Report of the Supervisory Board
Cooperation of the Management Board and Supervisory Board
During the 2016 financial year, the Supervisory Board comprehensively performed the duties assigned to it by law, the Articles of Association, Rules of Procedure and – with one exception – the recommendations of the German Corporate Governance Code (hereinafter referred to as the “Code”). We regularly advised and continually oversaw the Management Board in its management of the Company and dealt extensively with the operational and strategic development of the Group. The Management Board fulfilled its duty to inform and furnish us with periodic written and verbal reports containing timely and detailed information on all business transactions and events of significant relevance to the Company. The Management Board prepared these reports in collaboration with the respective departments. In our committee meetings and plenary sessions, we had the opportunity to fully discuss the Management Board’s reports and the proposed resolutions. The Management Board answered our questions on strategic topics affecting the Company with a great level of detail and submitted the relevant documents in a timely manner. Any deviations from the business plan were thoroughly explained to us, and we were directly involved at an early stage in all decisions relevant to the Company.
A corresponding resolution was passed when the Supervisory Board’s approval for individual actions was required by law, the Articles of Association or the Rules of Procedure. The Supervisory Board members routinely prepared resolutions for Management Board actions requiring Supervisory Board approval based on the documentation provided in advance by the Management Board. When necessary, the Supervisory Board received the support of the relevant committees and, together with the Management Board, discussed any projects pending decision. All matters requiring approval were submitted for review to the Supervisory Board on a timely basis.
Outside of the meetings of the Supervisory Board plenum and the committees, the chairperson of the Supervisory Board regularly exchanged information and ideas with the Management Board and especially the Chief Executive Officer, Dr. Simon Moroney. The Supervisory Board chairperson was always kept promptly informed of the current business situation and any significant business transactions. The other Supervisory Board members also had regular contact with the individual Management Board members.
Key Items of Discussion at the Supervisory Board Meetings in the 2016 Financial Year
A total of nine Supervisory Board meetings were held in the 2016 financial year, whereby four meetings were conducted by telephone. With the exception of two meetings, all Supervisory Board members were present at all meetings. In urgent cases occurring outside of meetings, the Supervisory Board passed resolutions by written procedure.
In addition to the above, a one-day strategy meeting took place between the Management Board and the Supervisory Board in July 2016 that primarily addressed
- the Company’s strategic focus; and
the further development of the Company’s product portfolio and its impact on the net assets, financial position and results of operations.
During the 2016 financial year, the Supervisory Board paid particular attention to the following topics and passed resolutions on these topics after a thorough review and discussion:
the evaluation of the Company’s achievement of the 2015 financial year corporate targets, an interim review and minor adjustment to the corporate targets defined by the Supervisory Board at the end of 2015 for the 2016 financial year and defining the corporate targets for the 2017 financial year;
the filing of a patent infringement lawsuit by MorphoSys against Janssen Biotech and Genmab A/S, seeking compensation for the infringing manufacture, use and sale of Janssen’s and Genmab daratumumab’s antibody directed against CD38;
the agenda and proposed resolutions for the 2016 Annual General Meeting;
the conclusion of a strategic partnership with MD Anderson Cancer Center for the research and the development of therapeutic antibodies against cancer;
the conclusion of the strategic alliance with LEO Pharma for the development of therapeutic antibodies for the treatment of skin diseases;
the execution of a capital increase from authorized capital in which a total of 2.622,088 new shares were issued to institutional investors in Europe and North America in the context of a private placement;
- the budget for the 2017 financial year.
We also passed a resolution in the Supervisory Board plenum on the remuneration of Management Board members for the period July 1, 2016 to June 30, 2017 taking external benchmarking into consideration. We evaluated the achievement of the 2015 corporate targets that were agreed with the Management Board and dealt with the corporate targets for 2016. We commissioned an independent remuneration consultant to confirm the appropriateness of the Management Board’s compensation and its comparison to the remuneration of various levels of employees. We discussed and adopted the key performance indicators for the long-term incentive plans for both the Management Board and the Senior Management Group. We also drafted and adopted new management board agreements for Dr. Simon Moroney, Jens Holstein and Dr. Marlies Sproll. The new management board agreements will take effect on July 1, 2017, directly following the expiration of the current management board agreements and will run for a term of three years. We have also appointed Dr. Malte Peters as a new member of the Management Board and Chief Development Officer effective March 1, 2017 and have drawn up and approved a corresponding management board agreement. His first term of office will end on June 30, 2019. The former Chief Development Officer, Dr. Arndt Schottelius, has resigned as management board member with effect February 28, 2017.
Furthermore, we approved the financial statements for the 2015 financial year and the Management Board’s proposal for the appropriation of profits. We also dealt with the Corporate Governance Report as well as the Statement on Corporate Governance.
