MorphoSys AG — Interim / Quarterly Report 2005

Nov 22, 2005

Financial Report for the Quarterly Period Ended September 30, 2005

Contents

MorphoSys Group: Nine Months' Financial Report 2005

• 3 Letter to the Shareholders
• 4 Group Management Report
• 10 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004 (unaudited)
• 11 Consolidated Balance Sheets
• as of September 30, 2005 (unaudited) and December 31, 2004 12 Consolidated Statements of Changes in Stockholders' Equity
• 14 Consolidated Statements of Cash Flows for the

as of September 30, 2005 and 2004 (unaudited)

• Nine Months Ended September 30, 2005 and 2004 (unaudited)
• 16 Notes to the Consolidated Financial Statements (unaudited)

Dear Shareholders,

MorphoSys' business activities continued to develop positively during the third quarter of this year.

In the third quarter, the company was pleased to announce that for the first time in its history as a public company, it had settled all outstanding intellectual property disputes. More specifically, in September, MorphoSys settled a four-year pending patent dispute with AME/Eli Lilly. Under a cross license agreement, MorphoSys received a license for the Kauffman patents owned by Lilly, and in return, Lilly received access to the HuCAL GOLD® technology for research purposes. Under the deal terms, Lilly has become another MorphoSys commercial partner and receives options to develop therapeutic antibodies and purchase antibody research reagents from MorphoSys.

Solid progress in other areas of the Company was also evident in the third quarter. In September, MorphoSys signed a three-year cooperation agreement with the Japanese pharmaceuticals group Shionogi. The agreement with Shionogi is the first significant step towards penetrating the Japanese market – the second largest pharmaceuticals market in the world.

With existing partners, the product pipeline continues to make steady progress. In only eleven months, MorphoSys completed its first antibody project in the Novartis cooperation. Furthermore, in the MorphoSys – Centocor cooperation, Centocor initiated another antibody project. In October 2005, MorphoSys started three new antibody programs within its collaboration with Schering, bring a total number of active projects between the companies to six antibody therapeutics.

Against the background of this strong growth, the Company has continued to strengthen and build its management team. Dr. Robert Friesen joined MorphoSys as Director of Pre-clinical Development. Dr. Friesen's appointment will aid the Company in determining the future composition and direction of Company's portfolio of own therapeutic antibody projects. Beyond this, the Company has also appointed Dr. Bernhard Erning as Director of Treasury & Corporate Development, reporting to the CFO. In this role, Dr. Erning will provide support in matters regarding treasury and mergers/acquisitions.

Thank you for your continued interest in our Company.

Dave Lemus Chief Financial Officer MorphoSys AG

Group Management Report Q3 2005

Industry Overview

The stock markets presented a mixed picture during the third quarter. The continued upwards development of U.S. interest rates and oil prices, the hurricanes Katrina and Rita in the U.S.A. as well as the outcome of the German political elections were challenging messages for the international capital markets.

Despite these news, the development on the German stock markets was positive. The DAX rose to over 5,000 points and achieved a new three-year high. Since the beginning of the year, the DAX has risen by 19%, the EuroStoxx Index by 18%. During the same period, the Nikkei Index rose by 18% and the Dow Jones Index decreased by 2%.

With regard to the biotech markets, the German Prime Biotechnology Index rose by 20% since the beginning of the year. The NASDAQ Biotech Index rose by 2% since the beginning of the year. On the back of positive newsflow, the share price increased by 22% during the third quarter, thus returning to its level at the onset of the year.

Financial Analysis

Revenues

Compared to the same period in the previous year, revenues increased by 52% to € 23.8 million in the first nine months of 2005 (September 30, 2004: € 15.7 million). Reasons for the increase included revenues arising from new deals signed in 2004 in addition to successbased payments from existing collaborations, which included clinical and research milestones achieved in the first nine months of 2005. Geographically, 60% of MorphoSys' commercial revenues in the amount of € 14.2 million were generated with biotechnology and pharmaceutical companies located in Europe and 40% in the United States and Canada. This compares to 38% and 62%, respectively, in the same period of the prior year.

Therapeutic Antibodies

Revenues arising from the Therapeutic Antibody segment accounted for 87% of total revenues (€ 20.7 million). This total comprises € 16.4 million funded research and paid license fees and € 4.3 million success fees.

Research Antibodies

The Research Antibody segment, comprising MorphoSys´ Antibodies by Design unit and the Biogenesis Group companies in the U.S.A. and the U.K., generated 13% (€ 3.1 million) of total revenues. The Biogenesis Group (Biogenesis), acquired in January 2005, contributed € 2.2 million revenues, or 71% of the total segment revenues. The Antibodies by Design unit, based in Munich, contributed the remaining 29%, or € 0.9 million, of the total Research Antibody segment revenues.

