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MorphoSys AG — Management Reports 2007
Feb 28, 2008
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Management Reports
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Consolidated Financial Statements (IFRS)
Group Management Report
2007 was the most successful year in the history of MorphoSys. First and foremost, MorphoSys was able to secure one of the industry's largest collaborations with Novartis, providing committed funding over the next 10 years in excess of W 410 million. Group revenues were up by 17 % from the prior year to W 62.0 million, and operating profi t increased by 13 % to W 7.0 million, including oneoff advisory costs in connection with the Novartis alliance.
REVIEW OF THE 2007 FISCAL YEAR
During the 2007 fi scal year, MorphoSys witnessed a continued high demand for its proprietary antibody technology HuCAL. At its headquarters in Germany and its subsidiaries in the UK and in the US, MorphoSys employed in total approximately 300 employees. The Company recorded the strongest business growth in the therapeutic antibodies segment.
On the operational level, the demand for MorphoSys's technology offerings was demonstrated by the collaborations signed during the year. First, in March 2007, the Company signed a therapeutic antibody collaboration with the second-largest Japanese pharmaceutical company Astellas. Furthermore, at the end of 2007, MorphoSys entered into a new 10-year collaboration agreement with Novartis, creating one of the biggest R&D alliances not only in the history of MorphoSys, but of the entire biotechnology industry.
The proprietary antibody programs MOR103 and MOR202 remained well on track. For MOR103, MorphoSys fi led a CTA (clinical trial application) in December 2007. In addition, MorphoSys secured a strong IP position around the underlying target molecule for MOR103.
In 2006, MorphoSys started a multi-year technology development program which will lead to a signifi cantly enhanced version of its antibody generation platform. To benefi t this effort, the Company in-licensed a broad portfolio of antibody-related patents from Dyax in November 2007. Financially speaking, in May 2007, MorphoSys successfully placed 652,188 shares with international institutional investors in Europe and North America, at a price of w 50.00 per share. Through the issue, the Company raised gross proceeds of approximately w 32.6 million, increasing its cash balance to over w 100 million. Furthermore, MorphoSys reported a tax benefi t in the amount of w 2.3 million for 2007 due to capitalization of all tax loss carry-forwards.
Looking ahead, MorphoSys will continue to advance its two-segment business model. With the fi nancial strength provided by the newly signed Novartis agreement, the Company intends to augment its own activities in proprietary drug development, while further broadening its partnered therapeutic antibody pipeline. The Research Antibodies segment is expected to grow and to increase its current market share.
ORGANIZATIONAL STRUCTURE AND BUSINESS ACTIVITIES
ORGANIZATIONAL STRUCTURE AND GLOBAL PRESENCE
Presently, MorphoSys conducts its business in two operating segments. One segment, the Therapeutic Antibodies unit, develops drug candidates for commercial partners as well as MorphoSys's own proprietary product pipeline. MorphoSys's second operating segment, the Research Antibodies unit, delivers high-quality antibodies to the research market, under the brand AbD Serotec.
MorphoSys is present in several locations throughout Europe and the USA. The three primary facilities for the Company include MorphoSys headquarters in the German biotechnology cluster Martinsried near Munich, newly opened labs in the academic center of Oxford, England, and offi ces in the technology region of Research Triangle Park near Raleigh, North Carolina, USA.
All MorphoSys's Therapeutic Antibodies segment activities are based in Martinsried. Research activities include development and functional characterization of product candidates for the pharmaceutical and biotechnology industries as well as for the Company's internal development pipeline. All Group corporate S, G&A functions are centralized in Martinsried.
The research antibody segment AbD Serotec is also present in Martinsried through both administrative functions and through efforts to generate new research antibodies based on the HuCAL technology, related historically to the Antibodies by Design business initiative. MorphoSys's second-largest site is located in Oxford, England, with 83 AbD Serotec employees. The research at this location is primarily focused on the development and characterization of antibodies to be used as research reagents, as well as international sales and marketing functions except for the US.
AbD Serotec is currently represented in the most important research antibody market, the USA, by a 20-person team based in Raleigh, North Carolina. At present, the primary function of this location remains marketing and sales support for the business; there are currently no research activities at this site.
The streamlining of the Group's corporate structure was accomplished during the year according to plan. The subsidiaries were merged and renamed in January 2007. In Germany, Serotec GmbH (Düsseldorf, Germany) was renamed MorphoSys AbD GmbH. In the UK, the former Biogenesis UK was fi rst renamed MorphoSys UK Ltd. and in 2007 again renamed Poole Real Estate Ltd. Furthermore, Serotec Ltd. (Oxford, UK) was renamed MorphoSys UK Ltd. In the United States, the former Biogenesis, Inc. (Brentwood, New Hampshire) was merged into the former Serotec, Inc. (Raleigh, NC, USA), and subsequently renamed MorphoSys US, Inc.
PRODUCTS AND MARKETS
THERAPEUTIC ANTIBODIES SEGMENT
The partnered therapeutic antibody pipeline continued its growth to reach a total of 50 programs at the end of 2007. Of these programs, two candidates advanced to clinical development during 2007, bringing the number of antibody programs in phase 1 clinical trials at year-end to 4. The number of programs in pre-clinical development increased from 14 to 23 programs, and the number of research programs amounted to 23 at the end of 2007 (2006: 27 programs).
Additionally, MorphoSys continued to develop proprietary therapeutic antibody candidates in the area of infl ammation and oncology. The Company's proprietary antibody pipeline currently consists of two programs, namely MOR103 and MOR202. In December 2007, MorphoSys submitted a clinical trial application (CTA) in the Netherlands to initiate a phase 1 clinical trial using the HuCAL-derived antibody MOR103 for the treatment of rheumatoid arthritis. The phase 1 trial is a randomized, double-blind, placebo-controlled, single-ascending dose trial and will be conducted in healthy volunteers. The study will evaluate MOR103's safety and tolerability as well as the pharmacokinetics of escalating doses. MOR202 is a fully human HuCAL antibody directed against CD38, a therapeutic target for the treatment of multiple myeloma and certain leukemias. During 2007, the Company conducted further pre-clinical studies, which produced promising results in animal tumor models.
The market for therapeutic antibodies is highly competitive. On the basis of technologies used, MorphoSys's main competitors can broadly be classifi ed in two categories, namely other antibody and antibody fragment technologies such as provided by Medarex, Dyax, Domantis (acquired by GSK) and Ablynx; and alternative scaffold-based immunotherapy, such as Molecular Partners (Switzerland) and Pieris (Germany). Due to the ongoing consolidation in the sector, MorphoSys's market position has improved, and allowed the Company to secure additional collaborations.
ABD SEGMENT
AbD (Antibodies Direct) is MorphoSys's research antibody division. The AbD Serotec brand was created in early 2006 to market the combined products and services of Antibodies by Design, Biogenesis, Serotec, and Oxford Biotechnology – representing more than 10,000 antibodies and immunological reagents, custom monoclonal antibodies developed from the MorphoSys HuCAL library, and large- and small-scale antibody production and conjugation services.
The AbD unit is collaborating with a couple of important licensing partners to further enlarge and improve the quality of its range of services. Amongst those partners is the Thermo Fisher Group providing technologies to prepare fl uorescent reagents, Great Britain's Medical Research Council providing access to a broad range of hybridoma cell lines as a source of research antibodies, and Molecular Probes, part of Invitrogen Corp., for access to the Alexa Flour family of fl uorescent dyes.
Since the start of the Research Antibodies segment AbD in 2004, rapid progress has been made in establishing the AbD Serotec unit as a leading supplier in the research antibody market. In a survey of the industry conducted by the company BioCompare at the beginning of 2007, AbD Serotec ranked No. 11 worldwide for customer recognition. Prior to the acquisitions, neither Serotec nor Antibodies by Design/Biogenesis were ranked in the top 20. AbD Serotec has made considerable progress since its foundation and continues to gain market share.
The research antibodies market is currently undergoing a period of technological change and consolidation. In structural terms, the market is very fragmented, with a large number of small providers. The main competitors are larger providers of research tools including antibodies such as Invitrogen and Millipore, as well the UK-based Abcam, which has specialized in the commercialization of research antibodies.
Despite the fact that the segment did not fully achieve all of its fi nancial goals set at the beginning of 2007, AbD Serotec has emerged as one of the leading suppliers of research antibodies. AbD Serotec is recognized as a high-quality research antibodies supplier, with superior products and reliable customer support.
PROCUREMENT
MorphoSys generally procures raw materials and supplies for its research activities and for the production of antibody material from external international suppliers. Most of the purchased materials are standard lab materials, provided by a large number of sellers. MorphoSys holds reserves to prevent supply bottlenecks and possible dependence on single providers. The main task of procurement is to purchase safe, high-quality materials at favorable conditions. To this end, the Company continually analyzes the international procurement markets and pools MorphoSys's needs worldwide as far as possible. The price of raw materials and supplies may vary substantially. Therefore, MorphoSys aims to secure strategic materials through mediumand long-term contracts, and has so far not experienced diffi culties in obtaining suffi cient amounts of raw materials and supplies at a reasonable cost.
Since the AbD segment actively competes with other providers of research antibodies worldwide, the Company seeks to reinforce the external distribution network with co-promotion and co-marketing arrangements.
PRODUCTION
Along with the evolution of optimized HuCAL versions over the last 15 years, MorphoSys has in parallel established several in-house manufacturing and analytics platforms serving the requirements of the project teams in both areas of research and discovery, as well as pre-clinical development. Those platforms facilitate the production of a large number of antibodies selected from HuCAL at high-throughput in the microgram to milligram scale and provide pre-clinical material (e.g. for initial animal studies) in the multigram scale. In order to provide a seamless transition from research applications to the production of clinical-grade material, the in-house expression systems have been chosen such that they can be used by external contract manufacturing organizations (CMO) under regulated environments (GMP) as well.
In recent years, MorphoSys has in-licensed and co-developed various innovative expression systems and has developed effi cient production processes customized for the requirements described above. For the expression of antibody fragments, MorphoSys uses mainly bacterial expression systems. Production platforms have been generated e.g. based on Wacker's innovative E. coli secretion system and effi cient E. coli production processes have been co-developed with Lonza. For the production of full IgGs, MorphoSys predominantly used the HKB11 cell
line in-licensed from Bayer and the PER.C6® cell line from Crucell as the basis for the design of in-house platforms. Both cell lines are of human origin and allow the production of human antibodies in human cell lines. This concept has been followed for the fi rst time in the MOR103 program, using human cell lines from the bench through clinical trials.
Besides selection of an appropriate expression system, the design of the overall manufacturing strategy is crucial as well. Effi cient process development in production and testing activities (offi cially summarized as CMC – Chemistry, Manufacturing & Control) takes into consideration the key criteria in this fi eld, which are speed, cost and quality. CMC determines the economy and quality of manufacturing, which is one of the most comprehensive steps in the entire development strategy. The major challenge here is to design a robust process reliably providing a safe pharmaceutical ingredient at acceptable costs. The ability to assure, over time, reproducible physical and chemical properties of an active pharmaceutical ingredient is critical for regulatory approval and therapeutic success.
For the production of clinical-grade material of MOR103, MorphoSys has signed a license agreement with the Dutch biotechnology company Crucell N.V. and a biopharmaceutical manufacturing agreement with Crucell's partner DSM Biologics.
ENVIRONMENTAL PROTECTION
MorphoSys is committed to environmental protection and high standards for quality and safety. All relevant environmental issues are regularly monitored and assessed. The Company's entire waste disposal system is continually reviewed and evaluated with respect to the potential for improvement.
MorphoSys is not subject to direct regulation other than regulation generally applicable to businesses of its kind. This includes various laws and regulations in effect in the different jurisdictions in which the Company operates, including laws and regulations applicable to environmental matters, such as the handling and disposal of hazardous waste. In total, the Company's research and development activities involve only small amounts of hazardous materials and chemicals.
The biotechnology industry, the sector in which MorphoSys is active, does not belong to the carbon-intensive sectors. MorphoSys is exploiting measures to further reduce its greenhouse gas emissions in the interests of the environment. The implementation of a video conferencing system for communication between the different sites of the MorphoSys Group and with our business partners has reduced the need to travel and meet in person.
QUALITY MANAGEMENT
Within the framework of the Company's quality management system, all business processes are continuously scrutinized and enhanced. Continuous improvement is an element of all of the Company's procedures.
To produce materials for therapeutic or diagnostic use, strict guidelines and regulatory standards must be met for all personnel and processes involved. All pharmaceutical products, including clinical trial materials, must be manufactured so as to ensure that they comply with the requirements of market authorization and do not place patients at risk due to inadequate safety, quality or effi cacy. Typical regulatory standards include protocols set out by the FDA and EMEA. Examples include ISO (international quality system), GLP (good laboratory practice), GMP (good manufacturing practice), and GCP (good clinical practice).
As MorphoSys is increasing its proprietary therapeutic activities, a quality assurance system was implemented during 2007. Additionally, the Company applied for a manufacturing license, allowing MorphoSys to release clinical trial material for MOR103 clinical studies as a sponsor. The manufacturing license was issued by the Bavarian government in January 2008.
Within the AbD segment, quality is the key to delivering a market-leading solution, and ISO9001:2000 accreditation, the worldwide quality standard, has been in place at Serotec Ltd. since December 1994 and at Serotec, Inc., since May 2003. This quality system provides a sound framework from which to operate, and all of these groups were successfully audited again during 2007.
AbD sells a group of "CE"-marked products that conform to the directives of the in vitro Medical Device Regulations and can be sold and used by customers as in vitro medical diagnostic devices. MorphoSys UK has updated quality systems during the year in compliance with the ISO13485:2006 standard, the standard for businesses involved in medical devices and in vitro diagnostic medical devices, and is expecting its initial formal audit and registration to this standard in the fi rst half of 2008. It is planned that a number of manufacturing systems will be compliant with GMP standards in 2008.
JOB SAFETY
A healthy and safe working environment is a high priority for MorphoSys. An initial medical checkup is performed for all new employees of the research and development department. In addition, the Company offers all employees in research and development the option to be vaccinated against hepatitis A and B. Every three years, all employees of the R&D department receive a medical checkup. For the employees of the S, G&A department, a regular eyesight test is offered.
MorphoSys conducts its research in safety level "Bio I" and "Bio II" laboratories under strict observance of all relevant legal guidelines. Internal standards are more stringent than those guidelines which are legally required.
As part of the expert team of employees responsible for work safety, biological safety and fi re prevention, there is one designated employee dedicated to work safety alone. This person is responsible for providing employees with regular training and updates to inform them of the latest guidelines. MorphoSys employees are familiar with all requirements relating to job safety, handling of hazardous materials as well as accident and fi re prevention. During 2007, there were no industrial accidents.
Due to regular maintenance by internal employees, all laboratory equipment adheres to the highest possible standard of safety.
INFORMATION TECHNOLOGY
During 2007, MorphoSys has implemented new ERP (enterprise resource planning) software for its S, G&A functions. The new system is expected to further increase the effi ciency of the ordering and accounting process.
A further core task during 2007 was to establish a new archiving solution for all corporate documents and business data, which fulfi lls all compliance requirements for clinical development.
To improve knowledge sharing and information exchange between all sites of the MorphoSys Group, the Company implemented a new intranet.
PATENTS AND LICENSES
In 2007, as the Company's patent portfolio continued to mature, the Company began pursuing national phase patent protection in numerous countries for its MOR103 and MOR202 programs, and fi led numerous patent applications for new proprietary platform technologies. Currently, the Company is prosecuting about 20 different proprietary patent families worldwide, which is in addition to the numerous collaboration-based antibody patent families the Company is pursuing in cooperation with its partners.
GROUP MANAGEMENT & SUPERVISION
MorphoSys AG is a German stock corporation and is managed by the Management Board, which was composed of three members in fi nancial year 2007. In line with the dual board structure, these members are appointed and monitored by the Supervisory Board which also provides advice on a regular basis. Further details regarding management and supervision as well as corporate governance can be found in the Corporate Governance Report of the Annual Report.
Pursuant to § 6 of the Company's Articles of Association, the Management Board shall consist of at least two members, whereas the Supervisory Board defi nes the concrete number of the members of the Management Board. The Supervisory Board may appoint a Chief Executive Offi cer and one or several representatives of the CEO. The members of the Management Board are elected by the Supervisory Board for a maximum term of offi ce of fi ve years. The Supervisory Board may dismiss a Management Board member with good cause prior to the termination of his term of offi ce (§ 84 AktG).
Pursuant to § 20 of the Articles of Association, the Articles may be changed with a majority of more than 50 % of the votes cast and of the share capital represented in the relevant shareholders' meeting, unless mandatory corporate law defi nes a different majority. This provision is in line with §§ 133 and 179 para. 2 sen. 2 AktG.
REGULATORY ENVIRONMENT
MorphoSys operates in the healthcare sector, which is particularly highly regulated. In particular, therapeutic and diagnostic products cannot be marketed without approval from regulatory authorities such as the EMEA or FDA. Therapeutic antibodies require thorough pre-clinical and clinical trials before they are approved for marketing.
For all partnered development programs, MorphoSys's partners are responsible for regulatory affairs. In contrast, MorphoSys is responsible for all regulatory requirements related to its proprietary development programs. At the end of 2007, MorphoSys fi led a clinical trial application in the Netherlands.
Clinical trials involving new drugs are commonly classifi ed into three phases. Before the start of a clinical trial, extensive pre-clinical studies are conducted. After the successful pre-clinical development, the drug development process will normally proceed through all three phases, which requires several years. If the drug successfully passes through phases 1, 2, and 3, it has to be approved by the competent authorities for use in the general population.
For pre-clinical and clinical studies, as well as for the approval process, MorphoSys is following current guidelines.
For research products, such provisions are less stringent, since the products are used for research purposes only.
VALUE-BASED MANAGEMENT
The Group is managed and controlled within the framework of a performance-based management system. The Management's objective is to systematically and continuously increase the value of the Company — through profi table growth and a focus on businesses which offer the best development opportunities in terms of competitiveness and performance.
STRATEGY
MorphoSys's strategy is aimed at extracting the maximum value from its proprietary technologies. Within its therapeutic antibody partnerships, MorphoSys receives technology license fees, R&D funding, success-based milestones and royalties, which are dependent on product sales after product approval.
MorphoSys's main goal on the therapeutic side of its business remains to create a broad antibody development pipeline. After the conclusion of the Novartis collaboration in December 2007, which secures pipeline growth for the years ahead, MorphoSys decided not to sign new fee-forservice partnerships, but increase its efforts to develop proprietary antibody therapeutics.
Within the AbD segment, MorphoSys aims to further increase its market share by constantly increasing its range of services via its catalog and its website. In 2007, AbD added 1,100 new products to its catalog. Additionally, MorphoSys continues to offer custom-made therapeutic antibodies based on the HuCAL technology.
SYNERGIES
HuCAL antibodies used as research tools to identify and validate disease-related target molecules bear the potential to act as diagnostic or therapeutic agents. The more research is performed using HuCAL antibodies, the more likely it is that lucrative commercial opportunities for MorphoSys will result, whether in the therapeutic or diagnostic fi eld or in wider research applications. For this reason, MorphoSys actively promotes the uptake of its technology in the research community.
