4 Notes to the Income Statement

4.1 REVENUES

In 2016, revenues consisted of license fees and milestone payments totaling € 28.4 million (2015: € 85.4 million). All revenues were generated by the Partnered Discovery segment (2015: € 59.2 million in the Proprietary Development segment and € 26.2 million in the Partnered Discovery segment).

Of the service fees totaling € 21.4 million (2015: € 20.8 million), € 0.6 million (2015: € 0.7 million) were attributable to the Proprietary Development segment and € 20.8 million (2015: € 20.1 million) to the Partnered Discovery segment.

4.2 OPERATING EXPENSES

4.2.1 RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased compared to the prior year due to substantial investments in proprietary product development as well as the partial impairment of MOR209/ES414 (see also Item 5.7.3 of these notes) and consist of the items below.

in 000’ € 2016 2015
Personnel Expenses 26,493 25,557
Consumable Supplies 2,321 2,971
Other Operating Expenses 2,922 3,352
Amortization and Other Costs
of Intangible Assets
13,689 7,177
External Services 44,409 34,411
Depreciation and Other Costs
for Infrastructure
5,889 5,188
Total 95,723 78,656
in million € 2016 2015 2014 2013 2012
R&D Expenses on behalf of Partners 17,2 22,1 19,5 17,5 16,0
Proprietary Development Expenses 77,1 54,1 33,6 27,5 18,1
Technology Development Expenses 1,4 2,5 2,9 4,2 3,6
R&D Total 95,7 78,7 56,0 49,2 37,7

4.2.2 GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses include the items below.

in 000’ € 2016 2015
Personnel Expenses 9,521 10,354
Consumable Supplies 97 77
Other Operating Expenses 978 913
Amortization of Intangible Assets 111 109
External Services 2,484 2,643
Depreciation and Other Costs
for Infrastructure
925 976
Total 14,116 15,072

4.2.3 PERSONNEL EXPENSES

Personnel expenses include the items below.

in 000’ € 2016 2015
Wages and Salaries 27,146 26,559
Social Security Contributions 4,570 4,271
Stock-based Compensation
Expense
2,357 3,559
Temporary Staff (External) 1,061 610
Other 880 912
Total 36,014 35,911

In 2016 and 2015, other personnel expenses consisted mainly of recruitment costs.

The average number of employees in the 2016 financial year was 354 (2015: 356). Of the 345 employees on December 31, 2016 (December 31, 2015: 365), 289 were active in research and development (December 31, 2015: 305) and 56 were engaged in general and administrative functions (December 31, 2015: 60 employees). As of December 31, 2016, there were 135 employees in the Proprietary Development segment and 156 employees in the Partnered Discovery segment; 54 employees were not allocated to a segment (December 31, 2015: 132 in the Proprietary Development segment, 176 employees in the Partnered Discovery segment and 57 employees were unallocated). Costs for defined-contribution plans amounted to € 0.5 million in 2016 (2015: € 0.5 million).

4.3 OTHER INCOME AND EXPENSES, FINANCE INCOME AND FINANCE EXPENSES

The line items “other income and expenses” and “finance income and finance expenses” include the following items.

in 000’ € 2016 2015
Gain from Revaluation of Participations 0 4,495
Grant Income 327 359
Gain on Exchange 192 306
Appreciation of Accounts Receivable Previously Deemed Impaired 15 0
Miscellaneous Income 175 338
Other Income 709 5,498
Loss on Exchange (400) (460)
Impairment of Other Receivables (7) (214)
Miscellaneous Expenses (147) (85)
Other Expenses (554) (759)
Gain on Available-for-sale Financial Assets and Bonds 294 94
Interest Income 1,017 1,907
Gain on Derivatives 74 1,826
Finance Income 1,385 3,827
Interest Expenses (20) (20)
Loss on Derivatives (44) (287)
Bank Fees (35) (34)
Loss on Available-for-sale Financial Assets and Bonds (1,209) (95)
Finance Expenses (1,308) (436)
Total 232 8,130

4.4 INCOME TAX EXPENSES/INCOME

MorphoSys AG and its German subsidiary Sloning BioTechnology GmbH are subject to corporate taxes, the solidarity surcharge and trade taxes. The Company’s corporate tax rate of 15.0 % and the solidarity surcharge of 5.5 % remained unchanged. The effective trade tax rate of increased by 0.35 % from 10.50 % to 10.85 %.

The Dutch entities Lanthio Pharma B.V. and LanthioPep B.V. are subject to an income tax rate of 25 % on annual income exceeding € 200,000; annual income below € 200,000 is subject to a tax rate of 20 %. Subject to certain conditions, a tax rate of 5 % may be applicable under what is known as the “Innovation Box”.

Income taxes for the past financial year consist of the items listed below.

in 000’ € 2016 2015
Current Tax Income/(Expense) (Thereof Regarding Prior Years: k€ (60); 2015: k€ 3) 45 (4,182)
Deferred Tax Expenses (564) (1,543)
Total Income Tax Expense (519) (5,725)
Total Amount of Current Taxes Resulting from Entries Directly Recognized in Equity 0 (1)
Total Amount of Current Taxes Resulting from Entries Directly Recognized in Other Comprehensive Income (82) 38
Total Amount of Deferred Taxes Resulting from Entries Directly Recognized in Other Comprehensive Income (112) 35
Total Amount of Tax-Effects Resulting from Entries Directly Recognized in Equity or Other Comprehensive Income (194) 72

