MorphoSys AG (MOR) 2009 Q3 法說會逐字稿

Good morning and good afternoon. I am Jason, the Operator for this conference. Welcome to the MorphoSys Publication of Nine Months Report 2009. Please note that for the duration of the presentation, all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I would like to turn the conference over to Claudia Gutjahr-Loser. Please go ahead, madam.

Good morning and good afternoon and welcome. This is Claudia Gutjahr-Loser, Head of Corporate Communications and Investor Relations of MorphoSys. With me are Simon Delaney, our CEO; and Dave Lemus, our CFO.

First, we would like to welcome you to our Q3 Conference Call and thanks for participating. During the call, we would like to talk about the Company's financial results for the first nine months of 2009. Simon will begin by giving you an overview of the quarter. Then Dave will review the financial results of the first nine months of 2009. Afterwards, we will open the call to your questions.

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

I would now like to hand over to Simon Delaney.

Thanks, Claudia. The third quarter was a very successful one for us and I'm delighted to be able to confirm that we're right on track to meet our main financial and operational goals for the year.

As usual, we'll start our operational review with the therapeutic side of our business. Q3 has seen major progress in our core Partnered Discovery segment. I'll list several highlights, but also note that in the meantime, there is almost too much progress in the partnered pipeline to be able to detail on these calls.

First and most importantly, our partnered pipeline continues to mature and at the end of the quarter three HuCAL-based programs were in phase 2 clinical trials. Additionally, Hoffman-La Roche recently communicated that they intend to move the HuCAL-based antibody [GANTINERAMAB] into a phase 2 trial on Alzheimer's disease next year.

Second, during Q3 Bayer Schering Pharma commenced a phase 1 clinical trial of a HuCAL-based immuno-drug conjugate for oncology. This is the first modified HuCAL antibody to enter clinical development and illustrates that our technology can also be used to support different drug formats.

Bayer Schering Pharma became the third partner in 2009 to file a clinical trial application for its HuCAL-based program, consistent with our projection at the beginning of the year of between two and four new INDs. We currently do not expect additional INDs before year end.

Overall, our partnered drug pipeline currently comprises 62 therapeutic antibody programs in total, of which four are in phase 1, three are in phase 2, 27 are in pre-clinical development and 28 are in the discovery phase.

Since the beginning of the year, 13 programs have been started and six programs have been removed from our roster. The latter reflects the attrition that we expect and planned for.

We anticipate commencing at least an additional four programs until year end, bringing the total number of new starts for 2009 to 17; slightly below our expectations for the full year.

The value of our largest alliance, mainly that with Novartis, was further enhanced during the quarter by Novartis' commitment to the full ten-year term of the strategic alliance signed as of December 2007. The achievement of certain predefined improvement in MorphoSys' proprietary technologies was the catalyst for this event.

Last but not least, in the Partnered Discovery segment was the announcement of our new alliance with Daiichi Sankyo. Although it occurred after the end of Q3, I want to mention it now because of its importance. This deal is distinct from our existing collaboration with them is focused on the development of antibodies for the treatment of certain hospital-acquired infections. We will work with Daiichi Sankyo on the development of HuCAL platinum-based therapeutic antibodies against specific disease targets.

An important additional feature of the deal is the development of infectious disease specific technologies, funded by Daiichi Sankyo. This funded technology development which relates to the generation of antibodies against certain types of bacterial targets, will enhance the power of our platform and will find application also in subsequent programs in the infectious disease area.

The origin of this deal is a provision in our agreement with Novartis which excludes certain infectious disease applications on our technology. We are therefore free to exploit our HuCAL technology in this field as we see fit.

We've spent some time looking at the opportunity and how best to take advantage of it, and concluded that entering a number of discovery partnerships, similar to those we have very successfully executed for the last decade, is the best way to go.

We believe that this is a big area of opportunity. We foresee doing additional deals in the infectious disease area in the future, starting next year; thereby adding to our ability to build revenues and also expand our product pipeline.

