Analysis of Net Assets, Financial Position and Results of Operations

The MorphoSys Group’s scope of consolidation changed as of December 31, 2015. The consolidated financial statements as of December 31, 2015 include MorphoSys AG, Sloning BioTechnology GmbH, Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. Further information on the Group’s organizational structure can be found here.

Revenues

Group revenues increased 66 % year-on-year to € 106.2 million (2014: € 64.0 million). This increase mainly originated from the realization of deferred revenue resulting from the termination of the MOR202 co-development and co-promotion agreement with Celgene.

Success-based payments amounted to 4 % (2014: 8 %) of total revenue.

On a regional basis, MorphoSys generated 59 %, or € 62.2 million, of its commercial revenues with biotechnology and pharmaceutical companies and non-profit organizations headquartered in North America and 41 %, or € 44.0 million, with customers headquartered primarily in Europe and Asia. In the same period of the previous year the distribution was 29 % and 71 %, respectively.

05 Figure Revenue of the MorphoSys Group by Region (in %)

Roughly 97 % of Group revenues are attributable to activities with our partners Celgene, Novartis and Pfizer (2014: 92 % with Novartis, Celgene and Centocor).

PROPRIETARY DEVELOPMENT SEGMENT

The Proprietary Development segment achieved revenues of € 59.9 million in 2015 (2014: € 15.0 million). Most of this revenue resulted from the termination of co-development activities with Celgene in the first quarter of 2015.

PARTNERED DISCOVERY SEGMENT

The revenues generated by the Partnered Discovery segment included € 42.3 million in funded research and license fees (2014: € 43.6 million) and € 4.0 million in success-based payments (2014: € 5.4 million).

06 Figure Revenues Proprietary Development and Partnered Discovery (in million €)

Based on the average foreign exchange rates in 2014, the revenues of the Proprietary Development and Partnered Discovery segments would have totaled € 106.1 million.

Operating Expenses

In 2015, operating expenses increased 34 % to € 93.7 million (2014: € 70.1 million). Expenses consisted of research and development expenses of € 78.7 million (2014: € 56.0 million) and general and administrative expenses of € 15.1 million (2014: € 14.1 million). Research and development expenses increased as planned due to ongoing projects.

Operating expenses in the Proprietary Development segment rose from € 33.5 million to € 54.1 million and in the Partnered Discovery segment increased to € 25.9 million (2014: € 23.0 million).

Personnel expenses from share-based payments are included in general and administrative expenses and research and development expenses. These expenses amounted to € 3.6 million in 2015 (2014: € 4.0 million).

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased by € 22.7 million in 2015 to a total of € 78.7 million (2014: € 56.0 million) and consist of expenses for external laboratory services (2015: € 29.2 million; 2014: € 14.9 million), personnel expenses (2015: € 25.6 million; 2014: € 21.0 million), expenses for intangible assets (2015: € 7.2 million; 2014: € 8.1 million), expenses for external services (2015: € 5.2 million; 2014: € 2.7 million), technical infrastructure expenses (2015: € 5.2 million; 2014: € 4.1 million), other expenses (2015: € 3.4 million; 2014: € 2.9 million) and expenses for consumables (2015: € 3.0 million; 2014: € 2.3 million). In 2015, a € 3.7 million impairment was recognized on goodwill resulting from the acquisition of Sloning BioTechnology GmbH. In 2014, expenses for intangible assets included impairment on patents, license rights and laboratory facilities of € 4.1 million.

07 Figure Selected R & D Expenses (in million €)

In 2015, the Company incurred proprietary development expenses of € 54.1 million (2014: € 33.5 million) and € 2.5 million (2014: € 2.9 million) for technology development.

08 Figure Distribution of R & D Expenses (in million €)

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were above the previous year’s level and amounted to € 15.1 million (2014: € 14.1 million). They mainly consisted of personnel expenses (2015: € 10.4 million; 2014: € 9.6 million), expenses for external services (2015: € 2.6 million; 2014: € 2.7 million), technical infrastructure expenses (2015: € 1.0 million; 2014: € 0.8 million) and other expenses (2015: € 1.1 million; 2014: € 1.0 million).

