MorphoSys AG (MOR) 2007 Q4 法說會逐字稿

Good day and welcome to today's MorphoSys presentation of year end results 2007 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to your hosts today. Please go ahead.

Good morning and welcome. It's my pleasure to welcome all of you to our analysts' conference. My name is Claudia Gutjahr-Loser. I am Head of Corporate Communications and Investor Relations at MorphoSys. I would like to thank you for your interest and your coming to our conference today. With me are Dr. Simon Moroney, our CEO, and Mr. Dave Lemus, our CFO.

Before we start, we want to remind you that during this conference we will present -- 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 those forward-looking statements, which speak only as of the date hereof.

Today, we will present the Company's annual results for 2007. We have planned approximately one hour for our presentation. Simon will start with the revenue of 2007. Subsequently, Dave will give you an overview about the financial results of 2007 and present the guidance for 2008. Before we start with the question and answer session, Simon will speak about the outlook for 2008 and beyond.

At the end of our presentation, we will take questions from this conference audience and those participants listening in by conference call. For the participants on the conference call, you can view the slides of the call on our corporate website, in the area of Investor Relations.

I would like to hand over now to Simon Moroney, our CEO, who will start with the summary of the year 2007.

Thank you, Claudia. I would like to add my welcome to this, our year end 2007 press' and analysts' conference.

We're delighted to be able to present our year end results following MorphoSys' strongest year ever. We concluded the year having achieved almost all of the goals we set at the outset, some spectacularly so. First and foremost, MorphoSys secured one of the industry's largest strategic alliances, namely that with Novartis, which will be worth at least $1b in pre-commercial payments. While this deal was clearly the standout highlight and will transform our ability to generate further value, performance was strong overall.

Other operational highlights include the five-year discovery alliance with Astellas, our third significant partnership in Japan, substantial increases in the breadth and depth of our therapeutic antibody pipeline, significant progress and technology development with the full implementation of our RapMAT technology, plus the announcement of our new Platinum library, and a very solid financial result with revenues of EUR62m, operating profit of EUR7m and net profit of EUR11.5m, all records for MorphoSys.

In reviewing the year, I'd like to start with our strategic alliance with Novartis. By now, most of you know the basic facts of the deal, which we expect to generate value in excess of $1b for MorphoSys in the years ahead, not including royalties on drug sales. The key metrics are $600m in committed funding, $400m in probability-weighted milestones, royalties on all products, an expected term of 10 years and options for MorphoSys to co-develop a number of programs.

Based on the number of programs that will be pursued, our estimates are that this alliance will build the industry's broadest antibody pipeline. Almost three months after the announcement of the deal, this is a good time to clear up one or two misconceptions about this alliance and its meaning for MorphoSys.

First, how did it originate? The answer is that the initiative came from MorphoSys. In reviewing our business, we came to the conclusion early in 2007 that the best way to build the Company's value was to strengthen our proprietary drug pipeline. We then looked at how best -- at how to secure our ability to invest in this area and concluded that our interests were best served by entering an alliance that would do two things - secure all of the benefits of our successful Fee-for-Service business, while providing revenue to drive investment in our proprietary therapeutics pipeline.

With this objective in mind, we designed a deal structure which we then offered to a number of the world's leading pharmaceutical companies. During the course of 2007, we spoke to and negotiated with a selection of these companies and finally settled on Novartis as the partner of choice.

The second question is why any of the pharmaceutical companies who were interested did not simply acquire MorphoSys. During the various discussions, we made clear to the potential partners that it was not our goal to sell the Company, the reason being that we are convinced that we can build substantial value in the years ahead. The companies to whom we talked respected this wish and probably recognized that in a well-structured alliance, an independent MorphoSys was in the interests of both parties.

The third question is does Novartis have exclusive access to our technology platform. Here, the answer is a clear no. In fact, the model which underlies this deal is the same as it has always been. Novartis is able to secure exclusive licenses to programs, target by target, on a first come, first served basis. The very recent announcement of our expanded deal with Astellas illustrates this point. All of our current partners have ongoing access to the HuCAL technology, under options contained in their respective agreements. Consistent with our desire to move away from broad Fee-for-Service partnering activities, we will not, however, enter new partnerships on this basis. In this regard, Novartis is getting preferred treatment.

Fourth, because we talk about the deal value in U.S. dollars, there seems to be a belief that all payments are in dollars. This is not the case. Some payments are in euros and some are in dollars.

The fifth and last question relates to the effect of terminated collaborations -- sorry, on terminated collaborations, such as those with Bayer-Schering and Centocor. Just because a collaboration ends does not mean that the drug development programs that were being pursued stop. Indeed, it is in the interests of our partners to continue to develop drugs that were discovered collaboratively, and all our contracts provide for and indeed encourage this. And of course, milestones and royalties continue to be due to MorphoSys.

The next slide shows, diagrammatically, the status of our current drug discovery collaborations. The dotted lines represent pre-existing options for the various partners to extend the relationships. The only difference between the Novartis deals and the others is one of scale. Many more programs will be pursued in the Novartis collaboration and therefore the number of exclusive target licenses they will take will exceed those of our other partners. When deals expire, we'll not renew them on the existing Fee-for-Service basis. This was the case when our collaborations with Bayer-Schering and Centocor ran out, as scheduled, at the end of 2007.

This leads to the main point - why do we not maintain the multi-partner Fee-for-Service business? Again, the answer is straightforward. The deal that we signed achieved exactly what we set out to do, locking in all of the benefits we could have secured and several more years of business development effort, while enabling us to strengthen our proprietary pipeline by providing substantial free cash flow allied with co-development opportunities. This outcome is much more attractive and transforming for MorphoSys than continuing to pursue Fee-for-Service deals as in the past, not least because the opportunities for further increasing our market share were clearly diminishing. We already have the majority of top 20 pharma companies in our roster of partners.

While it's a transforming deal for MorphoSys, it's not the only component of the future MorphoSys story. We have many opportunities to create further growth and value for the Company, outside and independent of Novartis. We're free, for instance, to license our own programs to partners other than Novartis and we have a lot of flexibility to enter new co-development deals. In other words, the conditions of our agreement with Novartis reflect our desire to move beyond Fee-for-Service, to focus on advancing our proprietary pipeline.

In completing the review of the Novartis deal, I want to highlight again one aspect that's significant when comparing it to other deals in the industry, namely the quoted U.S. dollar volume. By estimating probability-weighted milestone payments rather than total potential, we have provided an accurate measure of the true size of this deal. This should be kept in mind when comparing this deal to others, where total potential payments are often quoted, a parameter that we believe significantly overestimates the value of the deal.

The sheer size of the Novartis deal somewhat overshadowed an alliance we entered in March 2007, namely that with the Japanese pharmaceutical company Astellas. Astellas is the number two pharmaceutical company in Japan and this became our third deal with a Japanese pharma major. The relationship is an important one for us, especially since Astellas recently extended its commitment to our HuCAL technology from the initial one year to the full five years, under a pre-existing option for them to do so. Astellas has options to commence a number of HuCAL therapeutic programs, on which the usual milestones and royalties are due.

Turning now to our therapeutic antibody pipeline, we made significant progress in 2007. By year end, we had reached our goal of 50 active partnered programs, up from 43 at the beginning of the year. Not only did the total number of partnered programs show a strong increase, but the maturity of the pipeline advanced as well. Programs in the clinic increased from two at the beginning of the year to four at the end and pre-clinical programs were up from 14 to 23. As we have consistently communicated, these parameters are vital indicators of our future value, as candidates in development today become the marketed drugs of tomorrow.