Finally, this deal illustrates once again that the MorphoSys story is much more than just our alliance with Novartis. While the Novartis partnership is very important for us, we also have a lot of opportunities to build value independently, and we'll continue to do this in the months and years ahead.

Turning to the Proprietary Development segments; here we are progressing according to plan. Regarding MOR103, our anti-GM-CSF antibody, we continue to work through the regulatory process prior to commencing a European phase 1b/2a trial in rheumatoid arthritis patients. We anticipate receiving authorization to start this study soon, at which time we will provide you with details of trial design.

In the meantime, our pre-clinical studies on potential second and third indications for this drug are delivering promising results. It's no surprise that an antibody targeting an inflammatory mediator such as GM-CSF may have very broad therapeutic applications and we are confident that there will be opportunities to expand its clinical development beyond our initial focus on RA.

This program undoubtedly has blockbuster potential and we continue to experience strong interest for potential partners in the pharma industry. I want to underscore however, our commitment to taking the program to proof of concept in Rheumatoid Arthritis before looking for a partner.

Pre-clinical development of MOR202 continues to proceed smoothly. One point to note here is that we're achieving very high production [targets] with our partner Crucell and DSM, which supports our positive view of their production platform.

Our earliest stage programs also continue. All together we are currently running six proprietary programs; MOR103 and MOR202 as just mentioned, together with three internal discovery programs- two in cancer and one in inflammation; and last but not least, the first of our joint programs with Novartis.

Our other co-development collaboration with Galapagos is proceeding well. Targets which Galapagos has identified are undergoing further validation using HuCAL antibodies.

While on the subject of proprietary development, I'd like to highlight an important new appointment, namely Lisa Rojkjaar as Vice President and Head of Clinical Development. Lisa joins us from Novartis, which I'd like to highlight is purely coincidental. In her position there as Head of Medical Affairs- Hematology Europe; there was no contact or even indirect involvement with our alliance. Lisa reports to Arndt Schottelius, our Chief Development Officer, and is an important addition as we strengthen our development team.

Before completing my review of this area, I want to foreshadow guidance for 2010 that we will issue as usual, at the beginning of the year. As our revenues continue to develop according to plan, we're able to increase our level of investment in value-creating proprietary R&D. We will increase our R&D investment further next year, while continuing our commitment to maintaining profitability.

This investment is aimed at further advancing our proprietary pipeline of therapeutic antibodies. By the end of 2010, across the Partnered Discovery and Proprietary Development segments, we could have at least 13 HuCAL antibody programs in clinical development; several of which will be nearing pivotal phase 3 trials.

I want to turn now to our AbD Serotec segment. This unit is performing very well and is looking like exceeding its profit target for the year. In September, we announced that AbD Serotec will collaborate with FIND diagnostics of Switzerland to develop new diagnostic tools for poverty-related diseases such as malaria and tuberculosis.

This is an interesting new opportunity that highlights the potential for our proprietary technologies in the diagnostics field. The idea is to engineer antibodies with increased thermal stability for incorporation into kits that are used in areas lacking refrigeration. This is a major drawback hindering the widespread use of diagnostics for a range of tropical diseases.

We believe that our HuCAL technology offers the means of addressing this problem. Antibodies with improved thermal stability should make the diagnostic kits of which they are a part, useable over a greater range of temperatures.

In general, AbD Serotec continues its expansion into the diagnostics market and we expect further news flow in this regard before the end of the year.

In local currencies, the segment continues to outgrow the market with revenues increasing approximately 10%. Currencies are of course having an impact on both top and bottom lines, and Dave will speak more to this shortly.

That concludes my review of the quarter. I'd now like to hand over to Dave for his report on the numbers.

Thank you, Simon. I'm pleased to report today another quarter of solid financial performance. Let's start with revenues.

In the nine months of 2009, group revenues increased by 8% to EUR 57.6 million compared to EUR 53.3 million in the same period of the previous year. Assuming constant foreign exchange rates in 2008, total revenues would have amounted to EUR 58.1 million.

The increase of revenues is mainly due to higher revenues on the therapeutic side of the business. Segment revenues of the Partnered Discovery and Proprietary Development segments increased by just under 8%; which was mainly driven by higher FDE funding, license fees, and to a lesser degree milestones revenues.

