MorphoSys AG (MOR) 2008 Q4 法說會逐字稿

Good morning and good afternoon. I am Evie, the operator for this conference. Welcome to the MorphoSys presentation of year end results 2008. (Operator Instructions). At this time I would like to turn the conference over to Dr. Claudia Gutjahr-Loeser. Please go ahead, madam

(technical difficulty) 2008, Dave will then review the financial results of 2008 and give an outlook for 2009. That followed, Arndt will give you an update on our proprietary development programs. Before we start with the Q&A session, Simon will give an outlook for 2009 and beyond.

At the end of our presentation we will take questions from the conference audience and for those participants listening in by the conference call who are just waiting on the phone. For the participants of the conference call you can view the slides on our corporate website, so everything is there.

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

So, with that, I would like to hand over to Simon for his presentation.

Thank you Claudia. And also from me and my colleagues here, a very warm welcome to all of you, both here in Frankfurt and to the people on the call, to our year end 2008 results conference.

MorphoSys is in excellent health and is ideally positioned for future growth. Before reviewing this year that's just ended, I'd like to start by commenting on some of the factors and decisions that have brought us to this very favorable position.

We have a great technology that is robust and proven as a source of exciting drug candidates. We have exploited this technology to enter a number of lucrative partnerships with pharmaceutical companies as a means of maximizing the number of products based on our technology which will come to the market.

This strategy has put us in a very strong financial position, with respect to both our balance sheet and our current and future cash flows. This strength now provides the basis for substantially increased investment in proprietary products and technology to drive further growth and value generation.

My review of 2008 will look at four areas. Developments on the corporate front, our partnered discovery business, proprietary drug development and, last but not least, our AbD research antibody segment.

Following on from Claudia, I'd like to welcome a new face to you, namely Dr. Arndt Schottelius, our newly appointed Chief Development Officer. Arndt joined us right at the end of last year from Genentech in South San Francisco. At Genentech, his focus was on the development of inflammatory and immunological antibody drugs. He directed a number of early development programs in immunology, tissue growth and repair, and, most recently, was involved in the late stage development of the antibodies Rituximab and Ocrelizumab.

Prior to joining Genentech, he was at Berlex Biosciences in California and Schering AG in Berlin. He has a strong pedigree in medicine and immunology, and at MorphoSys has assumed responsibility for all preclinical and clinical development. We're delighted to have him on board.

This is a particularly important appointment for us. And strengthening the Company's management was a significant corporate achievement for us in 2008. As you will hear more about later, we're absolutely committed to building the Company's value through our proprietary pipeline. Arndt shares this vision and he will play a major role in making that a reality.

The second point I'd like to highlight under the topic of corporate progress is our strong financial profile. This is particularly important in the current economic crisis. Many of you have commented on the excellent performance of our share price in 2008, when we out-performed not only our peer companies, but also all of the relevant indices. This should come as no surprise when the following factors are taken into account.

First, with over EUR130m of cash, we are extremely secure at a time when many companies in our industry face critical questions over their very survival. Second, an operating cash flow of EUR29m shows that the business is in very good shape, and is all but immune from the current downturn. Third, through contractually secured partnerships, we have well in excess of EUR400m of future revenue secured. Fourth, on top of the secure revenue, there's a very substantial potential upside in the form of milestones and royalties.

As you'll see later in the presentation, during 2008 a number of institutional investors, notably in the United States, recognized the distinct and almost unique position of MorphoSys, and took positions in the stock, significantly changing the overall profile of our shareholder base.

At the heart of our success is the partnered discovery business, which is built on alliances with a number of the world's leading pharmaceutical companies. Our alliance with Novartis is progressing extremely well and has further increased its very positive financial impact on the Company. The major expansion of our relationship with Novartis in December 2007 marked the end of our pursuit of this type of fee-for-service deal.

Nevertheless, during 2008, five of our partners exercised pre-existing options to extend their relationships with us, as indicated by the red dots on the chart here. This is of course the best possible evidence that they are happy with the technology and the collaboration. It also shows that we're not dependent on just one partner to fill our pipeline.

In concrete terms, these extensions have the potential to add at least 15 new drug programs to our pipeline. We continue to work closely with all of our partners, with the goal of maximizing the number of HuCAL-based compounds that will become medicines to treat patients.

A good indicator of the strength of our business and the future value potential of MorphoSys is the status of this partnered pipeline. During 2008 this grew by 10%, to a total of 55 programs. Of particular importance was the increase in the number of preclinical programs, as many of these will lead to clinical candidates in the months and years ahead. This number increased from 23 to 29 in 2008.

With regard to our risk profile, we continue to be well positioned, since these 55 programs are ongoing with multiple companies in over seven distinct indications. No two programs are the same.

Looking at the most advanced compounds, there are now three partnered programs in clinical trials. The first we'll cover here is the anti-amyloid-beta antibody for treating Alzheimer's disease that we made for Roche. This antibody now has an official name, which is Gantenerumab. The antibody is in phase I clinical trials. And Roche designed the study in such a way that it could potentially deliver hints of efficacy in addition to safety and tolerability.

The study is in mild-to-moderate Alzheimer's patients, and comprises single dose and ascending dose arms. We can now confirm that both arms of the trial have completed recruitment, and can also announce that the antibody shows in vivo behavior typical of a human antibody.

The second partnered therapeutic in the clinic is BHQ880, an anti-DKK1 antibody that inhibits the activity of osteoclasts, the cells that are responsible for bone resorption. In 2008, Novartis conducted a phase I study, and have now moved on to a phase I/II trial in multiple myeloma patients. While the initial goal is to see effects on osteolytic bone disease associated with myeloma, this program has potential in other bone-related disorders, including, for example, osteoporosis.

The third compound is being developed by Centocor against a target that is involved in both cancer and immunological indications. Centocor first conducted a phase I study in cancer patients, on the back of which they started a phase II trial in the immunological indication in November of last year. This thereby became the first HuCAL antibody to move into phase II clinical trials and the first to be developed in two indications in parallel, creating the potential for higher milestone payments and royalty returns from the one target.

We are of course eagerly awaiting the data that will come from each of these trials in patients, as they promise to provide the first direct evidence that HuCAL antibodies will be effective medicines. Please remember, however, that, while pressing our partners as much as we can, we have no control over communication surrounding these programs, and are dependent on them for public information on progress.

I'd like to turn now to our proprietary pipeline. Here also significant advances were made during 2008. As this chart shows, we have increased our activity, adding new discovery projects to the existing pipeline of MOR103 and MOR202. Our focus remains on cancer and inflammation and the new programs with Novartis and Galapagos illustrate that co-development will be a part of our strategy. Arndt will talk in more detail about MOR103, our antibody against GM-CSF, its potential and our plans for its development, but I want to mention briefly the progress we made with this program in 2008.

The phase I, healthy volunteer, started, as planned, in the spring. Recruitment went smoothly and having seen no safety issues in the first five dosing cohorts, we took the opportunity to add two additional cohorts at higher doses to increase our flexibility in designing subsequent clinical trials. We're currently analyzing the data from the phase I study, which we'll report in the second quarter of this year.

In November, we published some of the preclinical data we generated in this program. And very importantly in December a US patent was granted on an application from the University of Melbourne in Australia covering inhibitors of GM-CSF for the treatment of inflammatory diseases. We have an exclusive license on this US patent, which, when added to the intellectual property we have on the antibody itself, gives us a strong proprietary position around the entire program.

Regarding the other programs, MOR202, our antibody against CD38 for the treatment of multiple myeloma, is now in preclinical development. In 2008, we entered a manufacturing agreement with Crucell and DSM for production of clinical material.

