MorphoSys AG (MOR) 2010 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the MorphoSys full-year results 2010 telephone conference and presentation. Please note that for the duration of the presentation, all participants will be on listen-only mode, and the conference is being recorded. (Operator Instructions).

Now I would like to turn the conference over to Claudia Gutjahr-Loser. Please go ahead, Madam.

Good afternoon and good morning, and a warm welcome to our 2010 year-end results conference call and webcast. I'm Claudia Gutjahr-Loser, Head of Corporate Communications and Investor Relations of MorphoSys. I'm here today with our complete management board, Simon Moroney, our CEO; Dave Lemus, our CFO; Arndt Schottelius, our CDO; and Marlies Sproll, our CSO.

First, we would like to thank you for participating. For the participants on the conference call, you can find the slide deck presented today on our corporate website. During the call, we would like to talk about the Company's financial results in 2010 and we will provide an outlook for 2011. We will then open the call up for your questions.

Before we start, I want to remind you that during the conference call we will present and discuss certain forward-looking statements concerning the development of MorphoSys core technologies, the progress of its current research and development program, 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 that speak only as of the date hereof.

I would now like to hand over to Simon Moroney.

Thank you, Claudia, and also from me a warm welcome to this, our 2010 year-end results conference and webcast.

2010 was an outstanding year for MorphoSys. 2011 promises to be even better. Exactly why, we will share with you during the presentation.

But before we get started, you will have seen that we announced this morning the departure of Dave Lemus, our CFO. This will be Dave's last results presentation with MorphoSys, and I'd like therefore to take this opportunity to thank him for all his hard work at the Company. The strong position that we find ourselves in today has a lot to do with Dave's performance and influence as CFO of the Company for the last 13 years. We wish him all the very best for the future.

Many thanks, Simon, for your very kind words. It's been a great experience to have served with you and the rest of the team over the last several years.

Although the list is simply too long to name individuals, I'd like the opportunity to thank all the people inside and outside of MorphoSys who have helped us build the Company over the years. I leave MorphoSys knowing that my job is done here. MorphoSys stands today as one of the preeminent life science companies in Europe. Best of luck, Simon, to you and the rest of the MorphoSys crew going forward.

Many thanks, Dave.

So, let's start by taking a look at how the presentation will run. We've got two parts. First, we'll review 2010, focusing on pipeline, technology, AbD Serotec, and financials, and second, we'll provide an outlook covering the same themes. The presentation will last about 30 minutes.

First of all, then, to our drug pipeline. The number of our antibodies in clinical development more than doubled in 2010. We started the year with eight of our antibodies in the clinic and finished with 17. That is serious progress.

This time last year, we told you that between four and six partner programs would enter Phase I in 2010. The final count was eight, well above our expectations. What this means is that our pipeline has advanced even faster than we thought, and very importantly, the probability that products will make it to market has also therefore increased, which will lead to a lucrative royalty stream.

As a result of the INDs last year and the programs advancing into Phase II, roughly 25% of our pipeline today is in clinical development. As you can see, we've come a long way from the situation just a couple of years ago, and our pipeline will mature even further over the coming years.

What this also means is that MorphoSys's share of the entire industry's antibody pipeline has grown dramatically. With close to 80 therapeutic antibody programs based on our platform, HuCAL is the most productive antibody library technology in the entire industry today.

If we take a look at those 17 programs in the clinic, we see something remarkable, which is the range of indications. One of the great strengths of our business model is that it enables us to participate in drug sales in many therapeutic areas and geographies for a long period of time. This underlines not only the productivity of our business, but as well its sustainability in the long run.

If we add up all of the volunteers and patients who will receive our antibodies in all of the trials currently ongoing, we come to over 1,500. This is another way of seeing the impact of our technology in the industry and is a very impressive statistic.

Another aspect is the size of the markets that are being addressed. As you see on slide seven, there are major commercial opportunities here. Gantenerumab, for example, Roche's Alzheimer's disease drug candidate, addresses an enormous unmet medical need. All of the other HuCAL drugs currently in Phase II trials also have huge medical and commercial potential.

Slide eight is an up-to-date snapshot of the entire pipeline. For those of you who know this slide, we've condensed it somewhat to make it a bit more legible. The first point to note is that the number of named programs is increasing. This leads to greater visibility and provides more information for investors and analysts to dig into.

This is certainly one reason why our shareholder base is changing to include more specialist funds, particularly U.S. based. This trend to greater visibility is one that we are very excited about.

To summarize the progress last year, first, eight new pilot programs and one proprietary program advanced into Phase I. Secondly, two partnered programs and one proprietary program advanced into Phase II. And third, seven partners in total now have HuCAL-based programs in the clinic. It's clear that there's just too much to talk about in detail here, and therefore we'll just pick out some of the individual highlights.

