MorphoSys AG (MOR) 2011 Q2 法說會逐字稿

Good after noon and also good morning and welcome. This is Claudia Gutjahr-Loser, Head of Corporate Communications and Investor Relations of MorphoSys. With me are Simon Moroney, our Chief Executive Officer, Arndt Schottelius, our Chief Development Officer and Jens Holstein our new Chief Financial Officer.

First we would like to welcome you to our Q2 conference call and thank you for participating. During the call we will talk about the Company's financial results for the first six months of 2011.

Our CEO, Simon Moroney will start by giving an operational overview of the second quarter, followed by a pipeline revenue focused on our proprietary compounds by Arndt Schottelius, our CDO.

Before we open the call for your questions, Jens Holstein our CFO will review the financial results for the first six months of 2011. Before we start, I want to remind you that during this conference call we will present and discuss 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 also differ from those anticipated.

You are therefore cautioned not to place undue reliance on such forward looking statements and 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 you all. I'd like to start by welcoming Jens to his first quarterly call as our new CFO. Although we were able to welcome him briefly last time, he is in place since May 1, so this is officially his first quarterly call.

We're going to use this call to provide you with a bit more detail on our three most advanced proprietary programs. For that reason, my comments will be rather brief and confined to our partner discovery and ABD segments to allow time for Arndt to talk more fully about our proprietary development activities.

Most importantly, the entire MorphoSys business is performing well and we are on track to meet the key goals we've set for ourselves this year. I'll start my review with the partner discovery side of our business.

During the second quarter we received our first clinical milestone payment of the year, when our partner OncoMed Pharmaceuticals took HuCAL antibody into Phase 1 clinical trials. This antibody coded OMP-18R5 is now in a Phase 1 trial in the USA in patients with advanced solid tumors.

The antibody targets the component of the WIMP signaling pathways and has been developed within OncoMed's alliance with Biohealthcare. This is the second antibody to reach clinical trials within our partnership with OncoMed.

We also entered a completely new partner discovery alliance during this quarter with ContraFect, a private US biotech company. Their focus is the development of combinations of drugs to treat infectious diseases such as influenza and methicillin resistant staph aureus, also known as MRSA.

Antibodies occupy a central position in ContraFect's strategy, and we were delighted to enter this alliance. We will install our HuCAL Platinum library at ContraFect facilities and support their use of the technology to make antibodies against selected targets.

For a small company, ContraFect has made a very large commitment to our technology, securing access to the HuCAL platform for five years. This deal is part of our deliberate strategy to exploit the HuCAL technology in infectious diseases, which are outside of our Novartis alliance.

Earlier in the year, we gave guidance that during 2011 up to three partner programs could enter clinical trials. OncoMed's was the first of these and we still expect up to two additional partnered programs to enter the clinic before year end.

Overall at the end of the second quarter of this year, out total partnered and proprietary pipeline comprised 75 programs, of which 18 were in clinical development. By year end, we expect this number of 18 clinical programs could increase to up to 22.

Turning to the AbD Serotec segment, the main operational highlight of this quarter was the announcement that we have licensed seven diagnostic HuCAL antibodies Proteomika. These products form the basis of kits to monitor the use of therapeutic antibodies, starting with drugs targeting TNS and CD20.

The kits are now being sold in Europe and are the first diagnostic product based on primary HuCAL antibodies to enter the market. We stand to benefit through royalty payments. This marks the beginning of what we expect to be a growing revenue stream, as more and more HuCAL based diagnostics come to market.

That concludes my overview of the quarter. I would now like to hand over to Arndt for his review of the proprietary pipeline.

Thank you Simon. I am happy to be able to give you an update on our proprietary development programs. All three clinical stage programs MOR103, MOR208 and MOR202 are on track in their core indications. And in the case of MOR103 also a second indication, as well as a second study to evaluate the subcutaneous administration.

As a result, we will have five clinical studies with our proprietary compounds running by the end of the year. A significant increase from the two that were ongoing at the beginning of the year.

Overall, I am delighted to report that we are on track to meet all of the goals that we set for the unit this year. With regard to our lead compound MOR103, we expect to fulfill our objective of completing recruitment into the Phase 1b/2a Rheumatoid Arthritis trial this year, and reporting data in the first half of next year.