We see co-development as an attractive way of adding to our proprietary pipeline, while accessing know-how and targets to which we would otherwise not have access. As a part of our strategic alliance with Novartis, we have a number of co-development options. The first of these was exercised in 2008 when we picked a target that had been identified by Novartis.

This program is funded by Novartis and therefore cost-neutral for us until such time as a formal development candidate is selected. Thereafter, we can elect to continue as a true co-development partner and, if so, elect to carry a share of the costs on a stepped scale up to 50%, in return for the same share of profits on a marketed drug.

In November of last year, we entered a co-development alliance with Galapagos. We are interested in securing access to novel targets against which therapeutic antibodies could be directed, and were very impressed by Galapagos' target discovery as well as its know-how in the areas of bone and joint disease. We have together picked three targets that will be the basis for the first collaborative programs, and we expect this alliance to provide the input for a number of the programs in our pipeline over the years ahead.

Turning to technology, at the end of last year we formally released our new PLATINUM version of the HuCAL library. PLATINUM is superior to its predecessor, GOLD, in several respects. First, it's a much larger collection, comprising 45b human antibodies in comparison to the 12b in GOLD. The library was designed using the most up-to-date database of human antibody gene sequences, which is much more complete than the version that we used more than 12 years ago when we designed GOLD.

The increased size and quality of the library were expected to lead to more successful antibody generation, and first experiments with PLATINUM have borne this out. For example, we get, on average, a 25-fold higher diversity of binders from PLATINUM than we do with GOLD, affinity constants are, on average, of four-fold higher, and production rates are, on average, three-fold higher.

We see diversity as a particularly important point. More and more evidence is emerging that therapeutic effects depend on precisely where an antibody binds to a target. Only by generating a range of antibodies that bind to distinct epitopes on a given target can we be sure that we have properly assessed the therapeutic potential of that target. And in this regard, we see increased diversity as perhaps the most important feature of the PLATINUM library. Overall, we expect the new library to enable us to generate better quality drug candidates, faster than was possible with GOLD.

It's appropriate to reflect on the enormous success of our GOLD technology so far. In summary, HuCAL GOLD is the basis of more than 50 ongoing therapeutic antibody programs, and well over 1,000 paid research projects. Most importantly, its contribution to our value is not over. We expect a significant number of GOLD-derived therapeutic antibodies will become marketed medicines. And, if so, the resulting milestone and royalty revenues will dwarf the revenues that the technology has brought us to date.

I would like to conclude the review of our Therapeutics segment with a look at how our total pipeline, comprising partnered and proprietary programs, has progressed. The total number of programs has grown at a compounded rate of 20% per annum over the last four years. Importantly, the maturity has also increased significantly. Whereas in 2005 33% of the programs were in preclinical development or beyond, today that number is 60%.

I'd like to turn now to the Research Products segment of our business. Here the picture in 2008 was a little more mixed than within the Therapeutics segment, for a number of reasons. On the positive side, the unit made the all-important transition to profitability. This was achieved despite some very strong adverse currency effects, as well as a write-down on former Biogenesis property in Poole that was brought about by the economic crisis in the UK.

Nevertheless, costs are well under control and without the effects just referred to, the unit would have achieved a considerably better result. We reached a significant milestone when Phadia introduced to the market the first diagnostic kit comprising a HuCAL antibody. This we hope to be the first of many. We're currently working with more than 20 diagnostics companies, generating HuCAL antibodies for specific diagnostic applications.

In our core catalog business, we introduced 5,000 new products into our catalog via an agreement with another supplier. We expect this expansion to benefit the business in the months and years ahead, but it was not sufficient to help us grow this sub-segment in 2008. In addition to the adverse currency effects I mentioned, an additional challenge was a weakening of the market for research antibodies.

Looking at our largest market, the United States, the biggest source of research funding is the National Institutes of Health, and their budget has been flat for the last three years. This has impacted directly on research programs and therefore the spending on reagents such as antibodies.

A recent and important development has been the appointment of Dieter Feger to head the unit. Dieter joins us from Abbott Diagnostics, where he headed global marketing for their biggest franchise, infectious diseases. Dieter has a very strong background in both sales and marketing. And his arrival at MorphoSys underscores our desire to sharpen the commercial focus, and also to increase our efforts on the diagnostics side of the business.

That concludes my review of 2008. Dave will now take you through the financial review.

Thank you, Simon. In opening, I'm very pleased to say that 2008 was a very positive year again for MorphoSys. And despite the economic turmoil in the global economy and the financial markets, we remained relatively unaffected by these events.

Let's start the financial review with revenues. Revenues of the MorphoSys Group for the full year 2008 increased by 16% to EUR71.6m, which was slightly below the lower end of our guidance of EUR73m to EUR76m. The reasons for that in just one minute.

Revenues from the Therapeutic Antibodies segment increased by 26% to EUR53.4m. This increase was mainly due to higher levels of funded research and licensing fees, as opposed to increasing milestones. The AbD segment contributed about a quarter of total Group revenues, with total sales of EUR18.2m. Sales decreased by 7% over the prior year and, as such, remained behind our most recent guidance of approximately EUR19m for the full year.

The main reason for the decline, I think you heard before from Simon, was related to currency exchange effects or, more specifically, the adverse effects of British pound and US dollar versus euro. Also affecting sales was a challenging overall market environment in the research antibody space. Assuming the same average foreign exchange rates of 2007, revenues in the AbD segment would have amounted to EUR19.7m.

Let's have a closer look at the revenues of the Therapeutic Antibodies segment. Partnered Funded Research grew by 7% to EUR16.7m, a change of EUR1.1m over the previous year. License fees nearly doubled in comparison to 2007, amounting to EUR26.8m in 2008. The main driver here was the Novartis collaboration, which we signed in 2007.

Compared to the previous year, success-based payments decreased by EUR2.2m to a total of EUR9.9m in 2008. Recall that success-based payments include milestones payments. And in the year's main milestone payments included phase I and phase II milestones from the Centocor agreement. Although in 2008 our success-based payments went down compared to the previous year's level, we believe the long-term trend of milestones payments is in fact upwards, not least due to the fact that we have a record number of preclinical candidates in our pipeline.

To take a look at the sales, mixed sales in the AbD segment showed a more mixed picture. Growth of the custom monoclonal subunit was 7%. Although this conforms to, or slightly outperforms overall market growth, some of the markets and distribution agreements that we have signed in the last couple of years lagged somewhat behind our expectations. That being said, we see continued demand in our offering, and interesting opportunities, especially in the diagnostics market. Last year you may recall that the first HuCAL antibody was marketed in a diagnostic kit.

In contrast to the custom monoclonal segment, the catalog unit revenues decreased by 4%. The adverse development of US dollar and British pound played a significant role here.

However, where we saw the strongest reduction, about 20%, is in our industrial business, or what we call OEM. Recall that in this sub-segment, we deliver antibodies in bulk to single customers. For example, we provide an antibody for a flu diagnostics kit. Therefore, one supplier can have a large impact on sales overall in this business, either upwards, as in previous years, or downwards, as was the case in 2008.

Let's move over to operating expenses. Total operating expenses increased by less than 1% to EUR55.2m. The big picture here is the increase in R&D expenses of approximately 24% was almost fully offset by lower SG&A expenses and lower cost of goods sold.

In 2008, COGS decreased by 10%. The decline in COGS is mainly a result of two factors. First and foremost, we had lower sales. Secondly, in 2008, inventories connected with the Serotec acquisition have now been fully depreciated and thereby affect COGs less.

SG&A expenses decreased by 17% to EUR20.5m. The main reason for the decrease was lower cost for external services or, more specifically, consulting costs in connection with our Novartis deal of November -- of December 2007. Marketing expenses arising from the AbD segment also decreased somewhat in comparison to the previous year.

