MorphoSys AG (MOR) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Morphosys' quarterly call on the financial results of Q1 2013. Please note that for the duration of this 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 call over to Claudia Gutjahr-Loeser.

Please go ahead.

Good afternoon and also good morning. Welcome to our Q2 2013 conference call. I am Claudia Gutjahr-Loeser, head of corporate communications and investor relations of Morphosys.

Before we start the presentation, I have to remind you that during this conference call we will present and discuss a certain forward-looking statements concerning 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 here.

With you today are Simon Moroney, our Chief Executive Officer, Jens Holstein, our chief financial officer, and Arndt Schottelius, chief development officer.

Simon will start by giving you an operational overview of the second quarter.

Before we opened the call to your questions, Jens will review the financial results of the first 6 months of 2013.

After, Simon, Jens, and Arndt will be answering questions on these topics.

I would now like to hand over to Simon Moroney.

Thank you, Claudia. And also for me, a warm welcome to the call.

To say that Q2 was a great quarter for Morphosys would be an understatement. Partnership deals with the GSK and Celgene around our proprietary programs MOR103 and MOR202 respectively are of massive importance for us.

We believe that each deal has given the respective programs a much greater chance of successful development and commercialization. In addition, Morphosys benefits in both cases immediately via upfront payments as well as in the longer term through milestones and royalties.

Recall that the Celgene deal brings the added benefit of an option to co-promote the compound in Europe with a 50% profit share.

Since we talked about the two deals in dedicated conference calls, we will not repeat the details in our summary of the quarter. I will, however, provide at the latest status of each project as I reviewed the portfolio.

We will start with programs coming out of our proprietary portfolio commencing with our anti-GM-CSF antibody, MOR103. Transfer of the project to GSK is proceeding smoothly. We are sure that you will understand that as the program progresses, and communications will be subject to agreement with our partner.

We will do our best to inform you of any news subject to this constraint.

The Phase 1b trial in MS is on track and we expected to have patient recruitment completed in Q4 of this year and to have data in the first half of 2014.

Moving on to our anti-CD38 Peabody, R202, we are awaiting our antitrust clearance from the US authorities for the deal with Celgene. We are hopeful that this will be completed shortly upon which the deal would become effective.

The immediate consequence of the deal becoming effective is that he would issue EUR46.2 million of equity to Celgene as part of the agreement.

Meanwhile, the Phase 1/2a with MOR202 in relapsed refractory multiple myeloma patients in Europe continues. We are working our way up through the dosing schedule and depending on the outcome and our discussions with Celgene, we may present first data at the ASH meeting in December of this year.

Turning to them or 208, our anti-CD 19 antibody for B cell malignancies, during Q2, we commenced to Phase 2 clinical trials. The smaller of these two trials is in B cell acute lymphocytic leukemia and is being conducted at two of the leading sites for this education in the US, namely the M.D. Anderson Cancer Center and Ohio State University Medical Center. We expect data from this trial in Q4 of next year.

In the second trial is in non-Hodgkin's lymphoma and is being conducted at sites in the US as well as in Europe. This is a larger to study which is designed to look at the four main subtypes of NHL, mainly diffused at large B cell lymphoma, follicular lymphoma, Mantle cell lymphoma, and indolent NHL.

Due to the trial design, this one will take longer to read out with the data expected in 2015.

Since both trials are open label, we may publish study updates for both during 2014.

I'll turn now to the partnered pipeline. At the end of Q2, we had a total of 73 active partnered programs ongoing. Of these, one was in a phase 3 clinical trial, seven were in Phase 2 and nine were in Phase 1 development. Overall, the partnered pipeline continues to be on track.

During the quarter, we received some news from Janssen on the program CNTO 1959, now known as Guselkumab. As a reminder, this is a HuCAL antibody that is specific to IL23 that is currently in two Phase 2 clinical trials; one in psoriasis and one in rheumatoid arthritis.

Jensen highlighted this program and an analyst day in May. The presentation showed a picture of a psoriasis patient who received a single administration of the drug and experienced clear psoriatic blocks within eight weeks.