The focus of our regular discussions in the Supervisory Board’s plenary meetings were MorphoSys’s revenue and earnings development, the financial reports, the progress of the two business segments Partnered Discovery and Proprietary Development, the results and progress of the clinical programs for the development of proprietary drugs, the future development strategy and the development of new technologies. In addition, we discussed the results of the efficiency review of the Supervisory Board’s work in 2016 that was conducted by an external consultant and evaluated possibilities for improvement. And finally, we kept ourselves regularly informed with respect to the Company’s cash investment policy, risk management, internal audit results, internal control system and compliance management system.
Conflicts of Interest in the Supervisory Board
In the 2016 financial year, a potential conflict of interest within the Supervisory Board arose regarding a possible transaction that was not pursued any further. As a precautionary measure, the affected Supervisory Board member did not take part in the discussion of this issue.
Activities and Meetings of Supervisory Board Committees
To ensure that its duties are performed efficiently, the Supervisory Board has established three committees – the Audit Committee, the Remuneration and Nomination Committee and the Science and Technology Committee – to prepare the issues that fall within the Supervisory Board’s respective areas of responsibility for the Supervisory Board plenum. In each Supervisory Board meeting, the chairs of the committees report to the Supervisory Board on the committees’ work. The minutes of the committee meetings are made available to all Supervisory Board members. The composition of these committees can be found in the “Statement on Corporate Governance,” which is available on the Company’s website under the heading
“Media & Investors > Corporate Governance > Statement on Corporate Governance,”
and in the Annual Report on pages 71 to 76.
The Audit Committee
met on six occasions in the 2016 financial year (three of those meetings were held by telephone). With the exception of three meetings, all committee members were present at all meetings. The committee dealt mainly with accounting issues, quarterly reports, financial statements and consolidated financial statements. The committee discussed these topics with the Management Board and recommended the approval of the statements to the Supervisory Board. The auditor took part in three Audit Committee meetings and informed its members of the audit results. The Audit Committee also made a recommendation to the Supervisory Board with respect to the Supervisory Board’s proposal at the Annual General Meeting for the election of the independent auditor. The committee also dealt with the risk management system, the outcome of the internal audit conducted in the 2016 financial year and specific reporting issues under international accounting rules (IFRS) that are or will become relevant for the Company. The committee regularly offered advice pertaining to the Company’s cash investment policy and reviewed the Management Board’s investment recommendations.
To increase efficiency, there is a common Remuneration and Nomination Committee
, in which the committees fulfill their respective roles. The committee met on fourteen occasions in the 2016 financial year (ten of those meetings held by telephone). With the exception of two meetings, all committee members were present at all meetings. In its function as a remuneration committee, the Remuneration and Nomination Committee mainly dealt with the Management Board’s remuneration system and level of compensation. In this context, the committee also commissioned an independent remuneration expert with the task of preparing a Management Board remuneration report to verify the appropriateness of the Management Board’s remuneration. Based on this report, the committee prepared a recommendation as to the future structure of the Management Board’s compensation and submitted this to the Supervisory Board for approval. In doing so, the committee also dealt with the ratio of compensation between the Management Board and the Senior Management Group and the staff overall and had this ratio reviewed by the commissioned remuneration expert. This expert confirmed the appropriateness of the “vertical” compensation ratios. In addition, the committee gave careful consideration to the corporate targets as a basis for the Management Board’s short-term variable remuneration and offered appropriate recommendations to the Supervisory Board for resolution. The committee discussed the key performance indicators for the Management Board’s and Senior Management Group’s long-term incentive plans. In its role as a nomination committee, this committee addressed the re-appointment of Management Board members Dr. Simon Moroney, Jens Holstein and Dr. Marlies Sproll, and the appointment of Dr. Malte Peters as a new member of the Management Board. The committee also drafted the related management board agreements to be proposed by the Supervisory Board for resolution. In relation to the appointment of Dr. Malte Peters as a member of the Management Board, the Nomination Committee commissioned a recruitment agency to offer professional support in the search for a suitable Management Board candidate and, in consultation with the Supervisory Board, developed a list of candidate requirements and conducted the respective interviews with suitable candidates. In addition, the Nomination Committee dealt with the preparations for the election of a new Supervisory Board member in the framework of the Annual General Meeting 2017, which became necessary as a result of the early resignation of Ms. Karin Eastham for personal reasons taking effect at the end of the 2017 Annual General Meeting. In this context, the Nomination Committee commissioned a recruitment agency to offer professional support in the search for suitable new Supervisory Board candidates and, in consultation with the Supervisory Board, developed a list of requirements that a candidate should possess in order to be nominated to the Supervisory Board. The Nomination Committee also conducted interviews with Supervisory Board candidates and submitted its recommendation for the new Supervisory Board nomination to be proposed at the Annual General Meeting, with which the Supervisory Board agreed. Supervisory Board members Dr. Frank Morich, Mr. Klaus Kühn and Ms. Wendy Johnson, whose terms of office are set to expire at the end of the 2017 Annual General Meeting, will stand for reappointment for another term.