Cost for R&D increased from EUR22.2m to EUR27.6m. This change resulted from higher personnel costs in the Therapeutic Antibodies segment, mainly associated with increases in proprietary drug development and partnered activities, as well as increased costs for intangibles. A little bit more detail about our proprietary programs you can see from our next slide.

Investment in proprietary product and technology development increased by 26% in 2008. As we guided in the third quarter of last year, this was due to our expanding the MOR103 phase I trial with two additional dosage groups. This decision led to a shift of activities which were originally planned for 2008 into 2009. Correspondingly, this had the effect of shifting those costs from 2008 into 2009. Going forward, our expenses, of course, will continue focus very much on proprietary drug development, as we see that much of the future value of MorphoSys is in the form of that activity.

Let's review the segment results. As stated in our press release this morning, the partnered business is doing very well and achieved a high operating margin of almost 47%. As we said earlier, Therapeutic Antibody revenues last year were mainly driven by higher levels of license fees and funded research. Operating expenses of the Therapeutic Antibodies segment remained nearly unchanged and amounted to EUR27.8m, including EUR7.7m investment in proprietary R&D. The resulting operating segment was a strong EUR25.6m.

Also on a positive note, the Research Antibodies segment turned the quarter -- turned the corner to profitability for its first full year, in 2008. Having said that, overall AbD Group sales declined by 7%, mainly the result of adverse foreign currency effects. Still, progress was made with our gross profit margins, which increased by 1% to 61%.

Also, despite the fact that the segment result was negatively impacted by a one-time, non-cash impairment charge of about EUR500,000 relating to a building that we own in the UK, it still achieved profitability of 2%. If one stripped out the effect of that one-time impairment charge, we actually would have met our guidance, the lower end of our guidance of approximately 5% operating margin.

Let's continue with non-operating items. Underneath our profit from operations of EUR16.4m, non-operating income amounted to EUR1.6m, and mainly decreased to last -- compared to last year as a result of lower gains from foreign exchange derivatives, and lower realized gains from marketable securities. That combined to result in a profit before taxes of EUR18m. For 2008, EBIT and EBITDA amounted to EUR16.5m and EUR21.9m respectively.

On profits, one has to pay taxes. MorphoSys reported tax expense in the amount of EUR4.8m for 2008. Of this amount, net deferred tax expenses amounted to EUR2.8m, and current tax expenses related to EUR2m of the total.

As we are on that topic, please note that the last of our deferred tax assets which had been built up in previous years, will very be possibly -- will be very possibly utilized fully during the year in 2009, so it could be that in years after 2009, expect that the current tax expenses will go up.

In summary, MorphoSys achieved a record net profit of EUR13.2m for the full year 2008. The resulting diluted net income per share for the full year 2008 amounted to EUR0.59 per share, compared to an EPS of EUR0.53 for the previous year. And, by the way, all those numbers reflect our three-for-one stock split, which we implemented at the end of 2008.

Let's move away from the P&L to the balance sheet. Current assets increased by approximately EUR27m, mainly as a result of cash generated from operations of EUR29m, an extremely strong result. That helped boost MorphoSys' cash position from approximately EUR106m to EUR137m at the end of 2008. The only other significant change in assets in 2008 related to the release of deferred tax assets, amounting to EUR3.2m, and the reclassification of real estate property in the UK, from investment property, to assets classified for sale.

As we have gotten quite a few questions about our cash investments since the financial crisis began, I'd like to use the opportunity to mention a quick word about our investment policy. We hold the majority of our cash and available-for-sale securities with two major German financial institutions. Our investment approach is on the conservative side, with the majority of our investments in highly rated, short-term money-market-like investments, as well as daily available money-market funds. In addition, one institution guarantees its investment with us up to a certain level.

Let's move to the next slide, liabilities. In 2008, current liabilities decreased by 27 -- to EUR27.4m. This change primarily arose from a decrease in accounts payable of EUR1.8m. The increase of total non-current liabilities to EUR13.9m was mainly impacted by an increase in non-current deferred revenues in the amount of EUR4.2m.

Let's move away from the financial statements and take a look, take a quick look at the shareholder structure. Looking at this slide, you can quickly recap how shareholder structure changed during the year. During 2008, about 318,000 new shares resulted from the exercise of stock options and convertible bonds. No capital increases were conducted in 2008.

In December 2008, a three-for-one stock split was implemented. All numbers given in the speech, the press release and the financial report fully reflect that measure. As a result, the total number of shares at the end of 2008 were roughly 22.5m shares.

Based on continued investor relations activity during 2008, we were pleased to be able to increase our international shareholder base. As you can see from the chart, strategic holders of the stock continue to comprise Novartis, with about 7%, AstraZeneca, with approximately 5%. Management and Supervisory Board ownership was about 2.5%. The remaining free float is about 88% of the total.

Geographically speaking, our largest institutional shareholder base is to be found in Germany, with about 15% of our total institutional holdings, followed by the US with 11%, the UK with 8% and Switzerland with 6%.

As my final slide prior to giving an outlook on guidance, I'd like to give a brief summary of headcount at MorphoSys. At the end of 2008, the MorphoSys Group employed 334 employees, compared to 295 at the end of the previous year. Of the 334 employees, 201 worked in the Therapeutic Antibodies segment and 133 in the AbD segment. As you can see, the big increase came from the beefing up of the therapeutics side of our business in relation to our expanded proprietary product development activities.

By the way, for those of you coming to visit us in Munich, I think it's worth noting that we have, during the course of the year, rented additional premises around the corner from us in Martinsried. Our current building, our current headquarters in Martinsried simply doesn't allow us to squeeze more employees into that building and we've been forced to occupy a second site in Martinsried to accommodate those new hires.

That concludes the review for 2008 and I'd like to close with the financial outlook for 2009. To start, as a more long-term goal, we strive to grow our top line somewhere between 10% and 20% per year. As it relates to our bottom line, we strive to remain profitable, albeit, as is the case this year, that does not necessarily mean an increase in profits will be seen every single year.

For 2009, we project total Group revenues of approximately EUR80m to EUR85m. Total Group operating profit is expected to come in at somewhere between EUR8m to EUR11m. Achieving exactly that level, of course, is very dependent on the timely execution of all product development activities which were planned for the year.

As was the case in 2008, product development activities are sometimes delayed, even with good reason, and that may cause developmental spend to be less than planned. That being said, based on our present plans, we expect total expenditures for proprietary product development to come in at somewhere between EUR18m to EUR20m.

For the Partnered Therapeutics activities, we anticipate approximately EUR10m worth of success-based payments. As it relates to the AbD business, we expect revenues of approximately EUR20m. We expect a profit level for the AbD unit to be at least as high as the level that we achieved in percentage terms in 2008.

That concludes my financial analysis for 2008 and the outlook for 2009. I'd now like to hand over to Arndt for his outlook on proprietary development activities for 2009.

Thank you, Dave. I'm delighted to speak here today and shed some more light on our plans for the expansion of our proprietary development activities. First, I would like to spend some thoughts on our vision for drug development.

Our ultimate goal is to develop innovative drugs to improve patients' lives. While highlighting the word 'innovative' in that respect, rest assured that the choice of any drug target and program we engage in will be based on a thorough analysis and rests on a sound validity of the respective target biology. To be successful as a drug developer in the long run, we are committed to building an excellent development organization, capable of producing valuable drug candidates and reproducing that success sustainably.

In the build-up of this team, we will rely on two factors. We will continue to build up expertise internally. I have found an excellent and highly committed development staff at MorphoSys. But we will also consolidate our current teams and make use of our attractiveness as an employer in Europe and abroad to hire top talent from other companies and countries.