The four partnered HuCAL compounds currently in clinical development are 1D09C3 for cancer with GPC Biotech, R1450 for Alzheimer's disease with Roche, an anti-cancer antibody with Centocor, which we can reveal today for the first time as our partner for this third clinical program, and a further anti-cancer antibody with Novartis.

I'd like now to turn to our proprietary product pipeline. We've also made strong progress here, with the elite program MOR103, our fully human antibody against GM-CSF, about to enter the clinic. We talked about this program in some detail on a conference call six weeks ago and will therefore not dwell on it here, other than to highlight a couple of points.

We believe that this program has potential in a number of diseases. Although our initial focus is on rheumatoid arthritis, an enormous market and a large unmet medical need, MOR103 also has potential to treat the respiratory diseases asthma and chronic obstructive pulmonary disease, or COPD, and possibly even multiple sclerosis, to name just a few.

This broad potential of the MOR103 program was the reason why we elected to conduct a very thorough Phase 1 study in volunteers, placebo-controlled, which could serve as a platform for multiple Phase 1b and 2a studies. The future value of this program is further underpinned by the exclusive license that we were able to secure to a U.S. patent application, covering the use of inhibitors to GM-CSF as a means of treating inflammatory disorders.

We've been asked, and rightly so, about our track record in product development. The answer is clearly not as strong as our experience in partnered discovery. However, I would like to highlight three features of the MOR103 program that illustrate the great job that our development team has done. First, the time taken from lead selection to filing of the clinical trial application was just 22 months. Second, the Dutch authorities approved the CTA in six weeks, which speaks to the completeness of the package and our ability to answer the few questions they raised. And third, the production permit we received from the Bavarian authorities also went quickly and smoothly.

Underlying these visible facts is a variety of key development capabilities, ranging from efficient management of the contract research organization, all the way through a full-fledged internal quality assurance system. Combined with our core competencies in therapeutic antibody discovery and knowledge we have gained through the many years of collaborating with drug developers, we feel well-equipped to expand our proprietary pipeline for our own account.

I'd like to move on to the second candidate in our pipeline, MOR202, a therapeutic antibody against the target molecule CD38, for the treatment of multiple myeloma. During 2007, we compared our two lead antibodies in detail. These two molecules are similar, both in respect of their efficacy in vitro and in vivo, as well as their physicochemical and biological properties. For antibodies of this type which are cytotoxic, care must be taken in choosing a lead molecule which can satisfy all of the pre-clinical development requirements, as well as having the right profile for human application. We've now chosen the lead candidate and I'll return to this topic in the outlook part of the presentation.

Turning now to technology. In November, we announced the development of the next HuCAL library, namely Platinum, and concurrently the acquisition of a bundle of licenses from Dyax to support the program. HuCAL GOLD has been used in many laboratories against many thousands of antigens. It's also the source of all but two of the 52 therapeutic antibodies currently in discovery and development.

The obvious question is - why change it? The reason is that we believe that antibody drug discovery can be made still faster and, perhaps more importantly, the pool of drug candidates from which to choose can be widened. The features that are being built into the Platinum version of our technology are aimed at these improvements. The ultimate goal here is to ensure the highest possible success probabilities for our HuCAL-based antibodies.

A development that came into general use at MorphoSys in 2007 is the RapMAT technology, one of the new technology modules in our development plan which was finished and actually presented in December 2006, but was then fully implemented in the antibody generation process of both of our segments during 2007. On the therapeutic side of our business, this has led to earlier development of milestones and partnered programs than would have been possible without RapMAT. For our AbD colleagues, RapMAT is enabling us to meet certain diagnostic industry requirements and is leading to a larger footprint in this market. We hope to be able to provide more details on these diagnostic relationships during the course of the year.

Which brings us nicely on to our AbD research antibodies segment. Operationally speaking, AbD had a solid year. In particular, the HuCAL-based business, the key reason why we entered this market in the first place, showed a strong performance. Growth here was in excess of 60%, growth which has been delivered from our expanded sales platform, built through the acquisitions of Serotec and Biogenesis.

Yesterday we announced an important strategic alliance with Sigma Aldrich, which is aimed at increasing even further our ability to reach customers for this service and to market HuCAL antibodies. Such a marketing alliance was originally a goal for 2007, but finalization was delayed until early this year.

During 2007 we expanded our offering by about 10%, by adding an additional 1,100 new antibodies to our catalog. Our efforts were recognized in the annual Biocompare survey, in which we ranked number 11 worldwide for customer recognition.

Financially speaking, the segment contributed just under one-third of our total revenue, as expected. Although it recorded a narrow loss, we understand the reasons for this and the underlying operational performance shows that the segment is on track to improve its performance significantly in 2008 and the years ahead. The most significant challenge we faced in 2007 was a noticeable slowdown in the market for research antibodies. We estimate market growth at 6% to 8%, compared with the double-digit rates we saw in years past. AbD revenues were affected by the slowdown and also by the weak U.S. dollar. This led to the small operating loss we reported.

Nonetheless, for the unit as a whole, on a like-for-like basis, we saw growth of 15%, twice the market rate. Dave will give you more detail on the financial results of the AbD segment shortly and elaborate on a number of positives that we believe auger well for the year ahead.

The synergies between our two business segments were always the centerpiece of our two-pronged strategy. Our intention has been to secure new opportunities from AbD Serotec customers, whose first experience with us, through the research antibody business, has encouraged them to bring higher value-added projects, for example in the therapeutics area, to MorphoSys. This approach has been demonstrated twice, with Astellas in 2007 and the U.S. based pharmaceutical giant Merck in 2006. Each company based its decision to initiate a therapeutic-oriented partnership with MorphoSys on their positive research antibody experience with HuCAL and AbD Serotec.

I'd like to highlight one development with an AbD that exemplifies the strategic importance of the segment for MorphoSys and the type of synergy we're looking at increasingly in future.

In March of 2006, the New Zealand company Genesis became a customer, ordering HuCAL antibodies for research on the molecule FGFR-5. Over the following months, it became apparent that the antibodies had therapeutic potential and Genesis approached us regarding their further development. We then negotiated a co-development option, meaning that we can elect to join Genesis in developing an anti-FGFR-5 antibody as a drug. We continue to monitor the pre-clinical work that has been done, before deciding whether to exercise our option. This is a nice example of a synergy between the two business segments.

That concludes my operational review of 2007. Following Dave's presentation of the financial results and financial guidance for this year, I'll return with a few words about our plans for the future.

Thank you, Simon. In opening, I'm pleased to say that 2007 was another landmark year for MorphoSys, both operationally and financially speaking. Some of the year's highlights you'll see on this first chart.

Revenues for the MorphoSys Group increased by 17% to EUR62m, leading to an operating profit of EUR7m. Despite one-off advisory fees related to the Novartis deal which were not included in the original guidance, we nonetheless hit our operational profitability target set at the beginning of this year. I think it's also important to mention that the AbD unit achieved its first year of cash positive flow.

Our net profit reached EUR11.5m, probably much higher than estimated by most. Although we will discuss the details a bit further in the presentation, a large part of that income relates to tax income arising from the capitalization of deferred tax assets. Beyond that, we achieved significant non-operating gains, as a result of foreign exchange derivatives and marketable securities gains, as well as higher interest income.

At year's end our cash position increased to EUR107m, in part through a private placement in May 2007, as well as from strong positive cash flow from operations of EUR17m.

Now I'd like to go into more detail, in our 2007 financial results. Let's start with the revenue breakdown. This next chart here shows where our revenue growth has arisen. Revenues for the MorphoSys Group for the full year 2007 increased by 17% to EUR62m, which was within our original guidance of EUR60m to EUR65m. Group revenues, measured in constant currency, would have been about EUR1m higher than actual, mainly due to the weaker dollar versus euro.