In our lead program, MOR103, as planned we commenced the Phase IB/IIA study in rheumatoid arthritis patients in four European countries. That trial is ongoing.

Based on some very promising preclinical data that we generated, we chose multiple sclerosis as the second indication. There is little doubt that MOR103 has potential in other indications as well. In this regard, we achieved an important milestone when a U.S. patent application covering MOR103 was granted in January of this year. This adds to the existing protection we have in the U.S. through our exclusive license to an issued patent covering the general approach of inhibiting GM-CSF in inflammatory conditions.

Moving down the chart, the second is the undisclosed Novartis program that has moved extremely quickly, achieving clinical proof of concept last year. The details of this program must remain confidential.

CNTO 888, a program developed by Centocor in two main indications, advanced into a second Phase II trial in cancer. This new trial is evaluating CNTO 888 in combination with four standard-of-care chemotherapy regimens.

Gantenerumab, Roche's Alzheimer's disease drug, went into a Phase II study that will recruit 360 prodromal Alzheimer's patients. The design of this trial is based on the recognition that intervening earlier may be important. Clinical studies on mild to moderate Alzheimer's patients may have little chance of working because the disease is already too far advanced.

Next is MOR208, the antibody that we in-licensed from Xencor last year. This is a great addition to our proprietary portfolio, which has closed a gap between MOR103 and MOR202. It's a highly innovative antibody that incorporates a proprietary modification of the Fc region, making it an effective killer of malignant B cells. The Phase I study of this drug in the CLL patients started in the U.S. in Q4 of last year.

The last program that we'll mention here is MOR202, our proprietary cancer drug candidate. Here, preclinical work was completed during 2010, and clinical trial application for a European study was submitted before year-end. All the preclinical data that we have generated encourages us to believe that we will have a truly differentiated multiple myeloma drug. We look forward to commencing the clinical trial this year.

This chart will continue to grow in the months and years ahead. It's perhaps the single most important graph in the Company as the product candidates it describes represent huge future value.

We move on to the technology section with another impressive number. 41% is the success rate for HuCAL antibodies from commencing a project until the start of clinical development. We've updated this figure up from about 35% following the recent series of INDs at the end of last year. Not included are those projects which were started within the last three years and which have therefore not yet had time to reach the clinic.

A 41% success rate to the clinic illustrates the power of our technology, as well as the commitment of our partners to moving products forward.

With success rates like this, why do we need new technologies? The answer is quite simply because we believe the potential of antibody-based therapeutics is far from being fully exploited. We are aiming to make new antibody drugs even better. That explains why, during 2010, we continued to invest internally in new technology and why we acquired Sloning BioTechnology.

So what technologies do we have and how do they fit together? First comes HuCAL. HuCAL is an established, high-quality, industry-proven source of antibodies for therapeutic applications. Increasingly, it's being used to make diagnostic antibodies too, as we will illustrate shortly in this presentation.

The second component of the platform is arYla. ArYla employs the Slonomics technology for antibody optimization. This newest technology is being applied to the optimization of HuCAL antibodies and will gradually replace the modular optimization that is an intrinsic part of HuCAL.

Finally, the Slonomics platform itself. Slonomics is the most powerful available technology for making protein libraries, and was the reason for the acquisition of Sloning. There is strong interest in this technology from many biotech and pharmaceutical companies, and we demonstrated this in December when we signed the deal with Pfizer, which provided an immediate return on investment.

Another aspect of technology is patent protection. Beyond the individual patents that we and our partners will seek to protect specific therapeutic antibody programs, we sometimes ask what happens when the core HuCAL patents expire around 2016. Through the acquisition of Sloning, we not only modernized our platform but extended the lifetime of patent coverage for a further seven years. By combining Slonomics with our antibody platform and expertise, we are building IP around our latest platform, arYla, and additional new technology developments, which expand the platform's lifetime even further.

Overall, 2010 was an excellent year for our technology platform.

Now to AbD Serotec. The statistic that we use to open this part is an important one. 12 is the number of diagnostic HuCAL antibodies in development within AbD Serotec. This is the area where we feel this unit has the greatest potential.

Slide 13 gives you an idea of the diagnostic projects based on HuCAL currently ongoing within AbD Serotec. As you can see, there are many different projects with different applications. The pipeline includes diagnostic antibodies for monitoring the clinical development of other drugs or enhancing the performance of kits. In fact, a HuCAL-based antibody already serves as a control in the market of diagnostic.

There is an even bigger commercial opportunity for HuCAL antibodies as the primary detection component of diagnostic tests. We'll talk more about this later.

