MorphoSys AG (MOR) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to today's Morphosys Q2 Results 2008 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Lemus, CFO. Please go ahead, sir.

Good morning and welcome. This is Dave Lemus, CFO of Morphosys. With me is Simon Moroney, our CEO. First, we'd like to welcome you to our Q2 conference call and thank you for participating. During the call, we would like to talk about the Company's financial results for the first six months of 2008. Simon will begin by giving you an overview of the second quarter. Then I will review the financial results for the first half 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's 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 to not place undue reliance on such forward-looking statements which speak only as of the date hereof.

Now, I'd like to hand over to Simon.

Thanks Dave, and also from me, a warm welcome to our Q2 2008 conference call. This second quarter has been one of the solid progress, with some significant developments on both the therapeutic and research antibody sides of our business. Our financial strength is evident in the results, which show strong growth in revenue and operating income. The business is generating a particularly strong cash-flow. This excellent financial performance is a direct result of the success of our partnered therapeutic discovery business, and particularly the relationship with Novartis.

As usual, I'll start with our partnered therapeutic discovery business, which continues to generate the lion's share of our revenues and profits. Following the execution of our landmark deal with Novartis in December of last year, the second quarter of this year saw extension of a further two of our ongoing pharmaceutical partnerships, namely those with Schering-Plough and OncoMed. Through the exercise of pre-existing options, these two companies have secured ongoing access to our HuCAL technology platform for use in drug discovery for further one and two years respectively. In addition, OncoMed elected to start two new HuCAL-based therapeutic antibody development programs targeting cancer stem cells.

Entering 2008, four of our partners had options to extend their relationships with us, and with these two most recent extensions secured, all four have now committed to continuing their use of our technology under the terms and conditions of the original contracts. This is the perfect proof, if it was still needed, that our Novartis relationship is not exclusive, and that our other partners can continue to benefit by working with us and incorporating our technology into their research and development.

In total, the partnered therapeutic pipeline continues to comprise 54 programs, of which four on in Phase I clinical development, 27 in pre-clinical development, and 23 in research. We're not yet counting the two new exclusive licenses acquired by OncoMed in these numbers.

On a side note, we currently still include at this point the therapeutic antibody from our collaboration with GPC Biotech. No new programs became active in the second quarter, but nothing has changed in our expectation that the partnered pipeline will continue to grow, driven mainly by our Novartis relationship.

Of the partnered programs currently in clinical development, the one that is attracting most interest is that ongoing with Hoffman La Roche in Alzheimer's disease. You will recall that this is a HuCAL antibody targeting amyloid B, which is also the target of the antibody being developed by Wyeth and Elan in the same indication. The industry as a whole is eagerly awaiting data that will validate the so-called amyloid hypothesis in the treatment of Alzheimer's disease, and as I'm sure you all know, Wyeth and Elan recently published preliminary results of their Phase II trial. Coincidentally, full data will be released this afternoon at the International Conference on Alzheimer's Disease in Chicago, and we are looking forward to see the results.

Turning to our proprietary pipeline, dosing is ongoing in the Phase I trial of our lead program MOR103, with no adverse events reported. The trial continues according to schedule, we are escalating the dose as planned, and the study is on track for completion and final reporting in Q1 of 2009. Today, we can announce that pre-clinical data from this program will be presented in November at the Human Antibodies and Hybridomas conference in New York.

Regarding MOR202, process development leading to production of the lead candidate is ongoing. We anticipate that costs will now start to increase significantly in this program, contributing to higher overall R&D expenses in the second half of the year.

On the back of the Novartis deal, we announced that we planned to add new proprietary programs to the two currently ongoing. This is indeed the case, and we expect to have at least a further two additional program ongoing by year end. We will certainly keep you updated as the proprietary pipeline continues to develop.

I want to turn now to our research antibody segment AbD. Clearly, foreign exchange effects are having a negative impact on sales, in a market that is already challenging due to cutbacks in research budgets. Importantly however, we are on track to achieve our EBIT target for the year in spite of the fact that we are unlikely, due to the causes I have just mentioned, to meet our revenue goal.

