MorphoSys AG (MOR) 2007 Q3 法說會逐字稿

Hello and welcome to the Q3 report 2007 conference call. This conference is being recorded. At this time I would like to turn the conference over to Dave Lemus. Go ahead sir.

Good morning and welcome. This is Dave Lemus, CFO of MorphoSys. With me this morning 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 would like to talk about the company's financial results for the first nine months of 2007. Simon will begin by giving you an overview of the third quarter, then I will review the financial results for the nine months 2007. afterwards, we will open the call to your questions.

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

I would now like to hand over to Simon Moroney.

Thanks, Dave, and also from me, a warm welcome to our Q3 2007 conference call. This third quarter has been an excellent one for MorphoSys in a number of respects. Dave will talk you through the numbers shortly, which show a strong improvement over the same period last year. I'd like to focus on three developments; our maturing therapeutic antibody pipeline, some aspects of our AbD segments performance, and the realization of synergies between the two operating units.

The most significant event of the quarter was the filing of an IND by our partner, Novartis. As you may recall, our partnership with Novartis was inked in May 2004. The antibody which has now entered clinical trials is in the field of oncology and is remarkable in progressing from start to Phase I clinical trials in just three years. This is a clear demonstration of the speed, robustness, and quality of our HuCAL platform, as well as the commitment of our partner, Novartis. The alliance with Novartis is currently our largest, and the fact that it is running so productively bodes well for the further development of our pipeline. This program became the fourth HuCAL-based antibody to enter clinical development and the second this year.

During Q3, our portfolio of partnered therapeutic programs increased by three over the previous quarter to a total of 48. In addition to the four HuCAL antibodies in Phase I clinical trials, there are now 20 in preclinical development and a further 24 in the discovery stage. Given that we now have the largest number ever of HuCAL antibodies in preclinical development we expect a steady increase in the number of antibodies in the clinic in the months ahead.

Increasingly, the strength of the pipeline will become more and more important as a value driver for MorphoSys. This point is illustrated by the fact that in the first nine months of this year therapeutic milestones represented more than one quarter of our Therapeutic segment revenue, up from just over a fifth for the whole of last year. We are convinced that the past several years of successful alliances has generated enough programs, derived from our HuCAL technology, to drive a very lucrative stream of milestones and royalties in the years ahead.

This provides us with an opportunity to think more creatively about possible new relationships with partners in the pharmaceutical and biotech industries. The emphasis will continue to be on exploiting our proprietary technologies and know-how to create increased pipeline value. We look forward to keeping you updated on the pipeline's progress and on the associated value accretion.

I want to turn now to our Research Antibodies segment, AbD Serotec, which realized the profit in this quarter on revenues over EUR5 million. An announcement that we made just after the end of the quarter provides a good illustration of the synergies between our two units. I refer to our press release on a therapeutic antibody collaboration with a New Zealand-based biotech company, Genesis.

About a year ago, Genesis became a client of our AbD Serotec unit receiving from us a HuCAL antibody against the target FGFR5 for research purposes. Based on the antibody's promising attributes and potential therapeutic properties, Genesis has now embarked on a therapeutic program with the antibody under an appropriate commercial arrangement with MorphoSys. This is the first research antibody sourced from our AbD segment which has matured into a therapeutic development project.

This is an example of the synergies we envisaged when we commenced operations in AbD Serotec. Although this is the first therapeutic antibody program coming out of the unit, it is not the first therapeutic relationship which originated in AbD Serotec. Indeed, the success of the unit in sourcing alliances on the therapeutic side of the business has prompted us to attribute an appropriate proportion of therapeutic revenue to the Research Antibodies segment.

Regarding our proprietary programs, MOR103 and MOR202, both of these continue to progress as expected. Specifically, MOR103 is on track towards an IND filing before year-end and our detailed comparison of the league candidates and the MOR202 program continues.

