Development of the Business Environment

The European sovereign debt crisis remained a pervasive topic in 2012. A range of countermeasures to lift the debt crisis were implemented at national and international level. The European Stability Mechanism (ESM), aimed at supporting members of the Eurozone in financial diffi culties, was set up at the end of September 2012. It should serve the Eurozone with a maximum credit extension capacity of € 700 billion as a permanent safety net. According to estimates by the OECD, the gross domestic product (GDP) of the Eurozone states shrank by around 0.4 % in 2012.

The USA also had to battle a growing national defi cit in 2012. Automatic spending cuts and massive tax increases are possible consequences of the growing defi cit, also known as “fiscal cliff ”. In its annual statement on the USA, the International Monetary Fund highlighted this fiscal cliff as the greatest domestic risk because recession with an accompanying rise in unemployment was expected. The occurrence of this fiscal cliff was avoided at the turn of the year 2012/2013 through an agreement between the political parties. According to estimates by the US central bank, the Federal Reserve, GDP increased in the USA from 1.7 % to 1.8 % in 2012.

With regard to the Asian markets, the Chinese growth engine stagnated somewhat in 2012. GDP grew by 7.7 % according to estimates. According to OECD estimates, Japan recorded GDP growth of 1.6 % in 2012.

CURRENCY RATE FLUCTUATIONS

In 2012, MorphoSys’s revenues were generated mostly in euros, US dollars and British pounds, while the Company’s costs were mainly incurred in euros and British pounds. The turbulence in Europe led to a significant weakening of the euro mid-year. Signals from the political arena, in particular a clear commitment from ECB President Draghi to the euro, served to stabilize the single currency, which closed at the end of 2012 slightly stronger than the US dollar. Over the year, the euro suff ered a loss of around 3 % compared to the British pound. In 2012, MorphoSys’s revenues and costs were influenced by these currency variations. A detailed description of this influence can be found in the Financial Analysis.

PHARMACEUTICAL AND BIOTECHNOLOGY SECTOR DEVELOPMENT

According to estimates from the US market research institute, IMS Institute for Healthcare Informatics, the pharmaceutical sector grew world-wide by 5 % to 7 % in 2012 and generated total revenues of over one trillion US$ in total for the first time. The US market, which is currently the largest single pharmaceutical market, grew moderately as the positive effect of the legal changes brought in by the Obama administration can only be expected in 2014. The main cause for the successful cumulative growth despite this was the development of the emerging pharmaceutical markets, which includes 17 countries. These are expected to have grown in 2012 by 12 % to 15 %. The Indian pharmaceutical market, for example, grew again by approximately 12 % in 2012 after an increase of 16 % in 2011.

The pharmaceutical industry continues to face significant challenges due to top-selling products losing patent protection and facing generic competition – copies of original drugs with the same active ingredients. The term “patent cliff ” describes the cumulative patent expirations of blockbuster pharmaceutical drugs between 2009 and 2015 and the effect of this on the pharmaceutical industry.

In the Indian market, the competitive situation for innovative drug developers worsened significantly in the 2012 financial year. At the beginning of April, the Indian patent office approved a request from domestic generics manufacturer Natco to be able to copy Bayerʼs cancer drug, Nexavar, before the expiry of the patent protection. Natcoʼs competitor Cipla had already launched a copy of the cancer drug on the Indian market. For the first time since 2005, when Indian patent law was reformed, India issued a compulsory license. In November 2012, the Indian Intellectual Property Appellate Board (IPAB) appealed a patent issued in 2006 to Swiss pharmaceutical group Roche for the drug Pegasys, used for the treatment of Hepatitis C, and based the complaint on several aspects including the high price of the drug.

Historically, generic competition mainly affected chemically derived drugs, but generic versions of biopharmaceuticals, so-called biosimilars, are also set to advance. Due to the complexity of biopharmaceuticals – including antibodies – the market entry barriers are considered much higher than those for generic versions of chemically produced compounds, on account of the regulatory requirements in particular. This is reflected in the pricing of biosimilars, with much lower price reductions in comparison to conventional generics. While the requirements for biosimilars are already regulated in Europe, the American admissions authority, the US Food and Drug Administration ( FDA  ) first put forward a policy draft in February, which has not yet been adopted. In the 2012 financial year, a monoclonal antibody drug received biogeneric commercial approval for the first time when Remsima in South Korea was approved as a biogeneric version of Remicade (Infl iximab) developed by Celltrion Inc.