Notwithstanding the challenges in this segment, two developments relating to the HuCAL technology are worth highlighting.

The first is another synergy with the therapeutics segment and relates to the expansion of an ongoing bio-defense project with the USAMRIID, a department of the US Army. One of the targets worked on by our AbD Serotec unit on behalf of the army was staphylococcal enterotoxin B. The Army's subcontractor, Integrated Biotherapeutics, has now received a five-year, NIH research grant to develop this project further.

Under the terms of the agreement, IBT will use a selection of HuCAL-based antibodies originally generated by AbD Serotec against staphylococcal enterotoxin B in vitro and in vivo experiments to identify neutralizing candidates. We expect additional services to be performed by AbD Serotec and therefore additional revenue to be generated as this project continues.

The next highlight is the first appearance of a HuCAL antibody in a diagnostic kit. This came about through our relationship with Phadia, for whom we have used HuCAL to generate antibodies as standards to support their kit platform. AbD offers a solution sought after by the diagnostics industry, namely a highly reproducible source of positive controls for autoimmune testing. This is one of a number of diagnostic relationships we are building that have the potential to lead to lucrative royalty streams on timescales considerably shorter than those in the therapeutic field.

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.

Thank you, Simon. Let's start with revenues. In the first six months of 2008, Group revenues increased by 16% to EUR 33.3 million, compared to EUR 28.6 million in the same period of last year. The increase is mainly due to higher levels of licensing fees. Using constant foreign exchange rates at the average rate for 2007, Group revenues would have amounted to EUR 34.1 million.

Revenues of the therapeutic segment increased by 30% to EUR 24.3 million, including success-based payments in the amount of EUR 2.7 million. In the first half of the previous year, milestone payments amounted to EUR 4.0 million.

Revenues of the AbD segment decreased in the first half by 9% or EUR 900,000 to EUR 9.0 million. The main reasons for the decline in sales included adverse foreign exchange effects and weaker than expected markets for research antibodies.

85% of segment revenues were generated with catalog and industrial customers, while custom manufacture antibodies contributed 15% or EUR 1.3 million.

OEM sales decreased in comparison to the first six months of 2007 by 27%, catalog and distributor sales decreased by 9%, while the customer monoclonal antibody segment increased its sales by 10%.

Assuming constant foreign exchange rates at the average rate for 2007, revenue in the AbD segment would have amounted to EUR 9.8 million.

For the first half of 2008, total operating expenses, which include stock-based compensation, increased by approximately by 1% to EUR 25.3 million. The change in operating expenses of EUR 0.2 million was mainly impacted by higher research and development expenses. Stock-based compensation, which is included within operating expenses, amounted to EUR 600,000 in the first six months of 2008, compared to EUR 700,000 in the same period of the previous year.

Cost of goods sold is composed of the AbD segment's cost of goods sold. COGS decreased in the first six months of 2008 from EUR 4.2 million on to EUR 3.5 million, mainly a result of lower sales levels in the segment, and as well, acquired inventories which are now fully depreciated.

Expenses for R&D increased by EUR 1.0 million to EUR 11.5 million. This was mainly due to higher personnel costs in the Therapeutic Antibodies segments mainly from increases in proprietary drug development and partnered activities as well as increased costs for intangibles in connection with the patent portfolio in-licensed from Dyax in 2007.

In the first six months of 2008, expense for proprietary product and technology development amounted to EUR 2.3 million, compared to EUR 2.6 million in the first half of 2007.

SG&A expenses slightly decreased by EUR 300,000 to EUR 10.2 million. This decrease mainly resulted from lower costs for marketing and stock-based compensation in the AbD segment.

The non-operating income for the first six months of 2008 amounted to EUR 1.1 million, including interest income from gains on marketable securities and from foreign exchange derivatives.

For the first half of 2008, income tax expenses amounted to EUR 2.8 million. This amount includes current tax expenses of EUR 1.1 million and deferred tax expenses of EUR 1.8 million from the release of deferred tax assets capitalized in 2007.