Science and Technology Committee
met on eight occasions during the 2016 financial year (three of those meetings were held by telephone). With the exception of one meeting, all committee members were present at all meetings. This committee dealt mainly with the progress and expansion of the Company’s portfolio, the development of new technologies and the Company’s drug development plans including the required budget resources. The discussions focused on the initiation of new development programs, the results of ongoing clinical studies for the development of proprietary drug candidates, development plans for current and planned clinical studies as well as the development strategy. The committee addressed the production of clinical trial materials for the Company’s proprietary drug candidates, the competitive and patent situations of the Company’s proprietary product candidates and discussed the Management Board’s recommendations on strengthening the portfolio. The Science and Technology Committee also dealt with the patent infringement lawsuit against Janssen Biotech and Genmab A/S.
The Supervisory Board devoted its attention to the further development of MorphoSys’s corporate governance taking into consideration the Code’s amendments made by the Government Commission German Corporate Governance Code in May 2015. The detailed Corporate Government Report, including the Corporate Governance Statement according to Sec. 289a HGB (German Commercial Code), can be found on the Company’s website under the heading
“Media & Investors > Corporate Governance > Corporate Governance Report”
and in the Annual Report on pages 71 – 93.
We also discussed with the Management Board the Company’s compliance with the Code’s recommendations and in one justified case approved an exception to the Code’s recommendations. Based on this consultation, the Management Board and the Supervisory Board submitted the annual Declaration of Conformity on December 2, 2016. The current version of the annual Declaration of Conformity can be found in this Annual Report and is permanently available to MorphoSys’s shareholders on the Company’s website under the heading
“Media & Investors > Corporate Governance > Declaration of Conformity.”
Changes in the Composition of the Management Board and Supervisory Board
There were no changes in the composition of the Management Board in the reporting period. With effect from March 1, 2017, Dr. Malte Peters was newly appointed as a member of the Management Board and Chief Development Officer. The former Chief Development Officer, Dr. Arndt Schottelius, has resigned as management board member with effect February 28, 2017.
There were no changes in the composition of the Supervisory Board in the reporting period. Ms. Karin Eastham has, however, resigned for personal reasons from her office as member of the Supervisory Board as of the 2017 Annual General Meeting.
Audit of the Financial Statements
For the 2016 financial year, the Company commissioned PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft, Munich (“PwC”) as its auditor. The audit contract was awarded by the Supervisory Board in accordance with the resolution of the Annual General Meeting on June 2, 2016. In accordance with Item 7.2.1 of the Code, the Supervisory Board obtained a declaration of independence from the auditor in advance.
The financial statements and the consolidated financial statements of MorphoSys AG, as well as the Management Report and Group Management Report for the 2016 financial year, were properly audited by PwC and issued with an unqualified Auditor’s Report. The key topics of the audit for the consolidated and separate financial statements for the 2016 financial year were the capital increase executed in November 2016, the presentation and valuation of cash investments, the valuation of the carrying amounts of goodwill and intangible assets with indefinite useful lives, the presentation and valuation of the stock option programs, the calculation of current and deferred taxes, the revenue recognition and the completeness and accuracy of the Notes.
In addition, the auditor confirmed that the Management Board has established an appropriate reporting and monitoring system that is suitable in its design and administration for the early detection of developments that could threaten the Company’s existence.
The audit reports and documents relating to the financial statements and consolidated financial statements were provided on a timely basis to all Supervisory Board members for review. The audit report, the consolidated financial statements, the Group Management Report of the MorphoSys Group and the audit report, the annual financial statements and the Management Report of MorphoSys AG were discussed in detail at the Audit Committee meeting on March 6, 2017 and the meeting of the Supervisory Board on March 7, 2017. The auditor attended all meetings concerning the financial statements and reported on the key results of his audit. The auditor also explained the scope and focus of the audit and was available to the Audit Committee and the Supervisory Board to answer questions and provide further information.
The Audit Committee discussed the audit results in detail and recommended to the Supervisory Board that it approve the financial statements prepared by the Management Board. The Supervisory Board also took note of the audit results and, in turn, reviewed the financial statements and management reports in accordance with the statutory provisions. Following its own examination, the Supervisory Board also determined that it sees no cause for objection. The financial statements and consolidated financial statements prepared by the Management Board and reviewed by the auditor, as well as the Management Report and Group Management Report, were subsequently approved by the Supervisory Board. Thus, the financial statements were adopted.
Recognition for Dedicated Service
On behalf of the entire Supervisory Board, I would like to thank the members of the Management Board and the employees of MorphoSys for their achievements, their dedicated service and the inspirational work environment witnessed during this past financial year. Through their efforts, MorphoSys’s portfolio has continued to mature and expand, and important milestones have been achieved.
The Supervisory Board would also like to take this opportunity to thank the outgoing Management Board member, Dr. Arndt Schottelius, for his outstanding contribution and commitment. The Supervisory Board also thanks Supervisory Board member Ms. Karin Eastham for her commitment and constructive cooperation. Ms. Eastham will terminate her office at the end of the 2017 Annual General Meeting.
Planegg, March 7, 2017
Dr. Gerald Möller
Chairman of the Supervisory Board