MorphoSys AG (MOR) 2010 Q3 法說會逐字稿

Ladies and gentlemen, welcome to MorphoSys presentation Q3 Results 2010. 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.)

Now I would like to turn the conference over to Dr. Gutjahr to begin. Please go ahead, madam.

Good afternoon and good morning and welcome. This is Claudia Gutjahr-Loser, Head of Corporate Communications and Investor Relations for MorphoSys. With me are Simon Moroney, our CEO, and Dave Lemus, our CFO. First, we would like to welcome you to our Q3 conference call and thank you for participating. During the call, we would like to talk about the Company's financial results for the first nine months of 2010. Simon will begin by giving you an overview of the quarter. Then, Dave will review the financial results for the first nine months of 2010. Afterwards, we will open the call to your questions.

Before I start, I want to remind you that during this conference, we will present and discuss certain forward-looking statements concerning the development of MorphoSys' 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 Moroney.

Thank you, Claudia. We've had some exciting events recently and I'm very happy to review this third quarter for you. Overall, we're on track to reach our goals for the year, and the picture that is emerging for next year is a particularly exciting one.

I'll start with the overall status of our therapeutic antibody pipeline. We currently have a total of 75 therapeutic antibody programs ongoing, including both partnered discovery and proprietary development. This is up from 72 at the end of Q2. Of these, five are currently in Phase 2 clinical development, seven are in Phase 1, 25 are in pre-clinical development and 38 are in discovery. We maintain our guidance that we may achieve up to six partner INDs this year, meaning that we have visibility on up to three more before year-end. I would like to stress however that we have no guarantees on precise timing, and cannot rule out that one or more slip into next year. Overall however, progress within our partnerships is excellent, and I'm confident that the coming 12 months will be a very productive time for our pipeline in terms of growth in the number of programs, as well as with regard to clinical data being reported and milestones being achieved.

The first segment I'll cover is proprietary development, comprising our own, as yet un-partnered programs. Patient recruitment is ongoing in our most advanced program MOR103. Most recently, we have secured regulatory clearance to add trial sites in Poland, where we see a lot of interest from clinical investigators. As you know, this is a fully blinded study, so you should not expect any interim data before headline results are available, probably a little more than a year from now. We will talk about some of the pre-clinical data around the program at our forthcoming R&D day.

The second most advanced program is MOR208, formerly XmAb5574. Here, the admission of patients into the US Phase 1 trial was delayed for reasons that I would characterize as being local and purely administrative. We expect that the first patient will be admitted shortly.

The third proprietary program is MOR202, where we are on track to file a clinical trial application by the end of the year, and anticipate admitting the first patient to the trial in the first half of next year. In addition to some very promising pre-clinical efficacy data, our anti-CD38 antibody is unique in having very good cross-reactivity to a non-human primate species, which has allowed us to conduct a full pre-clinical toxicity study. This in turn gives us an advantage when it comes to the forthcoming Phase 1 study, which we will start at a higher dose than our competitors with anti-CD38 antibodies have been able to achieve. This in turn should lead to a shorter study timeline.

An important recent development for us was electing the second pre-development program within our Novartis alliance. Recall that we have a number of options to co-develop programs with Novartis, and this new program adds to our focus on inflammation. As with the first program, Novartis fully funds activities until such time as the co-development part of the program is reached at formal candidate selection. This explains the revenue that you see booked within our proprietary development segment.

I'd like to turn now to the other segment of our therapeutic business, namely partnered discovery. Here too, we've had a very busy quarter. In August, we announced that Novartis had taken one of our antibodies into a clinical trial in the area of ophthalmology. This became the third HuCAL antibody to enter the clinic this year, and the first in this particular indication. It was also the fourth HuCAL antibody to enter the clinic within our relationship -- within our partnership with Novartis, which speaks to the productivity of this relationship.