As ever, of fundamental importance to our business on both sides is our proprietary HuCAL technology. The issuance of an additional United States patent relating to HuCAL was, therefore, an important development during Q3. This new patent expands the scope of protection around the HuCAL technology by capturing HuCAL's modular design at the DNA level providing solid product claim protection in the US.

With that, I conclude my review of the quarter. I would now like to hand over to Dave for his presentation of the financial results.

Thank you, Simon. To begin the financial analysis I'll start with revenues. In the first nine months of 2007 Group revenues increased by 13% to EUR44.1 million compared to EUR39 million in the same period of last year. Revenues arising from the Therapeutic Antibodies segment amounted to EUR29.2 million, or 66% of total revenues, which included success-based payments in the amount of EUR7.8 million. In the AbD segment, revenues grew by 15% compared to the same period in the previous year making up EUR14.9 million, or 34%, of total revenues in the first nine months of 2007.

The largest part of revenues, in the amount of about 80%, were generated with catalog and industrial customers while custom manufacture antibodies contributed 15%, or EUR2.2 million. Custom manufactured antibodies was the best performing sub-segment in the AbD group with a more than 30% sales growth over the previous year. Beyond that, the AbD unit profited from a revenue-sharing agreement put in place with the therapeutics unit.

Moving on to operating expenses for the first [three] months of 2007, total operating expenses, which included stock-based compensation, increased by 19% to EUR37.2 million. The rise in operating expenses of EUR6 million was impacted by R&D expenses increasing by 34% or EUR4 million, SG&A expenses increasing by 11%, or EUR1.4 million, and cost of goods increasing by 9%, or EUR0.5 million. Stock-based compensation amounted to EUR1 million in 2007, and remained unchanged compared to the same period of the previous year. Cost of goods sold is composed of the AbD segment's cost of goods sold. COGS rose to EUR6 million during the first three segments of 2007, compared to EUR5.5 million in the same period of the prior year. The rise in COGS resulted mainly from higher sales levels in the segment.

Costs for research and development increased by EUR4 million to EUR15.7 million, mainly due to higher expenses for technology and product development of MOR103 and MOR202, as well as extra personnel costs to serve additional partner projects. SG&A expenses amounted to EUR15.5 million, compared to EUR14 million in the same period of the previous year. This change was impacted mainly by higher costs for external services and personnel costs, and infrastructure costs.

Moving on to taxes, expenses for current and deferred taxes in the amount of EUR2.9 million were recognized for the first nine months of 2007, compared to EUR1.2 million in the same period the previous year. Compared to the previous year, this change mainly derived from the utilization of deferred tax assets on loss tax carry-forwards, established in 2006, and from tax charges related to capital raising measures in 2007.

Group operating profit amounted to EUR6.9 million in the first nine months of 2007, compared to an operating profit of EUR7.8 million for the same period of 2006. On September 30, 2007, the total number of shares issued was approximately 7.3 million shares, compared to approximately 6.7 million shares on December 31, 2006. The resulting diluted net profit per share for the nine months ended September 30, 2007, amounted to [EUR0.68] (sic-see press release) per share compared to a net profit per share of [EUR0.93] (sic - see press release) per share the previous year.

As we're on the topic of the number of shares, I'd like to briefly update you regarding our share split proposal. Recall at our last conference call we appealed the decision of a Munich commercial register judge who did not register our share split after our last AGM on account of a capital increase which preceded the meeting. On account of timing and resources used, we have decided not to further appeal this decision. Those proposals not affected by the contingency of the share split will now be requested to be registered.

On September 30, 2007, MorphoSys' liquid funds comprised approximately EUR105 million, compared to EUR66 million on December 31, 2006. As it relates to the rest of the balance sheet, one of the larger movements was in the deferred tax asset, which we have now utilized almost in full over the present year, and the buildup of accounts receivable, which relates to long-term contracts which we typically built up over the year, given several substantial contract signing dates are at the end of the year. That concludes the financial analysis.

