Group Management Report
(In 2010, MorphoSys showed solid financial performance and was able to increase the value of its proprietary product portfolio through significant R&D investments. MorphoSys’s Partnered Discovery segment continued to perform very well with eight clinical milestones met during the course of the year. As a result, total Group revenues were up by 7 % from the prior year to € 87 million. Because of the significant increase in proprietary R&D investment, operating profit decreased as expected by 14 % to € 9.8 million. Regarding the research and diagnostic antibodies segment AbD Serotec, the segment’s performance improved compared to the previous year in a challenging market environment.)
Business Environment and Activities
Economic Development
In 2010, global recovery following the downturn from the financial crisis continued. The US economy grew by 2.4 % in 2010. However, the lack of employment growth was seen as the “weakest link” of the economic recovery.
In the euro zone, several countries faced significant debt difficulties, most notably Greece and Ireland. In total, the economy of the nations sharing the euro grew only slightly by 1.7 % in 2010 according to OECD estimates. The German economy grew by approximately 3.7 % in 2010.
According to current estimates, global GDP grew by 3.6 % in 2010, compared with a decrease of 1.4 % in the prior year.
Development within the Pharmaceutical and Biotechnology Sector
The global pharma growth rate in 2010 amounted to approximately 4 % to 6 % according to IMS Health. Emerging markets like China and India showed substantially higher growth rates of approximately 14 % to 17 %.
Antibody-related transactions remained high on the agenda of pharmaceutical companies. Significant technology licensing deals included two agreements struck by MacroGenics with Boehringer Ingelheim and Pfizer respectively, covering bispecific antibodies and ImmunoGen’s collaboration with Novartis covering immunoconjugates.
Noteworthy product licensing deals included two alliances in the area of inflammatory diseases between Eli Lilly and Incyte Corporation and AstraZeneca and Rigel Pharmaceuticals respectively. Both deals covered mid-stage clinical compounds to treat inflammatory conditions such as rheumatoid arthritis (RA) and featured significant upfront payments of over € 10 million to the respective biotech partner.
With regard to antibodies in clinical development, Roche and Biogen Idec’s decision to suspend development of Ocrelizumab® for use in arthritis stood out. The decision came after an independent monitoring board evaluated safety risks as outweighing benefits observed in patients. Danish antibody company Genmab published its results with Zalutumumab®, an antibody targeting an epidermal growth factor receptor, which failed to reach the primary endpoint in a phase 3 trial in head and neck cancer.
At the end of 2010, the number of therapeutic antibodies on the market increased to 27. During the course of the year, the FDA approved Actemra®, an IL-6 receptor-blocking rheumatoid arthritis treatment, in the USA and Amgen’s Prolia™ (Denosumab), a monoclonal antibody to treat osteoporosis. Mylotarg®, a monoclonal anti-CD33 antibody used to treat acute myeloid leukemia (AML), was withdrawn from the market in 2010. Total revenues generated by monoclonal antibody sales in 2010 amounted to approximately US$ 37 billion.
With regard to mergers and acquisitions and consolidation, 2010 was another very active year for the pharmaceutical and biotechnology sector. Most noteworthily, Johnson & Johnson acquired Crucell and Sanofi-Aventis announced its plans to acquire Genzyme during 2010. Other transactions such as Abbott’s acquisition of Facet Biotech or Cephalon’s move to acquire Ception Therapeutics were in part motivated by mid-stage therapeutic antibody candidates developed by the target companies. In the research antibody market, German Merck KGaA acquired Millipore, one of the largest providers of research tools including antibody-based reagents, for about € 5 billion.
During 2010, the pharmaceutical sector underperformed the overall stock market. The FTSE Global Pharma index was up by 7.6 %, while the FTSE All World was up by 10.4 %. The DAXsubsector biotechnology index, currently comprising 14 publicly listed German biotechnology companies, fell by 5.2 %, while the NASDAQ biotechnology index increased by 14 %. Against that backdrop, MorphoSys’s stock showed solid performance. The MorphoSys share price gained 9 % during the year, while the TecDAX gained only 4 %.
Regulatory Environment
The healthcare sector in which MorphoSys is operating is highly regulated. Both therapeutic and diagnostic products require complex approval from regulatory authorities such as Europe’s EMA (European Medicines Agency) or the US FDA (Food and Drug Administration) before being able to enter the market. The number of approved drugs decreased in 2010 compared to the year before. While MorphoSys’s partners are solely responsible for regulatory affairs within the partnered development programs, MorphoSys is in charge of all regulatory requirements related to its proprietary development programs.
Increasingly, generic competition is challenging the biotechnology landscape since several drug patents are going to expire in the coming years. In 2010, the EMA published draft guidance on biosimilar antibody drugs , while regulatory preparations in the USA are still ongoing. These guidelines, which will be formally adopted after May 2011, generally demand regulatory control for biosimilar monoclonal antibodies in the development process. They propose that regulatory authorities make case-by-case decisions relating to the development process, for example, to what extent clinical studies are required or what kind of post-marketing analysis should be conducted. The entry barriers for biosimilar monoclonal antibodies in Europe are therefore likely to remain quite high.
Organizational Structure and Business Activities
Organization and Global Presence of the MorphoSys Group
MorphoSys’s business is split into three operating segments. The Partnered Discovery segment develops drug candidates for commercial partners. This segment is the foundation of the Company’s success and manages partnerships with several renowned biotechnology and pharmaceutical companies involving 65 distinct therapeutic programs. The Proprietary Development segment is focused on developing proprietary therapeutic antibody candidates, mainly targeting cancer and inflammation. The goal of this segment is to take innovative antibody drugs to clinical proof of concept before partnering, thereby creating additional value for the Company. MorphoSys’s third operating segment, AbD Serotec, delivers high-quality antibodies to the research and diagnostic markets.