MorphoSys could get access to therapeutic antibody candidates against new targets, which are discovered by customers of the AbD segment. As a fi rst example for this synergy, MorphoSys signed a collaboration with the New Zealand-based Genesis Research and Development Corporation Ltd.
SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY
MorphoSys's technologies have the potential to help improve treatment options for life-threatening diseases within an aging population. The demand for innovative therapeutics which help to ameliorate patients' quality of life is constantly increasing and allows the Company to expand its business globally.
MorphoSys is dedicated to sustainability and corporate social responsibility, as is clearly described in MorphoSys's credo. The Management Board is convinced that responsible and effective environmental protection and good corporate citizenship are essential to entrepreneurial success and value generation for its stockholders.
In May 2007, MorphoSys decided to make a contribution of w 10,000 to the Ronald McDonald house in Munich. The donation is used to help families with hospitalized children before and after heart operations or transplants.
At the end of each year, the employees of MorphoSys AG support local charitable non-profi t organizations with private donations. In 2007, MorphoSys's staff donated approximately w 3,400 to Elterninitiative Krebskranke Kinder München e.V., an organization supporting families with children suffering from cancer, and südSee Kinder- und Jugendhilfe e.V., an organization offering support for deprived children and adolescents.
In March 2007, MorphoSys sponsored an in-house voluntary characterization of potential bone marrow donors in partnership with the non-profi t foundation Aktion Knochenmarkspende Bayern. Blood samples from more than 40 employees of MorphoSys were characterized and profi les added to the national bone marrow donor registry.
PERFORMANCE MANAGEMENT
An integrated control concept, fi nancial and non-fi nancial performance indicators together with measures to enhance effi ciency and growth are key elements of our management system.
NON-FINANCIAL PERFORMANCE INDICATORS
MorphoSys's management uses various non-fi nancial metrics in order to measure progress towards their organizational goals.
For the 2007 fi nancial year, the KPIs (key performance indicators) against which MorphoSys measured the success of its strategy comprised pipeline development, as well as market share of the AbD segment.
In 2007, the partnered therapeutic antibody pipeline increased by seven new programs to a total of 50 antibody development projects, a record high in the Company's history. During the year, two new programs entered into clinical development, and the number of programs in the pre-clinical phase increased to 23 projects.
For its proprietary development programs, MorphoSys achieved its goal and fi led the necessary application to start clinical development of its lead program MOR103. The second program MOR202 progressed as planned.
| therapeutic segment | 2005 | 2006 | 2007 | |
|---|---|---|---|---|
| Number of Partnered Therapeutic Antibody Projects | 29 | 43 | 50 | |
| Phase 1 | 1 | 2 | 4 | |
| Pre-clinical Development | 7 | 14 | 23 | |
| Research | 21 | 27 | 23 | |
| Number of Proprietary Therapeutic Antibody Projects | 4 | 2 | 2 | |
The AbD segment continued to increase its market share during the last fi scal year. Segment revenues grew at the industry average of 7 %, while the custom monoclonal antibody service grew in excess of 20 %.
FINANCIAL PERFORMANCE INDICATORS
Operational business performance is measured on the basis of revenues and profi t from operations. For both segments, the performance is measured monthly; budget planning for the current fi scal year is reviewed and updated on a quarterly basis. Furthermore, a mid-term planning scenario covering the upcoming years is updated on an annual basis.
The Company is presently reviewing additional key performance indicators beyond those listed above.
| in million E | 2005 | 2006 | 2007 |
|---|---|---|---|
| MORPHOSYS GROUP | |||
| Group Revenues | 33.5 | 53.0 | 62.0 |
| Group Profi t from Operations | 6.2 | 6.2 | 7.0 |
| THERAPEUTIC SEGMENT | |||
| Revenues | 29.1 | 34.7 | 42.4 |
| Segment Result | 14.8 | 16.6 | 15.2 |
| ABD SEGMENT | |||
| Revenues | 4.3 | 18.3 | 19.6 |
| Segment Result | (2.9) | (3.4) | (0.6) |
THE MANAGEMENT'S GENERAL ASSESSMENT OF BUSINESS PERFORMANCE
In the opinion of the Management Board, MorphoSys demonstrated positive performance in 2007. The Company achieved the majority of its primary goals set at the beginning of 2007. Both business segments contributed to this development.
MorphoSys grew more strongly in the Therapeutic Antibodies segment, the main value driver of the Company. The AbD segment continues to grow at market rates. The weakness of the US dollar impacted US-generated revenues negatively. The AbD segment did not achieve the expected operating profi t, mainly due to higher than expected operating costs in the new building, and weaker than expected sales/marketing performance. However, management has signifi cantly improved operational effi ciency throughout the year, substantially reducing both COGS and G&A expenses, and is optimistic about hitting its targets going forward.
The MorphoSys Group again improved its operating result and signifi cantly increased the net income.
With MOR103, the fi rst proprietary antibody program is ready to start clinical development. This is the area in which the management sees the opportunity for future value generation. With the proprietary HuCAL technology, MorphoSys can offer improved treatment options and take advantage of new growth opportunities.
COMPARISON OF THE ACTUAL BUSINESS RESULTS WITH FORECASTS
During the course of the year, the Company reached most of its targets set at the beginning of the year.
| in million E | 2006 | target 2007 | result 2007 | goal achieved | |
|---|---|---|---|---|---|
| Group Revenues | 53.0 | 60 – 65 | 62.0 | √ | |
| TAB Segment | 34.7 | 2/3 of Group revenues |
68 % | √ | |
| AbD Segment | 18.3 | 1/3 of Group revenues |
32 % | √ | |
| Group Operating Profi t | 6.2 | 7 –10 | 7.0 | √ |
The positive development of the therapeutic segment compensated the somewhat lower growth of the research segment. The efforts to expand AbD sales and to increase the productivity of the sales organization as well as the fi nalization of key marketing tools such as the new catalog took longer than anticipated. Growth rates for the research antibodies showed an overall decrease worldwide, although AbD Group sales grew in line with the overall market growth rate. The AbD unit didn't achieve its goal of a positive operating result, and reported a negative segment result of w 0.6 million, which includes a non-cash impairment charge on the ex-Biogenesis US building in Brentwood in the amount of w 0.2 million.
MorphoSys achieved its goals of 50 partnered therapeutic antibody programs as well as the CTA fi ling for its proprietary compound MOR103. The anticipated new marketing alliance in the AbD segment wasn't concluded by year-end, partially as a result of the MorphoSys Management Board focusing on concluding the strategic collaboration with Novartis.
MACROECONOMIC DEVELOPMENT
ECONOMIC DEVELOPMENT
During 2007, the economic environment was generally positive. According to the latest estimates, world GDP increased by 2.7 %. Despite rising prices on the international energy markets and higher interest rates, global growth remained robust. However, the US real estate crisis and the related sub-prime crisis in the fi nancial markets negatively impacted the world economy towards the end of the year.
In the euro zone, the positive economic trend continued in 2007, with a growth of 2.6 % in GDP, which was in line with expectations. Of particular note was the continued upswing in Germany, which was driven mainly by exports, but also by strong investment activity and – to a lesser extent – by consumer spending. In 2007, the euro climbed 10 % against the US dollar.
By contrast, in the US, GDP growth decreased to 2.2 % in 2007, the weakest growth rate since 2002. The weak housing market brought about by the mortgage crisis has had a noticeable impact on the economy. Large write-downs by major banks relating to exposures to sub-prime mortgages led to uncertainty and turbulence in the capital markets. Such write-downs could amount to US \$ 300 – 400 billion worldwide. As a consequence, US consumer spending decreased signifi cantly in the fourth quarter.
In general, global capital markets showed a positive performance during 2007. By way of comparison, the DAX and TecDAX indices improved by 22 % and 30 % respectively. The positive performance of the TecDAX was mainly driven by the performance of solar-energy companies. The primary US stock exchange index, the Dow Jones, closed at 13,265 points at the end of the year, an increase of 7 %. The Japanese Nikkei Index ended the year with a decrease of 12 %.
DEVELOPMENT WITHIN THE PHARMACEUTICAL AND BIOTECHNOLOGY SECTOR
In line with last year's expectation, the global pharma growth rate in 2007 amounted to 5 % according to IMS Health and is expected to stay in a corridor ranging from 5 % up to 8 % in the years ahead. During 2007, the fundamental problems the pharmaceutical industry faces haven't changed. Pipeline and pricing pressure, government regulations, patent expiration and resulting generic drug entries including biosimilars continue to be major challenges for the industry. With regard to product failures both of marketed drugs and late-stage development programs, Pfi zer had to stop the development of its cholesterol-lowering drug Torcetrabip®, Swiss-based Novartis suspended marketing and sales of Zelnorm®, a treatment for irritable bowel syndrome, due to increased risk of heart failure, and Germany's largest drug maker Bayer Schering had to recall its cardiac treatment Trasylol®.
However, the sector generated some success stories, including that of cervical cancer vaccine Gardasil® by US-based Merck, Inc., which was approved in 2006 and reached blockbuster status within its fi rst full year on the market, generating sales of US \$ 1.5 billion in 2007. Other "fi rst-in-class" drugs such as Merck's type 2 diabetes medication Januvia® have seen strong sales growth, underlining still attractive product opportunities in the healthcare sector.
As in the previous two years, pharmaceutical companies increased their activities in the biologics arena, particularly in the therapeutic antibody sector. Several big pharmaceutical companies broadened their access to antibody-based development programs as well as antibodyrelated technologies both through M&A transaction and comprehensive strategic transactions, such as Novartis's alliance with MorphoSys or Sanofi -Aventis's relationship with the US-based Regeneron, Inc. In 2007, Japan's fourth-largest drug maker Eisai acquired the US-based antibody company Morphotek, F. Hoffmann-La Roche acquired Therapeutic Human Polyclonals, Inc., and Astellas bought US-based AgenSys. AstraZeneca's acquisition of MedImmune, Inc., in an all-cash transaction valuing the company at US \$ 15.2 billion was partially motivated by access to the blockbuster antibody drug Synagis®.
At the end of 2007, the number of therapeutic antibodies on the market remained unchanged from the previous year. While no new antibody-based treatment was approved in 2007, the 20 therapeutic antibodies currently on the market achieved total sales of approximately US \$ 25 billion – representing the fastest-growing segment within the pharmaceutical industry with a solid revenue increase of 25 % over the prior year's growth. Pickup in sales of antibodies which gained approval in 2006 such as Lucentis® (Genentech) and indication broadening of existing antibody therapies in oncology and infl ammatory diseases contributed to that growth. With regard to therapeutic antibodies in late-stage development, UCB Pharma received a negative opinion from the European Medicines Agency (EMEA) on its PEGylated antibody fragment Cimzia®, a modifi ed anti-TNF for the treatment of patients with Crohn's disease.
In contrast to the American biotech sector, the stock performance of European biotechnology lagged in 2007. Particularly in Germany, investor sentiment towards biotechnology companies was negatively affected after the two high-profi le phase 3 failures from German biotechnology companies. In Europe, 15 biotechnology companies went public, showing a mixed performance, with an average loss of 14 % in comparison to the issuance price.
During 2007, the pharmaceutical sector continued its underperformance. The FTSE Global Pharma index was fl at, while the FTSE All World index was up 10 %. In 2007, the US NASDAQ Biotechnology Index increased by 5 %. With regard to the antibody sector, an index summarizing the performance of leading antibody companies provided by the industry magazine Bio-Century decreased by 6 % during 2007. The WestLB EU biotech index, comprising the 20 largest European biotechnology companies by total market cap, decreased in 2007 by 12 %.
COMMERCIAL DEVELOPMENT
In the Therapeutic Antibodies segment, MorphoSys has shown an outstanding track record in establishing and expanding existing partnerships over the years, and more recently also in the AbD segment. MorphoSys uses its HuCAL technology for the development of therapeutic antibodies and research applications.
As a consequence of the Novartis collaboration extended at the end of 2007, MorphoSys will not pursue new fee-for-service discovery deals of the type the Company has signed in the last several years. These deals typically included payments for the identifi cation and optimization of therapeutic antibodies by MorphoSys. MorphoSys will continue to work closely with its existing partners to ensure those collaborations are as successful and productive as possible. These collaborations will run their respective courses, but will not be subsequently renewed or expanded. Several of the partners still have the potential to initiate new HuCAL-based antibody development programs and the partnered pipeline is expected to continue to grow.
THERAPEUTIC ANTIBODIES SEGMENT
At the end of 2007, MorphoSys had ten active antibody collaborations in place with companies from the pharmaceutical or biotechnology sector. The following partnerships were established, expanded or concluded in the 2007 fi scal year (in alphabetical order). For an overview of all partnerships, please refer to the Notes to the Consolidated Financial Statements — section 27.
ASTELLAS PHARMA INC.
MorphoSys and Astellas Pharma Inc. (Tokyo, Japan), Japan's second-largest ethical pharmaceutical company, entered into a license agreement for the use of MorphoSys's HuCAL technology in March 2007. Under the terms of the agreement, MorphoSys grants Astellas access to its HuCAL GOLD antibody library for use in its internal pharmaceutical drug discovery programs. In return, MorphoSys received an up-front payment and will receive annual user fees during the life span of the agreement. The agreement may have a duration of up to fi ve years.
BAYER SCHERING PHARMA AG
MorphoSys and Bayer AG (Germany/USA) signed a wide-ranging antibody collaboration in December 1999. The agreement encompassed a research collaboration and license agreement for the application of MorphoSys's proprietary technologies in a number of Bayer's research and development programs. The collaboration was extended for an additional four years in July 2001, and in December 2005, the collaboration was extended by another fi ve years, with a termination option after the fi rst collaboration year.
A strategic alliance was signed between MorphoSys and Schering AG (Germany) in December 2001. This collaboration was extended in December 2004 until the end of 2006, with the option of a further extension period of one year beyond this time frame.
After the acquisition of Schering AG by Bayer AG, the collaboration with Bayer was terminated, and all activities were consolidated under the Schering agreement, with a duration until the end of 2007. The collaboration expired at the end of 2007, but all existing therapeutic antibody projects will be continued.
CENTOCOR, INC.
MorphoSys and Centocor, Inc. (USA), a wholly owned subsidiary of Johnson & Johnson ("J&J"), signed a fi ve-year agreement in December 2000. The objective of the cooperation between MorphoSys and Centocor is the development of fully human therapeutic antibodies in a broad range of indications. Furthermore, Centocor has access to HuCAL GOLD to isolate antibodies for research use. In December 2004, the agreement with Centocor was extended until the end of 2007.
Presently, this collaboration comprises several therapeutic antibody programs and a HuCALbased research program.
The collaboration was concluded at the end of 2007, but all existing therapeutic antibody projects will be continued.
GENEFRONTIER CORPORATION
In September 2004, MorphoSys and GeneFrontier (Japan) signed a strategic marketing agreement to access the Japanese life science market. To date, this marketing agreement has resulted in three alliances with the leading Japanese pharmaceutical groups Astellas, Daiichi Sankyo and Shionogi. In 2006, both parties expanded their marketing alliance to cover the generation of HuCAL-derived fully human antibodies for proteome research and target validation together with a renowned Japanese research organization as well as commercialization of any resulting antibody products.
In November 2007, MorphoSys initiated an additional therapeutic target-sourcing collaboration in Japan with GeneFrontier. The expansion of the existing alliance with GeneFrontier aims to increase MorphoSys's access to innovative, druggable therapeutic targets sourced from leading Japanese research institutes and universities, which will in turn further strengthen MorphoSys's proprietary drug development capabilities. Under the terms of the agreement, research institutes in Japan will be offered access to HuCAL-based research antibodies against novel disease-related target molecules in exchange for commercialization rights. Antibodies for selected projects will be generated by GeneFrontier using MorphoSys's proprietary HuCAL antibody technology at its research laboratories in Tokyo. MorphoSys will have access to all research results and data around the selected research programs and the option to secure worldwide rights on such antibody programs.
GENESIS RESEARCH
MorphoSys and New Zealand-based Genesis Research and Development Corporation Ltd. announced the signing of a research collaboration in October 2007. Under the terms of the agreement, Genesis uses HuCAL-based antibodies originally generated by the MorphoSys business unit AbD Serotec against the human fi broblast growth factor receptor FGFR5 for target validation and pre-clinical studies as part of its proprietary Zyrogen program. In this program, Genesis is investigating the development of therapeutic antibodies specifi c for the target molecule FGFR5, which is implicated in various autoimmune and bone-related diseases. Based on the scientifi c data generated by Genesis during the collaboration, the parties will discuss further development of the therapeutic program.
NOVARTIS AG
In December 2007, MorphoSys and Novartis AG (Switzerland/USA) forged one of the most comprehensive strategic alliances in the industry for the discovery and development of biopharmaceuticals. The deal is aimed at establishing a pipeline of innovative drugs, and combines MorphoSys's and Novartis's research and development capabilities. Novartis becomes MorphoSys's preferred collaborator for HuCAL-based drug discovery, allowing MorphoSys to progress to the next stage of its corporate development, which involves a greater focus on drug discovery and development within the Novartis alliance, and proprietary drug development, thereby substantially reducing MorphoSys's reliance on new or extended fee-for-service discovery deals. The expanded alliance also includes rights to co-detail co-developed products in specifi c territories through the creation of MorphoSys's own sales force. In addition to programs pursued jointly, Novartis has accelerated its plan to internalize MorphoSys's leading human antibody technology, HuCAL, at its research sites under the option agreed in the original contract.
MorphoSys and Novartis started working together in 2004 in a collaboration that has resulted to date in multiple active therapeutic antibody programs across various diseases and the fi rst IND fi ling in 2007, just three years after initiation. The new agreement is built on the strong existing relationship between the partners.
Under the new agreement, Novartis will make a major long-term commitment to MorphoSys's HuCAL technology. The collaboration has a term of ten years. Novartis has the option to prolong the collaboration for a further two years or to conclude the alliance after seven years in certain limited circumstances. Over the lifetime of the agreement, the parties will engage in approximately double the annual number of therapeutic antibody discovery programs as compared to the previous alliance, encompassing a wide range of diseases. MorphoSys also has options to participate in certain development activities in various programs, with part of the early-stage costs being funded by Novartis. Under the co-development options, MorphoSys may elect to participate in these projects through cost and profi t sharing, with fi nancial participation refl ecting its level of investment in the respective programs.
Based on a 10-year term, committed annual payments totaled more than US \$ 600 million in technology access, internalization fees and R&D funding, excluding reimbursement of R&D costs related to early-stage development activities. Total payments under the agreement, including committed payments and probability-weighted success-based milestones, contingent upon successful clinical development and market approval of multiple products, could potentially exceed US \$ 1 billion, assuming the collaboration successfully runs its maximum term. In addition to these payments, MorphoSys would also be entitled to royalty payments and/or profi t sharing on any future product sales.
XOMA TECHNOLOGIES LTD.
