MorphoSys AG (MOR) 2011 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the MorphoSys presentation of the year-end results 2011. Please note that, for the duration of the presentation, all participants will be in listen-only mode, and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions).

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

Good morning, and also good afternoon, and welcome to our 2011 year-end results conference call and webcast. I'm Claudia Gutjahr-Loeser, Head of Corporate Communications and Investor Relations of MorphoSys. With me on the call today is our complete Management Board; Simon Moroney, our CEO; Jens Holstein, our CFO; Arndt Schottelius, our CDO; and Marlies Sproll, our CSO.

Simon and Jens will present you a review of the year 2011, and provide an outlook for 2012. After the presentation, all four Management Board Members will be available for your questions.

We would like to thank you for participating. For those participants on the conference call you will find the slide deck of this presentation on our corporate website.

Before we 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 and development 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, that speak only as of the date hereof.

Let's start by taking a look at how the presentation will run. We have two parts. First we will review 2011, focusing on pipeline, technology, AbD Serotec, and financials. And second we will provide an outlook on this year covering the same topics. The presentation will last about 45 minutes.

I would now like to hand over to Simon Moroney.

Thank you, Claudia; and also from me a warm welcome to our 2011 year-end results conference and webcast.

We're delighted to be able to report on a record year for the Company. Milestones drove revenue over EUR100 million for the first time ever. And the number of programs in clinical development reached an all-time high. This latter point, the growing maturity and breadth of our pipeline, is the key to our value creation. And is one we will emphasize during the presentation.

Our therapeutic antibody pipeline is one of the broadest in the industry. Execution of our strategy of combining partnerships with proprietary development is behind this success. At the end of 2011, we have 76 programs altogether in our pipeline; the total number of programs increased by one. Nine new programs were started by partners, six were stopped, and there was a net decrease of two proprietary programs.

Our tracking projection of how many drugs could make it to market from the current pipeline now stands at 14, the highest it has ever been. The number of clinical programs is the single-most-important metric in our Company, as this embodies lucrative future earnings potential.

During the course of 2011, the number of clinical programs increased to 20, a net gain of three, comprising INDs from two of our partners; and two of our proprietary programs, with one program being reclassified to pre-clinical stage. In addition, two programs moved from Phase 1 to Phase 2, highlighting the growing maturity of the pipeline. All but one of the clinical programs is based on the HuCAL platform, making this the most productive antibody library in the industry.

Let's now look in detail at the progress we've made with the pipeline starting with our proprietary portfolio. During 2011 we made excellent progress with our most advanced program, MOR103. In addition, results from outside increased the level of interest in this program. For the Phase 1b/2a study in rheumatoid arthritis patients, we can now report that we have hit our recruitment target in this trial. This means that we'll report data in Q3 of this year.

Late last year data from a competing program provided the first clinical validation for the pathway that MOR103 is targeting. Results were published from a Phase 2 study of the antibody mavrilimumab, which targets the GM-CSF receptor, in other words the receptor for the ligand against which MOR103 is directed. These data were important for us for several reasons.

First it was a statistically significant improvement in the symptoms of disease amongst the patients participating in the study. Second, there was a rapid onset to the action of the drug. An improvement in symptoms was observed within two weeks of administration. And third the treatment was safe and well tolerated. These results clearly show that the pathway, which MOR103 is targeting, is involved in the pathology of the disease in rheumatoid arthritis sufferers.

These data validate the pathway. We believe that our approach of targeting GM-CSF, rather than the receptor, should have some advantages which we hope will be revealed by the trial, which is due for completion this year. We look forward to sharing our clinical data with you in about six months from now.

Late last year we commenced the Phase 1b safety study of MOR103 in multiple sclerosis patients. We had always considered MS as a promising indication from anti GM-CSF Treatment, and data published last year added support for this approach.

Papers from research groups at the Universities of Zurich and Philadelphia pointed to GM-CSF being the key cytokine in the activation of auto-reactive T cells. These results add strong support for the development of MOR103 and MS.

Rounding out, the MOR103 program, a phase 1 PK study of a subcutaneous formulation, is ongoing in healthy volunteers.

The Phase 1 clinical trial of MOR208, our FC modified antibody for B cell malignancies, has also progressed well. We can now report that recruitment into the Phase 1 trial is almost completed. We'll be able to report data later this year; most likely at ASH.

MOR202, our HuCAL antibody for multiple myeloma is our fourth proprietary program in clinical development. We've published pre-clinical data of combination is of MOR202 with Revlimid and with Velcade; which showed very marked synergy between antibody and small molecule drugs in each case.

These promising results support the design of the clinical study, which commenced in the summer last year. Currently, we're conducting a classical dose escalation study. And once the maximum tolerated dose is established, two arms in the trial will explore combinations of MOR202 with Velcade and Revlimid, respectively.

While generally, we don't disclose information about earlier stage programs, we would like to take this opportunity to provide a brief update on two of our ongoing partnerships with other biotech companies.

Our co-development relationship with Galapagos has led to the first program that we've agreed to advance as quickly as possible. Together, we have generated some exciting data, against the promising new target in the area of inflammatory disease. Other activities within the collaboration may also produce candidates, which we'll take forward in the future.

The second collaboration that has produced some extremely promising, although early stage results, is that with Absynth Biologics, against staphylococcus aureus infections; including MRSA. MorphoSys has obtained specific antibodies to [fight] novel targets; with essential roles in staph aureus growth.

