the call we'd like to talk about the company's financial results for the first quarter of 2007. 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 2007. 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 for the very warm welcome to this, our Q1 2007 conference call. We look back on a quarter in which we have once again made solid progress. The announcements that we have made in this quarter reflect advances across the whole organization. Most importantly, we are where we expected to be and are on track to meet our operational and financial objectives for the year.

In March of this year we announced a partnership with Japan's second largest pharmaceutical company, Astellas. Under the terms of the deal, Astellas' scientists will apply our HuCAL GOLD technology in house in their discovery R&D for a term of up to five years. In addition, Astellas has an option to trigger collaborative projects with Morphosys scientists based around specific projects. As with our other partnerships, we see this deal as a means of adding to our partner therapeutic antibody pipeline as new drugs discovered within the partnership move into development.

To highlight the progress we've made since targeting the Japanese market in 2005, in this year we expect approximately 10% of our revenues in the therapeutic antibody segment of our business to originate in Japan. A lot of significant development with a different kid of alliance in the same country. In January we announced a 3-way deal which involves GeneFrontier Corporation, our Japanese marketing partners, together with a leading Japanese research institute. Within this 3-way arrangement, we have installed our HuCAL GOLD library in the laboratories of GeneFrontier where the technology is being used for proteomics research and target validation in conjunction with the research institute.

In some respects, this deal resembles a standard out-licensing of our HuCAL library as Morphosys receives annual payments from GeneFrontier covering its access to the technology. However, there is a broader, strategic aspect to the collaboration which was the main motivation for us in entering the deal. We expect the research to lead to new discoveries of potential therapeutic importance. As a result, we believe the new therapeutic antibodies will emerge, any commercial rights to which we would share with GeneFrontier. In this regard, the deal is similar to one we announced with the San Diego based Burnham Institute late last year where, again, we hope that new targets will develop agents with the help of our HuCAL technology and where we can secure rights to resulting antibody drugs.

It's worth noting that both of these deals illustrate an important synergy between the two sides of our business. In both cases, the initial interactions with the research institutes were through our AbD Division. In each case, the resulting deals are of great potential value to the therapeutic side of the business.

Looking now at the research products segment separately, earlier this year we inaugurated our new AbD Serotec building just outside Oxford in England. We were delighted to have Malcolm Wicks, the U.K.'s Minister of State for Science and Innovation open the facility. This state of the art building is our new U.K. headquarters and completes the consolidation of our former Serotec and Biogenesis sites. At the new premises, an external order of the ISO9001 2000 Quality System has been completed and continued certification has been recommended, showing that the move into the new building has not disrupted the high quality standards under which AbD operates.

In addition in the segment, we recently announced an expanded license agreement with MRC Technology, the licensing arm of the U.K.'s Medical Research Council. This deal extended a longstanding relationship between Serotec and the MRC and secures access to new antibodies which we will market under the AbD Serotec brand. We're delighted with the rapid progress we've made in establishing the AbD Serotec unit as a player in the research antibody market. In a recent survey of the industry conducted by the company BioCompare, AbD Serotec ranked number 11 worldwide for customer recognition. Prior to the acquisition in January of last year, neither Serotec nor Antibodies By Design/Biogenesis were ranked in the top 20. This result demonstrates very nicely that AbD Serotec has made considerable progress and is gaining market share in the segment. It further speaks to the fact that the integration process was executed successfully and the re-branding exercise created a business that is better positioned in the market than with the two former entities.

Regarding sales, the AbD Serotec unit made a slightly slower start to this year than may be expected from full year targets for the segment. This is attributable to two factors -- first, because we were completing the replacement of our previous catalog with a brand new consolidated version, and secondly there's been a focus on fulfilling several larger scale orders. Roll out of a new catalog usually results in a pickup in catalog sales which we expect to impact the next quarter. Dave will provide you with some color regarding the reasons for the segment loss in the first quarter. Notwithstanding this, we remain confident of reaching our goals for the full year in the AbD Serotec segment and expect revenues, as well as operating and net profits, to improve over the course of the year.

I'd like to turn briefly now to our proprietary therapeutic product programs. Although we made no announcements regarding MOR103 and MOR202 during the first quarter, both of these remain on track. Specifically, we intend to file an IND for MOR103 before year end and formal preclinical development of MOR202 continues.

