MorphoSys AG (MOR) 2010 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the MorphoSys presentation Q2 Results 2010 Conference. Please note that for the duration of the presentation, all participants will be in listen-only mode and the conference call is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions). Now I would like to turn the conference over to Claudia Gutjahr-Loser to begin. Please go ahead.

Good afternoon and good morning 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 Q2 conference call and thank you for participating. During the call we would like to talk about the Company's financial results for the first six months of 2010. Simon will begin by giving you an overview of the quarter, then Dave will review the financial results for the first half of 2010. Afterwards, we will open the call for your questions.

Before I start, I want to remind you that during this conference we will present and discuss certain forward-looking statements concerning the development of MorphoSys core technology, 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 like now to hand over to Simon Moroney.

Thank you, Claudia. And also from me a warm welcome to all of you on the call. As is evident from the financial results, the business continues to perform well. Operationally, we had some very significant events in the second quarter of this year and I'm happy to review the progress the Company has made.

I'll start my review with our proprietary therapeutic antibody portfolio. The big news this quarter was our in-licensing of a very exciting anticancer antibody from Xencor, now named MOR208. We described this program in depth on the conference call we held exactly a month ago and therefore I won't go into the details again. For clarity, however, I would like to highlight a couple of points that came up in discussions since the announcement.

We've been asked a few times why we don't just make a HuCAL antibody against the same target. The answer here is twofold. First, MOR208 comprises a proprietary Xencor modification that gives the antibody a dramatically enhanced ability to kill target cells. Second, by accessing this program, we save at least three years in comparison with starting a new program.

I'd also like to remind you of the terms of the agreement. We've made a one-off payment of US$13 million and stand to make development related milestone payments as well as paying royalties on end sales. Xencor will carry all of the cost of the phase 1 trial. Until completion of that trial, the deal is P&L neutral for us. Since we signed the deal a month ago, we've been working closely with Xencor on arrangements for the trial, which we now expect to commence within Q3.

We've been asked whether to expect more such deals in the near future. That's rather unlikely for two reasons. First, the deal was the result of a thorough survey of the antibody landscape. And as a result, we know what molecules are out there and that the Xencor compound was one of the few we felt was worth making a deal on.

Second, with MOR103 potentially going into multiple indications, MOR208 as well, and MOR202 perhaps in a second indication beyond multiple myeloma, we really have our hands full at the moment.

Moving on to the other advanced programs regarding MOR103, the ongoing phase 1b/2a trial in rheumatoid arthritis patients continues as planned. MOR202 also continues as planned. Earlier this month we announced that this program will benefit from a German government grant of about EUR1 million, which is intended to support the identification of biomarkers that will accompany its development.

We see this as an important means of adding value to the program and look forward to working with our local collaborators at the Klinikum rechts der Isar, the University Hospital of the Munich Technical University.

Switching now to the partner discovery segment, here, too, excellent progress was made during the second quarter. First and foremost, two new partner programs entered the clinic during the quarter, as Centocor and Novartis each advanced a HuCAL antibody into phase 1. As is often the case, we are unable to disclose the targets at this stage. However, it's worth noting that the Novartis program is in the field of musculoskeletal disease, which is the first HuCAL program in this area to reach the clinic.

The two other programs that are already in the clinic, data has been recently released. As part of the Q2 results conference, Roche confirmed that Gantenerumab, the HuCAL anti-amyloid beta antibodies for Alzheimer's disease, will move into a phase 2 clinical study. Roche also released some preclinical data on this program at the recent International conference on Alzheimer's disease in Hawaii.

These data highlight some of the interesting properties of the antibody, in particular the fact that in a transgenic mouse model, chronic treatment led to a significant reduction in amyloid load, smaller sized amyloid plaques being most sensitive for treatment. Peripheral a-beta levels were not increased after administration of the human antibody to transgenic mice, suggesting that clearance of peripheral a-beta was not affected.