You may have seen that we presented Dr. Ulrich Moebius as our new Head of Preclinical Development and Project Management just recently. Ulrich combines broad academic research experience in multiple disciplines and indications from his time at the DKFZ and the Dana-Farber Cancer Institute, with an extensive drug development expertise from his time at Medigene.

We are also looking to hire an equally experienced Head of Clinical Development and will update you on this position during the course of the year.

Why do we think that we are in a good position to make our vision a reality? First of all, with the HuCAL antibody libraries, including the latest version, HuCAL PLATINUM, we have a superior source of antibody drugs at hand. The technology has been widely accepted by the top 20 pharmaceutical companies, and allowed us to secure a long-term commitment by Novartis under very lucrative terms for our Company. The partnership business model has provided MorphoSys with a strong financial backing, both in terms of quantity and in terms of visibility for the future cash flows to build a substantial proprietary pipeline.

With MorphoSys in a strong position and committed to expand its proprietary activities, what is the situation in terms of demand for new drugs? In our opinion, the need for new innovative drugs is still substantial. Demand is likely to increase, not least due to the substantial need for big pharma to replenish their pipelines and compensate the revenue losses from once blockbusters coming off patent. Our goal is thus to deliver innovative drugs in the areas of inflammation, autoimmune diseases and oncology.

How do we approach product development at MorphoSys? It will be a focused R&D-driven process, with research and development teams working together in a strongly interwoven fashion. I am personally convinced that sharing ideas, providing feedback and even constructive criticism throughout the whole drug development process between the R&D departments is crucial, and will result in a higher probability of success of our programs. Marlies Sproll, our CSO, as well as Simon and Dave and I share that strong conviction that our R&D organization should be set up with that ideal in mind.

MorphoSys' approach to expanding its proprietary pipeline is currently based on four building blocks. The first component is the existing MOR103 and MOR202, both with potential to work as a drug in several indications. It is our current plan to develop both antibodies in several indications until proof-of-concept. Basically, we foresee to out-license the compounds on the basis of convincing data, showing efficacy in patients. In this audience I do not need to mention the favorable terms we could achieve at this stage of development.

The second pillar of our strategy is the co-development activities we can pursue together with Novartis. You may remember that this was a key component of our deal with Novartis. We see these options as a great opportunity to develop new antibody drugs side by side with one of the leading companies in the world.

On a sliding scale up to 50 we can chose our level of commitment for each individual program. This feature adds another layer of flexibility in terms of cost planning. In addition, we can decide to co-detail, which means co-marketing in certain European countries.

In order to build a sustainable pipeline, we intend to start several new proprietary development activities each year. In 2009, we intend to add a total number of up to five proprietary programs to our pipeline. We will focus on oncology, inflammation and other disease areas with a high unmet medical need. In these areas we will continue to build external -- internal expertise as we see these markets as still under-served, giving us the opportunity to provide innovative new treatment approaches, with better safety profiles.

We have established a small team of target scouts internally, which focuses on the identification of attractive targets with therapeutic value. Before we choose a target for a proprietary development program, we extensively analyze the concept of the approach and the target biology, unbiased and without any reservation. Only targets which pass this test will be chosen as the basis for de novo starts.

These targets may be in-licensed from third parties or public targets we have -- which we have identified, and where we think that the competitive landscape is still manageable, for example, because a target has been overlooked, as we think was the case for GM-CSF or MOR103. Another source of new programs will be co-development opportunities, such as the Galapagos collaboration. Our ultimate goal is to establish a continuous flow of new INDs.

Last but not least we are interested in in-licensing opportunities or in the acquisition of interesting antibody programs. This would help to advance our pipeline faster. And we see that the current market situation may provide us with interesting opportunities.

Let's take a closer look at the first of these four building blocks, namely the two existing programs, MOR103 and 202. When I first looked at the MOR103 program, I was intrigued by the target biology, sound scientific rationale for GM-CSF as a very promising approach to tackle inflammation and autoimmune disorders.

GM-CSF is a well studied molecule. It is a cytokine which was originally named for its ability to generate granulocyte and macrophage colonies from precursor cells in the bone marrow. More recently, GM-CSF has been shown to control the behavior of various cell types, including macrophages and neutrophils, particularly during inflammatory reactions.

The right side of the slide illustrates how blockade of GM-CSF, signaling through its receptor, can have a positive effect on a number of mechanisms that contribute to inflammation and tissue damage. Amongst the blood cells recruited to the site of inflammation are neutrophils and macrophages, which GM-CSF stimulates in a number of ways.

Thus GM-CSF acts as an inflammatory mediator, leading to an increased production of pro-inflammatory cytokines such as TNF-alpha and IL-6, chemokines such as IL-8, which trigger migration of further cells to the site of inflammation, and proteases and oxygen species which ultimately lead to tissue damage and joint destruction in rheumatoid arthritis.

By neutralizing GM-CSF, the antibody MOR103 is intended to reduce undesired proliferation and activation of inflammatory neutrophils and macrophages, and thereby blocking these damaging inflammatory events. Blocking the effects of GM-CSF may also reduce T and B-cell responses involved in the pathogenesis of many inflammatory diseases, such as rheumatoid arthritis and multiple sclerosis.

There's specific clinical and preclinical evidence that points towards GM-CSF playing a pivotal role in inflammation. First is the observation that administration of therapeutic GM-CSF was found to worsen arthritic symptoms in RA patients and in animal models. GM-CSF depletion, in contrast, using a monoclonal antibody or in a knock-out condition, demonstrated beneficial effects in animal models in inflammatory disease.

Taken together, these data support the development of GM-CSF monoclonal antibody therapy in different inflammatory diseases, such as rheumatoid arthritis, multiple sclerosis or COPD and asthma.

We've generated promising first data for the MOR103 program in the course of 2008. And I will come to that in a minute. But first I would like to highlight some of the solid experimental evidence available in the research community that validates the GM-CSF approach in general.

First, there are two research results that underline our strategy in the first indication RA. Administration of a GM-CSF-neutralizing antibody can reduce inflammation and cartilage destruction in a collagen-induced arthritis mouse model. Similar results were shown with the streptococcal cell wall-induced arthritis model, basically the same model we used for the data presented on the next slide.

Looking beyond RA, I would like to highlight the following scientific findings which point to the potential for a GM-CSF approach in other indications. As it relates to asthma and COPD, treatment with a GM-CSF-neutralizing antibody in the ovalbumin asthma model significantly reduced increased airway hyper-responsiveness, a characteristic feature of asthma, and also inhibited airway inflammation. Second, macrophage infiltration of the lung, TNF-alpha and matrix protein MMP9 release was reduced by an anti-GM-CSF antibody in the LPS-induced lung inflammation models.

Two findings from multiple sclerosis research I would like to mention briefly are that GM-CSF-deficient mice are resistant to developing experimental autoimmune encephalomyelitis, or EAE for short. Additionally, anti-GM-CSF antibody treated mice recovered from EAE after administration post and pre-disease onset.

Taken together, these observations strongly support the hypothesis that targeting GM-CSF could be an effective therapy for RA. Further data indicate that GM-CSF is also a potential target to treat other inflammatory diseases, including multiple sclerosis, asthma and chronic obstructive pulmonary disease.

The preclinical data we have generated with our HuCAL-based antibody MOR103 blends quite nicely to that overall package of preclinical proof of concept which I have just summarized. The preclinical data we have presented for the streptococcal cell wall-induced arthritis rat model in 2008 showed that MOR103 inhibits the signs and symptoms of an established experimental model in RA in vivo, in a dose-dependent manner.

