Outlook and Forecast

MorphoSys is increasingly focusing on the development of its proprietary therapeutic antibodies. These activities are supplemented by numerous partnered programs. By maximizing the number of development programs, MorphoSys raises its future growth potential and limits the overall risk inherent in developing novel drugs.

General Statement on Expected Development

MorphoSys’s strategic focus is on the development of a broad and sustainable pipeline of innovative drug candidates, both on a proprietary basis and with partners. The development of drug candidates is based on MorphoSys’s established and proven technologies and the Company continues to invest in their development. In the therapeutic area, the commercialization of these technologies provides contractually secured cash flows from long-term partnerships with major pharmaceutical companies. MorphoSys also benefits from the successful development of drug candidates through milestone payments and royalties from product sales as soon as the drugs are commercialized.

Revenues from R&D funding, license and milestone payments and a strong liquidity position enable the Company to build its commercial operations by investing in the development of proprietary drugs and technologies. The Management Board expects the following developments in 2016:

  • Higher investment in proprietary product candidates by initiating further clinical studies.
  • Continued expansion of proprietary development activities through in-licensing and possibly also through company acquisitions as well as co-development or new proprietary development activities.
  • New strategic agreements based on proprietary technologies focused on gaining access to innovative target molecules and compounds.
  • Investments in technology development to maintain the Company’s lead in the field of antibodies and related technologies, such as lanthipeptides.
  • Expansion of the therapeutic antibody pipeline as part of the partnership with Novartis.

Strategic Outlook

MorphoSys’s business model is based on its proprietary technologies, including the HuCALHuCAL: Human Combinatorial Antibody ­Library; proprietary antibody ­library enabling rapid generation of ­specific human antibodies for all ­applications and YlanthiaYlanthia: The novel next-generation antibody platform of MorphoSys antibody libraries, the SlonomicsSlonomics: DNA engineering and protein library generation platform acquired by MorphoSys in 2010 platform and the lanthipeptide library. We use these technologies to develop innovative drug candidates so that patients have access to better treatment alternatives. MorphoSys’s management intends to continue expanding the Company’s proprietary portfolio of drug candidates and increase its investment in its proprietary development portfolio. MorphoSys will also continue to concentrate on using and expanding its technologies in fast-growing, innovation-driven areas of the life sciences sector.

In the Proprietary Development segment, MorphoSys develops proprietary therapeutic antibodies and peptides, primarily in the areas of inflammatory diseases and oncology. Decisions to enter into alliances to develop MorphoSys’s proprietary candidates will be made on an individual basis. In some cases projects can remain in proprietary development for a longer period – even until their commercialization.

The Partnered Discovery segment generates contractually secured cash flows based on long-term cooperation agreements. The partnership with Novartis is responsible for the majority of development candidates. This partnership is scheduled to end in December 2017 with an option for Novartis to extend it for an additional two years. The development of candidates from this partnership and others continues even after the contract expires and can lead to further milestone payments. The Company’s broad pipeline promises an impressive number of market-ready, therapeutic antibodies in the coming years and financial participation in the form of royalty payments from product sales. Results from phase 3 trials of two product candidates are expected in 2016. If the study results are positive, the antibodies could receive approval as early as 2016/2017

For the foreseeable future, MorphoSys plans to invest a substantial portion of its financial resources in proprietary R&D. Management believes that this is the best way to expand the Company’s portfolio of proprietary development candidates and strengthen its technology platform and thereby, maximize shareholder value.

Expected Economic Development

The International Monetary Fund (IMF) expects the growth of the global economy in 2016 to be higher than in 2015 but, because of increasing global risk, growth is anticipated to be lower than previously expected. In its January forecast, the IMF estimates growth will reach 3.4 % in the current year (2015: 3.1 %), whereas in its fall 2015 forecast the IMF still expected growth of 3.6 %. The reasons given for the higher level of economic uncertainty at the start of the year were the ongoing slowdown in China and several other emerging markets, the sharp drop in oil and commodity prices and the unpredictable impact of the refugee crisis. The global economy and the capital markets were also shaken by the massive declines in stock markets in the first few weeks of the year.