At the ASCO conference in June in Chicago, Centocor released some early clinical data from their CNTO 888 program, which is a HuCAL antibody against MCP-1. Amongst other results, the data show the antibody to be well tolerated up to at least 15 mg/kg. You'll recall that this antibody is currently in two ongoing phase 2 trials, one in cancer and the other in idiopathic pulmonary fibrosis.

Overall, our pipeline is maturing well. There are more HuCAL antibodies in the clinic than ever before. As we talked about in May, for the first time Novartis has achieved clinical proof of concept with a HuCAL antibody. We remain on track to meet our projection that between four and six new programs from our partners entering clinical trials this year.

The total number of partnered programs, as of this reporting date, is 64, one less than previously due to the termination of a preclinical program by one of our partners. We expect this number to increase again as several new programs start during the rest of the year.

Turning now to AbD Serotec, the unit continues to grow the top line faster than the market. First half revenues reached EUR10.6 million, a 9% increase over the same period last year. Although the unit recorded a small operating loss during Q2, this was due to an unfavorable sales mix and a write-off of the inventory, which affected profitability in that quarter. But we don't in any way see this as indicative of how the business is developing. On the contrary, AbD Serotec is on track to reach its targets for the year.

That concludes my review of the first half. Before handing over to Dave, I'd like to inform you that we plan to hold an R&D Day in the fourth quarter of this year. We're planning two events, one in Europe and one in the US. On this occasion we'll provide a thorough update on the pipeline, as well as announcing for the first time some of our recent technology developments. With that, over to Dave for his review of the financial results.

Thank you, Simon. Let's begin the financial analysis with operating revenues. In the first six months of 2010, Group revenues increased by 15% to EUR43.5 million compared to EUR37.9 million in the same period of the previous year, with all three segments showing stronger revenues than last year. Our largest segment, partner discovery business, contributed EUR32.8 million in revenues, an increase of 17%, which includes success-based payments in the amount of EUR3.6 million, which declined from last year's EUR5.4 million.

The proprietary development segment, which includes the Company's own and joint drug development activities, accounted for EUR0.6 million of total revenues. Those revenues arose from funded research payments within our predevelopment program with Novartis. Revenues of the AbD Serotec segment increased by 9% to EUR10.6 million. Measured at constant foreign exchange rates, revenues in this segment would have amounted slightly lower to EUR10.4 million, while revenues in the other two segments would have remained unchanged.

Due to our planned higher investment in proprietary drug development, total operating expenses increased to EUR35.2 million in the first six moths of 2010, an increase of 12% compared to the same period of the previous year. In the first six months of 2010, cost of goods sold arising from the AbD segment increased to EUR3.8 million compared to EUR3.3 million in the same period of the previous year, in line with our sales increase.

Expense for research and development amounted to EUR20.5 million in the first six months of 2010, an increase of 14% compared to last year, which was mainly driven by higher personnel and material costs. Proprietary product development costs made up roughly half of those total R&D expenses. More specifically, expenses for proprietary drug development amounted to EUR11.1 million, up from EUR8.5 million in the first six months of the previous year, mostly impacted by higher headcount in the unit.

SG&A expenses increased to EUR10.9 million compared to EUR10 million in the first half of 2009, which is attributable to several items, including IT costs and building and infrastructure costs. Unallocated corporate costs in the first six months of 2010 went down from EUR4.3 million from EUR4.4 million in the same period of the previous year.

Total Group headcount was at 432 employees at June 30th compared to 404 at the end of 2009. The majority of headcount was added in the R&D department, which now makes up 269 people.

Group operating profit for the first six months of 2010 amounted toEUR8.3 million, an increase of 26%, compared to EUR6.6 million in the first six months of the previous year, despite the higher investment in proprietary R&D. Broken down by segments, the partner discovery segment showed an operating profit of EUR22.2 million, and the proprietary development segment came in with an operating loss of EUR10.5 million.

