MorphoSys AG (MOR) 2012 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the MorphoSys presentation of Q1 Results 2012. 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 Mario Brkulj. Please, go ahead, sir.

Good afternoon and welcome. This is Mario Brkulj, Senior Manager, Corporate Communications & Investor Relations of MorphoSys. With Claudia currently traveling, it's my pleasure to welcome you today to our Q1 2012 conference call and thank you for participating. With me are Simon Moroney, our Chief Executive Officer, and Jens Holstein, our Chief Financial Officer.

During the call we will talk about the Company's financial results for the first three months of 2012. Simon will start by giving you an operational overview of the first quarter. Before we open the call for your questions, Jens will review the financial results of the first three months of 2012.

Before we start I have to remind you that during this conference call we will present and discuss certain forward-looking statements concerning the development of MorphoSys core technologies, the progress of its current research programs, and the initiation of additional programs. Should actual conditions differ from the Company's assumptions, actual results and actions may differ from those anticipated. You are therefore cautioned not to place undue reliance on such forward-looking statements which speak only as of the date hereof.

I would now like to hand over to Dr. Simon Moroney.

Thank you, Mario. And also from me a warm welcome to the call. This was a quarter of solid operational progress as summarized on page four of the slide presentation. Our main value driver, our pipeline, continued to advance and we reported progress on several proprietary and pilot programs. We're looking forward to seeing proof of concept data from five programs over the next few months. From a financial perspective we have reconfirmed the guidance that we issued at the start of the year without any change.

Starting with the proprietary portfolio, we were delighted to complete patient enrollment into the phase 1B-2A study of MOR103 in rheumatoid arthritis. During the quarter we also enrolled the first patients in the phase 1B trail in multiple sclerosis. This second indication is generating a lot of interest and is one in which MOR103 has great potential based on a growing body of evidence of the involvement of GM-CSF in this disease. We also completed enrollment of healthy volunteers in a study that is evaluating a subcutaneous formulation of MOR103.

We look forward to a wealth of data from these clinical trials of MOR103. Most significant in the near-term will be the results of the rheumatoid arthritis study which will be available in the third quarter of this year. Data on the subcutaneous formulation will be available at around the same time. These will be followed next year by data from the MS trial.

I'll now turn to the next most advanced proprietary program, MOR208 for CLL and other B cell malignancies. Here, enrollment of patients into the phase one study is almost complete and we are on track to report phase one data later this year, most likely at the ASH conference in December. In the meantime we've generated some very exciting preclinical data with MOR208 that we plan to present at the ASCO conference in June. Phase one clinical testing of our third proprietary program, MOR202 in relapsed or refractory multiple myeloma patients also continues according to plan.

To complete the section on our proprietary portfolio, I'd like to mention our co-development alliance with Galapagos. Here we have jointly selected a program to move forward which has the preliminary program code [GT5-454]. This is an antibody program directed against the cytokine that Galapagos identified using its proprietary discovery platform. The cytokine is involved in the inflammatory processes and together with Galapagos we have generated compelling proof of concept data with antibodies in in vivo models of RA and COPD. We're currently conducting lead candidate selection.

Moving on to our partnered pipeline, two programs advances while one clinical program was discontinued during the quarter. As announced in March, Novartis commences the phase one trial with a HuCAL antibody in the area of oncology. This became the sixth program from our Novartis alliance to enter clinical trials. In addition, Novartis advanced another HuCAL antibody from phase one into phase two clinical trials in an ophthalmology related indication.

During the quarter we received an update on the program coded CNTO888 from our partner Janssen. We were informed that development of this program for cancer will be discontinued due to lack of observed efficacy from a phase two clinical trial in this indication. We therefore are no longer including this program in our pipeline count. As a reminder, we must expect attrition to impact our pipeline from time to time. This is a normal part of drug development and does not have any bearing on other programs or on our platform. Indeed, development of the same antibody continues in a second indication, namely idiopathic pulmonary fibrosis. The ongoing phase two trial in this indication was completed as planned.