Group operating profit amounted to EUR 8.0 million in the first six months of 2008 compared to an operating profit of EUR 3.5 million for the same period of 2007.

The Therapeutic Antibodies segment accounted for an operating profit of EUR 12.0 million, compared to EUR 8.1 million in the first half of 2007. The AbD segment achieved a segment profit of EUR 200,000, compared to a segment loss of EUR 700,000 in the same period of last year.

In the first six months of 2008, a net income of EUR 6.3 million was achieved, compared to a net income of EUR 2.0 million in the same period of the previous year.

The diluted net profit per share for the six months ended June 30, 2008 amounted to EUR 0.85 compared to a net profit per share of EUR 0.29 in the same period of the previous year.

On June 30, 2008, Morphosys liquid funds comprised EUR 126 million compared to EUR 107 million at December 31, 2007. Cash inflow from operations in the first six months of 2008 amounted to EUR 18.0 million, compared to EUR 4.2 million in that same period of 2007.

Before I move on to the financial outlook, I would like to give you an update regarding our share split. As part of our last shareholder assembly agenda, the shareholders approved a three-for-one split, but due to a pending complaint, the execution is currently on hold. An oral hearing will take place at the court here in Munich on the 4th of September, 2008. In the meantime, all other proposals were registered at the commercial register.

As is typical during these conference calls, we would like to take the opportunity to update you, regarding our financial guidance. I would like to use the opportunity to confirm our previous full-year guidance for the Group. We continue to believe we are on track to achieve revenue targets of between EUR 73 million and EUR 77 million on a Group basis, and an operating profit between EUR 9 million and EUR 11 million for the full year.

One of the reasons for high levels of profit so far is the relatively low R&D spend, compared to our full-year guidance. We expect this R&D spend to pick up in the second half as our proprietary product plans further develop, as outlined today.

Revenues for both the Therapeutic segment and the AbD segment are expected to rise in the second half of the year. We anticipate this will be driven on the Therapeutic side by increasing partnered milestones; and on the AbD side by higher sales expectations on the OEM and custom side of the business.

For the AbD segment, we expect now revenues now closer approximately EUR 20 million, mainly due to the negative currency effects and as well due to weaker growth than planned. However, we remain comfortable to achieve an operating margin of somewhere between 5% to 10% of sales.

That concludes our financial analysis for the first half of 2008. We'd now like to open the call to your questions.

Thank you. (OPERATOR INSTRUCTIONS). We will now take our first question coming from Cornelia Thomas from West LB. Please go ahead.

Good morning and thank you very much for taking my question. Just a quick question; could you give us an idea of whereabouts you stand with GPC regarding the antibody they still have from you-- what that will be like going forward?

Sure, Cornelia; I'm happy to answer that. As you may recall, in that agreement with GPC, as in fact in all of our agreements, we have so called diligence language which obliges the partner to keep the program going and not simply to stop it or put it on the shelf. That being the case, since GPC has communicated their intention to stop the program earlier this year, we are in communication with them with a view to finding a means to keep the program going. Obviously, it's in no one's interest for it to simply stop.

And based on the fact that they published data which showed that the antibody is certainly safe, they see no toxicity related-events at all; and indeed saw some hints of efficacy, we feel that it merits being continued and so we're in contact with GPC to find a means by which that can carry on. Probably, most likely, it would be in the hands of a third party, that we would look to secure to keep the program going.

Okay. Thank you very much.

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

Good morning, gentlemen; just two quick questions. The first one; you mentioned that you planned to acquire-- well, add at least two new programs in your proprietary pipeline. Could you give us an idea on what you're looking for exactly? Will that be co-development or in-licensing? And in the case of in-licensing, what kind of molecule are you looking for and what kind of indications and stage-- if you could give us a hint there, please?

Sure.

And I'll ask the second question after that.

Okay, that's fine. So in general, we see three sources for new proprietary programs. The first is targets where we started a novo HuCAL program against a target that we would select and identify ourselves. The second is through co-developments, and as you know, we have options with Novartis to elect to co-develop certain HuCAL programs with them. But we're also actually in discussion with one or two other companies about co-development and the Novartis contract permits us to do that. And thirdly, we see the opportunity to in-license programs, which by definition would be non-HuCAL programs.