The way this model works is that the antibody is administered once in a range of concentrations at 10, 20 and 50 mg/kg, two hours before the RA-like symptoms are induced via intra-articular administration of bacterial cell wall fragments to male Wistar rats in the right knee. Knee joint swelling is then assessed by uptake of a radioactive isotope into the affected joint, which serves as the readout parameter.

A significant dose-dependent reduction of knee joint swelling was observed on days 1 and 2. The experimental model of a RA is a very acute model, and thus deliberately only two days are monitored. This was the most compelling set of in vivo data we presented from our preclinical analysis.

On a side note, I would like to address a question concerning the performance of 103 against the positive control Dexamethasone. Looking at that data, one has to bear in mind that the antibody 103 has a much lower affinity for the rat homologue than the human GM-CSF. Thus the therapeutic effect we see in that rat model is by far not comparable to what we could expect in a human patient. In contrast, for Dexamethasone as a synthetic glucocorticoid, the species is more or less irrelevant.

In order to wrap up the rest of the preclinical in vivo data not shown here, I would like to highlight that joint histopathology revealed a reduced influx of inflammatory cells into the affected synovium and consistently snyovial fluid cytokline levels, namely IL6 and IL1 Beta were lowered as well. In terms of drug safety, no relevant toxicity effects were observed in a standard repeat dose rhesus monkey study.

In addition to the preclinical in vivo data I have just mentioned, some of our preclinical in vitro data on MOR103 antibody characteristics were published in the Journal Molecular Immunology in November 2008. Of particular note is the extraordinarily high affinity and neutralizing potency of the antibody for its target, human GM-CSF. Thus, we believe -- this, we believe, may turn out to be a major advantage for a resulting drug, both in terms of efficacy as well as dosage, both of which are important factors in a drug for chronic disease.

What will happen in 2009 with regard to the development of MOR103 and MOR202? The phase 1 clinical trial for MOR103 in healthy volunteers has been completed and is currently in the analysis stage. The final data will be presented in the second quarter of 2009. The start of a phase 1b/2a study in rheumatoid arthritis patients is planned for the second half of 2009.

Additional preclinical investigations of MOR103 in animal models for other inflammatory diseases are currently being conducted. In 2009, it is our goal to conclude the decision making process on a second indication for MOR103, based on efficacy in these disease models.

With regard to the cancer program MOR202, formal preclinical development is ongoing. In 2009, toxicology studies will be conducted to support regulatory filing for a phase 1/2a clinical trial. Additional models of multiple myeloma have been identified to further evaluate MOR202 for this disease, and we will add some additional data to our package during the course of the year. Furthermore, we will start preclinical efficacy studies in a second indication.

Cell line preparation and production is ongoing, the resulting antibody materials will be used for animal safety testing in preparation for phase 1/2a clinical testing, which is expected to start in 2010. Manufacturing of antibody material for both MOR103 and MOR202 for clinical studies and non-clinical safety studies, respectively, will continue during the course of 2009.

One of the main reasons for my decision to join MorphoSys was the prospect of becoming a member of a strong management team and the opportunity to build an innovative and sustainable antibody development pipeline. We in the executive team share a strong commitment to further expand the proprietary development activities.

As I mentioned at the onset, we want to improve treatment options for patients to improve their quality of life. In addition to this vision, we have a clear goal to build shareholder value. MorphoSys was built thoroughly by its management team and with the same diligence we will build a proprietary pipeline, which will lead the Company to the next chapter of its development.

We will leverage the expertise gathered from the vast array of partnered drug discovery projects and exploit the long-standing experience of MorphoSys in the area of antibody development, based on a proven technology and world-class partners. In addition, a key focus for me over the coming months will be to hone the development strategy for each program individually and for the entire portfolio with our ultimate goal in mind to build a sustainable proprietary pipeline.

That concludes my part of the presentation, and I would now like to hand back to Simon for the operational outlook for 2009. Thank you very much for your attention.

Thanks Arndt. At the beginning of today's presentation, I talked about the factors responsible for MorphoSys's success to date. I'd like to focus now on the factors that will drive our growth in the months and years to come.

The Company's value will increasingly be linked to the products that will emerge from the application of our proprietary technology. HuCAL-based therapeutic and diagnostic products will be lucrative drivers of future revenue. Most importantly, the levels of revenue and profit that we're aiming for are well beyond those we are currently delivering. For us as management, the question is not so much how to deliver 10% to 20% top or bottom line growth in the next two to three years, it is rather how can we double or triple these numbers in the years beyond.

We are convinced that this can be achieved by focusing on, one, doing all we can to support the further expansion and maturation of our partnered pipeline. Two, advancing our existing proprietary pipeline, while adding new programs. And three, growing the AbD business, investing internally where necessary, particularly in the diagnostics field. I'll talk a little bit about each of these areas in turn.

First, partnered discovery, the Partnered Therapeutics business is the financial engine that funds our proprietary activities. We expect this segment of our business to continue its strong growth in 2009, and for it to be the main driver of the company's revenue increase.

This year, we expect the partnered pipeline to mature further as programs progress forwards in development. We expect the total number of programs to increase, driven by the commencement of up to 20 new programs by our current partners. We expect new antibodies to enter clinical trials, and our best current estimate is that there could be between two and four additional INDs from various partners during the course of this year.

In terms of the status of the partnerships themselves, one is up for renewal, namely that with Schering-Plough. That collaboration could run for a further two years if Schering-Plough chooses to exercise a pre-existing option to extend that falls in May of this year. At this stage, we have no knowledge of whether that option will be exercised or not. All other collaborations are scheduled to continue through 2009.

Turning to our proprietary development, as a major driver of our future value, this will receive increased attention during 2009. This chart shows you the status that we anticipate by year-end. The main focus is, of course, on MOR103. Looking beyond this year, we expect to have observed a phase 2 signal in the RA trial before the end of 2010, and therefore to be in a position to partner the program in 2011. Depending on the preclinical data we generate in other indications, such a partnership may provide us with the option to retain development rights beyond Rheumatoid Arthritis. We're taking a flexible view of the possibilities, and will make a final decision on how to proceed once data is in hand.

For MOR202, we expect to have completed manufacturing, and preclinical tox studies to enable submission of a clinical trial application in 2010. Beyond these two lead programs, the pipeline will be expanded via the addition of up to five new programs. For two of these, namely MOR203 and MOR205, the targets have been selected and the programs are underway.

I would like to mention here that in-licensing and/or acquisition may offer opportunities to build the pipeline more quickly. For this reason, we are running a project internally that is surveying all therapeutic antibodies in preclinical development or beyond. Predicting major in-licensing or acquisition transactions is almost impossible and therefore we give no guidance on what we may achieve here. But I want to highlight that we are actively working on such opportunities, and you should therefore not be surprised if we announce such a deal. To be clear, the objective would be to use our balance sheet and potentially also new shares to secure one or more therapeutic antibodies which would increase the value of our pipeline.

Overall, taking both partnered and proprietary development into account, the chart shows the historical and expected progression of the clinical pipeline. By year-end 2009, we could expect to see eight HuCAL antibodies in clinical development, up from four currently. Illustrating the growing maturity as well as breadth of the pipeline, at least three of these eight could be in phase 2 clinical trials, including or own program MOR103.

Reference was made earlier to the change in our investor base. We are seeing a strong demand in our stock from biotech-focused US investors. The reasons are clear. Biotech investors know that, being on the cusp of reporting efficacy data in humans in any one of a number of programs, our valuation could climb very quickly, and they don't want to miss out on the uplift.

Turning to our AbD Serotec, we're confident that the unit can and will do better. The HuCAL based custom segment is increasingly focused on diagnostics projects, where we see the opportunity to participate in product sales via royalties. The catalogue segment is very dependent on public and private budgets.