Our antibodies show specific binding to bacterial cells; enhanced killing by neutrophils; and cause growth inhibition of cultures in vitro. First protective effects could also be shown in vivo, in two established disease models. Although five targets are being looked at, we're currently counting at this one early stage, anti-infective program.

I'd like to turn now to the progress that was made in our partnerships. The two new partner programs to enter the clinic during 2011 are both in cancer; namely Oncomed's OMP-18R5, and Bayer's BAY94-9343, at the bottom of the table on page 11.

Oncomed's program is directed against a promising target in the well-known winter pathway; while Bayer's is an antibody drug conjugate, based on the immunogen technology.

Novartis' HuCAL antibody program, BYM338, which is being developed in musculoskeletal diseases, advanced from Phase 1 to Phase 2 in 2011. This program shows how rapidly progress can be made. The time from entering the clinic to starting Phase 2 trials was just 15 months.

Janssen's HuCAL antibody program, CNTO 1959, in psoriasis, also progressed from Phase 1 to Phase 2; in this case, triggering a clinical milestone payment to us.

To bring you right up to date, most recently, Novartis has taken a HuCAL antibody, being developed for an ophthalmology indication, from Phase 1 into Phase 2 development. Again, progress has been quick here. The move into Phase 2 came only 18 months after the start of Phase 1.

Before we close out this section on partnered programs, it's worth mentioning data that was published on one of the most exciting programs, Hoffman-La Roche's HuCAL antibody for Alzheimer's disease, Gantenerumab.

In October, Roche published imaging data from a Phase 1 study of this compound in Alzheimer's patients, which provided very encouraging results. The data showed a clear post dependent reduction in the amount of amyloid plaque in the brain to the patients; while those receiving placebo experienced a continued increase in brain amyloid. Amyloid removal was very rapid; in some cases, after just two months of treatment.

The Phase 1 study also showed that the antibody was generally safe and well tolerated, and provided evidence on its mechanism of action.

Gantenerumab is now in a 360-patient Phase 2 trial in about 100 clinical centers, spread over 19 countries. A key feature of this Phase 2 study is that it is recruiting early stage so-called prodromal Alzheimer's patients. The idea is that treatment is more likely to be effective if it targets early stage patients. Current evidence suggests that when a substantial level of amyloid plaque is built up in the brain, treatment may be too late.

Although this study still has some way to run, 2012 will be an interesting year for the amyloid hypothesis, as we will see clinical data from two other antibody programs; namely, Bapineuzumab and Solanezumab.

Another interesting story came public through an Alzheimer's panel at last month's Bio CEO & Investor Conference in New York. A consortium of Alzheimer's opinion leaders is raising money from industry, government and philanthropic sources, to run their own Alzheimer's prevention trial.

They've chosen what they believe are the two most promising approaches, which happen to be Gantenerumab; and another anti beta amyloid antibody, Bapineuzumab. The commitment of these experts speaks volumes for the potential of Gantenerumab to make a real difference in this huge unmet medical need.

Turning now to technology, we made considerable progress with our platform during 2011. The announcement of our new Ylanthia technology, towards the end of the year, marks the beginning of a transition in which HuCAL will be replaced by the new platform.

Ylanthia was made possible by Slonomics, the technology that we secured through the acquisition of Sloning in 2010. Slonomics was used in the construction of the Ylanthia library. And Slonomics also made is possible for us to design out the modularity, which is the key feature of all HuCAL libraries. With Slonomics antibody optimization becomes much faster and more flexible, and no longer relies on the fixed modular cassettes, which are at the heart of HuCAL optimization strategy.

The benefits that we expect to derive from Ylanthia are considerable. Speed is one. We expect to be able to delivery drug candidates faster than ever before. The probability of success is another, but is harder to quantify. But already with Ylanthia, we're obtaining many more drug candidates per target than we do with HuCAL; giving us the chance to pick the ones ideally suited for the respective products.

We expect to be able to guide antibody solution towards targets or epitopes that are intractable today. Altogether, we expect Ylanthia to be an even more effective platform for the generation of therapeutic antibodies than HuCAL.

Focusing on Ylanthia should not cause us to overlook the fact that HuCAL is a tremendous success story. As mentioned earlier, HuCAL is the most successful antibody library technology in the industry; based on the number of programs and clinical development.

It has been an extremely lucrative platform for MorphoSys; the basis for over 30 commercial partnerships, which have already brought us revenues of more than EUR450 million. And, of course, we expect our revenues from HuCAL to continue to grow substantially, as products move forward, and generate increasing milestone and royalty payments.

I'd like to turn now to our AbD Serotec segment. While market conditions were challenging, the unit surpassed the profit expectations we had at the beginning of the year.

Operationally, the first diagnostic kits to be based on primary HuCAL antibodies entered the market and we began to receive royalty payments. So far, AbD has a number of control antibodies in marketed kits, but these ones are the first kits that use the HuCAL antibody as the diagnostic agent.

This is a significant milestone in the unit's transition to a more diagnostics focused business. These products comprise kits for quantifying several therapeutic antibodies and rely on so-called anti-idiotypic antibodies.

The HuCAL antibodies are used to determine circulating levels of different antibody drugs and the immune response triggered in the patient by the treatment. The measurement relies on the ability to detect the therapeutic antibody and the presence of the mass of other human antibodies in patient samples. This ability to provide anti-idiotypic antibodies is a particular strength of the HuCAL technology and it's something we're aiming to exploit.

