Business Environment and Activities

ECONOMIC DEVELOPMENT

After a strong first quarter 2014, Germany's economic development slowed slightly in the further course of the year. Declining economic performance in the euro area and growing uncertainty caused by geopolitical developments, particularly in the Ukraine and the Middle East, contributed to this slowdown.

The recovery in the euro area continues to be sluggish with sharply contrasting economic development in each country. Germany, Italy, and France have recorded rather weak performance in the course of 2014, while the Netherlands, Portugal, and Finland, for example, have experienced positive momentum.

Meanwhile, the “No” vote given by the Scots in the referendum on devolution from Great Britain has relieved some of the political tension in the European Union. This vote was seen as a sign of European stability.

Shortly after the end of the third quarter of 2014, an economic downturn and a weak outlook for Europe pressured markets worldwide. The International Monetary Fund (IMF) warned of a slowdown in the global economy and cut its growth forecast for 2014.

IMPLICATIONS FOR MORPHOSYS

The economic developments described above did not have a significant impact on the business development of MorphoSys AG in the first nine months of 2014.

INDUSTRY OVERVIEW

Also the third quarter saw further acquisition activities in the pharmaceutical and biotechnology industries; Roche Group acquired the U.S. biotechnology companies Intermune and Seragon Pharmaceuticals for a total of more than US$ 9 billion. U.S. government measures relating to the acquisition of foreign companies and thus the possible shift of tax residency to a state with lower taxes passed shortly before the end of the quarter and could have a profound impact on current and future transactions. The first example of this development was the termination of pharma group Abbvie’s proposed € 40 billion acquisition of the Irish company Shire plc.

In terms of product approvals, the PD1 antibody nivolumab, developed by the pharmaceutical group Bristol-Myers Squibb, was approved in Japan in July for the treatment of unresectable melanoma. This was a further antibody addressing so-called immune checkpoints to receive approval.

Biotechnology IPOs continued into the third quarter, even though some companies were forced to list on the capital market at reduced valuations. In the field of antibody technologies and related approaches, IPOs were executed by arGEN-X on the Euronext exchange in Brussels, and the Heidelberg-based company Affimed, which is now listed on the U.S. NASDAQ exchange. Unlisted companies attracted a total of US$ 1.1 billion in venture capital in the third quarter of 2014. In total, close to US$ 4 billion in venture capital flowed into the sector within the first nine months of the year.

OPERATIONAL PERFORMANCE

MorphoSys is satisfied with its 2014 year-to-date performance. The search for new product candidates that complement and enhance the Company's proprietary drug portfolio led to the conclusion of another contract in the third quarter. An innovative cancer compound for the Company's portfolio was obtained with the bi-specific antibody MOR209/ES414 from the US-based company Emergent BioSolutions Inc.

At the end of the third quarter of 2014, MorphoSys's product pipeline comprised 94 partnered and proprietary programs, 21 of which were in clinical development.

With the results shown in the first nine months of 2014, MorphoSys is on track to achieve and, in case of EBIT, exceed its full-year operating and financial goal.

STRATEGY AND PERFORMANCE MANAGEMENT

MorphoSys did not make any changes to the Company's strategy or performance management during the first nine months of 2014. A comprehensive description of the strategy and performance management can be found on p. 24 of the company’s 2013 Annual Report.

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