At the corporate level in Q1 we announced the retirement of our longstanding board member and my cofounder Professor Andreas Pluckthun. Andreas has made an enormous contribution to the development and success of Morphosys for which the company is indebted. He will now be able to devote more time to his growing university commitments and also to consider other entrepreneurial activities. We were delighted to be able to nominate Dr. Walter Blattler, former EVP of Science and Technology at Immunogen as Andreas' replacement. We expect the new appointment to be confirmed at our annual general meeting on May 16. With that, I conclude my review of the quarter, and I would now like to hand back to Dave for his presentation on the financial results.

Thank you, Simon. To begin the financial analysis, I'll start with revenues. Group revenues slightly decreased by 5% to EUR14.1m in the first three months of 2007 compared to EUR14.8m in the same period of last year. Reasons for the decrease were mainly due to high levels of success based payments in the therapeutics antibody segment received in the first quarter of 2006. Revenues arising from the Therapeutic Antibodies segment amounted to EUR8.8m, or 62% of total revenues which included success based payments in the amount of EUR1.6m.

Contrasting this amount to the success based payments received in Q1 2006 which amounted to EUR3.9m, and included the achievement of a Phase I milestone payment to Morphosys, the difference in success based payments between 2007 and 2006 was more than EUR2.3m. This brings me to the point which we have stressed in the past, namely that our results can be volatile in some quarters. The timing of milestone payments and new or expanded partnerships can have a significant effect on the top and bottom line in any one given quarter, although for the year it's a bit easier for these items to smooth each other out and predict their effects for the full year.

Moving onto the AbD segment compared to the same period in the previous year, revenues in the AbD segment increased by 8% to EUR5.3m or 38% of total revenues in the first quarter of 2007. The largest part of revenues in the amount of EUR4.8m were generated with catalog and industrial customers while custom manufactured antibodies contributed 9% or EUR500,000. I want to flag the point that within the catalog and industrial customers, an unusually high proportion of sales arose from our OEM or industrial business in Q1 2007 which had an impact on the profitability of the segment for the quarter. More on this later.

Moving onto operating expenses for the first quarter of 2007, total operating expenses which included stock based compensation increased by 26% to EUR12.8m. The total increase in operating expenses of EUR2.6m was impacted by R&D expenses increasing by 29% or EUR1.1m, SG&A expenses increasing by 24% or EUR1m, and cost of goods increasing by 29% or EUR600,000.

Stock-based compensation expenses embedded in COGS, SG&A and R&D expense. Stock-based compensation for the first three months of 2007 amounted to EUR400,000 compared to EUR300,000 in the first quarter of the previous year. Cost of goods sold is composed of the AbD segment's cost of goods sold. COGS rose significantly to EUR2.7m in Q1 2007 compared to EUR2.1m in the same period of the prior year. This rise in COGS mainly resulted from higher sales levels during the current quarter and from increased costs arising from the purchase price allocation in connection with the acquisition of Serotec which were not included in Q1 2006.

High levels of sales with industrial or bulk customers in the first quarter of 2007 further adversely influenced gross margins. Here I would like to point out that margins on our industrial, or OEM business, are lower than that of the custom and catalog business which come in at 60% plus. Therefore, an unusual high proportion of sales in the industrial business in any one quarter has the effect of pulling down margins for the segment which is what happened in Q1, 2007. We expect margins for the full year to approach 57 to 60% but in Q1, due to the high proportion of industrial sales, they came in at closer to 49%

Costs for R&D increased by EUR1.1m to EUR4.9m mainly due to higher expenses for product development of MOR103 and MOR202 and technology developments. SG&A expenses amounted to EUR5.2m compared to EUR4.2m in the same period of the previous year. The change was mainly due to higher expenses for administrative staff in the area of sales, marketing and customer support. Morphosys investment in PP&E amounted to EUR300,000 for the period ended March 31, 2007, an increase by EUR100,000 compared to the same period in prior year.

Depreciation of PP&E for the first three months of 2007 accounted for EUR400,000 compared to EUR300,000 in the first quarter of 2006. During the first three months of 2007, the Company invested EUR300,000 in intangible assets compared to EUR100,000 in the first quarter of 2006. Amortization of intangibles amounted to EUR700,000 and increase by EUR200,000 in comparison to the first three months of 2006 mainly due to the amortization of intangible assets acquired in the Serotec deal.