We're running a number of additional anti-idiotype projects and collaborations and expect to see more such diagnostic products come to market. In fact, another launch of a HuCAL-based diagnostic kit in the area of maternal health took place in late 2011 and here we stand to receive royalties on all diagnostic product sales.

To complete the operational review of 2011, we signed a non-exclusive license for the Slonomics with the industrial enzymes company, Novozymes. This is the first deal with made for Slonomics in the industrial biotech space. The announcement generated interest from other companies active in this field and we see opportunities to generate additional value from the platform in industrial biotechnology.

With that, I'll conclude the operational review of 2011, and will now hand over to Jens for the financial review and outlook for 2012, before I come back with a strategic outlook.

Thank you, Simon; and also from my side, a warm welcome to all of you attending this call.

The year 2011 was exceptionally successful for MorphoSys.

For the first time in our history, revenues exceeded EUR100 million, a clear proof of the sustainable success of our core technologies and our business model. Record revenues allowed us to invest massively in proprietary research and development, with now four own programs in the clinic. And despite the firm investment, we could increase our operating profit by 24% to EUR12.2 million. Our cash position continues to be strong and we ended the year with more than EUR134 million on our account.

Let me start my review with a quick look at our income statement. Total operating expenses increased by 15%, mainly due to a strong increase in proprietary R&D expenses. Costs of goods sold decreased and the gross margin for the AbD Serotec segment remained unchanged at 64%.

SG&A expenses slightly increased, mainly due to our higher personnel costs, partly influenced by the management change in the second quarter of last year.

In 2011, we had significantly lower finance income in comparison to the previous year. In 2010, marketable securities were sold for the in-licensing of MOR208 from Xencor and the acquisition of Sloning and pushed the finance income up by EUR5 million. The reason for the higher other expenses in 2011 were mainly for exchange losses of around EUR2 million.

The tax rate on a Group level was 28% compared to 30% in the previous year.

We ended the year with a very healthy net profit of EUR8.2 million or EUR0.36 per share.

On page 22, you see a more detailed revenue split for 2010 and 2011. AbD Serotec contributed EUR19.3 million to our 2011 revenue. AbD's revenues for last year came in lower than expected, driven by the increased budget pressure in research institutes and organizations.

The decrease in top line in comparison to the previous year was due to a large one-time order in 2010 and unfavorable exchange rates during the course of the year 2011. Taking this into account, the underlying growth of 3% is driven by the HuCAL business, as well as positive investments in our e-commerce and catalog facilities.

The Partnered Discovery business, [adds] R&D funding and licensing fees. We have a very solid foundation with committed yearly payments of approximately EUR40 million from Novartis, plus additional payments from other partners. You may recall that most of our collaborative therapeutic partnerships, based in HuCAL, were concluded by now. This is the main reason for the decline of 70% in 2011's R&D funding and licensing fees in comparison to 2010.

Revenues in the Proprietary Discovery segment are collected from the predevelopment programs with Novartis. Until we have officially elected to opt into a profit and cost sharing agreement, Novartis is funding all costs in connection with these programs.

Last but not least, we had an exceptional year with the success-based payments with milestone payments for the full transfer and internalization of HuCAL at Novartis' premises in Basel. For this reason, success-based payments reached a record level of EUR32.7 million.

Although we cannot disclose the exact amount of the payment, you can see the impact on the 2011 figures. As mentioned throughout 2011, the Novartis technology payment was a one-time event, in part of Novartis' committed funding for the access to our HuCAL technology.

Milestone payments were and will remain an important factor in our financial performance in the years ahead, with a significant impact on revenues and even more so on profit.

Slide 23 provides you with another perspective of our financial results. Revenues steadily increased over the last five years with the five year CAGR of 13%. At the same time, we see a steady increase in total R&D expenses as well. Despite our Proprietary R&D activities, which led to a strong increase of total R&D expenses, we happened to remain profitable at a significant level. As mentioned previously, we see it as an important call to maintain our financial discipline by moving our development programs forward as quickly as possible.

In 2011, we invested massively in our Proprietary portfolio, Simon reported on the progress we have made during the year. But R&D spending is not a one-way track for us. We have used the available profit and cash flows of the last years to move our programs forward.

As you can see in the pie chart on the right side of the slide 24, almost 50% of our spending went into external laboratory funding of our most advanced programs, comprising mainly the manufacturing of clinical materials and expenses for clinical research organizations, supporting us in conducting clinical trials. This cost block is driven by the status and the requirements of each single program and, therefore, varies year on year.

Taking a quick look at our balance sheet on page 25, you see that our cash position increased, as already mentioned to EUR134.4 million. We do not have any bad debt and together with our profitability, we are, I do believe, in a very unique position.

From a cash flow perspective, net cash inflow from operations in 2011 amounted to EUR27.1 million compared to EUR1.9 million in the previous year. The main reason for the strong cash inflow was the technology milestone payment from Novartis.

Before I move on to the outlook for 2012, I would like to show you the results of our latest shareholder identification analysis. Approximately 50% of our outstanding shares are held by institutional investors, increasingly the healthcare specialists; for us, a clear sign that the product development pipeline is gaining importance. We also see an increasing amount from the Board, especially from the US.

Let me now move on to the financial outlook for 2012. For 2012, we anticipate total Group revenues of between EUR75 million and EUR80 million. Taking in the non-recurrence of Novartis' milestone payment in the first quarter of 2011 into account, we anticipate a single to double-digit revenue growth for 2012.