There is a variety of business opportunities and diagnostics, and the time to market is usually shorter than on the therapeutic side. The model is similar to our therapeutics business, namely the use of our proprietary technology to make truly differentiated products which will be brought to market by partners. We believe that HuCAL can have as big an impact here as it is having in the therapeutic market.

With that, I'd like to conclude the operational review of 2010, and now I will hand it over to Dave for the financial review.

Thank you, Simon.

2010 was another very positive year for us, both operationally and financially speaking. Total group revenues increased to a record EUR87 million, and despite the significant increase in proprietary R&D investment, we still achieved a solid operating profit of approximately EUR10 million.

Let's begin the financial analysis with some highlights of the group result on slide 15. Group revenues for 2010 increased by 7% to EUR87 million and remained slightly under our initial expectations, resulting from new commercial agreements having a lower impact on revenues in 2010 than expected. Cost of goods sold, which only arises from our AbD segment, increased by 9% to EUR7.3 million, due to an increase in personnel-related costs and material costs, as well as foreign exchange effects.

As in previous years, the biggest increase in operating expenses can be observed in R&D, which increased by 20% to EUR46.9 million. SG&A expenses, on the other hand, decreased by 3% to EUR23.2 million. In sum, total operating expenses increased by 11% to EUR77.4 million, mainly as a result of the increased investment in proprietary R&D.

You can see a new line item in the financial statements, other operating income, which comprises grant income from governmental agencies. In previous years, funding from grants was included in group revenues.

Group operating profit was slightly above our original guidance range, coming in at EUR9.8 million.

Let's turn to our operating segments, which you can see on slide 16. The main financial contributor for the group is our partnered discovery segment business. Revenues in this segment increased by 7% to EUR66.3 million, due to a combination of higher levels of funded research and licensing fees. The segment's operating result amounted to EUR42.7 million with an excellent operating profit margin of 64%.

In the proprietary development segment, revenues increased to EUR1.8 million. These revenues stem from funded research of our two pre-development programs with Novartis. You may recall that until these candidates are firmly selected for co-development by MorphoSys, Novartis funds all development costs. In line with our communicated strategy, we'll significantly invest in our own (technical difficulty)

(Technical difficulty) within our original guidance estimates.

Let's have a closer look at our proprietary R&D spend on slide 17, which is the largest driver of expense in our Company. Consistent with our strategy to build value in our proprietary pipeline, our investment in proprietary product and technology development increased as planned and communicated by EUR7.2 million to EUR26.5 million.

Two-thirds of these expenses were allocated to the development of MOR103, MOR208, and MOR202. This includes the cost for the ongoing Phase IB/IIA study for MOR103 in RA and the preparation of a Phase IB safety study for MOR103 in MS. Also included are costs for the manufacturing of MOR202 with a planned Phase I multiple myeloma study.

You may recall that the current Phase I study of MOR208 is sponsored by Xencor. Nevertheless, we started some additional work here on our side to support future studies.

The remainder of the budget was invested in R&D programs and as well target validation projects, such as our collaboration with Galapagos.

On slide 18, you see the condensed balance sheets of MorphoSys. Total assets increased by EUR6.5 million to EUR212.6 million as of December 31, 2010. Compared to the previous year, cash and equivalents decreased to EUR108.4 million. The decrease resulted mainly from the acquisitions of Sloning and the in-licensing of MOR208 from Xencor.

Other current assets increased by EUR3.6 million, mainly as a result of an increase in Accounts Receivable. Non-current assets increased by EUR29.5 million, mainly as a consequence of the acquisition of Sloning and the in-licensing of a compound from Xencor.

The increase in patents by EUR9.5 million is mainly impacted by assets capitalized in connection with the purchase price allocation for the Sloning acquisition. Additional goodwill in the amount of EUR7.4 million arose from the Sloning acquisition. Unused tax loss carryforwards associated with the acquisition also allowed us to capitalize a deferred tax asset of EUR2.7 million.

From a cash flow perspective, net cash inflow from operations in 2010 amounted to EUR2.5 million, compared to a cash outflow of EUR1 million in the previous year.

Before I hand back to Simon for the outlook, I'd like to show you the results from our latest shareholder identification analysis on slide 19. Approximately 50% of our outstanding shares are held by institutional investors, increasingly by healthcare specialist investors. For us, this is a clear sign that the drug development pipeline is gaining importance. We also see an increasing demand from abroad, especially U.S. investors.

That concludes my review for the year 2010. I'd now like to hand back over to Simon who will continue with the outlook for fiscal-year 2010 -- 2011.

Thanks, Dave. So now to the outlook for 2011.

There is really a lot to look forward this year, but on slide 18 we've picked out just one item to kick this section off. For the first time in the Company's history, our annual revenue will exceed EUR100 million. This is a real highlight and illustrates the value and our success in commercializing the Company's proprietary technologies.