Revenues from the therapeutic antibodies segment increased by EUR7.7m to EUR42.4m, a growth of about 22%. Largely fuelling that growth were performance-based payments from partners, which increased by EUR4.6m to EUR12.1m, or about 29% of segment revenues. Included in those payments were two clinical Phase 1 milestones from partners Novartis and Centocor.

In 2007, the AbD segment contributed 32% of total Group revenues, with sales of approximately EUR19.6m. The sales growth of 7% remains somewhat behind our expectations. Although, that being said, within the unit the custom HuCAL monoclonal antibody unit showed a growth rate in excess of 30%.

If we take a look at where sales geographically arose, 64% of MorphoSys' commercial revenues were generated with biotech and pharma companies, as well as AbD customers located in Europe and Asia, compared with 62% last year. This trend reflects the growing importance of our collaboration with Novartis. Expect that trend of higher European revenues to continue over the next couple of years, due to the importance of that contract to us.

I think it's important to highlight the increasing amounts of performance-based payments that we saw in 2007. Our partnered pipeline grew to 50 ongoing programs in 2007, with milestone payments in our partnered pipeline have grown significantly over the last couple of years. Although in calendar year 2008 we expect to see lower growth rates for both items, this fact does not affect our view that the long-term trend for both parameters continues to be upwards.

With our Novartis collaboration, we have secured committed license payments and research funding over the next 10 years. For the next couple of years we anticipate those payments, meaning amounts arising from all of our partnerships, to further increase. However, at some point in the medium term, these payments will plateau, due to the expiration of the non-Novartis agreements, and we anticipate that milestone payments and additional payments from out-licensing the proprietary compounds could fill this void in order to provide continued growth.

Let's move to operating expenses. Total operating expenses increased by 17% to EUR54.9m. The rise in operating expenses of EUR8m was impacted by increasing R&D expenses, as well as SG&A expenses.

For the year 2007, total COGS slightly decreased to EUR7.9m, compared to EUR8m in the year 2006. As you'll recall, COGS in our Company only arise in the AbD segment. The relative percentage improvement in COGS to revenues is mainly a result of savings generated in purchasing, as well as lower amortization charges and depreciation related to acquired inventories.

Costs for R&D increased by EUR4.7m to EUR22m, mainly due to higher personnel costs relating to additional projects for the therapeutic segment. During the course of 2007, costs for proprietary product development for MOR103 and MOR202 and technology development more than doubled over the previous year, to EUR6.1m.

Sales, general and administrative expenses amounted to EUR24.8m, compared to EUR21.4m in the previous year. This change was mainly impacted by higher costs for external services, and in particular a one-off charge in connection with consultant fees for the Novartis deal.

Stock-based compensation expenses are embedded in COGS, SG&A and R&D expense amounts. Stock-based compensation in 2007 amounted to EUR1.4m and is a non-cash charge.

Let's take a look at the results by segment. On the therapeutic side, revenues amounted to EUR42.4m, mainly influenced by higher levels of performance-based payments and to a lesser extent by new and expanded collaborations. Operating expenses of the therapeutic antibodies segment increased by 50% to EUR27.2m, mainly driven by expenses for proprietary product and technology development in the amount of EUR6.1m. The resulting operating segment result was a strong EUR15.2m. I think it's fair to say that our expectations this year for the unit were exceeded.

That positive development on the therapeutic side of our business compensated the somewhat lower growth of the research antibodies segment. A partial reason for this relates to lower growth rates for the research antibodies segment globally. That being said, overall AbD Group sales grew in line with the overall market rate of approximately 7%. And for the custom HuCAL business, it outperformed with a growth rate far in excess of that.

Credit must be given for the fact that, despite higher revenues, AbD segment expenses actually fell for the year, in no small part due to the fact that we had significant integration and restructuring cost savings. Not only were there cost savings from the closings of ex-Biogenesis sites, but also existing Serotec sites achieved substantial progress in their efficiency. That being said, the AbD unit did not achieve its goal of a positive operating result and reported a negative segment result of EUR600,000. This loss, however, includes a non-cash impairment charge of approximately EUR200,000 on a U.S. building whose fair value has been affected by the sub-prime and real estate crisis in the U.S.

All in all, we have to count the year as a success, in terms -- although we missed our target for the year, very substantial progress has been made in terms of cost cutting and efficiency gains. And in fact AbD, as you heard earlier, had its first cash positive year behind it in 2007, not to mention a massive improvement over last year's result. More to that in a couple of slides.

While the catalog business only grew at market rate, the custom monoclonal HuCAL business grew with approximately -- in excess of 60%. In this business we experience synergies with the existing catalog business which we acquired. Two years into our acquisitions, I think it's fair to say the original synergy which was foreseen when acquiring Biogenesis and Serotec is borne out by the growth rates which this sub-unit is experiencing.

Additionally, other synergies, such as cross-selling within the sub-segments and between the operating segments, are occurring as well. In that vein, I think it's worth noting that included in the HuCAL numbers is a revenue-sharing agreement between the therapeutics unit and the AbD unit, which contributed approximately EUR700,000 to AbD unit revenues. We feel, given the instrumental role that AbD has had in sourcing these contracts and the amount of resources spent for the acquisition of these contracts on the therapeutic side of the business, a nominal agency fee is warranted.

As you can see from this next slide, the AbD unit achieved its first yearly positive cash flow during the year 2007. As you can also see from the chart above, there is a relatively large delta between financial numbers and cash flow. Specific contributors to this effect are depreciation and amortization impacts in the amount of EUR2.1m, relating to our previous acquisitions of Biogenesis and Serotec. Over time, these charges relating to our purchase price accounting will diminish due to our amortization of the assets. To that end, some of the inventory amortization charges have already began to taper off, which has in part helped to improve gross margins in the unit this year.

Moving back to the financial statements, I'll continue with non-operating items. Beneath our profit from operations of EUR7m, non-operating income amounted to EUR2.2m and mainly increased as a result of higher interest income, higher gains from our marketable securities, as well as gains from foreign exchange derivatives. That combined to result in profit before taxes of EUR9.2m.

Beneath the non-operating section is income tax. In total, the Company reported a tax benefit in the amount of EUR2.3m for 2007. This line item is mainly impacted by deferred tax of EUR4.1m and current tax expense of EUR1.8m. EUR3.6m of deferred tax income arises from the capitalization of a deferred tax asset. This represents full capitalization of all remaining tax loss carry forwards which we had available for us to use. We felt confident at year's end 2007 to capitalize this asset, due to the significant cash flows over the next 10 years arising from our Novartis deal, signed in December 2007.

In summary, MorphoSys achieved a record net profit of EUR11.5m for the full year 2007. The resulting diluted net income per share for the full year 2007 amounted to EUR1.59 per share, compared to an EPS of EUR0.93 per share last year.

In the fiscal year 2007, MorphoSys' investment in property, plant and equipment, as well as intangibles, amounted to EUR12.1m and increased by EUR8.2m compared to the same period of the prior year. Although CapEx and PP&E declined year on year, the investment in intangibles significantly increased, due in large part to the acquisition of licenses and patents from Dyax in November 2007.

Let's move to the balance sheet. Current assets increased by EUR46.8m, mainly as a result of cash generated from the capital increase in May 2007, cash generated from operations and increased accounts receivable due to new contracts signed in 2007. Also in 2007, non-current assets increased by EUR10.1m, mainly as a result of licenses purchased in 2007, as well as a build-up of deferred tax assets which I talked about earlier.

