MorphoSys AG (MOR) 2011 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the MorphoSys first quarter 2011 telephone conference and presentation. Please note that for the duration of the call, all participants will be on 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-Loser. Please go ahead, madam.

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, Klaus de Wall, our Head of Finance and Accounting. And Jens Holstein, who will join MorphoSys on Monday as our new CFO, is on the call as well.

First, we would like to welcome you to our Q1 conference call and thank you for participating. During the call we would like to talk about the Company's financial results for the first three months of 2011. Simon will start by giving you an operational overview of the quarter, followed by a review of our financial results. Afterwards, we will open the call to your questions.

Before I start, I want to remind you that during this conference call 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 got off to a great start in 2011, with record quarterly results. And I'm very happy to review this quarter for you. Before we start, I'd like to take the opportunity to welcome Jens Holstein, who will take over as CFO, effective May 1st. Jens wanted to use this call to introduce himself to you all. He'll be happy to answer general questions on his appointment, but I'm sure you'll understand that he's not yet in a position to make any comment on our financial results. Jens?

Thank you, Simon, and thanks for having me on the call. Ladies and gentlemen, it's a great pleasure for me to have the chance to introduce myself to you today. As I'm not officially in charge yet, Simon mentioned that, I'm not in the position to answer questions on the Company or its results. But let me share with you at least a short overview about my professional experience.

During the last almost 16 years I have served in a variety of financial and general management positions within the Fresenius Group. Starting in dialysis via the hospital project business and the hospital operations business of Fresenius, I moved to Fresenius Kabi, the infusion therapy, nutrition and IV generics business of the Group.

From 2006 to 2010 I was regional chief financial officer of Fresenius Kabi Asia-Pacific, based in Hong Kong. And most recently I was responsible as CFO for the region Europe and Middle East for Fresenius Kabi. In summary, I've had the chance to work in a broad range of teams within the Fresenius Group, notably in healthcare. Prior to Fresenius I have spent a number of years in the consulting industry, with positions in Frankfurt and London, mainly in the field of mergers and acquisitions.

Personally, I am really excited to join MorphoSys and I'm looking forward to using both my financial expertise and healthcare knowledge to help bring this company to another level. I also look forward to meeting, working and collaborating with all of you in the future. Thanks very much.

Thanks, Jens. We look forward to welcome you here on Monday.

Thanks.

So, with that, I'd like now to start with the operational review of the quarter. Clearly, the most important event was the successful installation of our technology at Novartis, which triggered a double-digit EUR1 million payment to us. Primarily as a consequence of this milestone payment, we've reported a record quarterly result, both in terms of revenues and profits.

It should go without saying, but I'll say it anyway, that you should not extrapolate from this quarter's results to the full year. As always, individual quarters can fluctuate and the most important orientation we provide is our full year guidance, which we reconfirm today. The milestone payment makes a major contribution to our targets for revenues and profits for the year as a whole.

But most importantly, the internalization of our HuCAL technology by Novartis underscores once more the commitment they have made to our technology. This is also evident in the productivity of the alliance. Novartis now has five HuCAL antibodies in clinical development, with, we hope and expect, many more to come in the years ahead as the earlier stage programs advance. Overall, based on the number of therapeutic antibodies in clinical development, we believe that HuCAL is now the industry's most successful antibody library technology.

Two other noteworthy events during the quarter relate to our proprietary development segment. First, we strengthened our US patent position on our lead program, MOR103. The new patent covers the antibody itself, as well as pharmaceutical compositions comprising the antibody, and is scheduled to expire in 2026, not including any potential extensions.

This newly issued patent complements a US patent, granted in 2008, covering medical uses of antibodies against GM-CSF, to which MorphoSys has exclusive access under a license agreement with the University of Melbourne. Together, the two patent families provide strong intellectual property protection for the MOR103 program.

The other highlights in Q1 in the proprietary development segment was the manufacturing agreement we signed with Boehringer Ingelheim. This agreement covers process development and manufacturing of MOR208 clinical material, as well as other drug candidates. You'll recall that MOR208 is currently being evaluated in a phase 1 clinical trial in the USA by our partner Xencor.