We made some minor adjustments in collaboration with the Steering Committee in response to some challenges we encountered in recruiting patients, and in order to streamline the overall trial.

Once the clinical trial starts on the patient it is standard practice for a sponsor to monitor factors influencing recruitment. With a streamlined design of the study, which has left the statistical power of the study unchanged, we now aim to recruit 92 instead of 135 patients.

The respective regulatory authorities and ethics committees have agreed to these updates.

Additionally the trial is currently running in four countries, namely Germany, The Netherlands, Bulgaria and Poland, and to keep enrolment on track we have added a fifth country, namely the Ukraine where sites will be open for recruitment within the next several weeks.

Again we confirm our overall timelines for the trial and the final results in the first half 2012. With regard to the clinical data generated by this trial, I would like to remind you of an aspect which we highlighted first during our R&D Day in October last year, which is the inclusion of magnetic resonance imaging or MRI in this trial.

MRI is probably the most sensitive imaging tool for demonstrating early responses to therapy in RA. Indeed MRI is capable of detecting early inflammatory changes such as inflammation of the synovium or synovitis, and inflammation of the bone or bone edema, which precede the later forming bone erosions. MRI also allows the patient's early response to treatment to be detected, which could not be possible using less sensitive methods, such as x-ray.

The focus of the trial is safety and tolerability, but we also aim to demonstrate early signs of efficacy and MRI as a very sensitive imaging tool, will help us to do so. An interesting piece of news for MOR103 came through the publication in Nat Immunology based on studies performed by the lap of Professor Becher at the University of Zurich.

As you can see on the slide, which also included -- which was also included in our R&D Day in 2010, GM -CSF is thought to be involved in many processes, leading to multiple sclerosis or MS. The work performed at the University of Zurich focused on the role of GM-CSF in connection with autoreactive help for T-cells.

The authors for the first time, have been able to show that GM-CSF is the key player in a mouse model of MS. This exciting new data supports our own pre-clinical findings and gives us additional confidence in selecting MS as the second target indication for MOR103.

The planned Phase 1b safety study in MS is on track to start in Q4 of this year. Furthermore as part of our development plan for MOR103 in MS and RA, we will start a study in healthy volunteers this year to evaluate the viability of MOR103 after subcutaneous administration.

In regard to our cancer program, MOR208, the Phase 1 study conducted by our partners Xencor in patients with chronic lymphocytic leukemia in the United States, who have not responded to, or have become refracted to previous therapy, is making excellent progress, and we expect to have the data available for this study in 2012.

This study is investigating the maximum tolerated dose, safety, tolerability, pharmacokinetics and immunogenicity, as well as preliminary anti-tumor activity MOR208. As a reminder Xencor acts as the sponsor of the trial and carries out all costs associated with it under the agreed development plan. Following the Phase 1 trial, MorphoSys will take over full responsibility of the subsequent development of the anti CD90 antibody program.

Now let's move on to MOR202, our program in multiple myeloma. First, as previously announced, we presented promising pre-clinical data at this year's ASCO meeting. In an invivo mouse model of multiple myeloma, MOR202 reduces tumor loads as well as tumor a-mediated bone destruction. As you can see on slide 11, MOR202 in combination with either Bortezomibs or Lenalidomides completely abolished multiple myeloma induced bone destruction in a synergistic manner.

This very encouraging synergistic effect has been seen in both invitro and invivo models of the disease.

Finally an update on our clinical development plan for MOR202. During the second quarter we received full and unconditional approval by the regulatory authorities and ethics committees in Germany and Austria to start a Phase 1 2a clinical trial with MOR202. The open label dose escalation study will enroll patients with relapsed or refractory multiple myeloma and will primarily evaluate the safety of MOR202 as monotherapy, as well as in combination with standard therapy.

The primary end point is to evaluate the maximum tolerated dose, safety and tolerability as well as pharmacokinetics and immunogenicity.

The study consists of two parts, in the first part participants will receive MOR202 as monotherapy followed by a second part, a combination of MOR202 with either Bortezomib or Lenalidomide. We expect data from the first part of the study in 2013. The study is now recruiting patients and we expect first dosing shortly.

That completes my review of the proprietary development activity and events during the quarter, and I look forward to giving you all a further update in one of our next quarterly calls, or seeing in person upcoming conferences and meetings.

With that, I would like to hand over to Jens for the financial review.