The AbD segment also contributed to increased revenues. Compared to the same period of the previous year, this segment's revenues increased 9% and thereby accounted for a quarter of total revenues.

Moving to operating expenses for the first nine months of 2009; total operating expenses including stock-based compensation increased by approximately 26% compared to the previous year; that rise was caused mainly by R&D expense increases within the Proprietary Development segment.

Cost of goods sold slightly decreased by EUR 100,000 despite increasing sales in the AbD unit of 9%. The decrease was mainly due to foreign exchange effects due to the fact that are COGS are mainly generated in British pounds and British pound has shown considerable weakness compared to the previous year.

Total expenses for R&D increased by nearly 50% or approximately EUR 9 million; this was mainly due to higher costs for external lab funding and increased personnel costs related to our Propriety drug Development segment.

In the first nine months of 2009, expenses for the Proprietary Product Development segment amounted to EUR 13.1 million; up substantially from last year's comparable number of EUR 3.6 million.

SG&A expenses increased by 7% over the previous year, mainly due to higher personnel cost and increased cost for external services, which were mainly associated with increases in the AbD Serotec segment and corporate unallocated segments.

Group operating and profit amounted to EUR 9.3 million, a decline of just under EUR 6 million compared to the same period of last year. This decrease was planned and mainly relates to our increased investment in the Proprietary Product Development segment.

As you can see from our segment reporting, the Partnered Discovery segment increased its operating profit to a very strong EUR 27.3 million and the Proprietary Development segment ran an operating loss of EUR 12.4 million. Rounding out the result, the AbD Serotec segment significantly increased its operating profit to EUR 1.4 million compared to EUR 300,000 in the same period of the previous year.

At the end of the third quarter, MorphoSys cash amounted to just under EUR 140 million, compared to approximately EUR 138 million at year end 2008.

Cash flow from operations in the first nine months of 2009 amounted to EUR 3 million compared to EUR 18.7 million in the same period of 2008.

We use the occasion of our quarterly results to discuss our full-year financial projections. Today we can reconfirm our original guidance from February of this year. We expect group revenues to come in between EUR 80 million to EUR 85 million, and an operating profit between EUR 8 million and EUR 11 million.

We also continue expecting investment in Proprietary R&D in the amount of EUR 18 million to EUR 20 million.

With the AbD segment, we continue to expect sales of approximately EUR 20 million. In our original guidance, we mentioned to expect at least 2% of operating profit as a percentage of sales. Given where we are today in the third quarter and how exchange rates develop in the upcoming quarter, we could give more guidance on the top end of the range.

More specifically, pending some extraordinary expenditures relating to investment in the unit to occur in the fourth quarter of this year, as well as the movement of currency exchange rates, it is possible that we could a result of up to 6% at year end.

As for the future of the overall business, we continue to expect to invest in our Proprietary Product pipeline, while maintaining overall profitability. Along these lines, next year we plan to have two compounds in clinical trials, MOR103 in a phase 1b/2a trial and MOR202 in a phase 1b trial which will lead to higher overall expenses in the Proprietary Product segment; more to those numbers when we give our guidance next February at our annual year-end press conference.

That concludes the financial analysis for the first nine months of 2009. I'd now like to hand back to Claudia for the Q&A session.

Thank you. We will now open the call for your questions.

(Operator Instructions). The first question is from Mr. Martin Possienke. Please go ahead, sir.

Yes, good afternoon. I missed part of the introduction so I apologize if I ask too many redundant things. I have three questions, actually; two on partnered antibodies and one financial question.

The first one is if I calculate it correctly, at least three projects, three pre-clinical programs have been stopped in Q3. Is this housekeeping? I mean do you just not count programs anymore which haven't progressed in recent quarters or have you really been notified by partners that they have stopped programs?

The second question is regarding the 888 of Centocor; clinical trials are suggesting that Centocor started the antibody in prostate cancer. Can you confirm that?