While we're happy with the manufacturing process we're using at present, this deal with BI will help to prevent any bottlenecks in clinical trial supply in the years ahead. Establishing a commercial manufacturing process early in the development of MOR208 will clearly increase the value of this program.

Overall, the current pipeline comprises 74 programs, of which 18 are now in clinical development. We today reported IND from OncoMed is our 18th program in clinical trials. The advancement of a second antibody from our collaboration with OncoMed underlines the success of this collaboration. This is not reflected in our quarterly reporting and the milestone will be booked in Q2 of this year.

You'll see that we've stopped one very early stage proprietary program during the quarter for reasons relating to the validity of the therapeutic target. Overall, the programs are developing as expected and we'll keep you posted on their progress as and when information becomes available.

Finally, a few words on the current situation in Japan. We have, of course, been in close contact with all of our Japanese partners, including Daiichi Sankyo, Astellas and Shionogi, and are happy to report the disruption brought about by the earthquake, tsunami and radiation has been minimal. It's a bit harder to gauge the impact on our AbD business.

With that, I'll now turn to the financial review. The first quarter was an extraordinary one, from a financial point of view. Group revenues more than doubled to EUR48.6 million. The main reason for the strong increase, as I mentioned, was the technology milestone payment from Novartis in connection with installation of the HuCAL platform at Novartis' premises in Basel. The payment is a major financial benefit to MorphoSys. And as we've also said, this milestone underscores Novartis' commitment to HuCAL.

Looking at the segments individually, you see the strong impact of the milestone payment on the product discovery segment, both on revenues and profits. Revenues in the proprietary development segment doubled to EUR600,000. Those revenues arose from funded research payments relating to our two predevelopment programs with Novartis.

The performance of the AbD Serotec segment remained below the first quarter of 2010. The unfavorable comparison is due to a large OEM order which was placed in Q1 2010 and had a major effect on revenues as well as on profits in that quarter. Despite the segment showing a loss in the first quarter, we fully expect to achieve our full year targets.

Coming back to the P&L of the Group, total operating expenses increased by approximately 25% to EUR19.9 million. The main reason for this was the increase in R&D expenses. We invested EUR6.6 million in proprietary development activities and EUR0.6 million in technology development. These are both within budget. Profit from operations amounted to EUR28.8 million as a result of the above mentioned milestone payment. Net profit increased by EUR18.8 million, corresponding to diluted earnings per share of EUR0.81.

Looking at the balance sheet, our cash position increased to approximately EUR120 million. In parallel, accounts receivable increased from EUR15 million to EUR38.4 million, as the milestone payment was still outstanding at balance sheet due date. Once again, our growing cash position shows the strength of our business model. This is a MorphoSys hallmark that distinguishes us from the majority of companies in our sector.

Before we open the call to your questions, I want to confirm that we're well on track to achieve our full year targets. We continue to anticipate total Group revenues of between EUR105 million and EUR110 million and an operating profit of between EUR10 million and EUR13 million.

We expect a year rich with news flow, driven by our proprietary programs as well as the partnered pipeline. We expect to commence the phase 1 trial for MOR202 in the first half of this year and can confirm today that we will present some exciting preclinical data around MOR202 at this year's ASCO meeting. For MOR103, the RA trial is ongoing and we are on track to start the safety trial in multiple sclerosis patients in the second half of this year.

For the partnered pipeline, we expect between one and three INDs this year, and potentially some data from ongoing clinical trials. The first of these INDs was the OncoMed one announced this morning. Data updates, of course, will be driven by our partners. During the summer we expect the first diagnostic kit based on a HuCAL antibody to be launched. We regard this as a significant milestone for AbD Serotec.

Lastly, we plan to publish an update on our latest technology development activities. All in all, then, we expect an exciting year. That concludes my review for the first quarter of 2011 and I'll now hand back to Claudia for the Q&A session.

Thank you. We will now open the call for your questions. Please note that Klaus de Wall, our head of finance and accounting, will be also available to answer questions.

(Operator Instructions). Our first question will come from Cornelia Thomas from WestLB. Please go ahead, madam.