Moving onto taxes, expenses for current and deferred taxes in the amount of EUR1m were recognized in the first few months of 2007. The deferred tax asset on tax loss carry forwards established in 2006 was partially utilized in the first quarter of 2007 resulting in both current and deferred tax expenses for the quarter. Group operating profit amounted to EUR1.3m in the first three months of 2007 compared to an operating profit of EUR4.7m in the first quarter of 2006. The net profit after taxes of EUR600,000 was achieved for the first three months of 2007 compared to a net profit after taxes of EUR4.9m in the same period of 2006. On March 31, 2007, the total number of shares was 6,724,410, compared to 6.7m shares at December 31, 2006. The resulting basic net profit per share for the three months ended March 31, 2007 amounted to $0.10 per share compared to a net profit per share of $0.79 in Q1 2006.

Moving onto the balance sheet, on March 31, 2007 Morphosys liquid funds comprised EUR72m compared to EUR66m on December 31, 2006 which arose mainly from operating cash flow amounting to EUR5.2m in the first three months of 2007. That concludes the financial analysis.

Moving onto outlook as is typical in our conference calls, we like to take the opportunity to update our financial guidance. I would like to confirm our full year guidance. We are on track to achieve our goals for the year. To reiterate the guidance we've already announced, the Company estimates full year 2007 Group revenues between EUR60m and EUR65m and an operating profit of between EUR7m to EUR10m. On a segment level, I'd like to confirm our goal to achieve a positive EBIT margin for the AbD segment. We believe that although Q1 showed a negative result for the quarter, there were good reasons for it. As mentioned, we had unusually low segmental gross profits due to the high level of industrial sales for the quarter which carries lower margins than other AbD business. We believe that this issue will be resolved once the mix of sales goes back into line over the next three quarters.

Underneath gross profit in this segment, we expect costs to further decrease over the next three quarters due to the reduction of mainly SG&A expenses. All said and done, the AbD unit was in fact for the quarter EBITDA positive. EBITDA came in at approximately EUR200,000 with stock based compensation removed and approximately just a bit over EUR100,000 with it included. Therefore, in summary we remain optimistic to hit at least the lower end of guidance of 5% operating profit at year end for that segment. Look for subsequent quarters to begin showing improvement in that segment. That concludes the financial analysis for the first three months of 2007. We'd now like to open the call up to your questions.

Thank you, sir. (Operator Instructions). Our first question today comes from Daniel Wendorff of WestLB. Please go ahead.

Yes, good morning. I have two questions actually, one regarding the development of the tax rate going forward. You mentioned that you utilized part of the tax asset formed in full year '06. And is that going to occur over the next quarters as well? Second question regarding the AbD segment. I mean, the revenues were pretty much in line with what we had. And question is in regarding the increased cost from the PPA you mentioned. Is that still an inventory step-up or what do you mean by that? So the question eventually is how likely is it that you can report the 5% EBIT margin over full year '07? That all boils down to that question. Thank you.

Sure. Maybe I'll handle the first two questions. The question on the taxes, expect the amortization of the deferred tax asset to continue for the year -- the answer is yes. And we expect what we have seen in Q1 to be representative of the full year 2007. So yes, we expect Q1 to be representative of the full year as it relates to taxes. As it relates to the second question, is it likely that we're able to pull the AbD unit from its current Q1 loss back into a profit? I think the answer is yes. Clearly we believe that is very possible. As we mentioned in the call, the unit's gross profit was adversely affected by a high proportion of industrial sales which carries a margin substantially south of 60% which is kind of the norm for the rest of the business which is the bulk of the business. We had an unusually high proportion of those sales in Q1 which served to reduce the gross margin which is normally -- if you take a look at last year's number, you'll see that it's closer to 60%. That margin was dragged down to 49%. So assuming we're able to get that sales mix back in order, and we think that's very, very likely, we think that the gross margins will approach the 58 to 60% range for the full year which will substantially help the profitability of the unit. In addition, as part of the integration, we had in any case planned reductions in SG&A expenses for the remainder of the year. So beneath gross profit we expect also to be able to cut for the next three quarters roughly EUR0.5m from the current run rate. So with the combination of those two things, we remain confident that unit can hit its target of EBIT at 5% for the full year.

Okay, thank you.

And our next question today comes from Thomas Schiessle with EQUI.TS. Please go ahead.

Good morning, gentlemen, this is Thomas Schiessle of Frankfurt speaking. I have to bother you concerning the AbD business I'm afraid. Could you elaborate a little bit on the typical reshuffling of the catalog business? Is this new issue of a catalog a yearly procedure? Shall we foresee such an event each spring? Or is it a one-off item if it comes to the yearly basis? This is the one. The other on the question is -- is this only postponed sales when the catalog is not published? So will we see let's say an extreme increase in sales in Q2? And third question concerning AbD is, is there a change in customer behavior? So OEM business is very robust or very vivid? And on the other hand, the catalog business is not doing very well. Thank you for answering the questions.