The AbD Serotec segment result slightly decreased to EUR0.9 million compared to EUR1.1 million in the first six months of 2009. In the first half of the year of 2010, net income amounted to EUR5.9 million, up from EUR5 million in the previous year. The diluted net profit per share was EUR0.26 compared to EUR0.22 in the first half of 2009.

Moving on to the balance sheet, MorphoSys held approximately EUR152 million in cash on June 30th, 2010, compared to EUR135 million at the end of 2009. Please note that this cash position at balance sheet date for Q2 2010 includes the outstanding upfront payment of approximately EUR10.5 million which was paid to Xencor in early July.

Cash inflow from operations in the first quarter of 2010 amounted to EUR28.5 million, a significant increase compared to the cash flow -- cash inflow ofEUR6.6 million in the same period of 2009, which was mainly due to revenue builddowns and the outstanding payment to Xencor at the balance sheet date.

As always, we use the occasion of our quarterly results to discuss any potential changes to our full-year financial projections. Today we can again confirm our original guidance from February of this year. And I'll repeat that we expect total Group revenues to come in at between EUR89 million to 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 is expected to come in at an amount between EUR26 million and EUR29 million.

Although we are not formally changing guidance for the full-year now, based on our best estimates today, we expect to be rather towards the upper end of profit guidance and a bit -- slightly lower to the bottom end of revenue guidance by the end of the year. It's important to note that we expect a significant increase in proprietary product expense related to expenses on our proprietary programs MOR103 and 202 in the second half of this year.

How and when that expense ramps up depends very much on actual progress within those programs. Additionally, we should see some revenue milestones before yearend, which could make revenues lumpy in the last two quarters of the year. I think by Q3 we will have some more visibility in order for us to be able to narrow our guidance range.

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

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

Thank you. (Operator Instructions). Your first question comes from the line of Cornelia Thomas from WestLB. Please go ahead.

Good afternoon. Thanks for taking my questions. Actually, just two, if I may. The -- could you give us an update on -- you've said that Roche is saying that the Gantenerumab antibody is phase 3 -- or phase 2 ready. Do you have any idea whether they've actually already filed the -- for approval of a phase 2 or whether that's still outstanding? And if it's still outstanding, when they are planning to do so?

And question number one is even after the Xencor deal, you still have a decent amount of cash on your balance sheet. You've already said you're not planning to use that to in-license any further antibodies. So just wondering if you have any plans regarding what you're going to do with that cash.

Thanks, Cornelia. I'll take those two. So, first of all, regarding Roche, the news that we have is that they have taken an internal decision to proceed with the phase 2 trial, and with that phase 2 trial they expect the first patients to be in early next year, is my understanding. More than that, we're not aware has been published at this stage.

So, whether they actually have approval, regulatory approval to start their trial, we can't say at this point. But we're aware that the intention is that those patients should be in at the beginning of next year.

Yes, okay. That's what I know, but okay.

So, unfortunately, we can't shed any more light on that. Sorry, secondly, regarding the cash, as we've said in the past, we continue to be interested in using at least some of that cash for potential acquisitions. We continue to look at potential opportunities that I would characterize being in the general areas of AbD relevance. And here particularly we're thinking about the diagnostics side of AbD rather than the research products, the reagent side.

And/or technology in its wider sense. We are actively looking at possibilities there. But as always, it's very, very difficult to predict if something will materialize and, if so, when. But that continues to be an ongoing effort internally here.

Okay. Thank you very much.

Pleasure.

Thank you. We currently have no questions coming through. (Operator Instructions). And we have a question now from Hanns Frohnmeyer from LBBW. Please go ahead.

Good afternoon. If nobody ask, I ask some questions on your P&L. So, the high financial income in Q2 is it a run rate for the rest of the year or where does it come from?

And then, as far as I remember it right, I read in an interview by one of your colleagues that you might expect by the end of the year up to 80 proactive programs running. Is that correct, coming from the 64 you currently have?