In February 2002, MorphoSys announced a cross-licensing agreement with XOMA Technologies Ltd. (Berkeley, CA, USA) for their antibody-related technologies. Under the agreement, MorphoSys and its partners received a license to use the XOMA antibody expression technology for developing antibody products (including Fab and scFv formats) using MorphoSys's phage display-based HuCAL antibody library. MorphoSys also received a license for the production of antibodies (including Fab and scFv formats) under the XOMA patents. XOMA received the right to use the HuCAL GOLD antibody library for target research and discovery purposes for fi ve years, with an option to develop antibodies into therapeutics.
XOMA's access to the HuCAL GOLD antibody library ended in the last quarter of 2007, in accordance with the terms of the original agreement. MorphoSys's access to the licensed patents from XOMA is unaffected and continues under the terms of the original agreement.
ABD SEGMENT
MEDICAL RESEARCH COUNCIL
In March 2007, AbD Serotec signifi cantly expanded its license agreement with MRC Technology (MRCT – UK), the technology transfer arm of Great Britain's Medical Research Council (MRC). The agreement, which provides AbD Serotec with access to a broad range of hybridoma cell lines as a source of research antibodies, was extended for a further fi ve years, and includes additional products which were implemented in AbD Serotec's offering. The Medical Research Council is a national organization dedicated to improving human health in the UK and abroad. The MRC has 40 institutes, units and centers, and supports research across the entire spectrum of medical sciences, in universities and hospitals through research grants, funded research training and MRC career awards.
NATIONAL INSTITUTE OF DIABETES AND DIGESTIVE AND KIDNEY DISEASES (NIDDK)
In December 2007, scientists at the National Institute of Diabetes and Digestive and Kidney Diseases (NIDDK) – part of the US National Institute of Health (NIH) – detected a new epitope on the HIV protein gp41 using antibodies generated by AbD Serotec from the MorphoSys HuCAL GOLD antibody library and demonstrated the antibody's capability to neutralize diverse laboratory-adapted B-strains of HIV-1 and primary isolates of subtypes A, B and C. Their results have been published in the Journal of Virology.
THERMO FISHER SCIENTIFIC
In February 2007, AbD Serotec and Thermo Fisher Scientifi c, Inc. (USA), signed a co-marketing agreement covering the use of Thermo Scientifi c DyLight™ dyes in combination with AbD Serotec's research antibodies to prepare a series of fl uorescent reagents. The resulting products were made available through the AbD Serotec sales catalog. DyLight™ fl uorescent dyes, available exclusively as part of Thermo Scientifi c's protein research product line, are an excellent alter native to other commercially available fl uorescent dyes.
RESEARCH AND DEVELOPMENT
In 2007, MorphoSys further invested in technology development. It is particularly important for MorphoSys to continuously optimize its technology platform, to ensure the highest possible success probabilities for HuCAL-based antibodies.
In November 2007, MorphoSys unveiled a multi-year technology development program which will lead to a signifi cantly enhanced version of its antibody generation platform. The new system, which involves several technology components and maintains its modular construction, represents a technological breakthrough in the advancement of antibody library technology and will offer unequaled opportunities for antibody-based drug development. The new technology suite will include enhancements involving substantially faster and more direct access to high-affi nity antibody drug candidates in the full IgG format compared to other antibody technologies on the market. The new technology platform will comprise an upgrade of MorphoSys's current antibody library HuCAL GOLD to an enhanced version, HuCAL Platinum™, as well as established screening and selection methods such as AutoCAL® and CysDisplay®, RapMAT® technology for faster antibody optimization, the AgX™ antigen expression system and the SAS™ sequence analysis software and additional technology modules currently in development.
PATENTS AND LICENSES
Once again, intellectual property (IP) played a prominent role in the Company's successful partnering track record; for example, exclusive access to specifi c platform technologies in certain areas was a key driver behind the Company-transforming deal with Novartis in December 2007.
LICENSE AGREEMENT WITH DYA X CORP.
In November 2007, MorphoSys in-licensed a broad patent portfolio from Dyax relating to antibodies and other proteins. The agreement grants MorphoSys a fully paid-up license to a variety of display-related patents from Dyax as well as other patents, including several relating to methods for displaying and selecting antibodies and other proteins through the use of alternative types of display. As part of the license agreement, MorphoSys gains the right to sublicense the patents in conjunction with its proprietary technology. The license agreement provides MorphoSys with fl exibility for future technology development to further diversify its antibody technology portfolio and improve its offering for therapeutic, diagnostic and research customers.
EXCLUSIVE LICENSE TO KEY PATENT FOR MOR103 FROM THE UNIVERSITY OF MELBOURNE During 2007, MorphoSys signed an agreement with the University of Melbourne providing MorphoSys with exclusive access to all rights under a US patent application and its progeny covering certain uses of inhibitors of the human cytokine GM-CSF (granulocyte-macrophage colony-stimulating factor). GM-CSF is the target molecule for MorphoSys's proprietary MOR103 antibody program for the treatment of rheumatoid arthritis (RA) and other infl ammatory diseases. MorphoSys expects that the license obtained from the University of Melbourne will lead to market exclusivity for therapeutic antibodies targeting GM-CSF in the US for infl ammatory disorders, once a favorable US patent is granted.
RESULTS OF OPERATIONS, FINANCIAL SITUATION, ASSETS AND LIABILITIES
REVENUES
Compared to the same period in the previous year, Group revenues increased by 17 % to w 62.0 million in 2007 (2006: w 53.0 million). The increase is due to higher levels of funded research, licensing fees and success-based fees as well as stronger revenues in the AbD segment. Revenues arising from the Therapeutic Antibodies segment (excluding the compensatory fee resulting from the revenue-sharing agreement) accounted for 68 % or w 42.4 million (2006: w 34.7 million) of total revenues while the AbD segment generated 32 % (w 19.6 million) of the total (2006: w 18.3 million).
Geographically, 36 %, or w 22.1 million, of MorphoSys's commercial revenues were generated with biotechnology and pharmaceutical companies or non-profi t organizations located in North America, and 64 %, or w 39.9 million, with companies located mainly in Europe and Asia. This compares to 38 % and 62 % respectively, in the same period of the prior year.
THERAPEUTIC ANTIBODIES SEGMENT
Revenues arising from the Therapeutic Antibodies segment comprised w 30.3 million in funded research and licensing fees (2006: w 27.2 million) as well as w 12.1 million success-based payments (2006: w 7.5 million), representing 29 % of total Therapeutic Antibodies revenues. Approximately 67 % of Therapeutic Antibodies revenues and 46 % of total revenues arose from the Company's three largest alliances with Novartis, Centocor and Bayer Schering (2006: Novartis, Centocor and Roche, 64 % and 42 % respectively).
Assuming constant foreign exchange rates at the average rate of 2006, revenues in the Therapeutic Antibodies segment would amount to w 43.1 million.
ANTIBODIES DIRECT – ABD SEGMENT
Compared to the previous year, the AbD segment's revenues increased by 7 %, or w 1.3 million, to w 19.6 million in 2007 (2006: w 18.3 million). The largest part of revenues (approx. 85 %), or w 16.6 million, was generated with catalog and industrial customers, while custom manufacture antibodies contributed 12 % or w 2.3 million.
Assuming the average foreign exchange rates for 2006, revenues in the AbD segment would amount to w 19.9 million.
As of December 31, 2007, orders in the amount of w 0.7 million were classifi ed as back orders in the segment (2006: w 2.5 million).
OPERATING EXPENSES
Compared to 2006, total operating expenses increased by 17 % to w 54.9 million in 2007 (2006: w 46.9 million). The rise in operating expenses of w 8.0 million was impacted by research and development (R&D) expenses increasing by 27 % or w 4.7 million and sales, general and administrative (S, G&A) expenses increasing by 16 % or w 3.4 million, whereas the cost of goods sold (COGS) slightly decreased from w 8.0 to w 7.9 million. Total purchase price allocation (PPA) effects on operating profi t amounted to w 1.5 million (2006: w 1.5 million), including an impairment on the ex-Biogenesis US building in Brentwood, presented as asset held for sale, in the amount of w 0.2 million.
Stock-based compensation expenses are embedded in COGS, S, G&A and R&D expense amounts. Stock-based compensation in 2007 amounted to w 1.4 million (2006: w 1.2 million) and is a non-cash charge.
COST OF GOODS SOLD
COGS is composed of the AbD segment's cost of goods sold in 2007 and – compared to the prior year – slightly decreased from w 8.0 to w 7.9 million. The relative percentage decline in COGS to revenues is mainly a result of savings generated in purchasing as well as of the fact that inventories identifi ed in connection with the PPA for the Biogenesis acquisition are now fully depreciated and, therefore, did not impact COGS to the same extent as in the previous year.
RESEARCH AND DEVELOPMENT EXPENSES
Costs for research and development increased by w 4.7 million to w 22.2 million (2006: w 17.5 million) mainly due to higher personnel costs (2007: w 8.5 million; 2006: w 7.2 million). The two proprietary products currently being internally developed by MorphoSys are MOR103 and MOR202. In 2007, the Company incurred costs for proprietary product development and technology development in the amount of w 4.9 million and w 1.2 million respectively (2006: w 2.1 million and w 0.9 million).
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, general and administrative expenses amounted to w 24.8 million compared to w 21.4 million in the previous year. This change was mainly impacted by higher costs for external services (2007: w 8.6 million; 2006: w 4.5 million), including consulting fees in connection with the Novartis deal.
COST BY EXPENDITURE TYPE
In 2007, personnel costs (excluding stock-based compensation) amounted to w 18.8 million (2006: w 18.1 million) or 34 % of total operating expenses, thus representing the largest cost block within operating expenses.
Expenses for external services, representing the second-largest block by cost type, mainly included consulting fees (2007: w 6.9 million; 2006: w 2.1 million) and external lab funding (2007: w 4.0 million; 2006: w 1.6 million), and amounted to w 12.8 million (2006: w 6.1 million) or 23 % of total operating expenses.
Costs for intangibles mainly consisted of expenses for licenses (2007: w 3.7 million; 2006: w 2.2 million), amortization of licenses capitalized (2007: w 1.5 million; 2006: w 1.2 million) as well as amortization of intangible assets identifi ed in connection with the PPAs for Biogenesis and Serotec (2007: w 0.8 million; 2006: w 0.8 million), and accounted for w 7.0 million (2006: w 5.9 million) or 13 % of total operating expenses.
NON-OPERATING ITEMS
Non-operating income amounted to w 2.2 million (2006: expenses of w 0.9 million) and mainly changed as a result of increased interest income, increased gains from marketable securities, gains from foreign exchange derivatives and decreased interest expenses. Profi t before taxes amounted to w 9.2 million (2006: w 5.3 million).
TAXES
In total, the Company reported a tax benefi t in the amount of w 2.3 million for 2007. This line item is mainly impacted by deferred tax income of w 4.1 million and current tax expenses of w 1.8 million.
The deferred tax income derived from the capitalization of a deferred tax asset (DTA) of w 3.6 million on the full remaining tax loss carry-forwards due to expected taxable income in future periods. This income was partly offset by deferred tax expenses from the amortization of a DTA on tax loss carry-forwards established in 2006 (w 1.2 million). Additional deferred tax income resulted from the recognition of DTA (w 1.2 million) in 2007 on temporary differences and from w 0.6 million arising in conjunction with the amortization of deferred tax liabilities in connection with previous acquisitions.
OPERATING PROFIT/NET PROFIT
Group operating profi t amounted to w 7.0 million in 2007 (2006: w 6.2 million). Earnings before interest and taxes (EBIT) amounted to w 8.3 million, compared to an EBIT of w 5.4 million in the previous year. The Therapeutic Antibodies segment accounted for an operating profi t of w 15.2 million (2006: w 16.6 million), whereas the operating loss for the AbD segment amounted to w 0.6 million (2006: loss w 3.4 million).
A net profi t after taxes of w 11.5 million was achieved in 2007, compared to a net profi t after taxes of w 6.0 million in 2006. The resulting basic net profi t per share for 2007 amounted to w 1.61 (2006: w 0.94).
LIQUIDIT Y/CASH FLOWS
Cash infl ow from operations amounted to w 17.1 million for 2007 (2006: w 16.3 million). Investing activities resulted in a cash outfl ow of w 5.2 million (2006: w 36.2 million), whereas the cash infl ow from fi nancing activities amounted to w 32.6 million (2006: w 19.6 million).
As of December 31, 2007, the Company held w 106.9 million in cash, cash equivalents and available-for-sale fi nancial assets, compared to a year-end 2006 balance of w 66.0 million. Funds were held in three high-quality fi nancial institutions, predominantly in short-term maturity money funds and short-term deposit accounts.
ASSETS
Total assets rose by w 56.9 million to w 184.7 million as of December 31, 2007, compared to w 127.8 million as of December 31, 2006. Current assets increased by w 46.8 million, mainly as a result of cash generated from the capital increase in May 2007 (w 32.6 million), cash generated from operations (w 17.1 million) and increased accounts receivable (w 5.8 million) due to new contracts signed in 2007.
In 2007, non-current assets increased by w 10.1 million as a consequence of licenses purchased in 2007 (w 8.7 million), as well as of the build-up of deferred tax assets (w 3.5 million).
LIABILITIES
In 2007, current liabilities increased from w 18.3 million as of December 31, 2006, to w 29.4 million. This change primarily arose from an increase in current deferred revenues (w 8.7 million) due to payments deriving from contracts signed in the current year as well as in previous years, and an increase in accounts payable (w 3.0 million) mainly associated with advisors' fees relating to the Novartis deal at year-end.
In 2007, the slight increase of total non-current liabilities by w 0.3 million to w 9.8 million was mainly impacted by an increase in non-current deferred revenues (w 0.8 million), resulting from contracts signed in the current and in previous years. This effect was partly offset by a decrease in deferred tax liabilities (w 0.6 million).
EQUITY
Total stockholders' equity amounted to w 145.5 million as of December 31, 2007, compared to w 100.1 million as of December 31, 2006, resulting in an equity ratio of 78.8 % (2006: 78.3 %).
As of December 31, 2007, the total number of shares issued amounted to 7,386,753, of which 7,360,021 were outstanding, compared to 6,715,322 and 6,686,160 as of December 31, 2006, respectively.
The increase in shares outstanding by 673,861 shares arose from the capital increase against cash successfully placed in May 2007 and from the conversion of bonds issued to employees as well as from exercised options. In 2007, 2,430 of the exercised options related to shares provided by treasury stock. Treasury shares were reduced accordingly, amounting to 26,732 shares as of December 31, 2007.
CAPITAL EXPENDITURE
MorphoSys's investment in property, plant and equipment amounted to w 1.1 million for 2007 and decreased by w 2.4 million compared to the prior year due to higher investments in lab and offi ce equipment (w 1.5 million) and leasehold improvements (w 0.9 million) in 2006. Depreciation of property, plant and equipment for the fi scal year 2007 accounted for w 1.5 million, compared to w 1.5 million for 2006.
In 2007, the Company invested w 11.0 million in intangible assets (December 31, 2006: w 0.4 million). This increase was mainly impacted by the purchase of licenses. Furthermore, in 2007, new ERP software was implemented. Amortization of intangibles amounted to w 3.0 million and increased by w 0.3 million in comparison to 2006.
The Group's fi nancial position and profi t situation at the time of the preparation of the Consolidated Financial Statements and the Management Report is in line with the Group's planning and expectations.
HUMAN RESOURCES
A good working atmosphere, outstanding training and education opportunities as well as performance-related compensation form the basis of MorphoSys's success. MorphoSys traditionally attaches great importance to the training and education of its employees.
NUMBER OF EMPLOYEES
On December 31, 2007, the MorphoSys Group employed 295 people (full-time equivalents) worldwide (December 31, 2006: 279), an increase of 6 % from the end of the previous year. The biggest personnel growth occurred in the Therapeutic Antibodies segment. On average, the MorphoSys Group employed 291 people in 2007 (2006: 265).
GROUP HEADCOUNT DEVELOPMENT
| 2003 | 2004 | 2005 | 2006 | 2007 | |
|---|---|---|---|---|---|
| Total Headcount of |
|||||
| the Group | 95 | 132 | 172 | 279 | 295 |
Of the 295 employees, 164 worked in research and development and 131 in sales, general and administration (December 31, 2006: 155 employees in R&D, and 124 employees in S, G&A).
EMPLOYEES BY SEGMENT AND FUNCTION
| 2006 | 2007 | |
|---|---|---|
| TOTAL EMPLOYEES | 279 | 295 |
| Therapeutic Antibodies segment | 158 | 167 |
| AbD segment | 121 | 128 |
| Employees in R&D | 155 | 164 |
| Employees in S, G&A | 124 | 131 |
Average sales per employee rose from w 0.20 million in 2006 to w 0.21 million in 2007.
MorphoSys's personnel costs (excluding stock-based compensation) amounted to w 18.8 million in 2007, 4 % up on the previous year. The average costs per employee were approximately w 64,000 (2006: w 68,000).
On December 31, 2007, MorphoSys had two apprenticeship positions (December 31, 2006: 1). During 2007, three diploma theses were supervised by MorphoSys R&D staff members.
EMPLOYEES BY REGION
| 2006 | 2007 | |
|---|---|---|
| TOTAL EMPLOYEES | 279 | 295 |
| Germany | 183 | 192 |
| UK | 78 | 83 |
| USA | 18 | 20 |
QUALIFICATION, TRAINING AND EDUCATION
Supporting science and management education is a priority for MorphoSys. The Company offers career opportunities in the areas of research and product development as well as a variety of management positions. All employees enjoy a wide range of professional and personal development programs as well as a working environment that encourages enthusiasm and collaboration among departments and between the Company's different locations.
75 of MorphoSys's workforce held a Ph.D. degree (December 31, 2006: 59).
LONG-TERM PERFORMANCE-RELATED COMPENSATION
All MorphoSys employees presently participate in the operational and fi nancial success of the Company. MorphoSys offers a performance-based bonus to all employees. This bonus supplements the existing remuneration system and opens up an additional performance incentive. Employee bonuses are based on the success of the Company and on personal performance. By setting personal goals, department goals and Company goals, each employee has the chance to contribute to the successful development of MorphoSys and to participate in its success.
In addition to the performance-related compensation, in 2007, all employees of MorphoSys AG participated in a stock option or convertible bond program as part of a long-term equity incentive scheme. The aim of this program is to give employees a long-term stake in the success of the Company.
Every year, all salaries are benchmarked within the biotechnology sector as well as other industries, to ensure adequate compensation standards.
Further information on the stock option plan can be found in the Notes to the Financial Statements (see Notes to the Consolidated Financial Statements – section 19).
REMUNERATION REPORT
The Remuneration Report refl ects the Management Board Compensation Disclosure Law as well as the principles of the German Corporate Governance Code.
