Financial Analysis

At the end of 2012, MorphoSys announced the sale of substantially all of its AbD Serotec business to Bio-Rad Laboratories, Inc. (Bio-Rad). As of 31 December 2012, substantially all of the AbD Serotec operating segment represented a discontinued operation as defined within IFRS 5. The Partnered Discovery and Proprietary Development operating segments, along with the continuing operations of the AbD Serotec segment, were classified as continuing operations as of the balance sheet date of 31 December 2012. The closing of the transaction was dependent upon certain conditions that were met on 10 January 2013 (closing date). Hence, substantially all of the AbD Serotec segment was sold as of this date. Therefore, the financial implications of the discontinued operations of AbD Serotec, owned by the MorphoSys Group until 10 January 2013, are reflected in the prior year's figures.

Revenues

Compared to the previous year, Group revenues declined by 26% to € 46.9 million (1-9/2013: € 63.6 million). This decrease was primarily the result of one-time effects related to the out-licensing of MOR103 to GlaxoSmithKline and license fees in connection with the sale of the AbD Serotec business unit to Bio-Rad in the first nine months of 2013.

From a geographical viewpoint, MorphoSys generated 27% or € 12.8 million of its commercial revenues with biotechnology and pharmaceutical companies and with non-profit organizations headquartered in North America. The Company generated 73% or € 34.1 million in revenues with customers mainly located in Europe and Asia. In the comparable period of the prior year, the breakdown was 8% and 92%, respectively.

PARTNERED DISCOVERY AND PROPRIETARY DEVELOPMENT SEGMENTS

The revenues of the Partnered Discovery segment included € 33.1 million in funded research and license fees (1-9/2013: € 37.5 million) as well as success-based payments totaling € 2.4 million (1-9/2013: € 3.0 million). Success-based payments amounted to 5% (1-9/2013: 5%) of the total revenues of the Partnered Discovery and Proprietary Development segments. The decline in license fees was the result of a one-time effect in relation to the sale of the AbD Serotec business to Bio-Rad that occurred in the first half of 2013. As part of this sale, a non-exclusive license for the use of the HuCAL technology in the market for research reagents and diagnostics was also transferred to Bio-Rad.

Revenue development by segment - Continuing operations (in € Million)*

The Proprietary Development segment achieved revenues of € 11.5 million in the first nine months of 2014 (1-9/2013: € 23.0 million). These originated mainly from our co-development activities with Celgene. In comparison to the previous year, this decline was largely impacted by the recognition of an up-front payment in 2013 as part of the out-licensing of the MOR103 antibody program to GlaxoSmithKline.

Approximately 93% of Group revenues were generated with customers Novartis, Celgene, and ContraFect (1-9/2013: 92% with Novartis, GlaxoSmithKline, and Bio-Rad).

Operating Expenses

At € 51.1 million, operating expenses in the first nine months of 2014 remained essentially at the previous year's level (1-9/2013: € 49.1 million). Expenses were composed of € 40.8 million for research and development (1-9/2013: € 35.9 million) and € 10.3 million for selling, general and administrative expenses (1-9/2013: € 13.2 million).

The operating expenses of the Partnered Discovery segment fell to € 17.2 million (1-9/2013: € 18.2 million) and rose from € 20.8 million to € 24.2 million in the Proprietary Development segment.

Personnel expenses resulting from share-based payments are contained in selling, general, and administrative expenses and within research and development expenses. These totaled € 3.2 million in the first nine months of 2014 (1-9/2013: € 4.1 million) and represent a non-cash expense. The decline is the result of a modification made to the 2011 and 2012 LTI programs in the first nine months of 2013.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses rose to € 40.8 million in the first nine months of 2014 (1-9/2013: € 35.9 million). These expenses consisted mainly of personnel expenses (1-9/2014: € 16.2 million; 1-9/2013: € 15.7 million), expenses for external laboratory services (1-9/2014: € 10.2 million; 1-9/2013: € 10.1 million), expenses related to intangible assets (1-9/2014: € 7.0 million; 1-9/2013: € 4.0 million), expenses for technical infrastructure (1-9/2014: € 3.1 million; 1-9/2013: € 2.6 million), and other expenses (1-9/2014: € 1.8 million; 1-9/2013: € 1.3 million). Expenses for research and development for the first nine months of 2014 also included impairment of patents, licenses and laboratory equipment amounting to € 4.1 million (1-9/2013: € 0.7 million).

