MorphoSys AG (MOR) 2010 Q1 法說會逐字稿

Ladies and gentlemen, welcome to MorphoSys Q1 results 2010 conference. (Operator Instructions). Now, I would like to turn the conference over to Claudia Gutjahr-Loser. Please go ahead, madam. Thank you.

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

First, we would like to welcome you to our Q1 conference call and thank you for participating. During the call, we would like to talk about the Company's financial results for the first three months of 2010. Simon will begin by giving you an overview of the quarter. Then Dave will review the financial results of the first quarter. Afterwards, we will open the call to your questions.

Before we start, I want to remind you that during this conference we will present and discuss certain forward-looking statements concerning the development of MorphoSys's core technologies, the progress of its current research programs and the initiation of additional programs. Should actual conditions differ from the Company's assumptions, actual results and conditions 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 like now to hand over to Simon Moroney.

Thank you, Claudia, and also from me, a warm welcome to you all. MorphoSys got off to a solid start in 2010 and I am happy to review the progress and events of the first quarter.

AbD Serotec has made a particularly good start to the year, with both turnover and profit at record levels. The therapeutic side of the business has also done well and promises to deliver a stream of progress highlights through the rest of the year.

As usual, we'll start our operational review with therapeutics, first the Proprietary Development segment. Most important is that the phase 1b/2a trial of MOR103 in rheumatoid arthritis patients is now actively enrolling in three countries namely Germany, Bulgaria and the Netherlands, and recruitment is on track. This was an important milestone for the Company and we look forward to providing you with updates on the program as and when reportable data becomes available.

I'd like to highlight a couple of recent deals in the industry that illustrate the extraordinary interest of pharmaceutical companies in drug candidates for the treatment of rheumatoid arthritis. Following a significant antibody-related licensing agreement in December 2009 between Alder Biopharmaceuticals and Bristol-Myers Squibb, the first quarter of 2010 saw two additional deals in the RA space.

Both of these deals, between Eli Lilly and Incyte Corporation and between AstraZeneca and Rigel Pharmaceuticals were based on mid-stage clinical compounds. In each case, the biotech company secured large double-digit million upfront payments, and stands to receive up to several hundred million in additional development, regulatory and commercialization milestones, plus double-digit royalties. These deals speak to the value companies can create with innovative and interesting new development candidates in rheumatoid arthritis.

Another development in the field was the recent failure of Ocrelizumab, Roche's next generation anti-CD20 antibody. We believe this development underlines the need for new drugs for inflammatory disease with an innovative mode of action.

Our next most advanced program is MOR202, which continues to progress according to the updated development plan we communicated earlier this year. The focus at the moment is on completion of the necessary pre-clinical work required for the CTA filing that we anticipate making at the end of this year.

Coming to the earlier stage activities, we have identified targets for two new internal programs, namely MOR105 and MOR206, and these two discovery programs are now underway. We have discontinued MOR203. This decision is based on the data that we generated in the program, which convinced us that other programs have more convincing return-on-investment profile. The total number of proprietary programs is now seven, including our co-development program with Novartis.

To close this section on proprietary product development, during Q1 we announced an expansion of our collaboration with Galapagos. Based on the solid progress made so far, we've agreed to add another antibody target to the alliance, thereby increasing the total number of programs to four.

We'll move on now to the Partnered Discovery segment of our therapeutics business. This segment continues to do well, and to provide the majority of our free cash-flow. As of today, MorphoSys' partnered drug pipeline comprises 65 therapeutic antibody programs in total, of which seven are currently in clinical development, three in phase II and four in phase I. The total number of programs has remained constant since the beginning of the year.

Our partnered drug pipeline continues to gain visibility as more and more scientific and clinical results emerge from individual partner programs. Our partner Bayer Schering Pharma, for instance, has presented first pre-clinical data from the HuCAL-based antibody drug conjugate BAY 79-4620 at the recent American Association of Cancer Research Annual Meeting in Washington.

The results demonstrate that targeted delivery of a cytotoxic agent bound to a HuCAL-derived antibody can inhibit proliferation and induce cell death of cancer cells in certain tumor models. BAY 79-4620, which is directed against the target molecule MN, also known as carbonic anhydrase IX, is currently in phase 1 clinical testing.