Cost of Goods Sold (COGS)

COGS only arise in the Research Antibodies segment. This item is composed of cost of goods sold of the Antibodies by Design unit and Biogenesis as well as depreciation of the fair value adjustment of Biogenesis' stock, which was identified by the purchase price allocation (PPA).

For the first nine months of 2005, COGS rose to € 1.9 million compared to € 0.7 million in the same period of the prior year, resulting in a gross profit of € 1.2 million for the Research Antibody segment (September 30, 2004: loss of € 0.1 million) and € 22.0 million for the MorphoSys Group (September 30, 2004: € 15.1 million) respectively. Reason for the increase of COGS was the inclusion of Biogenesis into MorphoSys Group's accounts in the current year, which amounted to € 1.1 million including depreciation of fair value adjustments in the amount of € 0.1 million.

Other Operating Expenses

For the first nine months of 2005, other operating expenses including stock-based compensation expenses increased by 30% to € 18.1 million (September 30, 2004: € 13.9 million), while operating profit increased by € 2.6 million to € 3.8 million (September 30, 2004: € 1.2 million). The total increase in operating expenses of € 4.2 million was mainly due to higher personnelrelated and material costs in conjunction with new collaborations as well as increased expenses for intangibles. The acquisition of the Biogenesis Group companies had the effect of increasing other operating expenses by € 1.2 million.

Research and Development Expenses

Costs for research and development increased by € 1.7 million to € 9.9 million (September 30, 2004: € 8.2 million). This increase mainly resulted from higher success-based license fees as well as the inclusion of the Eli Lilly cross licensing agreement signed in the third quarter of 2005. Personnel expenses and material costs further increased costs for research and development as a result of new cooperations signed during 2004.

Sales, General and Administrative Expenses

Sales, general and administrative expenses amounted to € 7.4 million and compared with € 5.0 million in the same period of the previous year. This effect mainly resulted from higher personnel costs partly due to the contribution of Biogenesis as well as increased costs for external marketing and legal services. Biogenesis' total contribution to sales, general and administrative expenses amounted to € 1.0 million for the first nine months of 2005.

Stock-Based Compensation

Stock-based compensation in the amount of € 0.9 million for the first nine months of 2005, resulting from application of IFRS 2 "Share-based Payments" under IFRS accounting, was recorded as a non-cash charge (September 30, 2004: € 0.8 million) and remained almost unchanged.

Cost by Expenditure Type

For the first nine months of 2005, personnel costs (excluding expenses arising from stockbased compensation) amounted to € 7.2 million (September 30, 2004: € 5.5 million) or 40% of total operating expenses, thus representing the largest cost block within operating expenses in the first nine months of 2005.

Costs for intangibles, which include patent litigation costs and amortization of licenses and patents, amounted to € 3.9 million (September 30, 2004: € 2.4 million) or 22% of the total in the first nine months of 2005. External consultancy costs amounted to € 2.0 million (September 30, 2004: € 2.0 million) or 11% of total operating expenses and mainly consisted of marketing expenses, legal costs, costs for tax, audit and accounting and general consulting. Costs for infrastructure accounted for € 1.9 million, compared to € 1.6 million in the prior year.

Non-Operating Items

Non-operating income amounted to € 0.0 million compared to non-operating expenses of € 0.2 million as of September 30, 2004. Gains from available-for-sale securities in the amount of € 0.5 million and tax benefits in the amount of € 0.2 million were offset mainly by losses from foreign exchange (€ 0.5 million) and interest expenses (€ 0.2 million).

Net Profit

Continuing the positive trend established in 2004, the Company presented a net profit of € 3.9 million, compared to prior year's net profit of € 1.0 million. The inclusion of Biogenesis' net result impacted the net profit by contributing € 0.2 million loss for the first nine months. The resulting profit per share for the entire MorphoSys Group for the nine months ended September 30, 2005, amounted to € 0.68 (September 30, 2004: Profit per share of € 0.18).

Liquidity / Cash Flows

On September 30, 2005, the Company held € 50.2 million in cash, cash equivalents and marketable securities compared to a € 37.2 million balance as of December 31, 2004. The increased cash item resulted mainly from a capital increase executed in March 2005. The cash inflow from operations contributed € 1.8 million to the same.

Assets

Total assets increased by € 23.6 million to € 79.4 million in the first nine months of 2005, compared to € 55.8 million as of December 31, 2004, mainly as a result of the increased cash and the acquisition of the Biogenesis Group's assets, including property and equipment in the amount of € 2.7 million, intangibles in the amount of € 2.1 million and acquired goodwill in the amount of € 4.2 million. The purchase price allocation resulting from the application of IFRS 3 currently exercised is reflected in the Group accounts (see also Notes to Consolidated Financial Statements – section 5). Tax benefits of € 0.3 million arising from share issuance costs charged to equity were recognized in Q3 2005 and shown as deferred tax asset.