And I can't tell you now precisely what the two new programs we would start this year would be. But it would be out of those-- those two programs would come from one of those three sources.

In terms of the indication, currently we're active in information and oncology with our MOR103 and MOR202 programs. And most likely any new programs we would add would also be within those two broad indications.

Okay. Can you say something in terms of stage-- will it be rather early stage or-?

Well, if we started a program against a target that is by definition an early-stage program, we would generate a HuCAL antibody de novo. A co-development with Novartis, for example, would have already gone through antibody generation and would therefore be further down the track--[for press], one to two years down the track.

In-licensing could of course be anywhere. And in general, our interest is to try and advance our pipeline as quickly as we possibly can and we see potentially in-licensing as a means of getting our hands on more advanced compounds, obviously than we could if we start programs de novo here. So we see in-licensing as certainly a very interesting opportunity and I think companies see us as an attractive partner; A, given our understanding of the antibody area and B, given our financial strength.

And there are not too many biotech companies out there right now that have the kind of financial muscle that we could bring to bear. And we're seeing good response from people that we're talking to about potential collaborations where we are a co-development partner.

Okay. So we're definitely talking about an antibody -- that was my question--

Our preference is definitely for an antibody. We may not rule out going beyond antibodies into-- let's call it the recombinant protein field in general. But our preference is certainly for an antibody.

Alright, great. Thank you. The next question goes to Dave. The AbD segment you mentioned that you see a lower-- or some weakness due to exchange rates but also a bit weak in a weakening market. Where does the lower sales come from- is it the question of price or volume in your segment?

I think that the chief weakness in AbD sales, aside from the FX effects which you just mentioned Christian, is coming from the OEM side of the business. The OEM side is the bulk side of our business in AbD and that tends to be somewhat volatile. Hence, we still think that we can catch up during the year, albeit in the first half of this year the sales were a bit light on the OEM side, but again we feel that we can catch that up because these OEM bulk sales are not made pro rata per month, but they're simply made when they're made, which allows us then to catch up in relatively short order.

I'd say that's probably where the main weakness was, which we saw in the first half of the year.

Okay. But was it more volume or more price?

I would say that it's probably more volume because the OEM business is made up of a number of different customers and I think simply the amounts of customers that we had on the OEM side was slightly beneath where we expected it to be in the first half. With that being said, as I said in the second half, I think we can catch that up.

Okay. Great, thanks a lot.

We will now take our next question coming from Thomas Schiessle from Equities. Please go ahead.

Good morning gentlemen, and thank you for taking my question. Indeed, putting the finger on the AbD business once again, I would like to have some additional comments on the OEM business. Dave, you mentioned that it's volatile, indeed, because it's a bulk business. But what makes you so confident to be-- of getting more orders in the second half? Is it the Sigma-Aldrich or will there be other reasons to be confident?

I think our confidence arises out of a couple of reasons. Number one, we've seen the deal flow, which is ahead of us. And I think the deal flow which we see lends us to believe that the amount of deals that we should be able to sign, what we're looking at now, is relatively high.

The second reason is one of the big customers we have on the OEM side of our business, is where we supply an antibody for a flu diagnostic. And as we head into the fall and the beginning of the winter, obviously we expect sales to pick up for that customer which is significant to the entire OEM business.

Then up to now you haven't seen any positive or negative impact out of the Sigma-Aldrich collaboration?

I would say at this point that we haven't seen a huge ramp up at this point, but again, we'll have to see how that collaboration unfolds over the coming months.

Are you heading for more diagnostic business in the AbD? Is this a new strategic move from Morphosys management?

Thomas, maybe I can handle that one. That's certainly picking up, interestingly enough. We published this Phadia press release just the other day and that's the first of we hope a number of products that will emerge from the HuCAL technology in the diagnostic space. We currently have over 20 customers in that space and certainly in excess of 100 projects going on at the moment, that are really diagnostic-focused. And that doesn't just mean-- we use diagnostics here in a very broad sense, which may be specific healthcare-related diagnostic products such as the flu one that Dave mentioned; but also we talk about research kits which we use for the measurement or detection of sets, for example, of markers or certain receptor types. We refer to those as diagnostics as well, in the broader sense.

