Analysis of Net Assets, Financial Position and Results of Operations

The MorphoSys Group’s scope of consolidation was unchanged as of December 31, 2016 in comparison to December 31, 2015. The consolidated financial statements as of December 31, 2016 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 on page 22.

Revenues

Group revenues in the financial year 2016 declined 53 % year-on-year to € 49.7 million as planned (2015: € 106.2 million). The ­previous year’s revenue figure included a one-off effect of approximately € 59 million resulting from the termination of the MOR202 co-development and co-promotion agreement with Celgene.

Success-based payments amounted to 11 % or € 5.6 million (2015: 4 % or € 4.0 million) of total revenue. On a regional basis, MorphoSys generated 10 %, or € 5.1 million, of its commercial revenues with biotechnology and pharmaceutical companies and non-profit organizations headquartered in North America and 90 %, or € 44.6 million, with customers headquartered primarily in Europe and Asia. In the same period of the previous year the distribution was 59 % and 41 %, respectively (see Figure 5: Revenues by Region). Roughly 95 % of Group revenues are attributable to activities with our partners Novartis, Pfizer and Janssen (2015: 97 % with Celgene, Novartis and Pfizer).

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

PROPRIETARY DEVELOPMENT SEGMENT

The Proprietary Development segment achieved revenues of € 0.6 million in 2016 (2015: € 59.9 million). The 2015 revenue figure contained a one-off effect in the amount of roughly € 59 million resulting from the termination of the MOR202 co-development and co-promotion agreement with Celgene.

PARTNERED DISCOVERY SEGMENT

The revenues generated by the Partnered Discovery segment of € 49.1 million included € 43.6 million in funded research and license fees (2015: € 42.3 million) and € 5.6 million in success-based payments (2015: € 4.0 million).

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

Operating Expenses

In 2016, operating expenses increased 17 % to € 109.8 million (2015: € 93.7 million). Expenses consisted of research and development expenses of € 95.7 million (2015: € 78.7 million) and general and administrative expenses of € 14.1 million (2014: € 15.1 million). Research and development expenses increased to continue the development of the increased number of projects.

Operating expenses in the Proprietary Development segment increased from € 54.1 million to € 78.5 million. In the Partnered Discovery segment these expenses declined to € 18.1 million (2015: € 25.9 million).

Personnel expenses from share-based payments are included in general and administrative expenses and research and development expenses. These expenses amounted to € 2.4 million in 2016 (2015: € 3.6 million).

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased by € 17.0 million in 2016 to a total of € 95.7 million (2015: € 78.7 million) and consisted of expenses for external laboratory services (2016: € 39.4 million; 2015: € 29.2 million), personnel expenses (2016: € 26.5 million; 2015: € 25.6 million), expenses for intangible assets (2016: € 13.7 million; 2015: € 7.2 million), technical infrastructure expenses (2016: € 5.9 million; 2015: € 5.2 million), expenses for ­external services (2016: € 5.0 million; 2015: € 5.2 million), other expenses (2016: € 2.9 million; 2015: € 3.4 million) and expenses for consumables (2016: € 2.3 million; 2015: € 3.0 million). Expenses for intangible assets primarily consisted of an impairment of € 10.1 million on the in-process R&D program MOR209/ES414. In 2015, a € 3.7 million impairment was recognized on goodwill resulting from the acquisition of Sloning BioTechnology GmbH.

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

In 2016, the Company incurred proprietary development expenses of € 77.1 million (2015: € 54.1 million) and € 1.4 million (2015: € 2.5 million) for the technology development (see Figure 8: Distribution of R&D Expenses).

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

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were below the previous year’s level and amounted to € 14.1 million (2015: € 15.1 million). These expenses mainly consisted of personnel expenses (2016: € 9.5 million; 2015: € 10.4 million), expenses for external services (2016: € 2.5 million; 2015: € 2.6 million), technical infrastructure expenses (2016: € 0.9 million; 2015: € 1.0 million) and other expenses (2016: € 1.2 million; 2015: € 1.1 million).