Accounts Receivable

Accounts receivable increased by € 2.7 million to € 5.0 million in comparison to year end 2004 (December 31, 2004: € 2.3 million). Accounts receivable attributable to the Therapeutic Antibody segment (€ 3.7 million) accounted for 74% of total accounts receivable. The Research Antibody segment represented € 0.8 million or 16% of total accounts receivable, whereas the Biogenesis Group and the Antibodies by Design unit contributed € 0.6 million and € 0.2 million, respectively, to this item.

Liabilities

In the first nine months of 2005, current liabilities increased from € 10.1 million as of December 31, 2004, to € 10.4 million. The increase arose primarily from higher licenses payable, associated with success-based license payments, which was partly offset by decreased current deferred revenue amounts.

Equity

As of September 30, 2005, the total number of shares issued was 5,997,613, of which 5,967,551 were outstanding, compared to 5,438,852 and 5,408,790 as of December 31, 2004, respectively.

The increase arose from the issuance of 490,133 shares in connection with a capital increase in March 2005. An additional increase of 68,628 shares resulted from the exercise and conversion of bonds and options issued to related parties during the first nine months of 2005.

Capital Expenditure

MorphoSys' investment in property, plant and equipment amounted to € 0.4 million for the nine-month period ended September 30, 2005, compared to € 1.2 million for the same period of the prior year. Investments in intangibles amounted to € 0.1 million and remained unchanged. Depreciation for the first nine months of 2005 accounted for € 0.6 million compared to € 0.5 million in the same period of the prior year.

Human Resources

Number and Qualification of Employees

As of September 30, 2005, the MorphoSys Group employed 170 people (December 31, 2004: 132). On average, the MorphoSys Group employed 169 people for the first nine months of 2005 (December 31, 2004: 117).

Of the 170 employees, 126 worked in research and development and 44 in sales, general and administration.

Of total employees, 28 worked for the Biogenesis Group, of whom 11 were engaged in research and development, and 17 in sales, general and administration.

As of September 30, 2005, MorphoSys employed 1 trainee as "technical information processor in the area of information technology" (December 31, 2004: 2).

During the third quarter, all outstanding litigation associated with the departure of ex-Chief Scientific Officer Thomas von Rüden was settled in an out-of-court settlement.

Research & Development / Partnered Research

1. Therapeutic Antibody Segment

The Company signed the following new collaborations or made further progress in the following existing collaborations (in alphabetical order):

Centocor, Inc. (U.S.A.)

In September 2005, Centocor Inc., a Johnson & Johnson company, elected a new target molecule involved in immune-mediated and inflammatory diseases, against which MorphoSys will generate antibodies using its proprietary HuCAL GOLD® technology. Centocor will carry out

pre-clinical and clinical development and subsequent marketing of resulting products. In exchange, MorphoSys stands to receive licensing and milestone payments, in addition to royalties.

Novartis AG (Switzerland/USA)

MorphoSys announced in August 2005 the conclusion of a first therapeutic antibody program with Novartis. MorphoSys generated numerous fully human antibodies fulfilling previously defined success criteria against a cancer disease-related target molecule from Novartis, and thus achieved the first performance-related milestone in the cooperation. The amount of the associated milestone payment made to MorphoSys was not disclosed. The project work commenced in September 2004 and was completed within 11 months.

Shionogi & Co., Ltd. (Japan)

MorphoSys and Shionogi & Co., Ltd., announced in September 2005 that they signed a threeyear license agreement on the use of MorphoSys' HuCAL® technology. Under the terms of the agreement, MorphoSys granted Shionogi access to its HuCAL GOLD® antibody library for use in Shionogi's pharmaceutical drug discovery programs. In return, MorphoSys stands to receive an up-front payment and annual user fees during the life span of the agreement. During the three-year term of the agreement, Shionogi will have access to the MorphoSys HuCAL GOLD® library at one of its research sites.

Intellectual Property

In September 2005, MorphoSys signed a cross license agreement with the pharmaceutical group Eli Lilly & Company concerning the use of certain recombinant protein technologies. The agreement allows MorphoSys rights to the Kauffman patents. At the same time, the agreement grants Lilly a license to use MorphoSys's HuCAL GOLD® technology in its own internal research and development programs over a certain period of time. This agreement stems from the patent dispute with Applied Molecular Evolution (AME), a wholly owned subsidiary of the Lilly Group, initiated by AME against MorphoSys in 2001.

2. Research Antibodies

In September 2005, Antibodies by Design announced that a number of completely human, recombinant research antibodies from the HuCAL GOLD® antibody library were to be incorporated into the Biogenesis Group's sales catalog. The recombinant research antibodies were identified by Antibodies by Design during active research collaboration and proactively developed by Biogenesis against target molecules for which there is clear demand from potential new customers.