As is typical during these conference calls, we like to take the opportunity to update our financial guidance. I would like to confirm our previous full year guidance, namely, we continue to believe that we are on track to achieve revenue targets of approximately EUR60 million to EUR65 million on a Group basis, and an operating profit between EUR7 million and EUR10 million for the full year on a Group basis. For the AbD segment, we expect revenue growth somewhere between 10% and 15% for the year, and we'd like to stick by our goal to achieve a profitability range of up to 5% for the year.

That concludes our financial analysis for the first nine months of 2007. We'd now like to open the call up to your questions.

Thank you very much, gentlemen. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will take questions in the order received and we will take as many as time permits. (OPERATOR INSTRUCTIONS) We will pause for a moment to allow everyone to signal for questions.

We'll take the first question from Thomas Schiessle from EQUI.TS. Please go ahead, sir.

Hi, gentlemen, this is Thomas Schiessle from Frankfurt calling. May I ask you several questions on the financial side? First of all, you are piling up a considerable amount of liquid funds, more than EUR100 million. For which purpose do you collect this money? Is there anything, any acquisition ahead of you? This is the one.

The second is concerning the tax rates. Could you update us on the tax rate for the full year, please?

And the third one is on the AbD segment. There is a nice increase in production in sales quarter-by-quarter, but the COGS is fluctuating a little bit. Is this due to a change in structure on customized antibodies versus catalog business? That's the third question. Thank you so far.

Okay. I think I'll take all three of those questions. The first question, liquid funds. As you know, our business is cash accretive, and as a result of that the liquid funds will tend to increase year-on and year-on, and they have done for the last several years. That being said, we see the use of those funds for very much still for potential M&A, and in that vein we continue to think about potential M&A targets, still mainly on the AbD side of our business.

That being said, I think I would note that you may have noticed in our last shareholder meeting, we have not asked for an approval to raise shares in the amount of 10% without preemptive rights. And therefore we do not have the possibility or the authorization to do that, which has been that case, actually, which we've actually done for the last three years. So that being said, we also don't intend to raise capital in the same way that we have for the last three years, via a 10% capital increase without preemptive rights.

The question regarding the tax rate; we know that the tax rate, if you look at the IFRS number at the end of Q3, you'll see that the tax rate was roughly 38% of pretax profits. We did not give guidance on a full-year tax rate. I think, in answer to a question last time on what could potentially be the full-year tax rate, we mentioned that a number somewhere around 20% could be possible. That being said, that would be depending very much on the level and the size of deferred tax assets that we build up at year end, and that very much depends on what type of profits we expect to achieve in 2008. And that's why typically, as you've seen last year, we've built up such deferred tax assets in the final quarter once we have a very good feel of what we expect the profits to be in the following year.

So that being said, just to give you a further feel for that, if we were to build up the same amount of DTA that we built up in 2006 for 2007, if we had done that; that amount was EUR1.2 million, as you may recall. If you apply that against the taxes that we actually have listed in Q3, that EUR2.9 million, if you subtract a possible buildup of EUR1.2 million DTA, you would have a tax rate of roughly 20%. So that's where the 20% is roughly coming from.

Okay, regarding the COGS question on AbD, yes, you are correct that the COGS partially reflects the sales mix. Recall that in Q1 we had a very high COGS rate, and that was explained very much by the fact that the mix of sales was very much biased towards bulk, and bulk antibodies or our OEM business has a lower margin than the catalog business, for example, or the custom business. And hence in Q1 we had a gross margin of roughly 49%.

In Q2 that product mix reversed itself a bit and we had a gross margin of 68%. That was also partially explained, as we mentioned on the Q2 call, by the fact that we had an extraordinary booking of roughly EUR200,000 in the COGS line relating to an entry that was in the previous year. So it was a one-off, if you will, which also improved the rate.