Most importantly, the high level of free cash flow that we generate enables us to maintain a high level of investment in value-creating proprietary research and development.

The largest area of investment is the pipeline, so let's start by taking a look at what to expect for our proprietary portfolio. This will be a big year for our lead program, MOR103. We expect to complete enrollment into the ongoing European Phase IB/IIA trial in rheumatoid arthritis during the year, in time to have the final results in the first half of 2012.

Second, we aim to commence a Phase IB safety study of MOR103 in multiple sclerosis, which is the second indication that we have picked for this program. Third, we've been preparing a subcutaneous formulation of MOR103 and will commence a safety study of this material on healthy volunteers this year. As previously communicated, we're on track to have final data from the ongoing rheumatoid arthritis study in the first half of next year.

MOR202. With this program, we will commence a Phase I trial in the first half of the year, based on the clinical trial application that we filed in Europe at the end of last year. This will be a dose-escalation safety study in patients with relapsed or refractory multiple myeloma. We'll also evaluate signs of preliminary anti-myeloma activity. The results of this study will be available in 2013. We'll also report some of the preclinical data we have generated in this program.

Last but not least amongst the proprietary programs, the U.S. Phase I study of MOR208 in CLL patients will continue during the year. Data from this trial will be available next year.

In total, then, there will be five proprietary clinical studies this year. This is a big step up from last year when we had one for most of the year, and then a second towards the end of the year. Please bear this in mind when we come to financial guidance. Substantial investment is being made here.

Turning to our partners' clinical programs, the pace of news flow will accelerate as more and more compounds move through development. From publicly-available information, we expect three trials to be completed. These are three Centocor programs and Phase I trials in cancer, psoriasis, and asthma. We will, of course, liaise with Centocor on how and when they plan to release information from these studies.

Our pipeline of therapeutic antibodies in development is expanding and maturing. Expanding in that we expect to initiate around 10 new programs with our partners, bringing the total pipeline to over 80 ongoing programs during 2011. Maturing, we expect to see between three and five programs commencing new clinical trials. This will bring the total number of programs in clinical development to between 20 and 22.

Overall, the pipeline is providing proof of a point that we have made over and over again -- that we have a powerful platform for delivering drug-quality antibodies. As we look beyond this year, we can anticipate a wave of proof of concept data, multiple programs in Phase III trials, and a little further out, drugs on the market.

All of this wonderful progress in the pipeline is based, of course, on our unique technology platform. The experience we gained in this field convinces us that it's possible to make even better antibody drugs. That's why we acquired Sloning and that's why we continue to invest in new technology.

Look out for new announcements also this year. Without giving too much away at this stage, we got new technology in the works that we hope will be another big step forward for antibody drug development for us and our partners.

The third area covered in our outlook is AbD Serotec. As we said earlier, the unit is making very good progress in establishing the HuCAL technology in the diagnostics market. This year, a major milestone will be reached when the first kit based on a primary HuCAL antibody comes to market. This important event will validate the use of our technology in this field.

We are convinced that AbD Serotec can grow and flourish, most likely through an increased focus in diagnostics. You've seen the pipeline of diagnostic HuCAL antibodies which are currently underway. In some ways, the unit is where we were in the therapeutics area a decade or more ago, just starting to establish the technology as an important source of products.

The diagnostics industry has been slower to adopt new technology than has the pharmaceutical industry. But with the first diagnostic kit based on a HuCAL antibody now coming to market, we expect the recognition of our technology to accelerate. Our focus this year is therefore to increase awareness and uptake amongst diagnostic companies. We're aiming to provide clearly differentiated products based on our antibodies, from which we expect a lucrative return through product royalties.

Although diagnostics products are, of course, smaller than therapeutics, time to market is much shorter. We're also looking at how the Slonomics technology could best be exploited within AbD Serotec.

Overall, some investment is required to further strengthen AbD Serotec's capabilities in diagnostics as the strategic focus area which will impact on the unit's operating performance this year. Nonetheless, the unit will be solidly cash flow positive and profitable, and we believe the investment is merited as we position AbD Serotec to grow further.

That brings us to our financial outlook. We already gave you a sneak preview of our expectations in January of this year. Today, we confirm that we expect revenues to be in the range of EUR105 million to EUR110 million, representing growth of 20% to 25% over last year. This range includes the one-off payment from Novartis that we recently announced. This will be booked as a success-based payment in Q1 of this year.

Overall, we expect in 2011 success-based payments of approximately EUR35 million. We expect operating profits to increase slightly over last year to between EUR10 million and EUR13 million.

To repeat what we've said in the past, we believe that long-term value is created by investment in R&D. And the operating profit guidance reflects that. This year, our investment in proprietary R&D will increase significantly from EUR26.5 million in 2010 to somewhere between EUR40 million and EUR45 million this year.