Guselkumab was listed as one of the programs on which Janssen expects to file for approval within the next four years. This one example illustrates a broader point is programs advanced, our partners become more likely to talk about them.

This in turn provides visibility which helps the community understand and value the programs.

That concludes my summary of the operational highlights on the quarter. I will now hand over to Jens for his presentation of financial results.

Thank you, Simon. Ladies and gentlemen, also from my side, a warm welcome it to our Q2 2013 conference call.

Before I will now present at the financial results of the first 6 months of the year, please let me remind you that with the sale of AbD Serotec which was completed on January 10, 2013, our financial statements have been adjusted according to the international accounting standard, IFS5.

With today's publication of the six-month report 2013, we will no longer report results from AbD Serotec as a separate segment. Revenues and expenses for this divested business activity are shown and are unallocated.

Let's now start with an overview about the most important financial figures of the first six months of 2013.

Total group revenues from continuing operations for the first 6 months nearly doubled to EUR48.2 million compared to EUR24.4 billion in the same period of the previous year.

This increase was the result of the licensing agreement with GlaxoSmithKline from our photosynthesis clinical antibody program, MOR 103 as well as a licensing fee relating to the sale of the AbD Serotec business to Bio-Rad.

The disposal of AbD Serotec included the sale of a nonexclusive license for the use of our HuCAL technology in the market for research reagents and diagnostics.

Total operating expenses from continuing operations increased by 21% to EUR31.2 million. In the first six months of 2013, research and development expenses rose by EUR2.5 million to EUR22.7 million.

This was first and foremost it due to higher costs of personnel and external lab services as well as higher material costs.

Compared to the first 6 months of 2012, sales, general, and administrative expenses increased to EUR8.4 million driven by higher expenses of personnel and for external services.

In the first 6 months of 2013, that EBIT from continuing operations amounted to EUR17.23 million compared to a negative EBIT of EUR1.3 million for the same period of the previous year.

Continuing operations generated a net profit after taxes of EUR13 million compared to a net loss of EUR0.3 million in the six months of 2012.

With the sale of AbD, Morphosys has been able to book an additional 6 million profit after tax.

As a consequence, the total net profit for the first half of 2013 amounted to EUR19 million. A fully diluted group earnings-per-share amounted to EUR0.81.

Let's now have a closer look at our two business segments. The partnered discovery segment generated revenues in the amount of EUR27.9 million in the first six months of 2013 compared to EUR23.4 million in the previous year.

The revenues of the partnered discovery segment comprised of EUR27 million from funded research and licensing fees up from EUR21.5 million in 2012.

Success-based payments amounted to EUR0.9 million in the first 6 months of 2013 compared to EUR1.9 million in the previous year. Operating expenses increased by EUR1.6 billion versus the first half of 2012 to EUR12.4 million.

The second EBIT amounted to EUR15.6 million compared to EUR12.6 million in the same period of the previous year. In the first half of 2013, the proprietary development segments achieved revenues of EUR20.3 million compared with a EUR0.8 million in the previous year.

This increase was primarily impacted by the recognition of an upfront payment of part of the out licensing of the MOR103 antibody program to GSK. Revenues from funded research and this is segment declined to EUR1 million as the joint development activities with Novartis has been amended.

Operating expenses amounted to EUR12.2 million compared it to EUR10.5 million in the first six months of 2012.

The second EBIT amounted to EUR8.2 million compared it to a loss of EUR9.6 million during the first six months of 2012.

Turning to the balance sheet, on June 30, 2013, Morphosys cash securities and interest bearing assignable loans as well as other financial instruments and investments amounted to EUR166.3 million compared to EUR135.7 million at the end of 2012.

This amounts does not yet included the upfront payment from GSK as the payment was received after the end of the quarter.

Before we open the call for questions, we would like to reconfirm our financial guidance for 2013 which was updated on June 3, 2013 to reflect the impact of the license agreement with GSK for the future development of MOR103.

For 2013, Morphosys anticipates total group revenues between EUR68 million to EUR72 million and an EBIT of between minus EUR2 million and plus EUR2 million.