Thank you Arndt. Ladies and gentlemen, let me spend some minutes summarizing the most important financial figures of the first six months of 2011.

The financial results for the first six months of 2011 were significantly impacted by the milestone payment in Q1 from Novartis in connection with the installation of our HuCAL platform at Novartis' premises in Basel.

Compared to the previous year, total Group revenues increased by 53% to EUR66.6 million. Total operating expenses increased by approximately 24% to EUR43.5 million. The main reason was the increase in R&D expenses. Total R&D expenses increased by 38% to EUR28.2 million.

In the first six months, R&D expenses in proprietary development, as well as in technology development increased to EUR15.2 million. This is in line with our budget and our guidance to the capital markets in the past.

Group operating profits for the first six months of 2011 amounted to EUR23.3 million and net profit increased to EUR50 million, corresponding to diluted earnings per share of EUR0.65.

Looking at the segments individually, you see the strong impact of the Novartis milestone payment on the Partnered Discovery segment, over revenues and profits. Cash flows from the Partnered Discovery segment continued to fully fund all of our development activities.

Revenues in Proprietary Development segment doubled to EUR1.2 million. Those revenues arose from funded research payment relating to the two pre-development programs with Novartis into which MorphoSys will have the option to opt in after the discovery phase.

Looking at AbD Serotec, you can see that the revenues decreased by 10% from EUR10.5 million to EUR9.4 million, in comparison to the first six months of 2010. As a reminder, AbD's Q1 2010 revenue was particularly strong due to a large OEM order which we had, which had a major effect on the revenues as well as on profits in that period.

In addition, the relatively weak dollar and pound exchange rate against the euro had a negative impact as well. Nonetheless, AbD Serotec returned to profitability during the first six months of 2011.

A quick look at the balance sheet shows that our cash position has increased to around EUR114 million. This again, despite our profitability, shows our financial strength in comparison to many other players in the biotech industry.

Let me also quickly comment on the share buyback program that we completed during the quarter. As many of you are aware, we decided to re-purchase our own shares on the stock market to implement the Company's long term incentive program. This process was finalized in June. We purchased roughly 84,000 MorphoSys shares at an average share price of EUR20.79 per share.

Before we open the call for your questions, we would like to confirm that we are 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. That said, we should note that AbD Serotec is currently tracking behind our revenue target of between EUR22 million and EUR23 million, a development that I would not call, as the CFO, terribly impressive. Having said that, please keep in mind that the potential downside of this segment has only rather limited influence on Group level.

Before I finish, let me also add a more personal comment. I have now been with MorphoSys for three months, and I have had the chance to take a look at all areas of the business. It is important to emphasize that the unique financial profile enjoyed by MorphoSys is created entirely by the size and [inaudible] the Company.

Hence no analysis of the Company's finances can be conducted without a thorough understanding of the scientific, developmental, regulatory and medical drivers thereof. As it is apparent, MorphoSys business development efforts have been hugely successful creating a financial profile that is unparalleled in European biotech as I see it.

This profile is characterized by sale of cash flows from the partnering business and in particular our multi alliance with Novartis.

Ladies and gentlemen, that concludes my review for the first half of 2011 and I will now hand back to Claudia for the Q&A session.

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

(Operator Instructions) Our first question will come from Daniel Wendorff from Commerzbank.

Daniel Wendorff from Commerzbank. Good afternoon and thanks for taking my questions, three if I may. Starting off with a specific question on MOR103. Can you potentially already talk about the subcutaneous version. How often it would have to be applied and if the version is already ready, when can we expect that the safety study will start? Is it more over the next few weeks or very likely at the very end of this year?

Then a question on AbD Serotec. I was just curious to know how such a deal would work when HuCAL antibodies incorporated in the diagnosis kit. Is it that you participate not just by supplying the material but also by getting royalty on the final end market sales of the kit?

Then lastly, you talked about new alliances to be signed on the Slonomics technology. What size would this alliance potentially have? Like the one we saw with Pfizer or maybe of smaller size? I guess that's also then on the [inaudible] technology, so that would be helpful to get more insight there. Thank you very much.

Daniel thanks for the questions. I will take the first one on MOR103. Just to repeat your question was about the frequency of subcutaneous evidence based and when this sub-cu study will start.