Other Income and Expenses

Other income totaled € 5.5 million (2014: € 0.8 million) and mainly stemmed from earnings effects from the fair-value measurement of the shares already held in Lanthio Pharma B.V. in the amount of € 4.5 million. Other income also included income from grants received and currency gains. Other expenses totaled € 0.8 million (2014: € 0.6 million) and mainly resulted from currency losses.

EBIT

Earnings before interest and taxes (EBIT) amounted to € 17.2 million compared to € – 5.9 million in the previous year. The Proprietary Development segment reported EBIT of € 10.7 million (2014: € – 18.4 million), while the Partnered Discovery segment achieved EBIT of € 20.4 million (2014: € 25.9 million).

Finance Income and Expenses

Finance income of € 3.8 million (2014: € 1.8 million) was generated in 2015 and included mainly interest income as well as realized and unrealized gains from currency hedging transactions. Finance expenses amounted to € 0.4 million (2014: € 0.2 million) and resulted mainly from realized and unrealized losses from currency hedging transactions.

Taxes

The Group reported income tax expenses of € 5.7 million in 2015 (2014: tax benefit of € 1.3 million) consisting of current tax expenses of € 4.2 million and deferred tax expenses of € 1.5 million.

Consolidated Net Profit/Loss for the Period

In 2015, the Company generated a net profit of € 14.9 million (2014: net loss of € – 3.0 million). The basic net result per share for 2015 is € 0.57 (2014: € – 0.12).

Multi-Year Overview – Income Statement

04 TABLE Multiple-Year Overview – Income Statement1

in million € 2015 2014 20132 20122 20112
Revenues 106.2 64.0 78.0 51.9 82.1
Research and Development Expenses 78.7 56.0 49.2 37.7 55.9
General and Administrative Expenses 15.1 14.1 18.8 12.1 14.9
Other Income/Expenses 4.7 0.2 (0.1) 0.3 (1.5)
EBIT 17.2 (5.9) 9.9 2.5 9.8
Finance Income/Expenses 3.4 1.6 0.8 0.6 1.4
Income Tax Income/Expenses (5.7) 1.3 (3.3) (0.7) (3.0)
Profit/(Loss) for the Year from Continuing Operations 14.9 (3.0) 7.4 2.4 8.2
Profit/(Loss) for the Year from Discontinued Operations2 0.0 0.0 6.0 (0.4) 0.01
Consolidated Net Profits/(Loss) 14.9 (3.0) 13.3 1.9 8.2

1 Differences due to rounding
2 Due to the sale of substantially all of the AbD Serotec business agreed in December 2012, line items in the income statement related to this transaction are recorded in a single line
titled “Results from discontinued operations” from the year 2011 onwards. Other line items contain the results of the continuing operations.

Financial Position

PRINCIPLES OF FINANCIAL MANAGEMENT

At MorphoSys, the primary goal of financial management is to ensure sufficient liquidity reserves at all times for the Company’s continued growth. The most important sources of this liquidity are the cash inflows from the operating business and commercial operations. Cash flowCash flow: Key performance indicator in the cash flow statement used to assess the financial and earning capacity projections and scenarios are used to determine the level of liquidity needed.

CASH FLOWS

The net cash outflow from operating activities in 2015 totaled € 23.5 million (2014: cash outflow of € 14.2 million).

In 2015, the Company invested in a variety of financial assets such as available-for-sale securities and bonds and financial assets classified as loans and receivables. These investments brought cash inflows of € 86.3 million (2014: cash outflow of € 21.5 million).

In 2015, financing activities led to a cash outflow of € 4.1 million (2014: cash outflow of € 3.9 million).

INVESTMENTS

In 2015, MorphoSys invested € 1.4 million in property, plant and equipment (2014: € 2.9 million) mainly for laboratory equipment (i.e., machinery) and computer hardware. Depreciation of property, plant and equipment increased slightly to € 1.5 million (2014: € 1.4 million).

The Company invested € 7.4 million in intangible assets in 2015 (2014: € 17.6 million). Amortization of intangible assets was slightly below the prior year’s level and amounted to € 1.9 million in 2015 (2014: € 2.7 million). In 2015, impairments of € 0.02 million (2014: on patents, licenses and laboratory equipment of € 4.1 million) were recognized on patents.