Here, you see the strength of our business. We're able to increase proprietary R&D investment by around 50% and remain very solidly profitable and cash flow positive.

We are investing significantly in R&D. We do so because we believe this is the best way to create long-term value for our shareholders. The lion's share of this investment will go into our very promising portfolio of antibody drug candidates to give them the best possible chance of becoming successful drugs.

We're also investing in earlier-stage therapeutic antibody programs and in new technology development.

Our decisions on proprietary R&D investment are linked to the merits of the individual programs. You should not extrapolate from the 2010 or 2011 levels of investment to future years. These costs do not reflect an irreversible build-up of infrastructure and resources in-house. For example, approximately half of the 2010 expenses for our clinical development candidates were external costs, for CROs, CMOs, et cetera. These are expenses which can be adapted as the Company moves forward.

We're committed to maintaining our profitability while investing as much as possible to drive value creation through proprietary R&D in the near term. This is the best possible way to create the conditions for increasing profits in the future.

For AbD Serotec, we expect revenue growth of around 9% this year. As I just said, operating profit will be down a little compared to last year at around 4%, but this is solely due to the increased investment that we believe is required to optimally drive this business segment.

Overall, we are looking forward to another very productive year, both operationally and financially.

That concludes the presentation. Thank you all for your attention. I'll now hand back to Claudia for the Q&A session.

Thank you very much. Please remember that also Arndt Schottelius and Marlies Sproll are available to answer questions. I would now like to open the floor for your questions.

(Operator Instructions). Cornelia Thomas, WestLB.

Good afternoon, and I would also like to take the opportunity to thank Dave for the fantastic work he has done over the past few years. I think we've all benefited from that tremendously. So thank you, Dave.

Now to my questions. I know, Simon, you've already just said that we shouldn't extrapolate costs to the years beyond 2011, but you have previously given an indication on where EBIT might be going in the years ahead. So I was just wondering if you could give an update on that sort of where we should be expecting EBIT to go towards, beyond 2011?

And then, the other question is, just wondering, you used to give guidance for how much you expect in terms of milestones. I haven't been able to see that yet. I might've missed it, but if I haven't, I was wondering if you could give us an indication for that. Thanks.

Hi, Cornelia, and thank you very much for those kind words.

To answer your questions and to give you an idea, I think in terms of proprietary R&D spend, I think we're looking at a band for the next several years going forward not terribly far from where we currently are. In terms of a target EBIT, we don't have one per se, but I believe -- I think we can fairly characterize as the EBIT development shouldn't drastically be different from where it currently is.

Obviously, the further out that you go out from where we are today, the higher we could imagine it would be on the basis of increasing numbers of eventually milestones and royalties on many of our partnered products coming into the market. But on -- for planning purposes for the next three or four years, two or three years, rather, I think you can expect to see both R&D and EBIT in ranges which are not very dissimilar from what you see today.

In terms of milestones, we did actually give a number, but I guess it was rather large and it may have been missed in the print. We actually gave a number of milestones that we target this year of approximately EUR35 million, which is substantially higher than our previous year's milestones, but as you could imagine, included in that milestone is the amount from Novartis.

Okay, fine. Understood. Thank you very much for that.

Daniel Wendorff, Commerzbank.

Thanks for taking my question, and also for my part, thank you very much, Dave, for the great work you've done for the Company.

And now to my questions, a few, if I may. Regarding a potential revenue guidance in midterm, I recall that at year-end 2009 you gave sort of midterm guidance, and at that time you expected or you were aiming for 10% to 20% annual revenue growth. Given that 2011 will be more than 20%, is there something -- that that's the need for 2012, that we should not expect a 10% to 20% revenue growth?

And then, again on the R&D investments, a follow-up question, basically. Does that mean that your proprietary R&D can also fluctuate a bit or is like the EUR40 million, EUR45 million, is that a sort of sustainable level over the next few years?

And then, lastly, on potential technology deals like the ones we saw in Pfizer, and does your guidance for 2011 include one or two similar deals like the ones you signed with Pfizer at the end of 2010?

Thank you very much, Daniel. I'll take the first two questions. And thank you, also, for those very kind words. It was a pleasure working with you and all of the people in the investment community.

In terms of targeting a revenue number, a topline number for the next couple of years, I think, generically speaking, we always target a number in excess of 10%, and our range is somewhere between 10% and 20%. I think it's fair to say that those numbers are very dependent on events which are somewhat beyond our control; for example, milestones. But in general, we target at least 10% growth on the top line.