I'd like to take this opportunity to make you aware of a positive development in our collaboration with Novartis, which will bear on the flow of programs in the years ahead. Novartis has been building downstream development capacity in its biologics unit, partly driven by the productivity of our alliance. We are now working with Novartis to a plan which foresees a higher than anticipated rate of candidate antibodies moving from pre-clinical to clinical development, which will be matched by a slight reduction in the total number of programs we pursue over the duration of the alliance. There is no other change in the alliance, and overall, we expect the output to remain unchanged.

During Q1 we reported from our Shionogi collaboration. Shionogi expanded its current research license to cover the use of MorphoSys' HuCAL PLATINUM technology in drug discovery. Shionogi had the opportunity to test the new HuCAL PLATINUM version of our technology alongside its predecessor HuCAL GOLD. Their decision to upgrade speaks clearly to the quality and the success of our internal technology development work in recent years.

Within our Partnered Discovery segment, new technology development continues to be a high priority. We believe that there are attractive commercial opportunities around new antibody-based technologies, which can provide even more effective therapeutic agents. As we said at our year-end results conference in February, we expect to be able to provide information on some exciting technological developments later in the year.

The third and final portion of my review covers the AbD Serotec segment. The unit made an excellent start to the year, as evidenced by its financial performance. Although we didn't announce new customer relationships through press releases, the financial results, which Dave will present in detail, speak for themselves.

Operationally, AbD Serotec was able to increase success rates in customer projects to 98%, leaving behind the average success rate seen with animal-based methods. This was again the result of implementing our latest technology HuCAL PLATINUM, but also thanks to effective process development efforts within the unit.

That completes my operational review of Q1. I'd now like to hand over to Dave for the financial review.

Thank you, Simon. Today, we are again looking at another quarter with solid financial results. Let's start with the revenues first.

In the first quarter of 2010, Group revenues increased by 8% to EUR20.6 million compared to EUR19.1 million in the same period of the previous year. Assuming constant foreign exchange rates of Q1 of 2009, total revenues would have been slightly higher at EUR20.7 million.

The Partnered Discovery segment remained our largest segment, with revenues of EUR15 million. Success-based payments amounted to EUR1.3 million, down from EUR2.8 million in the first quarter of 2009.

The Company's own and joint drug development activities are represented by the Proprietary Development segment which accounted for EUR300,000 of total revenues.

The AbD segment noted stronger sales for the first quarter with revenues increasing by 12% to EUR5.5 million, relatively unaffected by foreign exchange movements.

As expected, total operating expenses increased by 7% to EUR15.9 million in the first quarter of 2010, primarily due to higher investment in proprietary drug development.

Cost of goods remained unchanged at EUR1.7 million compared to the same quarter of the previous year, and was mainly affected by AbD's product mix sales in the first quarter.

Expenses for research and development amounted to EUR9.3 million in the first quarter of 2010, an increase of 9%, mainly driven by higher numbers of employees, and therefore, higher personnel and material costs. First quarter R&D expenses were roughly equally split between proprietary drug development costs and external R&D incurred on behalf of partners. More specifically, costs for proprietary product development increased to EUR4.6 million, an increase of 11% compared to the prior year, and was mainly impacted by continued expenditures for the products MOR103 and MOR202.

Sales, general and administrative expenses essentially stayed the same at EUR4.9 million for the first quarter. Total Group headcount was up for the quarter, at 428 employees at March 31, 2010 compared to 413 at the end of 2009. The majority of headcount was added in Germany, and in R&D and more specifically, in the Partnered Discovery segment, in order to cover ongoing partnership commitments.

Group operating profit for the first quarter of 2010 amounted to EUR4.7 million. Broken down by segments, the Partnered Discovery segment showed an operating profit of EUR10 million and Proprietary Development came in with an operating loss of EUR4.3 million. AbD Serotec increased its segment result significantly to EUR900,000 for the first quarter.

The current EBIT margin of 17% is much higher than our guidance for the full year and it is unlikely to be sustained in future quarters due to one-off OEM orders which were unusually profitable in the first quarter. Nonetheless, the first quarter was a record quarter for AbD Serotec, both on the revenues and profits side.

Unallocated corporate costs in the first quarter of 2010 amounted to EUR2 million and were essentially unchanged compared to the previous year.

On March 31, 2010, MorphoSys held approximately EUR147 million in cash, compared to EUR135 million at year-end 2009. Cash inflow from the operations in the first quarter of 2010 amounted to EUR13.1 million, compared to a cash outflow of EUR1.7 million in the same period of 2009. The increase of cash in this quarter results from delayed collections from the previous quarter, which we discussed on our Q4 call.

