MorphoSys AG (MOR) 2008 Q1 法說會逐字稿

Good day and welcome to today's Morphosys Q1 Results 2008 Conference Call. Today's conference is being recorded. At this time I would like to hand the call over to Mr. Dave Lemus, CFO. Please go ahead, sir.

Good morning and welcome. This is Dave Lemus of Morphosys. With me is Simon Moroney, our CEO. First we would like to welcome you to our Q1 conference call, and thank you for participating. During the call we would like to talk about the Company's financial results for the first three months of 2008.

Simon will begin by giving you an overview of the first quarter, then I will review the financial results for the first three months of 2008. 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. We would therefore caution not to place undue reliance on such forward-looking statements which state only as of the date hereof.

Now, I would like to handover to Simon Moroney.

Thanks Dave, and also from me, a warm welcome to our Q1 2008 conference call.

The first quarter of 2008 has been an historic one for Morphosys. Performance is on track and Dave will talk you through the numbers shortly. There have been several significant operational developments, which I will focus on during my part of the presentation.

The most significant event has been the entry of MOR103, our lead proprietary therapeutic antibody into Phase I clinic trials. This is the first compound discovered and developed entirely internally to enter the clinic. This event marks a transition in the Company's development as we begin to use the strength generated through our recent deal with Novartis to build value by expanding our proprietary pipeline.

MOR103 became the first HuCAL antibody to enter human clinical trials. As announced yesterday, we have just completed the first dosing cohort, have seen no untoward events, and the safety review of the medical data concluded that it was safe to proceed to the second dosing group. The discovery and pre-clinical development of this drug candidate has gone extremely quickly. From identifying the first HuCAL antibody and meeting our predefined success criteria to commence under clinical trials took 26 months. Our decision to conduct the Phase I trial in Holland has also been vindicated, from filing the clinical trial application to receiving approval took only 6 weeks, and that includes one round of responses to questions from the authorities.

Earlier in the quarter we announced the target for the program which is GM-CSF, and also the fact that we have secured a potentially extremely valuable exclusive license through U.S. patent application around the target. Should this patent application be granted, we would possess a powerful commercial position in the world's largest market for anti-rheumatic drugs.

With regard to our other proprietary program, MOR202, we have picked the formal development candidate and initiated the manufacturing process. Once again we have chosen the PER.C6 system, and are working with Crucell and DSM. In this regard I would like to highlight one piece of recent news in the industry that we think could be important for antibody manufacturing platforms.

As many of you probably know, a significant number of case of immunogenicity with Bristol-Myers Squibb's and [Implane's]and marketed cancer drug, Erbitux, have been reported in the U.S. Scientists at the University of Virginia have now analyzed the findings in greater detail, and were able to trace these cases back to the cell line with which the drug was manufactured. Specifically, a [diafactoride] that is attached to the antibody by the murein cell line used in its manufacturer, was found to be responsible for the immune rejection of the drug by some patients. Interpret this as an argument favoring the use of a fully human cell line, such as PER.C6, for the production of therapeutic antibodies.

Turning to our partnered therapeutic discovery business, we continue to make good progress. During Q1 our portfolio of partnered therapeutic programs increased by four to a total of 54. On a side note, we currently still include at this point the therapeutic antibody from our collaboration with GPC Biotech in this calculation. In addition to the four partner HuCAL antibodies from Phase I clinic trials, there are now 23 in pre-clinical development, and a further 27 in the discovery stage.

Following the execution of our landmark deal with Novartis in the last quarter of 2007, the first quarter of this year saw extension of two of our ongoing pharmaceutical partnerships, mainly those with Daiichi-Sankyo and Astellas. Through the exercise of pre-existing options, these two leading Japanese companies have secured ongoing access to our HuCAL technology platform for use in drug discoveries until Q1 2011 and Q1 2012 respectively. These renewal highlight a fact that some have misunderstood, mainly that our relationship with Novartis is not an exclusive one. It also provides a clear signal that other partners remain committed to the HuCAL platform for the generation of therapeutic antibodies.

Before the end of this year, a further two ongoing collaborations could be extended under pre-existing options, namely those with OncoMed and Schering-Plough.