And then the usual question, if I look at your guidance, can we -- and even if you move it now to the upper end what concerns operating income, can we now expect two quarters in 2010 with an operating loss or with a very small operating profit? Thank you.

Let me start with question two there, and then I'll hand over to Dave for the questions about the financial income and the guidance. What we said was that in total, the total number of programs by the end of the year could be up to 80.

Yes.

And where we actually come in, it may not be 80, but it will be approaching that number. And here we're talking about total number of partnered plus proprietary programs, of course.

Yes.

And that number is currently around 71, I believe. But we do expect additional programs to be added before the end of the year, both proprietary, and here I'm thinking in particular of co-development projects, and also, of course, new partnered projects we expect to -- we expect to add. So we're not sure where the number will finally end up, but it will likely be somewhere in the high 70s, I would characterize at this stage.

The partnered program are mainly coming from Novartis, I assume?

Mainly, but not exclusively.

Yes.

So, you'll recall that we do have other partnerships in place and there may be one of the other programs coming out of those partnerships. But mainly it's from Novartis, yes.

Okay, thanks.

Okay, Hanns, I'll just take the two financial ones. The first question about the financial income, I'm assuming you're talking about the quarterly --

Yes.

-- financial income, not the year-to-date.

No.

That quarterly number -- or actually both of those numbers include gains on marketable securities. So I would say that what you saw for Q3 is not representative of the year as a whole.

Yes.

Rather the year-to-date number is something that you should orient yourself as to what you would expect the financial income to be at yearend. That's the first question.

The second question was, given that we have unofficially somehow guided towards the upper end of profit guidance, does that imply that we will make relatively low profits and/or potentially a loss in future quarters? So I think I would answer that by yes.

Yes.

And I think it is, I would say, very likely that we will show relatively small profits in the second half of next year. We don't exclude -- sorry, in the next -- sorry, in the next half --

Quarters.

-- next half of -- the next two quarters, rather, sorry. And I don't exclude that one of those quarters could be a loss because, as I may have mentioned in the speech, the revenues that we will see in the coming quarters are going to be somewhat lumpy due to the fact that there are several milestones in those revenues.

Yes.

Because of the timing of those revenues and the timing of proprietary expense ramp-up, it could be that one of those quarters is negative.

Okay. Thanks.

Thank you. Your next question comes from Daniel Wendorff from Commerzbank. Please go ahead.

Yes, good afternoon. Firstly, regarding your very strong performance in the therapeutic antibody segment, could you give me a bit more details with regards to where that exclusively come from? Is that the Novartis deal?

And second question relates to the AbD Serotec division. And there I have a question regarding your sales growth you observed in the second quarter with regards to external revenues generated. Is that a revenue growth where we can expect going forward or was it impacted by some sort of one-off item? And also, related to the sales growth, do you see any sort of weakness in the markets which you serve there?

And lastly, I think the question you partly already answered, the Novartis deal. How does that develop with regards to the payments which you are entitled by commitment and the part which would be driven by meeting some certain milestones within the deal? That would be helpful. Thank you very much.

Hi, Daniel. I'll take the first two questions of that before I hand over to Simon.

Yes.

So, when you look at the AbD Serotec numbers year-to-date, they show an increase of about 8.5%, 9% compared to the prior year.

Yes

And I think that's consistent with our guidance and what you can expect till end of the year. Now, I'm afraid none of us caught your first question. Could you repeat that on the therapeutic side?

Yes. The other question was the therapeutic antibody segment was quite strong in the second quarter. And my question was, was it related largely to the Novartis deal or was it a general good performance across all deals basically?

Yes. That's a good point. And I assume you're pointing less to the sales and more to the profitability of the segment. And I think it was a very strong quarter. And remember that not all revenues that we have in that segment are, so to speak, equal, that, for example, milestones go not only into the top line, but they also go to the bottom line.

We also have revenues which are FTE bound. In other words, they have costs associated with them, meaning they have somewhat less revenues. And some type of licensing revenues go straight to the bottom line and are therefore very profitable, where some other type of license revenues that we have are somewhat less because they have payment outflows associated with them.