And this certainly seems to be a segment of the business that's picking up. And maybe just one other point to that, we see it as attractive because the financial terms of those deals are not just a fee for generating the antibody, but we also then participate in sales either through royalties or through a de facto royalty via product supply.

But because it will be a constant revenue stream out of those contracts, because the diagnostics business is constantly demanding for new reagents?

Yes. And in many cases, such as this Phadia one, Phadia is selling on to third parties and that's an ongoing business of course. And we participate in that business through product supply, which is essentially equivalent to a royalty.

So this is a business which we see picking up, which is one where HuCAL is particularly well-suited because of the ability to generate antibodies with very precise specifications; for example, it can distinguish one anolyte from a closely relate anolyte; or in this Phadia example, where we can generate very precisely reproducible antibodies; and so it's particularly well-suited to that segment, and we're encouraged to see that segment growing.

But in the current year, it won't be of material impact to the P&L- maybe next year?

It's included in our assumptions this year. But I think we would expect to see it increase in its contribution to overall revenues as we go forward.

Thank you. (Inaudible).

(OPERATOR INSTRUCTIONS). We will now take our next question coming from Daniel Wendorff from Commerzbank. Please go ahead.

Good morning, gentlemen. One question regarding your proprietary product pipeline and the expense you guided for, for the full year; so you were looking for EUR 13 million in all on the expense and you just had the EUR 2 million in the first half. Is the delta simply related to MOR103 and MOR202 and does the increase already include that you might be able to bring one antibody de novo forward or even in-license as far as antibody? So I'm just trying to get a feeling for how likely it is that you will really spend the EUR 13 million.

(Inaudible) I'll take that one quickly. You are correct that the spend in the second half of the year in encompasses not only the programs MOR103 and MOR202, but also the new project starts, which Simon eluded to a bit earlier in the call. This could include, for example co-development projects, the start of de novo projects, and as well the possibility of in-licensing new projects. So it includes all of those at this point.

Okay, so the EUR 13 million would be basically the highest potential spend you would have for the full year?

I would agree with that.

Yes, okay; thank you.

(OPERATOR INSTRUCTIONS). We will now take our next question coming from Martin Possienke from Equinet. Please go ahead.

Thank you and good morning, everyone. I apologize if I ask something which has already been asked. I missed part of the call. But just briefly on your guidance; while EBIT guidance looks more than safe actually, revenue guidance is a little bit more stretched. Maybe that's too hard a word. Some EUR 40 million are missing-- should we expect a smooth ramp up or is it more back-end loaded? Maybe you can give us a feel for that.

And then secondly, on the Alzheimer's antibody, to my understanding in events Phase II data, there is no efficacy in (inaudible) like the rest of (inaudible) events. Is this an issue for you as well, and if you can speak about it; how does Roche protocol look like today-- do they measure or do they check AOE4; if you can speak a little bit about that.

Sure, Martin. Let me start with the Alzheimer's disease question and then Dave will pick up on the revenue guidance question.

The preliminary Wyeth data that has been released indeed saw or observed that there was actually a clinically significant effect in AOE4-negative patients. So that when they conducted their trial, as far as we understand AOE4, which is normally a risk factor for Alzheimer's disease, they segmented the patient group into AOE4-positive and negative. And they saw a significant benefit in the subset of patients that were AOE4-negative. I haven't seen any explanation for how that may arise and I think at this stage, trying to interpret that data is really speculation.

As I said, by chance, they are publishing the full data this afternoon, actually in Chicago-- so late tonight, our time. And I think trying to interpret those data without seeing the full results would just be speculation at this stage.

In terms of Roche, Roche has not released the full details of their study protocol, so we can't comment on the relevance of that preliminary Wyeth data for the Roche program.

But is the process pretty similar- against speculation, one could speculate that it might be an issue for Roche or for your antibody as well or is this too farfetched?