The following table reconciles the expected income tax expense with the actual income tax expense as presented in the consolidated financial statements. The combined income tax rate of 26.675 % in the 2016 financial year (2015: 26.33 %) was applied to profit before taxes to calculate the statutory income tax expense. This rate consisted of a corporate income tax of 15.0 %, a solidarity surcharge of 5.5 % on the corporate tax and an average trade tax of 10.85 % applicable to the Group.

in 000’ € 2016 2015
Profit Before Income Taxes (59,864) 20,626
Expected Tax Rate 26.675 % 26.330 %
Expected Income Tax 15,969 (5,431)
Tax Effects Resulting from:
Stock-based Compensation 5 (221)
Non-Tax-Deductible Items (135) (1,039)
Differences in Profit and Loss Neutral Adjustments 812 1,689
Non-Recognition of Deferred Tax Assets on Temporary Differences (3,766) 0
Non-Recognition of Deferred Tax Assets on Current Year Tax Losses (13,354) (684)
Tax Rate Differences to Local Tax Rates (46) (28)
Effect of Tax Rate Changes 0 (4)
Prior Year Taxes 0 (3)
Other Effects (4) (4)
Actual Income Tax (519) (5,725)

As of December 31, 2016, neither deferred tax assets in the amount of € 12.8 million on tax loss carryforwards nor deferred tax assets on temporary differences in the amount of € 3.8 million were recognized by MorphoSys AG due to continued substantial investments in proprietary product development and related business development.

As of December 31, 2016, deferred tax assets in the amount of € 0.5 million were recognized on tax loss carryforwards due to the expected profit of Sloning BioTechnology GmbH on financial years 2017 through 2021 (December 31, 2015: € 1.2 million). The tax loss carryforwards may be carried forward indefinitely and in unlimited amounts. Since 2004, German tax law restricts the offsetting of taxable income against existing tax loss carry­forwards up to an amount of € 1.0 million plus 60 % of taxable income exceeding € 1.0 million.

As of December 31, 2016, deferred tax assets in the amount of € 2.5 million (December 31, 2015: € 2.1 million) on tax loss carryforwards were not recognized for Lanthio Group due to continued substantial investments in proprietary product development and related business development.

Deferred tax assets and liabilities are composed as follows.

in 000’ €, as of December 31 Deferred Tax Asset 2016 Deferred Tax Asset 2015 Deferred Tax Liabillty 2016 Deferred Tax Liability 2015
Intangible Assets 0 0 8,068 8,685
Receivables and Other Assets 0 0 8 200
Prepaid Expenses and Deferred Charges 0 0 3 4
Short-term Securities Investments 19 90 131 54
Provisions 130 921 0 0
Other Liabilities 123 0 0 0
Tax Losses 516 1,222 0 0
Total 788 2,233 8,210 8,943
Changes in Deferred Taxes in 2016
in 000’ €, as of December 31 Recognized in Profit and Loss Income/(Expense) Recognized in Other Comprehensive Income
Intangible Assets 617 0
Receivables and Other Assets 192 0
Prepaid Expenses and Deferred Charges 1 0
Short-term Securities Investments 0 (148)
Provisions (791) 0
Other Liabilities 123 0
Tax Losses (706) 0
Total (564) (148)

As of December 31, 2016, temporary differences existed in connection with investments in subsidiaries (known as outside basis differences) of € 0.3 million for which no deferred tax liabilities were recognized.

4.5 EARNINGS PER SHARE

Basic earnings per share is computed by dividing the 2016 consolidated net loss of € 60,382,776 (2015: consolidated net profit of € 14,900,768) by the weighted-average number of ordinary shares outstanding during the respective year (2016: 26,443,415; 2015: 26,019,855).

The table below shows the calculation of the weighted-average number of ordinary shares.

2016 2015
Shares Issued on January 1 26,537,682 26,456,834
Effect of Treasury Shares Held on January 1 (434,670) (450,890)
Effect of Repurchase of Treasury Stock (34,812) (63,054)
Effect of Share Issuance 327,761 0
Effect of Transfer of Treasury Stock to Management Board and Senior Management Group 0 60,894
Effect of Transfer of Treasury Stock / Shares Issued in January 0 975
Effect of Transfer of Treasury Stock / Shares Issued in February 0 2,650
Effect of Transfer of Treasury Stock / Shares Issued in March 0 1,578
Effect of Transfer of Treasury Stock / Shares Issued in April 12,638 0
Effect of Transfer of Treasury Stock / Shares Issued in May 10,039 0
Effect of Transfer of Treasury Stock / Shares Issued in June 17,749 3,875
Effect of Transfer of Treasury Stock / Shares Issued in July 0 3,208
Effect of Transfer of Treasury Stock / Shares Issued in August 6,463 1,021
Effect of Transfer of Treasury Stock / Shares Issued in September 490 0
Effect of Transfer of Treasury Stock / Shares Issued in October 76 0
Effect of Transfer of Treasury Stock / Shares Issued in November 0 629
Effect of Transfer of Treasury Stock / Shares Issued in December 0 2,135
Weighted-average Number of Shares of Common Stock 26,443,415 26,019,855

Diluted earnings (loss) per share is calculated by taking into account the potential increase in the Group’s ordinary shares as the result of granted convertible bonds.

The following table shows the reconciliation of basic earnings per share to diluted earnings per share (in €, except for disclosures per share).

2016 2015
Numerator
Consolidated Net Profit/(Loss) (60,382,776) 14,900,768
Denominator
Weighted-average Shares Used for Basic EPS 26,443,415 26,019,855
Dilutive Shares Arising from Convertible Bonds 99,764 224,437
Total Denominator 26,543,179 26,244,292
Earnings per Share (in €)
Basic (2.28) 0.57
Diluted (2.27) 0.57
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