Outlook and Forecast

The MorphoSys Group develops novel antibody technologies and products for therapeutic applications. MorphoSys has strengthened its focus on the development of therapeutic compounds with the sale of the AbD Serotec research antibody division, completed at the start of 2013.

The Company’s management intends to further expand MorphoSys’s portfolio of proprietary drug candidates. MorphoSys continues to apply its technologies in rapidly growing, innovation- driven sectors of the healthcare market.

Overall Statement on Expected Development

MorphoSys owns established and validated technologies and continuously invests in their further development – with an internal team but also through additional purchases. The Company’s strategy builds on these technologies to develop a broad and sustainable pipeline of innovative drug candidates – with partners and for its own account. In the therapeutics area, commercialization of these technologies provides secure cash flows from long-term partnerships with large pharmaceutical companies. Furthermore, MorphoSys profits from the successful further development of drug candidates by way of milestone payments as well as through royalties when a drug reaches the market.

The Group’s stable cash flows and strong cash position enable it to further strengthen its business through investments in proprietary drug and technology development. The Management Board expects the following developments for 2013:

  • MorphoSys will continue to invest in technology development to maintain its leading position in the antibody sector and related technologies. The Company intends to sign new commercial agreements based on its proprietary technologies, Slonomics  and Ylanthia.
  • The demand for antibodies as a new treatment modality remains high, allowing the Company to expand its pipeline of therapeutic antibodies within its partnerships.
  • The pharmaceutical industry continues to use the in-licensing of compounds as a means of gaining access to promising product candidates. Successful out-licensing of proprietary drug candidates could lead to lucrative cash flows.

Strategic Outlook

MorphoSys’s business model is built on its proprietary technologies, including the HuCAL  and the more recently announced Ylanthia  antibody libraries, as well as the Slonomics platform.

The development of therapeutic antibodies within partnerships will continue to be the mainstay of MorphoSys’s strategy. The Company’s therapeutic pipeline is expected to grow and mature over the coming years, resulting in additional milestone payments. Thanks to the breadth of the pipeline, a significant number of marketed therapeutic antibody products could emerge in the years ahead and, as a result, financial participation through product royalties will be secured.

The Partnered Discovery segment generates secured cash flows from MorphoSys’s long-term collaborations. The conclusion of additional alliances based on proprietary technologies – including acquired technologies as in the case of Slonomics – would provide further opportunities for future revenues. In the case of the successful development of drug candidates, MorphoSys would benefit through milestone payments and, following market approval, through royalties on the product sales of approved drugs.

In its Proprietary Development segment, MorphoSys is developing therapeutic antibodies in-house in the areas of inflammatory diseases and oncology. MorphoSys intends to develop proprietary drug candidates up to proof of clinical efficacy before a partner is sought for the commercialization. Subject to certain conditions, individual projects could also be further developed in-house, possibly even to market approval. At the end of 2012, three clinical programs – MOR103, MOR202 and MOR208 – formed the main assets of MorphoSys’s development portfolio. Currently, a partner is being sought for the further clinical development and later commercialization of MOR103, the development of MOR202 and MOR208 is being expedited at the Company’s own expense.

For the foreseeable future, MorphoSys will invest the majority of its cash flow in proprietary R&D  in order to further expand its own portfolio of proprietary drug candidates and to strengthen its technology platforms.

Expected Economic Development

The sovereign debt crisis will continue to dominate the economy and the performance of the financial markets in 2013. The economy in the Eurozone has been in recession since the spring of 2012. After the stabilization of the currency union by the ECB, only gradual recovery is expected. In the autumn of 2012, the European Commission reduced the growth prospects for the Eurozone in 2013 to 0.1 %; some experts also expect a decline in 2013. Germany is expected to grow in 2013, however the OECD expects economic growth of 0.5 %.

In the USA, the imminent fiscal cliff was narrowly avoided. Economic recovery is expected, resulting in growth of up to 2 %.

Japan will also experience an economic upswing. The International Monetary Fund predicts economic growth of 1.2 %.

The OECD reduced the outlook for its 34 member states and warns of a global recession in 2013.

Expected Development of the Life Sciences Sector

Historically, the pharmaceutical and life sciences sector is relatively immune to economic downturns. An aging population requires new and innovative treatment methods. The necessity of drastic savings measures in national budgets, however, leads to slumps in international healthcare systems, which in turn directly affects reimbursement policies and therefore pharmaceutical companies. The expiry of patents on top-selling drugs continues to concern the pharmaceutical industry, although the lion’s share of patent expiries has been overcome. However, pharmaceutical companies still suff er from a lack of innovation and product supply.

The prospects for the biotechnology sector nevertheless remain very favorable. There are currently approx. 7,400 drug candidates in the development pipeline, with an increasing number in phase 3. Pharmaceutical companies remain prepared to invest large sums in developing innovative and promising product candidates as well as to in-license such programs from biotechnology companies.

Financial resources play an important role for many companies. The access to new sources of finance is still limited as before but is of central importance for the further development of the biotechnology industry.

In the USA, President Barack Obama described the biotechnology sector as an important sector for growth. The funding of startups should create new jobs. The American approval authority, the FDA, has additionally been instructed to shorten approval processes – which should further reinforce the positive trend of more approvals.

Expected Commercial Development

MorphoSys’s collaboration with Novartis ensures steady cash flows over the coming years until at least the end of 2017. Additional commercial opportunities will arise from its proprietary technology platforms such as Slonomics and Ylanthia. MorphoSys will continue to concentrate on broadening its partnered pipeline and increasing the value of its proprietary portfolio.

Within the Partnered Discovery segment, the Company anticipates starting, on average, approximately ten new partnered programs per annum for the next several years. MorphoSys plans to partner its Ylanthia technology with additional pharmaceutical and biotechnology companies.