As is customary at the occasion of our quarterly results, we would like to update our full-year financial projections. Our most recent guidance is from February of this year and can be re-confirmed today.

We expect total Group revenues to come in somewhere between EUR89 million and EUR93 million and an operating profit in the range of EUR5 million to EUR9 million. Our investment in technology and product development to expand our proprietary pipeline will rise to an amount between EUR26 million to EUR29 million.

In closing, I would say that investment in proprietary R&D may appear rather low in the first quarter. Nevertheless, we still believe that proprietary product development expenses in particular will ramp considerably later in the current year. Additional costs will occur, for example, through the preparations for the second phase II trial for MOR103, and for the preparation of subcutaneous administration of MOR103. Therefore, future quarters this year should show more modest operating profits looking ahead.

That concludes our financial analysis for the first quarter of 2010. I now hand back to Claudia for the Q&A session.

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

(Operator Instructions) And our first question comes from the line of Cornelia Thomas from WestLB. Please go ahead with your question.

Hello, good afternoon, and thank you for taking my questions. I actually got a quite a few so -- but I'll start on the financial ones, particularly on the guidance. Dave, you have already said that the performance in Q1 is or rather the costs are likely to ramp up over the remainder of the year. Just wondering because in Q1, as you said, you haven't actually spent that much. When do you expect this to ramp up? Can we expect that already to happen in Q2 or is that more likely to happen in the second half of the year?

And then also, it's not just your R&D that looks slightly low, but also your SG&A. Just wondering if you are expecting that to go up as well over the rest of the year. Then with regards to the top line growth of the AbD Serotec unit, I may be wrong but I've got written down that there was some guidance for EUR21 million to EUR22 million turnover for that unit.

Now, you have already had quite a good performance in Q1. Just wondering -- I mean that was obviously driven by FX in large -- to a large extend. Just wondering if you're being cautious with regards to that because that was driven by FX or if there is another reason behind that.

And then, if I may go to the pipeline, I am just wondering there hasn't been any movement in the number of programs in the partnered pipeline. I'm just wondering is that really just static or has there been some change that we just can't see it, i.e., has there been some attrition from new programs that's been added.

And then with regards to Novartis, you said that there has been a bit of a change you have seen at Novartis increasing their downstream capacity and mentioned that we are going to be lower -- a lower number of projects. Just wondering if you could just give us an idea as to what lower means. And I will stop there. Thank you.

Hi, Cornelia. I'll start. Thank you for your questions. Maybe to the first question, how can we expect the R&D events to ramp up for the rest of the year by quarter, I think I can answer that by saying that the quarterly R&D spent for 2009 was somewhat -- or could be instructive here in that what you see or what you saw rather in 2009 is gradual ramp up of extensive (inaudible).

We expect that ramp up to accelerate in the second half of the year, but expect likely that Q2 expenses will be higher than Q1. But I think the second half of the year is where you will see the real increase.

Okay.

In terms of SG&A expenses, I believe that those expenses actually will be rather constant for the year. So I would not expect a very large ramp up in that regard.

As it relates to your question on AbD, you mentioned that you felt that the guidance might be a bit cautious. If one takes the Q1 results and multiplies it by four, I come to the top end of the guidance range of EUR22 million. Even if you kind of took a pro rata view of things, I really wouldn't say that it's terribly optimistic or pessimistic in any way. But rather, kind of, comes very close to our guidance range just by multiplying by four.

But I think the one wild card, as it relates to the results in that segment, relates to the development of foreign exchange, in particular, the US dollar and the pound versus the euro. Last year, we had very significant impacts as it related to the top line and bottom line for that unit because of the rather large movements in FX. So far, we haven't seen that this year. The effects have been minimal, but I would add that as the caveat to how the results of the year would come out.

Okay.

And Cornelia, I will take the other questions. First of all, regarding the Partnered pipeline, the number of projects, as you noted, there hasn't been any updates in the first quarter so far. What you haven't seen is that we had a gain of one program and a loss of one program, the early stage program, so that overall there is plus minus zero.

Regarding Novartis, the change is really not significant at all in terms of the number of projects overall. It's close to what we originally expected. I think it's good news in that we expect a higher rate of programs going into the clinic. So it essentially reflects, I think, higher productivity of our discovery in pre-clinical work. And therefore, simply out of capacity constraints, we are looking at or contemplating a slight reduction in the total number of projects that would be pursued over the full duration of the collaboration. But it really is an immaterial effect on the overall output that we expect this collaboration to bring.