To summarize the overall pipeline changes since the end of 2011, we still have a total of 20 programs in clinical development, 12 of which are in phase one and eight of which are in phase two. Looking at that total in another way, four programs are proprietary while 16 are partnered. We expect a further four partner phase two studies to come to an end this year, delivering proof of concept data. Altogether, the pipeline comprises 71 programs.

Before turning to AbD Serotec, I think it's worth mentioning two significant developments in our sector during the quarter, namely the acquisition of Micromet by Amgen and the interest in human genome sciences being shown by GSK. In both cases, antibody-based therapeutics are the value drivers underlining again the importance of this class of drugs for the pharmaceutical industry.

I'll conclude my operational review with a look at our AbD Serotec segment. The first month of the year was particularly slow in the research area, probably due to the effects of the economic downturn, especially amongst smaller companies and the academic sector. The last two months were, however, better. An area that continues to develop well is diagnostics. One of our partners introduced a new clinical diagnostic kit in the area of maternal health screening that incorporates a HuCAL antibody made by AbD. As with most of our diagnostic agreements, we will sell antibody material to the partner and in addition stand to benefit through royalties on sales of end product. There are multiple further diagnostics based on HuCAL antibodies in development with various partners and we expect to see more product on the market in 2012.

That concludes my overview of the quarter. I'd now like to hand over to Jens for his financial review.

Thank you, Simon. Ladies and gentlemen, I would like to now draw your attention to the most important financial (inaudible) for the first three months of 2012. Total group revenues amounted to EUR16.1 million in the first three months of 2012 compared to the same quarter of the previous year this means a decrease of 67% which is mainly a result of a significant one-time milestone payment we received in Q1 2011 from Novartis. As previously disclosed, this payment was triggered by the internalization of our HuCAL platform at Novartis' premises in (inaudible).

Total operating expenses decreased by approximately 15% to EUR17 million. The main reason for this development was the 18% decrease in R&D expenses to EUR10.4 million. R&D expenses and proprietary development as well as technology development decreased to EUR5.6 million. This is in line with the guidance we gave at the beginning of the year and results from the fact that costly production steps were already expensed in 2011 and the phase 1B-2A trial for MOR103 in the RA area is meanwhile completed. Also the SG&A expenses decreased by 8% to EUR4.9 million.

In the first three months of 2012 the EBIT amounted to minus EUR0.8 million compared to EUR27.5 million in Q1 2011. As already mentioned in the year end conference call in February, we have decided to adapt our external reporting towards using earnings before interest and taxes for guidance purposes. EBIT is the more commonly used parameter amongst our peer group companies. In that context we also modified the EBIT definition slightly compared to the one used in the past. The net loss of EUR0.5 million corresponded to our diluted loss per share of EUR0.02.

Regarding the segments in detail, nearly three-quarters of total revenues arose from the therapeutic side of the business with partner discovery generating EUR11.1 million compared to EUR43.7 million in the previous year, reflecting the nonrecurring technology milestone from Novartis. Revenues in the proprietary development segment amounted to EUR0.5 million. Those revenues arose from funded research payments relating to the two pre-development programs for Novartis into which MorphoSys will have the option to opt in after the discovery phase. Our development activities were again completely funded by cash flows from the partner discovery segment.

Looking at AbD Serotec you can see that the revenue increased by 2% to EUR4.5 million in the first three months of 2012. The segment was fairly breakeven in comparison to an EBIT of minus EUR0.2 million in previous years.

Taking a look at the balance sheet you will see that our cash position remains very strong. MorphoSys's cash, securities, and interest bearing assignable loans amounted to EUR137.4 million at the end of the quarter. The amount of cash and marketable securities have decreased to EUR127.4 million whereas the amount of interest bearing assignable loans increased by EUR10 million and this included the other current asset [position].

Before we open the call for your questions now, we would like to reconfirm our financial guidance for 2012. As stated at the year end conference call in March, total group revenues are expected to amount to EUR75 million to EUR85 million this year. As previously explained, this guidance doesn't reflect a potential successful out licensing of our proprietary programs which could significantly increase revenues.

