9 Additional Notes

9.1 OBLIGATIONS ARISING FROM OPERATING LEASES, RENTAL AND OTHER CONTRACTS

The Group leases facilities and equipment under long-term operating leases. In financial years 2015 and 2014, leasing expenses amounted to € 2,978,254 and € 1,939,537. The 2015 amount includes the recognition of a provision for onerous contracts from rent obligations for office premises. Leasing expenses for 2015 and 2014 include expenses for company cars and machinery totaling € 229,153 and € 192,597, respectively. The majority of these contracts can be renewed on a yearly or quarterly basis. Some of these agreements may be terminated prematurely.

The components of future minimum payments under non-terminable operating leases, insurance contracts are shown in the following table.

in 000’ € Rent and
Leasing 2015
Rent and
Leasing 2014
Other 2015 Other 2014 Total 2015 Total 2014
Up to One Year 2,349 2,415 840 1,057 3,189 3,472
Between One and Five Years 13,438 3,142 5 5 13,443 3,147
More than Five Years 13,875 0 0 0 13,875 0
Total 29,662 5,557 845 1,062 30,507 6,619

Compared to the previous year, the increase in the category “Rent and Leasing” mainly resulted from a new rental contract for a building signed in December 2015 and the related perennial obligations.

Additionally, the future payments shown in the table below may become due from currently active, terminable contracts for outsourced studies. These amounts can be substantially lower because of the respective contractual clauses if the study is terminated prematurely.

in 000’ € Total 2015
Up to One Year 46,735
Between One and Five Years 114,227
More than Five Years 0
Total 160,962

9.2 CONTINGENT ASSETS/CONTINGENT LIABILITIES

Contingent liabilities are potential obligations from past events that exist only when the occurrence of one or more uncertain future events – beyond the Company’s control – is confirmed. Current obligations can represent a contingent liability if it is not probable enough that an outflow of resources justifies the recognition of a provision. Moreover, it is not possible to make a sufficiently reliable estimate of the amount of the obligations.

The Management Board is unaware of any proceedings that may result in a significant obligation for the Group and may lead to a material adverse effect on the Group’s net assets, financial position or results of operations.

If certain milestones are achieved in the Proprietary Development segment, for example, filing an application for an investigational new drug (IND) for specific target molecules, this may trigger milestone payments to licensors. However, no further details can be published since the timing and the achievement of such milestones are uncertain.

If a partner achieves certain milestones in the Partnered Discovery segment, for example, filing an application for an investigational new drug (IND) for specific target molecules or the transfer of technology, this may trigger milestone payments to MorphoSys. However, no further details can be published since the timing, and the achievement of such milestones are uncertain.

Obligations may arise from enforcing the Company’s patents against third parties. It is also conceivable that competitors challenge patents
of MorphoSys Group companies or that MorphoSys concludes that MorphoSys’s patents or patent families are infringed by competitors, which may prompt MorphoSys to take legal action against competitors. At present, there are no specific indications for the occurrence of liabilities as described above.

9.3 CORPORATE GOVERNANCE

The Group has submitted the Declaration of Conformity with the recommendations of the Government Commission on the German Corporate Governance Code for the 2015 financial year under Sec. 161 of the German Stock Corporation Act (AktG). This declaration was published on the Group’s website (www.morphosys.com) on December 3, 2015 and made permanently available to the public.

9.4 RESEARCH AND DEVELOPMENT AGREEMENTS

The Group has entered numerous research and development agreements as part of its proprietary research and development activities and its partnered research strategy.

9.4.1 PROPRIETARY DEVELOPMENT SEGMENT

In the Proprietary Development segment, partnerships are entered into as part of the Group’s strategy to develop its own drugs in its core
areas of oncology and inflammatory diseases. Our partners include (in alphabetical order): Emergent BioSolutions, G7 Therapeutics, Galapagos, GlaxoSmithKline, Immatics Biotechnologies, Merck Serono, Temple University and Xencor.

In August 2014, MorphoSys and Emergent BioSolutions announced a co-development and co-promotion agreement for MOR209/ES414. This compound is a bispecific anti-PSMA/anti-CD3CD3: surface antigen on T cells antibody targeting prostate cancer that was developed by Emergent based on its proprietary ADAPTIR™ platform (modular protein technology). In early March 2015, MorphoSys and its development partner Emergent BioSolutions announced the commencement of a phase 1 clinical study with MOR209/ES414 in up to 130 patients suffering from metastatic castration-resistant prostate cancer (mCRPC). The study’s launch triggered a milestone payment to Emergent of € 4.7 million. The existing cooperation agreement was updated in the past financial year. After a joint examination of the clinical results, the companies decided to adjust the dosing regimen and administration of MOR209/ES414. Clinical development will continue in 2016 with an adapted clinical development plan. A change in the contractual agreement brought down MorphoSys’s share in the costs for the years 2016 through 2018 and lowers MorphoSys’s potential milestone payment to Emergent to a maximum of US$ 74 million. There were no changes made to the remaining financial agreements or the division of commercial rights.