Noteworthy here is President Obama's commitment to increasing the US Government's investment in scientific research. The recently announced US stimulus package included over $20b in additional research spending, 40% of which is earmarked for National Institutes of Health research grants. This is an encouraging development that we expect to work through into our market.

In the OEM space, one of the tasks for the new management will be to broaden our customer base, so as not to be reliant on the relatively few orders we currently support with bulk material.

Overall for AbD, as you've heard, we project revenues to increase by a healthy 10%, reaching approximately EUR20m. Although we could use the increased revenue to deliver a higher profit margin, we would like to invest in strengthening our sales performance and systems internally, the result of which will be an operating profit margin for the unit similar to last year.

So putting all this together, here are our Company goals for 2009. On the corporate front, we expect revenues of EUR80m to EUR85m and an operating profit of EUR8m to EUR11m.

On the partnered discovery side of the business we foresee somewhere between two and four INDs from our partners, and up to 20 new program starts. For proprietary development we'll report phase 1 data for MOR103 in the second quarter and commence a phase 2 trial in RA patients in the second half of the year. In addition, we'll start up to five new programs in our key focus areas cancer and inflammation. For AbD again, revenues of EUR20m, up 10% over last year, and an operating margin of roughly 2%, about the same as last year.

Finally, I want to bring the presentation to an end by emphasizing that MorphoSys is extremely well-positioned to build value for its shareholders. The key points here are, first, our strong balance sheet makes us largely independent of the capital markets. In today's environment this is a rare advantage to have. Second, our free cash-flow is fully sufficient to fund all of our proprietary development. With revenues growing at 10% to 20% per annum for the next few years, we have the ability to build a strong pipeline of proprietary medicines.

Overall, we are convinced that MorphoSys has the substance to become one of the industry's leading biotech companies, with a rich pipeline of drugs and other products developed from our proprietary technology. We're on track to achieving this goal and look forward to keeping you informed of our progress.

That concludes the presentation. Thank you for your attention. I'd now like to hand back to Claudia, who will moderate the Q&A session.

Thank you Simon. Thank you very much for your attention. We would like to open the forum now for your questions. (Operator Instructions). But I think we'll start with questions here from the audience. Are there any questions? You need the microphone.

Hi, Cornelia Thomas from WestLB here. A number of questions. Simon you mentioned that R1450 or whatever its new name is now, behaved as an antibody is expected to behave. Could you specify a little bit? I'm just wondering what that means.

Then a few questions for Dave. Tax rate going into 2009, you said that the last credits would come through in 2009, could you give us a bit of guidance on that?

And also the guidance was, for either of you, for EUR20m for the AbD segment. I'm just wondering how realistic that is given that you still are likely to see adverse currency effects in 2009 and that even on constant currencies the unit didn't grow in terms of revenues in 2008.

Okay, thanks Cornelia, let me start. Regarding the Alzheimer antibody Gantenerumab, or R1450, there's not a lot we can say about this because Roche is very cautious about what they say in the public domain. So all we can say is that it has the behavior that you would expect of a human antibody in human patients.

And my personal assumption is that they're referring to pharmacokinetics for example that have had the half life that you would expect a human antibody in humans which is a couple of weeks, up to two weeks. But again, that's my interpretation of this very general statement that Roche has made to us about the behavior of the antibody. Put another way, it doesn't have any surprising short half life or any, they're not seeing apparently any surprising bad behavior.

Cornelia, to answer your financial questions. The first one on the tax rate, when one looks at the tax rate one needs to consider that there's two elements to the tax rate. One is the expense that we actually show on our books as tax expense. That, in fact, is different from what we actually pay as cash to the tax offices in the world. So I would characterize the tax rate as being composed of something called deferred taxes and current taxes.

So the total tax rate, which includes both, was this year approximately 30% and will continue to be approximately 30% going forward. And that results out of the blended rates of Germany, the UK and the US.

What I was referring to is as we go through -- or when we deplete our net loss operating carry-forwards that will effectively mean that the deferred portion of taxes goes down to essentially close to zero. And the current tax rate, which is the equivalent of what we pay as cash will go up. So the actual cash that we pay for taxes is what I was referring to. The overall tax rate expense per say will be basically unchanged.

As relates to the question about AbD segment goals, we actually have taken the opportunity in early January, we constructed our budgets back in October, to revisit the exchange rate effects. Two things I would say about that. Number one, I feel that the exchange rate that we have used for Pound and Dollar very much reflect what I see in the market as consensus rates for the full year. So I feel reasonably confident that we have an accurate rate.

The second thing I would say is that you have to keep in mind that the negative effect of having adverse currency effect on the top line is you have less top line. The slight positive is we also have expenses associated with those foreign exchange currencies to the same effect. So although sales may go down, our expenses go correspondingly down also.

But to answer your question directly now, do we feel confident that we can hit the AbD goals? I would say yes. We've gone back and revisited the budget on the back of the performance in 2008, we revised the foreign exchange effect, we've lowered it down, we think there's quite a bit of operating cushion and we'll be able to achieve that. We've had the new head of the unit that Simon talked about, Dieter Feger, look over those numbers, we feel confident that those numbers can be hit.

Can I just ask one more question, Simon? With regards to the, I know you don't really know about the partnered antibody programs and when data might come up from those. I was just wondering if they are even planning to publish phase 1 data or if they're just going to sort of move it quietly into phase 2. What's you feeling there?

We honestly don't know the answer to that. We, as I said, we try and push them to be able to talk about those programs at whatever level, but we're at their mercy we're in the hands of both companies as to whether they decide to say something or not.

And those decisions vary, frankly, and they're driven by things like driving recruitment for example. If the company feels they want to drive recruitment faster by increasing awareness around a program they may choose to say more about it. But those we've found are decisions that are taken over time over which we have no influence at all and which we can't predict. So it's very hard for us to say that unfortunately. We would love to be able to tell you as much as we could about these programs but we're very much in the hands of our partners.

Hanns Frohnmeyer, LBBW. A couple of questions from my side. So you expect continuous steady growth of revenues from 10% to 20% in the next couple of years. Could you elaborate a bit on the growth drivers, not in 2009 but generally where this growth is coming from?

Then on the 2009 guidance what I found is that your milestones expectations seem to be the same as in 2008, roughly EUR10m, despite the number of preclinical programs seems to be higher right now. What are the reasons for that? Could you give us more details on that?

And in additional your operating profits guidance of EUR8m to EUR11m seems to be pretty cautious. I would like to have more details maybe on that.

Maybe a last question on the clinical program. It looks that the MOR202 directly goes into phase 1/2. Is that correct? And if it is then what are the reasons for that?

And in addition could give us more details on the phase 2 trials with MOR103 on the study design? Thank you.

Perhaps I'll start with the answers to the financial questions. The one that I think didn't come entirely unexpectedly was the cautious statement about guidance. I think it's important for us to kind of differentiate between what we budget and what we expect to achieve and what actually ends up happening.

In my speech tried to address the point by saying that we budget activities in proprietary product development, for example, that we expect to happen during the year. Now if those activities don't happen, and that was the case in 2008 and they often may not happen for good reason and in the case of 2008 the reason why our proprietary product development expense didn't achieve what we expected it to be or didn't come out the way we expected it, was due the fact that we decided to build in more flexibility into our product development plans going forward for that product by adding new cohorts to our clinical 1 trial or our phase 1 trial.

So based on the current planning we feel that the budget is accurate. Now we have a new CDO here who has looked over the activities and I'm going to leave it to him when he answers certain parts of the next question to tell you that he believes that that plan is accurate and that we will fulfill those activities during the year.