Other Income and Expenses

Other income totaled € 0.7 million (2015: € 5.5 million). In the year 2015, this item primarily contained earnings effects from the fair-value measurement of the shares already held in Lanthio Pharma B.V. in the amount of € 4.5 million. In 2016 and 2015, other income also included income from grants received and currency gains. Other expenses totaled € 0.6 million (2015: € 0.8 million) and mainly consisted of currency losses.

Earnings Before Interest and Taxes (EBIT)

Earnings before interest and taxes (EBIT) amounted to € –59.9 million as expected due to investments in proprietary development. In the previous year EBIT amounted to € 17.2 million due to a positive one-off effect. The Proprietary Development segment reported EBIT of € –77.6 million (2015: € 10.7 million), while the Part- nered Discovery segment achieved EBIT of € 31.0 million (2015: € 20.4 million).

Finance Income and Expenses

Finance income amounted to € 1.4 million (2015: € 3.8 million) and included mainly interest income as well as realized gains from the sale of available-for-sale securities and bonds. Finance expenses amounted to € 1.3 million (2015: € 0.4 million) and resulted mainly from realized losses from the sale of available-for-sale securities and bonds.

Taxes

The Group reported a tax expense of € 0.5 million in 2016 (2015: tax expense of € 5.7 million) derived from a deferred tax expense of € 0.6 million and a current tax income of € 0.1 million.

Consolidated Net Profit/Loss for the ­Period

In 2016, the net result for the period amounted to € –60.4 million (2015: € 14.9 million). The basic net result per share for 2016 is € –2.28 (2015: € 0.57).

03 table Multi-Year Overview – Income Statement1 1

Multi-Year Overview – Income Statement

in million € 2016 2015 2014 20132 20122
Revenues 49.7 106.2 64.0 78.0 51.9
Research and Development Expenses 95.7 78.7 56.0 49.2 37.7
General and Administrative Expenses 14.1 15.1 14.1 18.8 12.1
Other Income/Expenses 0.2 4.7 0.2 (0.1) 0.3
EBIT (59.9) 17.2 (5.9) 9.9 2.5
Finance Income/Expenses 0.1 3.4 1.6 0.8 0.6
Income Tax Income/Expenses (0.5) (5.7) 1.3 (3.3) (0.7)
Profit/(Loss) for the Year from Continuing Operations (60.4) 14.9 (3.0) 7.4 2.4
Profit/(Loss) for the Year from Discontinued Operations2 0.0 0.0 0.0 6.0 (0.4)
Consolidated Net Profit/(Loss) (60.4) 14.9 (3.0) 13.3 1.9
Basic Net Profit/(Loss) per Share (in €) (2.28) 0.57 (0.12) 0.54 0.08
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 source of this liquidity is the cash inflow from the operating business and commercial operations of the individual business units. Cash flow projections and scenarios are used to determine the level of liquidity needed.

CASH FLOWS*

The net cash outflow from operating activities in 2016 totaled € 46.6 million (2015: cash outflow of € 23.5 million).

* SEE Glossary

In 2016, the Company changed the composition of financial assets in its portfolio via purchases and sales of various investment products. These shifts resulted in net cash outflows of € 80.8 million (2015: cash inflow of € 86.3 million).

In 2016, financing activities led to a cash inflow of € 110.4 million (2015: cash outflow of € 4.1 million) that was mainly generated by the capital increase in November 2016.

INVESTMENTS

In 2016, MorphoSys invested € 2.5 million in property, plant and equipment (2015: € 1.4 million) mainly for laboratory equipment (i.e. machinery), computer hardware and tenant fixtures. Depreciation of property, plant and equipment in 2016 increased to € 1.8 million (2015: € 1.5 million).

The Company invested € 0.4 million in intangible assets in 2016 (2015: € 7.4 million). Amortization of intangible assets was above the prior year’s level and amounted to € 2.0 million in 2016 (2015: € 1.9 million). In 2016, an impairment of € 10.1 million was recognized on the in-process R&D program MOR209/ES414 (2015: ­impairment on patents, licenses and laboratory equipment of € 0.02 million).