In addition, there is room for a considerable out-performance of this revenue range in case of proprietary drug development program can be partnered, an event which we have not reflected in our 2012 guidance.

In 2012, our R&D budget for Proprietary product and technology development will decrease to between EUR20 million to EUR25 million. Much of the costly clinical material production has already been expended in 2011 and the phase 1b/2a trial for MOR103 in RA is about to be completed.

The majority our R&D spending will be channeled into clinical development of the most advanced drug candidates and the development of new technologies.

We will stick to our goals of maintaining profitability. We expect an EBIT between EUR1 million and EUR5 million. Please note that we have changed the guidance from operating profit to EBIT, as we feel that the capital markets are generally looking at EBIT instead of operating profit figures.

For AbD, we expect revenues between EUR20 million and EUR22 million. The EBIT margin will further increase to 6% to 8%.

Before I hand back to Simon for the operational outlook, let me close with some final general comments.

One of the main events, such as the out-licensing of proprietary products and large milestone payments will become more important factors for our fiscal performance in the years to come. Those events could lead to significant outperformance.

In the near term, revenue growth is dependent on the Company's ability to sign additional partnership and/or to out-license proprietary compounds. In the mid-term, royalties from marketed products will add to revenue growth.

These are the reasons why the financial results of MorphoSys will become more volatile in the upcoming years. However, MorphoSys is a biotechnology Company with an impressive pipeline. Measuring the Company in financial terms, looking only at revenue growth and profit does not capture the part of our value proposition.

We are committed to give reliable guidance to the markets that we plan for the long term. The most important part of MorphoSys' value-generation engine is our pipeline, one of the broadest antibody pipelines in the industry, with already partnered and yet unpartnered programs.

In addition, there is the AbD Serotec segment, which is steadily providing additional cash flows. And last but not least, there is our large long-term collaboration with Novartis, securing stable income and cash flows at least until the end of 2017.

We believe that we have built a sustainable business model, with great potential to deliver real growth in the future. Using our strong position, we also want to put our cash to work, to further strengthen our technology platform and our development pipeline. M&A is and will be one of our priorities for the upcoming years.

That concludes my part of the presentation, and I hand back to Simon.

Thank you, Jens.

Now to the operational outlook for 2012; we're expecting a lot of progress this year on several fronts, most notably around individual products and clinical development, technology and AbD.

Regarding the pipeline, up to six programs, one proprietary and five partnered, will complete phase 2 trials and deliver clinical proof of concept data during the course of the year. The data from these studies will give us the first clear evidence of whether these programs have the potential to become successful drugs.

MOR103, in rheumatoid arthritis is one of these programs. We'll release headline data when it becomes available in the third quarter, and we'll seek a partner for the further development of the program. As the study is blinded, we currently have no insight into the likely outcome of the study and, as Jens has mentioned, has therefore made no revenue assumptions in our financial planning.

If the deal were to be completed this year, any upfront payment could have a major positive impact on our revenue and profit guidance. Conversely, we are not dependent on a deal from MOR103, to achieve the guidance released today, irrespective of any partnering activity, the reported data from our clinical study, of a subcutaneous formulation, around mid-year. The Phase 1b trial of multiple sclerosis patients will also continue with data from this study due next year.

Five partner programs are scheduled to complete Phase 2 trials before the end of the year, according to publicly available information. These are three Novartis programs, one of which is undisclosed; the second of which is being developed for musculoskeletal diseases; and the third is BHQ880 and cancer; and the two Janssen programs being developed under the code CNTO888, for cancer and idiopathic pulmonary fibrosis. As always, we encourage our partners to release meaningful data, but we have no control over their decision to do so.

Even allowing for the attrition, which is to be expected on all drug development programs, positive data from a number of that group of six programs altogether, can be expected.

We also expect progress from elsewhere in the pipeline. Our Phase 1 trial of MOR208 in CLL patients will be completed, and we will report data in the second half of the year. We plan to commence Phase 2 studies in MOR208 and two additional indications, namely Non-Hodgkins Lymphoma and acute lymphocytic leukemia before year end.

Evaluating MOR208 and NHL and ALL, building on the data we then have for CLL, should enable us to quickly assess the broader commercial potential of the molecule and hematological malignancies.

The MOR202 clinical trial will continue in 2012. This is an open label study, and we could report data as and when it becomes available. Amongst our partners several programs are scheduled to complete Phase 1 trials, which means that the Phase 2 roster could expand during the year. Two Janssen and two Oncomed programs could make this transition. Currently we have visibility on one to three new partner programs entering the clinic, during the year.

As the pipeline matures, the amount of data from individual programs, that is publicly available, increases. As you know, we're restricted regarding what we can say about many of our partners' programs, with confidentiality as a requirement for competitive reasons.

This requirement is usually relaxed as programs advance, which is important for us, because it means that there is more visibility on our pipeline's prospect and its inherent value, than ever before. We expect this trend to continue, and make clear the huge potential value which is locked into our proprietary and partnered product pipeline.

Regarding technology, commercialization of Ylanthia will commence in 2012. A number of discussions are currently ongoing, and we will communicate our commercialization plans in due course.

Beyond Ylanthia, we continue to invest in technology development, the focus being to expand the application of therapeutic antibodies. A related development is a new database, called YBase, which is intended to enable us to manage the huge quantities of antibody sequence data, and biophysical information, that we're generating.

In time, YBase will be a powerful resource which we may be able to use to predict antibody drug development, from an antibody sequence. As always, we will communicate technological advances as and when they are made.