Well, that would be speculation. There are some differences in the programs as well, not least; one that ours is for a human antibody and theirs is a humanized antibody. Secondly, that we have a different epitope specificity; for example, our antibody binds the end term and a middle section of the target. And what we also know, which is important, is that our antibody does not bind to amyloid precursor protein, which is the molecule on the surface of neurons that leads to formation of the toxic peptide. We don't know what the case is for the Wyeth and Elan antibody, other than it binds to the end term and it's enabled to disrupt plaque.

So there are a few differences in the programs and I think trying to speculate as to what implications their data may have for the Roche study I think is just really that; it's just speculation at this stage. Let's wait for the full release of the Wyeth and Elan data and then possibly we may be able to say a little bit more. But as I say, Roche has not released details of their protocol or the clinical trial protocol. And I think in any case, therefore, it would be very hard to interpret whatever Wyeth and Elan publish for a potential impact on the Roche study.

Okay, just maybe a follow up on that one; regarding timing, we can still speculate about the second half of the year?

We've always said that that was our estimate of when Roche may complete the study. We have no official notification from Roche about when something may be announced. Obviously we hope that as soon as possible, data will be released. But again, we have no control over that. That's Roche's decision and that was at best always our estimate of when data may become available.

Okay, perfect; thanks a lot then.

And then maybe just briefly Martin, to answer your question regarding revenues. If you take the first half revenues of EUR 33 million and extrapolate for the full year, you would come to EUR 66 million. In the first half of the year, we achieved EUR 2.5 million approximately worth of milestones. We've given guidance that we would achieve EUR 10 million worth of milestones which means in the second half of the year we expect roughly EUR 7.5 million worth of milestones, according to our guidance. So if you add that EUR 7.5 million to the EUR 66 million which I referred to earlier, it puts you already within the range of our guidance.

But I think the answer you're looking for, the delta that you're looking for, is in the form of milestones in the second half of the year.

And it's rather smooth, or is it back-end loaded from today's point of view?

Well, milestones are sort of lumpy, by their nature. They tend to fall when they fall. So it would be kind of difficult for me to say that they all end in one month because we probably don't have the accuracy of determining in any case, within a 30-day period whether it lands in one month or another.

Okay, perfect. Thanks a lot.

Thank you. We have now a follow-up question coming from Thomas Schiessle from Equities. Please go ahead.

Thanks. It's exactly the same question of Martin Possienke concerning the therapeutic antibody revenue stream going forward. My point is if the ramp up of the Novartis-derived activities done or is it-- are we still in the ramp up phase concerning the revenue stream coming out of the Novartis collaboration?

Thomas, the ramp relates mainly to the buildup of the team that is working here on their behalf and which is funded by them. And the ramp is actually more like a set of steps in fact that occurs essentially at the beginning of each year, over the first three years. So within a year, the size of the team is not changing. But at the start of each year, the size of the team essentially jumps. So the word ramp is perhaps inappropriate here, a set of steps is perhaps a more accurate analogy.

Could you communicate how much revenue you will generate out of the Novartis collaboration this year?

We didn't disclose that and Novartis discourages from having us disclose that.

Okay, fair enough. Thanks so far, gentlemen.

Thank you. As we have no further questions, I would like to turn the call back over to Mr. Moroney for any additional closing remarks. Go ahead.

Thank you. That concludes the call. Before ending, I'd like to remind you of the main messages.

First, looking at the partnered pipeline, all partners who had options to extend their deals have elected to do so. This speaks to our performance as a partner and also to the strength of the technology, and also underscores the fact that the Novartis relationship is not exclusive. Second, our proprietary programs are on track, and will be supplemented with new programs before year end. And finally, while currency effects are providing a challenge for our AbD unit, new relationships continue to provide new growth opportunities, and we are on track to record our first full-year of profit here.

Overall, the financial results illustrate a robust business that is generating an impressive cash-flow, which we expect to continue for the foreseeable future, enabling us to drive further growth. The business is on track to achieve the objectives we have set for the year.

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

Thank you. This will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect your lines.