Outlook

At the time of the finalization of this report, the financial guidance for the business year 2005 was still under review. On the occasion of the publication of the Q3 results 2005, the financial guidance will be updated if, and as required.

Consolidated Statements of Operations (IFRS) – unaudited

	Three Months	Three Months	Nine Months	Nine Months
	Ended	Ended	Ended	Ended
	09/30/2005	09/30/2004	09/30/2005	09/30/2004
NOTE	EURO	EURO	EURO	EURO
Revenues	8,464,324	6,796,072	23,832,662	15,736,745
Cost of Goods Sold 2	767,473	241,148	1,877,489	652,256
Gross Profit	7,696,851	6,554,924	21,955,173	15,084,489
Other Operating Expenses
Research and Development	3,115,083	2,970,724	9,872,494	8,205,299
Sales, General and Administrative	2,496,698	1,505,170	7,370,307	4,960,754
Stock-Based Compensation	289,425	179,190	872,197	764,863
Total Other Operating Expenses	5,901,206	4,655,084	18,114,998	13,930,916
Profit from Operations	1,795,645	1,899,840	3,840,175	1,153,573
Interest Income	32,065	123,374	86,844	236,649
Interest Expense	71,704	87,201	212,956	251,798
Other Income / (Expenses), Net	250,629	250,179	8,254	(157,163)
Profit before Taxes	2,006,635	2,186,192	3,722,317	981,261
Income Tax Benefit 5	41,152	–	129,142	–
Net Profit	2,047,787	2,186,192	3,851,459	981,261
Basic Net Profit per Share	0.34	0.42	0.68	0.18
Diluted Net Profit per Share	0.34	0.42	0.67	0.18
Shares Used in Computing Basic Net Profit per Share	5,938,942	5,183,686	5,630,741	5,349,795
Shares Used in Computing Diluted Net Profit per Share	6,030,915	5,230,653	5,723,586	5,387,516

Consolidated Balance Sheets (IFRS)

		09/30/2005	12/31/2004
	NOTE	EURO	EURO
		(unaudited)
Assets
Current Assets
Cash and Cash Equivalents		2,561,347	12,531,198
Available-for-Sale Financial Assets		47,611,873	24,698,532
Accounts Receivable		4,999,163	2,304,778
Other Receivables		–	392,035
Prepaid Expenses and Other Current Assets	5	990,839	430,608
Total Current Assets		56,163,222	40,357,151
Non-Current Assets
Property, Plant and Equipment, Net	5	4,835,365	2,330,995
Patents, Net		2,475,623	2,790,091
License Fees, Net		8,760,601	9,671,131
Software, Net		154,158	288,115
Know How & Customer List, Net	5	2,070,083	–
Goodwill	5	4,154,556	–
Deferred Tax Asset		283,815	–
Other Assets		511,068	358,210
Total Non-Current Assets		23,245,269	15,438,542
Total Assets		79,408,491	55,795,693
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable		4,581,402	3,838,144
Current Portion of License Payable		1,527,290	910,243
Provisions		273,463	600,607
Current Portion of Deferred Revenue		4,029,881	4,757,249
Total Current Liabilities		10,412,036	10,106,243
Non-Current Liabilities
Licenses Payable, Net of Current Portion		971,168	880,015
Deferred Revenue, Net of Current Portion		4,026,981	5,100,646
Convertible Bonds Due to Related Parties		73,614	109,692
Deferred Tax Liability	5	1,472,013	220,611
Total Non-Current Liabilities		6,543,776	6,310,964
Stockholders' Equity
Common Stock, EUR 3.00 Par Value;	4
Ordinary Shares Authorized (11,416,850 and 9,597,400)
Ordinary Shares Issued (5,997,613 and 5,438,852)
Ordinary Shares Outstanding (5,967,551 and 5,408,790)
for 2005 and 2004, respectively
Treasury Stock (30,062 and 30,062 shares
for 2005 and 2004, respectively), at Cost		17,981,806	16,305,523
Additional Paid-in Capital	4	95,836,575	78,646,377
Accumulated Other Comprehensive Income		809,035	452,782
Accumulated Deficit		(52,174,737)	(56,026,196)
Total Stockholders' Equity		62,452,679	39,378,486
Total Liabilities and Stockholders' Equity		79,408,491	55,795,693