In August 2015, MorphoSys and Swiss-based G7 Therapeutics AG announced a new collaboration to develop novel antibody therapeutics ­targeting G protein-coupled receptors (GPCRs) and other potentially disease-related transmembrane proteins, such as ion channels. Under this agreement, G7 Therapeutics will give MorphoSys a choice of various receptors that can be linked to the emergence of a variety of diseases. MorphoSys will use its proprietary YlanthiaYlanthia: The novel next-generation antibody platform of MorphoSys antibody libraryantibody library: A collection of genes that encode corresponding human antibodies to identify and develop antibody compounds directed against these receptors. MorphoSys has the right to sublicense to partners access to these target molecules in conjunction with therapeutic antibody programs.

In November 2008, MorphoSys and Galapagos announced a long-term drug discovery and co-development cooperation aimed at exploring novel mechanisms for the treatment of inflammatory diseases and developing antibody therapies against these diseases. The agreement covers all activities ranging from the probing of target molecules to the completion of clinical trials for novel therapeutic antibodies. After demonstrating clinical efficacy in humans, the programs may be out-licensed to partners for further development, approval, and commercialization. Both companies contributed their core technologies and expertise to the alliance. Along with the use of its adenovirus-based platform for the exploration of new target molecules for the development of antibodies, Galapagos provided access to target molecules already identified that are associated with bone and joint diseases. MorphoSys provided access to its antibody technologies used for generating fully human antibodies directed against these target molecules. Under the terms of the agreement, Galapagos and MorphoSys will share the research and development costs. In July 2014, the collaboration advanced into the preclinical development of MOR106, an antibody from MorphoSys’ next-generation library Ylanthia directed against a novel Galapagos target molecule. The antibody will be co-developed in the area of inflammatory diseases.

In June 2013, MorphoSys announced it had entered into a global agreement with GlaxoSmithKline (GSK) for the development and commercialization of MOR103. MOR103/GSK3196165 is MorphoSys’s proprietary HuCALHuCAL: Human Combinatorial Antibody ­Library; proprietary antibody ­library enabling rapid generation of ­specific human antibodies for all ­applications antibody against the GM-CSFGM-CSF: Granulocyte-macrophage colony-stimulating factor; underlying target molecule of MOR103 program target molecule. Under the agreement, GSK assumes responsibility for the compound’s entire development and commercialization. MorphoSys received an immediate upfront payment of € 22.5 million as part of this agreement. Depending on the achievement of certain developmental stages and regulatory, commercial and revenue-related milestones, MorphoSys is eligible to receive additional payments from GSK in the amount of up to € 423 million, as well as tiered double-digit royalties on net sales. In the third quarter of 2015, GlaxoSmithKline announced the initiation of a phase 2 study with MOR103/GSK3196165 for rheumatoid arthritis. GSK also plans to initiate a second phase 2 study in osteoarthritis of the hand during the 2016 financial year.

In August 2015, MorphoSys announced a strategic alliance in the field of immuno-oncology with the German company Immatics Biotechnologies GmbH. The alliance was formed to develop novel antibody-based therapies against a variety of cancer antigens that are recognized by T cellsT cells: An abbreviation for T-lymphocytes; a subtype of white blood cells that together with B-lymphocytes are responsible for the body’s immune defense. The alliance agreement gives MorphoSys access to several of Immatics’s proprietary tumor-associated peptides (TUMAPs). In return, Immatics receives the right to develop MorphoSys’s Ylanthia antibodies against several TUMAPs. The companies will pay each other milestone payments and royalties on commercialized products based on the companies’ development progress.

In June 2014, MorphoSys and Merck KGaA announced an agreement to identify and develop therapeutic antibodies against target molecules of the class of immune checkpoints. Under this agreement, both MorphoSys and Merck Serono, the biopharmaceutical division of Merck, will co-develop therapies intended to trigger the immune system to attack tumors. MorphoSys will use its proprietary Ylanthia antibody library and other technology platforms to generate antibodies directed against the selected target molecules. Merck Serono is contributing its broad portfolio and expertise in the field of immuno-oncology and clinical development and will assume full project responsibility starting with phase 1 of clinical development.

In April 2014, MorphoSys agreed to a strategic partnership with the Moulder Center for Drug Discovery Research, a division of the School of Pharmacy at Temple University, USA, to discover new therapeutic antibodies. Under this cooperation, the Moulder Center receives access to MorphoSys’s Ylanthia technology for validating new disease-related target molecules and generating therapeutic antibodies directed against these molecules. MorphoSys receives an exclusive option to further develop each antibody resulting from the cooperation. The department for new bio-therapeutic compound discovery at the Moulder Center deals with the compound’s design and optimization of lead candidates in various disease areas, including cancer, Alzheimer’s disease, cardiovascular, metabolic and viral diseases.

