Outlook and Forecast
MorphoSys is focusing a growing amount of its efforts on the development of its proprietary drug candidates. By continually expanding its development pipeline and focusing on areas of therapy with a high unmet medical need such as oncology and inflammatory diseases, MorphoSys intends to raise its potential for future growth and value appreciation and, at the same time, limit the overall risk inherent in developing novel drugs. These activities are enhanced through a large number of partnered programs, which we believe will yield higher revenues from royalties, which we can increasingly use to finance our proprietary programs.
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 foundation for achieving this is the Company’s continued investment in the development of innovative and proven technologies. In the therapeutic area, the commercialization of these technologies provides contractually secured cash flows from long-term partnerships with major pharmaceutical companies. MorphoSys also plans to profit 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 MorphoSys to further expand its commercial operations by investing in the development of proprietary drugs and technologies. The Management Board expects the following developments in 2017:
- Higher investments in proprietary product candidates by continuing ongoing clinical studies and initiating new clinical studies.
- Continued expansion of proprietary development activities through potential in-licensing, company acquisitions, co-development and 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 leading position in therapeutic antibodies and related technologies, such as lanthipeptides.
MorphoSys’s business model is based on its proprietary technologies, including the HuCAL and Ylanthia antibody libraries, the Slonomics platform and the lanthipeptide library. We want to continue to 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, particularly in the areas of oncology and inflammatory diseases. 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 oncology and inflammatory diseases. 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 majority of development candidates derives from the partnership with Novartis. As previously mentioned, MorphoSys expects the partnership with Novartis to terminate at the end of November 2017 in accordance with the contract and does not believe that Novartis will exercise its option to extend the contract. The companies are currently discussing how to ensure that the ongoing projects are completed as smoothly as possible. The development of candidates from this partnership continues even after the contract expires and can lead to further milestone payments and royalties. The Company’s broad partnered 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. During the 2017 financial year, we expect a decision by the regulatory authorities in the United States and Europe on an application for approval of one of our partner’s product candidates. A positive decision could result in the first marketed antibody based on MorphoSys technology as early as 2017. We also expect results from a pivotal phase 2 study for a second product candidate.
For the foreseeable future, MorphoSys plans to invest a substantial portion of its financial resources in proprietary R&D. The Management Board 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 the Company’s value.
Expected Economic Development
The International Monetary Fund (IMF) expects the global economy to grow 3.4 % in 2017, or slightly higher than in 2016 (estimated at 3.1 %). Brexit and lower-than-expected growth in the United States continue to put pressure on global interest rates because these events are predicted to lead to a long-lasting continuation in expansive monetary policy.
Advanced economies are anticipated to grow 1.8 % in 2017 compared to a forecast of 1.6 % for 2016. The IMF expects moderate growth of 1.5 % for the eurozone, pointing out that the unemployment rate in some of the key European countries will be even higher in ten years than prior to the crisis. There is still risk of weaker economic development in light of Brexit, the refugee crisis and potential protectionist measures of the new US government. The IMF expects economic growth in Germany to reach 1.4 % in 2017 (2016E 1.7 %). Record employment figures, increasing nominal and real wages and low energy costs are fueling private consumption. However, challenges such as an aging population and a return to normal interest rate levels remain. The IMF is projecting a rise in US economic growth in 2017 to 2.2 % compared to expected growth of 1.6 % in 2016.
According to the IMF, growth in the emerging and developing countries in 2017 is expected to reach 4.6 % (2016E: 4.2 %). Growth in China should equal 6.2 % in 2017 (2016E: 6.6 %) while Russia is expected to resume growth with a positive 1.1 %, after an expected drop of 0.8 % in 2016. The trend in Brazil is also expected to turn around with growth in 2017 expected at 0.5 % following a projected decline of 3.3 % in 2016.
Expected Development of the Life Sciences Sector
After four years (2012–2015) of outstanding performance for biotechnology shares, during which the NASDAQ Biotechnology Index more than tripled, the leading biotechnology index worldwide lost round 22 % of its value in 2016 for its worst annual performance since 2002. Based on a poll by the industry news service BioCentury, investors expect the sector to improve in 2017 and report positive performance for the year overall. Industry experts expect M&A activity in 2017 to be high and believe the sector’s relative valuation is attractive. However, uncertainty is expected to remain high due to the new and difficult-to-read Trump administration, whereby most experts expect the political environment under a Republican-led US Congress to be industry-friendly overall.
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 immuno-oncology, coupled with a continued high medical need – particularly in cancer and chronic inflammatory diseases – and an aging population in the industrialized countries, lead industry experts to expect more innovation and new drug approvals. After the number of FDA approvals for new molecular entities declined from 45 in 2015 to 22 in the year 2016, BioCentury listed a potential 33 approvals for 2017 at the beginning of the year, including the approval of established drugs in new indications.
Future Research and Development and Expected Business Performance
The Company’s R&D budget for proprietary drug development will rise again in the 2017 financial year compared to the prior year. The majority of investment will fund the clinical development of the proprietary drug candidates MOR208, MOR202, MOR209/ES414, MOR106 and MOR107. Most of the investment within this group will be dedicated to the clinical development of MOR208. Further investment will be made in the area of target molecule validation and antibody and technology development. We will continue to seek cooperation with academic institutes to gain access to new target molecules and technologies.
The plans for the Company’s proprietary portfolio in 2017 include:
- Presentation of the first interim results of the phase 2 trial with MOR208 in combination with lenalidomide in DLBCL (L-MIND study).