In Q3 we have a gross margin percentage of roughly 62% which we think is a reasonably good proxy for what we expect the full year rate to be. Recall last year we had gross profits of roughly around 57%. We said that the target gross margin in this unit is roughly 60%, so expect for the full year a gross margin of somewhere in the region of roughly 60%. So yes it does move by quarter. There were some unusual movements relating to mix and one-off entries during the year, but for the full year, as we've mentioned both this year and last year, we expect a gross margin of roughly 60%.

Did that answer your questions?

Yes, indeed. And if it comes to the AbD business sales wise you indicated that you think an increase of roughly 10% to 15% might be possible, or will materialize. Is this coming from the bulk business or will it be more from the customized side?

It will come from a mixture of the two. I think the one unknown, the thing that's very difficult to project in the AbD side of the business is bulk sales as these tend to be one-off sales throughout the year which can significantly impact your result. That being said, as I mentioned during the speech the unit that's growing fastest within AbD, which is growing in excess of 30% per year, year-on-year, is the custom business. And that being said it's not such a lumpy business, but it's the fastest growing within our business. But the one that is the most volatile is our bulk/OEM business.

And that's not due to the delayed catalog?

No. No, the catalog would have very much to do with the catalog business.

And that's inherent in the business, this fluctuation?

Correct.

Okay, thank you, Dave.

We'll now take our next question from Daniel Wendorff from Commerzbank. Please go ahead, sir.

Yes, hello guys, from my new address. I have two questions remaining, if I may? Firstly, regarding further HuCAL-based antibodies moving into clinical development, could you tell us a bit about your -- well, do you feel comfortable with the current guidance still out there?

And second question relates to the other income line in the P&L which was quite high in the third quarter. Could you elaborate a bit on why that was the case? Yes, I think that's it for now.

Okay. Hi, Daniel; I'll take the first of those and Dave will answer the second one. The HuCAL antibodies entering the clinic, I'm sure you're referring to the guidance we gave at the beginning of the year, but the (multiple speakers) between one and three antibodies would enter the clinic this year, and as we said, two have done so. We're not sure on when the next one will be entering the clinic. As I said, we have 20 now in pre-clinic and we're confident that there will be an increasing flow of those compounds entering the clinic. And at the beginning of next year when we give our guidance for next year, we will give guidance for the full year 2008 on our expectations. But I think at this stage we'd like to leave it until then in order to be able to give a more accurate picture of what we see the flow being during 2008.

I think the main message is, it's always difficult to predict the precise timing of these things because, as you know, they're in the hands of our partners. But the most important thing is the numbers should now start to ramp up, of course, given the pure number of compounds in pre-clinic.

Okay. And in terms of a third one potentially moving in the clinic in full year '07, is that at least a bit likely or --?

As I said, we don't have sufficient visibility on that to be able to predict it concretely for this year. Which is simply a reflection of the fact that these decisions are in the hands of our partners.

Okay. Fair enough.

Okay, regarding the question on other income. Yes, we did have an unusual amount of high other income this year. That has very much to do with gains that we've made on some derivatives contracts that we've entered into hedging our US dollar/euro exchange rate. Another factor increasing that amount was gains on marketable securities that we've sold during the quarter.

Okay. And maybe one follow-up comment on the AbD segment. You said the custom manufacturing business has been quite strong over the year so far. Am I right when I say that this business has a higher gross profit margin than the business overall?

Yes.

Okay.

Gross profit.

Gross profit. Yes, that's it, yes. Okay. Thank you.

We now take our next question from Christian Peter from Sal Oppenheim. Please go ahead.

Yes, good morning, everyone. Thanks for taking my question; I have two. Firstly, I think there is a quite big increase in SG&A in the therapeutic antibody unit. Could you please comment on that? Maybe you said something on it and I missed it. I'm sorry for that.

And second you mentioned that you plan to find new ways, new models for future cooperations. Could you please give us a little bit more color on that? Thank you.

Yes, hi, Christian. I'll start with the second of those two questions and then Dave will answer the first one on the SG&A. What we're simply saying here is that the way I think of it is we've really sown a lot of seeds with our broad partnering strategy to date. There are 48 HuCAL-based programs in partnerships with a number of pharmaceutical companies and we expect, without any further programs being added to those, that that will represent a very, very lucrative future milestone and royalty stream.