Let's move to the next slide, liabilities. During the year 2007, the current liabilities increased by approximately EUR11m to EUR29.4m, mainly as a consequence of higher deferred revenues from contracts signed at year's end. All other questions on liabilities, should there be any, can be addressed during the Q&A session.

Let's quickly recap how our share capital increased during the year. In May 2007, MorphoSys successfully placed around 10% of our outstanding share capital in a private placement to international institutional investors, resulting in gross proceeds of approximately EUR32.6m to the Company. Beyond that, roughly 20,000 shares were issued as a result of employee convertible bonds and options exercises. At year end, the total number of shares issued was approximately 7.4m shares.

Again, another brief look at our shareholder structure on this next slide. Presently, our biggest shareholder is Novartis Pharma AG, who owns approximately 7%, followed by AstraZeneca with approximately 5%. The free float, according to the definition of Deutsche-Borse, amounted to roughly 88% and includes approximately 2.5% of shareholdings by the Management and Supervisory Boards.

Now, a brief summary of some personal statistics. At the end of 2007, the MorphoSys Group employed 295 employees, compared to 279 employees at the end of 2006. Of the 295, 167 worked in the therapeutic antibodies segment and 128 in the AbD segment. Of total employees, 192 worked in Germany, 83 in the U.K. and 20 in the U.S.

That concluded my review for the year 2007. I'd like to continue with the financial outlook for 2008. For 2008, we estimate revenues for the full year to range between EUR73m and EUR77m. Of this amount, we expect performance-based payments to make up a total of approximately EUR10m. We expect that the research antibodies segment will contribute approximately EUR21m of total revenues. Additionally we estimate, of the revenues relating to the therapeutic antibodies segment, two-thirds of the revenues are already secured through existing agreements.

There are a number of assumptions which affect expenses in 2008. First and foremost, approximately EUR13m worth of investment is assumed in the proprietary product and technology advancement. That, again, is roughly double what it was in 2007.

Despite this significant ramp-up of investment in proprietary products, for the Group we anticipate an operating profit in the range of between EUR9m and EUR11m, an increase over last year's amount. As it relates to the AbD segment, we expect in 2008 an operating profit somewhere between 5% and 10% of sales, with expected sales of approximately EUR21m. That represents top line growth in the region of overall market growth.

That concludes the financial analysis of 2007 and guidance for 2008. And now I'd like to hand back to Simon for the operational outlook for 2008. Thank you.

Thank you, Dave. I'd now like to conclude the presentation with a few words on our future plans.

As I mentioned earlier, the Novartis deal is transforming for MorphoSys. There are two aspects to this and I'll speak to each in turn. First, the number of new discovery programs that will be pursued within the deal is substantial. Our confidentiality undertaking with Novartis prevents us from detailing this, but their commitment to a defined number of programs per year was one of our conditions for the deal. What I can say is this. We will commence many more therapeutic programs during our second decade of applying the HuCAL technology than we did in the first decade.

The second aspect of the Novartis deal is how we will use our financial strength to transform our proprietary product development. Once again, the Novartis deal guarantees us revenues of $60m per year, for at least the next seven and probably the next 10 years. Roughly half of this is free cash flow. This will be supplemented by the income we receive in the form of technology license fees from our other partners and, increasingly, milestone payments. As a result, we're expecting at least $30m to $40m of cash to be available annually to finance our pipeline.

The other facet of our financial strength is the EUR100m of cash on our balance sheet. This is earmarked for strategic purposes, for example the acquisition of assets to strengthen our business. An example of the use of our strong cash position came in November of last year, when we announced the acquisition of a bundle of licenses from Dyax to support our technology development. Although financial terms were not disclosed, we were able to strike an agreement which leveraged our cash position in a way that was favorable to our longer term interests.

As we have stated in the past, we continue to be interested in acquisitions on the AbD side of the business. Although we have not completed a transaction since the two original acquisitions which built this unit, we do not rule out the possibility of further deals here. And as we said after signing of the Novartis deal, we're now also interested in acquisitions or in-licensing as a means of strengthening our drug pipeline.

All told, Morphosys is in an extremely strong financial position with secure long-term income plus a strong balance sheet, both of which can be put to work to build value. We're currently planning precisely how the pipeline will develop. We certainly aim to add additional programs beyond the ongoing MOR103 and MOR202. Planning is looking at where the new programs will come from. Consideration is being given to the expansion of MOR103 and MOR202 into new indications, de novo starts using HuCAL technology against newly selected targets, reacquiring HuCAL programs currently ongoing with partners, co-development of HuCAL programs, for example under the options we have negotiated with Novartis, but also with new companies through new co-development partnerships, and the fifth possibility, in-licensing and/or acquiring non-HuCAL antibody programs.

We see a multitude of attractive opportunities and these are receiving careful appraisal. Obviously, there are distinct advantages associated with all of these options and I want to highlight some of these here. For example, MOR103 and MOR202 have the advantage that they're already some way down the track. In-licensing could potentially give us similarly advanced programs. Starting programs de novo, on the other hand, has the advantage that we control the full discovery and development process from scratch, although with the disadvantage that it will of course take some time to get these programs to the clinic.

Reacquiring existing partner programs may offer a balance between these approaches. This route offers the advantage that we have some good insight into these programs and the quality of the underlying target molecules, as well as the characteristics of the chosen HuCAL antibodies. Especially the group of 23 candidates currently in pre-clinical testing offers some opportunities worthy of consideration, since we feel that a proportion of these programs could advance into the clinic rather quickly under our own control.

In this regard, we note GPC's announcement earlier this week that it does not intend to continue development of the 1D09C3 antibody program. Based on what we have seen of the program, we've concluded that we have more attractive alternatives for our proprietary pipeline and we have therefore informed GPC that we are not interested in pursuing it for our own account. Nevertheless, the safety of the compound and the hints of efficacy that GPC have seen in the clinic suggest that with appropriate investment the program may have a future. Accordingly, we are in discussion with GPC to determine how value could best be extracted from the work that has been done on the compound to date.

Certainly, co-development activities will be a central piece of our pipeline strategy, not least due to the options we have at hand as part of our deal with Novartis. I want to take the opportunity to state again that we have the freedom to sign co-development deals with others and we will look for fitting opportunities in 2008 and beyond. We'll keep you informed as we take decisions on precisely how we intend to expand our proprietary pipeline and balance these various options.

Meanwhile, work on MOR103 and MOR202 continues at full speed. In time, we will in all likelihood seek a partner for these programs, but we are in no hurry to do so. We will utilize our financial strength to advance both of them, with the goal of creating as much value as possible before any partnering activity.

We expect to commence the healthy volunteer Phase 1 study on MOR103 within the next few weeks. This study will occupy the remainder of 2008 and we expect the final report to be available approximately one year from now. During the course of this year, we'll publish results of our pre-clinical investigations of MOR103.

With respect to our second proprietary program, MOR202, we've now chosen the formal development candidate on the basis of in-depth pre-clinical comparison of our two leads. Our timeline for the next steps in the development of this compound is as follows. In 2008, we will manufacture the necessary clinical grade material of the antibody to conduct Phase 1 trials. Formal pre-clinical development during 2008 should then enable us to finalize the pre-clinical work and to file a CTA in 2010.

In closing, I'd like to highlight the most significant forthcoming events. In the therapeutic segment, there is the forthcoming Phase 1 study for MOR103 and the publication of pre-clinical results from this program. With regard to MOR202, manufacture of drug product will also commence shortly. Regarding the partnered pipeline, this will continue to develop. We expect at least 10 new programs to commence and currently have visibility on between one and two INDs from our partners. We expect information from several of our existing partner programs to be released during the course of the year.

