Letter to the Shareholders

The year 2010 was one of great achievement for MorphoSys. We made extraordinary progress in our pipeline, expanded our technology platform, and in addition to these strategic advances, the Company delivered very good financial results from operations. Our success clearly illustrates the attractiveness of our business model.

Nowhere was the Company’s progress more evident than in our pipeline of therapeutic antibodies. The number of compounds in clinical development more than doubled during 2010, from eight at the beginning of the year, to 17 by the end. Well over 1,000 patients and volunteers will have been administered HuCAL antibodies by the time the ongoing trials are completed. This is not only a compelling indicator of the success of our strategy in commercializing our technology, but a reminder of the contribution we will make to human healthcare. Amongst these programs are a number of potential blockbusters in indications as diverse as cancer, asthma and Alzheimer’s disease, to name just a few.

In our Proprietary Development segment, we now have two programs in the clinic. The first patient was dosed in the Phase 1b/2a rheumatoid arthritis trial of our lead compound MOR103 in January 2010. We’re very excited about this program, and look forward to completion of the trial in 2011. MOR103’s commercial potential was boosted during the year when we achieved encouraging preclinical data in multiple sclerosis, which will become the second indication for clinical development of MOR103 when we start a Phase 1b safety study in the second half of 2011.

In June 2010, we added a second clinical candidate to our proprietary portfolio by in-licensing the antibody MOR208 from Xencor. This program is now in clinical development in the United States, the initial focus being on chronic lymphocytic leukemia. This highly promising addition to our portfolio of drugs incorporates a proprietary Xencor modification that makes it an exciting potential new treatment for cancer.

We expect MOR202 to become our third fully-owned antibody in the clinic during 2011, following the filing of a clinical trial application in December 2010. Rounding out the Proprietary Development segment are several discovery-stage programs, our co-development alliance with Galapagos, and two active co-development programs with Novartis.

We also had a year of substantial achievement within the Partnered Discovery segment. No fewer than eight INDs were filed, by five different partners, during 2010. In addition, two partnered programs progressed from Phase 1 to Phase 2, bringing to five the number of partnered programs in Phase 2 clinical trials. We look forward eagerly to clinical data from these programs, which we hope should provide the clearest evidence that HuCAL antibodies are destined to become successful drugs. Altogether, 15 partner programs are in clinical trials, a number that we expect to grow given the abundance of preclinical and discovery programs currently ongoing.

MorphoSys’s success has a lot to do with our unique antibody technology platform, at the heart of which is HuCAL. Our commitment to maintaining our technological leadership was illustrated during 2010 by our acquisition of Sloning Biotechnology GmbH. Sloning’s world-leading technology for building protein libraries was quickly turned into a new antibody optimization platform called arYla. We expect arYla to transform the way antibodies are optimized, increasing both speed and success rates. The Sloning acquisition promises to open up a new world of partnering opportunities, as was evidenced by the agreement we entered with Pfizer just weeks after the Sloning transaction.

The AbD Serotec unit felt the effects of the financial slowdown, especially in its home, European, market. Although revenues did not grow as originally expected, the structural improvements that we have implemented were reflected in an improved operating profit margin of 6%. The AbD Serotec segment is well-positioned for an attractive future in the diagnostic segment where our antibody platform has the potential to deliver clearly differentiated diagnostic products. Collaborations are ongoing with over 20 diagnostics companies, and the first diagnostic kit based on a HuCAL antibody should reach the market in 2011.

“Nowhere was the Company’s progress more evident than in our pipeline of therapeutic antibodies. The number of compounds in clinical development more than doubled during 2010, from eight at the beginning of the year, to 17 by the end.”

Our Group operating profit of EUR 10 million exceeded expectations. The result is impressive, especially considering that it includes a 37% increase in proprietary R&D investment, to approximately EUR 27 million. In 2011, we expect revenue growth above 20% and will remain profitable while continuing to invest strongly in proprietary R&D. Our ability to continue to expand our partnered product pipeline, develop an exciting portfolio of proprietary products, and still achieve consistently good financial results makes MorphoSys almost unique in our industry. Cash is also an important strategic strength of MorphoSys. As illustrated by both the Xencor in-licensing agreement and the Sloning acquisition, our strong balance sheet enabled us to move quickly to acquire valuable assets.

MorphoSys enters 2011 stronger than ever before. I look forward to continued progress in our pipeline of proprietary and partnered antibody drugs, and to a year where our revenues will exceed EUR 100 million for the first time in the Company’s history. Our progress would not be possible without the hard work, dedication and creativity of our employees, to whom I am extremely grateful.

Thanks also to you, our shareholders, for your continued support. I am sure you will join me in wishing the Company a successful 2011.

Dr. Simon E. Moroney
Chief Executive Officer