REMUNERATION OF THE MANAGEMENT BOARD
The overall annual compensation paid to Management Board members consists of a number of compensation components. These include fi xed compensation, a bonus, a medium- and long-term incentive component as well as additional benefi ts. Each year, the structure and appropriateness of the total compensation packages are subject to a review by the Remuneration & Nomination Committee. Compensation is based in particular on the duties of the individual Management Board member, his/her personal performance and that of the Management Board, as well as on the business situation, success and prospects of the Company relative to its competitive environment. The complete compensation packages are compared to the outcome of the Annual German Biotechnology Industry Remuneration Study (GRS Study), and to other international benchmark sources. The adjustments to the compensation packages are adopted by the plenum of the Supervisory Board. The last date on which salaries were adjusted was in July 2007.
The total annual salary of the members of the Management Board comprises the fi xed components plus additional other compensatory benefi ts, which encompass primarily the use of company cars, the reimbursement of travel and telephone costs, allowances for health, social care and invalidity insurances as well as special allowances and benefi ts received when working outside of the home country. Furthermore, all members of the Management Board participate in private pension funds. MorphoSys pays the monthly contribution to these funds. These payments are included here as other compensatory benefi ts and amount to 10 % of the annual fi xed salary of each Management Board member plus tax contribution. No additional pension plans are in place.
Additionally, each member receives a performance-related cash bonus payment. Such payments are dependent on individual goals and Company-related goals, which are determined by the Supervisory Board at the beginning of each fi scal year. The corporate performance targets refl ect operating performance as measured by revenues and net income and other Company goals such as share performance, the successful integration of business units, or the completion and/ or extension of important collaborations. At the end of the year, the Supervisory Board evaluates the level of attainment of these goals. The bonus is determined by the Supervisory Board on the basis of the Company's business development after due assessment of the circumstances. 30 % of the bonus payment is dependent on personal goals; the other 70 % depends on the extent to which the Company goals have been reached. The bonus shown in the respective annual report are bonus payments for the goals achieved in the previous business year.
In the 2007 fi scal year, the total cash remuneration paid to the members of the Management Board amounted to w 1,473,438 (previous year: w 1,156,415). The table below shows the detailed and individualized compensation for the Management Board in 2007:
| . . | ٠ | . . |
|---|---|---|
| ×. |
| performance | other | total | |||
|---|---|---|---|---|---|
| fixed | related | compensatory | compensation | ||
| in E | compensation | compensation | benefits | 2007 | |
| Dr. Simon E. Moroney | 320,250 | 198,360 | 83,8821 | 602,492 | |
| Mr. Dave Lemus | 225,225 | 140,049 | 113,3092 | 478,583 | |
| Dr. Marlies Sproll | 211,860 | 124,146 | 56,3563 | 392,362 |
Includes W 65,105 annual contribution to private pension fund and allowances to insurances
2
Includes W 43,196 annual contribution to private pension fund and allowances to insurances
Includes W 39,665 annual contribution to private pension fund and allowances to insurances
The long-term performance-related remuneration consists of convertible bonds and stock options under the plans as resolved by the Annual Shareholders' Meeting. These are outlined in the "Equity-based Compensation for the Management Board" section below.
In 2007, 13,873 convertible bonds were granted to members of the Management Board. The value of the convertible bonds granted to members of the Management Board under the 2002 convertible bond plan attributable to the 2007 fi scal year totaled w 191,447 (2006: w 676,399).
During 2007, none of the members of the Management Board exercised convertible bonds or stock options.
No credit or similar benefi ts were granted to members of the Management Board. In the year under review, the Management Board members received no benefi ts from third parties that were either promised or granted in view of their position as a member of the Management Board.
The service contracts for the Chief Executive Offi cer Dr. Simon E. Moroney and the Chief Financial Offi cer Mr. Dave Lemus have a term of three years each. Dr. Marlies Sproll was appointed as Chief Scientifi c Offi cer for the fi rst time in November 2005; her respective service agreement has a term of two years, which was extended to June 2008. In the event of a non-reappointment and non-prolongation of the service agreement, each member of the Management Board is entitled to receive a severance payment in the amount of one annual fi xed salary. If the service contract of a member of the Management Board is terminated by death, his/her spouse or partner for life is entitled to the monthly fi xed salary for the month of death and the following twelve months. After a change of control transaction, each member of the Management Board is allowed to extraordinarily terminate his/her service contract and may demand the outstanding fi xed salary for the remaining contractually provided term of contract, or two years, whichever is greater. Furthermore, in such a case, all granted stock options and convertible bonds shall be treated as immediately vested.
REMUNERATION OF THE SUPERVISORY BOARD
The compensation of the Supervisory Board is based on the provisions of the Articles of Incorporation, the current version of which was adopted by the stockholders at the Annual Shareholders' Meeting on May 17, 2006. In accordance with the German Corporate Governance Code, members of the Supervisory Board receive fi xed as well as performance-related compensation. It takes into account the responsibilities and scope of tasks of the members of the Supervisory Board as well as the economic situation and performance of the Company.
In the 2007 fi scal year, the members of the Supervisory Board received a total of w 298,500 (2006: w 259,000), excluding reimbursement of travel expenses. This amount consists of fi xed remuneration and variable compensation (attendance fees).
The table below shows the detailed compensation for the Supervisory Board in 2007:
| fixed | variable | total | ||
|---|---|---|---|---|
| in E | compensation | compensation | compensation | |
| Dr. Gerald Möller, Chairman | 40,000 | 35,000 | 75,000 | |
| Prof. Dr. Jürgen Drews, Deputy Chairman | 30,000 | 19,000 | 49,000 | |
| Dr. Walter Blättler1 | 14,622 | 12,000 | 26,622 | |
| Dr. Daniel Camus | 25,000 | 21,000 | 46,000 | |
| Dr. Metin Colpan | 25,000 | 16,000 | 41,000 | |
| Prof. Dr. Andreas Plückthun2 | 8,878 | 4,500 | 13,378 | |
| Dr. Geoffrey N. Vernon | 26,500 | 21,000 | 47,500 |
Entered as per May 16, 2007
The German Corporate Governance Code proposes that remuneration of the Supervisory Board should also include components based on the long-term success of the Company. In 2006, the members of the Supervisory Board received a revenues-related compensation program in the form of a phantom stock program with a duration of three years in addition to the cash compensation.
A phantom stock is a claim on the Company to a cash payment of the difference between the stock exchange price at the end of the holding period and the exercise price. The holding period for phantom stocks is three years. An amount will only be paid if the Company's consolidated revenues during the vesting period show an average annual growth rate of at least 20 %. In total, payments by the Company under this plan to the Supervisory Board as a whole must not exceed the amount of w 80,000 ("cap"). In the 2007 fi scal year, no additional phantom stocks were granted to the Supervisory Board members.
In 2006, MorphoSys entered into consulting agreements with the member of the Supervisory Board Prof. Dr. Andreas Plückthun and another scientist of Prof. Dr. Plückthun's research team at the University of Zurich, Switzerland, ending December 2008. According to the agreements, the consultants shall provide consulting services in the antibody and scaffold fi elds. Under this
2 Retired as per May 16, 2007
agreement, Prof. Dr. Andreas Plückthun may receive payments of up to w 14,000 per year, depending on the extent to which the Company draws on his consultancy. In 2007, no payments were made to Prof. Dr. Plückthun and his research team. The sponsored research agreement with the University of Zurich, represented by Prof. Dr. Andreas Plückthun, was terminated by the end of 2006.
No other consultancy agreements with current or former members of the Supervisory Board are currently in place.
No members of the Management Board or the Supervisory Board were granted Company loans.
EQUITY-BASED COMPENSATION FOR THE MANAGEMENT BOARD
STOCK OPTIONS AND CONVERTIBLE BONDS
The Supervisory Board also decides each year on the number of stock options or convertible bonds to be allocated to the Management Board members. Members of the Management Board currently receive stock options only in the event of a new appointment or in the case of a renewal of a service agreement.
Since the implementation of equity-based compensation programs at MorphoSys AG, stock options or convertible bonds are only issued twice a year. The following overview shows the number of stock options issued in 2007 to members of the Management Board (see also "2002 Employee Convertible Bond Program," section 18 of the Notes to the Consolidated Financial Statements) and their potential current value. In 2007, no stock options were granted to members of the Management Board.
| member of the | number of convertible |
strike price | fair value of one con vertible bond |
fair value at the time of the grant |
|||
|---|---|---|---|---|---|---|---|
| management board | bonds | in E | grant date | expiry date | in E | in E | |
| Dr. Simon E. Moroney | 5,549 | 55.10 | Jan. 15, 2007 | Dec. 31, 2009 | 13.80 | 76,576 | |
| Mr. Dave Lemus | 4,624 | 55.10 | Jan. 15, 2007 | Dec. 31, 2009 | 13.80 | 63,811 | |
| Dr. Marlies Sproll | 3,700 | 55.10 | Jan. 15, 2007 | Dec. 31, 2009 | 13.80 | 51,060 |
STOCK OPTION PROGRAMS
The current stock option plan of 2002 provides for the issuance of nontransferable option rights to employees and to the Management Board. The option rights have a maximum life of fi ve years. Additionally, a two-year holding period is required after the date of grant, after which the holder of the option rights can exercise up to the number of vested option rights, on the condition that the value of the underlying stock has exceeded the stock price at the time of the grant by at least 20 % on one trading day before the exercise.
CONVERTIBLE BOND PROGRAMS
The current convertible bond program of 2002 provides the issuance of non-interest-bearing convertible bonds with a par/nominal value of w 1.00 each to employees and to the Management Board. The benefi ciaries may only exercise the conversion rights after the expiration of a waiting period of one year after the grant date. Each convertible bond with a nominal value of w 1.00 can be exchanged for one share of ordinary no-par value common stock of the Company against payment of the exchange price. Furthermore, the exercise of the convertible bonds is subject to the performance target that the value of the underlying stock has exceeded the stock price at the time of the grant by at least 10 % on one trading day before the exercise.
For a more detailed description of the various stock options and convertible bond programs currently in operation, see sections 18 and 19 of the Notes to the Consolidated Financial Statements.
INFORMATION REQUIRED UNDER TAKEOVER LAW
The following information is presented in accordance with art. 315 para. 4 of the German Commercial Code (HGB).
COMPOSITION OF CAPITAL STOCK
As of December 31, 2007, the Company's share capital amounted to w 22,160,259.00 and is divided into 7,386,753 no-par value bearer shares. With the exception of 26,732 own shares, all issued shares are exclusively common shares with voting rights. The Management Board is not aware of any restrictions of the voting rights or the right to transfer. This also applies to restrictions which may result from shareholders' agreements. The Company has not been notifi ed of direct or indirect shareholdings in its share capital exceeding 10 % of the voting rights pursuant to § 21 German Securities Trading Act ("WpHG"). There are no owners of shares with privileged rights or other rights giving a right to control votes.
SHAREHOLDINGS EXCEEDING 10 % OF THE VOTING RIGHTS
There is no direct shareholding in the Company which exceeds 10 % of the voting rights.
AUTHORIZATION OF THE MANAGEMENT BOARD TO ISSUE SHARES
Pursuant to § 6 of the Company's Articles of Association, the Management Board shall consist of at least two members, with the Supervisory Board defi ning the concrete number of the members of the Management Board. The Supervisory Board may appoint a Chief Executive Offi cer and one or several representatives of the CEO. Pursuant to § 20 of the Articles, amendments of the Articles are subject to a majority of more than 50 % of the share capital represented in a shareholders' meeting unless the law mandatorily requires a different majority.
The shareholders have provided the Management Board with the following authorizations to issue new shares or conversion rights or to purchase own shares:
- a) Pursuant to § 5 para. 5 of the Articles of Association and with the approval of the Supervisory Board, the Management Board is authorized to increase the Company's share capital during the time period until April 30, 2011, in the amount of up to w 7,481,307 and by issuing 2,493,769 young bearer shares with no-par value for contribution in cash and/or in kind on one or several occasions (Authorized Capital I). The Management Board may, with the approval of the Supervisory Board, exclude the preemptive rights of the shareholders under the following conditions:
- i) in the case of a capital increase in cash, to the extent that such exclusion is necessary to avoid fractional shares; or
- ii) in the case of a capital increase in kind, to the extent that the young shares are used for the acquisition of companies, shareholdings in companies, patents, licenses or other industrial property rights, or of assets which constitute a business in their entirety; or
- iii) in the case of a capital increase in cash, to the extent that young shares shall be placed at a stock exchange in context with a listing.
- b) Pursuant to § 5 para. 6 b of the Articles of Association, the Company's share capital shall be conditionally increased by an amount of up to w 5,488,686, divided into up to 1,829,562 bearer shares with no-par value (Conditional Capital III). The conditional capital increase shall only be accomplished (i) to the extent that owners of options and/or convertible bonds make use of their option and/or conversion rights issued by the Company until April 30, 2011, in accordance with the resolution of the Annual Shareholders' Meeting or (ii) to the extent that owners fulfi ll their duties to convert. The same shall apply to owners of options and/or convertible bonds issued by domestic or foreign affi liates which are totally owned by the Company.
- c) Furthermore, there exists a Conditional Capital I in the amount of up to w 39,285 (§ 5 para. 4 of the Articles of Association), a Conditional Capital II in the amount of up to w 643,425 (§ 5 para. 6 a of the Articles of Association), a Conditional Capital IV in the amount of up to w 1,364,532 (§ 5 para. 6 c of the Articles of Association) and a Conditional Capital V in the amount up of w 1,011,861 (§ 5 para. 6 d of the Articles of Association). These conditional share capitals may be used for the issuance of option and conversion rights to members of the Management Board and to employees of the Company or of its affi liates.
AUTHORIZATION OF THE MANAGEMENT BOARD TO REPURCHASE STOCK
d) According to the resolution of the ordinary Annual Shareholders' Meeting 2007, the Company may purchase own shares in the amount of up to 10 % of the share capital existing at the time of the said resolution. This authorization is valid until October 31, 2008. The Management Board may decide whether the shares shall be acquired as a purchase order in the stock market or by virtue of a public offer. The acquired own shares may be used for the following purposes:
- i) with the approval of the Supervisory Board, the shares may be redeemed; or
- ii) the shares may be used in order to fulfi ll conversion rights or option rights which have been granted by the Company or an affi liate; or
- iii) the own shares may be used as acquisition currency in context with the purchase of companies, shareholdings in companies, business assets, intellectual property rights or licenses.
CHANGE OF CONTROL PROVISIONS
KEY AGREEMENTS SUBJECT TO CONDITIONS
The Company and Novartis Pharma AG expanded their original 2004 cooperation agreement in the fi eld of pharmaceutical research, which, in case certain changes in control occur involving certain types of companies, Novartis Pharma AG is permitted, but not obligated, to take several measures, including the partial or complete termination of the cooperation agreement.
A change in control is considered the holding of 30 % or more of the voting rights in the Company in accordance with sec. 29 and 30 of the German Takeover Act ("Wertpapiererwerbs- und Übernahmegesetz – WpÜG"). The termination of the cooperation agreement by Novartis Pharma AG could affect future cash fl ows of the Company signifi cantly.
CHANGE OF CONTROL PROVISIONS FOR MANAGEMENT BOARD MEMBERS
After a change of control transaction, each member of the Management Board is allowed to extraordinarily terminate his/her service contract and may demand the outstanding fi xed salary for the remaining contractually provided term of contract or for two years, whichever is greater. Furthermore, in such a case, all granted stock options and convertible bonds shall be treated as immediately vested. The same applies to some of the directors of the Company to whom options or conversion rights have been granted.
RISKS AND OPPORTUNITIES
RISK MANAGEMENT AND CONTROLLING
In line with the German Corporate Sector Supervision and Transparency Act ("Gesetz zur Kontrolle und Transparenz im Unternehmensbereich — KonTraG"), MorphoSys has established a comprehensive and effective system to identify, assess, communicate and manage risks across its functions and operations. Risk management has the goal of identifying risks as early as possible, limiting business losses by means of suitable measures, and avoiding risks that pose a threat to the Company's existence. Regular risk analyses at a corporate level are carried out in all the functional areas of the Company including R&D, S, G&A and the affi liates abroad.
Twice a year, all members of the senior management group must consider the possible risks within their respective fi elds of responsibility. All identifi ed risks are quantifi ed and signifi cant changes of major risks are reported to the Management and Supervisory Boards. In addition, risks occurring at short notice are reported directly.
RISKS
MorphoSys AG operates on a global basis. Its business activities comprise different risks, which are relevant to many business functions. The business, fi nancial condition and operating results of MorphoSys may be materially adversely affected by each of these risks.
GENERAL RISKS
MorphoSys is subject to the typical industry and market risks inherent to the development of fully human antibodies for use in research, diagnostics and therapy. It is known that the development of drugs takes 10 to 15 years, with high attrition rates. MorphoSys is minimizing these risks by partnering its products with pharmaceutical and biotechnology companies, which are responsible for clinical development and marketing. In general, there is a risk that none of the antibody products in MorphoSys's current antibody pipeline will be successfully developed. Within its second operating segment, the MorphoSys Group generates antibodies for research applications and diagnostics applications. There is a risk that those products will not fulfi ll the requirements of the customers, or that other products will be more favorably priced.
PRODUCT DEVELOPMENT RISKS
MorphoSys is committed to generating therapeutic antibodies for its commercial partners and increasingly for its own account. Thus, the Company's product pipeline comprises both partnered and proprietary therapeutic antibody development programs. These programs are subject to a number of risks of failure inherent in the development of medical therapies. Product candidates require pre-clinical studies and clinical trials in humans as well as regulatory approval prior to commercialization. To date, none of the Company's licensees or partners has commercialized a product based on MorphoSys's HuCAL technology, and HuCAL-derived therapeutics are not expected to be commercially available for a number of years. In addition, none of the HuCALderived product candidates has successfully completed all stages of clinical testing and regulatory approval procedures. Pre-clinical and ongoing phase 1 studies may not predict and do not ensure safety or effi cacy in humans, and are not necessarily indicative of the results that may be achieved in pivotal clinical trials with humans.
ACQUISITION RISKS
In 2005 and 2006, MorphoSys acquired the Biogenesis Group and the Serotec Group, through which the Company has gained access to new distribution and sales channels. In the future, MorphoSys may acquire additional companies or technologies to increase market share and to complement existing business. Acquisition can expose the Company to risks associated with the assimilation of new technologies, operations, sites and personnel, the inability to generate revenues to offset acquisition costs, the issuance of dilutive equity securities, the inability to maintain relationships with employees and customers, and the incurring of additional expenses associated with future amortization or impairment of acquired intangible assets or potential business. The failure to address the aforementioned risks may prevent the Company from achieving the anticipated benefi ts from the acquisitions within a reasonable time frame.
RISKS FROM COMPETITION AND TECHNOLOGICAL CHANGE
MorphoSys's business environment is characterized by rapid technological change and innovation as well as intense competition. Its competitors include established pharmaceutical, chemical and biotechnology companies possessing greater fi nancial, technical, research and development, personnel, marketing and sales resources than those available to MorphoSys, and signifi cantly more experience in developing, manufacturing, marketing and supporting new technologies and products. Moreover, certain research and academic institutions are also active in areas similar to those of MorphoSys.