Hello. Good afternoon and thank you for the short presentation. Actually I've got a question on sort of how you're planning to distribute the particularly the R&D costs over the remainder of the year. I'm currently assuming that that's going to be ramp-up towards the end of the year as you prepare for further clinical trials. But just wanted to double-check that that is correct.

And then on the AbD segment, are you expecting this to go into profitability again with the launch of the diagnostics kit, or do you have any other plans to bring this back into profitability? And maybe if you could explain why it was not profitable in the first quarter, please. Thank you.

Okay, thanks, Cornelia. First of all, regarding the R&D costs, yes, these will certainly ramp. Bear in mind that we currently have two proprietary clinical programs ongoing, namely MOR103 in phase 1/2 trial in rheumatoid arthritis, and MOR208 in phase 1 cancer. By the end of the year we expect to have five clinical programs ongoing, so that means there are three more still to come. So, that will of course be associated with a significant ramp-up in R&D costs. And that's the reason why we stand by our guidance for R&D -- for proprietary R&D investment of somewhere between EUR40 million and EUR45 million for the full year.

Yes.

Regarding AbD, as we said, and certainly in comparison to Q1 of last year, the product mix was certainly lower margin this quarter in comparison to first quarter of last year. And we've also taken the opportunity to make some investments. We expect particularly on the OEM side of the business to secure some larger orders during the course of the year which will change the mix, the product mix and the margin balance, if you like. And that's why we're able again to confirm our original guidance for that segment for the full year, which is revenues of between EUR22 million and EUR23 million and a profit margin of around 4% of the operating level.

Okay. Thank you.

Our next questions will come from Daniel Wendorff from Commerzbank.

Good afternoon and thanks for taking my questions. Two I have remaining now. Maybe one question for Mr. Holstein. And my line was not really good at the beginning, so if you already said that, my apologies. But my question would be what made you move to MorphoSys? I was just wondering whether you can give us a bit more color on that.

And a follow-up question on AbD Serotec. Can you potentially tell us what the underlying development, excluding the one-off in Q1 2010, would have been? And how the demand at the moment is developing in the different regions in the world. You mentioned Japan at one point. But how is the situation in North America and Europe? That will be helpful. Thank you.

Okay. So, perhaps we start with the first question. Jens, do you want to answer that directly?

Yes, sure, I can do that. Thanks very much, Daniel, for the question. I actually didn't explain it.

Okay, good.

Basically, quite honestly, it have been a combination of the prospects of the Company which I saw in the setup of the team. It's always a combination of a lot of things. For me, it was clearly not a decision against Fresenius. It was one for MorphoSys.

Yes.

And for me, the opportunity to develop this company, which in my view has a very convincing and proven business model, as well as the dedication and the spirit of the team and the industry knowledge of the supervisory board as well, were all aspects which I was impressed of when I made my decision. So I felt that MorphoSys would be the right environment, offering the right opportunities and challenges for me. That's basically the reason.

Okay. Thank you.

And, Daniel, to your second question regarding AbD, I think the general trends we're seeing are currently that Europe is essentially flat. It's definitely a more challenging environment than perhaps it was in the past. And that's been counterbalanced, if you like, by the US, which is proceeding extremely well for us at the moment.

Yes.

And so we're seeing good growth in the US. Japan is always a small part of our total market. And it's also therefore a little bit early to say regarding Japan. I think the other significant thing for us is that the first -- as we mentioned, the first diagnostic products based on HuCAL are expected onto the market this year. These, we think, should be the first of a number of diagnostic products based on the HuCAL technology that we expect to see coming to market. And of course that should also help in terms of the profit margin of that part of the business.

So, although we can't right now on the call give you the exact impact of corrected for the one-off event that we had in Q1 of last year, I hope that those sort of general qualitative guidance that we gave you on the various geographical areas would have helped.

Okay. Yes, certainly does. Thank you.

The next question will come from Sachin Soni from Kempen & Co.

Good afternoon, everyone. My question is on the outlook. Two points. First, you said data from ongoing trials of partnered programs. Can you please specify which one we should wait for this year out of all those partnerships you have? And then you say further technology announcements. Can you please specify something in which direction we should be thinking that what technology announcement could happen, going forward? Thank you.

Sure. Sachin, again, just to be very clear about the data from partners, we're really in the hands of the partners here. If they choose to say something great, if they choose not to say something, of course that's something that we can't influence.