So, in summary, yes, we had an unusually good quarter. And I think that is probably not going to be representative of the year as a whole because we had many revenues went straight to the bottom line in that particular quarter.

Yes.

And then, Daniel, can I answer your last question, which I interpreted to be a more qualitative question about how the Novartis collaboration is going, if that's right?

Yes, that's right. If you could give me some numbers with regards to revenues and then profits, that would be helpful as well. But I would not expect that.

Yes. Remember that this deal, which originated at the end of 2007, had a three-year ramp phase to it, which is now complete.

Yes.

So it means that that project is now fully staffed. We have the full size of the team in place and the maximum number of projects is now ongoing.

Yes.

Remember we had a pre-agreed number with them of projects that should always be maintained at the steady state and, unfortunately, we're not allowed to disclose that number. But we're now operating at that steady state.

And so what happens is as a project is completed and it's handed off to Novartis, a new one will take its place. So there's always a constant steady state number of programs ongoing. And what can happen, and this can lead to unevenness in the number of new starts, is if a lot of programs are kind of running in parallel, they may all come to an end around the same time, so that you may suddenly get a whole bunch of new starts and it may then be quiet in terms of new starts for a while, while those new starts are all worked up.

Okay.

And we've commented on this before when people ask about how many new starts can you expect year-on-year? That can fluctuate quite a lot because a lot of projects may come to an end in a particular year and new starts be initiated, whereas in other years that may not happen. So it is uneven, but I think overall that arises from the fact that we have to maintain this steady state of a lot of projects can be running in parallel here with similar start times.

Yes.

So, as you think about the deal, remember that we get a constant annual license fee from them?

Yes.

Which is around the EUR20 million number, and we get a constant now annual level of FTE funding from them to support the team that is now fully staffed.

Yes.

And that number is roughly in the EUR20 million range per year as well.

And what about some additional success related payments?

Yes. So, then, of course, what I haven't talked about is milestones, that then each program has milestone payments associated with it at certain points as they move forward in development.

Yes. Okay.

I hope that was some help.

Yes, that was some help. Thank you.

Thank you. Your next question comes from the line of Sachin Soni from Kempen & Co. Please go ahead.

Good afternoon, everyone. I have two questions, one regarding the balance sheet. If I look at your account receivable from December to June, that improved, but from March to June it wasn't an improvement. So what is the realistic level that we should assume for accounts receivable going forward?

And second question is regarding size of acquisition. AbD Serotec, are you expecting to acquire a higher margin business and what range that acquisition might be. Can you give me some idea? Thank you.

Sachin, let me start with question two there, and then I'll hand over to Dave for the question about the accounts receivable in the second quarter.

We kind of -- as we look at the possibilities for AbD Serotec, we're kind of thinking less about acquisition size, although, of course, that would be a factor, but more about fit. And here the logic is we see increasingly interesting opportunities for the HuCAL technology in the diagnostics space.

As you know, we're working with over 20 diagnostic companies on specific applications of HuCAL to specific diagnostic problems. And as we look at potential acquisitions here, the thinking is can we find a company that has a diagnostic capability which meshes very well with what we can do with HuCAL. And therefore, to be able to go a little bit further downstream in generating not just the HuCAL diagnostic antibody, but a HuCAL diagnostic assay, which we would then be able to commercialize through a partner.

So it's really about getting hold of a little bit more of the value chain by finding a well fitting modern technology-based diagnostic company to sort of bolt-on to HuCAL. And if we can find the right fit, then that's the first and foremost priority for us. And I'd rather focus in on that at this stage, rather than saying it must be above or below a certain size in terms of turnover or cost or whatever.

Just to maybe quickly answer the accounts receivable question, it is correct that we did build down accounts receivable during that period that you mentioned. I'm afraid we can't give you guidance or realistic guidance as to what an appropriate amount of accounts receivable balance would be at yearend. And the reason is as follows.

