Sustainable Business Development

At MorphoSys, sustainability is a value firmly anchored in the Company’s corporate culture to ensure it acts in an environmentally and socially responsible manner for the benefit of present and future generations. Complying with the highest ethical, social and environmental standards goes hand in hand with long-term economic success. This section describes the measures taken in the reporting year to ensure the Company meets these standards. To ensure compliance with these standards, MorphoSys uses selected non-financial performance indicators in addition to the financial performance indicators discussed in the section “Analysis of Net Assets, Financial Position and Results of Operations”. The Corporate Governance Report details MorphoSys’s management structure and corporate governance practices.

Sustainable Corporate Management

Sustainability is a hallmark of MorphoSys’s corporate management and plays a major role in the pursuit of corporate goals and contributing value to society. This applies to the short- and longterm objectives of all levels of management and is reflected in the Company’s core task of developing even more effective and safer drugs. To ensure lasting business success, the Company incorporates environmental and social responsibility into its daily business and bases its business model on sustainable growth that protects the interests of its shareholders, creates long-term value and weighs the Company’s actions in terms of their impact on the environment, society, patients and employees. Internally, this business model is reflected in a progressive human resources policy that takes employees’ needs seriously.

The Company’s long-term and sustainable business success rests on innovative research and development to meet the major challenge of providing comprehensive healthcare in the future. Because of a growing and aging population, biotechnology-derived drugs represent a growing portion of the overall healthcare system. In the opinion of management, all aspects of the current business model of MorphoSys support the sustainable investment interests of its shareholders.

A comprehensive risk management system ensures that factors that could threaten sustainable corporate performance are identified early and corrected if necessary. MorphoSys only assumes risk when there is an opportunity to increase the Company’s enterprise value. At the same time, a great effort is made to systematically identify new opportunities and leverage its business success (more information on risks and opportunities can be found here).

Group-wide compliance with the sustainability strategy is monitored by the entire Management Board, chaired by the Chief Financial Officer. The Code of Conduct’s credo, which is available in German and English and applies to employees group-wide, regulates the strategy’s implementation in daily operations. Employee training on general and specific sections of the Code of Conduct is conducted regularly to ensure that the guidelines are understood and implemented. The Code of Conduct Committee consists of four members (a Chairperson and three other members) and is available to employees at all times. A Compliance Officer coordinates MorphoSys’s Compliance Management System. Detailed information on this subject can be found on page 78 of the Corporate Governance Report. Employees can ask for advice on all matters concerning legal compliance and corporate responsibility and report any suspected violations. This may be done on an anonymous basis, if preferred. Violations are systematically pursued and appropriate remedial action is taken. No such violations have been reported to date, and the Company believes it is unlikely in the future that any serious offenses would occur that could materially affect the Group’s net assets, financial position and results of operations.

Detailed information on the KPIs for sustainable development used by MorphoSys is provided in the section “Strategy and Group Management”. The following report on the implementation of MorphoSys’s corporate strategy and the Company’s sustainable business development is based on the recommendations of the German Sustainability Code originally presented by the Council for Sustainable Development in October 2011 and updated in January 2015.

Non-Financial Performance Indicators

ETHICAL STANDARDS AND COMMUNICATION WITH STAKEHOLDERS

The highest scientific and ethical principles for conducting human clinical trials and animal testing are anchored in MorphoSys’s Code of Conduct, which is modeled after the “Declaration of Helsinki” of the World Medical Association (WMA). Strict adherence to applicable national and international regulations is mandatory for all MorphoSys employees and sub-contractors.

Because European legislation prescribes the performance of animal testing to determine the toxicity, pharmacokinetics and pharmacodynamics of drug candidates, the biotechnology industry cannot forgo this type of testing. Animal studies for MorphoSys are given to contract research organizations (CROs) because the Company does not have laboratories suitable for this type of research. In the course of product development, MorphoSys contracts out animal studies according to the principles of good animal welfare and the respectful treatment of animals as set out in national and European regulations. MorphoSys introduced a quality assurance and control system with written standard operating procedures (SOPs) that are continually updated to ensure that the Company only contracts with contract research organizations that adhere to local, national and international regulations for animal studies. Studies are carried out only after the approval of the relevant ethics committee and under the constant supervision of a veterinarian.