As a central source of capital for privately led companies and start-ups, venture capital investments in the US life sciences sector decreased to around US$ 4.1 billion according to data from the National Venture Capital Association and PricewaterhouseCoopers. Europe also followed this trend. According to data from Dow Jones VentureSource, corresponding investments in Europe decreased to € 772 million. For MorphoSys, this capital shortage also resulted in opportunities. Via the investment in Lanthio Pharma, for example, MorphoSys was able to obtain access to a potentially powerful new drug discovery platform within the framework of the “Innovation Capital”* initiative.

The academic research sector, which is dependent on state research funding, was also put under pressure in the 2012 financial year. Following the financial crisis in Europe, providers experienced delays on purchase orders and payments from customers in the academic sector in individual states. Following the sale of substantially all of the AbD Serotec business unit, MorphoSys’s profit results will be less dependent on these fluctuations in public research budgets in future.

DEVELOPMENT WITHIN THE ANTIBODIES SECTOR

The number of therapeutic antibodies approved in the most important markets increased to 31 by the end of 2012. In June, the FDA approved Rocheʼs antibody drug Perjeta® (pertuzumab) for the treatment of late-stage breast cancer. The antibody targets HER2-positive cancer cells. The top-selling therapeutic antibody, the anti-inflammatory Humira® (adalimumab), achieved around US$ 9 billion in revenues world-wide in the 2012 financial year. A monoclonal antibody was thus the top-selling product for the first time in the history of the pharmaceutical industry. According to research from Datamonitor, the revenues generated from all approved therapeutic antibodies in 2012 came in at around US$ 50 billion.

Deals comprising antibody technologies and products remained high on the agenda of the pharmaceutical industry owing to the ongoing attractiveness of the antibody sector with regard to technologies and products. MorphoSys was able to update its long-standing partnership with Novartis with the latest technology platforms. Transactions observed in the industry with direct relevance for MorphoSys included the world-wide licensing and development agreement for the monoclonal antibody daratumumab signed between Genmab and Janssen Biotech group. According to the press release, the potential deal volume amounts to up to US$ 1 billion in the form of development, approval and sales milestones, in addition to tiered double-digit royalties. As with the current phase 1/2 MOR202 program from MorphoSys, daratumumab is also aimed at the CD38  target molecule, which is found on the surface of many myeloma cells.

Regarding M&A  activities, GlaxoSmithKline acquired Human Genome Sciences (HGS) for around US$ 3.6 billion. The HGS lead product Benlysta (belimumab) is a human monoclonal antibody for the treatment of systemic lupus erythematosus. Also worth mentioning was the takeover of the German-American company Micromet by Amgen for around US$ 1.2 billion. Micromet owns the BiTE  technology platform, which delivers bispecific antibody drug candidates. Furthermore, with blinatumomab, Micrometʼs portfolio contained a therapeutic bispecific antibody against the CD3 and CD19  target molecules.

REGULATORY ENVIRONMENT

The healthcare sector is highly regulated in terms of market access, pricing and reimbursement. The pressure on the pharmaceutical industry from healthcare systems and payers to deliver drugs with verifi able patient benefit increased in 2012. Seen in a positive light, these challenges to pharmaceutical groups promote greater risk-taking and innovation preparedness.

The USA’s supervisory and approval body, the FDA, approved 39 new drugs in the 2012 financial year, once again an increase on the previous year. A law which came into force in 2012, the Food and Drug Administration Safety and Innovation Act (FDASIA), enables the FDA to conduct a faster review process. In concrete terms, this means the time from the submission of the new drug application to the FDA’s decision will be shortened.

In Germany, the German Act on the Reform of the Market for Medicinal Products (Gesetz zur Neuordnung des Arzneimittelmarktes – AMNOG), a new law introduced in 2011 regulating reimbursement and the pricing of prescription drugs in healthcare, was put into practice. The manufacturer will now set the price for a new and innovative drug for one year after it is approved. Following an assessment on whether the product offers an additional benefit or not, the price of the new medicine will be negotiated by the German National Association of Statutory Health Insurance Funds and the company. In the event that no additional benefit can be determined, the new medicine will be part of the lower fixed-price system (Festbetragssystem). According to the German National Association of Statutory Health Insurance Funds (GKV-Spitzenverband), the central representative of the interests of the statutory health insurance and care funds, AMNOG has so far led to a refund being awarded in twelve cases.