Okay. But I mean from one of your presentations I seem to remember that you said you were looking at something like 100 programs.

Yes, we've always said a triple digit number and that number stands.

Okay, fine. All right. Thank you very much.

Thank you. And our next question comes from the line of Daniel Wendorff from Commerzbank, Frankfurt. Please go ahead with your question.

Yes, good afternoon. Two questions I actually still have. And after the last round, one is also relating to the AbD Serotec segment and as you mentioned that they were some one of orders on the OEM side. And I was just wondering how big they were in terms of sales contribution and it would certainly be helpful if you could give us a little bit more color on that.

And secondly, on your proprietary R&D pipeline you mentioned that you are preparing for a phase II program -- for a secondary phase II program for MOR103. I am just wondering when we would get a bit more details on that. And also on MOR202, how does the schedule for MOR202 with regards to the developments that looks like for 2010 and maybe also first half of 2011? Thank you.

Hi, Daniel. I will just answer one of those questions. I will take the first one, in fact. To give you a ballpark, we are talking about a one-off sale of approximately EUR1 million.

And regarding the R&D pipeline questions, for competitive reasons we are going to keep the identity of the second indication for MOR103 confidential as such time as we feel that we are sufficiently far down the track, we will announce that, but we don't feel, yes, this is the right time.

Regarding MOR202, recall that we said we would file a clinical trial application in the fourth quarter of this year for European phase I, II trial because of the campus study obviously and we are on track for that, and we would anticipate then on the back of that, starting the trial in Q1 of next year.

Okay. And maybe with regards to the EUR1 million one-off in Q1, that's -- how lagging is it that these sort of orderings will occur in the quarter to come in 2010? Was it surely a one-off this year or --?

I think the type of business that it is, so it is an OEM type of business which means that it -- from its nature it is a one-off type of business.

Okay.

Of course, there is competing orders but they are -- they tend to be kind of large orders that are ordered once or twice per year by a customer. And so by their nature they are one-off, but I think in terms of the profitability that was associated with that, that was somewhat unusual, and I don't expect that to continue for the rest of the year. It may happen, but -- we don't put that into our plan.

Okay. Thank you very much.

Thank you. And our next question comes from the line of Hanns Frohnmeyer from LBBW. Please go ahead with your question.

Hi, good afternoon. Just one question left again on the Novartis changes. So you mentioned that the number of clinical projects might increase. Can we get a -- more detail on when this will happen? Will this happen already in 2010 or later? And in combination to that, you already wrote down that you expect four to six INDs this year which is not any change compared to the full year presentation. So I would assume that those clinical projects might start later. Could you clarify that please?

Sure. Indeed we stand by the guidance that we gave earlier this year that we expect four to six new INDs from partners this year, so no change there. And the improved throughput -- so the improved number of -- or increased number of programs moving this to the clinic in the Novartis collaboration we expect to take effect really over the coming years.

Okay.

And I think the way to think about this is more in terms of really higher productivity of the discovery and pre-clinical activities that we have, which is of course a very gratifying development for us.

Okay. Yes, that is helpful. Thanks.

Thank you. We currently have no questions coming through. (Operator Instructions) And we have a follow-up question from the line of Cornelia Thomas from WestLB. Please go ahead with your question.

Hi, I would like to ask a follow-up question on this number of new INDs in 2010. You are going from four to six. Is that new antibodies or is that new programs, i.e., can it be -- is that a program that is already in clinical phase could have another clinical trial coming up?

Good question Cornelia. Actually we mean antibodies here, so specifically new individual programs moving into the clinic.

Okay. So that means theoretically there could be more from new programs, clinical programs, if one of the antibodies that is already in the clinic starts another program -- clinical trial.

Theoretically, yes. But I think the way you should think about that is that this is the visibility we have on all new clinical starts.

Okay. All right thank you very much.

Okay.

Thank you and our next question comes from the line of Thomas Schiessle from Equities. Please go ahead with your question.

Thank you for taking my question. This is Thomas Schiessle. Actually, there is a question on the Galapagos collaboration. Would you please go in to shed a little bit more light on the new programs you started with the partner. And the second one is for Dave concerning the cash flow statement. There is a quite steep increase in deferred revenues in the quarterly view. Will we see such an increase in the coming months ahead -- coming quarters ahead and what will be the outcome for the P&L account? Thank you.