Expenses for proprietary development activities will mainly include the clinical development of our most advanced drug candidates as well as the development of new technologies and are expected to be between EUR20 million and EUR25 million. In 2012 we anticipate an EBIT in the range of EUR1 million to EUR5 million. let me reiterate again that a look at the financial results offers only a limited view on the MorphoSys value generation potential. Our most important asset is our broad and increasingly maturing product pipeline. Therefore, one of our major goals is to advance our pipeline and to especially our proprietary clinical programs MOR103, MOR202, and MOR208.

As mentioned before, our investment in these programs will be substantially less in 2012 and last year. Since most of these cost intensive clinical materials have already been expensed in the phase 1b-2a trial of MOR103 in rheumatoid arthritis is completed. With data from this trial becoming available in the third quarter of this year, MOR103 is also likely to be the first compound we will partner. As stated before, this could have a major positive upside on our financial guidance for 2012. Although we do not plan on out licensing this year.

Ladies and gentlemen, this concludes my review for the first three months of 2012 and I'll now hand back to Mario for the Q&A session.

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

(Operator Instructions) The first question comes from Mr. Gunnar Romer, Deutsche Bank, Please, go ahead.

Good afternoon, everyone. It's Gunnar Romer from Deutsche Bank. I have two questions, if I may. Firstly, Simon, maybe if you could give us an update on the current status of negotiations around Allancia. I know as usual you're probably restricted in your comments but could you give us an indication of whether you see them on track and potentially any timeline? And then secondly, on the discontinued program from Centocor, I'm aware that there is another study ongoing in IPF and I was wondering whether you see any potential, negative cross read from the discontinued to the still ongoing program?

Thanks, Gunnar. First of all, regarding Allancia, there's no update we can give you currently for the simple reason that as always we don't comment on ongoing discussions or negotiations. I'm comfortable with how things are going and we look forward to being able to report on that later on in the year. But as I said, just as standard policy we don't comment on ongoing discussions and negotiations.

Regarding CNTO888, discontinued in cancer as we reported. We have no reason to think that should have any negative cross read into the IPF study but frankly we don't know. They're two completely different indications obviously although the target is obviously the same. But I think it's almost impossible to try and guess how the IPF study could work out. It's being completed. Recruitment into that trial is being completed and we're looking forward to seeing the data from that. I don't think you can interpret anything from the cancer trial and you certainly can't interpret anything about the platform from the discontinuation, although the lack of observed efficacy in that one study.

I agree with your very last comment for sure but maybe again on the cancer program, could you share with us any potential insight you have on failing of the trial?

In the feedback that we've heard from our partners at Janssen was simply that no efficacy was observed. They conducted a phase two study in metastatic prostate cancer. They also actually conducted a phase 1b trial in solid tumors, all comers, in combination with standard of care and there were several arms there including I think gemcitabine, docetaxel, and a couple of other standard therapies and neither the phase 1b trial nor in that phase two trial in all comes was any efficacy observed. So, that was obviously the reason for them to discontinue it. So, beyond that we currently don't have any insight.

Okay. Thank you.

Your next question comes from the line of Elmar Kraus, DZ Bank. Please, go ahead.

Good afternoon and thanks for taking my call. I've got perhaps two questions. The one is when I look at your balance sheet there was a striking increase of other receivables from EUR0.3 million to EUR10 million. So, you could perhaps explain what is hidden behind that line and on a more general line looking at the number of employees you have been reducing head count by 5% since end of last year and even more pronounced in proprietary development. So, from 67 to 55. Could you please perhaps shed also some light on that? Thank you.

Yes. Thanks very much, Elmar, for the two questions. The first one is fairly easy to answer. It's basically that increase comes from an interest bearing loan that we have taken on -- not which we have taken on, which we have given. Yes? And that's why you see also the decrease in the cash amount because that dropped as you have seen from EUR134 million to EUR127.4 million. So, we have to allocate just this loan in other receivables. That's the reason. It's accounting.