Based on reduced growth prospects in the emerging economies, the economic outlook was further reduced by other institutions. In its latest update from February 2016, OECD reduced its estimate for global growth to 3.0 % (previously 3.3 %).

The advanced economies should grow by a total of 2.1 % on average in 2016 compared to the previous year (2015: 1.9 %). The IMF expects Germany to grow 1.7 % in 2016 (2015: 1.5 %), which is the average rate expected for the eurozone (2016: 1.7 %, 2015: 1.5 %), but below European countries such as Spain and Great Britain. Europe’s growth is expected to be more consumer-led rather than export-led because the very low level of inflation coupled with sluggish growth in the emerging markets will pressure exports. The US economy is expected to remain more robust and could reach growth of 2.6 % (2015: 2.5 %). In 2016, the emerging markets are expected to achieve overall growth of 4.3 % following 4.0 % in 2015 but will still be pressured by weaker growth in China, which the IMF has estimated at 6.3 % (2015: 6.9 %). There is also some concern about Brazil, which is expected to remain in a deep recession (2016: -3.5 % versus 2015: -3.8 %), and Russia, whose economy is also expected to shrink (2016: -1.0 % versus 2015: -3.7 %).

Expected Development of the Life Sciences Sector

After four years (2012 – 2015) of outstanding performance for biotechnology shares, during which the Nasdaq Biotechnology IndexNasdaq Biotechnology Index: stock market index made up of biotechnological or pharmaceutical companies listed at the US stock exchange NASDAQ more than tripled, the industry news service BioCentury expects the sector’s performance in 2016 to be more in line with the overall market. The sector’s volatility is expected to increase because of potential discussions during the US presidential campaign on price controls in the pharmaceutical industry. The sector has already come under massive pressure on the stock markets in early 2016 with the Nasdaq Biotechnology Index falling to a 15-month low. The significantly greater volatility of the capital markets means that it has become more difficult to forecast development of the sector’s financing conditions in 2016.

Fundamentally, the sector is still on a strong footing. Scientific advances and a growing understanding of biological relationships, such as those in combination therapies in the area of immunooncology, coupled with a continued high unmet medical need particularly in the areas of cancer and rare diseases, lead industry experts to expect more innovation and new drug approvals. After an exceptional year 2015 in which the FDAFDA: Food and Drug Administration; US ­federal agency for the supervision of food and drugs granted 45 approvals, BioCentury has already listed a potential 35 approvals for the year 2016.

Expected Business Development

MorphoSys will use the majority of the proceeds from the Novartis contract, which are guaranteed until at least the end of November 2017, and its strong liquidity position to concentrate on expanding and increasing the value of its development pipeline.

The Company expects the Partnered Discovery segment to start ten new partnered programs every year on average until the end of 2017. The customary attrition rates in drug development mean that the net growth of the overall pipeline, however, will be somewhat lower. The Company aims to enter new partnerships with pharmaceutical and biotechnology companies based on the Ylanthia technology. These collaborations and those with academic institutes are also expected to provide access to new target molecules and technologies.

In a best-case scenario, the Company may see the first approval of a therapeutic antibody from one of its partnerships in 2016. Results from a phase 3 study of bimagrumab (BYM338) are expected in the first half of 2016. Novartis is solely responsible for the development of this antibody and recently announced that it will seek approval in 2016 if the study results are positive. An application for approval might also be submitted for guselkumab (CNTO1959), being developed by Janssen.

Expected Personnel Development

The number of employees in the Proprietary Development and Partnered Discovery segments is expected to remain stable during the 2016 financial year.

Future Research and Development

The Company’s R&D budget for proprietary drug development will rise significantly again in the 2016 financial year compared to the prior year. The majority of investment will fund the clinical development of the most advanced drug candidates MOR208, MOR202 and MOR209/ES414. Further investment is planned in the areas of target molecule validation and antibody and technology development.