You have to remember that a number of our very important collaborations have anniversary dates and correspondingly payment dates in the months of December. Add to that the fact that we have several milestones, which we anticipate which are not insignificant, also in the final quarter means that I think it would be almost impossible for us to gauge an appropriate level of accounts receivable.

I think it's fair to say that what we saw at yearend was somewhat higher than we would expect. What we're seeing now is in line with what I recollect over the last several years as being an appropriate accounts receivable balance. But I'm afraid we can't give you a target simply because if one of these partners who owes these payments in December decides to pay in January, as, in fact, did happen in 2009 and had a significant impact on our cash flow, that would throw the number way out. And that's very, very difficult to predict.

That's clear. Okay, thank you.

Yes.

Okay, thank you. Your next question comes from the line of George Zavoico from MLV. Please go ahead.

Hi, everyone. Congratulations on a very nice quarter. A couple of questions. One, Simon, you mentioned that you would be advancing four to six programs -- or you or your partners would be advancing four to six programs into the clinic. And at the same time you'd be ramping up your expenses on your proprietary portfolio. You spoke of 103, 208 and 202.

First thing is in regards to the other proprietary candidates that you have spoken of before. Can you provide any guidance as to when 205, 104 or some of the others might be advancing into the clinic and therefore ramping up on your research and development expenses?

Hello? Hello? Hello?

Ladies and gentlemen, please bear with us. The host line has disconnected. I'll just reconnect.

Hello? Anybody there?

Okay, I'm just going to reconnect the host. Please bear with me.

All right. Thank you.

Sir, your line is now reconnected.

Very good.

Okay, sorry. Something happened there. George, we lost you after you asked about other proprietary candidates going into the clinic.

All right. So, briefly, I was asking about those other candidates that aren't in the clinic yet, whether you can provide guidance as to when they might enter the clinic and therefore increase your R&D expense.

Okay. So, the answer is we can't give guidance. Those discovery programs, the early stage, they're a good couple of years away from the clinic. And therefore, it's really a little bit early at this stage to speculate about that.

All right, thanks. Second question regards AbD Serotec. Clearly you're growing that business and I'm thrilled about that and looking for new opportunities in the diagnostic space. Can you break down the AbD Serotec business by geography? Do you see more growth opportunities in the US, EU, rest of world, and where your revenues are coming from?

Sure, George. I'll take a quick stab at it. I don't have the exact numbers here in front of me, but I would say roughly half of the turnover that we make in AbD actually comes out of North America, slightly less than half comes from the EU, about 40%, and the rest of world represents about 10% that we generate through distributors throughout the world. That's roughly the breakout that we have.

And the growth opportunities in each one of those markets, is growth more opportunistic or growing faster in any one of those compared to the others?

I would say at this point we see significant opportunity in all of those markets. I wouldn't overstress one geography vis-a-vis another at this point.

Okay. That's great. Thank you very much.

Thank you.

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

This is Thomas Schiessle from Frankfurt speaking. Hi, gentlemen. Two questions, if I may, one on AbD, one on the proprietary.

To the AbD, could you share with us the structure of the AbD business, so what is of -- what is made with the catalog business, what is made with customized business, and what is the reason for this write-down? Is it in the customer -- in the catalog business and is this because of a change in strategy concerning catalog business? That is one question.

The other is on proprietary pipeline. Recruiting on more 103, Simon, you mentioned that it's all according to plan. Does that mean that you will add some additional centers to speed up or to broaden the recruitment in 103? And is the second phase 2 in 103, how -- what about the next steps to do? What about the (inaudible) to start the phase 2? Thanks.

Okay, Thomas, thanks. Let me start with the second question about MOR103 and then Dave will come back on the AbD question.

Yes, we're always interested in adding more centers. Basically, the more centers you have for your study, the faster it goes. So we -- as you know, we currently have three countries up and running. We're looking at adding one to two additional countries. And we're also looking at adding additional centers in the existing countries where we're currently up and running.