We continue to collaborate closely with 9 partners from the pharmaceutical and biotech industry. All of these have options to start additional HuCAL based-therapeutic programs. A related point concerns HuCAL antibody drugs programs ongoing at companies with whom our active collaborations have now ended. 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 we have discovered collaboratively, and all our contracts provide for, and indeed encourage this. Of course (inaudible) and royalties continue to be due to Morphosys.

Currently there are 17 such HuCAL programs ongoing at partners where there is no longer an active collaboration with Morphosys. A partner therapeutic antibody business is all about maximizing the number of products that are developed based on our HuCAL technology, and continue to develop strongly.

During this year we hope to learn more about the progress of some of the HuCAL antibodies in clinical trials with our partners. One of the most exciting of these is R1450, Roche's program begins Alzheimer's disease, which is based on a HuCAL anti-amyloid antibody. During the first quarter, Roche presented some of the pre-clinical data from this program at an Alzheimer's Disease Symposium in Hong Kong. Amongst the results that were of particular significance were data from a transgenic mouse model which showed that sustained levels of circulating antibodies could be achieved, that the antibody was able to enter the brain and bind to amyloid plaque, and that the antibody largely eliminated amyloid plaque in this model. We look forward to learning more about this very promising program in our partners pipeline.

This year promises to be a very interesting one to the anti-amyloid approach since Wyeth and Elan will present Phase II data on the antibody during the course of the year. This program, which is similar to Roche's with our antibody, could provide an indication of the general validity of this approach to treating Alzheimer's disease.

Meanwhile Novartis has presented interesting pre-clinical data around the HuCAL antibody program BHQ880. The antibody is directed against a target molecule implicated in bone metabolism and was shown in animal models to inhibit tumor-induced osteo-arthritic bone disease. To see this result is very promising and we look forward to data from the ongoing Phase I study.

I want to turn now to our research antibody AbD serotec. During the first quarter we took further steps towards one of our main objectives, namely increasing the uptake of the HuCAL technology outside of the therapeutic segment. First we formed a strategic marketing alliance with Sigma-Aldrich, one of the leading suppliers of research tools, and arguably the leading brand in the research reagents market. This deal will increase our ability to sell HuCAL antibodies into this market, and we expect it to lead to increased acceptance for the technology.

Further, AbD received a multiple research antibody order from the Spanish biotechnology company, Proteomika, one of the largest generators by AbD so far in the custom part of the business.

In total, Q1 sales numbers were somewhat below expectations, and adverse currency movements of the U.S. dollar and the British pound against the euro certainly had a significant impact here.

The unit did however record an operating profit showing that our restructuring efforts over the last 12 months have been successful. With that, I conclude my review of the quarter and would now like to hand back to Dave for his presentation of the financial results.

Thanks, Simon. To begin the financial analysis, I will start with revenues. In the first three months of 2008 Group revenues increased by 16% to EUR16.3m compared to EUR14.1m in the same period of last year. This increase is mainly due to higher levels of funded research and licensing fees. Using constant foreign exchange rates, revenues for the full Company would have amounted to EUR16.6m.

Revenues arising from the therapeutic antibody segment amounted to EUR12m, or 74% of total revenues, which included success-based payments in the amount of EUR1.3m.

Revenues of the AbD segment decreased in the first quarter by 19%, or EUR1m, to EUR4.3m. The main reasons for the decrease were lower than expected sales, mainly on the OAM business, which is cyclical in its nature and can vary significantly quarter by quarter.

As Simon mentioned, to a lesser degree, foreign exchange rate movements also influenced the top line results of the segment. 84% of (inaudible) revenues were generated in catalogue and industrial customers, while custom manufacturing antibodies contributed 16% or EUR0.7m.

Moving to operating expenses for the first quarter of 2008. Total operating expenses, which included stock-based compensation, decreased by 5% to EUR12.2m. The decline in operating expenses of EUR0.6m was mainly impacted by lower costs of goods sold, which decreased from EUR2.7m to EUR1.7m. Stock-based compensation, which is included in operating expenses, amounted to EUR0.3m in Q1 2008, compared to EUR0.4m in the same period of the previous year.

Cost of goods sold is composed of the AbD segment cost of goods sold. Costs decreased to EUR1.7m during the first two quarters of 2007, mainly a result of lower sales levels in the segment, and as well acquired inventories now fully depreciated.