The licensing agreement with Celgene MOR202 is still subject to clearance by the US antitrust authorities under Hart-Scott-Rodino Act and will become effective as soon as this condition has been met. Therefore, potential financial implications are not yet reflected under current guidance.

Ladies and gentlemen, that concludes my review for the first six months of 2013. I will now hand back to Claudia for the Q&A session.

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

(Operator Instructions).

The first question comes from Igor Kim from Close Brothers Seydler. Please go ahead

Hello, everyone. I have two questions. The first one is regarding your proprietary program MOR208. You said that to you are running two trials in ALL and NHL. You also were considering to run the trial in CLL indications. Are you still considering to do this and is it realistic to expect this in the second half of this year?

And the second question is regarding your expected liquidity for 2013. As far as I remembered, during the last conference call regarding the agreement with Sultan, you mentioned that your liquidity position will most probably increase up to around EUR300 million.

And now, at the end of the second quarter, your liquidity position was approximately EUR166 million and if we take into account potential liquid contribution from GSK, in the amount of about EUR21 million net euros in Celgene, EUR71 million, I come up to a figure of EUR256 million of which is notably low EUR300 million.

Maybe I misunderstood something or could you shed a bit more light regarding your liquidity expectation? Thank you.

Thanks very much for the question. I'll start with the first part. You asked of about two [A's]. Indeed, we have these two studies of running, ALL and NHL, as you know, the ALL in the US and NHL, US and Europe.

Concerning CLL, yes, we do still consider very seriously to start something in combination therapy. It's still feasible to see that second half of the year we will provide updates as that has crystallized because it still in advanced stages of discussion.

And then Igor, thanks for your question. I clarify -- try to clarify a little bit the cash position here.

So as you said, it's correct, it's EUR66.3 million cash which we have announced having on the book for the end of the quarter. In this amounts, EUR22.5 million, the upfront payment is not included. There is a little deviation in comparison to the revenues because not all of the revenues have been booked in the first six months, but only around EUR20 million of this.

But the total cash payment is EUR22.5 million and then that adds up to somewhere in the range of [EUR90 million] and then on top of the EUR71 million roughly upfront payment from Celgene, we also will have a capital increase of EUR46.2 million and if you add this all up, we are in the ballpark of around EUR300 million which you will have --.

Okay. Yes, a bit above the capital increase? Now it's clear. Thank you.

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

Hello. It just a question on the antitrust process. I was just wondering, when you were looking at potential partners for the program, did you conduct your own antitrust review and are there any specific hurdles that you might be concerned about in that antitrust review under Hart-Scott-Rodino?

Thanks, Gary. Yes, we kind of thought about this, but frankly, we really don't anticipate this being an issue given that this is a compound that's in early clinical development.

This is as its name suggests an antitrust check to see whether one company is going to dominate the market as a result of acquiring an asset and given that this asset is in the first stage of clinical development, we honestly don't feel that this should be a concern for the antitrust authorities but as a matter of course you have to go through this check, but given the size, the volume of the deal, it crosses a certain threshold in terms of its volume and therefore, the check is due. Of course, we have to go through that.

And how long do you expect to the process will take before you have clearance?

The rule is apparently that if you have not heard anything within 30 days from the authorities, questions for example that you have clearance.

So in the absence of any questions in the remaining whatever two weeks, we would be through. If we do get questions, then that would extend the process. I understand by another 30 days during which time additional questions could come in.

So we all hope and our expectation is that this should be straightforward, that we wouldn't get any questions and did that we therefore should be done in the first half of August.

Okay, so assuming the clearance comes through, which I agree is probably likely, what is the anticipated impact on your financials? I understand that you may recognize the revenue from the upfront payment over a number of years, but is there any guidance on how long that period might be?

Thanks, Gary. I think that's a proper question and a value for everybody.

The treatment of this upfront payment is indeed accounting wise quite a challenge and we are currently still in discussion with our auditors how to treat that case correctly, but the likely hood that it has to be spread over a number of years is very high and we are still part of the development activities and that is then normally requires that you have to spread that upfront payment.

Of the question then in that respect is always how many years. You have to anticipate here. I would like to refer to a comment from Celgene's side just recently made in their quarterly call and they anticipate that the program could make it to the market within four to six years and I think that is probably something which appears to be a relatively realistic timetable also to assume full revenue spread.