And that simply gives us some strategic flexibility to think, for example, and this is only an example, to think about saying in a deal, okay, we would like an option to co-develop a program, for example. And the payoff for us would be a potentially greater interest in that program in the form of higher royalties or even through genuine co-develop where we may be profit sharing finally.

So really it's because of the strength of the pipeline, the breadth and depth of the pipeline that we've already put in place that we just have more financial flexibility in thinking about alternative kind of deal structures which should be even greater value generating deals in the future.

Okay, thank you.

The question regarding the SG&A expenses. So we actually don't show our SG&A expenses broken down by segment, but you are correct that there is year-on-year comparing the year-to-date 2007 versus year-to-date 2006 numbers an increase in the SG&A expenses. I would say almost half of that I would consider to be one-off costs associated with consultants or legal experts or legal counsel. Also included in those costs are costs that we pay our marketing partner in Japan for Japanese revenues, which are increasing in the Group now. And the other big part of the increase could be attributable to some additional costs in the UK as it relates to the new building that we have recently moved into at the beginning of this year compared to the previous year.

Okay, thanks a lot.

We'll now take our next question from Holger Blum from Deutsche Bank. Please go ahead, sir.

Yes, hi there. I just have one question left. You mentioned the importance of the patent that you'd been granted in the third quarter. So what would be your current expectations when you would see something like your intellectual know-how being genericized? Or at what point you might want to look out for new technologies, maybe use the cash you have or you're just sticking with the current competence of the antibodies? Thank you.

Thanks, Holger. Just as a reminder, the underlying HuCAL estate has a patent lifetime out to 2016, and this is a member of that estate. So we have a good nine years of patent protection still left on the core technology. In addition, we continue to invest, as you know, in-house here in technology improvements and, of course, as patentable improvements are made, we filed patented applications on those. And those may help us to extend the lifetime of the platform even further beyond that 2016 date.

In addition, I'd like to just go back to a comment that Dave made earlier regarding acquisitions. He was right in saying that we're certainly interested in M&A on the AbD side of the business, but we would also not rule out the possibility that we may acquire, for example, a technology position using some of that cash that we talked about.

So we're in a strong position to be able to make acquisitions. And it may be that an acquisition is on the technological side, insofar as it would help us strengthen the platform, update the platform, and increase the value of our offering based on that platform.

Okay, but just for the patent you filed in the third quarter, is there really any specific value emerging from that patent, or is it just one of a lot of other patents to extend your platform beyond 2016?

It's a member of the HuCAL estate, and in that regard, it's another brick, if you like, in the wall of protection that we have created around the HuCAL platform.

Okay. Thank you.

We'll now take the next question from Oliver Kaemmerer from WestLB. Please go ahead.

Yes, hi guys. Coming a little bit back to Daniel's question on guidance. What are the points we should bear in mind which could lead to you actually are striving lower ends of the guidance for the full year (inaudible) on EBIT bearing in mind that you already had the EUR6.9 million at the nine month stage? So if you just could point out what you feel could be the points that we might be looking out for.

And second, on the AbD segment, I just wonder, given the order intake we have seen some momentum building up in Q1 and Q2. I think that you had a backlog there in Q2 of EUR1 million and that dropped now to EUR0.6 million in Q3. Is that a seasonal trend, or what's behind that figure actually dropping in terms of order backlog and a building up for the AbD segment? Thanks.

Okay. I'm [about] to take those questions. I'll take your last questions first. Yes, the effect is seasonal and we expect that Q4 will be a strong quarter, at least seasonally speaking. It typically always is one of the two strongest quarters of the year, and that actually now goes into your second question. What are the main threats or opportunities as (inaudible) to our guidance? And there on the AbD side I think we touched upon it a little bit earlier. I think the level of OEM sales are bulk sales that we achieve in the final three months of the year will very much determine whether we're on the upper side of 5% or somewhat beneath that.