So I think the bottom line is we are not building any kind of buffer or cushion into that. I think it serves nobody's purpose to do that and we give our best estimate of what the numbers will be. This year, and I believe last year, the activities were simply not done in accordance of what the plan was.

Okay, the other question related to financials was, what are the growth drivers of revenue for the next couple of years? Which I think is also associated with your milestones question because I think they're one and the same. Our expectations of milestones were somewhat beneath where we expected them to be, only slightly below.

That being said, what we could imagine to continue to be growth or top line revenues for the next couple of years would be, number one, additional milestones. So we still have a very large free clinical pipeline. We expect those milestones to increase in absolute terms and in percentage terms of our revenue. Number two, we have not yet achieved the full steam, so to speak, of the Novartis agreement. So there is still some additional revenues which we would expect emerging from that agreement before we reach some type of steady state with it. And last but not least, as we start to talk about medium term growth, so the next three to five years, they we're starting to talk actually very large amounts and very large upsides in the form or out-licensing phase 2 programs.

Arndt, do you want to talk about the MOR202 phase 1/2 and MOR103 design?

Well let me start with the 1/2a design multiple myeloma for oncology. Let me just preface it, the planning is in very early stages. We haven't got into very much detail, but it's not unusual for a multiple myeloma to go actually in a combined 1/2a which would be a kind of classical design. Obviously the objectives, as usual would be first safety, PK and then probably also some hints of efficacy there.

In terms of the trial design while I can't share much detail for the phase 1b/2a but we plan to initiate in the second half of this year, this would be a multiple dose, dose escalating obviously for the first time in patients. And again, with the main objective again to look at safety in RA patients, tolerability, also look at PK but also at first signs of clinical efficacy. Would that answer the question?

And there was another question about the phase 2 trial design for MOR103. But I think we don't want to --

I started with that actually.

I've heard there's a question from the conference call if I may ask the operator.

The question if from Yasir Al-Wakeel from Credit Suisse.

Hello and congratulations on a good set of numbers. I'd just like to ask one question on the partnered antibody drugs that you have ongoing. I realize it may well be difficult to give an answer on this, but what's your working assumption as to when we might get phase 2 proof of concept data, and in particular for the Centocor antibody? Would it be right in assuming that it's unlikely to happen prior to 2010? Thank you.

Could you repeat this please?

Okay. My question basically revolves around the Centocor antibody. I realize it's very difficult to give any form of guidance, but would it be fair in assuming that we are unlikely to have proof of concept data prior to 2010?

Your question is specifically about the Centocor antibody. Remember that that antibody has been in cancer patients at a phase 1 trial and has gone now into a phase 2 trial in an immunological indication. As Arndt has just talked about cancer trials in patients, there is the possibility to see hints of efficacy in phase 1 because you're in patients. So that I wouldn't rule out.

As for the likely timing of an efficacy signal in the phase 2 immunological indication, as you know they just started in November of last year. We don't know how long that trial is going to run but I think if it was to produce an efficacy signal this year it would be certainly tight in terms of timing, if not actually fallen in 2010.

Thank you.

Does this answer your question? Okay, then we take the next question from here.

Holger Blum, Deutsche Bank. I have three questions. Firstly on AbD, the guidance, does it include any upside from the stimulus package? Would it be then something like 50% upside potential on top over two years, if you just look at stimulus?

The second question would be on your comment about M&A. Given that you can finance your proprietary pipeline out of your cash flow and have such a big cash pile, you've just mentioned you might issue shares. And I wonder at what kind level or cash level you would decide to do something like that and how likely a major transaction would be?

Third point would be more on a personal note to Arndt. What are the most -- what are your first experiences after the first weeks? What is now on your agenda? Where are you positively or negatively surprised so far coming to MorphoSys?

Maybe just to start with the question about the stimulus package. As Dave mentioned, the budgeting for this process was done prior to the announcement of the stimulus package that happened very recently. So that hasn't been factored in at all and I think it would be almost impossible to factor that it because we don't know how that's going to actually feed directly into people ordering antibodies. All we mention is that we think that the climate, especially in the US is more favorable for research now than it was under the previous administration and we think that is a general positive for that side of our business.

In terms of issuing shares for acquisition, here I just wanted to highlight the fact that a potential acquisition may be affected by cash or potentially a mixture of cash and shares. We don't know yet because we don't have a specific target in mind, we don't have a specific deal on the table and we don't have a valuation that we know we're going to have to pay yet. But we just want to highlight the fact that we have this possibility to pay either in cash or in a mixture of cash and shares. So that overall we have significant firepower to be able to carry out an acquisition.

Now, of course, any transaction that we would do would have to stand the test of financial reasonableness. It goes with saying that the value of the asset that we would acquire would have to, in our view, be worth it. So speculating as to how such a transaction could look, how much cash, how much shares and so on is absolutely premature at this stage.

So, thanks for that question, which part should I start? You know, I feel very energized actually, excited as I said about coming here. And obviously one of the things that really attracted me was the scientific strength of the program, the strong leadership team. So to that extent I see that we work really tightly as a team and follow the same strategy and beliefs in terms of making a sustainable and successful organization.

What I've found, I've found a very committed and also experienced development staff. Obviously we have some needs to hire new expertise, additional. We'll do that from building internally and getting new staff top-down from the outside.

I've been very excited that just recently, three weeks ago, we had the arrival of Ulrich Moebius as our new Head of Preclinical Development and Project Management, a very central position. So that part is very strengthened.

I also pointed out I'm looking for a new Head of Clinical Development with the same expertise. This year that will be one of my top priorities to strengthen that part and also strengthen leadership of the teams. I strongly believe in strong leaders that really take the molecules in hand and be champions and drive it forward on all aspects. So we're certainly consolidating the teams in that respect.

And just to answer, I feel very energized, there's nothing I could think of negative. There are certainly areas where we want to build up as we have committed and we have made some progress and we'll hopefully be able to report to you in the remaining of the year.

Let's hear from Gary.

Hi there. Gary Waanders of Nomura Code. Just a question on the antibody in-licensing activity that you might envisage. Do you have any preference for where antibodies might come from, what sort of antibodies they would be, chimeric, fully human? I imagine fully human has got to be your religion, but would you stick with that?

Are there disease areas that you're focusing on and what sort of magnitude of development and feed would you envisage? Is it clinical stage only and are talking multiple millions of Euros?

Okay, first of all, in terms of the format of the antibody I think 'beyond chimeric' is how I would characterize that. We -- as you said, the religion is that chimeric is too old technology for us so, I think humanized we would consider and human we would obviously consider, but chimeric we believe there could be an increasing risk in the future that chimeric antibodies may struggle to get approved by the regulatory authorities. So that's specifically what we're looking for, humanized or later so-to-speak.

In terms of the indication focus, cancer and inflammation continue to be the focus areas of what we're looking for.

And in terms of kind of sweet-spot I would characterize that as late preclinical development through phase 1. Now remember that our strategy is to take antibodies to proof-of-concept in man and the look to partner them. So given that, it doesn't really make sense, or it wouldn't make sense for us to acquire an antibody in phase 2 or in late phase 2 development and then partner it some months later.

So, again, the sweet-spot is a bit earlier than that, which also has the advantage that we're less in competition with pharma, for example. Pharma tends to look a little bit further downstream than where we're looking which we think should give us higher chances, of course, of getting our hands on something interesting.

Elmar Kraus, DZ Bank. I have a couple of questions, more strategical and I'd like to follow the question from before. Arndt, when you were talking about innovative drugs, do you restrict yourself to antibodies or are they antibody-like drugs are also the name of the game?