In September, we announced a new partnership with the UK-based, infectious disease company Absynth. The basis for this collaboration is a set of targets identified by Absynth that represent highly promising points for an antibody attack on Staphylococcus aureus and in particular MRSA, the most common cause of hospital-acquired infections. It goes without saying that this is an area of enormous unmet medical need, and is of great importance to our industry. Our goal is to develop antibodies against each of the targets we have secured, and to look to partner the proprietary target antibody combinations at some point prior to the commencement of clinical development. This is a variation on the usual theme of our partnered discovery model, and is based on a particular opportunity we recognized together with Absynth.

Turning to our other partnerships, I'd like to remind you that the collaborative parts of our discovery deals with Boehringer Ingelheim and Oncomed will expire before the end of the year. This was expected as per the terms of the original agreements. There are two important points to note here. First, these expirations have no impact on our near-term revenue guidance of 10% to 20% growth, and second, while the collaborative part of the deals ends, we fully expect individual drug programs to continue, as is the case with Centocor, to name just one company, who continue to develop HuCAL-based drugs derived from our earlier collaboration.

All of our therapeutic programs except for MOR208 are derived from our proprietary technology platform. Our capability, which has always been built around the unique HuCAL technology, has now been significantly enhanced by our acquisition of Sloning Biotechnology and their Slonomics technology. We will have more to say about this in the coming weeks, but we are confident that it will result in us being able to generate even better antibodies, faster than is currently possible. We are no longer reliant on the modular structure of HuCAL for antibody optimization, and will increasingly incorporate Slonomics into all of our antibody optimization projects. Integration of the Sloning organization into MorphoSys is now under way and running smoothly.

I'll conclude my review of the quarter with a look at our third business segment, AbD Serotec. Despite a difficult market, particularly in the EU, the unit recorded a further revenue increase. Recent announcements have pointed to an important element of our strategy in AbD, namely establishing close relationships with a number of academic institutions. We see these as an important means of strengthening our revenue opportunities and increasing the attractiveness of our offering.

Finally, I'd like to take this opportunity to remind you of our forthcoming R&D day. We will hold two events, one in London on Thursday, November 25th, and one in New York on Monday, November 29th. We look forward to welcoming as many of you as possible to what I'm sure will be two very interesting days.

With that, I'll now hand over to Dave for his financial review.

Thank you, Simon. As you all have just heard from Simon's summary, MorphoSys's operating business is increasingly characterized by higher levels of investment in proprietary development activities, and accordingly, we can see this impact in our P&L statement today. Additionally, as evidenced by the Sloning acquisition, we are also investing more heavily in our platform technology and related service businesses than in previous years.

Having said that, let's begin the overview of our latest financial results for year-to-date Q3 2010 with revenues. In the first nine months of 2010, group revenues increased by 9% to EUR62.8 million compared to EUR57.6 million in the same period of the previous year. Partnered discovery, our largest business segment, contributed EUR47.4 million to revenues, an increase of 10%, including success-based payments in the amount of EUR4.8 million, which declined from last year's EUR7.8 million. This decline is the result of the timing of single milestone events, which of course has a significant impact on these numbers when viewing them by quarter. The proprietary development segment, which includes the Company's own and joint drug development activities, accounted for EUR1.1 million of total revenues. Those revenues arose from funded research payments related to our two pre-development programs with Novartis.

Revenues of the AbD Serotec segment increased by 3% to EUR15 million. Measured at constant foreign exchange rates using the corresponding average rates of 2009, revenues in this segment would have totaled EUR14.7 million, while revenues in the other two segments would have remained unchanged.

Total operating expenses increased to EUR54.8 million in the first nine months of 2010, an increase of 13% compared to the same period of the previous year. This was mainly due to our planned higher investment in proprietary drug development, or more specifically, increased costs related to our clinical and pre-clinical studies.