Regarding AbD Serotec, we expect an uptick in both revenues and profits. The foundation is being laid for future growth, as more and more diagnostic partnerships are established, and new diagnostic products come to market.

We intend to continue to monetize our investment in the Slonomics technology platform. As announced earlier this week, we have completed a new deal with an unnamed pharmaceutical company, in the therapeutic space, which does not compete with our interest in therapeutic antibodies. We see a number of other opportunities to commercialize Slonomics.

Finally, we remain very interested in putting our strong cash position to work, to create value. Two years ago, we did two transactions for cash, namely the in-licensing of MOR208, and the acquisition of Sloning. These two transactions promised to add substantial value to MorphoSys. We're hopeful that the intensive efforts we're making will identify more such opportunities that may lead to transactions this year. Our focus is on technologies and/or product candidates that will strengthen the therapeutic side of our business.

Overall, we're looking forward to another very productive year, from both operational and financial perspectives.

That concludes the presentation. Thank you all for your participation.

With that we open the call for your questions.

(Operator Instructions) Gunnar Romer, Deutsche Bank.

Firstly, I have a question on the guidance, especially the revenue corridor you are providing. And here, whether it would be possible that you could run us through your assumptions on the upper end, lower end. And also, whether there is already some revenues included from a potential agreement on Ylanthia?

And that also relates to my second question, on Ylanthia. Could you help us to understand what your current thinking is regarding a potential deal? I think you stated that you're in a number of discussions, and I was just wondering whether this means we can read this as potential more than one deal, around Ylanthia?

Then also a third question would be on new partnered INDs in 2012, could you just confirm? I think I noted down you expect one to three in 2012. Thank you.

Yes, thanks Gunnar. Let me start with that, and maybe starting with Ylanthia. Let me just say that we have included in our revenue guidance some assumed revenue for, let me call, it new commercial activities. And under that heading comes Ylanthia, comes also Slenomics, comes also [aureus], and potentially, other relationships, and we don't want to, in any way, break those things out. So there's a broad pot of activity that we call new commercial activity, in which Ylanthia is one component.

Regarding the commercialization of Ylanthia itself, we prefer not to give any details on that at this stage. Discussions are ongoing, and at such stages those discussions I have clarified, we will give more information on that. We don't want to give any guidance or discuss at this stage, how many parties could potentially be involved, or timing or anything like that, because it's simply too early to do that. So you'll have to bear with us on that one.

Your third question about partnered INDs; indeed, we can confirm that the guidance that we gave during the presentation is that we expect somewhere between one and three new partnered INDs this year.

All right, thank you. Just, I understand your communication on Ylanthia, but you're at least certain that you can announce something over the course of the year?

We're not certain about anything; if we were certain, we'd tell you. We're working on it, and we're confident, and we're hopeful. And as I said, we look forward to informing you as and when those discussions are concluded.

Okay, thank you.

Daniel Wendorff, Commerzbank.

I have two questions. One is relating to MOR103. I saw the deal which Abbott signed with Galapagos, on an oral compound for rheumatoid arthritis. I'm just wondering whether you could run us through the potential competitive landscape, how you see developing over the next one to three years in RA, and how a subcutaneous version of that antibody might still fit in there.

And second question is on your AbD Serotec segment. The diagnostic antibodies, which will be launched to the market and where you receive royalties on them, I was just wondering whether you could quantify that, like current contribution to AbD Serotec revenues, coming from diagnostic antibodies, as well as the royalty rate, how big is it really, in market [share]? Is it more like low single digits, high single digits, any insights there would be helpful. Thank you very much.

Yes, thanks for the question. I will -- this is Arndt Schottelius. I'll start with your question about the Galapagos deal, and how we see the competitive landscape.

You're absolutely right, a great deal that we were able to strike, with very nice data in the Phase 2 trial. I think very encouraging overall. Great deals can be made in the landscape. As you were alluding to, of course, this is an oral compound.

We see data evolving also, in other Phase 3 trials, (inaudible) [one three] competitors. The way we see this, there's absolutely room and need for more differentiated RA drugs, which includes bio therapeutics. We will see of course, how the oral compounds pan out, also long term in the safety profile.

But I think the need is also shown by the recent other Abbott deal that was here done on the CD4 antibody. There's great interest when you speak to the investigators, the key opinion leaders, there is very specific need for other mechanism [of action] in this space. Specifically also targeting the macrophages, where there is nothing out there.

Of course, also these specific inhibitors of specific pathways, single cytokines is one thing, but investigators are looking for a new drug that also targets macrophages and that's what we feel quite confident 103 can provide this additional mechanism.

And, Daniel, coming on your question about AbD, we prefer not to quantify the royalties at this stage. Suffice it to say, I think, that the royalty rates are currently in the single-digit range that we're looking at. What we can't give you guidance on really is the level of sales that are to be expected, particularly these applications like the anti-idiotypic antibodies. This is really new territory here.

Applications seem to be growing. Interest seems to be growing. But it's really premature to speculate as to what level of turnover could be reached on those products.

Okay, and maybe as a follow up to that; the current contribution to AbD Serotec revenues coming from diagnostics overall.

Daniel, this is Jens. The business -- the current revenue numbers we do with diagnostic companies is in the range of 20% of AbD's total sales, and that is increasing. So we're quite happy with the development for that segment.

Gary Waanders, Nomura Code.