And the third question, the financial one, is on the negative free cash flow development in Q3- EUR 4.3 million if I calculate correctly. It's mainly related to declining deferred revenues from EUR 26 million to EUR 20 million in the quarter. Is this a trend or maybe is it because revenue recognition outweighs your [up front] and can we assume this to continue over the next quarters until maybe in 2011 there will be no deferred revenues anymore?

Okay. Thanks, Martin. Let me take the first two and then Dave will handle the third one of those questions. I don't know whether you missed the initial part of the presentation. We said that so far during this year, we've started 13 programs and that six programs have been stopped altogether for one reason or another. So I don't know whether-- how that relates to the three that you were referring to in your question?

The three is coming from-- I think at the Q2 you said 31 in pre-clinical and now it's 27 and one antibody moved to the clinic, so--

Right. That could well be correct and that will-- those three will comprise the six in total that have been stopped. This is normal attrition, as I said during the presentation. This is what we expect and this is what we planned for. And thinking of the cases concerned, it's a combination of the kinds of reasons that pharma companies decide to stop programs and that can be a combination of medical reasons, strategic reasons, priorities and so on and so forth. So I think there's nothing to be surprised about here. As I said, it's what we expect and what we planned for and what we've always said-- one has to be prepared to see. And I don't think it is to be interpreted negatively at all; it's just drug development.

And maybe in this context-- are there any pre-clinical projects which are older than five years?

Ooh-- there-- let me think. I don't have the figures in front of me, to tell you the truth. But there could be-- I couldn't rule that out, I think.

You know what? I'd have to check that and get back to you, but it's possible that from some of our older collaborations so for example, Bayer-Schering, perhaps Centocor; but there could be programs that are older than five years. But as I say, I'd have to double check that.

The other question; you mentioned a compound called CNT 0888. As I think we've mentioned in the past, we have to follow the requests of our partners in terms of respecting confidentiality of the programs. What I can confirm to you is that Centocor has got one of our antibodies currently in two phase 2 trials, so we count that as two programs even though it's one antibody. One of those trials is in idiopathic pulmonary fibrosis and the other one is in cancer. What I can't do; and again this is respecting the wish of our partner-- an explicit request that the partner is to [confirm] the actual label or name for that program. But I hope that I've given a clear answer to your question that way.

And normally information at clinical trials would be assumed to be correct?

If you're referring to the websiteclinicaltrials.gov, yes I would agree with you.

Okay. Thank you.

Regarding the question that you had on cash flow. That difference in cash flow is mainly attributable to two things. Number one, first of all we had less net income at the top there. That represents a difference of about EUR 4 million. In addition, as it relates to the deferred revenue, there are two components to that. First of all, you have the amount of the release of deferred revenues. And secondly you have the amount of additions to deferred revenues. One number you see in the change in operating assets and liabilities; the other one you see as a reconciling item to net income.

Your question-- will the result that we saw in the first three quarters of 2009 reverse itself and what can we expect in the future; I think actually that to a certain degree, that the results that we see in 2009 are probably more normal if there is such a thing, than 2008. 2008 was heavily affected by one or two contracts. To your question-- Will deferred revenues end and no longer build up? Absolutely not; they will continue to rise as they do at the beginning of every year-- the trend is very much is that at the beginning of the year, the deferred revenue tend to rise or towards the end of the year that the deferred revenues rise and then they're amortized throughout the year. Pending new deals, they may increase but that's highly dependent on new deals or new revenues that we have which involve deferred revenues.

Okay, perfect. That was very helpful; thank you.

The next question is from Miss Cornelia Thomas. Please go ahead, madam.

We're not getting a question here. Cornelia, if you're asking a question, we're not hearing it. Jason, perhaps if we can't get the question, we could move on to the next one.

The next question is from Mr. Thomas Schiessle. Please go ahead, sir.

I wonder if we're having a technical issue here because we're not getting Thomas's question either.

Hello, hello?

Yes. Now we can hear you, Thomas.