In the first nine months of 2014, the Company incurred expenses of € 24.2 million for proprietary product development (1-9/2013: € 20.8 million) as well as technology development expenses of € 1.9 million (1-9/2013: € 3.3 million).

DISTRIBUTION OF R&D EXPENSES (IN MILLION €)

  1-9/2014  1-9/2013 
R&D Expenses on behalf of Partners 14.7 11.8
Proprietary Development Expenses 24.2 20.8
Technology Development Expenses 1.9 3.3
R&D TOTAL 40.8 35.9
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

At a total of € 10.3 million, selling, general, and administrative expenses were below the level of the comparable period of the previous year (1-9/2013: € 13.2 million). These expenses consisted mainly of personnel expenses (1-9/2014: € 7.1 million; 1-9/2013: € 8.2 million), expenses for external services (1-9/2014: € 1.9 million; 1-9/2013: € 2.6 million), expenses for technical infrastructure (1-9/2014: € 0.6 million; 1-9/2013: € 0.9 million), and other expenses (1-9/2014: € 0.6 million; 1-9/2013: € 0.8 million).

Development of operating Expenses - Continuing operations (in € Million)*

Other Income and Expenses

Other income amounted to € 0.7 million (1-9/2013: € 0.6 million) and consisted mainly of currency gains and a reversal in write-downs of accounts receivable impaired in previous years due to payments received. Other expenses amounted to € 0.2 million (1-9/2013: € 0.4 million) and resulted mainly from impairments of receivables and currency losses.

EBIT

Earnings before interest and taxes (EBIT) amounted to € -3.7 million, in comparison to the previous year's EBIT of € 14.6 million. The EBIT of the Partnered Discovery segment was € 18.3 million (1-9/2013: € 22.4 million) while the Proprietary Development segment generated an EBIT of € -12.7 million (1-9/2013: € 2.4 million).

Finance Income and Expenses

Finance income reached € 1.5 million (1-9/2013: € 0.6 million) and mainly comprised interest income and gains from the sale of securities. Finance expenses of € 0.1 million (1-9/2013: € 0.1 million) largely resulted from bank fees.

Taxes

In the first nine months of 2014, the Group's income tax income amounted to € 0.3 million (1-9/2013: income tax expenses € 4.3 million), composed of current tax expenses of € 0.3 million as well as deferred tax income of € 0.6 million.

Profit/Loss for the Period from Continuing Operations

In the first nine months of 2014, continuing operations generated a net loss of € 2.0 million (1-9/2013: net profit of € 10.9 million).

Profit/Loss for the Period from Discontinued Operations

In 2014, the Group did not identify discontinued operations as defined by IFRS 5 and therefore no profit or loss from discontinued operations was recognized in the first nine months of 2014 (1 9/2013: € 6.0 million from the sale of substantially all of the AbD Serotec business to Bio-Rad).

Consolidated Net Profit/Loss for the Period

In the first nine months of 2014, a net loss of € 2.0 million was generated (1-9/2013: net profit of € 16.9 million).

Financial Position

CASH FLOWS

Net cash outflows from operating activities amounted to € 3.3 million in the first nine months of 2014 (1-9/2013: inflow of € 100.8 million). Investment activities resulted in a cash inflow of € 10.4 million (1-9/2013: outflow of € 171.1 million). Financing activities in the first nine months of 2014 produced a cash outflow of € 5.0 million (1-9/2013: inflow of € 129.3 million).

INVESTMENTS

MorphoSys made investments in property, plant, and equipment of € 2.3 million in the first nine months of 2014 (1-9/2013: € 0.5 million), mainly for lab equipment (primarily machines) and computer hardware. At € 1.1 million, depreciation of property, plant, and equipment in the 2014 nine-month period was largely unchanged compared to the previous year period (1-9/2013: € 1.0 million).