A new component in Morphosys's drug development story will kick in, in 2008. We're aiming to start at least one co-development program, either with Novartis using the agreed co-development options or with a new partner.

Turning to our research antibody segment, AbD, we expect further improved performance. As mentioned earlier, the cost structure of the unit is well in hand and we look forward to improved revenues, taking it into profitability. We continue to see strong demand for our HuCAL custom service and anticipate a further increase of HuCAL-based revenues to over EUR3m. We expect key HuCAL research relationships, such as those with the Burnham Institute in California and other research institutes, as well as our Japanese partner GeneFrontier Corporation, to become ever more important sources of new targets for therapeutic programs. With this in mind, we're looking to sign a new deal of this sort in 2008.

That concludes the presentation. Thank you very much for your attention.

Thank you very much. I would like to open the floor now for the Q&A session. I suggest that we start with the people listening in by conference call. May I ask the operator if there are questions from the conference call?

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). At this time, we have no questions from the audio.

I've got the first question here.

Can you hear me? Christian Peter, Sal Oppenheim. My first question concerns the revenue guidance for '08. Doing just a quick back of the envelope calculation, I think that the guidance is fairly conservative. If we take about EUR20m plus from the research antibody segment and EUR10m from success-based payments and then look at the Novartis deal, you should be easily above the EUR90m. Could you explain where that gap comes from, please?

Yes. Perhaps, in explaining where that delta may lie, I believe part of the explanation might be due to the fact that when we give this ballpark number that the Novartis deal is worth, approximately $30m, that is in average the case. However, there is, I think, at the time that we mentioned the deal, a ramp-up in reaching there. So that may explain part of the delta that you're looking for.

Thank you.

Good morning. Hanns Frohnmeyer, LBBW. Anyway, I just want to continue these questions on your revenue guidance, because I feel also a bit that it looks to me rather conservative, if you -- if I subtract everything what you mentioned in your things, in your guidance, then I end up with roughly EUR225m which is coming from other partnerships. So is it so low or do you expect -- is it your normally very conservative guidance on that side?

Maybe, in addition, the EUR10m milestones you expect in '08. Why is it less than last year? Is it just because of the closing of your other partnerships?

And maybe this last question. You say that you plan about $30m to $40m per year to finance your own pipeline. If I look to your current clinical pipeline, it seems to be a high number. What other plans do you have? Is it more on the pre-clinical side or is it more on the in-licensing side?

Let me maybe start with the last part of that question. As I said, we're currently evaluating a number of opportunities of where to make that investment and there are really a multitude of opportunities. If, for example, we were to in-license a later stage compound, then obviously the burn on that program gets higher quicker than if we start programs de novo. So between potentially de novo starts, additional applications for the existing MOR103 and MOR202 programs and potentially in-licensing or acquisition of an existing perhaps pre-clinical or even clinical compound, that of course, if you add all that up, can consume a fair amount of that cash flow.

And maybe, just before handing to Dave for a more detailed explanation on the revenue guidance, when we announced the Novartis deal we mentioned this ramp effect and one shouldn't underestimate the effect of that ramp effect. We always said that taking the total volume of the deal and simply dividing it by 10 gives you an indication, but that that has to be corrected in the early years, years one, two and three, potentially, for the effect of this ramp until we get to the full size internally and until all of the programs that will be pursued actually kick in. And perhaps those of you who are feeling that revenue looks -- revenue guidance looks a little on the low side may have neglected our comments regarding that ramping up effect.

Yes. I actually don't have terribly much more to add to that. I think there was a question earlier why have milestones gone down. I think that's a fair comment. One of the reasons we find ourselves in that situation is that milestones unexpectedly spiked in the last 60 days of the year. As you'll recall, for 2007 we originally estimated that miles would be up to EUR10m. In the end, they ended up being EUR12m, so beyond our expectations. Beyond that, I think we have been, as you point out, conservative, but I think rightly so. And in terms of viewing entire guidance, in 2007 we predicted a range of EUR60m to EUR65m. We landed almost exactly in the mid-point of that range, at just under EUR62m. So I think perhaps some lines of guidance may be more conservative than others, but I think in the end it all balances itself out, as we've seen in 2007.

Daniel Wendorff, Commerzbank. Three questions, one still regarding the guidance on the revenue side for 2008. I also understood that the fact that it's not higher is also related to the ending of the Centocor and the Bayer-Schering collaborations and not also so much on the ramp-up effect. Am I correct in that assumption?

And secondly, regarding your increase -- strong increase in own R&D investments, the EUR30m guidance you gave for 2008, why is it more than double in 2007? So what have you already included with regard to your expansion plans and for your own in-house R&D programs?

And thirdly, on the AbD segment, you said that the market slowed down. Does this only relate to the catalog business? And could you give us more details regarding the impact of the weak U.S. dollar? Is it that you have also transaction effects in that division, although you are located in the U.S., U.K. and Germany?

Let's go backwards through those. I'll start with the qualitative bits and then Dave will take over with the financial parts. Yes, I think if you look beyond us to other companies in the reagents space, everyone is feeling a slowdown. So, whereas growth was in the double digits one, two years ago, clearly the other players, also the bigger players in this space, are now growing in the single-digit area. And that's driven by a number of effects. Typically, for example, academic research funding in the U.S., NIH budgets, NSF budgets are a big factor in how much academic institutions have to spend on research products. So that's definitely a factor at play here. The revenue that we receive in that segment of the business from AbD, that's the biggest single market for the AbD. Somewhere around 40% of our revenue in the AbD side is dollar-denominated revenue and of course there is a commensurate impact then, due to the softening of the dollar against the euro.

Yes. There was a question, I think, regarding the EUR12m proprietary drug development. Approximately two-thirds of that spend is related to MOR103 and 202. The remainder, so roughly EUR5m or so, will be allocated to either new projects or indications within the [monoclonal class] of MOR103 or 202. We will inform the financial community when we make those decisions.

And just a follow-up on that. Is it the clinical manufacturing of MOR202 which is the main contributor there?

Actually, the main contributor, if you took a look -- I assume you're talking about the two-thirds. The two-thirds mainly relates to clinical trials for 103.

There was also a question regarding the impact of the U.S. dollar versus euro. I think we showed a slide a bit earlier, showing that revenues would have been EUR1m higher for the Group had we used a constant currency for the euro/dollar rate. That roughly breaks down into EUR750,000 for the therapeutics unit and about EUR0.25m for the AbD unit.

And regarding the revenue guidance for 2008, so my first of these many questions, and the end of the Bayer-Schering and Centocor agreement and so on, does this have a substantial effect as well or is just the ramp-up?

I think it's a combination of both. Definitely, when you take a look at our previous financials, you'll see that Centocor and Bayer-Schering have been for years within the top three -- sorry, top five partners of Morphosys in terms of revenue terms. Certainly, that had an impact but I think equally having an impact is this ramp-up that we've talked about.

Maybe I can just add to that. When we talked to Novartis about how this ramp-up should look, we obviously had the expiration of Bayer-Schering and Centocor in mind, and so we kind of matched the two to some extent. So we looked to certainly cover the FTEs that were committed to Bayer-Schering and Centocor by the incoming projects that would come from Novartis. So there was a roughly equal match there. And again, I think this is important for all of you who are constructing models here, when you look at your models please bear this ramp effect in mind for at least the next two years, regarding Novartis.