Yes? Wonderful, thanks. Hi there. Some financials if I may or start with; first of all, the tax rate-- I'm a little bit-- I wonder whether there might be some implications of the group tax rate coming out of the currency movements-- British pound versus the euro. If I recall correctly, you are quite profitable in the U.K. but the German activities are not that-- the amount of profit is not that much. So if one takes an amalgamated tax there-- must be in favor of reducing the tax rate on the corporate level out of these currency movements. This is the one.

The next is on AbD operating activity, the catalog business-- is this-- what is the prospective of the catalog business? Is it research activities moving on? Is there any stimulus coming out of the stimulus programs in the U.S. or is this pure politics?

And on the customized business-- to my calculation it's a little bit sluggish, isn't it?

And the last financial question is on the fourth quarter '09. Are you intending to deliver a profitable quarter separately calculated or will there be a loss in the last quarter of this fiscal year? Thank you.

I'll handle some of those, Thomas. So in terms of the tax rate; so most of our profits are actually generated in Munich; I think when you made your comment you were probably referring to the [A-by-D] part of the AbD Serotec group when you talked about the significant profits in the U.K.

If you take a look at actually where we pay the bulk of our taxes, it is in fact still in Munich on a group level. And in fact, we've been quite fortunate in that we've had significant net operating losses that we've been able to utilize over the last couple of years against that. And that's very much reflected I think in the report where we said of the approximately EUR 3.2 million that we spent, just under EUR 2 million of that was actually cash that was paid to the tax man, so to speak; and just over EUR 1 million was deferred tax; so utilization of those NOLs.

The change in group tax level has been relatively minor. It's gone from 28.4% to 29%; some of that I think as you rightly point out, has to do with the increasing profits that we're seeing in both the U.S. and the U.K. where we have a slightly higher tax rate than we do here in Germany.

As to your point-- how are these various businesses fairing within AbD? If we take a look at where the bulk of the growth came through the third quarter of this year, actually the bulk of that growth was generated by the OEM business and the catalog business actually did quite well also. I think it's a fair comment to say that of the three lines of our business; probably the custom was the one that lagged the most so far this year.

Yes, just let me add to that last point. That is certainly the case. However, we see within the HuCAL-based custom business actually the most exciting growth potential and this is coming and will come we think increasingly out of the diagnostic applications of that technology; of which for example, the FIND one that we announced during this quarter was one example.

Thomas, you had a few questions. Did we answer all of them there?

Yes. Maybe I'll take the next couple of questions in the second round. That's okay. Thanks.

Sorry. There was one more question that maybe others may wanted to ask that you--

Yes, fourth quarter-- profitable or not?

Exactly. We see breakeven or perhaps potentially going into slight loss in the fourth quarter for AbD; that being very much due to the fact that we see some extraordinary expenditures being made in the fourth quarter for that unit. That involves mainly investment, but as well a little bit of restructuring cost.

So restructuring is still going on? If I recall rightly, in the conference call of the first quarter you indicated that there are some investments still going on, but then everything is fixed and quite well.

Yes, and I think at that point it accurately reflected the situation. But of course in this type of business, which is a very margin sensitive business; one has to be constantly vigilant about making sure one has the right structure and again the vast majority of that spend I would highlight is in fact investment.

Okay. Thanks.

The next question will be from Cornelia Thomas. We will try and reconnect her. Please go ahead, madam.

Okay. I hope you can hear me now.

Yes we can.

Okay; fantastic. A few of my questions have already been asked, but I've still got a few left. One on your revenue guidance for 2009; I was just wondering because there's still quite a big gap between what you've shown during the first nine months and the EUR 80 million to EUR 85 million. I'm assuming some of that will probably come from your new contract with Daiichi. I'm just wondering if you could sort of maybe give us an idea of how much this might add to your fourth quarter and possibly you'll say whether you are still expecting any milestone payments for the remainder of 2009-- and that was on the revenue guidance.

And we've talked about the operating results for Q4. The other thing was-- you've been saying that in order to beef up your pipeline, you would be looking at your own capabilities-- apart from antibodies coming from partnerships such as Novartis; but you would also be looking at in-licensing products or possibly even buying something. I'm just wondering if you could give an update on whether anything is happening on that front.