In the first nine months of 2014, the Company invested € 16.4 million in intangible assets (1-9/2013: € 3.9 million). These investments were mostly related to the research program in-licensed from Emergent in return for an upfront payment in the amount of US$ 20 million. Amortization of intangible assets amounted to € 2.2 million in the first nine months of 2014 and thus was below the previous year's level (1-9/2013: € 2.5 million). In the third quarter of 2014, an impairment of patents, licenses and laboratory equipment amounting to € 4.1 million (1-9/2013: € 1.0 million) was recognized.

LIQUIDITY

On 30 September 2014, the Company held cash and cash equivalents, marketable securities, and other financial assets in the amount of € 364.3 million, compared to € 390.7 million on 31 December 2013.

This sum consisted of € 74.0 million (31 December 2013 € 71.9 million) in cash and cash equivalents, marketable securities and bonds amounting to € 98.4 million (31 December 2013: € 199.5 million) as well as other financial assets totaling € 191.9 million (31 December 2013: € 119.3 million), which were reported as other receivables within current assets in the category "loans and receivables".

The decline in cash and cash equivalents, marketable securities, and other financial assets by € 26.4 million was mainly a result of the use of cash and cash equivalents for operating activities during the first nine months of 2014 and the payment made to Emergent.

Balance Sheet

ASSETS

On 30 September 2014, total assets amounted to € 434.1 million and were € 13.6 million below the level reported on 31 December 2013 (€ 447.7 million). The decline in current assets by € 25.0 million primarily resulted from the use of cash and cash equivalents for operating activities during the first nine months of 2014.

In comparison to 31 December 2013, non-current assets saw an increase of € 11.4 million, mainly due to the rise in intangible assets under development by € 15.4 million resulting from the payment to Emergent. This was offset by impairment charges of € 4.1 million relating to patents, licenses and laboratory equipment.

LIABILITIES

The rise in current liabilities from € 35.4 million on 31 December 2013 to € 36.5 million on 30 September 2014 primarily arose from the item "accounts payable and accrued expenses" and specifically from the € 4.0 million rise in provisions for external laboratory services. This was partially offset by the decline in personnel-related provisions by € 3.3 million. The decrease in tax liabilities of € 2.2 million was offset by the increase in the current portion of deferred revenue of € 2.3 million.

Non-current liabilities decreased by € 10.4 million in comparison to the level reported on 31 December 2013. This was mainly due to a decline in deferred revenue.

STOCKHOLDERS’ EQUITY

On 30 September 2014, stockholders' equity for the Group totaled € 347.8 million in comparison to € 352.1 million on 31 December 2013.

The number of shares issued on 30 September 2014 totaled 26,392,084 of which 25,941,194 shares were outstanding (31 December 2013: 26,220,882 and 25,880,992 shares, respectively).

Compared to 31 December 2013, the number of ordinary shares authorized increased from 2,335,822 to 4,957,910. This resulted from the creation of the new Authorized Capital 2014-I at the Annual General Meeting of 23 May 2014. Meanwhile, the number of ordinary shares of conditional capital decreased from 8,057,470 to 7,231,598 due to the cancellation of Conditional Capital 1999-I amounting to € 70,329 and Conditional Capital 2008/II amounting to € 212,077 and the reduction of Conditional Capital 2003-II from € 725,064 by € 372,264 to € 352,800. A further reduction of Conditional Capital 2003-II of € 171,202 to a total of € 181,598 resulted from the exercise of 171,202 conversion rights during the first nine months of 2014.

As of 30 September 2014, the value of treasury stock increased by € 7,833,944 to € 14,251,962 compared to its level on 31 December 2013 as a result of MorphoSys's repurchase of 111,000 of its own shares on the stock exchange. On 30 September 2014, MorphoSys held 450,890 of its own shares.

Financing

On 30 September 2014, the Company's equity ratio equaled 80% compared to 79% on 31 December 2013. The Company is currently not financed via financial debt.

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