Maybe a last question on your revenue guidance. 2006 -- sorry, 2007 figures and revenues, roughly 50% are already derived from the Novartis deal because it was already running, the Novartis cooperation. This may help us [understand]. And then this proportion of Novartis here then in 2008, and it's expected to increase to 70%, 80% or something like that, maybe this gives an indication about the importance of the Novartis deal.

The second question is in the operative result of the therapeutic part you included, obviously, the EUR4.5m consulting fees of -- for the Novartis deal. If one does a quick calculation on what you have in costs, EUR6m for tech and drug development, EUR4.5m for these one-offs, then -- and also taking -- having in mind the milestone payment, then you come to the conclusion that actually the margins on -- that you're getting on doing the antibody development, which you always describe as you getting cash from the beginning, seems to be quite similar only. I say only because you mentioned in the past that with the increase of HuCAL Gold in your projects, the margins should ramp up a little bit in that respect. A comment on that, please?

And then a last question, the customized antibodies, the antibodies by design mentioned with EUR2.3m for full year 2007. You mentioned 30% growth rate there year over year. Is that right? Because there was -- it's a little bit confusing. You mentioned HuCAL-based business in AbD and you mentioned the antibodies by design revenues. Just to clarify on that.

Okay. I'll see if I can take them in some kind of logical order here. There was a question regarding the margins of HuCAL Gold versus previous versions of the library. I think for the next couple of years the primary drivers of margin will be the level of milestones. The profitability of the unit is mainly affected by the proportion of milestones revenues to total revenues in the therapeutic antibodies segment and they did not significantly change between 2007 and 2006, although the absolute terms did. That being said, we do confirm that the version of HuCAL Gold should have a higher margin due to the fact that it is a royalty-free library, and of course that will show up once royalties start to flow. And of course, also related to milestones expenses that we potentially would have, they would be lower with HuCAL Gold. The bottom line is the effect on the margins you'll see probably more back-ended than now.

I can confirm your comment regarding the consulting fees for Novartis. I think we characterized them as being less than EUR5m. We didn't give an exact amount. But it has been put into the therapeutic antibodies segment.

There was also a question regarding the AbD growth rates. We characterize the business as being prosecuted in three different sub-segments. We have an OEM sub-segment, we have a catalogs sub-segment and we have the business which we originally started with Novartis, which was the HuCAL tailor-made custom antibody business. And when we talked about growth rates in excess of 30%, we were talking about the business which we originally started, which was the HuCAL custom antibody creation business. And again, that goes back to the whole point of why we did these acquisitions. We did acquisitions in order to be able to secure a distribution channel. Those synergies have been borne out by the growth rates that we're evidencing in that business, which are double or triple what the overall market is doing.

Does that answer most of your questions?

Good morning. Cornelia Thomas from WestLB. I've got a number of questions. Maybe it's better if I split them up into two blocks. One is, could you comment on - maybe I've just missed it - the AbD business unit. How do you see the profitability going forward? Do you expect that business unit to become profitable in 2008 or, if not, when do you see that happening?

And the second question is your guidance this time on the operating profit '08, not the revenues. I thought that looked quite low. Not so much the revenues. Is that mostly because of your high costs you're expecting in technology and product development, or why is that?

Yes. Why don't I start with the AbD question and then Dave can talk about the effects on the operating profit in this year. So, to be very clear, yes, we are expecting AbD to be profitable in this year. It's in the presentation that we expect them to have an EBIT margin in the 5% to 10% range. As we said, expenses are well in hand. We expect -- we're projecting growth around the market rate. We hope to be able to exceed that, but that's what we're currently projecting, based on our best estimates. And as Dave mentioned during his presentation, a number of the acquisition-related charges are starting to taper off and of course that's having a commensurate impact on the expense line. So we think that the operation is in good shape and ready to swing into profitability for the first time this year.

And just to repeat again what Dave also mentioned, which I think is an important point, nevertheless, despite the fact that it recorded a loss at a P&L level last year, it was cash generative for the Company as a whole to the tune of EUR700,000.

I think what I would add to Simon's comments, we gave during the presentation actually specific guidance that we expected profitability to be somewhere in the realm -- operating profit to be in the realm of between 5% and 10% of sales this year. So, yes, we do expect it to be financially cash positive this year.

In terms of your questions relating to operating profit or your disappointment relating to that, I think it's important to stress that we have to compare apples with apples. And in that vein, I would say that the two operating results are not comparable in the sense that we have in the year 2007 investment in proprietary product development and technology development of approximately EUR6m. In the 2008 results, we have an amount of investment which is double that, approximately EUR12m. So comparing apples with apples, you would have to add roughly EUR6m worth of profit, pure profit, to our operating results in 2008 to come to a comparable number. So if you took the mid-point of EUR10m in 2008, it would come to roughly EUR16m, which of course is a very significant ramp-up of operating profit vis-a-vis the prior year.

(Technical difficulty) question. One is could you comment, when GPC announced their restructuring program earlier this week, they said that they were dropping the antibody which came from your -- from HuCAL Gold, from HuCAL. And they quoted that there was evidence that this particular type of antibody was seen to swap parts of the antibody with other antibodies, resulting in a compound of unknown properties. Do you see any problems with the other antibodies that are out there in the development pipelines? Are there any which are of the same sub-type as this one?

That's one question. And then the other one is regarding your partnership with Sigma. I was just wondering if you could comment a little bit on the financial structure of that, like do you get any fees from them or is it just milestone payments you get there, and give a rough indication of the number of antibodies you're expecting to come from that. Thank you.

Yes. So, first of all, regarding the GPC question, indeed GPC in their announcement cited the fact that this antibody is an IgG4, and IgG4s are known to have this propensity to form so-called half-molecules, which means that the two chains of the antibody, for those of you on the phone you're not going to see this, but I'm holding my hands together, the two chains can come apart and then combine with different chains or exist on their own as a so-called half-molecule. This is well-known and in fact there are two antibody drugs on the market that have this same format. Tysabri for example, the multiple sclerosis treatment from Biogen Idec, is an IgG4. Mylotarg, the Wyeth antibody for cancer, is an IgG4. There are at least 10 antibodies in clinical developments from other companies that are IgG4s. This is a well-known phenomenon.

We're aware that GPC mentioned that as being an issue earlier this week. We're not sure that that's the only issue. And so therefore, we think that this merits further investigation, this program, and we think that based on the clinical data that they have seen and certainly the pre-clinical data they've generated, there could be value in this program and therefore we think it's not worth giving up completely. Whether they had other reasons to give it up, I'm not aware. That could well be the case.

Just to finish off that question, we've reviewed our entire pipeline of partnered programs and we're comfortable that all of the programs that we have going on with our partners are in good shape in that regard.

The question regarding Sigma, it's a rather simple arrangement. Sigma is very keen to market HuCAL antibodies. Sigma will develop -- will deliver targets to us, to our AbD segment. AbD will make HuCAL antibodies against those targets and Sigma has the rights to market those antibodies through their catalog business. And we participate financially in each project that is delivered to us by Sigma.

And what about a rough indication of number of antibodies, or is that not specified in your agreement?

We have -- we do have an agreement and understanding on that, although it's subject to the confidentiality of the agreement, unfortunately.

I got a signal that there's another question from the conference call. May I ask the operator to give us a question?

(OPERATOR INSTRUCTIONS).

Okay. There's no further question from the conference call. Is there another question here from the audience?

Patrick Fuchs, DZ Bank, again. One question on the Sigma Corporation, also. I was a little bit surprised that you did not include in that deal the customized antibody business, because Sigma also does polyclonal antibody customized business service. So is there a special reason for that?