And then the last thing was; Simon, you mentioned during the call that at the end of next year you would have at least 13 antibodies that could be in clinical development and several of these could be nearing phase 1. Can you give us an idea of which ones particularly you're thinking of there?

Okay, maybe Cornelia I'll take the first one as it relates to revenue guidance. I think it's a fair comment that you say that if you took the run rate of the first three quarters for the partnered revenues, one would come up with a number that's approximately just under EUR 57 million. That being said; I think you have identified the two items of delta here; so those remaining EUR 4 million plus for us to make guidance for the year; that has very much to do with first and foremost the Daiichi Sankyo agreement which will be booked in Q4. And as well, milestones will also contribute to that.

I'm afraid, due to the fact that we haven't disclosed the financial terms on Daiichi Sankyo, that I can't tell you the mix of that. But at least I've told you the magnitude; that would be-- so combining the two amounts so in excess of EUR 4 million.

Okay. But just to double check then; in terms of milestones, so are you expecting more in terms of milestones in the fourth quarter than we've seen so far in 2009 per quarter?

Okay. Can I come back to you in just a second? Simon is going answer part of your questions and then I'll come back to you.

Sure.

Let me take the other two parts of it. First of all, regarding the potential in-licensing or acquisition of compounds and/or companies; indeed, we have been looking quite intensively at that during the course of this year and continue to do so. And we have looked at and will continue to look at really a considerable number of compounds. We've generated a long list which we've whittled down to a short list. Like all of these things, it's very difficult to predict whether something will actually eventuate out of that.

We have to be obviously convinced about the asset concerned which requires detailed analysis about the scientific and medical potential and the commercial and IP situation and so on and so forth. And that activity continues.

And as I said, I don't want to predict what may eventuate out of that, just because of the unpredictability of the process, but we're certainly continually very actively working on it. I'm going to have to leave that a little bit vague, I'm afraid. But it's ongoing.

Then I hope I said during the speech that we will have at least 13 antibodies in the clinics by the end of next year and that some of them will be nearing phase 3. I hope I said phase 3 and not phase 1 which I understood you to say.

Sorry, no. I meant phase 3. If I said phase 1, that was wrong.

Yes. And the way we're thinking about that is that as we said, there are currently three partner programs in phase 2, two of them from Centocor and one of them from Novartis. We have also an understanding from Roche that GANTINERAMAB will go into phase 2 next year. That's probably a little bit further away from proof of concept. But I think that certainly, the Centocor and Novartis programs, during the course of this year, we certainly are nearing-- during the course of next year we certainly will be nearing proof of concept and therefore corresponding start of the phase 3 trial. So I think we're approaching in total, a very interesting time in terms of clinical readout in a patient setting, in a disease setting, for actually several HuCAL programs.

Okay. Thank you.

Cornelia, maybe just to get back to your last question; in Q4 we expect milestones to be approximately at the same run rate that you've seen them for the first three quarters.

Okay. Thank you.

The next question is from Mr. Daniel Wendorff. Please go ahead, sir.

Thanks for the questions and I actually have a few remaining ones. Regarding the guidance for proprietary R&D spending, you have now the exact number for the first nine months and you give a guidance of EUR 18 million to EUR 20 million for the full year. I was just wondering if the guided range-- what is the main factor which could either mean that you come in at EUR 18 million or at EUR 20 million?

And then the second one; I think Simon you said at the beginning but I did not get that; that do you expect more IND filings for partnered programs during the fourth quarter?

And lastly, another question remains relating to the cash flow. In your comments you said that 2008 was rather an extraordinary year due to the deals you signed. Is 2007 or 2006 more an appropriate comparison for 2009 and beyond, perhaps? Thank you.

So let me just start with the easy one there, Daniel while Dave prepares to answer the other two. Regarding the number of INDs for this year, I actually said or I hope I said that we do not expect any more additional ones from partners before the end of this year.