Consolidated Statements of Changes in Stockholders' Equity (IFRS) – unaudited

Common Stock

	Shares	EURO
Balance at January 1, 2004	4,901,332	14,703,996
Compensation Related to the Grant of Stock Options and Convertible Bonds	–	–
Conversion of Convertible Bonds Issued to Related Parties	19,850	59,550
Conversion of Convertible Bonds,
Net of Issuance Cost of € 124,083	490,133	1.470,399
Other Comprehensive Income: Change in Unrealized Gain on Available-for-Sale Securities, Net of Deferred Tax Asset	–	–
Foreign Currency Gain from Consolidation	–	–
Net Profit for the Period	–	–
Comprehensive Income	–	–
Balance at September 30, 2004	5,411,315	16,233,945
Balance at January 1, 2005	5,438,852	16,316,556
Compensation Related to the Grant of Stock Options and Convertible Bonds	–	–
Exercise of Options and Convertible Bonds Issued to Related Parties	68,628	205,884
Capital Increase, Net of Issuance Cost of € 483,253	490,133	1,470,399
Other Comprehensive Income: Change in Unrealized Gain on Available-for-Sale Securities, Net of Deferred Tax Asset	–	–
Foreign Currency Gain from Consolidation	–	–
Net Profit for the Period	–	–
Comprehensive Income	–	–
Balance at September 30, 2005	5,997,613	17,992,839

Total

		Additonal				Total
Treasury Stock		Paid-in	Revaluation	Translation Eq	Accumulated	Stockholders'
		Capital	Reserve	Reserve	Deficit	Equity
Shares	EURO	EURO	EURO	EURO	EURO	EURO
59,762	(21,934)	68,632,990	244,930	50,826	(56,308,308)	27,302,500
–	–	764,863	–	–	–	764,863
–	–	172,497	–	–	–	232,047
–	–	7,360,247	–	–	–	8,830,646
–	–		256,326	–	–	256,326
–	–	–	–	557	–	557
–	–	–	–	–	981,261	981,261
–	–	–	–	–	–	1,238,144
59,762	(21,934)	76,930,597	501,256	51,383	(55,327,047)	38,368,200
30,062	(11,033)	78,646,377	403,229	49,553	(56,026,196)	39,378,486
–	–	872,197	–	–	–	872,197
–	–	871,932	–	–	–	1,077,816
–	–	15,446,069	–	–	–	16,916,468
–	–	–	91,827	–	–	91,827
–	–	–	–	264,426	–	264,426
–	–	–	–		3,851,459	3,851,459
–	–	–	–	–	–	4,207,712
30,062	(11,033)	95,836,575	495,056	313,979	(52,174,737)	62,452,679

Consolidated Statements of Cash Flows (IFRS) – unaudited

	2005	2004
For the Periods ended September 30, Note	EURO	EURO
Operating Activities
Net Profit	3,851,459	981,261
Adjustments to Reconcile Net Profit to Net Cash Provided by / (Used in) Operating Activities:
Depreciation	620,720	469,126
Amortization of Intangible Assets	1,669,482	1,488,401
Income Tax Benefit	(126,684)	–
Net Gain on Sales of Financial Assets	(487,955)	(109,748)
Unrealized Net Loss on Derivative Financial Instruments	330,506	70,590
Loss on Sale of Property and Equipment	29,208	–
Loss on Sale of Intangible Assets	3,792	–
Recognition of Deferred Revenue	(9,003,491)	(9,027,910)
Stock-Based Compensation	872,197	764,863
Changes in Operating Assets and Liabilities:
Accounts Receivable	(2,276,754)	(2,023,145)
Prepaid Expenses and Other Assets	(467,854)	75,442
Accounts Payable and Provisions	295,075	195,440
Licenses Payable	708,200	217,682
Other Liabilities	(1,408,908)	166,823
Deferred Revenue	7,202,457	6,810,025
Net Cash Provided by Operating Activities	1,811,450	78,850

	2005	2004
For the Periods ended September 30, Note	EURO	EURO
Investing Activities:
Purchases of Financial Assets	(38,728,094)	(14,682,499)
Proceeds from Sales of Financial Assets	16,690,275	9,055,420
Purchases of Property, Plant and Equipment	(438,406)	(1,185,719)
Proceeds from Disposals of Property, Plant and Equipment	62,962	19,408
Additions to Intangibles	(70,146)	(138,134)
Acquisition of Biogenesis, Net of Cash Acquired 5	(7,057,664)	–
Net Cash Used in Investing Activities	(29,541,073)	(6,931,524)
Financing Activities:
Proceeds from the Issuance of Equity 4	17,399,721	8,954,729
Proceeds from the Exercise of Options and Convertible Bonds Granted to Related Parties 4	1,077,816	232,047
Net of Proceeds and Payments from the Issuance of Convertible Bonds Granted to Related Parties	(36,078)	(26,950)
Purchases of Derivative Financial Instruments	(75,000)	(158,576)
Proceeds from the Disposal of Derivatives	136,529	508,000
Cost of Share Issuance	(767,068)	(124,083)
Net Cash Provided by Financing Activities	17,735,920	9,385,167
Effect of Exchange Rate Differences on Cash	23,852	557
(Decrease) / Increase in Cash and Cash Equivalents	(9,969,851)	2,533,050
Cash and Cash Equivalents at the Beginning of the Period	12,531,198	6,652,456
Cash and Cash Equivalents at the End of the Period	2,561,347	9,185,506

Notes to the Consolidated Financial Statements – unaudited

The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), IAS 34 "Interim Financial Reporting" adopted by the International Accounting Standards Board, London, in consideration of interpretations of the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC).