LIQUIDITY

On December 31, 2015, the Company held liquid funds, marketable securities and other financial assets of € 298.4 million versus € 352.8 million on December 31, 2014.

This amount consisted of cash and cash equivalents of € 90.9 million (December 31, 2014: € 32.2 million), marketable securities and bonds of € 97.4 million (December 31, 2014: € 113.5 million) and other financial assets in the amount of € 94.6 million (December 31, 2014: € 157.0 million) that are categorized as “loans and receivables” under “other receivables” contained in “current assets.” Other investments under the category of “loans and receivables” of € 15.5 million were reported under non-current assets as of December 31, 2015 (December 31, 2014: € 50.0 million).

The decrease in marketable securities and other financial assets mainly resulted from the acquisition of the remaining shares in Lanthio Pharma B.V., the share buyback, the milestone payment to Emergent and the use of cash for operating activities in 2015.

05 TABLE Multiple-Year Overview – Financial Situation1

in million € 2015 2014 2013 2012 2011
Net Cash Provided by/Used in Operating Activities2, 4 (23.5) (14.2) 89.1 1.8 27.1
Net Cash Provided by/Used in Investing Activities4 86.3 (21.5) (193.9) (12.1) (18.1)
Net Cash Provided by/Used in Financing Activities2, 4 (4.1) (3.9) 130.6 1.6 1.3
Cash and Cash Equivalents (as of 31 December)3 90.9 32.2 71.9 40.7 54.6
Available-for-sale Financial Assets 64.3 106.0 188.4 79.7 79.8
Bonds, Available-for-sale 33.1 7.5 11.1 0.0 0.0
Financial Assets Categorized as Loans and Receivables, Current Portion 94.6 157.0 119.3 10.0 0.0
Financial Assets Categorized as Loans and Receivables, Net of Current Portion 15.5 50.0 0.0 0.0 0.0

1 Differences due to rounding
2 In 2011, purchases of derivative financial instruments and proceeds from the sale of derivative financial instruments were reclassified from financing activities to operating activities
in the statement of cash flows. In order to provide comparative information for the previous year, the figures for 2010 have been adjusted accordingly.
3 In 2012, € 5.3 million in cash and cash equivalents was recorded under assets of disposal group classified as held for sale.
4 In 2015, interest paid and interest received were reclassified from operating activities into investing activities and financing activities in the statement of cash flows. In order to provide comparative information for the previous year, the figures for 2014 have been adjusted accordingly.

Net Assets

ASSETS

As of December 31, 2015, total assets amounted to € 400.1 million and were € 26.4 million lower compared to December 31, 2014 (€ 426.5 million). Current assets declined by € 22.3 million. The rise in cash and cash equivalents and available-for-sale bonds was overcompensated by the use of cash for operating activities in 2015, the cash payment of € 20.0 million for the acquisition of the remaining shares in Lanthio Pharma B.V. and the decline in accounts receivable.

Most of the cash and cash equivalents were invested in various securities. As of December 31, 2015, an amount of € 64.3 million (December 31, 2014: € 106.0 million) was invested in various money market funds and reported under “available-for-sale financial assets.” The item “bonds, available-for-sale” contained bonds totaling € 33.1 million (December 31, 2014: € 7.5 million). Financial instruments totaling € 94.6 million (December 31, 2014: € 157.0 million) were allocated to the category “loans and receivables.” These instruments were mainly term deposits with either fixed or variable interest rates.

Non-current assets declined by € 4.1 million year-on-year to € 100.0 million due to the reclassification of cash invested in longterm assets to current assets because maturities had fallen below 12 months. The effect of this reclassification was largely compensated by the rise in R&D programs under development of € 32.7 million from the purchase of preclinical programs through the acquisition of Lanthio Pharma B.V. and a milestone payment to Emergent. The preclinical program MOR107 (formerly LP2) as well as three further molecules at an earlier stage of development acquired through the acquisition of Lanthio Pharma B.V. have been part of MorphoSys’s proprietary portfolio since May 2015.