In terms of threats and opportunities on the therapeutic side, I would say that the main opportunity obviously is milestones that could come in unscheduled or in terms of timing, earlier than we expect. But that would be an opportunity where we would perhaps be a little bit higher than we would expect to be at the end of the year.

On the expense side, on the therapeutic side, I would say the level of expenditures we have on product development would be the main question mark there. We could spend perhaps a little bit less or a little bit more; it's very difficult to say at this point. But those are the main threats and opportunities for guidances on both sides of our business.

Okay, thanks.

We'll now take the next question from Rudolphe Besserve from SG Securities. Go ahead.

Yes, good morning, two questions. First, on when I look at the evolution of funded research in your revenue line it sounds stagnating over the last few quarters, or even a little bit declining in Q3. Should we consider this as a trend for the future in the next few quarters, considering that the research part in your collaboration -- in several of your collaborations may come to an end?

And second question's on the top three clients. We see that in Q3, Schering is now in the top three. Should we interpret that as a one-off from Schering, or should we consider that Pfizer, which was previously in the top three, has reduced its research funding over the last few months? Thanks.

Okay, I'll take the last question first. In terms of Schering being in the top three, that when we make those statistics, we also include milestones or success-based payments. And those success-based payments can very much put somebody in the top three or take somebody out of the top three, depending on what the level of success-based payments were. So yes, it depends very much -- it could be a one-off factor as it relates to Schering.

As it relates to your other question, which was funded research over time. That number very much depends on the number of FTEs that our partners fund and that, of course, is directly related to both the size and the number of collaborations we have in place. So to the extent that we sign new deals which involve higher levels of FTEs, or to the extent that we expand existing relationships, will very much drive that line. Now obviously, I'm not in a position right now in October to tell you over the next six months exactly how that number will develop because it speaks to guidance for already next year.

Thank you.

We'll take our next question from Patrick Fuchs from DZ Bank. Go ahead sir.

Hello everybody. I have a question. Could you work out again what you meant the revenue sharing agreement between AbD segment and the therapeutics segment and if there is the possibility to adjust for that? In order just to see how AbD without this new agreement would have developed also in terms of profitability?

Then the other question relates to costs for R&D, technology and R&D, which you are scheduling for EUR5 million to EUR6 million for 2007, or you have scheduled. Is this still the range that you're looking to spend for and secondly, how much of that had been already spent after nine months?

And the last question is the unallocated costs; they look pretty stagnating compared to last quarter. Are these the special effects that you mentioned, one-offs and can we work with this figure going forward that you have now of some EUR1.7 million in unallocated costs? Thank you.

Okay. There are a lot of questions here.

Maybe I'd start with the principle at least about the revenue sharing thing. And then Dave maybe can talk you through one or two of the other more financial oriented questions.

So the principle here is a very simple one, which is with the Genesis deal that we signed and announced at the end of Q3, it became to us crystal clear that AbD was indeed performing a synergy that we had expected it to from the outset, which was to source therapeutic deals for us. And given that then very solid evidence that that was a concrete fact, we felt it was appropriate to go back and look at the therapeutic deals that were being booked purely on the therapeutic side of the business and ask ourselves which of those deals had been in fact sourced genuinely by the activities of the AbD Group.

And we were able to identify such deals, and a mechanism was arrived at whereby an appropriate fraction of the revenue that we had been recognising on the therapeutic side of the business should indeed be recognised on the AbD side of the business. So that was the reason why we decided to formalise that with this so-called revenue sharing thing that appears for the first time in this quarter.

Predicting it going forward is a little bit difficult, of course, because it depends on new deals that would be signed on the therapeutic side of the business that would have been sourced originally by the AbD Team. And therefore, it's very hard for us today to give guidance on that, just as it's as hard for us today to give guidance on which new therapeutic deals we'll be signing with whom, at what stage in the future. But I think -- the point I think to make, and I'm sure Dave will confirm this, is that we feel it's appropriate, we've now introduced it and therefore it will continue to be component of the revenue that is attributed to AbD going forward.

