Strategy and Performance Management

STRATEGY

MorphoSys aims to develop innovative technologies and drug candidates with a focus on antibody-based compounds. Partnerships with pharmaceutical and biotechnology companies that generate turnover create the financial clearance for additional value generation through the development of proprietary drug candidates. This business model allows for the constant expansion of the product pipeline and thus long-term value for the Company’s shareholders without relying on the capital markets as a source of financing. In 2012, € 18.1 million or about 35 % of revenue from continued operations was invested in proprietary R&D. Proprietary R&D  investment was therefore roughly on the same level as 2011.

The Partnered Discovery segment, as the first pillar of the corporate strategy, develops optimized therapeutic antibodies for partners in the pharmaceutical industry. With 70 partnered programs at the end of the 2012 financial year, MorphoSys possesses one of the broadest antibody pipelines in the industry. The contractually guaranteed payments incorporate license fees for technologies and research funding, as well as successbased milestone payments and royalties on product sales. The cash flows* generated in this manner can be invested in the second pillar, the Proprietary Development segment. Proprietary and partnered antibody programs share the same technology platform for development purposes. In this segment, the compounds are developed independently (or in a co-development setting) to proof of clinical efficacy before being out-licensed to pharmaceutical or biotechnology companies for late stage development and marketing. Under certain conditions, individual projects could be developed even further, perhaps even to market approval.

Technology development remains at the heart of the corporate strategy. In November 2012, the next generation of antibody platform, Ylanthia  was successfully launched with a first commercial agreement. MorphoSys also launched a new initiative in 2012 through which the Company invests in promising startup companies with technologies and products that fit with MorphoSys’s interests. MorphoSys’s first activity in this area was a commercial agreement with the biopharmaceutical company Lanthio Pharma announced in November 2012. The Dutch company specializes in the research and development of lantipeptides*, a novel class of therapeutics with high target molecule selectivity and improved drug properties. Due to their size, lantipeptides are significantly smaller than antibodies, other classes of target molecule can be addressed that are unsuitable for antibodies. Within the framework of their commercial agreement, MorphoSys and Lanthio Pharma will combine their technologies to develop high-quality and diverse lantipeptide libraries.

With regard to future commercial development, MorphoSys monitors the pharmaceutical and biotechnology industries very closely in order to secure sustainable growth through acquisitions and out-licensing. Liquidity reserves of around € 135.7 million (including an interest-bearing transferable loan amounting to € 10.0 million and liquid funds in the amount of € 5.3 million from the discontinued operations of AbD Serotec) are reserved for strategic transactions and investments in proprietary research and development that could improve MorphoSys’s technology base and therapeutic pipeline. The stated goal is to increase the Company’s value via significant investments in its proprietary development activities with consistently high financial discipline and rigorous cost controls.

At the end of 2012, MorphoSys announced the sale of substantially all of its research and diagnostic segment, AbD Serotec. This transaction will strengthen MorphoSys’s focus on the Company’s core competence in the therapeutic field, which presents the greatest potential growth driver. Consequently, the organization will be completely focused on technologies and drug development which enable the targeted use of financial resources on the crucial value drivers.

PERFORMANCE MANAGEMENT

To achieve sustainable corporate growth and thereby generate a value increase for its shareholders, MorphoSys uses financial as well as non-financial indicators. These help to monitor the success of strategic decisions in day-to-day operations and if necessary, to take appropriate countermeasures in a timely manner.

FINANCIAL PERFORMANCE INDICATORS

The financial indicators used to evaluate the operational business performance are mainly parameters such as revenues and results from normal business activity. Performance is tracked on a monthly basis for every segment; budget planning for the current financial year is reviewed and updated quarterly. Furthermore, a medium-term plan covering the next three years is prepared each year. A thorough cost analysis measuring the Company’s performance in line with its financial targets and in comparison to prior periods is carried out on an ongoing basis. Expenses for S, G&A and R&D are evaluated particularly carefully.