LIABILITIES

Current liabilities declined from € 32.7 million on December 31, 2014 to € 27.5 million on December 31, 2015. This effect mainly resulted from a decrease in the item “deferred revenue, net of current portion” and was partially compensated by higher accounts payable and accrued expenses.

Non-current liabilities (December 31, 2015: € 9.9 million; December 31, 2014: € 45.0 million) declined by € 35.1 million year-onyear mainly due to the recognition of deferred revenues through profit and loss after the termination of the co-development and co-promotion agreement with Celgene for the MOR202 program.

STOCKHOLDERS’ EQUITY

As of December 31, 2015, Group equity totaled € 362.7 million compared to € 348.8 million on December 31, 2014.

The number of shares issued totaled 26,537,682 as of December 31, 2015, of which 26,103,012 shares were outstanding (December 31, 2014: 26,456,834 shares issued and 26,005,944 shares outstanding).

The number of authorized ordinary shares increased from 4,957,910 on December 31, 2014 to 13,206,421 as a result of the creation of € 10,584,333 in new Authorized Capital 2015-I and the cancellation of € 2,335,822 in Authorized Capital 2013-I at the Annual General Meeting on May 8, 2015.

The number of ordinary shares of conditional capital declined from 7,166,848 to 7,086,000 after the exercise of 80,848 conversion rights in 2015.

The value of treasury stock increased from € 14,251,962 on December 31, 2014 to € 15,827,946 on December 31, 2015 mainly as the result of MorphoSys’s repurchase of 88,670 of its own shares on the stock exchange. The repurchase, which totaled € 5,389,984, was carried out at an average share price of € 60.79. Brokerage fees for the repurchase totaled € 2,947. The effect of this repurchase was offset by the transfer of 104,890 of the Company’s own shares from the 2011 long-term incentive plan (LTI plan) amounting to € 3,816,947 to the Management Board and Senior Management Group. The vesting period for this LTI program expired on June 1, 2015. As of December 31, 2015, the Company held a total of 434,670 of its own shares.

Financing

As of December 31, 2015, the Company’s equity ratio had risen to 91 % compared to 82 % on December 31, 2014. The Group is currently not financed by debt.

Off-Balance Sheet Financing

MorphoSys does not use any off-balance sheet financing instruments such as the sale of receivables, asset-backed securities, sale-and-leaseback transactions or contingent liabilities in combination with non-consolidated special-purpose entities.

Credit Rating

There is no agency currently assessing the creditworthiness of MorphoSys.

Multi-Year Overview – Balance Sheet Structure

06 TABLE Multi-Year Overview – Balance Sheet Structure11

in million € 12/31/2015 12/31/2014 12/31/2013 12/31/2012 12/31/2011
Assets
Current Assets 300.1 322.4 406.6 142.9 153.9
Non-current Assets 100.0 104.1 41.1 40.6 73.7
Assets of Disposal Group Classified as Held for Sale 0.0 0.0 0.0 40.9 0.8
Total 400.1 426.5 447.7 224.3 228.4
Equity and Liabilities
Current Liabilities 27.5 32.7 35.4 11.9 23.8
Non-current Liabilities 9.9 45.0 60.1 6.6 7.5
Liabilities of Disposal Group Classified as Held for Sale 0.0 0.0 0.0 3.7 0.0
Stockholders’ Equity 362.7 348.8 352.1 202.0 197.1
Total 400.1 426.5 447.7 224.3 228.4

1 Differences due to rounding

Comparison of Actual Business Results to Forecasts

In the 2015 reporting year, MorphoSys demonstrated solid financial performance. The revenue and earnings targets published at the start of the financial year were revised in March 2015 following the termination of the cooperation with Celgene to develop MOR202. The full recognition of deferred revenue from the original agreement and a one-time payment from Celgene prompted an upward revision in the revenue and earnings forecasts. The related projected costs for proprietary research and development were also raised.

A detailed comparison of our forecasts with the actual results can be found in Table 7.