Just a question to follow up on the Ylanthia position. Are there any limitations on licensing various therapeutic fields or targets covered under the Novartis alliance when you're talking about new alliances on Ylanthia?

The detail of how Ylanthia can, and will, be commercialized is something we really don't want to talk about at this stage. Let me just say that, obviously, we're talking to Novartis about this as well. We have a vested interest that all of the antibodies we generate for everyone are as good as they possibly can be.

So, of course, Novartis is one of the parties that is being talked to about this. But the contents of those discussions we'd really prefer to keep to ourselves at this stage.

Okay, thanks.

(Operator Instructions) Victoria English, [Mendoze].

Simon, I was wondering if you could give us a little bit more information on the anti-infective program that you mentioned, which is at a very early stage, and whether your new platform Ylanthia will be playing a role in progressing this?

Yes, Victoria, thanks for the question. I refer to the Absynth collaboration that we have, which is focused on MRSA, methicillin-resistant Staph aureus. And Absynth is a small UK biotech company which has done some very interesting work around new targets on Staph aureus. And what we have done is we have actually used the HuCAL platform technology, I must say, to generate antibodies against five targets in that collaboration.

And actually I would ask Marlies to give you some more information around that program.

Yes, I'm happy to do so. I would like to confirm that it's still at an early stage program. So we are in a discovery phase. And, together with our colleagues at Absynth, we have selected out of a panel of very interested target candidates that are critical for the growth of the bacteria, the five targets. And against all of those five targets we were able to generate very interesting binders, a huge collection of binders. And we are right now in the process of characterizing those antibody candidates.

So what we can clearly, say, is that we have very nice in vitro data for those antibodies clearly are in what is called [optimization], so the uptake of the bacteria by immune cells. But the antibodies also directly inhibit the growth of the bacteria, which is really, really, an interesting feature.

We also have a number of preliminary data from animal experiments, where we could show that the antibodies do what we expect them to do. And we are very curious to follow up on those programs and see where we can bring them; very excited.

Thank you.

Sachin Soni, Kempen & Co.

My question is regarding MOR103. Can you please remind us where do you stand with the recruitment? Is it already finished? Is it very difficult to still recruit? And I was wondering because initially the timeline was somewhere around March we could see the results.

Yes, Sachin, this is Arndt, thanks very much for the question. As Simon mentioned in the speech already, we have hit our recruitment target what we initially planned for, the 92 patients. We're just getting the last patients in until the last patient in recruited, which is a fact of you cut off the recruitment at one specific point, and then you allow those patients still in screening in. So that's just a couple. It's a matter now of very few weeks to have this done and, basically, the trial is fully enrolled.

So relating to your second question, no issue with that; we have reached the target already and will be completed very soon

Great. And the second question regarding to the study itself, so I understand your primary end point there is daf-28. But what kind of benefit can we expect from including that MRI thing into it, which I understand is something which you are doing and others haven't done in the past?

Just a little correction, it's true we have daf-28 as an end point -- as a secondary end point. The primary end point is safety and tolerable. This is primarily a safety study. Of course, it is also early clinical science. And then, as you say, we have daf-28 as well as ACR20, the other composite and MRI.

You will understand I can't give you any kind of quantitative measures MRI. What we can expect, and obviously looking forward and confident to see, is a reduction in synovitis. So, as you might know, MRI is the most sensitive parameter to pick up inflammatory effects on the soft tissues, which you cannot detect with x-ray. X-ray you look for erosions. This would be too early. And this should be a 1-year trial. So we're looking forward to see effects on synovitis, swelling of the lining of the joints.

So one last question on the same trial please if I may. So daf-28 improvement of, say, over 20%, and ACR20 marginal score, which is competitive enough. Would that be the right way to look at the result of the trial?

Let me see that I understood that. Can you just repeat that? What kind of effect of daf-28 you were looking for?

I'm looking for daf-28 score improvement of at least 20%.

20%, well, usually we don't -- daf-28 is usually looked at total numbers. And let me put it this way, a change in 0.6% daf, this is a points score, is considered clinically meaningful. So, basically, anything above that would be great. And that's kind of the lowest.

I think what you mean that the 20% changes look for the ACR score and here, in general, when you look at the TNF inhibitors, when you have a full registrational trial, one has to keep that in mind, which is usually at least 24 weeks, there's kind of a 60/40/20 rule that people are looking for.

In earlier trials which this also is the case, and keep in mind Galapagos, for example, was an early trial, and there's earlier trials out there. Mavrilimumab, the one that showed clinical approval concept, was a relatively short trial. You would look for [ACR20, 40, 60], below those numbers, because usually expect that the full potential of the drug has not been demonstrated yet. You would expect to see that when you have longer trials, longer than 12 weeks, or more like 24 weeks.

Does that answer your questions?

Yes, because I was looking at daf-28 CRP response. I'm sorry for being shorter and using just daf-28. Because I'm looking at mavrilimumab data, and the total and placebo difference is around 20% at daf-29 CRP response.

Yes, I know what you mean. They pooled the data and I think that would be a good outcome.

Okay, great. So 20% is the correct thing I am looking at there as well? Okay, thank you.

Mick Cooper, Edison Investment Research.

Good afternoon. Three questions, firstly on the partnered pipeline, could any products progress into Phase 3 this year? And if they did, I assume there would be a significant milestone associated with it, is that included in your guidance?

Secondly regarding your M&A, do you have a targeted amount of cash that you consider you want to keep in, keep on the books? So how much cash might you spend on acquisitions this year?