There can be no assurance that competitors of the Company are not currently developing, or will not in the future develop, technologies and products that are equally or more effective, that have better side-effect profi les and/or are more economical as any current or future technology or product of the Company. Competing drugs may gain faster or greater market acceptance than the Company's drugs and medical advances or rapid technological development by competitors may result in the Company's drug candidates becoming non-competitive or obsolete before the Company is able to recover its research and development and commercialization expenses. If the Company or its drug candidates do not compete effectively, the Company's business would be materially adversely affected.
The fi rst pharmaceutical product to reach the market is often at a signifi cant advantage to later entrants, particularly since subsequent potential entrants must prove an advantage of their product over products already on the market. There is a risk that MorphoSys's competitors could succeed in developing technologies and products that are safer, less costly and more effective than its technologies or products. In addition, there is a risk that these technologies could produce products that reach the market earlier and could be more successful than those developed by MorphoSys.
PRODUCT RISKS
The marketing and sale of antibody products and services for certain applications entails a potential risk of product liability, and there can be no assurance that product liability claims will not be brought against the Company. MorphoSys currently carries global product liability insurance coverage. There can be no assurance, however, that the Company will be able to maintain such insurance at a reasonable cost and on reasonable terms or that such insurance will be adequate to protect MorphoSys against any or all potential claims or losses.
The Company is exposed to potential product liability claims that are inherent in clinical testing and could potentially be exposed to potential claims relating to the testing of drug candidates in human clinical trials. As the Company does not yet have a commercialized pharmaceutical product, it only maintains clinical trials insurance for its clinical trials.
Moreover, product liability claims may require signifi cant fi nancial and managerial resources, may cause harm to the Company's reputation if the market perceives its drug candidates to be unsafe or ineffective due to unforeseen side effects, and may limit or prevent the further development or commercialization of the Company's drug and drug candidates.
DEPENDENCE ON HEALTHCARE AND PHARMACEUTICAL SPENDING
MorphoSys is dependent on various sources of income, including, in particular, fees, milestone payments and royalties from licensees and partners, the fi nancial condition of public treasuries and the fi nancial markets, the government and governmental health authorities, research institutions, private health insurers and other organizations. Part of MorphoSys's revenues is derived from entering into collaborations with partners, including pharmaceutical companies. Many collaborative and/or out-licensing agreements provide for milestone payments and fees to be paid subject to the satisfaction of specifi c criteria. MorphoSys has no control over whether its partners or licensees will be able to meet such milestones, nor will MorphoSys be able to control whether products derived from its technology are being developed at all by its partners. Moreover, certain pharmaceutical companies may be more likely to seek to in-license products which have already reached a relatively advanced stage of development, such as phase 2 compounds, as opposed to less advanced product candidates still in pre-clinical stages. Consequently, the products in MorphoSys's pipeline may not reach a suffi ciently advanced stage of development to be of interest to these pharmaceutical companies for some time. Therefore, the Company can offer no assurance that there will be a guaranteed revenues stream from current collaborations.
INTELLECTUAL PROPERTY RISKS
MorphoSys has been involved in legal proceedings in Germany and certain foreign jurisdictions, including the United States. These involve claims brought by and against it for license or patent infringement, which arose in the ordinary course of business. After the settlement of the litigation with Applied Molecular Evolution/Eli Lilly in September 2005, no signifi cant patent litigation is pending. However, the fi eld of recombinant antibody libraries and phage display,
in which the Company is active, is relatively new, and the intellectual property position of the various parties involved is complex and litigious. Therefore, MorphoSys can offer no assurance that further patent suits will not be brought by companies possessing existing patents or patents which have not yet been granted or which the Company is currently not aware of. Any such proceedings, if brought and subsequently decided against MorphoSys, could have an adverse material effect on the business, fi nancial condition and operating results of MorphoSys.
FINANCING RISKS
MorphoSys's future capital requirements will continue to be substantial and will be dependent on many factors, including its ability to fi nd licensees and to enter into satisfactory collaboration agreements, as well as the success of such collaborations in generating revenues (e.g. licensing fees, milestone payments and royalties). The costs of the pre-clinical testing of MorphoSys's products and technologies and the costs associated with fi ling, defending and enforcing patent rights may exceed the returns from these products. MorphoSys may also need to raise additional funds in future years. The Company can offer no assurance that adequate funds will be available to MorphoSys when needed on satisfactory terms or at all. If adequate funds are not available or are not available on acceptable terms, MorphoSys may have to reduce its expenditures for research and development, production or marketing. Any such development could have an adverse material effect on MorphoSys's business, fi nancial condition and results of operations. If additional funds are raised by issuing shares, stockholders are likely to experience a dilution of their interests.
CURRENCY AND INTEREST RATE RISKS
The Group accounts are administered in euros. A signifi cant portion of revenues and expenses are earned and incurred in currencies other than the euro. Although the euro is the most predominant currency, others, especially the US dollar, and the British pound, and to lesser degrees the Swiss franc and the Japanese yen may experience fl uctuations in the exchange rate to the reporting currency of the euro, thus impacting fi nancial results. The Company examines the necessity of hedging foreign exchange transactions to minimize the currency risk during the year and attempts to address these risks by establishing a program to hedge, the foreign exchange risks as required.
Interest income earned on our available-for-sale fi nancial assets is affected by changes in the relative level of market interest rates. The Company follows an investment policy which dictates that all investments must have at least an investment grade (BBB+) rating to qualify as an investment. Cash, cash equivalents and marketable securities are maintained principally with
three high-quality fi nancial institutions in Germany. The Company continually monitors its positions with, and the credit quality of, the fi nancial institutions, which are counterparties to its fi nancial instruments, and does not presently anticipate non-performance or non-payment risks.
DEPENDENCE ON KEY PERSONNEL
MorphoSys has not experienced any diffi culties in attracting or retaining key management or scientifi c staff, but the continued ability to recruit and retain qualifi ed skilled personnel is critical to the Company's success. Due to the intense competition for experienced scientists from numerous pharmaceutical and biotechnology companies and academic and other research institutions, there can be no assurance that MorphoSys will be able to attract and retain such personnel on acceptable terms. Planned activities will also require additional personnel, including management, with expertise in different areas. The inability to recruit such personnel or develop such expertise could have an adverse material impact on the Company's operations.
OTHER RISKS
Further, MorphoSys continuously monitors applicable environmental, health and safety, operational as well as other applicable statutory or industrial guidelines, and has implemented functions to comply with all of these effectively at each of our business locations. To minimize the manifold tax, corporate, employment, competition, IP and other legal frameworks, the Company's management bases decision making and the design of policies and processes on the advice of external as well as internal experts. There could be other risks beyond risks described here that MorphoSys currently either deems as insignifi cant or is not aware of at the time of this report.
OVERALL ASSESSMENT OF THE RISK SITUATION
MorphoSys's Management Board continuously analyzes potential risks, which include factors partly or wholly out of the Company's control, such as the overall development of national and global economies. Potential risks also include factors within the Company's control – such as operating risks – which can be anticipated and analyzed early by the risk management system. When necessary, counteractive measures can be introduced.
Based on the information available today, the most important risks are associated with major contracts and the performance of major customers.
OPPORTUNITIES
Thanks to its internationally oriented strategic positioning, MorphoSys has positive growth opportunities for the coming years. By expanding its expertise in the generation, characterization, production and clinical development of therapeutic antibodies, MorphoSys can systematically raise its profi le in the healthcare sector. Additionally, the AbD segment strives to increase its market share for research and diagnostics antibodies. MorphoSys is confident that the research market as a whole is ready for a technological shift and that in the medium to long term, animalbased methods will be replaced by in vitro approaches such as the Company's HuCAL GOLD technology.
GENERAL STATEMENT ON OPPORTUNITIES
The growing demand for new treatment options will be met not only by using existing therapies, but also by new ones originating from advances in the understanding of the biology of disease and the application of new technologies. Innovative new products such as human antibodies have been launched in recent years, which are changing therapeutic approaches and are improving the quality of life for patients. In addition, due to strong competition among generics companies, almost all pharmaceutical companies are increasing their commitment to biologics such as human antibodies. Therapeutics based on biologicals are not as exposed to generics competition as small molecules, mainly because the manufacturing of the compounds is much more complex. To fi ll development pipelines, all major pharmaceutical players have made major commitments to biological therapies. Therefore, the demand for antibodies and the interest of the industry in this class of drugs have sharply increased over the last 12 to 24 months, clearly underpinned by several acquisitions and large licensing agreements in this fi eld. The use of antibodies as therapeutics as well as for research purposes and diagnostics applications represents future growth opportunities for MorphoSys.
MARKET OPPORTUNITIES
MorphoSys believes that the HuCAL antibody platform can potentially be applied to make products that address signifi cant unmet medical needs and provide new research tools cheaper and faster.
THERAPEUTIC ANTIBODIES
MorphoSys has established itself as one of the leading providers of fully human therapeutic antibodies. During the last three years, the scope of competition in the antibody fi eld substantially decreased through the acquisitions of several competitors. Only a few companies offer technologies to develop fully human antibodies. During the last years, MorphoSys has established a strong international patent portfolio, and has secured its freedom to operate and to commercialize its technologies worldwide.
By participating in drug development with multiple partners, MorphoSys has effectively lowered its risk profi le. With currently 50 therapeutic antibody development programs ongoing with its partners, the chance that MorphoSys will participate fi nancially in one or more marketed drugs is much higher than if the Company concentrated on single development programs. At the end of 2007, MorphoSys signed a large strategic collaboration with Novartis, providing MorphoSys with committed payments over the next ten years. Within the collaboration, MorphoSys can pursue co-development options, allowing the Company to develop new antibody therapeutics together with an experienced pharma partner. The committed funding of the collaboration will allow MorphoSys to increase its spending for proprietary drug development.
Through in-licensing new target molecules, the Company seeks to expand and enhance its proprietary pipeline. After clinical proof of concept corresponding to a phase 2/2a study, MorphoSys strives to collaborate with companies with comprehensive expertise in late-stage clinical development and commercialization. By taking its two internal antibody programs MOR103 and MOR202 forward without a partner, the Company stands to benefi t from more lucrative fi nancial terms at such time when an alliance for further development is signed.
RESEARCH ANTIBODIES
Through the acquisitions of Biogenesis and Serotec, MorphoSys established itself within the top 20 of the worldwide leading providers of antibodies and antibody technologies for research and diagnostic applications. AbD Serotec has established a strong base from which to commercialize HuCAL-derived antibodies in the research and diagnostics markets. These markets have traditionally been served by antibodies derived from animals. MorphoSys intends to lead the transition to new in vitro technologies for antibody generation. In contrast to animal-based methods, in vitro technologies, such as the HuCAL library, offer greater speed, throughput and fl exibility in antibody generation. From its current position as one of the leading suppliers in the European market, the Company expects to become one of the leading global players in this fi eld.
ACQUISITION OPPORTUNITIES
MorphoSys has demonstrated its ability to complete acquisitions and to use such transactions to accelerate its growth. MorphoSys may use an acquisition strategy to augment strong organic growth as a means of increasing its market share, accessing patents and licenses for proprietary technology and drug development as well as other relevant assets.
SUBSEQUENT EVENTS
On January 16, 2008, MorphoSys disclosed that human cytokine GM-CSF (granulocytemacrophage colony-stimulating factor) is the target molecule for the Company's proprietary MOR103 antibody program for the treatment of rheumatoid arthritis (RA). With MOR103, MorphoSys is developing the fi rst fully human therapeutic antibody against that target in clinical trials, which is an innovative non-TNF treatment option for patients suffering from RA.
No other signifi cant events of which the Company is aware took place between the closing date of December 31, 2007, and the Management Report fi nalization date of February 11, 2008.
OUTLOOK AND FORECAST
MorphoSys is one of the world's leading biotechnology companies focusing on fully human antibodies and intends to expand its position in the years to come. The Company's management expects to further develop its proprietary antibody pipeline, while increasing its focus towards the value-oriented development of proprietary compounds based on its HuCAL technology. Moreover, MorphoSys seeks to enlarge its market share within the research and diagnostics fi eld.
STRATEGIC OUTLOOK
Looking forward and on the basis of current planning, MorphoSys intends to continue to conduct its business in two operating segments.
Within the Therapeutic Antibodies segment, MorphoSys will continue to provide its existing partners with therapeutic antibody candidates. The partnered therapeutic pipeline is expected to further mature and grow over the coming years, while attrition rates may increase due to the more advanced status of the development programs. After the signature of the strategic alliance with Novartis, MorphoSys will not sign additional fee-for-service therapeutic antibody partnerships with new pharmaceutical or biotechnology companies as in previous years.
Moreover, over the coming years, MorphoSys will seek to increase its proprietary antibody development activities. The expanded agreement with Novartis provides the Company with committed funding over the next decade, allowing MorphoSys to potentially raise its investments in proprietary drug development. Within the Novartis alliance, MorphoSys may elect to participate in certain co-development activities in various programs, with part of the early-stage costs being funded by Novartis. Additionally, MorphoSys may start co-development projects for HuCAL antibodies with other biotechnology or pharmaceutical companies.
In the AbD segment, revenue growth is expected to remain consistent with the prior year's growth rates. Web-based commercialization of products, with sophisticated technical services and customer support, plus an increase of products and services offered are expected to be the main growth drivers of organic growth for the segment.
EXPECTED ECONOMIC DEVELOPMENT
As a result of the US real estate crisis, the rise in worldwide interest rates and oil prices, the risks to weakening global growth have increased. According to the OECD (Organization for Economic Cooperation and Development), global economic growth will continue at a slightly slower pace. As regards Germany, economic upswing is expected to continue at 2.1 % in 2008 and 1.6 % in 2009.
EXPECTED DEVELOPMENT OF THE PHARMACEUTICALS SECTOR
More than three dozen blockbuster patents will lose patent protection over the coming years. Generic competition is expected to eliminate US \$ 67 billion from the top companies' annual US sales between 2007 and 2012. This fact is substantiated by falling research and development productivity. During the years 2002 through 2006, the industry brought 43 % fewer chemicalbased drugs to market than in the last fi ve years of the 1990s, despite more than doubling research and development spending. For this reason, new drugs based on biotechnology are very attractive due to low competition of generics. Currently, no regulatory pathway to approve generic biotech drugs exists in the US. Therefore, biotechnology companies and biotechnology drugs will remain interesting partnering or acquisition targets.
EXPECTED COMMERCIAL DEVELOPMENT
In contrast to previous years, when MorphoSys's business development activities concentrated mainly on new fee-for-service partnerships for the Company's HuCAL technology, MorphoSys will now focus more on in-licensing activities for new antibody development programs, as well as future out-licensing of proprietary drug programs upon clinical proof of effi cacy.
The AbD segment intends to further expand its distribution network, the in-licensing of new research antibodies, as well as new tools to increase and upgrade its range of services.
EXPECTED RESEARCH AND DEVELOPMENT
MorphoSys expects to continue to invest in its proprietary HuCAL technology and has an ongoing multi-year technology development program in place which will lead to a signifi cantly enhanced version of its antibody generation platform.
During the 2008 fi scal year, MorphoSys will seek to fi nalize the phase 1 trial for its proprietary compound MOR103, which will be the basis for phase 2 studies in patients, to prove clinical effi cacy in humans. For MOR202, formal pre-clinical development is intended to be started in 2008, with the aim to start clinical development in 2009.
EXPECTED FINANCIAL DEVELOPMENT
Therapeutic antibodies belong to a well-established and rapidly growing class of drugs, and MorphoSys is benefi ting from this trend. The Therapeutic Antibodies segment has been highly profi table in the past, evidenced by a strong operational cash fl ow. MorphoSys anticipates increasing its spending for proprietary drug development over the coming years. The AbD segment provided a positive cash fl ow in 2007, and MorphoSys intends to build on this result by seeking to achieve increased fi nancial operating profi t margins in future years.
EXPECTED EARNINGS SITUATION
MorphoSys's management anticipates total revenues growth of at least 15 % in the current fi scal year in comparison to 2007. The revenue breakdown between the two segments is anticipated to remain relatively constant in 2008 compared to the prior year.
On the basis of the Management Board's current planning, expenses are expected to increase in 2008 and 2009. COGS is anticipated to increase corresponding to sales of the AbD segment. In upcoming years, MorphoSys will increase its investment in proprietary drug development in order to further develop its proprietary antibody pipeline, including MOR103 and MOR202. S, G&A expenses are expected to increase slightly. On the basis of current planning, MorphoSys will strive to remain profi table on an operating level in 2008 and 2009. For 2008, an overall operating profi t exceeding that of 2007 is anticipated.
DIVIDENDS
Dividends may only be declared and paid from the accumulated retained earnings (after deduction of certain reserves) shown in the Company's annual German statutory accounts. Such amounts differ from the total of additional paid-in capital and accumulated defi cit as shown in the accompanying consolidated fi nancial statements as a result of the adjustments made to present the consolidated fi nancial statements in accordance with IFRS. The Company's German statutory accounts showed taxable income in 2007; however, as of December 31, 2007, and 2006, they refl ected no accumulated earnings available for distribution, and the Company's ability to pay dividends will therefore largely depend upon its future earnings.
For the upcoming year, MorphoSys does not anticipate paying a dividend. Any profi t generated by the business shall be reinvested into the operation of its business in order to create further growth opportunities.
OVERALL STATEMENT ON THE EXPECTED DEVELOPMENT
The demand for new treatment options remains high, allowing the Company to expand its therapeutic antibody development pipeline within its partnerships as well as for its own account. The market for research and diagnostics antibodies is currently undergoing a period of technological and structural upheaval. MorphoSys views these developments as strong incentives to remain active in the market and as an excellent opportunity for future growth.
This outlook takes into account all factors known at the time of the preparation of the fi nancial statements which could affect our business in 2008 and beyond, and is based on Management Board assumptions. Future results may deviate from the expectations described in the outlook section. Major risks are discussed in the risk report.