The steps planned for the Company’s proprietary portfolio in 2016 are expected to include:

  • Initiation of the L-MIND combination study of MOR208 in combination with lenalidomide in DLBCLDLBCL: diffuse large B cell lymphoma, a subform of NHL
  • Initiation of a safety evaluation of MOR208 in combination with bendamustine (B-MIND); this study is expected to be transitioned into a pivotal phase 3 study in 2017 in which MOR208 in combination with bendamustine is tested in comparison to rituximab and bendamustine
  • Initiation of the combination study of MOR208 in combination with idelalisib in CLLCLL: Chronic lymphocytic leukemia; most common type of cancer of the blood and bone marrow, affecting the B cells
  • Continuation of the phase 1/2a study of MOR202 with additional patients and a recommended dosage of 16 mg/kg alone and in combination with pomalidomide and lenalidomide
  • Continuation of an adapted phase 1 trial of MOR209/ES414 in mCRPC as part of the cooperation with Emergent
  • Continuation and initiation of a phase 1 study of the MOR106 co-development program with Galapagos
  • Initiation of a phase 1 study of MOR107
  • In-licensing of one or more target molecules or compounds to reinforce the proprietary portfolio
  • Further development of the lanthipeptide technology
  • Initiation and continuation of new development programs in the field of antibody identification and preclinical development

Expected Development of the Financial Position and Liquidity

MorphoSys has a solid financial base and predictable revenues that stem mainly from its collaboration with Novartis. Additionally, MorphoSys receives performance-based milestone payments for the successful development of product candidates. Based on these factors, the Management Board expects Group revenue for the 2016 financial year in the range of € 47 million to € 52 million. This forecast does not include any additional revenue from new collaborations. The majority of the Group’s revenue is expected to be generated by the Partnered Discovery segment.

Based on management’s current projections, R&D expenses for proprietary programs and technology development in 2016 should be in the range of € 76 million to € 83 million. MorphoSys plans to initiate further clinical studies in addition to continuing the current ongoing studies for MOR208, MOR202 and MOR209/ES414. R&D expenses in the Partnered Discovery segment are expected to be at roughly the same level as the previous year.

The Company’s EBIT in 2016 is expected to be in the range of € – 58 million to € – 68 million. This guidance does not include any potential in-licensing or co-development of further development candidates. The Partnered Discovery segment is expected to generate operating results in 2016 at roughly the same level as the previous year. MorphoSys anticipates the Proprietary Development segment to report a significant loss brought on by higher expenses for proprietary R&D.

In the years ahead, there will be an increasing impact on net assets and the financial position from one-time events, such as in-licensing and out-licensing proprietary product candidates, major milestone payments as well as royalties related to HuCAL or Ylanthia antibodies that reach the market. Just as failures in drug development can have a negative impact on the MorphoSys Group, these types of events can lead to a significant change in our financial targets. Near-term revenue growth depends on the Company’s ability to enter new partnerships and/or out-license proprietary programs. RoyaltiesRoyalties: Percentage share of ownership of the revenue generated by drug products for commercialized products could start contributing to revenue growth as of 2017.

At the end of the 2015 financial year, MorphoSys had liquid funds of € 298.4 million (December 31, 2014: € 352.8 million). This decline resulted from proprietary R&D expenses as well as the acquisition of the remaining shares in Lanthio Pharma B.V. The projected loss in 2016 will cause the liquidity position to decline even further. MorphoSys considers its solid cash position as an advantage that can be used to accelerate its future growth through strategic activities, such as in-licensing compounds and investments in promising companies. The funds can also be used for increased research and development in the Company’s portfolio of drug candidates.

DIVIDEND

Based on German accounting principles, MorphoSys’s financial statements report an accumulated profit that could be used for dividends. Based on the expected losses in 2016, the Company no longer expects to report any accumulated income. MorphoSys will continue investing in the development of proprietary drugs and intends to do further in-licensing and acquisitions so that it can continue creating shareholder value and open up new growth opportunities. For this reason, the Company does not expect to pay a dividend in the foreseeable future.

This outlook is based on Management Board assumptions and factors that were known at the time of preparing this Annual Report that could influence the Company in 2016 and beyond. Future results may differ materially from the expectations described in the section “Outlook and Forecast.” Key risks are described in the risk report.

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