In June 2010, MorphoSys AG and the US-based biopharmaceutical company Xencor signed an exclusive global licensing and cooperation agreement under which MorphoSys receives exclusive global licensing rights to the XmAb5574/MOR208 antibody for the treatment of cancer and other indications. The companies jointly conducted a phase 1/2a trial in the US in patients with chronic lymphocytic leukemia. MorphoSys is solely responsible for further clinical development after the successful completion of the phase 1 clinical trial. Xencor received an upfront payment of US$ 13 million (approx. € 10.5 million) from MorphoSys, which was capitalized under in-process R&D programs. Xencor is entitled to development, regulatory, and commercially-related milestone payments as well as tiered royalties on product sales.

In May 2015, MorphoSys acquired the Dutch company Lanthio Pharma B.V., which specializes in research and development of lanthipeptides. MorphoSys had initially acquired almost a 20% interest in the biopharmaceutical company in 2012 as part of its Innovation Capital initiative before acquiring the remaining shares in the past financial year. LanthipeptidesLanthipeptides: Novel class of therapeutics with high target selectivity and improved drug-like properties are a novel class of therapeutics demonstrating high target molecule selectivity and improved compound properties. This transaction adds MOR107 (formerly LP2) to MorphoSys’s proprietary portfolio. MOR107 is a novel lanthipeptide in development for diabetic nephropathy and fibrotic diseases.

9.4.2 PARTNERED DISCOVERY SEGMENT

Commercial partnerships in the Partnered Discovery segment provide MorphoSys with various types of payments that are spread over the duration of the agreements or recognized in full as revenue when reaching a predefined target or milestone. These payments include upfront payments upon signature, annual license fees in exchange for access to MorphoSys’s technologies and payments for funded research to be performed by MorphoSys on behalf of the partner. In addition, MorphoSys is entitled to development-related milestone payments and royalties on product sales for specific antibody programs.

Prior to the 2015 financial year, active collaborations with a number of partners had already ended because the agreements had expired. However, drug development programs initiated in the active phase are designed so that they can be continued by the partner and, therefore, still result in performance-based payments for the achievement of the defined milestones. For more detailed information on individual drug candidates within the various alliances – limited to information available to the public – please refer to the section “Research and Development” contained in this annual report and the overview of the Group’s drug pipeline. Detailed information on the Group’s individual research alliances is available on the Group’s website.

Partnerships in the Partnered Discovery segment that ended before the beginning of 2015 but where drug development programs were still being pursued, include (in alphabetical order): Astellas, Bayer Healthcare Pharmaceuticals, Boehringer Ingelheim, ContraFect, Daiichi-Sankyo, F. Hoffmann-La Roche, GPC Biotech, Immunogen, Janssen Biotech, Merck & Co., OncoMed Pharmaceuticals, Pfizer, Fibron Ltd. (transfer of the contract from Prochon Biotech Ltd.) and Schering-Plough (a subsidiary of Merck & Co.).

Partnerships that were still active in 2015 include (in alphabetical order): GeneFrontier Corporation/Kaneka, Heptares and Novartis.

The Group’s most comprehensive alliance is with Novartis AG. Both companies started working together in 2004, which has led to the creation of several ongoing therapeutic antibody programs against a number of diseases. In December 2007, MorphoSys and Novartis significantly expanded their previous relationship and forged one of the most comprehensive strategic alliances in the discovery and development of biopharmaceuticals. The contractually guaranteed annual payments for technology access, internalization charges, and R&D services amount to more than € 400 million over the contract term of ten years. The total amount of guaranteed payments and probability-weighted performance-based milestones, contingent upon the successful clinical development and regulatory approval of several products, could exceed € 650 million by the expiration of the contract underlying the collaboration. In addition to these payments, MorphoSys is also entitled to royalties on any future product sales.

In November 2012, MorphoSys and Novartis entered into a cooperation agreement for the use of the new Ylanthia technology platform. This was an extension of the existing strategic cooperation.

9.5 SUBSEQUENT EVENTS

There have been no significant changes in the industry environment since the end of the 2015 financial year. Other events having a material impact on the net assets, financial position and results of operations have also not occurred after the end of the financial year.

9.6 RESPONSIBILITY STATEMENT

We confirm to the best of our knowledge and in accordance with applicable reporting principles that the consolidated financial statements give a true and fair view of the Group’s assets, liabilities, financial position and results of operations and that the Group Management Report provides a fair review of the Group’s business development, results and position as well as a description of the principal opportunities and risks associated with its expected development.

Martinsried, February 16, 2016

Dr. Simon Moroney
Chief Executive Officer

Jens Holstein
Chief Financial Officer

Dr. Arndt Schottelius
Chief Development Officer

Dr. Marlies Sproll
Chief Scientific Officer

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