Hi, Thomas, I'll take those questions. Just a little bit of explanation about how the catalog business works. Typically in the past, Serotec has brought out a catalog on an annual basis which essentially updates the product offering. What we have engaged in is actually a massive undertaking which was consolidating the catalog offerings of Serotec, of their subsidiary OBT, and of Biogenesis and that enormous undertaking has resulted in us now having about 10,000 products to offer altogether and it's taken us quite an effort to consolidate that into a meaningful and useful catalog. That catalog is now being launched and sent to many thousands of customers. And Serotec's experience in the past is that you can usually expect a jump in catalog sales when people receive the new catalog. Typically launch of a new catalog for them in the past has been an annual event. And we will probably look to maintain that, although I must say we're looking to transition towards more of an online sales basis. But the catalog nevertheless remains an important selling tool. So that's something that's engaged us very heavily for the last several months. It's now complete, it's out there, and we expect to benefit from it.

In terms of your question about customer behavior, the increased industrial business, I think what you're seeing here is traditionally Serotec has had some industrial business but not a lot. And I think as they have become part of Morphosys, we with our very strong links into the industry, have helped in terms of securing new customers on that side of the business. And by chance more or less, we have a particularly high proportion of that business in the first quarter of this year. Overall, we don't see a change in the split between the various components of that AbD business between the custom, which is the HuCAL based business, the catalog, and this industrial supply business. In the longer term, we believe those -- we don't expect a huge change, but as we said, Q1 was by chance rather heavily on the industrial side and that had an impact as Dave has mentioned, on the margins.

Okay, thank you.

(Operator Instructions). Our next question today comes from Patrick Fuchs of DZ Bank. Please go ahead.

Hello. I have a question to the figure that we reported by Antibodies by Design. You normally do not disclose that separately on a regular basis so the EUR0.5m. I assume they sound a little bit disappointing. Are there reasons for that? Basically are there other technologies, price is too high, maybe competition from academic groups? And what do you expect for this part of the business for the whole year? Then again a question on AbD. So did I get it right the SG&A will fall by EUR0.5m run rate per quarter due to what? Due to PPA changes or due to other things? And then the last question on that is you mentioned COGS of 60% as a goal in that unit. Or no, it was gross margin of 6% in that group, in that business unit. And we didn't see that, if I remember right, the whole last year. And where is your confidence to getting into that area? Then the last point is, I mean, end of February you mentioned 5% to 10% as the EBIT margin goal. And now you are sticking at least to 5%. Has anything changed since February in your perception of the market or the business in that segment? Thanks.

Maybe I can handle some of the numbers question and Simon, perhaps you might want to give a perspective on the business going forward and its prospects. As it relates to the COGS number, last year if I remember correctly, we achieved a margin of roughly 57%, 58% which is clearly above the run rate of the margin we had in Q1 which was closer to 49%. And I guess as we've tried to stress on the call, the main reason for that was the unusually high proportion of OEM or industrial business which we did in Q1, a much higher percentage than we normally do in that business. And of course those types of businesses carry a much lower margin than the kind of 50% to 60% target that we have for this year.

So from that perspective, we have done the analysis of where we think the sales mix will go. For the full year, we believe that the mix will kind of normalize sometime later in the following quarters and therefore we remain optimistic for us to hit a margin that's somewhere between 58% and 60% for the year. And to that end mathematically to hit that, we just need to achieve 60% margins in the next three quarters. So we think that's doable based on, not on historical performance, but on what we project.

There was another question regarding SG&A expenses. I think what we've tried to point out this quarter was that in fact compared to the run rate of Q1 versus future run rates, that if you sum the run rate for the next three quarters, in total it should sum to roughly about EUR0.5m lower than what the run rate was for the first quarter of this year. And that's simply part of cuts that we had planned on identifying for the full year to make sure that we hit the operating EBIT margins that we had projected for the year.