The frequency we don't know yet because that's the whole purpose objective of this study. We will assess the viability of the program between IV and sub-cu administration. So that will actually tell us where we will land on the frequency.

I can tell you we're really happy with the formulation, which is obviously ready to go. And in terms of everything is running according to plan with the submissions and as planned, we plan to recruit the first healthy volunteers in that study in Q4 of this year.

Daniel, hi, I'll take the next two questions that you asked.

First of all with regard to AbD and the diagnostic deal structures that they do. Indeed, royalties are always a component of those deals, and supply of material may or may not be that varies from case to case.

But all of the deals contain a royalty component and some of them also contain supply of material that would be manufactured by us.

Okay, but the royalty component is always part of that yes?

Yes exactly. That's why these deals are, I think, particularly attractive on the one hand and represent a new revenue component and opportunity for AbD. Because of course, royalties represent pure profit for us and we hope and expect that that will have a positive impact on their profit margin in the future.

We're really just at the beginning at the moment. These are the first HuCAL based products to come to market in the diagnostics phase, and we really hope and expect to see a number more of these in the months and years ahead.

And maybe a question on the potential size of the royalties. Is it more that we talk about a low single digit range or maybe even in double digit range, just to get a feeling for how big that level could be?

Yes, I prefer not to actually give specific guidance on that. For the following very simple reason. There is more variability here than perhaps we see in the therapeutic side and we don't want to obviously give too much away at this stage.

I think the key point is we do see that future royalties from diagnostics as being a very, very attractive potential revenue stream.

Okay.

Then to your question about new alliances around Slonomics, perhaps [Arilla]. Again, we don't like to give precise predictions of sizes of deals or expected revenue streams or timings. Let's just say that we see interesting opportunities to exploit Slonomic based technologies in different ways actually.

But as to when and precisely how much revenue those deals are going to generate, I'm afraid we'll have to be rather quiet on that and hope to surprise you with some news on that in the future.

But you are confident that something would still happen in 2011?

We don't want to give specific guidance on timing of deals, again for competitor reasons, which I'm sure you can understand.

Of course, yes.

But we do see interest being in potentially attractive opportunities around the Slonomics technology.

Okay, thank you very much.

(Operator Instructions). The next question will come from Mick Cooper, Edison Investment.

Good afternoon. A couple of questions about the MOR103 trial, the ongoing 1b and 2a trial. First of all have you just decreased the number of patients from 135 down to 92 or are there any other changes, possibly to do with the screening of potential patients? And also can you explain how you can reduce the number of patients as you have and leave the powering of the trial unchanged. So it seems a bit strange to me.

Then one other question on the new technology. Can you give us any guidance on when we might hear about the new technology being rolled out?

Thanks for that question. Let me start with that first. You ask about the number of patients. We looked at the numbers and as this, with many RA trials, we experienced some hurdles there with the recruitment, not unusual at all but then we work with the Steering Committee to really optimize enrolment and to improve the study plan. We came up with a smart way which, I hope you can understand I don't want to share the details, but I can assure you we look at this very, very carefully with a number of independent bias decisions.

The scientific value and the statistical powering of the study is unchanged. It's a legitimate question to ask, so we are very sure about that. We have changed some of the inclusion criteria and looked at this very carefully. Not surprisingly, for example, CRP you asked specifically is one of those hurdles.

It's that we have left the, as you can also look up in clinicaltrials.org, we've left the CRP enrollment criteria at 5 mix per mil for those patients that are negative for rheumatoid factor or anti CCP. Those are important markers that also show activity and have allowed those patients with lower levels, at 2.5 to be enrolled only if they are either positive for rheumatoid factor or for anti CCP, to really ensure that they have the adequate activity.

Also what we have allowed now is patients that have been on Rituximab, if they are on a stable dose, which we think is very reasonable, and there was a slight change with women of childbearing age are allowed. That was based on the [inaudible] data, if they are on a stable does of methotrexate and [inaudible].

Okay.

And Mick coming onto the third question regarding the timing of the technology announcement. We've guided that it will be this year, so before the end of the year. But at this stage I can't give more precision than that.

Okay, thank you.

(Operator Instructions). The next questions will come from Martin Possienke from Equinet Bank. Please go ahead.