Business Activities of the MorphoSys Group
MorphoSys’s headquarters are located in Martinsried near Munich, Germany. The Group’s corporate functions are centralized at this facility. In addition to that, the Company has a facility in Puchheim near Munich and a sales office in Düsseldorf, Germany, as well as offices in Oxford, England, and Raleigh, North Carolina, USA.
Legal Structure of the MorphoSys Group
Group Management and Supervision
MorphoSys AG is a German stock corporation listed on the Frankfurt Stock Exchange in the Prime Standard segment, and heads the MorphoSys Group.
MorphoSys AG has a dual-board structure in accordance with the German Stock Corporation Act. The Company is managed by a four-member Management Board. The Management Board members are appointed and directed by the Supervisory Board. For more information regarding management and supervision as well as corporate governance in general, please see the Corporate Governance Report on page 28.
The Senior Management group, composed of 14 people, represents the different MorphoSys departments and completes the MorphoSys management team.
Business Activities of the MorphoSys Group
Business Activities and Markets by Segment
Partnered Discovery
The partnered business is a key driver of MorphoSys’s commercial success and contributes significantly to the Company’s product pipeline, which is one of the broadest pipelines in the industry. MorphoSys’s series of industry-leading technologies for the research and optimization of therapeutic antibody drug candidates forms the basis of the Company’s Partnered Discovery segment. The healthcare market is constantly looking for innovative products and MorphoSys successfully applies its technologies in extensive partnerships with pharmaceutical and biotechnology companies. Each development program is fully financed by the respective partner; MorphoSys profits from successful development in the form of milestone payments and stands to earn royalties on product sales. The Company’s alliance with Novartis dating from 2007 is one of the largest agreements in the industry, securing revenues for MorphoSys through funded research and license fees in the amount of approximately € 40 million per year until 2017, plus potential milestone payments and royalties on marketed products deriving from this alliance.
There are only a small number of established providers in the sector for therapeutic antibody technologies. MorphoSys remains one of the most renowned providers of highly validated antibody technologies and, in 2010, further strengthened its technological leadership in the industry by acquiring Sloning BioTechnology GmbH, a German biotechnology company developing new methods of synthetic biology. Just a few weeks after this acquisition, MorphoSys demonstrated its partnering abilities when the Company’s new subsidiary signed a non-exclusive license and technology transfer agreement with Pfizer relating to Sloning’s Slonomics® technology platform for the fabrication of highly diverse gene and protein libraries.
This successful development is reflected by the revenue increase of the Partnered Discovery segment over the last three years:
Strong Revenue Growth from Partnered Discovery Segment
|
in million € |
2010 |
2009 |
2008 |
|||
|---|---|---|---|---|---|---|
|
66.3 |
61.7 |
54.3 |
Proprietary Development
Over the last two years, MorphoSys has built a highly competitive development team with the aim of developing innovative antibody products. With these capabilities and this experience in-house, the Company is able to generate even more value, adding to the standard fee-for-service business of the Partnered Discovery segment. The focuses of internal know-how and expertise and thus key target areas for MorphoSys’s researchers and developers are inflammatory and autoimmune diseases as well as oncology.
Inflammatory and Autoimmune Diseases
Chronic inflammatory disorders such as rheumatoid arthritis (RA), multiple sclerosis (MS) or [psoriasis](psoriasis) are a substantial burden in social and economic terms. However, despite the significance of these diseases and intensive global research, there have been relatively few innovative breakthroughs in their cause, treatment or cure thus far.
A promising therapeutic target for the treatment of various inflammatory disorders is GM-CSF . MorphoSys’s lead compound MOR103 is a fully human HuCAL-derived antibody directed against this target. The program is currently undergoing a clinical phase 1b/2a trial in rheumatoid arthritis, the largest single market in the area of inflammatory diseases. Additionally, MorphoSys expects to start a phase 1b trial in a second indication, namely multiple sclerosis, in the second half of 2011.
Oncology
The oncology market includes a large number of heterogeneous indications demonstrating a wide range of unmet medical needs and incidence rates. Today, there are more products in the oncology development pipeline than in any other, with a huge number of new oncology products set to launch within the next few years. While new players are entering the market, established pharmaceutical companies are re-engineering their organizations in order to tap emerging opportunities.
MorphoSys is currently developing two proprietary compounds against cancer. One is MOR202, a fully human HuCAL-based antibody against CD38 , a therapeutic target for the treatment of multiple myeloma and potentially certain leukemias. MorphoSys expects to start a phase 1/2a trial with MOR202 in patients with relapsed/refractory myeloma in the first half of 2011.
The second proprietary development program MorphoSys is pursuing in this area is MOR208 (XmAb®5574), which MorphoSys in-licensed from Xencor in June 2010. The program is currently in a phase 1 trial in chronic lymphocytic leukemia (CLL).
AbD Serotec – Research and Diagnostic Antibodies
MorphoSys’s third operating segment is AbD Serotec, providing antibodies for scientific research and modern clinical diagnostics. AbD Serotec is one of the top 20 antibody providers in the field of research and diagnostics, allowing the immediate online purchase of more than 14,000 products via its catalog business. The HuCAL-based generation of new antibodies made to order is significantly faster than the current market standard, even when producing antibodies in larger quantities on behalf of diagnostic customers. AbD Serotec’s custom services facility is able to serve customers with specific antibody development challenges. The business unit currently has relationships with more than 20 diagnostic companies and its antibodies are trusted by many thousands of researchers.
According to a study by BCC Research, the worldwide diagnostic market for monoclonal antibodies has a compound annual growth rate of 7 % and is expected to be worth US$ 9 billion by the end of 2012.