However, the most likely data that we could expect this year comes actually from a number of Centocor programs, particularly CNTO 888, which is currently in phase 2 trials in idiopathic pulmonary fibrosis. That one probably won't report this year because we know that it is due to run on into next year. But the phase 2 cancer trial for that program may read out this year and Centocor may choose to publish data there.

The other two where we may see something are Centocor CNTO 1959 and 3157. These are programs in asthma and psoriasis, both currently in phase 1, due to be completed this year. And again, which we could potentially expect some data from Centocor during the course of this year.

In terms of the technology, we don't want to preempt what we want to say here. I mean, as you know, we continue to invest in technology in-house. A lot of what we're interested in here and what we've been investing in is really making -- the ability to make better antibody based drugs.

So you shouldn't be surprised that it will be antibody based technology. We think it will enhance our ability both on our own and together with partners to make even better antibody based drugs. And I think more than that at this stage I wouldn't want to say for fear of preempting the announcement itself.

Okay, thank you.

The next questions will come from Hanns Frohnmeyer from LBBW. Please go ahead.

Good afternoon. I have just two small questions on your Q1 figures, and then maybe one more from the perspective. So your organic growth of the partner discovery section in Q1, excluding milestones, could you give us a number for this, how high was organic growth? And the second question is just what interests me is that what is behind this other non-operating expenses of roughly EUR1.3 million you accounted in the first quarter? And can we expect that this is the kind of run rate for the rest of the year, or is it a onetime item?

And maybe in addition, more on the -- on your future, can we -- you bought the Sloning last year and pretty soon after that we found that [now is contract with] Pfizer. And at that time you said you will probably have at least one or probably more than one deal coming up in the next quarters. So is it realistic to assume that we will find other Sloning technology based deals in 2011? Thanks.

Yes, thanks for those questions. First of all, in terms of the organic growth in the partner discovery segment, once you strip out the milestone -- maybe a general comment here first is that remember that we had always anticipated and planned for the fact that a number of the partnerships other than Novartis would expire. And obviously that means that revenues collaborative revenues from those collaborations will also expire. Essentially, the trend between 2010 and 2011 in the first quarter is roughly flat --

Yes.

-- at about EUR13.7 million first quarter of last year versus EUR13.3 million in the first quarter of this year. As I said, that was expected and it has to do with the fact that certain of these partnerships are expiring. That's something that we planned for. Can you just remind me about the second question?

That was on this non-operating financial expenses you accounted EUR1.3 million in the financial results.

Okay --

What's behind that? It's just I'm wondering because I haven't read anything on that.

Yes, I'm going to ask Klaus to answer that in one second.

Yes.

Let me just start by addressing your third question regarding Sloning. Yes, indeed we do anticipate doing deals around the Slonomics technology. Some of those deals may be Slonomics in isolation --

Yes.

--as was the Pfizer deal. But more importantly for us, we anticipate doing deals where the Slonomics technology is part of a package, which may include specific obviously antibody based technology. As always, I don't want to comment on the timing of any potential deals. But we do definitely see the Sloning technology as being our key part of our platform and should be definitely a key part of the deals and the partnerships that we do in the years ahead.

Maybe just to add this -- to add on this, is it right to assume that the current deal of Novartis -- with Novartis is not including the Slonomics technology, right?

That's correct. We've certainly had a discussion with Novartis, as we always do, about whether the technology is of interest, whether it can be added somehow to the collaboration. And those discussions are ongoing.

Thanks.

So I hope that helps. And I'd now like to hand over to Klaus de Wall for the answer to the second one of your questions.

This item was other expenses, which you mentioned, EUR1.3 million. This mainly includes FX losses, approximately EUR1.2 million of this total amount.

Okay.

And this relates to cash inflows which came in foreign currency.

Yes. Thank you.

(Operator Instructions). The next questions will come from Thomas Schiessle from Equities.

Yes, hi. This is Thomas Schiessle from Equities in Frankfurt calling. Question to Simon, if I may, concerning your collaboration -- or your collaboration with Boehringer Ingelheim concerning the production of antibody materials. Is this the cause of this collaboration because of reducing costs in the production, so changing technology leads to lower cost of goods? Or is it because of spreading the risk if it comes to the production of clinical or commercial material? And is this collaboration within commercial material sizes? Thank you.