And in terms of headcount, yes, say the number of headcount went down. You can't unfortunately fully draw decisions by looking at the segment reporting on the headcount because there have been a couple of shifts between various departments, allocations of responsibilities between partnered and proprietary especially. But we have streamlined to a certain extent a little bit our cost base here. Please, also be reminded that as you know, we'll have some programs with partners over the years running out and that certainly also led to some reduced headcount and we'll see the reflection overall then in our headcount development at the end of Q1.

Okay. Thank you.

The next question comes from Sachin Soni from Kempen & Co., Please, go ahead.

Good afternoon, everyone. My question is regarding AbD Serotec. Do you see any signs of improvement for end markets there and if this continues would the guidance of EUR20 million to EUR22 million for AbD Serotec -- is this ambitious? Or is it realistic? You can still make it if this thing continues to struggle? Thank you.

Thanks, Sachin. I think the really encouraging thing that we're seeing here is in the diagnostic activity. If we look at the two sub segments that AbD operates in -- the research market, the best information we have on current growth rates in that market is about 2% to 3% based on studies from organizations who track that market. And that's I think a reflection of low grant funding monies available, both here in Europe especially but also in the US. So, that research market is not a very rapidly growing market and that's just a fact of life at the moment.

However, on the diagnostic side of the business, as we mentioned, the first product now coming to market, we expect to see more. And both of course have a different kind of revenue profile for us and that we have revenues from supplying material to those partners and then we get a royalty on product sales. So, they are by nature higher margin activities. And that's where I think we also expect to see more growth out of that diagnostic side of the business and altogether for this year in response to your second question, we stand by the guidance that we issued for AbD at the outset of the year.

Great. And just to follow-up on that, that means that you expect margin improvement for AbD Serotec from this year onwards? Because the mix is going towards the molecular diagnostics part?

yes. As we look ahead we certainly expect margins to improve. That's one of the objectives for that unit. From the mid- or higher than mid-single digits that we're currently working at, certainly up into double digits. That's something that is a priority for us and we believe should become easier to achieve as the mix of products that we commercialize out of that unit begin to evolve and begin to change toward higher margin products.

Okay. Thank you.

The next question comes from the line of Gary Waanders from Nomura Code Securities.

Hi there. Just a question on that discontinued program if I may. Simon, do you have any information regarding the ability of the antibody to penetrate solid tumors or solid prostate cancer metastases?

Gary, sorry. We don't have any information on that. We would hope that that would be something that Janssen would publish in conjunction with a report on the outcome of the trial but as yet we haven't seen any such data.

It is a full length antibody, is it not?

It is. Yes. If I remember correctly, it's an IGG1 but it's certainly an IGG.

Okay. Thanks a lot.

(Operator Instructions) The next question comes from Mick Cooper, Edison Investment Research. Please, go ahead.

Good afternoon. Could you provide us with an update on the status of the AbD Serotec diagnostic pipeline, please?

Mick, we haven't published in precise detail with whom we're collaborating or what targets or what projects are being worked on. All I can tell you is that there are more than 20 diagnostic projects ongoing spread between various partners and the commonality here is that much like the therapeutic partner business, the partner comes to us with a diagnostic project which will eventually involve a target that they want to have a diagnostic antibody again. These are usually challenging projects which have typically failed with conventional technology and our responsibility is to make a HuCAL antibody against that particular target, supply that, and then the partner is responsible for establishing the kit and then marketing the kit on which we then earn royalties. So, as I said, in excess of 20 such projects are currently ongoing against various different types of targets and with various partners, all with the end goal of bringing new diagnostic kits to market.

You described before that you've got one on the market with Phadia in autoimmune disease, I think. Can you tell us have you got a target for a number of antibodies to be on the market by the end of this year? By the end of 2013?

We have -- the one you referred to, the Phadia one, indeed is on the market as a standard. What we do is we supply standards for the kit that Phadia sells. We also disclosed last year that we have kits on the market that are being commercialized by our partner Proteomika where we're the supplier of the antibody and the most recent one is a maternal health one. We haven't disclosed who the partner is. But across those three there are three different partners involved but more than three products involved. Now in our projections we have of course expectations of how many products we want to see come to market by the end of this year, next year, and the following year. However, we haven't published any of those expectations but in general we do expect the number of products increase and as I mentioned before to increase the margin of the business.