In the first nine months of 2010, cost of goods sold, arising solely from the AbD Serotec segment, increased to EUR5.5 million, compared to EUR5.1 million in the same period of the previous year. Expenses for research and development increased by 18% to EUR32.5 million in the first nine months of 2010, mainly driven by higher personnel costs as well as increased costs for external services, which was predominately driven by antibody manufacturing costs. As in the previous quarter, proprietary product development costs made up roughly half of total R&D expenses. More specifically, expenses for proprietary product development amounted to EUR16.3 million, up from EUR11.9 million in the first nine months of the previous year, mostly impacted by higher headcount in the segment. Costs for technology development amounted to EUR1.4 million.

Sales, general and administrative expenses increased to EUR16.8 million compared to EUR15.7 million in the first nine months of 2009, which was attributable to several items, including additional IP costs and increased building and infrastructure costs, mainly due to higher numbers of employees in Munich. Unallocated corporate costs in the first nine months of 2010 went down to EUR6.9 million from EUR7 million in same period of the previous year.

Total group headcount came in at 436 employees at the end of September, compared to 404 at the end of 2009. The majority of headcount was added in the R&D department, which now comprises a talented pool of 278 scientists - and I would add, likely one of the largest biopharmaceutical R&D teams currently operating in Germany today.

Group operating profit for the first nine months of 2010 amounted to EUR8 million, a decrease of 14% in comparison to the same period of the previous year. The third quarter in isolation generated a loss, which was mainly due to increased investment in proprietary R&D. Broken down by segments, the partnered discovery segment showed an operating profit of EUR31.4 million and the proprietary development segment delivered an operating loss of EUR17.3 million.

In the AbD Serotec segment, operating profit decreased to EUR700,000 compared to EUR1.4 million in the first nine months of 2009 and would have remained unchanged under the assumption of constant foreign exchange rates using the average rates for the first three quarters of 2009. Net profit of EUR7.2 million was achieved in the first nine months of 2010, compared to EUR7.7 million in the same period of the previous year. The resulting basic net profit per share for the first three quarters of 2010 amounted to EUR0.32, compared to EUR0.34 in the first nine months of 2009.

Moving on to the balance sheet, MorphoSys held approximately EUR132 million in cash on September 30, 2010, compared to approximately EUR135 million at year-end 2009. The cash position at balance sheet date does not reflect the October 7th payment of EUR19.0 million, which was paid for the acquisition of Sloning BioTechnology.

Net cash inflow from operations in the first nine months of 2010 amounted to EUR8 million, a significant increase compared to the cash inflow of EUR3 million in the same period of 2009.

As is customary during these conference calls, we use the occasion of our quarterly results to discuss and update our full-year financial projections. The Company's most recent guidance was given in February 2010 and reconfirmed in both the first and second quarter of the year. At the occasion of today's reporting of Q3 year-to-date financial results, we again reconfirm our full-year guidance, albeit narrow the range of previous guidance. As alluded to during our Q2 call at the end of July, we continue to expect total group revenues to come in at the lower end of the guidance range. Accordingly, we now narrow the range for our full-year 2010 group revenues to between EUR89 million and EUR90 million. Assumed in this narrowed guidance are significant milestone events and additional commercial revenues in the last quarter of 2010, which are expected to have a considerable impact on our full year results.

Likewise, in our previous conference call updates, we expected a group operating profit to be at the upper end of our guidance, and now accordingly narrow our operating profit range to EUR7 million to EUR9 million. Investments in proprietary technology and product development are expected to land in the range of EUR27 million to EUR29 million, a tightening of the previous range by approximately EUR1 million. For the AbD segment, we also expect revenues to come closer to the lower end of our sales guidance given during the year, of EUR21 million to EUR22 million. Accordingly, we can re-confirm our original profit margin guidance for the AbD unit, but also expect it to come in at the lower end of guidance - that is now closer to 5% from the original 5 to 8% band of profit.

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

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

(Operator Instructions.)