Thank you, Thomas. Let me take the first one on Galapagos. And this is, remember, an early stage discovery and really target validation program at this stage and we feel there is really nothing to be gained by talking about or identifying specifically these programs. As you have seen, we have decided to terminate one of our early discovery programs, MOR203. We are happy to keep you updated on the number of programs, but it really doesn't do anyone any good to talk about these programs. We should recognize that they are early stage and experimental. So all I can say at this stage in regards of Galapagos is we have been very happy with the collaboration with them, it has gone very well and that is why both parties agreed to add this fourth program to it, but more than that in terms of the identity of the program I really can't say.

Fair enough.

Okay. As it relates to your deferred revenue question, Thomas, you are correct that if you take a look at the two positions of deferred revenue in the cash flow statement, the recognition of deferred revenue is relatively constant versus the prior year. But there was a big build-up that has very much to do with the collection which I referred to in my speech where I talked about a collection of monies which we did not collect in Q4, but rather collected in Q1. And that has an impact on the level of cash which is generated by operations in Q1.

As it relates to your question will it occur again, there is nothing foreseen that is really unusual compared to prior years that we would characterize as noting of significance at this point.

Okay. So it won't trickle down or it will trickle down during the year?

Yes, it will be recognized during the year and the effect that it has had on both our balance sheet in terms of additional cash and the cash flow statement as you see from the cash generated from operations, that's kind of happened already in Q1.

May I ask another financial question about --?

Please.

Dave, you mentioned in your speech that AbD Serotec made a good business and current exchange rates didn't impact those numbers very much, but if one compares it to the year ago, we have seen a little better British pound and better US dollar. So is this -- why didn't it impact it so low?

Yes, and Thomas perhaps we may be looking at different things. When I look at the average of the quarter and that is really is kind of what may be relevant for the calculation of sales because of course the sales come pro rata throughout the quarter, if I look at the average for US dollar in Q1 2010 it was 138 and in 2009 it was 139 in the previous quarter. The effect wasn't that large. In terms of the GDP, there I see relatively also minor movement. So maybe what we are talking about here are two different things. I think the average rate may be the more relevant one as we consider changes of FX as it relates to sales.

So we will see if currency won't change that much in the coming months we will see a leeway movement to the segment revenues and net profit.

That is correct.

Okay, thank you so far. Thanks.

Thank you. And our next question is a follow up question from the line of Daniel Wendorff from Commerzbank, Frankfurt. Please go ahead with your question.

Yes, thanks for taking the follow-up question. Actually, one question, one financial one relating to the big financial income you had in Q1 2009, which I understand is due to the sale and reinvestment of marketable securities. I was just wondering whether any such event is also scheduled for the year of 2010 just (inaudible) next quarter there. Thank you.

We don't have anything planned per se, but of course as did happen in 2009, we did have one of our major payments get paid in the first quarter of 2010, which we talked about before, which was one of the reasons why we ended up selling some of the marketable securities to give us liquidity. So I think in conclusion I would say I don't rule it out, but at this point I haven't planned it as part of our cash flow management practice for the rest of the year.

Okay. That is helpful. Thank you.

Thank you. And our next question comes from the line of Gary Waanders from Nomura. Please go ahead with your question.

Good afternoon folks. Just on MOR103 in the phase Ib/2a trial. You mentioned you've got centers open in Germany, Bulgaria and The Netherlands. Are you likely to open centers in other countries during the next year or so?

Gary, yes we are looking at another European country at the moment. We are not yet ready to disclose which one it is, but simply to build up the number of centers that we want to get to, yes we are indeed looking at another major European country.

And in sort of a rough proportion, where do you expect most of the patients to come from?

I mean purely population wise, Germany we expect obviously to be an important contributor and probably the most important just in terms of numbers. But it's roughly, very roughly we expect it to be divided evenly between those four then eventually countries with perhaps Germany being the single biggest.

Okay. And the total number of centers in the end?

That is something we haven't talked about either.

All right, thanks.

All right.

Thank you. We have no further questions. I will now hand back over to Claudia Gutjahr-Loser to wrap up today's call. Thank you.

Actually, it is me again and then I'd like to conclude by reminding you of the key messages to take away from the call. First, our two most advanced proprietary programs MOR103 and MOR202 are both moving forward according to the timelines we announced earlier this year. Both the Partnered Discovery and AbD segments are progressing very well, as evidenced in the latter case by a record quarter regarding both revenues and profit. And finally, we have reconfirmed the financial guidance we issued at the beginning of the year, and overall the business is well on track.

Should any of you would like to follow up with us directly, we are in the office for the remainder of the day. Thank you again for joining the call and goodbye.

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