Thank you, Thomas. So, first of all, the prime driver for this collaboration was not purely about costs. It's really to ensure that we have a second source for the MOR208 program and also a source that we're confident could provide commercial supplies material once the product comes to market -- or goes into late stage clinical trials and then comes to market.

We're also delighted to have a relationship with BI, who we regard as very much champions leader, if not world champions when it comes to antibody manufacture. Being located relatively close to us, of course, in Biberach, is also an advantage. So, really, from a number of points of view, including risk mitigation, as you mentioned, diversifying the sources of supply, geographical proximity, those are all good arguments for us to be working with BI. And we foresee that this relationship will not just be limited to the MOR208, although that's the initial focus. We can foresee running future programs beyond MOR208 together with BI.

Is it planned to spread the collaboration across the whole portfolio of future products at MorphoSys so that will be your civil or the main or the house-and-roof producer of antibody material?

That's certainly an option. The decision there will be made case by case. But we see this really as the start of what we hope will be a long and fruitful relationship with, as I say, clearly one of the world's leaders, if not the leader, in antibody manufacture.

As it comes to the commercial terms, is everything done in euros or is there any FX risk in between from your point of view?

I'm 99% sure, not 100% sure, but I'm 99% sure that everything is in euros.

Okay. Thanks so far.

Yes.

And now we have a follow-up question from Daniel Wendorff from Commerzbank.

Yes, hi, again. Maybe a follow-up question on the proprietary clinical programs. You mentioned that two programs currently ongoing and mentioned the ones which are ongoing. That's fine. You pointed towards five proprietary programs being active at the end of 2011. Can you remind me again what are the new three programs to start, clinical programs, to start during the course of this year? Thank you.

Yes, and Daniel, just to be absolutely clear here, we refer to clinical studies.

Yes. Sorry, yes. That's right.

And the difference between the two that you know of and the five is, first of all, a subcutaneous study of MOR103, so testing a subcutaneous formulation. Remember that the current formulation in the phase 1/2 trial is an intravenous formulation. That's one. The second one is the MOR103 study in multiple sclerosis. And the third one is the initiation of MOR202 in multiple myeloma.

Yes, okay. Perfect. Thank you.

We have a follow-up question from Thomas Schiessle. Please go ahead.

Thanks. Thomas Schiessle once again. As it comes to your partner, is there anything new on the Absynth collaboration or with Galapagos? To my knowledge there should be some, let's say, milestones reached in '11. So is there anything ahead of us?

So, first of all, both of those collaborations, with Absynth with the infectious disease focus remember, and Galapagos with the co-development of bone and joint targets, both proceeding well. But of course both are also at a phase that we would characterize as being discovery, so early stage. And as a policy, essentially we don't comment on those early stage programs. Essentially because it's early and there's really not a lot we can say at this stage.

But there should be something coming out of these programs in the current year?

I mean there are constantly results being generated. Whether we choose to say anything or publish any of those results is another matter. But you shouldn't -- you shouldn't plan on it or you shouldn't assume it. And essentially that's because early stage programs, as is really commonplace throughout the industry, are largely not commented on.

Okay, fair enough. Thank you for that.

Thanks Thomas.

And now we have a question from Mick Cooper from Edison Investment Research.

Just a quick question on the subcutaneous (inaudible - audio gap) safety and tolerability or is it going to be nonvascular [inaudible - background noise] in RA?

Thanks, Mick. This is a PK study, essentially looking at the -- at the bioavailability of the drug in this formation versus the bioavailability in the intravenous formulation.

In healthy patients?

In healthy volunteers.

Thank you.

Yes.

We have no further questions coming through. I would like to hand back over to you.

Okay, thank you. I'd like to close now by reminding you of the key messages to take away from the call, and those are the quarter was dominated by this milestone payment we received from Novartis, which really sets up well to achieve our financial objectives for the full year. Operationally we're well on track and look forward to updating you further on pipeline programs as the year progresses.

That concludes the call. 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 goodbye.