We have a question coming from the line of Hanns Frohnmeyer from LBBW. Please go ahead.

Yes, good afternoon. It suddenly works. So, I have three questions. The first is could you please elaborate a bit on this MOR208 delays, what you mentioned on the first three -- Phase I patient recruitment? And then, I'm curious on the, whether you could give us more insight on the weak AbD business, what are the actual reasons for what the segment is fighting with? And the third question is, if I looked at on the payment of your Sloning acquisition in the fourth quarter, can we expect further [bookings] from the sale of marketable securities in that quarter as we saw it this quarter or last quarter? Thanks.

Okay. Thanks, Hanns, and I'm glad that we got the technical problems sorted out. It didn't seem believable somehow that there were no questions at all, so we're happy to hear from you.

First of all, regarding MOR208, as we said, the delay is really purely local at the study center in the US. And it really is -- without going into the precise details, I can tell you that it's really a very, very minor, very administrative holdup, nothing to do with the trial design or the application or any regulatory problems at all. It's a peculiar, very local and very minor administrative holdup, which is now being solved. And we literally expect patients to be admitted any day now.

Okay, good.

So, that's the MOR208. AbD - yes, they did have a weak Q3. Summer was very slow. And the main weakness we're seeing is predominately in Europe, especially in some of the important countries. The UK has been weak for us. Some of the more southern countries, at least Spain, France have been weak for us. We -- this seems to be related perhaps to the downturn. Particularly, smaller companies seem to be looking to save or to be more price sensitive perhaps than they were in the past. So, we interpret this as being to summer, the extent, a reflection of what's going on in the economy of some countries, because certainly, the US has actually done rather well. So, the US is growing and at a good rate, high single digits. And here, we think, and also talking to some of our peer companies, we're now really seeing the impact of the stimulus package filtering through into the US. So, we hope that this is something that won't persist in Europe, and already, Q4 is looking much better than Q3.

So, that's the next question. So, you see some recovery now in October, I assume?

Yes, we feel -- Q4 traditionally is a pretty good one and Q3 is traditionally quiet because of summer. So, we're hopeful and expect that the Q4 will indeed be significantly better.

Yes. Good. Thanks.

And very -- taking after your point on marketable securities, we actually sold those in advance of the transaction. So, as it relates to the Sloning acquisition, you won't see the same size of marketable securities gains in Q4 that you saw in Q3 of about EUR1.8 million.

Yes. But, you will have also to sell some marketable securities, or you already have enough cash?

Well, as CFO, I would say we never have enough cash, but--.

--No, just for paying the Sloning.

Yes. To pay Sloning, I think you've seen all of the gains that you would have seen related to that transaction in Q3. We had sold that amount prior to the transaction that you see as the EUR1.8 million.

Thank you.

Thank you. Our next question is coming from the line of Victoria English from MedNous. Please go ahead, Victoria.

Yes. Simon, I was interested in the agreement that you've gotten into with Absynth Biologics, and I was wondering if you could just give us a view as to where the antibody might be able to be effective where traditional antibiotics have not been.

Sure. The work that Absynth has done has impressed us enormously in terms of identifying new and proprietary targets, which they have shown can be attacked with antibodies. One of the traditional problems, as you know, of course, is the emergence of resistance against traditional antibiotics from a molecule antibiotic type of approaches. We're hopeful that the targets we're going after here are sufficiently conserved and sufficiently essential to the organism that an antibody approach will be lethal.

That, of course, remains to be shown. But, certainly, the scientific work that Absynth has done suggests that that may be possible. And we're very excited to be able to demonstrate or -- and hopeful that we can demonstrate that that is indeed the case as we take our own antibodies forward against those targets.

Thank you.

Thank you. Your next question is coming from the line of Daniel Wendorff from Commerzebank. Please go ahead, Daniel.