Hi good afternoon. Just one question regarding the AbD statement. Can you maybe give me the figures for the goodwill as of December 2010 and maybe for other intangibles related to this business unit. And then maybe your key assumptions regarding the impairment tests.

Well thanks very much for the question. Maybe let me put the comment from myself in the right perspective first before I come to the numbers here. Well, you know the AbD sag and the recent performance is certainly not there where we would like to see it.

On the other hand, and I think Simon already pointed it out, the segment is really making solid progress in diagnostics and here we see significant opportunities coming up. So far the goodwill or the participation of the total value of the participation for AbD is around EUR37 million. And you see that in last year's Annual Report there is an explanation and a calculation made. Also an impairment test evaluation.

We passed in the review of PWC and that is not an audit but it's a review for the half year numbers, the impairment test without any problems. So it's not a problem here really that either the management or the auditors see a problem on the value of AbD. But nonetheless I mean as the CFO, if I see the numbers are below what we have planned, I cannot be happy and that is what you should get as a message that I certainly always will have a very close look on the goals which we set and that we achieve those goals being the basis for your planning.

And what are your key assumptions for the goodwill? Is it still 10% growth over the next couple of years?

You know I think we've got to see that this growth around 10% is certainly something we should keep in mind. That's the right ballpark of growth that we should aim for. On the other hand that means also that we can't expect in that sort of industry we are acting in, that we have 10% revenue growth year on year like clockwork.

Payments like the technology milestone that we have seen in Q1 by the [inaudible] this year, are lumpy by nature, and the timing of new deals is extremely difficult and hard to predict. So this results in some volatility for the top line and that is something we have to face for the future.

No, that's quite obvious. I mean the 10% was the target for the last year as well and you never achieved it. So I know that it's lumpy. But just for the future, for the impairment test, I think there will be another one.

Sorry I was talking about the Group. You talk about AbD alone yes?

Yes, yes.

Well you know, I can't give you more details. We never give predictions for the forthcoming year for a single segment here. We always give our guidance at the beginning of the year for the year and I would like to stick to that, and especially here for AbD as well. So you know there is no reason why we should look at AbD separately.

No because you do it in your Annual Report. I mean you used 10% for the [inaudible] impairment if I am right. You used the figure of 10% and I just wanted to know if you still used it in the half year review and if you will use it in the future as well.

Well for the impairment calculation of AbD, we certainly assume very detailed claims year over year and with a specific growth number. And then certainly also specific the role for the [inaudible] which is much lower than the 10%. Very much lower, that's what we do.

So we do it in a very precise way, whereas our guidance is rather in the broad manner.

Okay. And can you maybe tell me if there are other intangibles? I mean you said goodwill is EUR37 million related to AbD.

Actually the goodwill alone is EUR26.7 million and there are other intangibles adding up to EUR37 million. So I didn't do -- that's the total.

Okay.

Total value for AbD is EUR37 million.

Okay. And the safety cushion of EUR5 million, that was on the goodwill alone in December 2010?

I have to come back to you on that one. I'm not aware of the basic for that from last year. I have to figure that out. I'll have to come back to you on that.

Okay. Sorry for being such a nerd. Okay thanks a lot.

(Operator Instructions). The next question will come Mark Pospisilik from Kempen & Co.

Hello, good afternoon and thanks for taking my questions. Just two. One on the MOR202. Given how busy and crowded the multiple myeloma space is, I'm just wondering if you can give us any color on discussions with regulators leading up to the approvals, or what issues they were concerned with. And maybe do you already have the clinical trial centers online and if so, what level of interest was there for the program?

Maybe another one on AbD. If you could just perhaps give a little color detail on perhaps why the segment is on or is behind target. Whether this is a short term thing. Whether, I assume MorphoSys fully intends to address this in the short term or whether it's more of a structural thing. Thank you.

Yes Mark, I'll take the first question on MOR202 thank you for that. Indeed when we discussed with the regulators there were no issues. I mean you are right of course, this is a crowded space. We are aware of that. We think we have a good molecule, a good rationale here. There were really no issues that were specifically raised. The study has unconditional approval and we have a way forward.

The interest of the investigators is great. We had terrific investigator on scientific advisory boards and it is open in Germany, the site is open in Germany and Austria and I can tell you that the investigators are highly motivated to recruit patients.

As we said, we are on track here, the sites are open and we expect dosing to occur shortly.