Maybe just a word about prospects and particularly, Patrick, your question about the custom business. That continues to grow extremely well and we're very happy with it. The interest is growing, the awareness of the technology out there is growing. The -- we expect to reach the target for the year which will be something like a 30% increase over last year in terms of revenue for that segment. And of course as capacity grows, and economies of scale kick in, then the margins on that side of the business improve as well. I think it's important not to forget the strategic aspect, particularly on that HuCAL side of the business which is we're looking to build relationships. And we mentioned the Japanese one, we mentioned the Burnham one. So that business is all about getting the HuCAL technology out there, getting people using the antibodies, and also seeding potential future therapeutic projects. So we're not looking to charge people the absolute maximum that we may be able to charge if we were simply interested in maximizing revenue. We're also trying to add an interesting mix there of future strategic opportunities which involves maybe making compromises on pricing at the front end. So the most important thing to me is demand is increasing, awareness is increasing and the unit is functioning very well.

And will you report then from time to time about that activity? I assume not regularly.

We may not continue to report quarter by quarter, but I think you can expect that we will report certainly on an annual basis how that component of the total business is doing.

Okay, then maybe last question from my side to the in-house drug development. I mean you mentioned that the projects are proceeding. Can you give us a hint what the costs for the quarter were roughly about that? I know that you don't, also do not disclose it regularly, but one can estimate which project costs what and just to maybe cross check that for my side, the costs for in house drug development if you have that available? Roughly, just roughly one, two, three --

Yes I think this year we gave guidance at the beginning of the year that our spend would be roughly double what it was last year, namely on the order of EUR5m to EUR6m, that product and technology spend. I don't have the exact numbers for Q1 as it relates to the individual products, but clearly here the vast majority of spend is being spent on the two projects, MOR103 and MOR202. And of those two projects, MOR103 is obviously taking the lion's share given that we're going for an IND filing in the second half of this year. Of course what's driving those expenses are the manufacture of material for those impending IND filings.

So one can calculate it with roughly 2 million costs for this quarter roughly?

That sounds potentially slightly high, but yes, not terribly far from there.

Okay. Thank you.

Our next question today comes from Rodolphe Besserve from SG Securities. Please go ahead.

Yes, good morning. I've got two questions. First, on therapeutic antibodies. The EBIT margin for the quarter was between 42%, 43%. How do you see this figure developing over the rest of the year versus this figure? And second question is on Astellas alliance. Was the up-front booked in Q1? And also could you be maybe a little bit more precise on the optional parts of this alliance, notably is it already included in the contracts or is it -- could it be a new contract in the future? Thanks.

Yeah, maybe I'll talk to that second question first, the contractual arrangements, and then maybe Dave can talk about the financial question. The -- we said that the collaboration could extend up to five years. This is typical of many of the contracts that we enter that we define a period over which we aim to work together, in this case five years. But we also include a kind of escape clause in the event that for whatever reason, one side or the other may not want to commit to that full five-year term. So there is that kind of escape clause built in there. Typically our experience has been that the partner who may start working with us, not knowing anything about the technology and not knowing anything about us, typically as you've seen with our other partnerships, they get comfortable, they like the technology, they like to work with us, and those escape clauses are never triggered. Obviously we don't know what will be the case here, but that's why we stated that we may work for up to five years to be strictly accurate.

Yeah, my question is related to the fact that Astellas may come with some targets to you. But as I understood, it's just an option. So is it already included in the contract or is it something that may come at any time or that could be the occasion of another contract?

So the option for them to come to us for collaborative work where our scientists are actively working on their projects is already built into the contract. And it's basically contemplated that initially they will work on their own with perhaps some minimal support from us. But they have the possibility to come back to us and engage us and that is already regulated in the contract.

Okay.

Okay, regarding the EBIT question, I couldn't quite track the 41% to 42%. I'm going to assume that you were talking about the total business minus COGS, so the total revenues minus COGS given some margins. I would add that that's not really how we view our business. We view our business that COGS is really solely attributable to the AbD segment and there this morning we said that the margins on the AbD segment were sub par. They came in at roughly 49%. We expect margins for the full year to come closer to somewhere between 58% and 60% for the full year. And therefore, we expect margins to rise in that segment. Margins on the therapeutic side, we could imagine also could perhaps rise. We think that in terms of the run rate on success based payments for Q1, if you multiply it by 4, you would come out to a run rate of EUR6.4m worth of milestones. We were expecting I think for the full year a bit more, so therefore, if we get a bit more milestones in the next three quarters so that we achieve our target for the year, we could imagine that that would positively impact profitability on the therapeutic segment also. So I guess in summary, we could imagine that margins would rise.

Okay, thanks.

We now have a follow up from Daniel Wendorff from WestLB. Please go ahead.

Yes, maybe a follow up on the milestone revenue line you reported in Q1 and you mentioned that that was EUR1.6m. Was it widespread in terms of the source of these milestone revenues or could it be directed to one or two very important customers?