TAB. 3 /// DEVELOPMENT OF FINANCIAL PERFORMANCE INDICATORS

in million €   2012   2011   2010   2009   2008  
MorphoSys Group
Revenues from continuing operations* 51.9 82.1 87.0 81.0 71.6
EBIT (Earnings before interest and taxes)
from continuing operations**
2.4 9.8 9.8 11.4 16.4
Partnered Discovery
Segment revenues 44.7 79.3 66.3 61.7 54.3
Segment result 23.0 55.7 42.7 39.6 34.4
Proprietary Development
Segment revenues 7.0 2.4 1.8 1.0 0
Segment result (11.0) (32.2) (24.5) (18.3) 8.9
AbD Serotec
Segment revenues 18.0 19.3 20.2 19.3 18.2
Segment result 0.3 0.9 1.2 1.0 0.4

* Revenues of discontinued operations 2012: € 17.7 million (2011: € 18.7 million); 2008 through 2010 total Group revenues
** 2008 through 2010: profit from operations

MorphoSys’s financial performance is impacted by factors such as milestone and license payments, research and development expenses, operational cash flow, liquidity and working capital. These indicators are also regularly evaluated and compared, with a focus on cash management, exposure to foreign exchange effects and investment opportunities. The net present value of investments is calculated with the use of discounted cash flow models.

NON-FINANCIAL PERFORMANCE INDICATORS

In addition to finance-related performance indicators, a sustainably successful corporate management must also use non-financial performance indicators as equal components in order to be able to map the whole value creation chain.

MorphoSys’s goal is to develop first-class antibody technologies and maintain its leading position in the therapeutics market by means of its wide product pipeline. In order to achieve this goal, the corporate strategy is aimed at the steady development of the product pipeline in particular, both in respect of the number of therapeutic antibodies as well as their quality and maturity. As successful products are based on first-class technologies, advances in technology development are a further central performance indicator. More information about activities of the MorphoSys Group can be found under Research & Development.

In addition to the quality of the research and development work, professional alliance management is at the heart of the Company’s success. This encompasses new contracts as well the strategic further development of existing partnerships, as demonstrated by the successful launch of the Ylanthia platform in November 2012. More information on our partner projects can be found under Research & Development.

Furthermore, the monitoring of further non-financial indicators is crucial for business success.

Committed and well-trained employees are a requirement for long-term success in an R&D-based industry such as biotechnology. The Company’s competitiveness can only be ensured and further expanded via a performance-oriented and forward-looking human resources strategy. This is why human resources management plays a key strategic role; it must entice promising talented individuals, keep high performers at the Company and provide employees with continuous and tailored training opportunities. A clear example of the success of human resources management in past years is the highly qualified and experienced workforce. More information can be found on MorphoSys’s human resources management and in the Sustainability Report.

Responsible behavior is a hallmark of MorphoSys’s corporate management. It’s crucial to always observe the strict ecological and social principles governing our work. For this reason, all processes and products are assessed with regard to their impact on environmental protection and work safety. Strict quality assurance is equally central to a forward-looking business strategy that will help MorphoSys to meet its own high quality requirements as well as the demands of its partners and clients.

The Company has established relevant guidelines in order to take into account the growing importance of value creation in the procurement process. These ensure compliance with best practice solutions in purchasing processes and regulate the purchase of goods, consultancy and other services. More details on purchasing and procurement management can also be found in the Sustainability Report.

TAB. 4 /// SUSTAINABLE DEVELOPMENT OF KEY PERFORMANCE INDICATORS (SD-KPIS) AT MORPHOSYS

  2012  2011   2010   2009   2008   2007   2006  
Performance in Proprietary
Research & Development (Number)
Programs in Discovery 2 4 5 3 1 0 0
Programs in Preclinic 0 0 1 1 1 1 2
Programs in Phase I 2 3 1 0 1 1 0
Programs in Phase II 2 1 1 1 0 0 0
Performance in
Partnered Programs (Number)
Programs in Discovery 34 28 32 32 22 23 27
Programs in Preclinic 20 24 20 27 29 24 14
Programs in Phase I 8 9 10 4 3 3 2
Programs in Phase II 7 7 5 3 1 0 0
Programs in Phase III 1 0 0 0 0 0 0
R&D Expenses according
to Segment (in million €)
Partnered Discovery 16.0 19.1 18.9 19.2 27.1 21.0 14.5
Proprietary Development 18.1 33.9 25.9 19.1 0.0 0.0 0.0
Technology Development 3.6 2.9 2.1 0.7 0.5 1.2 3

