Outlook and Forecast

The MorphoSys Group develops novel antibodies for therapeutic, diagnostic and research applications.

The Group’s main focus is on applying its technologies in rapidly growing, innovation-driven sectors of the healthcare market. The Company’s management intends to continue to expand MorphoSys’s proprietary drug development activities by taking advantage of opportunities in the therapeutics area. Moreover, MorphoSys seeks to enlarge its market share within the research and diagnostics fields, the latter of which in particular represents a largely untapped market for the Company’s technologies.

Overall Statement on the Expected Development

The Company owns established and validated technologies. In the therapeutics area, commercialization of these technologies contributes secure cash flows from long-term partnerships with large pharmaceutical companies. The Company’s strategic focus is to apply its technologies to build a broad and sustainable pipeline of innovative antibody drug candidates within these collaborations and from its own development activities. Through its AbD Serotec segment, the Company has a wide customer network. The AbD Serotec segment is well positioned in the diagnostics market, providing innovative antibodies to open up new diagnostic applications.

Its stable cash flows and the strong cash position allow the Company to build up its business through investments in proprietary drug and technology development.

The Management Board expects the following developments for MorphoSys in the relevant markets:

  • MorphoSys continues to invest in technology development to remain at the forefront of the antibody field. The Company expects to sign additional commercial collaborations based on its proprietary technologies in combination with those recently secured in the acquisition of Sloning BioTechnology GmbH.
  • The demand for antibodies as new treatment modality remains high, allowing the Company to expand its pipeline of therapeutic antibodies within its partnerships and on its own account.
  • The pharmaceutical industry continues to look for in-licensing opportunities to gain access to promising product candidates. If clinical proof of concept of a proprietary drug candidate is reached, lucrative deal terms could be achieved.
  • The AbD Serotec segment is now increasingly focusing on diagnostic applications using MorphoSys’s technologies. New technology for antibody generation has had very little impact on the market for diagnostic antibodies to date. The ability to make superior antibodies for diagnostic applications makes AbD Serotec increasingly attractive for this market segment. AbD Serotec’s management is confident about future growth prospects based on existing research collaborations with a number of leading diagnostics companies.

Strategic Outlook

MorphoSys’s business model is built on its proprietary technologies including HuCAL and recently launched arYla.

The development of therapeutic antibodies within partnerships will continue to be a significant part of MorphoSys’s strategy. The Company’s therapeutic pipeline is expected to expand and mature over the coming years. The extraordinary breadth of this pipeline promises to yield a significant number of marketed therapeutic antibodies in the years ahead.

Within its Proprietary Development segment, the Company is committed to developing therapeutic antibodies in the areas of inflammation and oncology for its own account. In the near-term, the plan is to take proprietary drug candidates to clinical proof of concept before seeking a commercial partner. The proprietary portfolio will be enlarged by starting de novo programs, and also by securing access to interesting targets and product candidates through additional in-licensing activities. The addition of MOR208 to the Company’s portfolio was a good example of this. To diversify its proprietary pipeline, MorphoSys will pursue additional co-development projects within its alliances with Novartis and Galapagos, and potentially with other biotechnology or pharmaceutical companies.

The Partnered Discovery segment generates secured cash flows from MorphoSys’s long-term alliances. For the foreseeable future, MorphoSys will continue to invest the majority of these cash flows in broadening and strengthening its Proprietary Development segment. Growth in this area is expected as existing drug programs progress, through new fee-for-service partnerships in the area of infectious diseases and by commercialization of new technologies, including those secured via acquisitions, such as Sloning.

The AbD Serotec segment strives to increase its market share within the research and diagnostics fields. AbD Serotec’s management intends to concentrate on high-value applications of the HuCAL technology, especially in the area of diagnostics.

Expected Economic Development

The global economic upturn is expected to continue in 2011. In a preview of its economic report for 2011 early in December, the United Nations said it expects the world economy to grow by 3.1 % in 2011 and 3.5 % in 2012. However, due to the ending of numerous stimulus programs and the need to consolidate government budgets, global economic growth in 2011 will be weaker than in 2010. Risks to economic growth lie in a possible sharper slowdown of the US economy, exchange rate developments, the debt crisis in many countries, the continuing pressing need for write downs in the banking sector and the price situation regarding raw materials.

The pharmaceutical and healthcare industries have historically been relatively immune to economic downturns, due to a continuously increasing demand for innovative treatments. Nevertheless, pharmaceutical companies are facing challenges such as low R&D productivity, government-imposed price erosions and patent expiries.

Expected Development of the Life Sciences Sector

The pharmaceutical industry is facing unprecedented challenges. Expiring patents, lack of new product supply and cost pressure from healthcare reforms in Europe and the USA all combine to place the industry under increasing pressure. According to IMS Health, drugs generating sales of around US$ 135 billion will lose their patent protection by 2013. This is the largest decrease in the industry’s history, The world pharmaceutical market in total has a size of about US$ 800 billion.

Within the biotechnology industry, the access to capital will remain one of the main issues. While in 2010 the stock market climate for biotechnology companies improved overall in the USA, in Europe, the window for IPOs is still closed. In general, the expectations for 2011 are again more positive. The need to add innovative therapies into the pipelines of the larger pharmaceutical companies could further increase M&A activities, partnering deals and licensing, a development that has gained speed already in 2009 and 2010.

Expected Commercial Development

With the Novartis deal ensuring a steady cash flow stream over the coming years, and new commercial opportunities arising from the Sloning acquisition, MorphoSys will continue to concentrate on broadening its partnered and proprietary development pipelines. Within the Partnered Discovery segment, the number of programs is expected to continue to grow. The Company anticipates starting, on average, approximately ten new partnered programs per annum for the next several years.