Costs for research and development increased by EUR0.4m to EUR5.3m, mainly due to higher personnel costs and increased costs for intangibles. In the first quarter 2008, expense for proprietary product and technology development amounted to EUR1.1m, compared to EUR1.2m in Q1 2007.

Sales, general and administrative expenses remained more or less unchanged at EUR5.2m.

Non-operating income for the first three months of 2008 amounted to EUR0.6m, including interest income for gains from marketable securities and foreign exchange derivatives gains.

For the first quarter of 2008 income tax expenses amounted to EUR1.4m. This amount includes current tax expenses of EUR0.6m and deferred tax expenses of EUR0.9m related to the release from deferred tax assets capitalized in 2007.

Group operating profit amounted to EUR4.1m in the first three months of 2008, compared to an operating profit of EUR1.3m for the same period of 2007. The therapeutic antibody segment accounted for an operating profit of EUR6.1m, compared to EUR3.7m in the first quarter of 2007.

The AbD segment achieved a segment profit of approximately EUR0.04m compared to a segment loss of approximately EUR0.465m in the same quarter of last year.

In the first three months of 2008, a net income of EUR3.3m was achieved, compared to a net income of EUR0.6m in the same period of the previous year.

The diluted net profit per share for the three months ended March 31, 2008, amounted to EUR0.44 compared to a net profit per share of EUR0.09 per share in the same period of the previous year.

On March 31, 2008, Morphosys' liquid funds comprised EUR111.8m, compared to EUR106.9m on December 31, 2007. That concludes the financial analysis.

As is typical during these conference calls, we'd like to take the opportunity to update our financial guidance.

In the first quarter, a relatively low R&D spend -- there was relatively low R&D spend compared to our full-year guidance. We expect this R&D spend to pick up in the subsequent quarters as our proprietary product plans unfold. The same is true for revenues. We expect to see further milestones from various partners later in the year and as well we should start to feel some of the ramp up from the Novartis agreement.

On that basis I would like to confirm our previous full-year guidance. We continue to believe we are on track to achieve revenue targets of between EUR73m to EUR77m on a Group basis, and an operating profit of between EUR9m and EUR11m in all for the full year.

In the AbD segment, we expect revenues of approximately EUR21m and we still remain confident to achieve an operating margin of somewhere between 5% to 10% of sales.

That concludes the financial analysis for the first quarter of 2008. We would now like to open the call up to your questions.

Thank you. The question and answer session we be conducted electronically. OPERATOR INSTRUCTIONS.

Our first question comes from Daniel Wendorff from Commerzbank. Please go ahead.

Yes, good morning, gentlemen. I have two questions, if I may. Firstly regarding the cell line PER.C6 from Crucell. I was just wondering how validated that cell line has already become now as a production cell line for human antibodies.

Second question regarding the research antibody segment. Dave, you mentioned the OEM business is quite volatile over the quarters. Do we have a certain pattern so that we can say in Q2 or Q4 are particularly strong and Q3 weak, for example? Or how does it look like there? Thank you.

Thanks Daniel. I will start with the PER.C6 question. This is a cell line that's being increasingly widely adopted, and it's mainly been used to date for vaccines in fact. So, for example, Merck, the American Merck, has embraced the technology very broadly for its vaccine platform. It's less-- It is indeed less used in the antibody space to date, but we are quite comfortable that that's not going to be an issue, also from a regulatory point of view, not least given the fact that it's a human cell line. The point I made about the immunogenicity of murein-based cell lines is certainly an advantage that this is relative to those.

I think another significant point to make about PER.C6 is the kind of yield that can be achieved. Crucell have reported cases of production of antibodies where they have produced more than 10grammes of antibodies a litre, and that exceeds anything that we are aware of that can be achieved using conventional, for example, CHO-based cell lines. So it's clearly not as proven a cell line as somewhat conventional antibody generating cell lines, but we believe that there is sufficient validation for its use in other production of other types of bio-molecules for there not to be an issue.

And (inaudible) are also producing that cell line. Am I right?

Correct. Correct, yes. We produce the clinical material for the Phase I trial that's now ongoing using that cell line, and as we said. We will also produce more [202] on that cell line.