Okay, regarding the question of the unallocated costs. When I look over the last couple of quarters, what we had as unallocated costs, yes it is correct that the numbers have been stagnating, in your words. And again basically what these costs represent are very much headquarters costs where we can't attribute those costs to either segment. So I think it's relatively safe to say that those costs will remain at that level for at least the foreseeable future.

The R&D and tech expense?

The R&D and -- oh yes the R&D and tech expense to date was a little bit over EUR4 million, and what that essentially means is that we expect that the R&D and tech expense will increase in Q4. You can see that the expenses went down a bit in Q3, but we expect them to ramp up again a bit in Q4. But to date the number was a little bit over EUR4 million.

But then again back to this revenue share in premium between therapeutic and AbD, can you give us a feeling of what percentage of that is helped on the revenue line and maybe on the earnings line or the COGS line? If it's 5%, 10%, if it's EUR1 million of a usual antibody deal or what else?

Yes maybe we could give you a rough idea. Maybe to go further to Simon's point, basically there are two contracts which we have thus far attributed to the therapeutic antibody side of our business where the partner has taken the technology of HuCAL and installed it locally, which effectively meant a loss of business to AbD. And again that's particularly important given that AbD was critical and central in sourcing the contract. So it's really unfair to penalize them by not letting them have any of the revenues.

So we have an arrangement in place where -- and again there's only two contracts that we have in place for this. Where within a partnership, where the partner has taken the technology and installed it locally and they pay a licensing fee to us, that the therapeutics unit takes 50% of that revenue and the AbD side of the business takes 50% of that revenue. To the extent that the partnership also involves further things like creating therapeutic antibodies and so forth, the AbD side of the business gets none of that because it has nothing to do with AbD.

And it makes up some 5% of revenues or something like that of the AbD?

Yes I think the AbD unit ran at an increase of 15% for the quarter. Stripping that one-off effect off, it would have come a little bit closer to 10%.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). We will now take a question from Thomas Schiessle from EQUI.TS. Go ahead.

Thank you for taking my questions. The next question is on your collaboration with research institutes. Simon could you please so kind and give us an update on the interaction and the activities on that field? You once indicated that you had high hopes on the collaboration with those institutes, and 'til now we haven't heard anything about Burnham and so forth. This is the one.

The second is on a partnership. If my files are right the Novoplant GmbH deal run out this year, has there been any result out of this collaboration in animal health and parasite fighting activities?

And the third one is on the patent issue. You filed another patent in the US protecting your intellectual property rights. Is there a patent gap in Europe and elsewhere on the world concerning your patent protection? So shall we foresee activity in this field, you're protecting your intellectual property elsewhere -- outside the US? Thank you.

Thanks Thomas. So to your first question about the research institutes, recall that we announced earlier that we have a collaboration with the Burnham Institute, as you mentioned, and with an unnamed Japanese research institute. And recall also that these are long-term research collaborations and we hope and expect that they will produce interesting target opportunities in the years ahead. But I don't think any of us should be surprised that in the few months since those agreements have been in place that no major announcements have resulted. These are research collaborations I would stress and that research may take time, but we believe they will be fruitful in the years ahead.

Regarding the partnership with Novoplant, it was mentioned in the press release that went out this morning that that collaboration has been concluded. That was a three year -- that was always scheduled to be a three year collaboration; that was signed in 2004 that has run its course and been now closed. If you want to know the output or the specific discoveries or uses that were made of the technology in Novoplant's hands you will have to contact Novoplant on that. We're not at liberty, of course, to talk about the activities that they have made in-house using our technology.