Institutes cooperating with MorphoSys must comply with ethical principles and legal regulations for research involving animals and, within certain circumstances, have the Good Laboratory Practice (GLPGLP: Good laboratory practice; a formal framework for the implementation of safety tests on chemical products) quality assurance certification. This is how MorphoSys ensures it fulfills its moral obligation for the respectful treatment of animals. The Company also conducts on-site inspections of the research institute’s study centers that include a review of the staff’s skills and training as well as animal welfare. These inspections are carried out during the audits conducted prior to contract awards.

The Declaration of Helsinki mentioned above also defines the ethical principles MorphoSys follows when dealing with healthy volunteers and patients in clinical trials. MorphoSys carries out clinical trials in accordance with Good Clinical Practice (GCPGCP: Good clinical practice; an inter­national ethical and scientific quality standard for ­designing, conducting, recording and reporting trials that involve the participation of ­human subjects), and testing is conducted in compliance with the relevant provisions on privacy and confidentiality. Protecting the rights, safety and welfare of all clinical trial participants has the highest priority at MorphoSys. Clinical trials are initiated only after the approval of the relevant independent ethics committee and/or institutional review board. Before participating in a clinical trial, each participant must voluntarily submit an informed consent.

The goal of MorphoSys’s business activities is to improve patients’ health through its scientific work. The Company can only achieve this goal if its activities are socially accepted. Achieving this acceptance requires continuous and open dialog with stakeholders so that MorphoSys can understand potential concerns with regard to biotechnological approaches and explain the Company’s activities and their benefits. To this end, MorphoSys is active in a variety of ways that range from participation in public information events to active support of the Communication and Public Relations task force of BIO Deutschland e.V.

PROCUREMENT

The Central Purchasing and Logistics Department is responsible for purchasing external goods, consulting and services for MorphoSys in specified areas. New systems and processes were introduced during the reporting year to improve efficiency and reduce purchasing costs. This department reinforced MorphoSys’s position in key areas by introducing special framework agreements and establishing preferred partnerships with suppliers. All suppliers selected by MorphoSys agree to comply with all anticorruption standards, human rights practices and internationally recognized labor standards and data protection laws.

ENVIRONMENTAL PROTECTION AND OCCUPATIONAL SAFETY

Because the biotechnology industry is subject to stringent regulatory requirements, environmental protection and occupational safety are important tasks of Group management. The Environmental Protection and Occupational Safety Department monitors compliance with all relevant requirements. In addition to strict compliance with all legal requirements, MorphoSys makes a tremendous effort to maintain sustainable environmental management and the effective protection of its employees.

For the seventh consecutive year, the Company took part in a survey conducted by the Carbon Disclosure Project (CDP), an independent non-profit organization whose aim is to reduce greenhouse gases and ensure the sustainable use of water. As in previous years, the study results showed that there is no need for the Company to take any action. The results are used for the current monitoring of consumption and provide an additional control indicator.

MorphoSys was certified for the sixth consecutive year as a “bicycle- friendly company” for its participation in the “Bike to Work” initiative sponsored by the German Bicycle Club (ADFC) and a German health insurance company. MorphoSys also offers employees an extensive range of preventative healthcare options, such as autogenic training, ball sports, weight training and marathons.

With one reportable occupational accident in the reporting year, the number of accidents remained below the previous year’s low level of two accidents and placed the ratio of reportable accidents at MorphoSys significantly below the average ratio in Germany (22.3 reportable occupational accidents per 1,000 full-time employees in the latest survey conducted in 2014).