And Mark to your second question about AbD, why we're behind target. I think it's a combination of factors. There is some currency effects in there definitely. Dollar weakness for example, a big chunk of the revenue on that side of the business is in dollars. But I think also there's an element of difficult challenging market conditions.

Research budgets are under pressure, as I'm sure you're aware and that feeds through into this market. And as Jens added into that, we feel that the unit could simply perform a bit better as well. So it's really I think a combination of factors. Things have definitely improved a bit over the last few months. We see the trend this year is in the right direction, it's improving and we're confident that we can finish the year in the second half strongly.

So I think there's a combination of factors at play in the numbers you see today that we're confident in the near term that things can improve and we're confident in the longer term that as we transition to a product mix that is more diagnostic based, with these royalty components to them that that should have a fundamentally positive impact in the margins in that business.

Okay great. Maybe just one quick follow up on the MOR202. Arndt is there perhaps an advantage to the MOR202 or a nice from the regulators where clinical trial centers, their perspective that they find this particular molecule attractive?

So you mean in terms of on target competition or in general? I can share with you, I think we've mentioned that during the R&D Day we see, for example, a clear advantage. Of course it's specific for multiple myeloma. With this particular molecule we had the advantage that we have very solid tox data, other target competitors for example, don't have. That gives us a kick start there in the way also with safety.

And you know, I want to re-emphasize you might have seen or will be glad absolutely to share with you the poster that we had at Asco that I find very encouraging. What we showed there really supporting our strategy in the clinical trial that MOR202 combined with two of the approved standard therapy, namely Bortezomib or Lenalidomides the proteasome inhibitors not only doubles or added the effect that was strong and synergistic upon very strong statistical rules, which again will be happy to share.

People, throughout the poster were quite impressed. The investigators were impressed by the data and I feel very confident that this is a good strategy to first test this molecule as we said in first phase as monotherapy and then in combination therapy.

Great thanks.

Sure thank you.

Now we will move to Thomas Schiessle from EQI.TS. Please go ahead.

Thank you. Thomas Schiessle from EQI.TS in Frankfurt. One additional question on MOR202. If it comes to more tests you are heading for. First the monotherapy and second the combination therapy.

Thomas. Sorry to interrupt you. We can barely hear you. Your terminal is a bad connection.

Much better?

Oh much better.

So I will repeat all.

Thank you.

Concerning MOR202 and the mono and combination therapy. Did I get it right that first you start with the mono therapy and data will be available in '013?

That's correct Thomas, I can confirm that exactly.

And second, so afterwards you start the combination therapy in multiple myeloma so we will see data later on.

That's correct. Thomas it's an open labeled study. We will have ongoing data also on combo. Ongoing in '013 and then we will see the final data a little later.

Okay. May I switch to the MOR103 and the change in recruitment scheme. The new recruitment scheme with up to 92 patients. Does that mean that the overall Phase 1 cost for this test will be lower, significantly lower? That we will have to change our, let's say our spreadsheet so to speak?

Thomas you shouldn't make that assumption. Of course its true there will be some lower patient numbers. We expect overall results are mitigated by adding another country. Other than that we have a fifth country with Ukraine, which is usually a strong recruiting country. We see that also in Poland. So I would suggest not to change anything.

Okay. And one general question if I may. Up to now you invested a little bit more than EUR50 million in technology and other projects for your own purposes. Shall we assume an even higher number to be spent in the second half of the year?

Thomas, that relates to our proprietary R&D investment.

Indeed, indeed.

Yes, the guidance for the full year on that was EUR40 million to EUR45 million, remember that we issued at the beginning of the year.

Yes indeed.

And we are standing by that number or that range.

Could you give us any hint if the chunk of the -- most of the amount will be paid in the third or in the fourth quarter?

No in short. But I mean if you look at the general trend, the general trend.

Is up indeed.

So you can probably extrapolate reasonably from that in respect that there may be more in the fourth quarter than the first quarter. But I think an important point to make here is that this is not a one way track. A substantial chunk of our expenditure in proprietary R&D is external. Contract manufacturers, contract research organizations. And those are things of course which are not locked in to the long term. It doesn't represent permanent headcount, here at MorphoSys or bricks and mortar. So you shouldn't automatically expect the proprietary investment in R&D is a one way track going upwards.

Okay. Thank you.