Okay. Thanks very much. And thank you for the cash guidance.

You're very welcome. I know you like that topic.

The next question comes from Gunnar Romer of Deutsche Bank. Please go ahead.

Good afternoon everyone. First question that would it be more general one with regard to your proprietary pipeline strategy going forward and now that you have out licensed to of your programs, we all know you have one remaining in the clinic and a couple of really early-stage programs. I was just wondering how you think about your strategy regarding proprietary pipeline projects going forward further.

I think you've already touched upon potentially broadening development of MOR208 but how about potentially adding or accelerating discovery programs and that you have in-house already or in licensing of potential compounds. How are your priorities here in this regard?

Then the second question would it be on the Celgene deal again, whether you can share anything more with us as compared it to your conference call them back in June with regard to the costs you would anticipate for code development of the program and how we should potentially think about the timing of the cost here.

Thank you.

Okay, thank you, Gunnar. Let me start with the proprietary development strategy. We are very, very conscious that the two most advanced or actually not the two most advanced, but two of the most advanced programs, MOR102 and MOR202 have now been partnered.

And we are very actively and as a priority looking to strengthen our portfolio and that includes both in licensing activities so looking at other biotech and even pharmaceutical companies and even potentially academics for interesting programs and that we can bring in, much as we did bring in 208 a couple of years ago and we are also looking at strengthening and accelerating our earlier sourcing activities, earlier discovery activities.

So if you look at our proprietary portfolio, we do have a gap now in pre-clinic and pre-clinic, close to clinic stage and we regard it as a priority to try to address that gap by bringing new compounds in and also by starting and accelerating existing discovery programs.

And then Gunnar, on your second question, in terms of the costs, in general, Hart-Scott-Rodino prohibits us to interact with Celgene at this point in time, so to go into details in terms of certain cost estimates for the future. So unfortunately, we cannot give you a clearer guidance today here.

In terms of impacts for 2013, we certainly when this transaction is approved, will then also show some impact here in case that we should adopt our guidance at that point in time and give you at least some insight for the rest of the year.

But for the outer years, it will be a bit challenging at this point in time to give you a clear guidance.

Okay, thank you. And then maybe one last question on your commercialization of the Ylanthia technology; anything that you can share with us on this front?

Nothing new. We're in discussions. We're looking at some potential opportunities around the expectation of Ylanthia in collaboration with others but there's nothing at this stage of that we can tell you which is basically consistent with our long-standing policy that we don't talk about ongoing discussions and negotiations.

Okay, thank you very much.

Yes.

The next question comes from the line of George Zavoico from MLV. Please go ahead.

Thank you. Good morning and good afternoon.

Following on Gunnar's question regarding broadening your exploratory and discovery operations, could you provide a little bit of update if there's anything to say about the collaboration with Heptares and Lanthio.

And then particularly with regard to Lanthio, and you're working with cyclic peptides which aren't really antibodies. So were you even thinking about broadening your platform away from antibodies kind of like what Amgen has done now going into small molecules question Mark

Thanks, George, for the questions.

The first of all, regarding Heptares and Lanthio, there's really nothing that we are ready were prepared to say about those collaborations other than they are proceeding well.

Heptares remember is of focused on providing GPCRs against which we would generate antibodies using the Ylanthia technology. It's looking promising and we would like to be able to provide an update to you which we will do in due course.

Regarding Lanthia Pharma, remember that this is our first venture outside of the antibody space into the cyclic peptides as you mentioned and it's really a longer-term investment. The intention here is to establish a new platform that would be ready for use some years down the track.

So we don't anticipate this being commercially viable tomorrow or even next month or maybe even next year. It's really an investment in the longer-term. In respect of our proprietary portfolio, the kind of compounds were interested in broadly speaking those are antibodies of course but also other types of proteins. I would characterize it like that.

The likelihood of that we would be interested in small molecules, a completely different molecular class is extremely remote so we are focusing our search for new compounds really on antibodies or other types of recombinant proteins.

Okay, thank you very much.