Okay, Daniel; to your questions about guidance, if one takes a look at what we're spending in terms of the two lead programs MOR103 and MOR202; we're spending more than two thirds of our spending on those two projects. So to answer your question-- what could be the difference between-- a slight difference in the proprietary spend? I think it's a fair bet to say it would be having to do with either an overspend or an under-spend as it relates to one of those two products.

Okay, so no specific reason for that (inaudible) that if you-- if for example MOR103 would start a bit later in Q4, but if 1b/2a trial and not earlier; that this could have an effect there already?

That's correct; absolutely-- not that we're currently expecting that, but again as MOR103 moves into the 1b/2a study, you can imagine that's where the bulk of the costs are going to be starting to accumulate towards the end of the year.

Okay. The cash flow question?

Okay, the cash flow question is a bit hard to quantify because again, first of all, you're dealing with on the cash flow the change from one period to another. You're not talking about the absolute amount but actually the change. 2008 was very much affected by what actually happened in 2007 with Novartis. So can I say today with any definitive accuracy that 2008 is going to be representative of a future year? I can't say, but in all likelihood, given that we probably wouldn't sign another deal of the magnitude that we have in Novartis, I think it's reasonably safe to say that 2008 is not a good proxy for future years.

As to the question as to 2006 or 2007 or rather even this year would be a better proxy? I would say that 2009 again, by virtue of the fact of that you're comparing with 2008, might not be the best year. I'm afraid I just can't answer from my hip whether 2006-2007 would be appropriate.

Okay. I think I was also referring to the question asked from Martin on deferred revenues because the [debt] in terms of what you recognized and what you actually got in cash in that year was quite positive in 2006 and '07 and I just wanted to get an idea of how that might change going forward now.

Okay, if that's your question, given the fact that we have a cash flow lower; operating cash flow lower than the operating profit; I would say it's fair to assume that kind of one-off effect between 2008 and 2009 is not my expectation. But then again, if we sign a deal that involves significant deferred revenues, then I'm afraid I'll have to renege on that assumption. But for now, that's not foreseen.

Okay. Thank you.

The next question is from Mr. Rodolphe Besserve. Please go ahead, sir.

Yes, good afternoon everybody. A few questions; the first one on the number of new (inaudible) programs for this year-- so how can we interpret the size that you anticipated before up to 20 programs and now just 17. So were you too optimistic or is there a change in the dynamics or ramp up of collaboration with Novartis or any delays in any of your collaborations?

Second question is on funded research and license fees. If my calculation is right, you had EUR 12.4 million in Q3 which is about EUR 1 million above what you--

Oops. We just lost Rodolphe there. Jason, can you help with that?

Yes. Hold on just one second. I'll take the next question. The next question is from Mr. George Zavoico. Please go ahead, sir.

Once again, we're not hearing the question, Jason. I don't know whether--

Yes. Just one moment, please. Just one moment please; gentlemen, we're just getting the connection back. Okay, Mr. Zavoico is now back. Just one moment.

Hi, can you hear me?

Hi George.

Hi Simon; hi Claudia. I've got a lot of static on this side so I hope that doesn't interfere. (Inaudible) R&D. Simon you mentioned that you were going to do that (inaudible). I assume that's perhaps expanding on your proprietary pipeline including some of the additional later-stage clinical trials that you're going to be continuing and starting next year. (Inaudible) beyond that; maybe some more capital expenditures to expand your workforce for example to add to research or to perhaps increase clinical development; how much larger might we expect the Company to grow next year?

We didn't really get all of that. You were breaking up quite a bit, George. But let's answer what we heard at least and let us know if it's not what you asked. I think you asked --to what extent do we expect the Company to grow, especially on the development side of the business.

Arndt Schottelius is pretty close to completing the development of his team on the development side, and therefore we don't expect really significant growth. I think the bulk of that growth has taken place during the course of this year.

We do expect to add people on the development side to some extent, in discovery research to some extent; but additions beyond that will really depend on our deal doing. There will be a step up at the end of this year to complete the ramp up phase for the Novartis deals under 2007. The last step of that ramp takes place in December actually and to the extent that we sign additional deals along the lines of the Daiichi Sankyo infectious disease deal, that will of course involve bringing in additional headcount in as well.