And just now we move to Gunnar Romer from Deutsche Bank.

Gunnar are you still there?

Can you hear me?

Yes now we can hear you.

Sorry. Gunnar Romer, Deutsche Bank. I have a couple of questions, we've been talking a lot about your own proprietary programs. But I was interested in an update on your partner pipeline and the potential availability of Phase 2 data. Still this year I know that you're dependent on your partners, but maybe you can shed some more light on this.

Then secondly, could you please remind me of the visibility in AbD as regards acceleration of the business in the second half.

And then thirdly, more general question. Going into next year we probably lose some of the revenues you've recorded this year, in particular with regard to the technology milestone from Novartis. And I was wondering what your strategy would be in terms of adjusting your own R&D.

Is it still your aim to remain profitable, also going into next year despite a lower revenue base but still ongoing proprietary development. Thank you.

Okay thanks Gunnar. Let me start on that. First of all regarding the partners programs. As you mentioned we have no influence over what the partners choose to say about those programs and when. We rely on their decision, when they're going to communicate their data.

We're aware of the timing of the various trials that are ongoing. We're aware for example that three Centocor programs, one Phase 2 program and two Phase 1 programs are scheduled to be completed this year. And that may, of course, mean that they could announce data from one or more of those programs at one or more of the conferences that are coming up. But again we have no influence on that.

I think in general as we look for the next 12 to 18 months, so from now to the end of next year, there's quite a lot of data that could come available. Also Phase 2 data on other programs. So we would expect it to be a rather newsy period over the next say 12 months or so. But again we can't influence what they say and when they say it.

Regarding the second question about visibility and the acceleration of AbD in H2, the second half of this year. We see, as I said, things are tracking up at the moment. We've had a good last couple of months and that makes us confident that things will pick up.

There is some seasonality to that business of course. So for example, summer, August there's usually a little bit quieter. But then the latter part of the year is usually quite good historically. So based on that alone we would expect some acceleration. And as I've said, we've seen a trend in the right direction over the last couple of months.

Regarding revenues for next year. Let me just say in general that we certainly do intend to remain profitable, and stick with something that has become a by-word at MorphoSys which is that we fund our own proprietary activities out of our operating cash flow. And we see we have a clear path to how we can do that.

In terms of revenue sources, I think Q1 and the Novartis milestone has illustrated how lumpy our revenue can be and I think we should prepare ourselves for that sort of thing in the months and years ahead as well.

We should expect lumpiness, for example. When the time comes to outlay some proprietary program after Phase 2 data that's typically associated with an upfront payment, that type of revenue is very lumpy obviously. So this will become more the case as we look to the next couple of years ahead. But in general we intend to remain profitable and we intend to fund all of our proprietary activities out of our operating cash flow.

Okay thank you, that's helpful. And maybe if you can just to follow up on the last question, how flexible are you really in terms of your proprietary R&D funding?

We are fairly flexible. As I said before, we have deliberately not built up a huge infrastructure and a lot of bricks and mortar internally. We do a lot of our work externally with contract manufacturers, contract research organizations. Just to give you one example, we deliberately chose not to establish an animal facility in-house as other companies may have done, which is really fixed cost and represents expensive maintenance and something that you can't turn on or off very quickly.

So the fact that we have a lot of external relationships and externalized cost, gives us quite some flexibility as and where necessary to adjust our R&D investment.

And can you give us an indication of the externalized cost relative to your total spending?

Yes, it's around 50%. Certainly around all of last year the number was pretty much exactly 50%.

Okay thank you very much.

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

Thank you very much. I'd like to close by reminding you of the key messages to take away from this call. And actually just before I do that, we just made a note of one question which was Martin, your question regarding the parameters relating to goodwill on the AbD side. Jens will come back to you on that question.

Overall we're on track to reach all of our most important goals for this year. Our pipeline is progressing well and Arndt and his team are confident of reaching the challenging objectives we've set for all three of our most advanced proprietary programs this year.

Our Partner Discovery business also continues to perform well. The OncoMed and ContraFect announcements are nice examples of the success of both existing partnerships and our ability to form new ones.

Finally while AbD Serotec has experienced some -- experiencing some currency headwinds, the introduction of the first HuCAL based diagnostic kit on the market represents an important strategic step forward for the unit.

That concludes the call. Should any of you want to -- if 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.