And then to answer your question as to whether or not we see, or find, a pattern OEM sales throughout the quarters, I think my gut reaction would be to say that there is no pattern per se in the sales of OEM throughout the quarters. But we can definitely say is that Q1 2007, so the comparable quarter to last year, versus this year, we had a much higher weighting of OEM sales than we did in 2008. And the OEM sales in Q1 for 2008 were relatively weak.

That being said, we feel that's no cause for alarm simply because OEM sales tend to be quite volatile throughout the quarters.

Okay. Thank you.

We now have a question from Hanns Frohnmeyer from LBBW.

Good morning. I have three questions. The first is on AbD. When can we see any impact from your Sigma-Aldrich collaboration which you announced in Q1? Is it in the second half of the year or earlier?

Then I have a question. You mentioned that you have 17 ongoing programs running at the labs of your former partners. Could you give us an idea at what stages these projects are?

And the last one, I was just wondering on your Roche collaboration. I assume it has ended. Are there any payments to be expected in 2008? Thank you.

Okay. Let me start with the question about AbD. So you asked about the impact of the Sigma-Aldrich Agreement. That's something that is simply built into our projections for the year. So Sigma-Aldrich have the right to request that we make certain antibodies on their behalf, which they will then introduce into their catalogue and sell. And we have made projections about the expected orders that should come in, and also about the timing when those should reach the catalogue and therefore generate sales. But this is not something we expect should really stick out of the AbD revenue in the months ahead. But it's simply built into our overall projections for that segment.

In your EUR21m deadline.

Correct. Correct. In terms of the 17 programs of former partners, at what stage they are at. They really span the clinical phase, the pre-clinical phase and the discovery phase.

So for example, just to mention two of them. One is of course the GPC antibody, which, as we mentioned, (inaudible), which is in Phase I. The second one in Phase I is from Centocore, with whom we are no longer actively collaborating, but who also have a program in Phase I. Again there are a number in pre-clinical, and I think rather few in the discovery stage. So as you might expect, I think there's a higher proportion of more advanced programs amongst those 17 than there are with the newer partners.

In terms of the Roche, your question regarding Roche. Indeed we are not expecting further payments in respect of the collaboration. But of course there remains the possibility for future milestone payments from that collaboration.

Thank you.

OPERATOR INSTRUCTIONS. We now have a question from Cornelia Thomas from West LB. Please go ahead.

Good morning, and thank you for taking my question. I was just wondering if you could say something about the growth rates you see in the research antibodies market at the moment and how you are expecting that impact on your AbD segment?

Sure. Hi, Cornelia. So the overall market here has certainly slowed down. There's no question that reduction in for example, government research funding is having an impact on the market. If you look at the U.S., which is the biggest market, MIH funding, which is again the biggest provider of research funding to the academic community, is essentially flat. And we've seen that when we've talked to customers there. People are saying they are not getting their grants approved, therefore they are not doing a number of studies or experiments that they would normally be doing. And that's definitely having a flattening effect on the market.

Our current estimate of the growth of the research antibody market is in the mid to higher single digit, so 6%, 7% or 8% perhaps is our best estimate. We still see ourselves going faster than that. And certainly for some segments that concerns the HuCAL part of our business, which is a custom research antibody generation, is growing at a good double digit rate. And that is pulling up, if you like, the rest of the segment, which is more heavily based around the catalogue business, but is certainly subject to the overall market slowdown.

So overall we're seeing growth for us continue to be double digit, but that's really being helped significantly by the custom HuCAL part of the business.

Okay. Thank you very much.

As we have no further questions I would like to turn the call back to your hosts today for any additional or closing remarks.

Thank you. That concludes the call. And just before ending, we would like to remind you of the main messages again. First, the commencement of the first clinical trial of the fully internally developed antibody, is a significant milestone as we begin to exploit the strategic flexibility that the recent Novartis deal brings us.

Second, our many partnerships continue to flourish and contribute further to the overall depth of our product pipeline.

And third, while currency effects are providing a challenge for our AbD unit, new relationships continue to provide new growth opportunities, and the profit recorded by the units speaks to tight control of costs.

Overall, our business is on track to achieve the objectives we have set for this year.

That concludes the conference call. Should any of you wish to follow up with us directly, both Dave and I are in the office and available to take your calls. Thanks again for participating. Goodbye.

Thank you ladies and gentlemen, that will conclude today's conference call. Thank you for your participation you may now disconnect.