fig. 3 /// CLINICAL PIPELINE AT YEAR-END

fig. 4 /// OVERVIEW OF MORPHOSYS’S LATEST TECHNOLOGIES

TAB. 5 /// KEY PERFORMANCE INDICATORS 2012 RELATED TO EMPLOYEES OF THE MORPHOSYS GROUP

Employee Trainings on the Code of Conduct   (%)   100  
Employees in R&D (Number) 278
Women in Workforce (%) 60
Trainees (Number) 10
Occupational Accidents (Number) 3
Absence Rates (%) 3.01

The efficiency improvement project “Gepard” was established in early 2012. The aim of this initiative is to use suggestions from all employees to identify and implement improvements that could increase the efficiency and quality of work processes. The project expresses a belief in continuous improvement which is part of the MorphoSys company culture – a culture that helps MorphoSys to remain competitive in the long-term. As part of this project, the Company’s employees were able to submit suggestions on various topics within a defined time period starting in June 2012. In this period, 168 suggestions were submitted, and these were dealt with by nine working groups. Around half of these suggestions had already been successfully implemented by the end of 2012. Topics ranged from IT/software to HR topics and improvements in laboratory processes. Suggestions on further internal processes and in the area of finances and contracts were also represented.

For example, the MOR2WORK online car sharing tool for employees was set up to organize carpools for traveling to work. On the one hand, advantages are a sustainable driving experience with reduced CO2 emissions, on the other hand, employees also profit tangibly from savings in fuel consumption. Additionally, this platform promotes communication and company spirit among employees.

EARLY INDICATORS

MorphoSys monitors early indicators relating to the macroeconomic environment, the industry and the Company itself on a monthly basis. At Company level, this means scientific and economic data relating to the progress of each program for the therapeutic segments, and sales volume statistics for AbD Serotec. Regarding early macroeconomic indicators, MorphoSys examines general market data derived from external economic and financial studies with a particular focus on industry transactions, changes of regulatory parameters and the availability of research grants.

For existing active partnerships, joint steering committees regularly hold meetings. The committees’ objectives are to provide updates and monitor program advances and potential resultant milestone payments. This continuous monitoring within the framework of alliance management allows both the early steering of possible failed developments and produces information on expected milestone revenues at an early stage. In the case of concluded collaborations, regular reports help the Company to track the status of the ongoing therapeutic programs.

Market screenings in the area of commercial development help to determine the demand for new technologies. Constant observation of relevant market data enables MorphoSys to react to trends and demands early, and to pursue partnerships.

Prior to the initiation of a therapeutic development program, a Target  Product Profile ( TPP  ) is created. This process provides information at an early stage on the requirements needed to be successful in the given market. Key questions are also addressed within this process, for example on the level of efficacy that should be achieved, whether an improved safety profi le should be at the heart of the development plan or whether the focus should be on an alternative administration route. A detailed scenario for a positioning in the market, as well as the relevant patient population is part of the TPP, too. Frequent monitoring of these criteria and their fulfillment ensures that the most important influencing factors in the course of a product development program are covered and that changes can be responded to in a timely manner.

In the AbD Serotec segment, both monetary and non-monetary early indicators were utilized. The creation of sales projections as well as the monitoring of new developments in the market played a crucial role. The monitoring of the distribution of funds to scientific facilities and institutes produces information at an early stage about the financial funds to be expected for this customer segment. The observation of legal parameters in the area of research and diagnostics is equally important for a forward- looking management.