46
Financial Statements
financial statements
- Consolidated Statement of Operations (IFRS)
- Consolidated Balance Sheet (IFRS)
- Consolidated Statement of Changes in Stockholders' Equity (IFRS)
- Consolidated Statement of Cash Flows (IFRS)
notes to the consolidated financial statements
- Organization and Summary of Signifi cant Accounting Policies
- Segment Reporting
- Cash and Cash Equivalents
- Financial Assets
- Accounts Receivable
- Other Receivables
- Prepaid Expenses, Tax Receivables, Other Current Assets and Inventories
- Property, Plant and Equipment
- Intangible Assets
- Other Assets
- Investment Property
- Assets Classifi ed as Held for Sale
- Purchase Price Allocation
- Accounts Payable
- Provisions
-
Financial Instruments and Financial Risk Management
-
Stockholders' Equity
- Convertible Bonds
- Stock Options
- Personnel Expenses
- Income Taxes
- Earnings per Share
- Operating Leases
- Contingencies
- Related Parties
- Corporate Governance
- Research and Development Agreements
- Detailed Roll-Forward Fixed Assets IFRS (Appendix 1)
- Chart of the Consolidated Entity (Appendix 2)
- Responsibility Statement
-
Auditor's Report
-
Statement of Operations Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
Notes to the Financial Statements
Consolidated Statement of Operations (IFRS)
| in E | note | 2007 | 2006 |
|---|---|---|---|
| Revenues | 1r | 61,962,008 | 53,031,172 |
| Operating Expenses | |||
| Cost of Goods Sold | 2 | 7,947,128 | 7,978,641 |
| Research and Development | 22,237,173 | 17,458,347 | |
| Sales, General and Administrative | 24,759,882 | 21,418,416 | |
| Total Operating Expenses | 54,944,183 | 46,855,404 | |
| Profi t from Operations | 7,017,825 | 6,175,768 | |
| Interest Income | 904,704 | 60,241 | |
| Interest Expense | 10,956 | 143,197 | |
| Other Income/(Expenses), Net | 1,306,036 | (806,924) | |
| Profi t before Taxes | 9,217,609 | 5,285,888 | |
| Income Tax Benefi t | 21 | 2,257,421 | 742,046 |
| NET PROFIT | 11,475,030 | 6,027,934 | |
| Basic Net Profi t per Share | 22 | 1.61 | 0.94 |
| Diluted Net Profi t per Share | 22 | 1.59 | 0.93 |
| Shares Used in Computing | |||
| Basic Net Profi t per Share | 22 | 7,115,890 | 6,379,046 |
| Shares Used in Computing | |||
| Diluted Net Profi t per Share | 22 | 7,211,101 | 6,469,839 |
Consolidated Balance Sheet (IFRS)
| in E | note | 2007 | 2006 |
|---|---|---|---|
| ASSETS | |||
| Current Assets | |||
| Cash and Cash Equivalents | 3, 16 | 48,407,064 | 3,765,320 |
| Available-for-sale Financial Assets | 4, 16 | 58,491,852 | 62,260,552 |
| Accounts Receivable | 5, 16 | 9,461,832 | 3,699,386 |
| Tax Receivables | 7 | 1,023,762 | 199,951 |
| Other Receivables | 6 | 138,903 | 110,734 |
| Inventories, Net | 7 | 3,833,208 | 3,511,405 |
| Prepaid Expenses and Other Current Assets | 7 | 1,163,521 | 1,897,040 |
| Assets Classifi ed as Held for Sale | 12 | 346,330 | 664,108 |
| Total Current Assets | 122,866,472 | 76,108,496 | |
| Non-current Assets | |||
| Property, Plant and Equipment, Net | 8 | 4,229,043 | 6,894,112 |
| Patents, Net | 9 | 1,594,749 | 1,950,154 |
| Licenses, Net | 9 | 16,430,881 | 7,776,374 |
| Software, Net | 9 | 632,453 | 243,813 |
| Know-how and Customer Lists, Net | 9 | 3,686,512 | 4,834,289 |
| Goodwill | 9 | 26,953,864 | 27,002,591 |
| Investment Property | 11 | 1,602,558 | 0 |
| Deferred Tax Asset | 21 | 4,948,435 | 1,455,723 |
| Prepaid Expenses and Other Assets, | |||
| Net of Current Portion | 7, 10 | 1,767,579 | 1,577,570 |
| Total Non-current Assets | 61,846,074 | 51,734,626 | |
| TOTAL ASSETS | 184,712,546 | 127,843,122 |
- Statement of Operations
- Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
Notes to the Financial Statements
| in E | note | 2007 | 2006 |
|---|---|---|---|
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||
| Current Liabilities | |||
| Accounts Payable | 14, 16 | 13,440,778 | 10,455,799 |
| Licenses Payable | 14, 16 | 131,326 | 126,382 |
| Provisions and Tax Liabilities | 15 | 476,548 | 1,082,042 |
| Current Portion of Deferred Revenue | 1r | 15,345,863 | 6,648,107 |
| Total Current Liabilities | 29,394,515 | 18,312,330 | |
| Non-current Liabilities | |||
| Provisions, Net of Current Portion | 15 | 62,763 | 62,763 |
| Deferred Revenue, Net of Current Portion | 1r | 7,049,474 | 6,216,007 |
| Convertible Bonds Due to Related Parties | 18 | 79,065 | 38,371 |
| Deferred Tax Liability | 21 | 2,589,280 | 3,162,332 |
| Total Non-current Liabilities | 9,780,582 | 9,479,473 | |
| Stockholders' Equity | 17, 18, 19 | ||
| Common Stock, W 3.00 Par Value; | |||
| Ordinary Shares Authorized (12,729,785 and 12,729,785 for 2007 and 2006, respectively) |
|||
| Ordinary Shares Issued (7,386,753 and 6,715,322 for 2007 and 2006, respectively) |
|||
| Ordinary Shares Outstanding (7,360,021 and 6,686,160 for 2007 and 2006, respectively) |
|||
| Treasury Stock (26,732 and 29,162 shares for 2007 and 2006, respectively), at Cost |
22,150,448 | 20,135,263 | |
| Additional Paid-in Capital | 155,376,343 | 123,878,001 | |
| Reserves | 1,858,910 | 1,359,948 | |
| Accumulated Defi cit | (33,848,252) | (45,321,893) | |
| Total Stockholders' Equity | 145,537,449 | 100,051,319 | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | 184,712,546 | 127,843,122 |
Consolidated Statement of Changes in Stockholders' Equity (IFRS)
| common stock | |||
|---|---|---|---|
| shares | R | ||
| BALANCE AS OF JANUARY 1, 2006 | 6,025,863 | 18,077,589 | |
| Compensation Related to the Grant of Stock Options and Convertible Bonds | 0 | 0 | |
| Exercise of Options and Convertible Bonds Issued to Related Parties | 96,561 | 289,683 | |
| Capital Increase against Contribution in Kind, Net of Issuance Cost of W 32,060 |
208,560 | 625,680 | |
| Capital Increase, Net of Issuance Cost of W 472,884 | 384,338 | 1,153,014 | |
| Reserves: | |||
| Change in Unrealized Gain on Available-for-sale Securities, Net of Deferred Tax |
0 | 0 | |
| Effect from Equity-related Recognition of Deferred Taxes | 0 | 0 | |
| Foreign Currency Loss from Consolidation | 0 | 0 | |
| Net Profi t for the Year | 0 | 0 | |
| Comprehensive Income | 0 | 0 | |
| BALANCE AS OF DECEMBER 31, 2006 | 6,715,322 | 20,145,966 | |
| Result Incurred Through Restructuring of Affi liates | 0 | 0 | |
| Compensation Related to the Grant of Stock Options and Convertible Bonds | 0 | 0 | |
| Exercise of Options and Convertible Bonds Issued to Related Parties, Net of Issuance Cost of W 9,350 (Net of Deferred Tax) |
19,243 | 57,729 | |
| Exercise of Options from Treasury Stock Issued to Related Parties | 0 | 0 | |
| Capital Increase against Contribution in Cash, Net of Issuance Cost of W 1,215,656 (Net of Deferred Tax) |
652,188 | 1,956,564 | |
| Reserves: | |||
| Change in Unrealized Gain on Available-for-sale Securities, Net of Deferred Tax |
0 | 0 | |
| Effect from Equity-related Recognition of Deferred Taxes | 0 | 0 | |
| Foreign Currency Loss from Consolidation | 0 | 0 | |
| Net Profi t for the Year | 0 | 0 | |
| Comprehensive Income | 0 | 0 | |
| BALANCE AS OF DECEMBER 31, 2007 | 7,386,753 | 22,160,259 |
- Statement of Operations Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
- Notes to the Financial Statements
| R R R R R shares 29,162 (10,703) 96,412,849 584,679 293,184 (51,349,827) 0 0 1,250,891 0 0 0 0 0 2,739,618 0 0 0 0 0 7,997,500 0 0 0 0 0 15,477,143 0 0 0 0 0 0 623,420 0 0 0 0 0 (141,309) 0 0 0 0 0 0 (26) 0 0 0 0 0 0 6,027,934 0 0 0 482,111 (26) 6,027,934 29,162 (10,703) 123,878,001 1,066,790 293,158 (45,321,893) 0 0 0 0 0 (1,389) 0 0 1,430,406 0 0 0 0 0 630,756 0 0 0 (2,430) 892 0 0 0 0 0 0 29,437,180 0 0 0 0 0 0 1,304,584 0 0 0 0 0 (130,046) 0 0 0 0 0 0 (675,576) 0 0 0 0 0 0 11,475,030 0 0 0 1,174,538 (675,576) 11,475,030 26,732 (9,811) 155,376,343 2,241,328 (382,418) (33,848,252) |
treasury stock | additional paid -in |
revaluation | translation | accumulated | total stockhol |
|---|---|---|---|---|---|---|
| capital | reserve | reserve | deficit | ders' equity R |
||
| 64,007,771 | ||||||
| 1,250,891 | ||||||
| 3,029,301 | ||||||
| 8,623,180 | ||||||
| 16,630,157 | ||||||
| 623,420 | ||||||
| (141,309) | ||||||
| (26) | ||||||
| 6,027,934 | ||||||
| 6,510,019 | ||||||
| 100,051,319 | ||||||
| (1,389) | ||||||
| 1,430,406 | ||||||
| 688,485 | ||||||
| 892 | ||||||
| 31,393,744 | ||||||
| 1,304,584 | ||||||
| (130,046) | ||||||
| (675,576) | ||||||
| 11,475,030 | ||||||
| 11,973,992 | ||||||
| 145,537,449 |
Consolidated Statement of Cash Flows (IFRS)
| in E | note | 2007 | 2006 |
|---|---|---|---|
| OPERATING ACTIVITIES: | |||
| Net Profi t | 11,475,030 | 6,027,934 | |
| Adjustments to Reconcile Net Profi t to Net Cash Provided by Operating Activities: |
|||
| Non-cash Charges from PPA | 724,647 | 699,709 | |
| Depreciation and Amortization of Tangible and Intangible Assets |
4,470,172 | 4,251,545 | |
| Income Tax Benefi t | (580,317) | (524,615) | |
| Net Gain on Sales of Financial Assets | (1,333,651) | (667,534) | |
| Unrealized Net Gain on Derivative Financial Instruments | (474,734) | (18,372) | |
| Loss/(Gain) on Sale of Property, Plant and Equipment/Intangible Assets |
37,833 | (28,929) | |
| Recognition of Deferred Revenue | (20,775,489) | (15,981,692) | |
| Stock-based Compensation | 1,419,515 | 1,242,971 | |
| Changes in Operating Assets and Liabilities: | |||
| Accounts Receivable | (5,877,999) | 1,140,530 | |
| Prepaid Expenses, Other Assets and Tax Receivables | (4,092,265) | (2,894,480) | |
| Accounts Payable and Provisions | (2,534,689) | 2,060,891 | |
| Licenses Payable | 4,944 | (885,851) | |
| Other Liabilities | 4,086,203 | 593,509 | |
| Deferred Revenue | 30,306,712 | 20,423,400 | |
| Cash Generated from Operations | 16,855,912 | 15,439,016 | |
| Interest Paid | 4,967 | 20,480 | |
| Interest Received | (906,372) | (60,099) | |
| Income Taxes Paid | 1,110,547 | 949,330 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 17,065,054 | 16,348,727 |
- Statement of Operations
- Balance Sheet
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
| in E | note | 2007 | 2006 |
|---|---|---|---|
| INVESTING ACTIVITIES: | |||
| Purchases of Financial Assets | (16,311,410) | (33,848,867) | |
| Proceeds from Sales of Financial Assets | 22,745,022 | 22,778,680 | |
| Purchases of Property, Plant and Equipment | (1,057,368) | (3,548,865) | |
| Proceeds from Disposals of Property, | |||
| Plant and Equipment | 410,085 | 38,850 | |
| Additions to Intangibles | (10,950,279) | (425,931) | |
| Acquisition of Serotec, Net of Cash Acquired | 0 | (21,172,502) | |
| NET CASH USED IN INVESTING ACTIVITIES | 16 | (5,163,950) | (36,178,635) |
| FINANCING ACTIVITIES: | |||
| Proceeds from the Issuance of Equity | 32,609,400 | 17,103,041 | |
| Proceeds from the Exercise of Options | |||
| and Convertible Bonds Granted to Related Parties | 698,727 | 3,029,301 | |
| Net of Proceeds and Payments from the Issuance | |||
| of Convertible Bonds Granted to Related Parties | 40,694 | (11,843) | |
| Purchases of Derivative Financial Instruments | 6 | (91,500) | (93,650) |
| Proceeds from the Disposal of Derivative Financial | |||
| Instruments | 6 | 538,065 | 31,006 |
| Net Cost of Share Issuance | (1,225,005) | (504,945) | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 16 | 32,570,381 | 19,552,910 |
| Effect of Exchange Rate Differences on Cash | 170,259 | 25,289 | |
| Increase/(Decrease) in Cash and Cash Equivalents | 44,641,744 | (251,709) | |
| CASH AND CASH EQUIVALENTS AT THE | |||
| BEGINNING OF THE PERIOD | 3,765,320 | 4,017,029 | |
| CASH AND CASH EQUIVALENTS AT THE | |||
| END OF THE PERIOD | 48,407,064 | 3,765,320 |
Notes to the Consolidated Financial Statements
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
MorphoSys AG (the "Company" or "MorphoSys") is a biotechnology company using combinatorial biology for drug discovery with the principal objective of developing and commercially exploiting new enabling technologies across a broad scientifi c spectrum. The Company was founded in July 1992 as a German limited liability company. In June 1998, MorphoSys became a German stock corporation. In March 1999, the Company went public on Germany's Neuer Markt, the stock exchange designated for high-growth enterprises. On January 15, 2003, MorphoSys AG was admitted to the Prime Standard segment of the Frankfurt Stock Exchange.
CONSOLIDATED COMPANIES
The Company has four wholly owned subsidiaries (together referred to as the "MorphoSys Group"):
MorphoSys USA, Inc., was incorporated in the United States on February 16, 2000. The subsidiary's purpose was to assist the Company in the sale and licensing of MorphoSys AG products. MorphoSys USA, Inc., substantially ceased its operations in November 2002.
MorphoSys IP GmbH was incorporated in Munich, Germany, on November 6, 2002. The subsidiary's purpose is to purchase, maintain and administer certain intangible assets of the MorphoSys Group. The Company's operations are physically located on the premises of MorphoSys AG, and operations commenced on December 31, 2002.
1 Serotec Ltd. with its subsidiaries Serotec, Inc., Serotec GmbH and Oxford Biotechnology Ltd. (together referred to as the "Serotec Group") was acquired by MorphoSys in January 2006 and became a wholly owned subsidiary of MorphoSys AG. The Serotec Group has been integrated within MorphoSys's existing AbD segment. The purchase price of approximately £ 20 million (approx. w 29.3 million) was paid in cash (£ 14 million or w 20.5 million) and the remainder in 208,560 new MorphoSys shares from a capital increase against contribution in kind.
Serotec Ltd. and Serotec, Inc., were renamed MorphoSys UK Ltd. and MorphoSys US, Inc., as of January 2007. Serotec GmbH was renamed MorphoSys AbD GmbH as of March 2007.
In January 2005, MorphoSys acquired Biogenesis Ltd., Poole, UK, and Biogenesis, Inc., New Hampshire, USA, for a total consideration of £ 5.25 million less net debt of approximately £ 0.7 million. Biogenesis UK was fi rst renamed MorphoSys UK Ltd. and in 2007 again renamed Poole Real Estate Ltd. Biogenesis, Inc., was renamed MorphoSys US, Inc., and merged into Serotec, Inc. The merged entity resumed the name MorphoSys US, Inc.
In 2007, the Company applied § 264 paragraph 3 of the German Commercial Code (HGB). For this reason, no separate fi nancial statements for 2007 were published in the Bundesanzeiger for MorphoSys IP GmbH.
GENERAL INFORMATION
The consolidated fi nancial statements for the year ended December 31, 2007, were authorized for issuance in accordance with a resolution of the Management Board on February 11, 2008. The Management Board is represented by Dr. Simon E. Moroney (Chief Executive Offi cer), Mr. Dave Lemus (Executive Vice President and Chief Financial Offi cer) and Dr. Marlies Sproll (Chief Scientifi c Offi cer).
- Statement of Operations 57 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
Notes to the Financial Statements
The Supervisory Board is represented by Dr. Gerald Möller (Chairman, Chairman of the Remuneration & Nomination Committee), Prof. Dr. Jürgen Drews (Deputy Chairman, Remuneration & Nomination Committee), Dr. Daniel Camus (Audit Committee), Dr. Metin Colpan (Remuneration & Nomination Committee), Dr. Walter Blättler and Dr. Geoffrey N. Vernon (Chairman of the Audit Committee). The Supervisory Board is empowered to amend the fi nancial statements after the resolution of the Management Board.
The registered offi ces of the headquarters of MorphoSys AG are located at Lena-Christ-Str. 48 in 82152 Martinsried/Planegg, Germany.
SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF ADOPTION
The preparation of the consolidated fi nancial statements in conformity with the International Financial Reporting Standards (IFRS) requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated fi nancial statements and accompanying notes. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
The accounting policies set out below have been applied consistently to all periods presented in these consolidated fi nancial statements.
IFRS 2 "SHARE-BASED PAYMENT"
IFRS 2 "Share-based Payment" requires an expense to be recognized where the Group buys goods or services in exchange for shares or rights over shares ("equity-settled transactions") or in exchange for other assets equivalent in value to a given number of shares or rights over shares ("cash-settled transactions"). The main impact of IFRS 2 on the Group refers to the expense associated with employees' as well as management boards' and supervisory boards' share options and other share-based incentives by using an option pricing model. In accordance with IFRS 2.54, the Group has applied IFRS 2 to equity-settled awards granted on or after January 1, 1999. In
accordance with IFRS 2.56, options granted prior to January 1, 1999, are therefore not expensed. All information is nonetheless disclosed in line with IFRS 2.44 and 2.45. Further details are given in the Notes to the Consolidated Financial Statements sections 18 and 19.
IFRS 3 "BUSINESS COMBINATIONS", IAS 36
"IMPAIRMENT OF ASSETS" AND IAS 38 "INTANGIBLE ASSETS" IFRS 3 applies to accounting for business combinations for which the agreement date is on or after March 31, 2004. IFRS 3 requires that all business combinations are accounted for using the purchase method, whereby identifi able 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 useful economic life of an intangible asset is generally assessed at the level of individual assets as having either a fi nite or an indefi nite life. The Company has not identifi ed any asset with an indefi nite life. Intangible assets with fi nite lives are being amortized over their useful lives. Amortization periods and methods for intangible assets with fi nite useful economic lives are reviewed annually or earlier where an indicator of impairment exists.
Receivables, liabilities, provisions, income and expenses, and profi ts between consolidated companies are eliminated on consolidation.
NEW STANDARDS EFFECTIVE IN 2007
• IFRS 7 "Financial Instruments: Disclosures" and the complementary amendment to IAS 1, "Presentation of Financial Statements – Capital Disclosures" introduce new disclosures relating to fi nancial instruments and do not have any impact on the classifi cation and valuation of the Group's fi nancial instruments or the disclosures relating to taxation and trade and other payables.