So that's an ongoing process, I would say, with the goal of making the trial as successful as possible and recruitment as fast as possible. But at this stage, as we said, things are broadly on track and we're pretty happy with the way things are going.

Regarding the second phase 2 trial, and here I assume you're talking about a second indication, we have actually very recently consulted with experts on the preclinical data that we have in the second indication. Remember, we haven't disclosed that second indication and are not going to do so now, what that is.

But we have some very nice looking preclinical data. We recently had a very good consultation with experts in this field. And we're getting more and more encouraged, I would say, that it is, indeed, worth commencing a phase 2 trial in that indication. But the precise timing of that we haven't yet concluded. But my guess would be that that could indeed start sometime during next year. Does that answer your question?

Yes, of course.

Okay.

Okay, Thomas, as you know, you've followed the Company for some time, we don't give exact split-outs of the custom -- the OEM and the catalog business. But what we have done in the past is given a rough breakout of what the total numbers were for catalog plus OEM and custom. So what we can say is of the turnover that you saw in the first half of the year, though, roughly just over EUR1 million came from the custom business, and the rest came from catalog and OEM.

Now, if you look historically how those two split out, I would say in generic terms that catalog is the larger business of the two. But again, OEM, by its nature, means that these are business that we kind of do ad hoc, and there could be one year where OEM is actually larger than catalog. So in, again, generic terms, I would say that catalog represents of that rest slightly more than OEM does.

Yes. And what was the reason for this write-off?

The write-off in stock? There was no impairment. There was not a special write-off.

Yes.

According to our stock reserve policy, we routinely take a look at stock, at how long it's actually been in inventory. And irrespective of whether or not we actually think we can sell it, that much of these stocks that we write off are written off not based off of -- again, not whether or not we can sell it or not, but rather based on a time.

Yes.

So if the stock is in our stock for a short period of time, that it automatically gets written off. Clearly, this write-off is associated with a rather larger purchase of stock that had been done some time ago. The stock that was written off doesn't mean that it can't be sold, but rather mechanically we wrote off things that had been sitting in stock for longer than a certain period.

And that had been the reason for the long -- for the depressed gross margin in this segment?

For that quarter --.

For that quarter, indeed.

Correct.

Okay. Thanks so far. Or maybe an additional question on personnel. You had a quite nice increase in personnel after ramping up the Novartis activities, or the activities with Novartis. Is now a, so to speak, a plateau on personnel or will we see even increase in personnel numbers for the quarters to come?

I think -- it certainly won't increase at the rate it has increased in the past. As you said, the Novartis team is now fully staffed. [Hans Shortilee] has pretty much built out his development team, and that was part of the expansion that took place last year. So, yes, I think the rate of expansion will certainly be much, much less looking forward for the next 12 or so months than it has been in the last couple of years.

Okay. And the absolute last question on the -- on the stock repurchase program. Is there any intention to use it in the next -- in the next quarter?

So you're talking about the authorization that we've received at our annual shareholder meeting, I'm assuming, Thomas?

Indeed.

I think for the next quarters, no, we do not intend to use it. Legally we don't have the paid-in capital reserves that we need to go ahead and utilize it this year, but we will have that, assuming we meet all of our revenue and income targets, by the end of this year. So I think the earliest we could see using that would be sometime next year.

Okay. Thank you.

Pleasure.

Okay, thank you. We have no further questions coming through, so I'll now hand back over to Dr. Gutjahr-Loser to wrap up today's conference.

Before concluding the call, I'd lust like to remind you of the key messages to take away. Overall, the business is on track to reach its key operational and financial targets for the year. We expect the MOR208 phase 1 trial to commence soon, and MOR103 and MOR202 are both proceeding according to plan. And as well, our partnered pipeline is also progressing well and as expected.

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

Thank you. This now concludes today's call. You may now disconnect your telephone.