The consolidated financial statements for the period ended September 30, 2005, include MorphoSys AG, MorphoSys IP GmbH, MorphoSys USA, Inc., Biogenesis, Inc., and Biogenesis Ltd. (together referred to as the "Group").

Changes in Accounting Policies 1

The accounting policies applied for the financial statements as of December 31, 2004, have been used throughout the first nine months of 2005, except for the following changes:

Basis of Consolidation

The equity of the subsidiaries is consolidated according to IFRS 3 "Business Combinations". All business combinations are accounted for using the purchase method, whereby identifiable assets acquired and liabilities assumed are measured initially at their fair value. Any excess of the purchase price over the amounts allocated is recognized as goodwill. The goodwill is subject to a regular review for possible impairment.

The Company determined the accounting for business combinations in the third quarter 2005 only provisionally. The Company is currently performing a purchase price allocation. The outcome may result in an adjustment of the goodwill following IFRS 3.62, any adjustments to the provisional values will be recognized within twelve months of the acquisition date (IFRS 3.69). Please see note 5 for detailed information.

Cost of Goods Sold

Cost of goods sold comprises the cost of manufactured products and the acquisition cost of purchased goods which have been sold.

Inventories

Inventories are stated at the lower of manufacturing or acquisition cost and net realizable value on the FIFO basis. Manufacturing cost of self-constructed inventories comprises all costs which are directly attributable and an appropriate proportion of overhead.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Replacements and improvements are capitalized while general repairs and maintenance are charged to expense as incurred. Assets are depreciated with their expected useful lives using the straight-line method. Leasehold improvements are depreciated over the estimated useful lives of the assets.

Segment Reporting

General and administrative expenses are allocated to the respective business segments by applying an allocation along the headcount. Intangibles attributable to both segments are allocated along revenues.

Segment Reporting 2

A segment is a distinguishable component of the Group that is engaged in providing products or services and that is subject to risks and returns that are different from those of other segments.

Segment information is presented in respect of the Group's business and geographical segments. The primary format, business segments, is based on the Group's management and internal reporting structure. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

The Group consists of the following main business segments:

Therapeutic Antibodies

MorphoSys possesses one of the leading technologies in the generation of human antibody therapeutics and bespoke antibody research projects. The Company makes use of its technology in collaborations with international pharmaceutical and biotech companies.

Research Antibodies

The reagent business leverages MorphoSys' core technological capabilities in the design and manufacture of antibodies for research purposes. It commercializes HuCAL® technology focusing on the custom generation of research antibodies for partners on an individual basis.

Geographical Segments

In presenting information on the basis of geographical segments, revenue is based on the geographical location of the customers.

		Therapeutic Antibodies		Research Antibodies		Unallocated		Consolidated
For the Periods ended Sept. 30,
in 000's €	2005	2004	2005	2004	2005	2004	2005	2004
Revenues	20,716	15,234	3,116	503	–	–	23,832	15,737
Cost of Goods Sold	–	–	1,877	652	–	–	1,877	652
Gross Profit	20,716	15,234	1,239	(149)	–	–	21,955	15,085
Segment Result	7,852	4,790	(1,878)	(1,701)	(2,134)	(1,936)	3,840	1,153
Interest Income	–	–	–	–	–	–	87	237
Interest Expense	–	–	–	–	–	–	213	252
Other Income / (Expenses), net	–	–	–	–	–	–	8	(157)
Income Tax Benefit	–	–	–	–	–	–	129	–
Total Profit	–	–	–	–	–	–	3,851	981

		Therapeutic Antibodies		Research Antibodies		Unallocated		Consolidated
in 000's €	09/30/2005	09/30/2004	09/30/2005	09/30/2004	09/30/2005	09/30/2004		09/30/2005 09/30/2004
Revenues	7,146	6,617	1,318	179	–	–	8,464	6,796
Cost of Goods Sold	–	–	767	241	–	–	767	241
Gross Profit	7,146	6,617	551	(62)	–	–	7,697	6,555
Segment Result	2,969	2,987	(490)	(556)	(683)	(531)	1,796	1,900
Interest Income	–	–	–	–	–	–	32	123
Interest Expense	–	–	–	–	–	–	72	87
Other Income, net	–	–	–	–	–	–	251	250
Income Tax Benefit	–	–	–	–	–	–	41	–
Total Profit	–	–	–	–	–	–	2,048	2,186

The following table shows the split of the Company's consolidated sales by geographical markets:

in 000's €	09/30/2005	09/30/2004
Germany	5,908	2,238
U.S.A. and Canada	9,591	9,806
UK	782	–
Switzerland	6,988	3,071
Other Europe	250	622
Other	313	–
Total	23,832	15,737

Changes in Stockholders' Equity 3

Common Stock

On September 30, 2005, the Common Stock of the Company was € 17,981,806 (December 31, 2004: € 16,305,523). An increase of € 1,470,399 arose as a result of a capital increase executed on March 15, 2005. Through conversion of convertible bonds and exercises of options issued to management and employees, Common Stock increased by an additional € 205,884 in the first nine months of 2005.