In terms of R&D spend fluctuating, I think that was a fair way to characterize it, that I think it would be incorrect to say that it's going to be in a tight band between EUR40 million and EUR45 million. I could well imagine opening that band not only upwards, but also downwards a bit. We said during the conference call, I think Simon alluded in his conference call, that there is quite a bit of flexibility we have in terms of the spend, given that almost half of our spend is external to the likes of CMOs and CROs.

So from that perspective, I would give a somewhat broader band than the one that you gave of EUR40 million to EUR45 million. Also one that could involve lower amounts of R&D.

And Daniel, I'll take the last one about the technology deals. What we can tell you is that on the partnered discovery side of our business, which, as you know, contributes to the bulk of our revenue, roughly 80% of that revenue is already secured.

So that means that we have somewhere between 10% and 20% of the assumed budgeted revenue which comes out of that segment for this year is still at risk, assuming -- meaning that we need certain events to happen in order to be able to generate that revenue.

Elmar Kraus, DZ Bank.

Good afternoon and thanks for taking my questions. I actually have a number of questions.

One is with respect to the overall number of partnered projects. If I have seen it correctly, this has stayed constant in 2010, but is supposed to increase by 10 in 2011. I'm somewhat surprised, given the range of the Novartis deal, because I would've expected some more to come in. So can you please comment on this, let's say, hole in that increasing number for 2010?

The next one would be on your revenues from your proprietary development. If I understand it correctly, then if Novartis or if these projects are selected for further development, these revenues will disappear and you will have additional costs in the R&D segment. Is that notion correct and will that be part of your R&D guidance?

And the last one would be on the two Phase I studies with MOR103. Why is there a need for additional safety study in MS, and why has it not been able or possible to combine this additional safety study with the subcutaneous study?

These were my questions, and also a big thank you to Dave for cooperation in the last years and hope to see you in days to come. Thanks.

So Dave, with that, do you want to start with -- maybe by answering the co-development one?

Well, of course, I have to do that. Again, thank Elmar for the very kind words. Thank you, Elmar.

Maybe just to answer one of the questions, the proprietary development revenues, in 2011 they are not anticipated to go down. However, you're correct that once the program actually goes into a formal co-development, those revenues associated with a particular program will go down. That being said, the expenses will correspondingly go up, albeit they are incorporated into our R&D guidance.

And Elmar, let me take the one about the total number of partnered programs.

So if we just -- the 75 you mentioned is the total number of partnered plus owned programs. If we just focus in on the partnered programs, just to make things easy, what you're seeing actually is a steady addition of a net 10 per year. So we had 55 at the end of 2009. We have 65 at the end of 2010. And we expect about 75 at the end of 2011, so you are seeing, actually, a nice and rather steady increase here.

Just remember, as a reminder, the way the Novartis deal works, we maintain a steady-state number of programs there. So as one program moves on and back to Novartis for further development, it's replaced by another one. The timing of those events, of course, varies, so there is a tendency for this to proceed in waves a little bit, depending on how long an individual project takes. But the net effect has been a rather steady addition of about 10 programs per year for the last couple of years.

Sorry to interrupt you, Simon. I was actually citing from your annual report page [oh-nine] that said 65 active development programs, partnered programs, unchanged from 65 at the beginning of the year.

Yes, you are quite right there. And I actually misspoke. You are correct, but again, the point is really that there's a wave effect going on here, depending on how quickly, mostly, those Novartis programs cycle through.

So there may be some variation there, but overall the trend in the number of programs should be upwards, and as we said, there should be an addition of 10 new programs this year.

Now onto the -- thanks for the question about 103 in those two safety studies. Just to recall, as we said we're planning this safety study subcu formulation in healthy volunteers, and then, as you correctly said, the Phase IB safety study in MS.

Now this is easily explained why they cannot be combined. They need to be run separately because recall that MS will be a new patient population and we need to do the safety part in that new patient population as the first study because that has not been studied, and when it's through that going into a new safety population.

The other point about the subcu safety study, this will look at the newly-produced generated subcu formulation that first needs to be tested in healthy volunteers to see how the pharmacokinetic properties will be for 103 and looking at bioavailability. So, easily explained that we need both of those studies.

(Operator Instructions). Hanns Frohnmeyer, LBBW.

Good afternoon. I have a few questions left. So the first is on your partnered R&D costs. (Technical difficulty) 2011. Does it mean that we have a flat 2012 level or is it just underestimating the value?

And then, [Rick], in correlation to your guidance, what events do you expect might trigger the upper and lower ranges you describe in the financial guidance? Thank you.

Thank you, Hanns, and I'll take the final opportunity to say that my guidance is not, in fact, conservative.

But I think in response to your question, partnered R&D expense, recall that this is the expense associated with servicing the deals that we have, for example, Novartis and so forth. That is expected to stay more or less constant in 2012, despite the fact that we have new numbers of programs. So expect more or less a constant number there.