Yes, good afternoon, and thanks for being able to ask a question finally. And three ones I have on the financial side, and starting off with the proprietary R&D spending. I found a number on your report of EUR16.3 million. Is this the comparable number to your full-year guidance of EUR27 million to EUR29 million? And second question on guidance for 2010 - how many--well, how should I ask this--how many INDs would have to be filed as partners to comfortably meet your guidance, and any more color on that would be helpful? And lastly, on the AbD Serotec division, assuming a better Q4 than we saw in Q3, is it possible that the division will turn back into profitability? That would be nice if we could get some color on that. Thank you.

Okay, Daniel, so if you go to page 22 of the financial report, you'll see the number that we believe to be the correct number for fully allocated proprietary product development spend of EUR18 million, not the EUR16 million. Probably, the EUR16 million number that you're referring to in the report is probably without overhead allocations from other segments.

Yes, okay, thank you.

The question is will the spend ramp up in the final quarter. Yes, we continue to expect that spend will ramp up in the final quarter.

Okay. So, the EUR27 to EUR29 million is still a likely level, yes?

Absolutely.

Okay.

Next question in terms of number of INDs to be filed in order for us to make guidance - I think the total number of INDs that we had scheduled for the year is four to six, and so far, we have filed three. So, for us to make guidance, we'll have to do at least one to three additional INDs to hit our full-year guidance.

Just to expand on that, as we mentioned in the speech, there are additional commercial activities ongoing, as well, which could result in revenues that could supplement whatever IND milestone revenue we generate in Q4.

And can you give a bit more details on these commercial activities?

I don't want to get into too much detail about that, but, I mean, there are discussions, negotiations ongoing within our core partnered business and they -- one or more of those discussions may generate revenues in Q4.

Okay, thank you.

And I guess to your final question, Daniel, about AbD's final quarter, for them to make the guidance that we've elaborated on during this call, they will not only have to have a reasonably strong quarter, but it will also have to be a profitable quarter. So, yes, it will have to be a profitable quarter--.

--Okay. That's helpful. Thank you very much. And maybe one add on to the proprietary R&D spending level - can you already tell how the level might look like in 2011?

I'm afraid we prefer to give that guidance either at year-end or some time in the first two months of 2011. We -- possibly, we might give some color during R&D Day in the coming months, but I'm afraid I prefer not to do it on this call.

Okay, that's fine. Thank you very much.

Thank you. The next question is coming from the line of Cornelia Thomas from WestLB. Please go ahead.

Hi, good afternoon, and thanks for taking my questions. If I could just follow up on that guidance issue, the top line guidance issue - so, if you want to make your guidance, you basically need something like 27, EUR26 million revenues in the fourth quarter. Seeing that your best quarter this year was a 23 and now you are back at 19 and a bit, just wondering which particular segment you think is going to perform or make up that difference, which is going to perform best in the fourth quarter and where you see that increased performance coming from in the fourth quarter.

And then, the second question is on your balance sheet, actually. I've noticed that in the current portion of deferred revenue, that has gone down by EUR7 million from the first half to nine months. I guess where did that -- I guess that went in your P&L. Could you just give us an idea of where that went and also how you see that developing going forward? Thank you.

Okay, maybe I'll take the question, I guess, related to the top line guidance, like where the performance is going to be. I think we've given guidance at the beginning of the year that milestones will be up to EUR10 million. You probably would have noticed the report that we have gotten roughly half of that guidance achieved so far, even though we're now in the third quarter - but, certainly, an outperformance in that partnered discovery segment for us to reach milestone guidance is foreseen in the fourth quarter. And as well, Simon alluded to that we would make some, perhaps some additional new commercial revenues. That would also be attributed to the partnered discovery segment. And last but not least, AbD will have to have one of its stronger quarters of the year for it to make guidance, also.

Okay. Can I just follow up on that, actually, because if you're -- I mean, that basically means they're expecting something like EUR5 million in milestone payments for the fourth quarter. And you just said you're expecting one to three more INDs. As far as I remember, that's about EUR1 million to EUR2 million per IND. What about if you just make one IND then?