And finally, with AbD Serotec you've got underlying growth of 3% this year; you're looking for growth around 10% next year by the look, from your guidance. Is that mainly from your diagnostics, or why do you think you're going to accelerate the growth, turn around the growth of that division?

Okay thanks Mick. Let me start with the partnered pipeline question. So as we said five programs are scheduled to complete Phase 2 this year. Potentially, yes, they could move into Phase 3, depending, of course, on the outcome of the proposed Phase 2s, and also the timing, whether there's sufficient time then for a Phase 3 to start.

To be prudent here we have not included Phase 3 milestones in our financial planning, for the simple reason that we don't know the outcome of the Phase 2 studies, obviously. And I said that transition time from Phase 2 to Phase 3 has to also be allowed for. So although it's possible in principle, we are not planning for it at this stage.

Regarding the M&A one, the targeted amount of cash we'd be looking to not spend, if you like, it's a bit like how long is a piece of string? We don't have a defined number for that. It really depends on the opportunity. And there are, of course, various ways to pay for a transaction; one could imagine, for example, paying with a mixture of cash and equity, or purely cash.

It really depends on the opportunity, and perhaps also things like how much cash the opportunity would bring to the table. So although -- I think it's sufficient to say that we have a significant amount of firepower, certainly in the tens of millions of euros of cash that we could spend on a transaction.

And then the third question about AbD growth rates; yes we're certainly expecting the increasing focus on diagnostics to do two things for us. One is to produce faster top line growth, and we're seeing in the research reagents market at the moment, which is a tough market, relying heavily on grants. Funding, of course, which is heavily government-driven; which, of course, in this era is a difficult area.

So we're relying on the diagnostics to do two things. Drive top line growth faster, and also provide better profit margins, because these royalties that we get are pure profit and so go straight to the bottom line.

Okay, thanks very much.

Gary Waanders, Nomura Code.

Thanks for taking another question. It's about MOR103. If we expect to see data from the Phase 2 in September, I'm just wondering on the timeframe for a licensing deal. And if we use Galapagos as a reference point, because it's quite recent and in everyone's mind, from the initial disclosure of data from their Phase 2 to signing the deal it was roughly three and a bit months, and I'm just wondering whether that might be something that we could hope to see in your case?

And also, what is the dosing overlap in the subcutaneous trial with the Phase 2 study, and would that potentially have an impact on that timeframe?

Okay, Gary, thanks. Let me take the first part of that and then Arndt will speak to the subcutaneous point.

The -- in terms of the timing, we, as I said in the speech, we're not assuming that a deal will be closed this year; if it is, terrific, of course. But we're not assuming it and we're not planning for that, because, for the very simple reason that we don't want to put ourselves under time pressure to do a deal. We want to do the best possible deal and not the fastest possible deal.

So I wouldn't rule out that it's possible, and indeed, we're actually in discussion already with some potential partners. Potential partners are split between those who are very interested in looking at the story now, and looking at the pre-clinical data and everything else now, so that when the clinical data comes along they're well and truly up the curve.

And then some other potential partners are saying to us, no, we'll just wait until the clinical data and then we'll have a look at everything. So it's possible, but from our point of view, it's not a must that we close a deal this year.

And Gary your question concerning the subcu, that flows in, actually very nicely with the timing, because, as Simon mentioned, we expect to announce the date of that mid-year. The dosing will be an overlap between the RA and the MS study; we are looking at 0.51 and 2.00 mix per [kick]. But this has no bearing on doing the deal.

There will be additional information which will be helpful, in principle doing the deal, because it will show, we expect that there is [variability] very comparable and that further subcutaneous development of MOR103 will be feasible.

Okay, thanks very much.

(Operator Instructions). Mark Pospisilik, Kempen & Co.

I apologize for bringing up Galapagos one more time. But I wanted to ask if on the GM-CSF program, I think that one of the things that Galapagos benefited from in signing its deal was the familiarity with the JAK space and the amount of data available for a variety of JAK inhibitors.

So I wondering if you could comment on the comfort level for potential partners for a GM-CSF antibody, although it's for the cytoki not the receptor, based on the fact that there's a couple of other programs out there? And, how that may translate into the deal terms that you would get once the data is out?

Thanks for that question Mark. You're right of course, there is more and more data coming in the JAK space, so there is some comfort. We feel, actually, we're very encouraged now that we have clear validation of the GM-CSF pathway through mavrilimumab also.

So, of course, not so familiar with so much data out there, but very critical data with proof of concept out there with the MedImmune antibody against the receptor, with the net, basically, effect on the pathway. So -- and we see this when we talk to potential partners as Simon mentioned. People are aware of the data, they can relate to this, they understand the pathway, and I think this makes negotiations, speaking about this program easier, because obviously there is now established proof of concept for the pathway.

Okay, great, thank you. And maybe just one further quick question on the AbD Serotec. You've mentioned that you didn't want to say too much about the royalty, but I was wondering if the improved EBIT margin, next year and perhaps over the coming years whether any contribution has come from the royalty stream from the marketed kits from AbD Serotec? Or for that simply from -- you mentioned top line growth with improved margins from other sources?

We certainly expect that increasing royalty flow will help the overall margin, because those royalties are pure profit for us. So as those, as the weight of those things increases in the mix then the overall profit margin should improve.

Okay, and do you expect any impact at all for 2012?

Some, some, but the trend will be certainly increasing in the years to come.