In terms of 2012, I'm afraid, as is the case every year, you know that we never give multiyear financial guidance, so I'm going to stick to my usual conservative self and not give you a number for 2012, but rather say generically, we try to achieve an increase of -- in excess of 10% per year, not least because I don't want to mislead the market, given that we're really rather far from 2012 at this point to be giving exact guidance on it.

And Dave, do you want to do the one about what events could lead to us being rather at the lower end of the profit guidance or the upper end of the profit guidance?

Yes, sure. I think that's due to a variety in the mixture of our revenues.

Clearly, profit guidance is not only influenced by the absolute number of revenues and expenses that we have, but also the mix of revenues that we have. For example, milestones carry higher profit margins than, for example, FTE-related revenues. So one thing that could influence, for example, the profit mix is the mix of type of revenue that we have.

But aside from that, I think the main thing that we need to focus in on in achieving guidance is actually hitting the top line, and there, the biggest source of risk, I would say, is a mixture of new collaborations that we would hope to sign, but again, on top of that, milestones which we would achieve through the partnered discovery segment, which are, again, not within our control but we somehow have to incorporate into guidance.

Which leads nicely into your last question, Hanns, which is the number of programs going into the clinic, and let's be very clear here.

What we said in the speech was the total number of programs which will go into the clinic this year should be between three and five. But that comprises, we think, between one and three partner INDs, plus two owned programs going into the clinic. That's where that total of three to five comes from.

Let me just say, it's now middle of February. These things are always a little bit hard to predict, and as we saw last year, in December, we were kind of pleasantly surprised by the number of INDs that suddenly happened in a short space of time. (Technical difficulty) our best estimate at this stage is that the total number will be between three and five.

(Operator Instructions). Thomas Schiessle, Equities GmbH.

This is Thomas Schiessle from Frankfurt speaking. I would like to ask a question on AbD Serotec and the more pronounced strategy to penetrate the market of diagnostics applications with antibody technologies.

Are you -- in the past, you emphasized that you would like to increase market share to be more stable in the economic development and to generate more flexibility to reinvest. Is this still the way you would like to run the business? Or are you more on the strategic way to aim at collaborations with diagnostic companies to join forces and to implement antibody technologies within those products? This is the one side.

The other side is, what is your feeling on the overall market in the AbD Serotec business? Is it still lagging momentum or are you feeling that there might be a rebound in demand coming from the U.S. or elsewhere? This is the one complex.

The other complex of questions are concerning the amalgamation of your technologies you mentioned in the speech. Could you shed a little bit more light on how we shall -- what we shall think about this combination of technologies? Is it more efficiency, is it more -- even more timely in production of new antibodies, or what is the overall aim of the game? Thank you so far.

Thanks, Thomas. Let me start with the AbD aspect of that, and then Marlies will speak to the technology question.

Regarding the strategy within AbD, as you know we have a diagnostics focus and we have a reagent business there. If we look at the reagent market, and you just have to look at the annual reports, the recent results announcements of some of the bigger players, the Sigmas, the Technes, and other players in this field, that growth rates have been in the low single-digit percentage range, and we've experienced ourselves that, especially in Europe, the market has been difficult.

These are -- this is a market that's heavily dependent on grant income from governments, which, of course, has been hit by cuts across Europe and also in other parts of the world. What we're seeing right now is actually the U.S. is doing pretty well there. So we're encouraged by what we are seeing in the U.S.. But overall, we don't expect that reagent market to grow particularly quickly, and against that backdrop our projection of a 9% growth rate for the segment this year we think is actually quite good in top line.

From the point of view of the diagnostics strategy, I think the thing I said during the speech is the best way to look at this, which is in many ways, this business segment is where we were in therapeutics 10 years ago in that this technology is just now gaining really a foothold in the diagnostics industry, and we're really excited about the fact that the first kit based on a primary detecting HuCAL antibody is going to come from the market this year. That, we think, will help increase the visibility for this technology as a way of making good diagnostic products.

So, indeed, it is a decision that we've taken to invest a bit more in this segment. But it will continue to remain profitable (multiple speakers) will continue to remain profitable and solidly cash flow positive, so it's not consuming resources, consuming cash at all, but we think by investing a bit, we can improve its chances to make a real impact in this diagnostic space.

So I hope that answers your questions about AbD. And I would hand over to Marlies for the technology bit.

Yes, so your question was what about the combination? Why to combine what we announced already earlier, arYla, [those] Slonomics, arYla and our [you call] technology.

So the rationale behind that, of course, is to allow us this more flexibility, really, to improve the properties of our drug candidates. So more flexibility in engineering, which definitely leads to an increased speed and a higher probability of success when those drug candidates are selected and then enter the preclinical and clinical development.