07 TABLE Comparison of Actual Business Results to Forecasts

2015 Targets 2015 Results
Financial targets Group revenue between € 101 million and € 106 million (initial guidance € 58 million to € 63 million, updated on March 26, 2015 with the announcement of termination of Celgene cooperation) Group revenue of € 106.million
Expenses for proprietary product and technology development of € 56 million to € 63 million (initial guidance € 48 million to € 58 million, updated on March 26, 2015 with the announcement of termination of Celgene cooperation) Expenses for proprietary product and technology development of € 56.6 million
EBIT of € 9 million to € 16 million (initial guidance € – 20 million to € – 30 million, updated on March 26, 2015 with the announcement of termination of Celgene cooperation) EBIT of € 17.2 million
Proprietary Development MOR208
  • Continuation of the phase 2 study in NHL and B-ALL*
  • Initiation of further combination studies in NHL
MOR208
  • Presentation of clinical data from the ongoing phase 2a study in NHL at the ASCO Annual Meeting in May/June, the EHA conference in June and the annual ASH meeting in December
  • Planned initiation of further combination studies in 2016 based on data presented in the 2015 financial year
MOR202
  • Continuation of the phase 1/2a study in additional cohorts and combination studies with pomalidomide and lenalidomide
MOR202
  • Presentation of clinical data from the ongoing phase 1/2a study at the ASCO Annual Meeting in May/June, the EHA conference in June and the annual ASH meeting in December
  • Initiated treatment of additional patient groups in combination with pomalidomide or lenalidomide shortly after financial year end
MOR209/ES414
  • Initiation of phase 1 trial in mCRPC under the cooperation with Emergent
MOR209/ES414
  • Initiation in March 2015 of a phase 1 trial in up to 130 patients suffering from mCRPC
Partnered Discovery Progress of partnered development programs
  • Net addition of five partnered programs
  • Initiation of a phase 2 clinical study with the HuCAL antibody guselkumab (CNTO1959) in psoriasis arthritis by partner Janssen
  • Initiation of a phase 1 trial of a HuCAL antibody in the field of blood disorders by partner Novartis
  • Exercise of the option by partner Heptares to initiate its own therapeutic antibody program under an existing research alliance
  • Initiation of a phase 1 trial of the HuCAL antibody BAY1093884 in the field of bleeding disorders by partner Bayer HealthCare

The Management Board’s General Assessment of Business Performance

The 2015 financial year marked a successful year for the Group overall, even though not all targets were reached. We made solid progress in growing our pipeline and raised our number of development programs to 103 by the end of 2015 (2014: 94).

The Group’s revenue increased to € 106.2 million in the 2015 financial year, and EBIT grew to € 17.2 million. The rise in revenue and the positive operating result were mainly driven by the recognition of deferred revenues arising from the termination of the Celgene cooperation. Net cash outflows from operating activities in 2015 totaled € 23.5 million. These outflows stemmed from increased investment in the proprietary R&D, in line with expectations. The equity ratio of 91 % and liquidity of € 298.4 million underscore the Group’s very sound financial position.

The number of development programs in the Proprietary Development segment increased to 14. Promising results from preclinical and clinical studies of MOR202 and MOR208 were presented at major medical conferences. MorphoSys is developing both of these programs independently after the cooperation with Celgene to develop MOR202 ended in March. In the first quarter, MOR209/ES414 commenced clinical development, and GSK announced the initiation of an additional study of MOR103 in osteoarthritis. The acquisition of Lanthio Pharma added four development candidates to MorphoSys’s portfolio. Collaborations with Immatics, Heptares and G7 give the Company broader access to innovative targets to be validated as part of our R&D activities.

Solid progress was also made in our Partnered Discovery segment. The number of programs in this segment increased to 89, with three of these programs in clinical phase 3 studies, nine antibody programs in clinical phase 2 and a further nine development candidates in clinical phase 1.

Accounting Judgements

In preparing the 2015 consolidated financial statements, no accounting policies or accounting options were used that differ from those in prior years and that, if used or exercised differently, would have had a material effect on the Company’s net assets, financial position or balance sheet structure. Information on the effects of the Management Board’s use of estimates, assumptions and judgments can be found in the Notes to the Consolidated Financial Statements.

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