LIQUIDITY

On December 31, 2016, the Company held cash and cash equivalents, marketable securities and other financial assets of € 359.5 million versus € 298.4 million on December 31, 2015.

This amount consisted of cash and cash equivalents of € 73.9 million (December 31, 2015: € 90.9 million), marketable securities and bonds of € 69.9 million (December 31, 2015: € 97.4 million) and other financial assets in the amount of € 136.1 million (December 31, 2015: € 94.6 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 € 79.5 million were reported under non-current assets as of December 31, 2016 (December 31, 2015: € 15.5 million).

The increase in liquidity resulted primarily from the capital increase executed in November (€ 115.4 million). This was partially offset by the use of cash and cash equivalents for operations in the year 2016 and share repurchases for the Group’s long-term incentive programs.

04 table Mult-Year Overview – Financial Situation 1

in million € 2016 2015 2014 2013 2012
Net Cash Provided by/Used in Operating Activities2 (46.6) (23.5) (14.2) 89.1 1.8
Net Cash Provided by/Used in Investing Activities2 (80.8) 86.3 (21.5) (193.9) (12.1)
Net Cash Provided by/Used in Financing Activities2 110.4 (4.1) (3.9) 130.6 1.6
Cash and Cash Equivalents (as of 31 December)3 73.9 90.9 32.2 71.9 40.7
Available-for-sale Financial Assets 63.4 64.3 106.0 188.4 79.7
Bonds, Available-for-sale 6.5 33.1 7.5 11.1 0.0
Financial Assets Categorized as Loans and Receivables, Current Portion 136.1 94.6 157.0 119.3 10.0
Financial Assets Categorized as Loans and Receivables, Net of Current Portion 79.5 15.5 50.0 0.0 0.0
1
Differences due to rounding.
2
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.
3
In 2012, € 5.3 million in cash and cash equivalents was recorded under assets of disposal group classified as held for sale.

Net Assets

ASSETS

As of December 31, 2016, total assets amounted to € 463.6 million and were € 63.5 million higher than their level on December 31, 2015 (€ 400.1 million). Current assets increased by € 7.9 million. The rise in financial assets under the category “loans and receivables” as well as “advance payments and other assets” was largely offset by the decline in available-for-sale bonds and cash and cash equivalents.

As of December 31, 2016, an amount of € 63.4 million (December 31, 2015: € 64.3 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 € 6.5 million (December 31, 2015: € 33.1 million). The category “loans and receivables” included financial instruments totaling € 136.1 million (December 31, 2015: € 94.6 million). These instruments were mainly term deposits with either fixed or variable interest rates.

Non-current assets increased by € 55.6 million year-on-year to € 155.5 million as of December 31, 2016, primarily as a result of the investment in non-current financial assets in the category “loans and receivables” using financial liquidity from the capital increase executed in November. The effect of this investment was largely offset by the € 10.1 million decline in in-process R&D ­programs due to the impairment taken on the MOR209/ES414 program.

LIABILITIES

Current liabilities increased from € 27.5 million on December 31, 2015 to € 38.3 million on December 31, 2016. This effect mainly resulted from the rise in accounts payable and accrued expenses.

Non-current liabilities (December 31, 2016: € 9.8 million; December 31, 2015: € 9.9 million) remained virtually unchanged compared to December 31, 2015.

STOCKHOLDERS’ EQUITY

As of December 31, 2016, Group equity totaled € 415.5 million compared to € 362.7 million on December 31, 2015.

The number of shares issued totaled 29,159,770 as of December 31, 2016, of which 28,763,760 shares were outstanding (December 31, 2015: 26,537,682 shares issued and 26,103,012 shares outstanding).

On November 15, 2016, a total of 2,622,088 shares were issued in the context of a cash capital increase from Authorized Capital 2014-I and fully exhausted the Authorized Capital 2014-I. As a result, the number of authorized ordinary shares fell by 2,622,088 shares, from 13,206,421 as of December 31, 2015 to 10,584,333 shares.