Yeah, I mean I think it is attributable to probably two or three events which didn't happen in the quarter. Although that being said, they didn't necessarily have to happen in that quarter either. And this kind of goes back to the point that it's incredibly hard to exactly define what happens in one quarter or another quarter as it relates to for example success based payment milestones. And to the extent that they didn't land in Q1 and for example will land in Q2 or Q3, doesn't particularly bother us at this point. The main thing is that they land during the calendar year and here we still remain confident that what we envisioned for the full year will happen.

Okay, thank you.

Our final question today is a follow up from Thomas Schiessle from EQUI.TS. Please go ahead.

Thank you. Some housekeeping issues. Could you please update us with the number of active projects in the first quarter of 2007? That is one. The second is, are you planning or are you let's say in the short list mode concerning acquisitions? If I remember rightly, you're still on looking around concerning additional AbD businesses. And the third one is concerning the Serotec purchasing price allocation. Shall we assume a rising amount of let's say EUR0.5 million, up to EUR0.5 million per quarter concerning the PPA allocation so that the costs will increase from this side? And the final question concerning your Japanese collaboration with GeneFrontier. You are striving for new findings concerning therapeutic research antibodies and you indicated, Simon, that you will share the earnings out of those findings. Could you elaborate on which proportion you will share the earnings? Is it 50/50 jointly? Or is it another percentage? Thank you.

Thomas, thanks for that. Let me take questions one, two and four, and Dave will talk about the PPA question. Regarding number of active projects, that still stands at 43, so no change there from the end of last year. However, what has changed within that is that two research projects have moved up into preclinical stages, so we now have 16 preclinical projects, 25 in research and the two in Phase I clinical trials.

Regarding our interest in acquisitions, yes, we continue to be interested in acquisitions. We've been well served by the two that we've done on the research antibody side of the business. We continue to believe that that's a good way for us to build further and we continue to look closely and actively at what possibilities there may be there. And at such time as we feel comfortable of updating on that, we will do so. Obviously we can't talk about any considerations that may be taking place at this stage.

Your fourth question with regards to GeneFrontier, indeed any emerging therapeutics out of that collaboration, the rights to those would be shared. What we haven't done, because of our agreement with GeneFrontier, is we haven't detailed how those rights would be shared. And unfortunately I can't, therefore give you more color on that at this stage.

Okay, thanks.

Okay, adding to the point on PPA, I think the question was, what is the run rate currently and has it increased or why has it increased over the previous year? The current run rate for the quarter is somewhere between EUR300,000 and EUR400,000. For the quarter we expect that run rate to be constant as it relates to operating expenses. What of course is not included in that is the amortization of the deferred tax liability associated with that, so that hits non-operating so we won't go into that now.

The reasons for the increase of the PPA vis-à-vis Q1 2006, although we did purchase Serotec in Q1 2006, and theoretically there should have been a PPA charge in Q1 2006, the issue was that as we had acquired them in January, the PPA hadn't been completed by the time of our Q1 report in 2006. Hence you do not see a charge in Q1 2006 as it relates to Serotec. But you do see one for Q1 2007 as of course the PPA was completed during the year.

Okay, thank you, that's the missing point. Yep, thank you.

We do have one final question from Markus Metzger with Bank Vontobel. Please go ahead.

Yeah, hi, everybody. I just wonder whether you have now more increased visibility on partner antibodies possibly entering the clinic this year. Are you in a position to actually give us a bit more flavor on the progress that has been made from that side either on the positive or the negative side? Thanks.

Hi, Markus. Yeah, at the beginning of the year we gave guidance that we would expect somewhere between one and three partner antibodies going into the clinic. We can reconfirm that range. Obviously a couple of months have elapsed since the last press conference when we announced that. It's important to recall here that we don't have the ultimate control over this. And we've been a little bit burned in the past by making pronouncements about when we think partners are going to take things into the clinic. We remain confident that the number will be somewhere in that range, but we prefer at this stage not to comment precisely on when and which program that may be that enters the clinic.

Okay, thanks.

As there are no further questions in the queue at this time, I would like to turn the call back over to Simon Moroney for any additional closing remarks.

Many thanks and if there are indeed no further questions, I'd like to close by reminding you of the main message to take away from this conference call, and that is that both segments of the business are performing as expected and we're on track to meet both our operational as well as our financial goals for the year. That concludes the call. Should any of you wish to follow up with us directly, Dave is available in the afternoon. Thanks again for participating and good bye.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.