MorphoSys tries to minimize the amount of harmful substances used in its laboratories. Only those who are specially trained are allowed to work with toxins. Work involving contagious pathogens can only be carried out in secure laboratories. MorphoSys only uses certified companies to dispose of chemical waste and also refrains from labeling antibodies with radioactive substances.

11 Figure Occupational Safety at MorphoSys

QUALITY ASSURANCE

Biopharmaceutical companies bear a special responsibility to comply with the highest quality and safety standards. MorphoSys follows detailed procedures and stringent rules in drug development to avoid safety risks that may pose a threat to patients and, in turn, the Company’s financial situation. This is how the Company ensures the quality of the investigational medicinal products, keeps risks to volunteers and patients in clinical studies as low as possible and assures that the data are measured reliably and processed correctly.

To control and regulate these processes in its own development department, MorphoSys created an integrated quality management system that complies with the principles of Good Manufacturing Practice (GMPGMP: Good management practice; term for the control and management of manufacturing and quality control testing of pharmaceutical products and medical devices), Good Clinical Practice (GCP) and Good Laboratory Practice (GLP). An independent quality assurance department ensures that all development activities comply with national and international laws, rules and guidelines. The Quality Assurance Manager reports to and coordinates activities with the Chief Executive Officer to meet the stringent quality standards, ensure product quality and data integrity as well as the safety of volunteers and patients in clinical trials.

The Quality Assurance Department prepares an annual review plan using a risk-based approach that is used when auditing the contract research institutes, suppliers and contract manufacturers selected for clinical studies as well as MorphoSys’s own departments.

MorphoSys holds a manufacturing license for the approval of tested compounds for its proprietary development activities and was also issued a certificate from the German authorities of Upper Bavaria confirming the Company’s compliance with Good Manufacturing Practice (GMP) standards and guidelines.

12 Figure Quality Management System at MorphoSys

INTELLECTUAL PROPERTY

Proprietary technology and the drug candidates derived therefrom are MorphoSys’s most valuable assets. Therefore, it is critical to the Company’s success that these assets are protected by patents and other appropriate measures so that they may be utilized exclusively and effectively.

MorphoSys’s core technologies – HuCALHuCAL: Human Combinatorial Antibody ­Library; proprietary antibody ­library enabling rapid generation of ­specific human antibodies for all ­applications, YlanthiaYlanthia: The novel next-generation antibody platform of MorphoSys, SlonomicsSlonomics: DNA engineering and protein library generation platform acquired by MorphoSys in 2010 and lanthipeptide technology – form the Company’s basis for success. Each single technology is protected by a number of patent families that are complemented by various independent technology patents. Most of these have now been issued in all major markets, including Asian markets such as China.

Our development program portfolio was also strengthened this past financial year through the acquisition of Lanthio Pharma and the related development of the MOR107 drug candidate. This program, like other proprietary drug programs, is protected by the appropriate patents and applications. The development candidates MOR103 (out-licensed to GSK) and MOR202 are each protected by more than half a dozen issued patents and patent applications that cover various aspects of the compounds and provide effective protection. The relevant patents and associated protection certificates are expected to expire in 2031. The MOR208 program is also protected by various patents scheduled to expire in 2029 (US patent) and 2027 (European patent), excluding any consideration given to possible regulatory or patent office extensions. Patent applications covering MOR209/ES414 are scheduled to expire in 2032 at the earliest, also without giving any consideration to possible regulatory or patent office extensions.

The programs developed in cooperation with or for partners are also fully secured by patent protection. MorphoSys’s patent department works closely with the relevant partners. Patents covering all drug development programs have durations that significantly exceed those of the underlying technologies.

MorphoSys’s patent lawyers are currently maintaining over 50 different patent families worldwide in addition to the numerous patent families the Company pursues with its partners. The patent portfolio is routinely analyzed and adapted to the Company’s corporate strategy.