Your third question regarding the US patent, you mentioned that it had been filed, I just want to correct that. It's actually been granted of course, in the US, which is more significant. And this doesn't -- the fact that we have now a granted patent in the US doesn't say anything about the state of our patent estate in other jurisdictions. It simply happens that we got a US patent granted during the quarter. We continue to pursue patent protection for all our technologies in all of the most important markets and we believe, as always, that we have good coverage in all of those most important markets.

Okay, thank you.

Thank you.

We'll now take a question from Patrick Fuchs from DZ Bank. Please go ahead sir.

Just a last question on your plans of giving more (technical difficulty)

Sorry the line has broken down.

Hello. Hello.

Hello.

We lost Mr. Fuchs in the middle of his question.

Alright I'll try to get him back for you. Mr. Fuchs, your line is now open again.

Okay can you hear me again?

Yes now we can hear you.

Just a short comment from your side on the plans to give more details on more MOR103 until the year end with the IND for MOR103? Is that still on tack and --?

Yes, I think we said earlier this year that we intended -- certainly what we've said and just now reconfirmed as the filing of the IND before year end, as we said we're on track for that. We also said that we will announce the target against which MOR103 is directed and we will, as promised, do that before the end of the year.

Okay, great, thank you.

We'll now take our last question from Martin Possienke from Equinet. Please go ahead sir.

Yes hi good morning. Just two questions on the Therapeutic Antibodies segment, one of which has been addressed before by our French colleague I guess. It's regarding the revenue line of the, at least of one part of the Therapeutic Antibodies segment. If you strip out the milestone payments of EUR3.8 million out of the EUR10.5 million revenues of Therapeutic Antibodies in Q3 you end up with a figure of EUR6.7 million which is related to license fees, R&D funding and so on. And this EUR6.7 million is somewhat below Q3 last year, 7% actually and roughly 10% below the average of the last four quarters. And as this figure somehow monitors your early stage partnerships or new cooperations, I was a little bit surprised that it was down that significantly. Maybe you can elaborate a little bit more on that?

And maybe just your view on Q4. Should we expect a significantly higher figure in Q4 regarding license fees, R&D funding and so on? And the second part of the question then with regard to milestones in the Therapeutic Antibodies segment of EUR3.8 million in Q3, an exceptional good figure, is there any reason to believe that the Q4 milestones should be significantly below the average of the last three or four quarters?

Okay. I'll take some of those questions. Regarding the funded research line, again that number basically is a combination of mainly two things. It's a combination of funded FTEs and it's also a reflection of licensing fees that the company receives, and that also represents upfront payments which have been amortized over time. So it's a combination of all three of those things. So seeing it go down a little bit is not a reason for alarm.

One of the reasons it's gone down a bit is that we've had, as we've seen in the press release, some of the contracts fall away, Novoplant for example; that would be a reason for some of the decline. Another reason for some of the decline is, again, related to this revenue sharing arrangement between the Therapeutics unit and the AbD unit. So I think between contracts dropping away and that revenue sharing it should explain most of that.

Regarding Q4, what we expect in Q4, as I said before, is that we expect somewhat higher R&D costs related to proprietary drug development and technology development. In terms of milestones, we have cumulative to date approximately EUR7.8 million of milestones. I think at the beginning of this year we said potentially up to EUR10 million could be hit, so that gives you a rough idea what potentially, within the framework of our guidance, we could hit or we could anticipate in Q4.

Did that answer all of your questions, Martin?

Yes. Yes, in principle, yes. Thank you.

Sure.

As we have no further questions I would like to turn the call back over to you gentlemen for any additional or closing remarks.

Thank you, that concludes the call. And before ending, I'd just like to remind you of the main messages for you to take away. First, our Therapeutic Antibody pipeline is developing extremely well; our strategy of establishing a broad pipeline through multiple partnerships is paying off. The pipeline is becoming an ever more important driver of the company's value proposition and we're convinced it will be a lucrative source of revenue in years ahead. Second, our Research Antibodies segment remains on track to make the transition to profitability for the full year.

Should any of you wish to follow up with us directly, we're in the office today and available for your calls. Thanks again for participating and goodbye.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.