- IFRIC 8 "Scope of IFRS 2" requires consideration of transactions involving the issuance of equity instruments, where the identifi able consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group's fi nancial statements.
- IFRIC 10 "Interim Financial Reporting and Impairment" states that the impairment losses recognized in interim fi nancial statements on goodwill and investments in equity instruments and in fi nancial assets carried at cost must not be reversed at subsequent interim or annual fi nancial statements. This standard does not have any impact on the Group's fi nancial statements.
The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after January 1, 2007, but are not relevant to the Group's operations:
- IFRS 4 "Insurance Contracts";
- IFRIC 7 "Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinfl ationary Economies";
- IFRIC 9 "Reassessment of Embedded Derivatives".
STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN EARLY ADOPTED BY THE GROUP The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after January 1, 2008, or later periods, but have not been early adopted by the Group:
• IAS 23 (Amendment) "Borrowing Costs" (effective from January 1, 2009). The amendment to the standard is still subject to endorsement by the European Union. It requires an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option
of immediately expensing those borrowing costs will be removed. The Group will apply IAS 23 (Amended) from January 1, 2009 but the standard is currently not applicable to the Group as there are no qualifying assets.
- IFRS 8 "Operating Segments" (effective from January 1, 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131 "Disclosures about segments of an enterprise and related information". The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from January 1, 2009.
- IFRIC 14 "IAS 19 The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements and their Interaction" (effective from January 1, 2008). IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognized as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from January 1, 2008, but the standard is currently not applicable to the Group as there are no defi ned benefi t assets and funding requirements.
- Other standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group include IAS 1 revised, IFRIC 11 "IFRS 2 – Group and treasury share transactions", IFRIC 12 "Service concession arrangements" and IFRIC 13 "Customer loyalty programmes".
B) STATEMENT OF COMPLIANCE
The accompanying consolidated fi nancial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB), London, in consideration of interpretations of the Standing Interpretations Committee (SIC), the International Financial Reporting Interpretations Committee (IFRIC) and the IFRS adopted by the European Commission.
- Statement of Operations 59 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
- Notes to the Financial Statements
The consolidated fi nancial statements of the Company for the year ended December 31, 2007, comprise the Company and its subsidiaries (together referred to as the "MorphoSys Group").
C) BASIS OF PRESENTATION
The fi nancial statements are presented in euro, which is the functional currency for the MorphoSys Group. They are prepared on the historical cost basis except the following assets and liabilities that are stated at their fair value: derivative fi nancial instruments, available-for-sale fi nancial assets and certain licenses (Cambridge Antibody Technology Ltd. [CAT] and XOMA Ireland Ltd.). All fi gures in this report are rounded either to the nearest euro, thousand euros or million euros.
IAS 27 "Consolidated and Separate Financial Statements" shall be applied for annual periods beginning on or after January 1, 2005. The Company decided to adopt IAS 27 for all fi nancial statements beginning January 1, 2003. The accounting policies have been applied consistently by Group entities in accordance with IAS 27.28.
D) BASIS OF CONSOLIDATION
Intercompany balances and transactions and any unrealized gains arising from intercompany transactions are eliminated in preparing the consolidated fi nancial statements in accordance with IAS 27.24. Unrealized losses are eliminated in the same way as unrealized gains but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Please see the Notes to the Consolidated Financial Statements – section 1A, IFRS 3 "Business Combinations", IAS 36 "Impairment of Assets" and IAS 38 "Intangible Assets" for further details.
E) FOREIGN CURRENCY TRANSLATION
IAS 21 "The Effects of Changes in Foreign Exchange Rates" defi nes the accounting for transactions and balances in foreign currencies. Transactions in foreign currencies are translated at the foreign exchange rate as of the date of the transaction. Foreign exchange rate differences arising on these translations are recognized in the statement of operations. On the balance sheet date, assets and liabilities are translated at the closing rate, and income and expenses are translated at the average exchange
rate for the period. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Any foreign exchange rate differences deriving from these translations are recorded in the statement of operations. Any further foreign exchange rate differences on a Group level are recognized in translation reserve (equity).
F) INTEREST
MorphoSys uses interest rates to calculate fair values. For stock-based compensation calculation, MorphoSys uses for convertible bonds the interest rate of a German government bond with a duration of two years at grant date and for stock options the interest rate of a German government bond with a duration of three years at grant date.
G) DERIVATIVE FINANCIAL INSTRUMENTS
The Group uses derivative fi nancial instruments to hedge its exposure to foreign exchange rate risks. In accordance with IAS 39.9, all derivative fi nancial instruments are held for trading and recognized initially at cost. Subsequent to initial recognition, derivative fi nancial instruments are stated at fair value, which is their quoted market price as of the balance sheet date. Since the derivatives were not designated for hedge accounting, any resulting gain or loss is recognized in the statement of operations. According to the Group's foreign currency hedging policy, future cash fl ows with a high probability and receivables which are defi nite and collectable within a twelve-month period will be hedged.
H) CASH AND CASH EQUIVALENTS
The Company considers all cash at bank, in hand and short-term deposits with an original maturity of three months or less to be cash or cash equivalents. The Company invests its cash in deposits with three major German fi nancial institutions, namely Dresdner Bank, HypoVereinsbank and Deutsche Bank.
I) NON-DERIVATIVE FINANCIAL INSTRUMENTS
All non-derivative fi nancial instruments are initially recognized at cost, being the fair value of the consideration given and including acquisition charges associated with the investment for instruments not at fair value through profi t or loss.
The Company accounts for its investments in debt and equity securities in accordance with IAS 39. The management determines the proper classifi cations of fi nancial assets at the time of purchase and re-evaluates such designations as of each balance sheet date. As of December 31, 2007, and as of December 31, 2006, the fi nancial assets held by the Group have been classifi ed as available for sale. These fi nancial assets are recognized or derecognized by the Group on the date it commits itself to purchase or sell the fi nancial assets. After initial recognition, available-for-sale fi nancial assets are measured at fair value, with any resulting gain or loss reported directly in revaluation reserve within equity until the fi nancial assets are sold, collected or otherwise disposed of, or until the fi nancial assets are determined to be impaired, at which time the cumulative loss is reported in the statement of operations.
The Company considers a decline in the fair value of availablefor-sale fi nancial assets which is longer than six months in duration to be deemed other than temporary unless specifi c facts and circumstances indicate otherwise. If, in a subsequent period, the fair value increases, the impairment loss is reversed with the amount of reversal included in revaluation reserve for equity securities and in the statement of operations for debt securities.
Other non-derivative fi nancial instruments are measured at amortized cost using the effective interest method, less any impairment losses.
J) ACCOUNTS RECEIVABLE
Accounts receivable are stated at their cost less any allowance for doubtful accounts (see below) and impairment losses (see accounting policy N).
The allowance for doubtful accounts is based on the management's assessment of the collectibility of specifi c customer accounts and the aging of the accounts receivable. If there is deterioration in a major customer's creditworthiness or if actual defaults are higher than the historical experience, the management's estimates of the recoverability of amounts due to the Company could be adversely affected. Based on the management's assessment, allowances in the amount of w 65,498 as of December 31, 2007, and w 189,103 as of December 31, 2006, were recognized. The Company does require collateral from customers for accounts receivable in the AbD segment. The amount of collaterals held as of December 31, 2007, was not material.
K) INVENTORY
Inventories are stated on a FIFO basis at the lower of manufacturing/acquisition costs and net realizable value. Manufacturing costs of self-produced inventories comprise all costs which are directly attributable and an appropriate portion of overheads. Inventories can be classifi ed into raw material/consumables, work in progress and fi nished goods.
L) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation (see also the Notes to the Consolidated Financial Statements – section 8) and impairment losses (see accounting policy N). Replacements and improvements are capitalized while general repairs and maintenance are charged to expenses as incurred. Assets are depreciated over their expected useful lives using the straight-line method. Leasehold improvements are depreciated over the estimated useful lives of the assets using the straight-line method.
- Statement of Operations 61 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
- Notes to the Financial Statements
M) INTANGIBLE ASSETS
MA) RESEARCH AND DEVELOPMENT
Research costs are expensed as incurred. Development costs are expensed as incurred (IAS 38.5 and IAS 38.11–38.23).
MB) PATENT COSTS
Patents obtained by the Group are stated at cost less accumulated amortization (see below) and impairment losses (see accounting policy N). Capitalized costs principally relate to the costs of legal counsel. Patent costs are amortized on a straightline basis over the lower of the estimated useful life of the patent (ten years) and the remaining patent term. Amortization commences when the patent is issued. The Company's patents covering its proprietary HuCAL technology were granted in Australia in October 2000, in the United States of America in October 2001 and in Europe in June 2002. Further patent applications are pending in Canada, Japan and other jurisdictions.
MC) LICENSE RIGHTS
The Company acquired license rights by making upfront license payments, paying annual maintenance fees and making sublicense payments to third parties. The Company amortizes upfront license payments on a straight-line basis over the estimated useful life of the acquired license (ten years). The amortization period and the amortization method are reviewed at each balance sheet date (IAS 38.104). Annual maintenance fees are amortized over the term of each annual agreement. Sublicense payments are amortized on a straight-line basis over the life of the contract or the estimated useful life of the collaboration for those contracts without a stipulated term.
MD) SOFTWARE
Software is stated at cost less accumulated amortization (see below) and impairment losses (see accounting policy N). Amortization is charged to the statement of operations on a straightline basis over the estimated useful life of three to fi ve years. Software is amortized from the date it is available for use.
ME) KNOW-HOW AND CUSTOMER LISTS
MorphoSys established a purchase price allocation (PPA) required by IFRS 3 "Business Combinations". Intangible assets identifi ed consist of customer lists, know-how as well as customer relationships and distributors.
MF) GOODWILL
The goodwill recognized is partly attributable to expected synergies to be achieved as well as to the skills of the acquired workforce.
MG) SUBSEQUENT EXPENDITURE
Subsequent expenditure on capitalized intangible assets is only capitalized when it increases the future economic benefi ts embodied in the specifi c asset to which it relates. All other expenditure is expensed as incurred.
N) IMPAIRMENT
The management evaluates the carrying amount of the Group's fi nancial and non-fi nancial assets for potential impairment at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If any indication of impairment exists, the asset's recoverable amount is estimated. An impairment loss is recognized whenever the recoverable amount is less than the carrying amount of an asset. Impairment losses are recognized in the statement of operations.
The recoverable amount of an asset is defi ned as the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset. For an asset that does not generate independent cash infl ows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss in respect of an available-for-sale fi nancial asset is calculated by reference to its fair value. Individually signifi cant fi nancial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognized in profi t or loss. Any cumulative loss in respect of an available-for-sale fi nancial asset recognized previously in equity is transferred to profi t or loss.
An impairment loss in respect of a fi nancial asset is reversed if the subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. With respect to other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Non-current assets that are expected to be recovered primarily through sale rather than through continuing use are classifi ed as held for sale. Impairment losses on initial classifi cation as held for sale and subsequent gains and losses on remeasurement are recognized in profi t or loss. Gains are not recognized in excess of any cumulative impairment loss.
O) SHARE CAPITAL
Ordinary shares are classifi ed as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. When share capital recognized as equity is repurchased, the amount of consideration paid, which includes directly attributable costs, is net of any tax effects, and is recognized as a deduction from equity classifi ed as treasury shares. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or defi cit on the transaction is transferred to/from retained earnings.
P) TRADE AND OTHER PAYABLES
Trade and other payables are stated at their repayment amounts. Payables with repayment dates exceeding one year are discounted to their net present values.
Payables of uncertain timing or amount are shown as provisions.
Q) CONVERTIBLE BONDS
The Company issued convertible bonds to the Management Board and to employees of the Group under application of IAS 32 and IAS 39. In accordance with IAS 32.28, the equity portion of a bond has to be separated and presented as additional paid-in capital. The equity component is deducted from the fair value of the bond. The remaining value is recognized as stock-based compensation. The Company applies the provisions of IFRS 2 "Share-based Payment" for all convertible bonds granted to the Management Board and the employees of the Group.
R) REVENUE RECOGNITION
The Company's revenues include technology access fees and fees derived from research and development collaboration agreements predominantly with companies based in the United States.
Revenues related to non-refundable technology access fees, subscription fees and license fees are deferred and recognized on a straight-line basis over the relevant periods of the agreement, generally the research term or the estimated useful life of the collaboration for those contracts without a stipulated term unless a more accurate means of recognizing revenue is available. Research and development collaboration service fees are recognized in the period when the services are provided. Milestone revenues are recognized upon achievement of certain criteria.
- Statement of Operations 63 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows Notes to the Financial Statements
Investment grants from governmental agencies for the support of specifi c research and development projects for which cash has been received are recorded as revenues to the extent the related expenses have been incurred. Under the terms of the investment grants, the governmental agencies generally have the right to audit the use of the payments received by the Company.
In accordance with IAS 18.21, 18.25 and IAS 20.18, the total consideration in revenue arrangements with multiple deliverables will be allocated among the separately identifi able components based on their respective fair values under application of IAS 18.20, and the applicable revenue recognition criteria will be considered separately for each of the separate components.
Deferred revenues represent revenues received but not yet earned as per the terms of the contracts.
Grant revenues in 2007 amounted to w 0.2 million (2006: w 0.2 million).
S) EXPENSES
SA) 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.
SB) STOCK-BASED COMPENSATION
The Company applies the provisions of IFRS 2 "Share-based Payment" which obligates the Company to record the estimated fair value for stock options and other awards at the measurement date as a compensation expense over the period in which the employees render the services associated with the award. Stock-based compensation expenses for the full year 2007 amounted to w 1,419,515 (2006: w 1,242,971) and were shown in COGS, S,G&A and R&D expenses for the period.
SC) OPERATING LEASE PAYMENTS
Payments made under operating leases are recognized in the statement of operations on a straight-line basis over the term of the lease. According to SIC-15, all incentives for the agreement of an operating lease are recognised as an integral part of the net consideration agreed for the use of the leased asset. The aggregate benefi t of incentives are recognised as a reduction of rental expense over the lease term on a straight-line basis.
T) INTEREST INCOME
Interest income is recognized in the statement of operations as it occurs, taking into account the effective yield on the asset.
U) INTEREST EXPENSE
Borrowing costs are expensed when incurred.
V) INCOME TAXES
Income tax on the profi t or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of operations except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable with respect to previous years.
Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and if they relate to income taxes levied by the same tax authority on the same taxable entity or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profi ts will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefi t will be realized.
W) EARNINGS PER SHARE
The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profi t or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profi t or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to management and employees.
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 and assets include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Intersegment pricing is determined on an arm's length basis according to Group transfer policy.
General and administrative expenses are allocated to the respective business segments by applying an allocation key using head count. Intangibles attributable to both segments are allocated using revenues.
Segment capital expenditures are the total cost incurred during the period to acquire property, plant and equipment as well as intangible assets other than goodwill.
The Group consists of the following two 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 biotechnology companies, as well as on its own account.
ANTIBODIES DIRECT — ABD
The AbD segment leverages MorphoSys's core technological capabilities in the design and manufacture of antibodies for research purposes. It commercializes the HuCAL technology, focusing on the custom generation of research antibodies for partners on an individual basis. The segment generates sales from custom antibodies as well as catalogue antibodies and industrial bulk production.
GEOGRAPHICAL SEGMENTS
In presenting information on the basis of geographical segments, segment revenues are based on the geographical location of the customers and segment assets on the geographical location of the assets.
-
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
| therapeutic | elimina | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| antibodies | abd | unallocated | tion | consolidated | |||||
| in 000's E | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2007 | 2006 |
| REVENUES, TOTAL | 43,103 | 34,713 | 19,608 | 18,318 | 0 | 0 | (749) | 61,962 | 53,031 |
| External Revenues | 43,103 | 34,713 | 18,859 | 18,318 | 0 | 0 | 0 | 61,962 | 53,031 |
| Inter-segment | |||||||||
| Revenues | 0 | 0 | 749 | 0 | 0 | 0 | (749) | 0 | 0 |
| TOTAL OPER ATING EXPENSES |
27,863 | 18,124 | 20,195 | 21,746 | 7,635 | 6,985 | (749) | 54,944 | 46,855 |
| Cost of Goods Sold | 0 | 0 | 7,947 | 7,979 | 0 | 0 | 0 | 7,947 | 7,979 |
| Other Operating Expenses |
27,114 | 18,124 | 12,248 | 13,767 | 7,635 | 6,985 | 0 | 46,997 | 38,876 |
| Intersegment Costs | 749 | 0 | 0 | 0 | 0 | 0 | (749) | 0 | 0 |
| SEGMENT RESULT | 15,240 | 16,589 | (587) | (3,428) | (7,635) | (6,985) | 0 | 7,018 | 6,176 |
| Interest Income | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 905 | 60 |
| Interest Expense | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 11 | 143 |
| Other Income/ (Expenses), Net |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 1,306 | (807) |
| PROFIT BEFORE TAXES |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 9,218 | 5,286 |
| Income Tax Benefi t | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 2,257 | 742 |
| NET PROFIT | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 11,475 | 6,028 |
| Current Assets | 7,255 | 1,895 | 8,431 | 8,649 | 107,180 | 65,564 | 0 | 122,866 | 76,108 |
| Non-Current Assets | 2,019 | 2,064 | 35,013 | 36,967 | 24,814 | 12,704 | 0 | 61,846 | 51,735 |
| TOTAL SEGMENT ASSETS |
9,274 | 3,959 | 43,445 | 45,616 | 131,994 | 78,268 | 0 | 184,713 | 127,843 |
| Current Liabilities | 15,253 | 6,476 | 3,362 | 4,426 | 10,780 | 7,410 | 0 | 29,395 | 18,312 |
| Non-Current Liabilities |
7,050 | 6,216 | 1,742 | 2,483 | 989 | 781 | 0 | 9,781 | 9,480 |
| Stockholders' Equity | 0 | 0 | 0 | 0 | 145,537 | 100,051 | 0 | 145,537 | 100,051 |
| TOTAL SEGMENT LIABILITIES AND |
|||||||||
| EQUITY | 22,303 | 12,692 | 5,104 | 6,909 | 157,307 | 108,242 | 0 | 184,713 | 127,843 |
| Capital Expenditure | 11,250 | 2,128 | 724 | 1,863 | 41 | 13 | 0 | 12,015 | 4,005 |
| Depreciation & Amortization |
2,165 | 1,735 | 1,558 | 1,868 | 750 | 651 | 0 | 4,473 | 4,254 |
A segment result is defi ned as segment revenues less operating segment expenses. As a compensation for therapeutic revenues generated from contracts that had been originally initiated by the AbD segment, the Therapeutic Antibodies segment granted a compensatory fee of w 0.7 million to the AbD segment for 2007 as a result of the revenue sharing agreement established between the two segments in 2007.