The next question comes from the line of Victoria English from MedNous. Please go ahead.

Yes, signing, I'm wondering whether there's anything that you can say at all about the gantenerumab trial, the phase 3 trial that Roche is conducting or the work that's going on in the US at the Washington University School of Medicine in which at the same antibodies are being used in a prevention trial that has US government support.

Thanks, Victoria. Of the second part of your question, you are referring to the DIAN network that has dominantly inherited NETWORK study but the answer is actually the same regarding both studies are that we don't have news in either case.

Of those are both blinded studies as you recall, and therefore we are not aware of simply -- and I'm sure no one is aware of any data from those studies of that one can meaningfully talk about.

The only thing I would say is that Roche had always is said that they intended it to conduct an interim safety analysis of the gantenerumab studied during 2013. We haven't heard anything about that so we assume it's still outstanding, still to be done. If there is news that can be shared about that when it's done, we will of course share it with you.

It could well be that if and when they conducted that they simply and assuming the outcome is favorable, i.e., that there are no safety problems that they would just roll forward and carry on with the trial and we may not hear anything about it which would be kind of no news is good news in that case.

But that's the only potential piece of news we are aware of regarding gantenerumab that could emerge during this year still.

Okay, thanks very much.

We currently have no questions coming through. (Operator Instructions)

The next question comes from Mark Pospisilik from Kempen & Co. Please go ahead.

Good afternoon, everyone. Just two brief questions from my side.

Could you provide us just a little extra color on the higher as G&A costs that seem to arise largely from long-term incentive plans? Is this indicative of a higher run rate or is it more of a one-off or occasionally once a year? Just a little bit more detail there would be much appreciated.

And then on the mechanics of the Celgene equity investment. When you was originally announced, it was a minimum 15% premium to the share price. Obviously we are well beyond that. Would it be wrong to proceed on the assumption that such an investment boom would likely take place at the close to whatever the current share price is?

Yes, I'm happy to give answers on the two questions.

Coming to the first one, of the SG&A expenses, it's correct what you said that there is a big impact by the LT -- in the ITI program -- there have been some legal changes in Germany that required us to change the accounting methodology. The fact is that at the beginning of a certain program you have higher costs and lower costs at the end of the program.

That has to a great extent, a negative impact for this year. It will smooth and a little bit in the years to come.

So I wouldn't say that a whole thing is a one-time effect, but to a great extent, it's really driven by this a one-time thing.

In terms of the equity, we have several arrangements in terms of the share price and what happens if the share price reaches a certain level. Indeed, the sort of percentage which you can expect Celgene will have after approval from the authorities is rather in the ballpark of the price which you have currently seen than at the price which was calculated it with a 50% premium when we signed the deal.

Maybe just one clarification.

Is there essentially, is that 15% minimum premium more or less of the only mechanism there so that --

No, we have actually -- we have a couple -- we have free mechanisms and it's probably -- it's too complicated to explain that in the detail here, but the premium is changing depending on the level of the share price and the premium which we will expect is a lower one than the 15% after the share price went up to this level.

So we have a different amount of premium to expect than the one you had in mind when we signed the deal. We will explain the details really when the Hart-Scott-Rodino Act approval is announced has taken place and then you will see the details.

But I think, Jens, maybe just to be helpful, can we give some sort of guidance as to the expected state that Celgene would finish up having at Morphosys if the deal was to be done today for example?

Yes, to do that math, it's in the ballpark between 3.5% and 4% I would assume.

Thank you. We have no further questions coming through, so I will now hand back over to Simon Moroney to wrap up today's conference call.

Thank you. To conclude the call, I'd like to remind you of the main points to take away.

First, the deals we closed in June with GSK for MOR103 and Celgene for MOR202 are a huge importance for Morphosys. If they provide both immediate and substantial cash inflows as well as increasing the prospects for the two programs and therefore our upside.

Second, the partner pipeline continues to progress with a nether program being highlighted.

And finally, we've had an excellent quarter financially and are well on track to achieving all of our objectives for this year.

That concludes our call. If any of you would like to follow up with us, we are in the office for the remainder of the day. Thank you for your participation on the call, and goodbye.

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