The next question would be to Simon. You mentioned that you think about increasing your diagnostic focus. Can you shed a bit more light on what that might mean in terms of acquisitions or technologies or machines or whatever?

And another question for Dave would be, can you just give a rough guidance on how you would allocate R&D costs between 103 and 202 in the years to come? Thanks.

So maybe I'll start with the first question. You know, clearly based on our platform we're putting focus on antibodies right now. Obviously there are other innovative drugs. I mean they're certainly not only limited to monoclonal antibodies. This is our focus building up the turnover five year pipeline.

In terms of in-licensing candidates, please jump in. I think we would be open to other similar molecules as well, even though there I think the focus is still the antibody platform.

Coming to part two of the question regarding diagnostics, I mentioned that we're increasingly working with diagnostic companies on the AbD side of the business. And the opportunity here is there are many diagnostic opportunities for specific assays for example which are not well served by existing antibodies. There are certain analytes that you just cannot make decent antibodies against in mice, for example.

And that's an ideal opportunity for the HuCAL technology to make an antibody that is highly specific perhaps for a particular steroid or a particular metabolite of a drug or whatever it may be. That's why (technical difficulty) companies are coming to work with us to get indirect access to the HuCAL technology.

Now our new Head of the Unit, Dieter Feger, of course comes from Abbott Diagnostics so he's a real diagnostics man. He's been with them for twenty years. And he's looking and thinking, and he's only been there six weeks, so this is early days. But he's looking and thinking about ways where we could add a bit more value. Rather than just making an antibody and handing it over to some diagnostics company, perhaps where we could create the assay itself, so the antibody and the other component that form the main value part of a kit then that eventually comes to market.

So, if you like, taking a step or two further downstream than we are at the moment, comparable to what we're doing on the therapeutics side. I mean what we're doing on the therapeutic side is nothing more than that. Going further downstream based on an existing capability.

I think part three of the question was the split of costs between MOR103 and MOR202 and others. I would imagine for the next two years the costs will be very much weighted towards MOR103 by virtue of the fact that we will have a phase 2 ongoing and potentially another indication also. Thereby, just by virtue of the fact that it's further along than the other projects, means that it probably will have a much higher spend than the other.

That being said, MOR202 will see a ramp-up in costs this year because we are producing the clinical material for the anticipated entry into phase 1 in 2010. I think the other five or so preclinical projects will be relatively minor in comparison to those.

Daniel Wendorff of Commerzbank. A few questions if I may. Two are on the therapeutic antibodies side.

You mentioned 20 new program starts during the course of 2009. I wonder if this is mainly related to the Novartis agreement and, if so, how the potential milestones relating to that would look like? I guess that follows an earlier question regarding your milestone guidance for 2009.

And you mentioned that you plan to show your proprietary R&D development as a sort of separate statement. I wonder from when on we can expect that?

And a follow-on question on the AbD segment. Your profit margin guidance fro 2009 appears conservative to me given that you're very confident regarding sales growth and that you even had a one-off effect in 2008. I wonder if you could shed some more light on that.

And lastly, what are you expectations for the total headcount towards the end of this year if all your plans go to according to your own thoughts there? Thank you.

So let me start there. The 20 new starts, yes, of course, we've mentioned that Novartis is our biggest partner. They're the biggest sort of programs and so they will be a major contributor to that 20. As before, unfortunately we're not at liberty to say exactly how many programs we're working with them on and how many new programs get added at what rate. So I think it's fair to assume that the majority of those will come from Novartis.

Let me take the one about the profit guidance for 2009 being conservative because it relates to some of the activities we're doing there. As I said during the speech, we're taking the opportunity to invest more in the unit. We think its performance can be improved by investing in certain systems internally and investing and strengthening the sales and marketing team.

We feel that if we take the time and the opportunity to do that this year we'll be much better positioned to grow at a more interesting rate in the years ahead. So if you like, this is a kind of consolidation year or an investment year for AbD which we feel is much more valuable in the long run to do that now rather than to now make those necessary investments, simply to report a somewhat higher profit this year for the unit.

The headcount question and then I'm going to hand over to Dave for your point about the separating out of the segment reporting. We've said that we expect to hire up to 40-odd new people for the company as a whole. Most of those people will be in Munich and most of them will be in R&D. As you've heard from Arndt, he's in the process of building up his area, but also for the new discovery programs that we're starting for ourselves and also for our partners, we obviously need hands to do that work. So the majority of those 40-odd people will be R&D people.

As relates to the proprietary drug segment, a potential new third segment at MorphoSys, again, what does it mean? What it essentially would mean would be to hive out the proprietary drug activities that we do within currently the Therapeutics Antibody segment.

We are currently looking at that. Whether we end up doing it or not, and it will probably end up being dictated by what we're required to do under IFRS. Whether we do it or not, we will maintain at least the level of transparency we have relating to proprietary drug development, if not increase it. So whether we have a third segment or not you'll still get, in essence, the same amount of information that we currently give, at least.

Okay. Are there further questions?

Martin Possienke, Equinet. Let me have another try on the AbD. I guess you did an impairment test by the end of the year and if I read correctly no goodwill was amortized. So maybe you can tell us the key assumptions because I guess with the 2% EBIT margin and practically no growth, goodwill impairment would be necessary, so there must be some other key assumptions in there for the margin level I mean. What is your mid term assumption in this goodwill test?

I'm sorry the first question again was?

It's basically one.

Okay, maybe just a clarification point. The impairment that we saw in AbD had nothing to do with a goodwill impairment of any type but rather we had a building which was left over from our acquisition of Biogenesis which we were actually renting out. By virtue of the fact that we know longer rent that building out and want to sell it, meant that we needed to make a fair value estimation of that building. And the difference in the fair value between what we had on our books and what the market said it was at the end of 2008 was in fact the impairment. So it had nothing to do with the income prospects of the unit per say.

As it relates to the assumptions that we -- or the parameters that we use in building up our impairment tests, if I'm not mistaken it's actually inside the report. On page 71 you see under section 13 the WACC that we end up using, the perpetual growth assumptions that we end up using and all the other calculations that you could imagine would be in there.

Yes, just the margin is missing.

Okay, in terms of gross margin I think it's fair to say that the history has shown that a 60% gross margin is reasonable and I think you could assume that that's the case. I think it's fair to say that we expect an improvement over the current margin that we have.

As Simon mentioned the margin for 2009 is somewhat impacted by the investments we intend to make going forward. So I think without nailing myself to a particular number or giving away competitive information I think we'll leave it at that, that simply the margin is expecting to increase. But I would also say that in doing the impairment test we had quite a bit of cushion between what we expect the carrying value to be versus the fair market value or the carrying value of the unit -- so the value in use of the unit.

Let me just make a general comment about AbD. We're absolutely convinced that this unit can be a significant growth provider for MorphoSys. We have a distinct technology. We have a unique technology. There's nobody out there in this field who's applying a technology as powerful as HuCAL and this is opening up new opportunities for us.

We feel we haven't done a great job of exploiting all of those opportunities yet. We've taken steps in terms of hiring new management who bring specific experience to help us build that unit. And we're absolutely committed to have that unit not just proceed along at market rates but to do better than the market, grow beyond the market, and we think we can do that. Why? Because we have a unique technology platform which can provide novel products for opportunities that are out there.

So this for us is not, we don't see this as an also-ran or a less favorite cousin or something of the business by no means. We feel it has potential and we want to enable it to fulfill its potential.

Okay, are there further questions? That's obviously not the case. Then I would like to thank you all for your participation. I would like to invite you for a cup of coffee finally. We will be around here for a while and if you would like to talk to us directly please feel free to stay with us a little bit.

Thanks for participating and have a nice day. Thank you.

Ladies and gentleman the conference is now concluded and you may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.