Understood. Thank you.

Melanie Senior, Elsevier

I just had a couple of clarification questions on the number side of things and the Novartis milestone. Was that one-off linked to the ophthalmology program progression that you eluded too? I'm sorry I didn't make that link there, so could you just confirm or correct that notion?

And then secondly with regard to the revenues, you say from the Partnered discovery segment, they comprise EUR46.6 million and that's actually slightly down on 2010. Was that about currency mainly? Just -- I ask because of a later statement about what the revenues would have amounted to, but they also included development.

So without the Novartis one-off, are you saying partner discovery, revenues would have gone down by that amount, and/or is the currency really the factor that's affecting that? So, thank you for those two clarifications.

Yes. Let me just quickly answer on that one, you can hear me now, sorry for that. It's the -- mainly it's coming first on the Novartis payment. This one-time payment, this one-off payment is a payment which we received for the internalization of the technology at the Novartis premises. It has nothing to do with the program, it is just for giving them access directly to the technology and that's part of the original deal.

Okay. So it's -- and it's a one-off in the sense that you're not -- you don't know when -- there's not another one due, or there is but it's not each year or --?

There is not another one due for the internationalization. That took place once and that's it for all.

Coming back to the second question you have on the top line, referring to the revenue development of the partner business. Yes, it's right, as I have pointed out on my slides here, the revenues went down. This is basically driven to the fact that we had a number of programs with the partners, also from the time before we have signed the deal with Novartis. And those programs have run out and therefore, licensees and R&D funding were running out.

Okay. Okay. Thank you.

Thomas Schiessle, EQUI.TS.

A question on AbD. Do you still hear me?

Yes.

Yes.

Yes, wonderful. Concerning AbD and the future prospects, to me, it seems that your guidance is pretty reluctant as you have -- project a revenue increase of 10% and the margin is going up only to a maximum 300 basis points. So is the -- could you please elaborate a little bit on that?

Is it the price pressure is so heavy, or is the investment you have to undertake to improve your e-commerce platform so tremendous that a really nice profitability will occur not before '14?

First of all, on the top line, as you have seen, we have given guidance on EUR20 million to EUR22 million, so it's to a certain extent, cautious guidance coming from the fact that we missed the guidance for AbD on the top line this year.

We have been a lot better on the profitability this year, or a little bit better than we have originally planned, despite of the fact that we have taken money into our hands to improve the top line in the long run for AbD. And namely, what you have also mentioned, the investments we undertook to improve the -- what's present of the company, which was not that favorable in the past. And we're continuing to do that because we realize it's paying off.

And therefore, I think, it's very important for the Company that we show growth in the mid-term, as we haven't grown that nicely in the past. And I think that is something we have to do if we want to really move that business forward. And, therefore, we have been a bit cautious on the EBIT development, but we feel it's prudent to act that way.

Okay. Additional question on AbD, you started with R&D applications and you broadened your portfolio to diagnostic and even more, you are heading for veterinarian applications. Is this still a focused approach, or are you broadening your activities across the galaxy?

No, we're not broadening our approach that much. The -- just to mention the veterinary applications; actually, Serotec has always historically been strong in veterinary products, in other words antibodies for veterinary applications. And you're referring to the collaboration that we formed in that area in the UK last year. We saw that as nothing else than building on an existing Serotec strength actually.

So all we're doing really is -- AbD Serotec has always been active in research products and diagnostics, and what we're doing is increasing the emphasis and the focus on the diagnostics area.

Could you share with us your first experiences with the first kit which is on the market? So what are the sales figures coming out of this collaboration?

It's too early to say. It is on the market. Royalties are flowing. But it's really premature to give you any numbers there, because I think it's partly misleading.

As I said, this is -- the exact -- your [typical kits] are really new -- this is new territory and we see a lot of potential here, but as I said when I answered to an earlier question, I think it's just really premature to speculate on what kind of sales could be reached there and therefore what kind of royalty revenue we could generate.

But because of the fact that this technology is new to most of the clients or of the customers, will sales be very -- or sales dynamic will be very reluctant, because of the [newity] of this technology, so you will have to pay a lot of activities to promote and to convince the market?

Just to be clear here, remember that we're not the ones who are selling the kit, so the initial ones are being sold by our partner, Proteomika. But like any new product, there is education that needs to be done. We think Proteomika's doing a good job here. And, as I said, I think it's just way too early to speculate as to how important a tool these kits could become.

From your point of view, when shall we ask again, concerning this issue?

You're welcome to ask on the next conference call, Q2, and we'll be happy to give you an update at that stage.

Okay, wonderful. Thank you.

Thanks, Thomas.

(Operator Instructions). And we have no further questions coming through, so I hand you back to Dr. Moroney to wrap up today's call.

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

We expect to see considerable progress with our pipeline this year. Phase II data will become available from up to six programs, five partnered and one proprietary. We're, of course, particularly looking forward to the results of the MOR103 study in rheumatoid arthritis.

Elsewhere, we're looking forward to commencing application of the Ylanthia platform and to further commercial exploitation of Slonomics. Within AbD Serotec, we anticipate top and bottom-line growth and additional progress in the diagnostic area.

Overall, we will maintain our profitability, while investing as much as needed in R&D in order to continue the creation of value in our pipeline.

With that, we end our call. Should any of you wish to follow-up with us directly, we are in the office for the remainder of the day. Thank you again for joining the call, and goodbye.

Thank you for joining today's conference. You may now replace your handset.