The Company’s most advanced proprietary development program, MOR103, completed a phase 1b/2a trial in RA patients with very promising results. MorphoSys is currently in partnering discussions for further development and marketing of this drug candidate. MorphoSys plans no further clinical trials with MOR103 at the current time. The ongoing phase 1b trial in patients with multiple sclerosis will be continued in 2013.

The approval of a therapeutic antibody based on the Company’s proprietary technologies is not expected before 2015/2016. As one of the first partners, Novartis publicly announced that the therapeutic antibody BYM338 could be submitted for approval in 2016.

Expected Personnel Development

The Group’s workforce is reduced by 135 positions due to the sale of substantially all of AbD Serotec to Bio-Rad. The Group’s workforce in both remaining segments is, however, expected to remain roughly at the same level as in 2012. Additional human resource requirements could arise depending on requirements, e.g. through the conclusion of new commercial development agreements or through the in-licensing of new technologies or development candidates.

Expected Research and Development

In 2013, the Company’s R&D budget for proprietary drug development will increase compared with the previous year. In 2013, MorphoSys plans to invest approx. € 32 million to € 37 million in proprietary product and technology development. The majority of this investment will be channeled into the clinical development of the most advanced drug candidates and into the development of new technologies.

The steps planned for the Company’s proprietary pipeline in 2013 include the following:

  • Secure partner for the MOR103 development program with a view to continuing clinical development
  • Continuation of phase 1b safety trial for MOR103 in MS as a second indication
  • Continuation of phase 1/2a trial for MOR202 in MM
  • Start of two phase 2 trials for MOR208 in NHL  and ALL
  • Continuation of the joint development program with Galapagos
  • In-licensing of new target molecules or compounds to reinforce the development portfolio
  • Collaboration with Lanthio Pharma to establish high-quality and diverse lantipeptide libraries

For the Partnered Discovery segment, the marketing of the proprietary technology platforms Ylanthia and Slonomics is paramount.

Expected Financial and Liquidity Development

MorphoSys has a solid financial foundation and generates signifi cant recurring revenues, mainly from its collaboration with Novartis. Following the sale of AbD Serotec, the Management Board anticipates total Group turnover for 2013 of € 48 million to € 52 million.

The Partnered Discovery segment is a highly profitable business unit. Long-term commercial agreements will provide the Company with secured cash flows for at least the next five years. In addition, MorphoSys’s management anticipates signing additional agreements based on proprietary technologies such as Slonomics and Ylanthia.

Pending the successful out-licensing of drug candidates, the Proprietary Development segment will continue to show losses due to ongoing investment in the preclinical and clinical development of the various programs. Successful out-licensing of one or more proprietary programs would result in significant profits being achieved in this unit. If one of MorphoSys’s proprietary development programs shows convincing efficacy data in clinical trials, double-digit-million upfront payments, plus additional development- and sales-based milestone payments, as well as double-digit royalties could be achieved.

On the basis of the Management Board’s current planning, total Group operating expenses are expected to increase to between € 70 million and € 74 million in 2013. Investments in proprietary research and development will be heavily influenced by the start of additional clinical trials, and are expected to increase to between € 32 million and € 37 million. In addition to the continuation of the trials of MOR103 in multiple sclerosis and MOR202 in multiple myeloma, MorphoSys is planning to start two phase 2 trials of MOR208. The EBIT for continuing operations is expected to be between € –18 million and € –22 million.

There is, however, the possibility of these expectations being significantly outperformed if a proprietary development program such as MOR103 can be out-licensed. Such a contract is not currently included in the projections. One-off events such as the out-licensing of proprietary products, generating substantial up-front and milestone payments, together with royalties from partnered HuCAL antibodies reaching the market, will become more important factors for the Group’s fiscal performance in the years to come. Such results could lead to a significant outperformance of the Company’s financial goals. Failures of drug development programs could have a negative impact on the MorphoSys Group. In the near term, top-line growth is dependent on the Company’s ability to sign additional partnerships and/or to out-license proprietary product candidates. In the mid-term, royalties from marketed products will add to topline growth.

In 2013, a profit contribution before taxes in the amount of € 4 million to € 6 million from the discontinued segment AbD Serotec is expected, comprising mainly a deconsolidation gain and transaction costs.

At the end of the 2012 financial year, MorphoSys’s cash position amounted to € 135.7 million (31 December 2011: € 134.4 million), including an interest-bearing transferable loan amounting to € 10.0 million as well as liquid funds from the AbD Serotec segment in the amount of € 5.3 million. The successful completion of the sale of AbD Serotec to Bio-Rad leads to a further increase of the company’s cash balance of approximately € 48 million in the first quarter of 2013. MorphoSys sees its strong cash position as an asset which can be used to accelerate future growth through strategic transactions and/or increased investment in the Company’s proprietary portfolio of therapeutic antibodies. The financial participation in Lanthio Pharma in the past financial year is a good example of a strategic transaction.

DIVIDENDS

MorphoSys AG’s German statutory accounts showed accumulated profits which could be available for distribution. Nevertheless, in line with standard practice in the biotechnology industry, MorphoSys does not anticipate paying a dividend for the foreseeable future. Any profit generated by the business will be substantially reinvested in the operation of its business, mainly in the area of proprietary drug development, and in strategically interesting acquisitions in order to create further shareholder value and growth opportunities. As was the case in 2012, the Company plans to purchase its own shares from the market in 2013 for issuance to management under the Company’s annual long-term incentive program.

This outlook takes into account all factors known at the time of the preparation of the financial statements which could affect our business in 2013 and beyond, and is based on Management Board assumptions. Future results may deviate from the expectations described in the Outlook and Forecast section. Major risks are discussed in the Risk Report.