And then the other question relates to the co-development options that you are trying to identify and to manage. I'm quite sure that it is easy, or not easy but there's a possibility for you to get co-development options for companies like Genesis that are rather early stage, not so well-funded. I assume it's getting more difficult with the pharmaceutical industry, because they are -- for high priority projects I'm quite sure that they are not willing to give up quite at an early time point on this in terms of the margin that could be possible. Do you have a strategy in order to focus, for example, on niche indications that pharma is not willing you'd pursue in order to get access to whole development teams inside pharma? Or is it just more take what is possible there?

Okay. Thanks, Patrick. Let me speak first to the Sigma question, why is there no custom HuCAL generation as part of this deal. There's no big secret there. It simply was that we agreed to initially get started on a more conventional footing, which was have them sell custom-made antibodies through their catalog. I think one thing that's still taking place is customers for these types of antibodies are still getting used to this technology. And I think what we saw as a great advantage was having a fantastic company like Sigma help us to spread understanding for HuCAL as a perfectly good source of antibodies. That still requires an ability for customers to adopt that technology, in the sense that they're not traditional mouse antibodies, for example. So there is the possibility that additional components could be added to this deal as we go forward, but we've made a start which is very focused on one particular type of application. But it may well evolve in time.

The co-development thing is an interesting question. You're quite right that there are opportunities ranging from small biotech, which doesn't have a lot of money and loves to have someone share the cost, all the way up to big pharma who doesn't really want to have the bother of having to deal with a little company. And for us as well, there are advantages and disadvantages. One of the disadvantages of co-developing with big pharma is they tend to do everything incredibly thoroughly and dot every i and cross every single t, which means that as a result the program finishes up being more expensive than perhaps a biotech company would do it. So that's a disadvantage, that you have -- if you share costs, you have a higher cost burden to carry with a big pharma partner.

The advantage, of course, is that big pharma has usually done this a lot and knows what they're doing and you learn from that and you benefit from that. On the other hand, the smaller company may put more priority on that program, because it may be their only or one of the very few programs that they have. They may be faster, they may be cheaper. And so those things have to be balanced against each other.

The opportunities we're looking at at the moment of course include Novartis, as we mentioned. But essentially, we're basing our decision on a multitude of factors - the quality of the target, the quality of the IP around the target, the competitive situation in that particular indication, the quality of the partner as a co-development partner. There's a whole host of issues that feed into the decision-making process and that we have to weigh on a case-by-case basis before we make a decision there.

Does that answer the question?

So basically, no special focus on looking at indications that are more attractive for biotechs, smaller indications, maybe? That's not the case?

We're still reviewing that. We're still reviewing to what extent we want to focus on one or more indications and we haven't reached a final decision on that. That's also a very -- a question that needs to be very, very carefully thought through. The disadvantage of focusing in on one indication is that the pool of targets is smaller. The disadvantage of focusing on many indications is that it's hard to have the expertise across all those areas of biology. So we're actually -- that's part of the planning that we're doing at the moment is to figure out in which indication or indications we will focus our efforts.

Maybe a last question on the ongoing cooperations or ongoing deals, with Astellas for example. How much visibility do you have there on the number of projects that they have to follow in order -- for example, Astellas is an example that follows both mouse technologies and phage display technologies. So do you have there a visibility of what you can expect from that running operations?

Somewhat. So let's use Astellas as an example of all of our partnerships. All of these partners have a certain number of options that they may exercise, and on those options are predefined financial terms, milestones and royalties. Whether they choose to exercise those options is of course up to them. So, although we have -- although we know precisely how many options they may exercise, we don't know whether they actually will exercise them. But those options are all predefined when the contract is signed at the outset and can be exercised at any time during the duration of the contract. And so therefore, for all of the partners that we still have, the Pfizers, the Mercks, the Lillys, the Astellases and so on and so forth, these people have the ability to trigger those options.

(Technical difficulty) the big difference between Novertis and the existing cooperations that the market has committed to a certain extent over the years and the others have the options, basically, to --

Yes, exactly. There's two differences. Novartis commits to start a certain number of programs per year and the number, so the scope, the number of programs that Novartis will commit to is substantially more than the number of options that any other individual partner has.

Question from Holger Blum.

Holger Blum, Deutsche Bank. Just one question of more strategic nature on a word, maybe, how you balance R&D spending versus bottom line growth. And maybe (inaudible) be that that was [advocated] in a worst case, how much money would you have to burn until you would say, okay, let's change strategy and give the cash flows -- let it flow to the bottom line completely - after EUR50m R&D spend or do you have any scenarios like that for a worst case? Thanks.

That's of course a good question. It depends who you ask inside the Company. [Our CFO] might like to spend a bit more and Dave might like to spend a bit less. But we think we can strike a good balance in the interests of the Company's growth and the shareholders. As you've seen, our proprietary R&D spend has increased 100% year on year over the last two years. There aren't many companies that do that, that increase their R&D spend at such a fast rate and still report a growing profit line.

At the moment the -- we're limited by how much money we can actually spend in terms of how many programs we've got. Even if we'd like to spend more money on MOR102 or 103 or 202, for example, there's a limit to what we can actually do there that makes sense. So we're looking to -- as I said, and I think this is all we can say for the moment, we're certainly looking to increase the strength of the pipeline. We have the ability to spend more money. We also have the ability to stay in profit. And that's, I think, the best guidance that we can give you, at least for the near future.

We're convinced that the longer term driver of our value will be the strength of our pipeline. And therefore, that was one of the reasons for doing the Novartis deal, as we said, to secure the cash flow that we need to be able to strengthen that pipeline further. But as you've seen from the guidance for this year, not only are we strongly increasing R&D investment, but we're also strongly increasing our guidance for operating profit for the year. So we think that for the moment at least that's a nice combination.

I think, to underscore that, I would just add one point which is a more forward-looking statement, which relates to our action of capitalizing the deferred tax assets and the amount of NOLs which we had of roughly EUR14m. What that essentially is, is a statement, in our view, that we believe that we'll generate at least that level of profits over the next couple of years.

There was another question?

Yes, also one relating to last question regarding your R&D expenditures. Could we expect more in-house programs to be initiated, not necessarily during 2008 but 2009/2010, so that this first doubling of R&D investment is just a starting place of a ramping-up phase?

And secondly, regarding the AbD segment, again, what -- if you still think of acquisitions there? Is it more that you would like to expand your customer network or your product offerings?

And the last question, regarding milestones still booked in 2007, which were higher than you originally guided for. So that means that the milestone level was quite high in Q4. Was there a specific reason for that?

Maybe I'll take the last question first. The level of milestones did exceed our expectations. You may recall that during the summer we actually guided towards the lower end of revenues. And as you know, we had guided originally at the beginning of the year at a level of EUR10m worth of milestones. In the end, we achieved EUR12m, so we were EUR2m over where we expected. Had we not achieved that, then we would have had revenues along the lines of EUR60m, which would have been in line with the guidance that I gave during the summer.

Is there a reason for that? I would say partially yes and partially related to the signing of the Novartis deal. I can't name which partners generated those revenues, but because of that, that triggered milestones events and acceleration of revenues which would have otherwise been spread over time. For example, the Centocor and Bayer-Schering revenues, even though they were characterized as performance or success-based payments, some of these payments are spread over time. But by virtue of the fact that these agreements ended, we were then able to accelerate the recognition of that revenue in December, November when we signed the Novartis agreement.