In comparison to December 31, 2015, the number of ordinary shares of conditional capital declined from 7,086,000 to 6,752,698. At the Annual General Meeting on June 2, 2016, Conditional Capital 2003-II in the amount of € 36,000 and Conditional Capital 2011-I in the amount of € 6,600,000 were canceled. Created in their place was new Conditional Capital 2016-I in the amount of € 5,307,536 and Conditional Capital 2016-III in the amount of € 995,162.

On December 31, 2016, the Company held 396,010 shares of treasury stock valued at € 14,648,212, representing a decline compared to December 31, 2015 (434,670 shares, € 15,827,946) of € 1,179,743. The reason for this decline was the transfer of 90,955 shares of treasury stock valued at € 3,361,697 to the Management Board and Senior Management Group from the 2012 long-term incentive (LTI) program. The vesting period for this LTI program expired on April 1, 2016 and October 1, 2016, respectively, and beneficiaries were given the option to receive a total of 90,955 shares within six months. Offsetting this amount was MorphoSys’s repurchase of 52,295 of its own shares at a weighted-average price per share of € 41.69 for a total value of € 2,179,963. The fee for this transaction was € 1,999.

Financing

As of December 31, 2016, the Company’s equity ratio amounted to 90 % compared to 91 % on December 31, 2015. The Group has currently no financial debt vis-à-vis financial institutions.

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.

05 table Multi-Year Overview – Balance Sheet Structure 1

Multi-Year Overview – Balance Sheet Structure

in million € 12/31/2016 12/31/2015 12/31/2014 12/31/2013 12/31/2012
Assets        
Current Assets 308.1 300.1 322.4 406.6 142.9
Non-current Assets 155.5 100.0 104.1 41.1 40.6
Assets of Disposal Group Classified as Held for Sale 0.0 0.0 0.0 0.0 40.9
Total 463.6 400.1 426.5 447.7 224.3
       
Equity and Liabilities        
Current Liabilities 38.3 27.5 32.7 35.4 11.9
Non-current Liabilities 9.8 9.9 45.0 60.1 6.6
Liabilities of Disposal Group Classified as Held for Sale 0.0 0.0 0.0 0.0 3.7
Stockholders' Equity 415.5 362.7 348.8 352.1 202.0
Total 463.6 400.1 426.5 447.7 224.3
1
Differences due to rounding.

Comparison of Actual Business Results Versus Forecasts

MorphoSys demonstrated solid financial performance during the 2016 reporting year. A detailed comparison of the Company’s forecasts versus the actual results can be found in Table 6.

06 table Comparison of Actual Business Results Versus Forecasts

2016 Targets 2016 Results
Financial targets Group revenue between € 47 million and € 52 million Group revenue of € 49.7 million
Expenses for proprietary product and technology development of € 76 million to € 83 million Expenses for proprietary product and technology development of € 78.5 million
EBIT of € –58 million to € –68 million EBIT of € –59.9 million
Proprietary Development MOR208
  • Initiation of the L-MIND trial (in combination with lenalidomide in DLBCL)
  • Initiation of the B-MIND trial (in combination with bendamustine in DLBCL)
  • Initiation of the COSMOS trial (in combination with idelalisib in CLL)
MOR208
  • Initiation of the L-MIND trial in April
  • Initiation of the B-MIND trial in September
  • Initiation of the COSMOS trial in December
MOR202
  • Continuation of the phase 1/2a study in additional cohorts with the recommended dose of 16 mg/kg alone and in combination with pomalidomide and lenalidomide
MOR202
  • Presentation of clinical data from the ongoing phase 1/2a study at the ASCO Annual Meeting in June, the German, Austrian and Swiss Associations of Hematology and Medical Oncology in October and the annual ASH meeting in December
MOR209/ES414
  • Continuation of the adapted phase 1 trial in mCRPC under the cooperation with Aptevo Therapeutics, a spin-off of Emergent BioSolutions
MOR209/ES414
  • Recruitment in the fourth quarter of 2016 of the first patient for the trial under the adapted trial protocol
MOR106
  • Initiation of a phase 1 trial as part of the co-development program with Galapagos
MOR106
  • Initiation of a phase 1 trial in healthy volunteers in April; evaluation in patients suffering from atopic dermatitis started in September
MOR107
  • Initiation of a phase 1 trial
MOR107
  • Preparations for initiating phase 1 trial completed in 2016; start of phase 1 study with healthy volunteers in February 2017
In-licensing of one or more targets and compounds to strengthen the proprietary development portfolio
  • No target or compound in-licensed
Ongoing development of the lanthipeptide technology
  • Ongoing development of the lanthipeptide technology in the reporting year
Initiation and continuation of new development programs in the area of antibody discovery and preclinical development
  • Initiation of a strategic partnership with MD Anderson Cancer Center to discover and develop new antibodies against cancer
Partnered Discovery Progress of partnered discovery programs
  • Net addition of 11 partnered discovery programs
  • Positive results from a phase 3 study with the HuCAL antibody guselkumab in plaque psoriasis; Janssen submitted application for regulatory approval in the United States and Europe
  • Initiation of a pivotal phase 2 trial by partner Bayer with the HuCAL antibody anetumab ravtansine (BAY 94-9343) as a potential treatment for mesothelioma
  • Initiation of a phase 1 trial by Novartis with a HuCAL antibody to prevent thrombosis
  • Initiation of a phase 1 trial by Novartis with a HuCAL antibody against cancer
  • Initiation of a strategic partnership with LEO Pharma to discover and develop novel antibodies for the treatment of skin diseases; MorphoSys has co-development and co-commercialization options in the area of cancer