The Company’s management sees many opportunities to expand its proprietary development activities: de novo program starts, in-licensing of existing product candidates as well as co-development opportunities with Novartis, Galapagos and/or additional partners all offer attractive opportunities.

With regard to MOR103, the most advanced development program in MorphoSys’s proprietary pipeline, the Company expects final data from the ongoing phase 1b/2a trial in the first half of 2012. Assuming the clinical trial proceeds as planned and proof of concept can be demonstrated, a partnership deal could be struck in the same year. In 2011, MorphoSys plans to start a safety study for MOR103 in a second indication, namely multiple sclerosis. In parallel, preparations for a pharmacokinetic study of a subcutaneous formulation are ongoing. Out-licensing of the other proprietary compounds is not planned before 2013.

The AbD Serotec segment strives to continously outgrow the market. Despite the global economic downturn, the management of AbD Serotec predicts growth rates for the coming years of approximately 10 % at constant exchange rates. In 2011, profit margins will decrease in comparison to 2010 due to an increase in personnel-related costs and investments in infrastructure, nevertheless it is expected that segment profit margins will continue to increase in the following years.

Expected Personnel Development

MorphoSys will continue to expand its proprietary and partnered development capabilities by adding additional expertise and personnel. The rate of growth will, however, be less than in 2010.

Expected Research and Development

The Company’s R&D budget for proprietary drug development will continue to rise, roughly in line with the increase in revenues. In 2011, MorphoSys plans to invest between EUR 40 million and EUR 45 million in proprietary product and technology development. The majority of this investment will be channeled into the clinical and preclinical development activities for the most advanced drug candidates. The trend of increasing investments is expected to continue in 2012 and the years thereafter, although the size of such increases will depend on the status of the Company’s drug pipeline and revenue development. Notwithstanding this, the Company is committed to remaining profitable.

The Company’s proprietary pipeline activities in 2011 are projected to comprise:

  • Completion of recruitment of rheumatoid arthritis patients for the phase 1b/2a study for its lead compound MOR103
  • Filing of CTA for a phase 1b safety study in multiple sclerosis as second indication for MOR103
  • Start of enrollment of multiple myeloma patients in a phase 1b/2 study for MOR202
  • Ongoing enrollment of CLL/SLL patients in the phase 1b/2 trial sponsored by Xencor, Inc., for MOR208.

For 2011, no further expansion of the proprietary pipeline is planned. At the end of 2011, the Company expects up to ten proprietary compounds in total.

Regarding AbD Serotec, profitable growth based on innovative products and services is the central objective for the unit. The diagnostic industry offers the most attractive opportunities for growth and will therefore increasingly be the focus of the unit’s activities. In 2010, several feasibility studies were conducted, which could lead to conclusion of larger collaborations in 2011 and 2012.

Expected Financial and Liquidity Development

MorphoSys’s management strives to achieve average annual revenue growth in excess of 10 % in 2011 and 2012. For 2011, management anticipates total Group revenue growth in excess of 20 %, namely at least € 105 million. In the future, revenue growth will become more dependent on the out-licensing of proprietary products such as MOR103, MOR208 and MOR202, as well as on increasing milestone payments and royalties, as partnered HuCAL antibodies are developed further and will enter the market. The revenue split between the Company’s therapeutic antibodies segments and the AbD Serotec segment is anticipated to shift slightly towards the therapeutic side of the business in 2011 compared to the prior year.

The Partnered Discovery segment represents a highly profitable business unit. Long-term alliances will provide the Company with secured cash flows for at least the next six years.

On the basis of the Management Board’s current planning, total Group operating expenses are expected to increase in 2011 and 2012, subject to corresponding revenue increases. S, G&A expenses are expected to increase only slightly. MorphoSys plans to increase its investments in its proprietary antibody pipeline, particularly in MOR103, MOR208 and MOR202, additional de novo discovery programs and co-development alliances.

On the basis of current planning, MorphoSys expects to remain profitable on an operating level in 2011 and 2012. For 2011, the Company anticipates an operating profit of at least € 10 million, and to maintain profitability in 2012.

AbD Serotec showed revenue growth in 2009 and 2010, with a profit margin of around 5 % and 6 %, respectively. For 2011, management anticipates revenues of approximately € 22 million, while the profit margin will experience a one-off decrease due to an increase in personnel-related costs and investments in infrastructure. COGS is anticipated to increase in line with sales of the AbD Serotec segment, whereas segmental operating expenses are expected to increase only slightly. For 2012, at constant foreign currency rates, management expects the segment to show annual revenue growth rates of at least 10 %, with increasing margins.

At the end of the 2010 fiscal year, MorphoSys’s cash position amounted to € 108.4 million. Despite the more difficult conditions resulting from the global financial crisis, MorphoSys’s financing is solid. MorphoSys sees its strong cash position as an asset which can be used to accelerate future growth by strategic transactions: the in-licensing of MOR208 and the acquisition of Sloning Bio Technology GmbH are good examples of this.

Dividends

For the first time, MorphoSys’s German statutory accounts showed accumulated earnings available for distribution. Nevertheless, in common with standard practice in the biotechnology industry, MorphoSys does not anticipate paying a dividend for the foreseeable future. Any profit generated by the business shall be substantially reinvested in the operation of its business, mainly in the area of proprietary drug development, in order to create further shareholder value and growth opportunities. Nonetheless, the Company does plan to purchase shares from the market to support a new long-term incentive program for management.

 

This outlook takes into account all factors known at the time of the preparation of the financial statements which could affect our business in 2011 and beyond, and is based on Management Board assumptions. Future results may deviate from the expectations described in the outlook section. Major risks are discussed in the risk report.