Yes. I mean, again, I won't comment on the individual IND because they -- each contract is separately. But, yes, perhaps if we only have one IND, then we may indeed fall short in terms of milestones. But, again, as Simon alluded to, we are also currently looking at getting some additional revenue from these new commercial agreements.

Okay, thank you.

As it related to your question in terms of deferred revenues, actually, the two things you need to take a look at in terms of deferred revenues are not only the current portion, which is the portion you talked about, but also the long term portion. And if you add the two, comparing the two, you would have seen that from 2009, they've gone from roughly 25 to the number in 2010 would be 11 so that they, in fact, have gone down by quite a bit. Will they go back up? Yes. That number is very much driven by, in fact, payments, either milestone payments or payments from Novartis. And whether that is done in any particular quarter will influence that number heavily.

Okay. Thank you.

Thank you. Your next question is coming from the line of Christian Peter from Macquarie. Please go ahead, Christian.

Yes, good afternoon. Just actually a couple of my questions have already been asked, but just as a follow up for the last question asked by my colleague, to put it crystal clear, you are confident that you will deliver on your top line guidance even if you're only able to book one additional IND this year. Is this correct?

Yes, we are confident, Christian. And like always, when we issue or update guidance, it's always our best current view of what we can achieve for the remainder of the year. And our best current view are the numbers that we communicated this morning. And it's based on the visibility that we have on the milestones and also on the visibility that we have on these other commercial activities that are currently ongoing.

So, as we assume now, absolutely, we're confident that we can deliver that guidance range that were communicated and that's our best estimate as of today.

Okay. Thank you. And a second question, Simon - you mentioned at the beginning of the call that you expect 2011 to be very exciting. Could you give us a bit more color? I know you're not going to give the guidance on 2011 now, but give us a bit more color on where we would have to expect most of the excitement to come from.

I mean, particularly in regard to the pipeline. There are just already so many programs ongoing that's already in the clinic and we expect quite a considerable number of additional programs going into the clinic over the next 14 months, right, between now and the end of next year. But, the -- just the density of the data flow that's coming along and the density of the milestones that are coming along we expect to significantly increase.

So, for those reasons, and also for a variety of other reasons, yes, I expect next year to be a very news rich year and I'm very confident that we'll have a very financially strong year, as well.

Okay, that's very helpful. Thank you.

Thank you. The next question is coming from the line of Rudolph Besserve from Societe Generale. Please go ahead.

Yes, good afternoon to all. First question on your partnerships with Pfizer, Merck and [Bayer-Schering] - since we have not seen any partnered projects resulting from these collaborations yet, so should we expect anything in the near future on this front, and in particular, on Merck and [Bayer-Schering] partnership are supposed to come to an end respectively by end of December or March next year if I'm right. Can we have any hope that they will be expanded? Thanks.

Thanks, Rudolph. Yes, I mean, first of all, as with all of our therapeutic partnerships, we hope and expect those partners that you named to take drugs forward and take them into the clinic and to develop them. As you mentioned, we haven't had any yet that we've been able to announce, but we remain hopeful and indeed confident that there will be news flow from those and other partners in the months and years ahead.

Will it be a possibility that those deals could be extended? Not under the current terms and conditions. And remember that when we entered the Novartis deal at the end of 2007, we did so on the understanding that we wouldn't continue that standard fee for service business. So, there won't be an extension under the current terms, but that doesn't mean that we may not be able to work or may not choose to work with them or with anyone else under different terms and conditions.

Okay, thank you.

Okay, I just learned that this was the last question from the call. Since Simon has already given the closing remarks, we would end the call at this point. If any one of you should wish to call the office directly, we are all in the office for the remainder of the day. Thank you again for joining the call and for your patience to ask the questions 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.