And the focus is indeed on flexibility or on speed?

It's the combination of the three characteristics I mentioned -- flexibility, speed, and, finally, probability of success. So you really engineer and improve the characteristics of the drug candidates. So make it more developable drugs.

Yes, and that means that you will be more efficient with the same amount of resources you put into the whole development business. That means in the future, you will be able to even -- to improve the number and -- yes, improve the number of programs you are actively pursuing.

Exactly, yes.

Gary Waanders, Nomura.

Good afternoon. I have just a couple of questions on MOR103, if I may. Firstly, could you give us a bit more color as to the nature of the study in MS, how big that might be, and [more of the 37] will you be getting in, [especially] readouts from that?

And secondly, since you announced that MS was the second indication for MOR103 to the [staff], it seems to be taking [something] about 12 months. Is there any particular reason for that? It just seems a little bit modest. And good luck, Dave.

Thank you, Gary.

Gary, thanks for the question. The question was about -- you were a little bit hard to hear. The MS safety study, you know, a little bit more detail.

Sorry to say that I can't give you much detail. Just to the extent that this will be a safety study, so we'll look at safety endpoints. I'm not in a position to talk about specifically how long this will be, but long enough to look at that safety, and it will look at a rather broad patient population, but I'm not in a position specifically what this will be. This will be MS patients.

I think the second part, Gary, to your question was that we announced it during the R&D day, and yes, when you consider, first of all, what it takes to submit the study and do the package, I would consider that kind of quite normal. We just did the decision then, and then immediately started working. So, I think you've heard the information that we would expect the study, then, to be initiated towards the end of the year. I hope that answers your question.

(Operator Instructions). Thomas Schiessle.

Question on Simon, if I may. What is the main topics the new CFO will have to tackle, from your point of view? Thank you.

Thomas, we don't foresee a change in role or a change in function here. We think Dave has done an excellent job. And we look forward to the new CFO continuing in the same vein.

And also, I think, we hope and expect that the new CFO will maintain the financial discipline which Dave has -- I won't say imposed on the Company, but helped the Company maintain. That's been a very important part, I think, and feature of MorphoSys as a Company. But overall, I think there won't be a change in focus or a change in function for the incoming person.

Thank you so far.

Mick Cooper, Edison Investment Research.

Good afternoon. Just one quick question. I was wondering about the prospect of M&A activity, given your strong cash position.

Yes, indeed, we have a strong cash position. We demonstrated two examples of how to use that last year when we in-licensed the Xencor compound and then when we acquired Sloning.

We continue to be interested in M&A. We see the war chest we have as being a means of executing deals. We continue to look for opportunities, especially to strengthen either the technology platform and/or the pipeline. But we don't want to give any guidance or suggestions about what we may do and at what stage we may do it. But we continue to see M&A as being a means, an interesting means, of building the Company further.

Victoria English, MedNous.

Simon, this is actually not a bad follow-up to the last question. You mentioned in your opening remarks that new technology was in the works. And I'm wondering whether you see a Sloning type of acquisition or whether this is something that you're working on in-house?

Yes, as I said, and I'll ask Marlies maybe to add a little bit of color to this, we continue to invest internally in technology. The fact that we're interested in potential acquisitions doesn't change the fact that there's organic technology development going on in here as well.

Yes, maybe just to add to that, we have a dedicated team of scientists working on new tech ideas, and as you can imagine, scientists always have great ideas.

So, we are looking what those ideas are and how they can complement our existing portfolio. Outside, of course, we have certain things on our radar screen. And yes, I think it will be an exciting year also for MorphoSys to come, and we will let you know in time what we plan to do.

(Operator Instructions). We have no further questions coming through, and I would like to hand it back to Dr. Moroney.

Thank you. And to conclude the call, we'd just like to remind you of the key take-home messages from today.

First of all, that the pipeline is stronger than ever, and continues to expand and mature. The pipeline is based on HuCAL, which has gone from being a novel technology to being the basis of a significant portion of the industry's pipeline of therapeutic antibodies.

Second, we're not standing still as regards to technology. Last year's announcement about Sloning and arYla will be augmented further this year.

Third, AbD Serotec is establishing a presence in the diagnostics market, and the first HuCAL-based diagnostic product will reach the market this year.

During the year, we expect the unit's penetration of the diagnostics market to increase as the contribution of our technology in this field becomes apparent.

And finally, the Company's strong financial foundations and cash flows continue to give us the ability to invest for the future without relying on the capital markets.

That's the end of our presentation. Should any of you wish to follow up with us directly, we are all in the office for the remainder of the day. Thank you, again, for joining the call, and good-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for joining and have a pleasant stay. Good-bye.