Coming back to the first two questions, Daniel, the number of proprietary programs, which is what we're currently working on, we're looking to strike a balance between earlier programs, which cost less, of course, starting de nova and making an antibody is relatively cheap, versus later programs that may be in-licensed, for example, or maybe more indications that we work on with MOR202 or 103, which costs more because they're later. So it's really a case of striking a balance between those. And we think that there is an optimum to be found in there between earlier stage and later stage programs, and that's exactly what we're working on at the moment and we hope to give you feedback on when that exercise is complete.

In terms of the acquisitions on the AbD area, we think market reach is all important here. That's one of the reasons why we did the Sigma deal, to increase our ability to reach out into the research community. One of the criteria is that there has to be a logical fit to what we have at the moment. So, for example, it could be -- it should be somehow antibody related. It could be a conjugation technology, a labeling technology for antibodies. It could be additional sales channels, as I've indicated. But there has to be something that makes sense and forms a synergistic fit with what we have at the moment.

(Technical difficulty) like Sigma distributing your HuCAL antibodies. I'm just wondering if, by providing them with HuCAL antibodies, you're not creating a competitor yourself, a competitor for AbD. How do you see that impacting on the AbD unit and revenues for that?

The short answer to that question is we are, in a sense, but the benefit that we will get by having someone with a much greater reach and much greater sales and marketing muscle than we have will outweigh the competitive effects that we create there. We think that one of the things that still has to be solved in this market is acceptance for this new technology. Most -- the vast majority of people who use antibodies still think if it hasn't come out of an animal then it's not a real antibody. And that's seriously one of the things that we continue to struggle with, to get people comfortable with the fact that these are human antibodies, which is completely irrelevant in this research market, that they're made using phage and bacteria, which is again completely irrelevant but nevertheless users tend to focus in on that and regard that as somehow something that they shouldn't be comfortable with.

So the idea of having an established player, well-known with a huge reach, an enormous reach, Sigma catalogs are on the shelves of every research lab in the world, to have them promoting this technology we think will massively outweigh the potential, and we think temporary, disadvantage that it may be from a competitive point of view for the activities of AbD. So we're absolutely convinced that it's only going to be additive and not negative.

Thank you. Thomas Schiessle from EQUI.TS. A question to Simon, please, on this Sigma deal. Will you be -- will those antibodies be marketed under the Sigma label, so to speak, or will it be, so to speak, powered by a Morphosys label on it? That seems to me a very interesting question.

The complete other question is on the therapeutic antibody field. Could you give an idea of how long this decision-making process will go on, concerning improving your development pipeline? So, shall we foresee a news flow on that issue in, let's say, the next six months? Thank you.

Thanks, Thomas. First of all, regarding the marketing of those antibodies, yes, to my previous answer that part of the objective of doing this deal was to have the acceptance of HuCAL antibodies in the research community increased, we -- a requirement for our deal with Sigma was that they would market the HuCAL brand, if you like. So yes, all of the antibodies that are sold by Sigma will be clearly identified as being of HuCAL origin for that purpose.

Secondly, the planning of the proprietary pipeline, we've got a specific project ongoing in-house at the moment. That project is due to be completed at the end of April. That's not to say that we will then on the first of May stand up and say, the pipeline will look like this, this, and this, because it may then depend on transactions, for example, to in-license compounds or to secure targets. But certainly, the planning process will be complete by the end of April and we hope to be able to update you certainly within the next six months.

Patrick Fuchs. I have a question on the research market. Taking out the antibodies by design business, the revenue growth then seems to be somehow below market growth of 6% to 7% what you mentioned. And on the other hand, my impression is that the tool industry's in quite good shape, looking, for example, what other companies are reporting in the genomics arena, I admit, like these high throughput sequencing machines and so on. So there seems to be quite a lot of money. And is this specific for the proteomics segment?

On the other hand, we have this statement that, for example, make an antibody for each gene product, for each splicing variant or what else, so there should be higher growth rates there. And I'm a little bit disappointed, in a way, that we're talking about 20% growth rates, meaning around 15% from the companies that you acquired plus adding the synergies, and now we are a little bit down on that. Could you please discuss that, to give us a view about the next two to three years, because in general I think the tool industry is not in a really bad shape?

First of all, a comment on the growth of the industry in general. To just talk about the research market is far too broad, because that encompasses reagents, it encompasses machines, it encompasses different types of reagents, from DNA reagents through proteins, through enzymes, through you name it. So what we try to do is we try to focus in on our segment of the industry, which is the antibodies segment. Now, it's not that easy to get information here because, for example, Sigma, which is a huge supermarket which sells everything, antibodies is one part of that and it's not always possible to get data on that. But based on our best estimates of antibody and related research reagents, market growth of all of the companies that we know about, our very best estimate is that the market is growing at 6% to 8%.

Now, our growth last year for the unit as a whole was 7%, so it was right in line with market. If you allow for discontinued products and the acquisition of Biogenesis, there were a number of discontinued products. So if you compare like-for-like 2006 versus 2007, we actually grew at 15% or twice the market. So we feel that we're performing better than the market as a whole. The numbers last year proved that. And we believe that we can continue to outperform the market. But frankly, it's A, hard to measure the market growth and it's B, hard to estimate how it's going to develop going forward. Things like, for example, change of government in the U.S. at the end of the year, changes in NSF or NIH funding in the U.S. can have an enormous effect on research budgets. So it's a little bit hard to project how those things are going to develop beyond about a one-year period.

A follow-on on that. Many companies were sold in the antibody -- in the research antibody space, in the academic or research antibody space, like Serologicals in the last years, so maybe on somehow a peak priced phase of the market with now growth rates coming down. Do you see the price coming down for your potential targets in that space that you always announce to have a look at?

Many of the companies are private, so the issue of price is not one that's visible until you have a discussion with them. I think, just to comment on that point, there was one case last year where one of our competitors, Abcam, essentially put themselves up for sale and at the time I think they were trading at around five times sales. As a public company, that was their market cap. And they didn't find a buyer and eventually withdrew their offer from the market. Perhaps that says something about what potential buyers are willing to pay, which again, of course, relates to anticipated growth rates in this segment. But since most of the companies are either private or parts of public companies, it's very hard to extrapolate in terms of what prices are that are being paid at the moment.

Some financials, please. What about the stock split? Are you preparing and [addressing] another round of getting the approval for a stock split?

This is the one and the other is on cash flow. Cash flow on the Group basis had been more or less stable, so some switches in inventories. Is the inventory issue for the top management or is inventory and working capital no issue on the top level? Thank you.

Okay. I'll start with the second question first. The cash flow, of course, is of great importance to us. We have recently instituted in our Treasury department a monitoring system to monitor and actively manage our working capital. We look at that very seriously.

I think, in terms of the cash flow comparison between 2007 and 2006, I believe the main driver for the reduced cash flow related to investment in proprietary products. If one again compares apples with apples, if you compare similar levels of proprietary product development expense year on year, you'll see that actually cash flow would have increased. There's also special effects that we had to pay, for example the external consulting fees for the Novartis deal also added up to EUR5m worth of additional expenses in there. So you have to strip out the one-off effects and if you strip those out you'll see that cash flow significantly increased.

Related to the question of stock split, I can't currently today tell you what's on our AGM agenda, for corporate governance reasons. But I can say that it is definitely a thought that we are having for the next shareholder assembly and I believe that we will publish that in the next couple of weeks. But we haven't lost sight of that goal and we actively think about it in the upcoming shareholder assembly.

Are there any further questions? Okay. Then I would like to end our presentation and the Q&A session today. I would like to thank you for your participation and coming to the conference. We would like to invite you afterwards outside for a little lunch and would appreciate if you could stay a little bit longer. Dave, Simon and myself, we will stay here, as well.

So thanks for coming and goodbye.

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