- Completion of the phase 2 safety part of the B-MIND study and initiation of the pivotal phase 3 part of the study in which MOR208 will be tested in combination with bendamustine in comparison to rituximab and bendamustine in DLBCL.
- Initiation of another study arm of the phase 2 COSMOS trial with MOR208 in CLL in addition to the ongoing study arm of the combination of MOR208 and idelalisib in order to test MOR208 with a further combination partner.
- Completion of the phase 1/2a dose-escalation trial in multiple myeloma, including the results of MOR202 in the highest dose of 16 mg/kg alone and in combination with pomalidomide and lenalidomide.
- Continuation of the phase 1 trial of MOR209/ES414 with adapted dose regimen in mCRPC as part of the Aptevo cooperation.
- Completion of the phase 1 trial of MOR106 co-developed with Galapagos in atopic dermatitis.
- Initiation of a phase 1 study of MOR107 in healthy volunteers (started in February 2017).
- Initiation and continuation of new development programs in the field of antibody identification and preclinical development.
Based on information from the clinicaltrials.gov database, the Company also expects the possible publication of data from a phase 2b study of MOR103/GSK3196165 in rheumatoid arthritis and from a phase 2a study in hand osteoarthritis conducted by its partner GSK.
MorphoSys will concentrate foremost on increasing the value of its current proprietary development pipeline using secured cash flows from its Novartis contract, which is scheduled to end at the end of November 2017, and the Company’s strong liquidity, which was reinforced by the capital increase executed in November 2016. MorphoSys plans additional collaborations with pharmaceutical and biotechnology companies based on the Ylanthia technology, similar to its partnership with LEO Pharma established in the reporting year.
The first partner-developed therapeutic antibody based on MorphoSys technology could receive market approval in 2017. MorphoSys also believes regulatory authorities may make a decision in the second half of 2017 on Janssen’s application for the approval of guselkumab to treat adults with moderate to severe psoriasis. According to clinicaltrials.gov, anetumab ravtansine, an antibody-drug conjugate developed by Bayer, may report results in 2017 from a pivotal phase 2 trial in mesothelioma. MorphoSys assumes, that this could lead to an application for regulatory approval. Based on other information from clinicaltrials.gov, results may be disclosed from up to 31 different clinical studies in various phases conducted by partners with antibodies based on MorphoSys technology in 2017.
Expected Personnel Development
The number of employees in the Proprietary Development segment is expected to remain fairly unchanged during the 2017 financial year. The number of employees in the Partnered Discovery segment is expected to decline slightly.
Expected Development of the Financial Position and Liquidity
MorphoSys has a solid financial base and predictable revenues. Revenues will be derived mainly from its collaboration with Novartis. MorphoSys expects the partnership with Novartis to terminate at the end of November 2017 in accordance with the contract and does not believe that Novartis will exercise its option to extend the contract. Slightly lower revenues are therefore expected for the full year. In addition, MorphoSys receives success-based milestone payments for the successful development of product candidates. Based on these factors, the Management Board expects Group revenue in the 2017 financial year to reach a range of € 46 million to € 51 million, of which a majority will be generated by the Partnered Discovery segment. This forecast does not take into account any additional revenue from future collaborations and/or licensing partnerships.
The Company was able to substantially strengthen its liquidity by successfully executing a capital increase in the gross amount of € 115.4 million in November 2016, allowing Morphosys to continue developing its proprietary pipeline from a position of strength.
Based on management’s current projections, R&D expenses for proprietary programs and technology development in 2017 are expected to be in the range of € 85 million to € 95 million. In addition to continuing the ongoing studies for MOR208, MOR202, MOR209/ES414 and MOR106, MorphoSys initiated a clinical study of MOR107 in February 2017. R&D expenses in the Partnered Discovery segment are expected to be at roughly the same level as the previous years.
The Company’s EBIT in 2017 is expected to be in the range of € –75 million to € –85 million. This guidance does not take into account any potential in-licensing or co-development of further development candidates. The Partnered Discovery segment is expected to generate a clearly positive operating result in 2017, which is anticipated to be slightly lower than in 2016 due to the contractual expiration of the cooperation with Novartis at the end of November 2016. MorphoSys expects the Proprietary Development segment to report a significant operating loss brought on by higher R&D expenses for proprietary programs, as planned.
In the years ahead, there will be an increasing effect on the net assets and 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.
At the end of the 2016 financial year, MorphoSys had liquid funds of € 359.5 million (December 31, 2015: € 298.4 million). This rise is a result of the capital increase executed in November. The proceeds of this capital increase were partially offset by proprietary research and development expenses and the buyback of shares for the Group’s long-term incentive programs. The projected loss in 2017 will cause a decline in liquidity. MorphoSys considers its solid cash position as an advantage that can be used to accelerate its future growth through strategic activities such as the in-licensing of compounds and investments in promising companies. Available liquidity can also be used to fund high research and development for the Company’s proprietary portfolio of therapeutic antibodies.
Under German accounting principles, MorphoSys AG is reporting an accumulated loss in its separate financial statements, which does not permit the Company to pay a dividend for the 2016 financial year. In view of the anticipated losses in the year 2017, the Company expects to continue to report an accumulated loss. MorphoSys will invest further in the development of proprietary drugs and intends to do further in-licensing and acquisitions so that it can create additional shareholder value and open up new growth opportunities. Based on these plans, the Company does not expect to pay a dividend in the foreseeable future.
This outlook is based on the Management Board’s assumptions and takes into account all of the factors known at the time of preparing this annual report that could influence the Company in 2017 and beyond. Future results may differ from the expectations described in the section “Outlook and Forecast.” The key risks are described in the risk report.