Authorized Capital

On May 11, 2005, the Annual Shareholders' Assembly authorized the Company to increase Authorized Capital I by 215,008 shares to create a maximum of 2,175,541 new shares of Authorized Capital I (December 31, 2004: 1,960,533 shares). Also approved was an increase to Authorized Capital II of 592,898 shares to create a maximum of 592,898 new shares of Authorized Capital II (December 31, 2004: 490,133 shares). These capital measures have been recorded in the commercial register as of September 26, 2005.

Conditional Capital

In the first nine months of 2005, 900 shares were raised from Conditional Capital I through exercise of the same number of options by employees, increasing the subscribed capital by € 2,700. Furthermore, 29,775 shares were raised from Conditional Capital II through exercise of the same number of options by employees, increasing the subscribed capital by € 89,325 and 36,078 shares were raised from Conditional Capital IV through exercise of the same number of convertible bonds by employees, increasing the subscribed capital by € 108,234. Finally, 1,875 shares were raised from Conditional Capital V through exercise of the same number of options by employees, increasing the subscribed capital by € 5,625 in the first three quarters of 2005.

On May 11, 2005, the Annual Shareholders' Assembly authorized the Company to create an additional 74,017 shares for Conditional Capital V to create a maximum amount of € 732,840 (244,280 shares).

Also approved was a further increase in Conditional Capital IV of 150,269 shares, thereby creating a maximum amount of € 1,720,248 (573,416 shares). The additional creation of 817,258 shares to increase Conditional Capital III up to € 4,806,375 (1,602,125 shares) has been authorized by the Annual Shareholder's Assembly. All capital measures have been recorded in the commercial register as of September 26, 2005.

Additional Paid-In Capital

On September 30, 2005, Additional Paid-in Capital amounted to € 95,836,575 (December 31, 2004: € 78,646,377). The increase of € 17,190,198 is due to stock-based compensation provisions in the amount of € 872,197 and € 15,446,069 as a result of the capital increase on March 15, 2005 including net direct share issuance cost of € 483,253. A further increase of € 871,932 arose from exercise and conversion of convertible bonds and stock options issued to related parties.

Changes in Stock Options 4

In the year 2005, a stock options grant was executed under the 2002 Stock Options Plan with terms identical to the 2003 and 2004 stock option grants. On July 1, 2005, 63,000 options were granted to executive board members and 34,358 options were granted to employees of MorphoSys Group.

Preliminary Goodwill Allocation 5

On January 20, 2005, MorphoSys acquired Biogenesis Ltd. (Poole/UK) and Biogenesis, Inc. (Brentwood, New Hampshire, U.S.A.). The final agreements specified the purchase of 100% ownership of the two companies by MorphoSys AG for a total of £ 5,250,000, less net debt of approximately £ 0.7 million. The total cost for financial advisors, legal counsel and other advisors was € 706,281. The two Biogenesis companies became wholly owned subsidiaries of MorphoSys AG. In the nine month-period ended September 30, 2005, the subsidiaries contributed a net loss of € 0.2 million to the consolidated net profit for the first three quarters of 2005. In accordance with IFRS 3.62 and 3.69, the group has applied a preliminary goodwill allocation. The acquisition had the following effect on the Group's assets and liabilities:

	Biogenesis Group
Recognized	Fair Value	Fair Value
Values	Adjustments	Amount
206	–-	206
1,788	898	2,686
123	328	451
425	–	425
–	2,230	2,230
(990)	–	(990)
(543)	–	(543)
–	(1,266)	(1,266)
1,009	2,190	3,199
		4,065
		7,264
–	–	206
–	–	7,058

* Advisors fees amounting to € 0.7 million included

As of September 30, 2005, foreign exchange effects of € 0.3 million were recognized for the assets acquired and accounted for as Other Comprehensive Income.