The Management Board’s General ­Assessment of Business Performance

The 2016 financial year marked a successful year for the Group overall. We successfully expanded our pipeline and increased the number of development programs to 114 by the end of 2016 (2015: 103). We significantly strengthened our liquidity through a capital increase that yielded € 115.4 million in gross proceeds. As a result, the Company can continue to develop its programs from a position of strength. Furthermore, the first antibody based on MorphoSys’s technologies has been filed for regulatory approval in the United States and Europe.

The Group’s revenue in the 2016 financial year decreased to € 49.7 million and EBIT declined to € –59.9 million. The main cause of the decline in revenue and negative EBIT was the termination of the Celgene cooperation and the related one-off effect in the amount of roughly € 59 million in 2015. Net cash outflows from operating activities totaled € 46.6 million. These outflows were the result of the increased investment in our proprietary R&D, as expected. Our equity ratio of 90 % and liquidity of € 359.5 million underscore the Company’s very sound financial position.

The Proprietary Development business segment saw a clear maturation of its pipeline consisting of 14 active compounds (year-end 2015: 14). Three phase 2 combination studies were started with MOR208 in blood cancer indications. The ongoing dose-escalation study with MOR202 in multiple myeloma tests the drug at higher doses. Updated results were presented at major medical conferences. In our cooperation with Galapagos, MOR106 began clinical development in atopic dermatitis. The phase 1 study of MOR209/ES414 was resumed by our development partner Aptevo, with a new dosage regimen. Partner GSK launched two phase 2a studies with MOR103/GSK3196165 in hand osteoarthritis and rheumatoid arthritis. Preparations continued for the first clinical trial with MOR107, the active substance acquired as part of the acquisition of Lanthio Pharma. In addition, our cooperation with MD Anderson Cancer Center increased our access to innovative targets in cancer medicine.

The Partnered Discovery segment also progressed very well. Its pipeline significantly expanded and matured. The HuCAL antibody guselkumab, developed by Janssen, met the study endpoint in a phase 3 study in plaque psoriasis, after which Janssen applied for regulatory approval in the United States and Europe in November. Guselkumab could become the first antibody on the market based on MoprhoSys’s technologies – a momentous event in the history of the Company. The antibody bimagrumab missed its primary endpoint in a phase 3 study in sIBM but ongoing phase 2 trials in two other indications continue and a phase 2 development in a new indication was started. Partner Bayer launched a pivotal phase 2 study with anetumab ravtansine in mesothelioma. With a total of 100, we ended the year with a record number of programs (year-end 2015: 89).

Accounting Judgments

In preparing the 2016 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, results of operations 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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