So we will continue to grow, but perhaps not at the rate that you've seen over this year and the year before. I hope that was the question.

Well, that's pretty close. One follow up to that is-- your proprietary pipeline; do you expect to advance any clinical programs into clinical by the end of next year?

Yes, regarding our own proprietary activities; we expect more MOR202 to advance into the clinics and we expect that MOR103 will during the course of next year, be in the phase 1b/2a trial that we intend to start before the end of this year.

But no other new compounds coming up?

Well, there are other proprietary compounds in the pipeline, but they're not at a stage where they could enter the clinic next year.

That answers my question.

Okay.

Okay, we have managed to reconnect ourselves to Mr. Rodolphe Besserve. Mr. Besserve, if you would like to ask your question?

Good afternoon. I don't know if you got my first question before?

Yes, we did. And maybe before you move on, let me just answer that. So that was the question about why there are 17 new starts this year rather than the 20 that expected. This is also a difficult thing to predict at the beginning of the year and we make the prediction based on discussions that we've had with the various partners as to what their expectancy is for the full year.

It's turning out to look like 17 rather than 20. I'm not dramatically concerned about that. It doesn't reflect largely on how the programs are going or how the collaborations are going or on the ramp up in the Novartis collaboration. It just represents I think sort of fluctuation you could expect and the difficulty of predicting this number in advance.

Okay. Thank you. And another question on funded research and license fees; so if my calculation is right, in Q3 you had EUR 12.4 million of funded research and license fees which was above EUR 1 million compared to what you had in Q1 and Q2. So is there an exceptional item in this EUR 12.4 million? And should we consider this as a run rate also for Q4, obviously excluding any exceptional items from Daiichi?

I think that the run rates that we've seen for the first three quarters is broadly in line with what we can expect as a run rate going forward. That being said, we do have some-- over time and I have to look exactly when that is-- some of our older collaborations falling away. So I think it would be a mistake to give a generic statement right now that this will be a run rate that you can plan on for the next year or the next several quarters, simply by virtue of the fact that as we all know, that some of our agreements will fall away over the coming quarters and years.

That being said, I think the idea that you can use that as a proxy for Q4 would not be inaccurate.

Okay and the last question if I may; the 13 compounds you mentioned before in co-development by the end of 2010-- is it 13 compounds or 13 programs? It's always the same question; sorry. And also does it include you own proprietary programs and does it take into account the (inaudible)?

So that 13 is program; we always talk about programs just because as you know that Centocor antibody has two different indications in two different trials and therefore we count that as one antibody and two programs. So we're referring here to program. That 13 includes our own two programs and it's based on what we currently see in the clinic and we have no reason to believe that any of the programs that are in the clinic at the moment will stop being in the clinic at the end of next year; although we can't obviously rule that out. And it includes anticipated new starts that we'll see next year.

Okay, great. Thanks.

The next question is from Miss Cornelia Thomas. Please go ahead, madam.

On the Daiichi partnership that you've just signed; I seem to remember that it was initially agreed for two years, this partnership. Is there any extension possible for that particular partnership and if so, how long for?

It's certainly possible. There's nothing specific that we can say about that at the moment. But of course, one could anticipate that if things go well and that it's productive, that it could be extended. But I cannot say to you by how long or what the likelihood is.

Okay. Thanks.

There are no more questions at this time. I'll hand back now to Dr. Delaney for his closing remarks.

Thank you. In closing, I'd like to remind you of the main messages to take away from the call. First, we're on track to meet our financial goals for the year. Second, both our Partnered Discovery and Proprietary Development segments continue to advance according to plan. Our deal with Daiichi Sankyo of certain hospital-acquired infections opens up a world of new opportunities to exploit our HuCAL technology in the infectious disease space. And finally, AbD Serotec is making further inroads in the diagnostic market and is looking like it's exceeding its profit target for the year.

That concludes the call. If any of you would like to follow up with [either] Simon, Dave or myself; we'll all be in the office for the rest of the day. Thank you for joining us today and good-bye.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Good-bye.