HUMAN RESOURCES

MorphoSys operates a progressive human resources policy for the long-term retention of professionally and personally suitable employees from a variety of fields. In an industry such as the biotechnology industry, in which success is largely dependent on the creativity and commitment of staff, employee retention and satisfaction are crucial success factors. At the end of the reporting year, MorphoSys had employees representing 29 different nationalities (2014: 22) employed at the Company for an average of 6.0 years (2014: 5.8 years).

13 Figure Employees by Gender (2015)

14 Figure Seniority (average duration in years)

Employees have access to a broad range of in-house and external training programs, advanced education, specialized continuing education and development programs as well as industry conferences. MorphoSys promotes not only ongoing professional education but also the personal development of its employees and, in individual cases, even offers support through customized coaching.

MorphoSys requires all executives with management responsibility to take part in management seminars created exclusively for the Company. The training is based on several thematically related components that aim to provide not only theoretical knowledge but also prepare participants for the special demands placed on the Company’s executives. As in previous years, all executives in the reporting year took part in an external workshop that fully addressed the challenges of management under the motto “Mission: Management.”

MorphoSys also actively promoted the professional career paths of specialists and experts during the reporting year. The goal of this type of career promotion – also for those without personnel responsibilities – is to maintain flat hierarchies and put traditional management and professional career paths on an equal footing, also in terms of titles and compensation structures.

MorphoSys offers in-house vocational training to open up promising career prospects, particularly for young people. In awarding apprenticeships, the Company has been very successful in considering students who are equally suitable but do not have a diploma. On December 31, 2015, MorphoSys had three trainees in the IT department and six biology laboratory trainees (December 31, 2014: two IT trainees; six biology laboratory trainees).

Transparent communication among employees is a central aspect of MorphoSys’s corporate culture as stated in the Company’s credo. In meetings held every two weeks, the Management Board presents the Company’s recent developments and answers questions, and employees are given the opportunity to present selected projects. Questions and feedback from the staff can be taken directly in the meeting or submitted in advance in writing – anonymously if desired. The Company’s intranet was technologically and conceptually redesigned in the reporting year to streamline internal communication. The new design ensures that the Company is using the latest generation of document management systems and applications. Employees have access to a broader range of information on external communication especially created for the internal target group.

To improve employer branding, MorphoSys started a Facebook career page in March 2015. The target group is potential applicants who want to gain a better understanding of the Company. Employee profiles and information on a variety of activities that extend beyond a typical workday are presented to give an authentic and positive impression of the Company.

MorphoSys helps new employees become more familiar with the Group through extensive onboarding activities. Employees can learn about the Company’s processes in two-day orientation seminars with presentations from all operating departments and by participating in laboratory tours.

Free sport and relaxation options, such as the recently introduced barbell weight training for strengthening the back muscles, soccer, volleyball and basketball, as well as autogenic training and massage for a fee promote health and socializing among employees across departments. All of the members of the Senior Management Group accepted an offer for free health checkups.

Feasible concepts for reconciling professional development with personal life are a strategic success factor for progressive companies and the reason MorphoSys has offered employees a diverse range of options, such as flexible work hours and special part-time employment arrangements, for many years. Modern IT equipment also allows employees to work during business trips or from their home office without interruption. MorphoSys makes it easier for employees with families to re-enter the workforce and combine work and family life. MorphoSys is also a co-founder of the “Biokids” kindergarten in Martinsried. Special arrangements for other services for working family members have also been made with a German service provider.

MorphoSys makes every effort to protect employees from workplace hazards and maintain their health through preventative measures. The extremely low number of occupational accidents illustrates the success of the Company’s strict monitoring of all occupational protection and safety measures. During the reporting year, there was one reportable occupational accident. MorphoSys tries to maintain the low number of accidents and the highest level of employee safety and well-being through the help of policies and training from the Department of Health and Occupational Safety and by offering routine medical examinations. The continued decline in the fluctuation rate during the reporting year to 4.1 % (2014: 5.6 %) is another indication of employees’ strong identification with the Company.

15 Figure Labor Turnover Rate (in %)

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