Thank you.

The next question comes from Mr. Thomas Schiessle, EQUI.TS.

Thomas Schiessle, EQUI.TS. Thanks for taking my question. I have two questions on the financial side, please. The cash flow shows quite an increase in investments. Could you be a little bit more specific? For what have you paid these amounts? And what is the future development in this line item? And the second one is on taxes -- you have a tax refund. Is this because we have to observe a loss for the whole year? Or is this an extra one off in Q1? Thank you.

Thanks, Thomas, for your two questions. In terms of the first one, the investments here, that's related to basically purchases of marketable securities which we undertook in the first quarter. So, if certain cash payments are coming in like for example licensed payments or FDE payments from our partners like Novartis then we certainly invest that and this is then going to that position. That's why you see these amounts. It's not for CapEx or something like this which is extraordinarily high in comparison to previous quarters.

In terms of the taxes, we do not expect a negative tax implication for the full year as per our guidance for EBIT is we have pointed out one through five. So, we also would expect that we then would have to calculate the negative tax implication. This one is a one-time effect which we have to report and have to report in this first quarter of 2012.

Okay. Thanks for the clarification.

We have another question from the line of Gunnar Romer, Deutsche Bank.

Yes. Thanks for taking the follow-up. Jens, could you give us any detail on the loan you've given, who you've given it to, maturity, potentially the interest you're earning on it? And the timelines for liquidation in case you would be in need of cash anywhere in the future?

Yes. I wouldn't like to give you very great details but to give you some more comfort in the short-term activity, very short-term. Where so far in the past we have invested only in assets which we could basically liquidate, on a daily basis we have extended that a little bit due to the amount of cash we have on the books but it's not longer than something to three to six months or so. Otherwise we wouldn't have been able to show it on the current assets. That would've been then a position which we would have to show on the long-term assets. In terms of the quality maybe of what we invested, the key topic for us is certainly to be secure with our investments as much as possible. It's not mainly about return. We try to optimize return as much as possible. But security comes first. And in terms of investment classes we think of ratings from Standard & Poor's like triple-A down to maybe A minus but not in triple-B areas or so. We do not invest in this.

That's helpful. Thank you. And could you once again address the reduction SG&A expenses? I guess some of it is related to some of your partner programs coming to an end. Was there anything more behind that?

No. No specific events were basically abnormal in comparison to what we have expected. So, no. There's nothing very specific in there.

And if you think about the full year level, is that then in the end comparable to last year's level on absolute terms?

This is not too far off. Yes.

Thank you.

The next question comes from the line of Igor Kim, Close Brothers.

Hi, everyone. I have a quick question on R&D expenses and are mainly on R&D expenses on behalf of partners that amounted to EUR4 million in the first quarter. Do you think we can assume it as kind of a run rate for the second quarters and ongoing year?

Yes. You see that our operating expenses for the partner business of EUR4.9 million which we have reported, I think -- I mean, it always depends a little bit on the development of these various programs but in that sort of ballpark I would expect further development for the quarters to come.

Okay. Thank you.

It varies from quarter to quarter. Please be reminded, Igor, that we never give quarterly exact numbers on the Company. It's just fluctuating a little bit. If you want to do some calculations in terms of full year cost expectations, I think something like the numbers which we have reported now in Q1 2012 and in the previous quarters is something you can work with for sure.

Okay. Thank you.

Thank you. We have no further questions so I will now hand back over to Dr. Moroney to wrap up today's call.

Thank you. To conclude the call I'd like to remind you of the key messages to take away. Most importantly, our proprietary portfolio is on track and data are expected on schedule later this year. While attrition has claimed one partner program, its place has been taken by another, illustrating again the strength of our business model. We expect clinical proof of concept data from a total of five programs in the coming months. And finally, we're on track to hit our financial objectives for the year as set out in our guidance.

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

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Good bye.