Directors' Dealings 6

The table below shows the shares, stock options and convertible bonds as well as the changes of ownership of the same, which were held by the Management Board and the Supervisory Board during the first nine months of 2005:

Shares
	01/01/2005	Additions	Forfeitures	Sales	09/30/2005
Management Board
Dr. Simon E. Moroney* (held through a controlled entity)	113,461	–	–	–	113,461
Dave Lemus	–	–	–	–	–
Total	113,461	–	–	–	113,461
Supervisory Board
Dr. Gerald Möller	2,500	–	–	–	2,500
Dr. Daniel Camus	–	–	–	–	–
Dr. Metin Colpan	–	–	–	–	–
Prof. Dr. Jürgen Drews	–	–	–	–	–
Prof.Dr.Andreas Plückthun*	59,300	–	–	–	59,300
Dr. Geoffrey N. Vernon	–	–	–	–	–
Total	61,800	–	–	–	61,800

* Shares were subject to share loan agreement as of March 14, 2005 in connection with a capital increase and were retransferred on April 13, 2005

	Stock Options
--	---------------

01/01/2005	Additions	Forfeitures	Sales	09/30/2005
47,000	36,000	–	–	83,000
21,000	27,000	–	–	48,000
68,000	63,000	–	–	131,000
2,500	–	2,500	–	–
–	–	–	–	–
–	–	–	–	–
3,930	–	1,500	–	2,430
1,500	–	1,500	–	–
1,500	–	1,500	–	–
9,430	–	7,000	–	2,430

	01/01/2005	Additions	Forfeitures	Sales	09/30/2005
Management Board
Dr. Simon E. Moroney	19,474	–	–	–	19,474
Dave Lemus	30,228	–	–	24,000	6,228
Total	49,702	–	–	24,000	25,702
Supervisory Board
Dr. Gerald Möller	2,500	–	–	–
Dr. Daniel Camus	1,500	–	–	–
Dr. Metin Colpan	–	–	–	–
Prof. Dr. Jürgen Drews	–	–	–	–
Prof. Dr. Andreas Plückthun	1,500	–	–	–
Dr. Geoffrey N. Vernon	1,500	–	–	–	2,500 1,500 – – 1,500 1,500

New Research & Development Agreements 7

In June 2001, a lawsuit was filed against the Company by Applied Molecular Evolution, Inc., ("AME") San Diego, California, U.S.A., (a wholly owned subsidiary of Eli Lilly & Company) at the United States District Court of Massachusetts in Boston/U.S.A., alleging that the Company infringes the Kauffman-Ballivet patent family. These patents cover the stochastic production of proteins and were granted in the late 1990s. In January 2003 MorphoSys confirmed that it had received a positive "Report and Recommendation" from the Magistrate Judge to the District Judge for the District Court in Boston, Massachusetts, U.S.A., in the legal action filed by Applied Molecular Evolution. The Magistrate Judge recommended that MorphoSys' motion for summary judgment of non-infringement be allowed and that AME's motion for partial summary judgment of infringement be denied. In September 2004, the District Judge issued a "Memorandum and Order" wherein he declined to adopt the recommendation and denied the summary judgment motions. Instead he ordered that a Markman hearing, which took place on April 1st, 2005, for claim construction should be held. In September 2005, MorphoSys announced a cross license agreement with Eli Lilly & Company (Lilly) on the use of certain recombinant protein technologies. This agreement is part of a settlement to resolve the above mentioned patent litigation with AME. Under the agreement, MorphoSys receives a license under the Kauffman patent estate to generate and screen certain recombinant peptide and protein libraries and to commercialize any resulting products. The agreement also provides Lilly access to the MorphoSys HuCAL GOLD® technology for Lilly's internal research & development programs. For any therapeutic antibodies Lilly develops under the agreement, it will pay MorphoSys exclusive licensing fees, success fees, milestone payments and royalties on end products. The settlement agreement covers MorphoSys' and it's partners past, present and future use and commercialization of all versions of its HuCAL® libraries, as well as its TRIM technology. The agreement also gives Lilly access under agreed terms to Antibodies by Design, MorphoSys' business unit focusing on development of custom monoclonal antibodies for non-therapeutic purposes.

In September 2005, MorphoSys signed a three year license agreement with Shionogi & Co., Ltd. (Shionogi) on the use of MorphoSys' HuCAL® technology. Under the terms of the agreement, MorphoSys grants Shionogi access to its HuCAL GOLD® antibody library for use in Shionogi's pharmaceutical drug discovery programs. In return, MorphoSys stands to receive an up-front payment and annual user fees during the life span of the agreement.

Imprint

Contact

Corporate Communications

Dave Lemus Chief Financial Officer Tel.: +49 89 899 27-439 Fax: +49 89 899 27-5439

Dr. Claudia Gutjahr-Löser Director Corporate Communications Tel.: +49 89 899 27-122 Fax: +49 89 899 27-5122

Mario Brkulj PR Specialist Tel.: +49 89 899-454 Fax: +49 89 899 27-5454

MorphoSys AG Lena-Christ-Str. 48 82152 Martinsried / Planegg Germany

E-mail: investors@morphosys.com Internet: www.morphosys.com