The following table shows the split of the Company's consolidated revenues by geographical market:
| TOTAL | 61,962 | 53,031 |
|---|---|---|
| Other | 1,603 | 303 |
| USA and Canada | 22,099 | 19,935 |
| Europe and Asia | 38,260 | 32,793 |
| in 000's E | 2007 | 2006 |
The following table shows the split of the Company's assets by geographical segment:
| TOTAL | 184,713 | 127,843 |
|---|---|---|
| USA | 1,663 | 1,465 |
| UK | 8,414 | 9,040 |
| Germany | 174,636 | 117,338 |
| in 000's E | 2007 | 2006 |
The following table shows the split of the Company's capital expenditure by geographical segment:
| in 000's E | 2007 | 2006 |
|---|---|---|
| Germany | 11,368 | 2,154 |
| UK | 612 | 1,808 |
| USA | 35 | 43 |
| TOTAL | 12,015 | 4,005 |
CASH AND CASH EQUIVALENTS
3
| in 000's E | 2007 | 2006 |
|---|---|---|
| Bank Balances and | ||
| Cash in Hand | 46,382 | 3,577 |
| Term Deposits | 2,275 | 438 |
| Restricted Cash | (250) | (250) |
| CASH AND CASH EQUIVALENTS |
48,407 | 3,765 |
The w 250,000 restricted cash paid for the headquarter building in Munich is a rent deposit.
- Statement of Operations 67 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows Notes to the Financial Statements
FINANCIAL ASSETS
4
Financial assets consist of the following as of December 31, 2007 and 2006:
| gross unrealized | ||||||
|---|---|---|---|---|---|---|
| holding | realized | |||||
| holding | market | |||||
| in 000's w | maturity | cost | gains | losses | gains | value |
| DECEMBER 31, 2007 | ||||||
| DB Money Cash | daily | 56,388 | 3,219 | 0 | 0 | 59,607 |
| Restricted Cash | (1,115) | |||||
| 58,492 | ||||||
| DECEMBER 31, 2006 | ||||||
| DB Money Cash | daily | 61,598 | 1,888 | 0 | 0 | 63,486 |
| Restricted Cash | (1,225) | |||||
| 62,261 | ||||||
The gross unrealized holding gains of w 3,218,916 for the year ended December 31, 2007, and w 1,887,656 for the year ended December 31, 2006, were recorded as a separate component of stockholders' equity (revaluation reserve). In 2007, the Group recorded gains of w 1,333,651 in the statement of operations on the sale of fi nancial assets, which had previously been recognized in equity (2006: w 667,533). The w 1.1 million restricted cash paid for the headquarter of MorphoSys UK Ltd. is a rent deposit.
For further details on accounting for fi nancial assets, see also the Notes to the Consolidated Financial Statements – section 1I.
ACCOUNTS RECEIVABLE
5
All accounts receivable are non interest bearing and are generally due on a 30- to 45-day term. On December 31, 2007 and 2006, accounts receivable included unbilled amounts of w 1,031,250 and w 133,333 respectively.
OTHER RECEIVABLES 6
According to the Company's hedging policy, expected future cash fl ows with a high probability and defi nite foreign currency receivables which are collectable within a twelve-month period are reviewed for hedging. These derivatives are shown as other receivables with their fair values. Starting 2003, MorphoSys entered into foreign currency options and forward contracts to hedge foreign exchange exposure related to US dollar accounts receivable.
As of December 31, 2007, one option contract was outstanding in the notional amount of w 1,125,000 or US \$ 1,462,500 (2006: w 1,562,500 or US \$ 1,921,875) due February 2008. The fair market value of the contract as of December 31, 2007, was w 130,163 (2006: w 106,334). Additionally, two forward contracts were outstanding in the notional amount of US \$ 10,700,000 (2006: US \$ 0) due February 2008. The fair market value of these contracts as of December 31, 2007, was w 4,340 (2006: w 0) respectively. This was recorded in other receivables on the balance sheet. The time of expected cash fl ows regarding option contracts and forward contracts equals the due date. Changes in fair values and realized gains were recognized as other income and amounted to w 0.5 million for the fi nancial year 2007 (2006: w 18,557). As of December 31, 2007, the unsettled contract premium for derivatives entered into in January 2007 amounted to w 41,500 (2006: w 75,700).
PREPAID EXPENSES, TAX RECEIVABLES, OTHER CURRENT ASSETS AND INVENTORIES 7
Prepaid expenses, both the current and the non-current portion, mainly include prepaid sublicense fees of w 0.4 million as of December 31, 2007 (2006: w 0.1 million), and other prepayments in the amount of w 0.9 million as of December 31, 2007 (2006: w 1.2 million).
Tax receivables amounted to w 1.0 million (2006: w 0.2 million) as of December 31, 2007, and mainly comprised receivables in connection with withholding tax on capital gains.
Other current assets amount to w 0.2 million (2006: w 0.5 million) and mainly include receivables from value added tax.
Inventories of w 3.8 million (2006: w 3.5 million) are mainly located in Oxford, UK, Raleigh, USA and Martinsried, Germany. As of December 31, 2007, inventories comprised raw materials, consumables and supplies in the amount of w 3.4 million (2006: w 3.1 million), work in progress in the amount of w 0.2 million (2006: w 0.1 million) and fi nished goods of w 0.2 million (2006: w 0.3 million). As of December 31, 2007, the inventory reserve amounted to w 1.7 million (2006: w 1.1 million) and is included in Cost of Sales. Inventories carried at fair value less cost to sell amount to w 0 (2006: w 0). In 2007 raw materials, consumables and changes in fi nished goods and work in progress recognized as Cost of Sales amounted to w 5.7 million (2006: w 6.0 million).
Statement of Operations 69 Balance Sheet
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
Notes to the Financial Statements
PROPERTY, PLANT AND EQUIPMENT 8
| in 000's E | land and buildings* |
office and laboratory equipment |
furniture and fixtures |
totals |
|---|---|---|---|---|
| Cost | ||||
| JANUARY 1, 2007 | 3,023 | 7,399 | 2,219 | 12,641 |
| Additions | 78 | 867 | 129 | 1,074 |
| Disposals* | (1,786) | (308) | (185) | (2,279) |
| Foreign Exchange Variance | (241) | (52) | (47) | (340) |
| DECEMBER 31, 2007 | 1,074 | 7,906 | 2,116 | 11,096 |
| Accumulated Depreciation | ||||
| JANUARY 1, 2007 | 100 | 4,506 | 1,141 | 5,747 |
| Depreciation Charge for the Year | 65 | 1,186 | 229 | 1,480 |
| Write-Offs for the Year | 0 | 0 | 0 | 0 |
| Disposals | (21) | (272) | (33) | (326) |
| Foreign Exchange Variance | (7) | (16) | (11) | (34) |
| DECEMBER 31, 2007 | 137 | 5,404 | 1,326 | 6,867 |
| Carrying Amount | ||||
| JANUARY 1, 2007 | 2,923 | 2,893 | 1,078 | 6,894 |
| DECEMBER 31, 2007 | 937 | 2,502 | 790 | 4,229 |
| Cost JANUARY 1, 2006 |
2,247 | 5,334 | 1,881 | 9,462 |
| Additions | 1,487 | 2,322 | 613 | 4,422 |
| Disposals* | (697) | (257) | (265) | (1,219) |
| Foreign Exchange Variance | (14) | 0 | (10) | (24) |
| DECEMBER 31, 2006 | 3,023 | 7,399 | 2,219 | 12,641 |
| Accumulated Depreciation JANUARY 1, 2006 |
10 | 3,783 | 972 | 4,765 |
| Depreciation Charge for the Year | 66 | 909 | 229 | 1,204 |
| Write-Offs for the Year | 57 | 60 | 204 | 321 |
| Disposals | (33) | (247) | (265) | (545) |
| Foreign Exchange Variance | 0 | 1 | 1 | 2 |
| DECEMBER 31, 2006 | 100 | 4,506 | 1,141 | 5,747 |
| Carrying Amount JANUARY 1, 2006 |
2,237 | 1,551 | 909 | 4,697 |
| DECEMBER 31, 2006 | 2,923 | 2,893 | 1,078 | 6,894 |
* Including reclassifi cation to Investment Property (see Note 11) and to Assets Classifi ed as Held for Sale (see Note 12).
Currency translation effects for property, plant and equipment held in foreign currency were minor as of December 31, 2007.
As of December 31, 2007, land and building located in Brentwood, New Hampshire, USA, in the total amount of w 0.3 million were classifi ed as held for sale and included in the current assets section of the AbD segment. Land and building located in Oxford, UK, presented as assets classifi ed as held for sale as of December 31, 2006 (w 0.2 million), was sold in December 2007 (see Note 12).
The depreciation charge is included in the following line items of the statement of operations:
| in 000's E | 2007 | 2006 |
|---|---|---|
| Research and Development |
898 | 625 |
| Sales, General and Administrative (Depreciation) |
491 | 528 |
| Sales, General and Administrative (Write-off) |
0 | 317 |
| Cost of Goods Sold | 109 | 48 |
| TOTAL | 1,498 | 1,518 |
As of December 31, 2007, minor foreign exchange effects were recognized for the assets acquired and were accounted as translation reserve in equity.
For more detailed information see Appendix 1.
Statement of Operations 71 Balance Sheet
-
- Statement of Changes in
- Stockholders' Equity
Statement of Cash Flows Notes to the Financial Statements
INTANGIBLE ASSETS 9
| know how and |
||||||
|---|---|---|---|---|---|---|
| customer | ||||||
| in 000's E | patents | licenses | software | list | goodwill | total |
| Cost | ||||||
| JANUARY 1, 2007 | 3,845 | 12,741 | 1,669 | 6,478 | 27,003 | 51,736 |
| Additions | 110 | 10,202 | 628 | 0 | 0 | 10,940 |
| Disposals | 0 | (85) | (6) | 0 | 0 | (91) |
| Foreign Exchange Variance | 0 | (43) | (10) | (518) | (49) | (620) |
| DECEMBER 31, 2007 | 3,955 | 22,815 | 2,281 | 5,960 | 26,954 | 61,965 |
| Accumulated Amortization | ||||||
| JANUARY 1, 2007 | 1,895 | 4,965 | 1,425 | 1,643 | 0 | 9,928 |
| Amortization Charge for the Year | 466 | 1,467 | 227 | 764 | 0 | 2,924 |
| Write-Offs for the Year | 0 | 0 | 0 | 0 | 0 | 0 |
| Disposals | 0 | (42) | 0 | 0 | 0 | (42) |
| Foreign Exchange Variance | 0 | (6) | (3) | (134) | 0 | (143) |
| DECEMBER 31, 2007 | 2,361 | 6,384 | 1,649 | 2,273 | 0 | 12,667 |
| Carrying Amount | ||||||
| JANUARY 1, 2007 | 1,950 | 7,776 | 244 | 4,835 | 27,003 | 41,808 |
| DECEMBER 31, 2007 | 1,594 | 16,431 | 632 | 3,687 | 26,954 | 49,298 |
| Cost | ||||||
| JANUARY 1, 2006 | 3,795 | 12,140 | 1,392 | 2,313 | 4,137 | 23,777 |
| Additions | 50 | 605 | 277 | 4,194 | 22,783 | 27,909 |
| Disposals | 0 | (4) | 0 | 0 | 0 | (4) |
| Foreign Exchange Variance | 0 | 0 | 0 | (29) | 83 | 54 |
| DECEMBER 31, 2006 | 3,845 | 12,741 | 1,669 | 6,478 | 27,003 | 51,736 |
| Accumulated Amortization | ||||||
| JANUARY 1, 2006 | 1,434 | 3,683 | 1,260 | 827 | 0 | 7,204 |
| Amortization Charge for the Year | 461 | 1,286 | 132 | 816 | 0 | 2,695 |
| Write-Offs for the Year | 0 | 0 | 33 | 0 | 0 | 33 |
| Disposals | 0 | (4) | 0 | 0 | 0 | (4) |
| Foreign Exchange Variance | 0 | 0 | 0 | 0 | 0 | 0 |
| DECEMBER 31, 2006 | 1,895 | 4,965 | 1,425 | 1,643 | 0 | 9,928 |
| Carrying Amount | ||||||
| JANUARY 1, 2006 | 2,361 | 8,457 | 132 | 1,486 | 4,137 | 16,573 |
| DECEMBER 31, 2006 | 1,950 | 7,776 | 244 | 4,835 | 27,003 | 41,808 |
Currency translation effects for intangibles held in foreign currency amounted to w 0.1 million as of December 31, 2007 (2006: w 0.1 million).
The amortization charge is included in the following line items of the statement of operations:
| in 000's E | 2007 | 2006 |
|---|---|---|
| Research and Development |
2,285 | 2,131 |
| Sales, General and Administrative (Depreciation) |
563 | 505 |
| Sales, General and Administrative (Write-off) |
0 | 33 |
| Cost of Goods Sold | 127 | 67 |
| TOTAL | 2,975 | 2,736 |
As of December 31, 2007, minor foreign exchange effects were recognized for the assets acquired and were accounted for as translation reserve in equity.
The Company has entered into the following license agreements covering certain patented technologies which are capitalized (non-capitalized license agreements have not been disclosed in detail):
DYAX CORP., USA
In November 2007, the Company signed a licensing agreement with Dyax Corp. covering a broad patent portfolio relating to antibodies and other proteins. The agreement grants MorphoSys a fully paid-up license to a variety of phage display-related patents from Dyax as well as other patents, including several relating to methods for displaying and selecting antibodies and other proteins through the use of alternative types of display. As part of the license agreement, MorphoSys gains the
right to sublicense the patents in conjunction with its proprietary technology. The license agreement provides MorphoSys with fl exibility for future technology development to further diversify its antibody technology portfolio and improve its offering for therapeutic, diagnostic and research customers.
As of December 31, 2007, the license had a remaining amortization period of approximately ten years.
SCA VENTURES, INC., USA
In December 1999, the Company concluded a nonexclusive product-derived license agreement with SCA Ventures, Inc., USA, in which the Company obtained a nonexclusive license from SCA Ventures in order to design, discover, develop, make, use, sell, offer for sale and import HuCAL-derived products under SCA Ventures' patent rights to single-chain antibodies. The Company may use SCA Ventures' licensed technologies for the research and discovery of novel therapeutic agents and targets and may sublicense the technologies to its commercial partners. The Company may terminate this agreement for any reason upon six months' prior written notice to SCA Ventures. The Company pays an upfront license fee in addition to annual maintenance and transfer fees.
As of December 31, 2007, the license had a remaining amortization period of two years.
BIOSITE DIAGNOSTICS, INC., USA
In January 2000, the Company signed a collaboration agreement with Biosite Diagnostics, Inc., under which the Company received a royalty-bearing, nonexclusive, worldwide license to patents owned by Biosite and the XOMA Corporation covering certain technologies relating to the display and screening of multi-chain antibodies. The Company may use the licensed technologies for research and discovery of novel therapeutic agents and targets and may sublicense the technologies to its commercial partners.
- Statement of Operations 73 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
- Notes to the Financial Statements
Unless terminated earlier, the term of this agreement shall be the later of the expiration of the parties' respective obligations to pay royalties and the expiration of the last patent right licensed by one party to the other. The Company pays an upfront technology access fee in addition to annual maintenance and transfer fees.
As of December 31, 2007, the license had a remaining amortization period of two years.
GENENTECH, INC., USA
In May 2000, the Company concluded a license agreement with Genentech, Inc., granting the Company rights under Genentech's patents relating to the monovalent phage display screening technology. The Company may use the licensed technologies for research and discovery of novel therapeutic agents and targets and may sublicense the technology to its commercial partners. The Company pays an upfront technology access fee in addition to annual maintenance and transfer fees.
As of December 31, 2007, the license had a remaining amortization period of approximately two years and a half.
XOMA IRELAND LTD., IRELAND
In February 2002, the Company concluded a cross-license agreement for antibody-related technologies with XOMA Ireland Ltd. Pursuant to the agreement, MorphoSys paid w 1.1 million to XOMA with a second installment of w 4.6 million due September 2002. At the Company's option, the second installment could be paid in cash or with new shares of the Company's common stock equivalent to w 5.5 million. The Company recorded w 2.5 million as a charge to research and development expenses in the year 2002. The remaining w 3.2 million represents the value of the license received. It has been capitalized as an intangible asset and is amortized over its expected useful life of ten years.
In October 2002, the Company exercised the option to pay the second installment with 363,466 new shares of its common stock, which was determined with reference to the market price of the Company's common stock at the time of the notice. The Company recorded a charge to interest expense of w 0.7 million at the time the shares were issued in May 2003 as a consequence of exercising this option.
As of December 31, 2007, the license had a remaining amortization period of fi ve years.
CAMBRIDGE ANTIBODY TECHNOLOGY LTD. (CAT), UK
In December 2002 and effective July 2003, the Company entered into a license and settlement agreement with CAT. The settlement agreement covers MorphoSys's past, present and future use as well as the commercialization of all versions of its HuCAL libraries and all patents in the past disputes between the two companies. This includes the litigation in the United States regarding CAT's Griffi ths, McCafferty, Winter II and Winter/ Lerner/Huse patents as well as oppositions launched by MorphoSys at the European Patent Offi ce against CAT's Winter II and McCafferty patents.
As of December 31, 2007, the license had a remaining amortization period of six years.
CRUCELL N.V., THE NETHERLANDS
In August 2006, MorphoSys AG signed a second PER.C6® license agreement with Dutch biotechnology company Crucell N.V. and a biopharmaceutical manufacturing agreement with its technology partner DSM Biologics. The license agreements allow MorphoSys to use the PER.C6® cell line in the production of clinical-grade material for the development of its proprietary therapeutic antibody program MOR103. Production of clinicalgrade material is a relevant step to keep to the timeline for this project.
As of December 31, 2007, the license had a remaining amortization period of nine years.
UNIVERSITY OF MELBOURNE, AUSTRALIA
During 2007, MorphoSys signed an agreement with the University of Melbourne providing MorphoSys with exclusive access to all rights under a US patent application and its progeny covering certain uses of inhibitors of the human cytokine GM-CSF (Granulocyte-macrophage colony-stimulating factor). GM-CSF is the target molecule for MorphoSys's proprietary MOR103 antibody program for the treatment of rheumatoid arthritis (RA) and other infl ammatory diseases. MorphoSys expects that the license obtained from the University of Melbourne will lead to market exclusivity for therapeutic antibodies targeting GM-CSF in the US for infl ammatory disorders, once a favorable US patent is granted.
For further information see Appendix 1.
OTHER ASSETS 10
The Company has classifi ed certain items in other assets that are not available for use in its operations as restricted cash (see Notes to the Consolidated Financial Statements – section 3). As of December 31, 2007 and 2006, the Company had commitments of w 1,365,095 and w 1,475,182 for guarantees issued as well as w 79,065 and w 38,371 respectively for convertible bonds issued to employees.
INVESTMENT PROPERT Y
Investment property comprises the commercial properties of the subsidiary Poole Real Estate Ltd., Poole, UK, that are leased out to third parties under operating leases. The lease contains an initial non-cancellable period of two years. No contingent rents are charged.
The carrying amount of the property amounts to w 1.6 million (reclassifi ed from property, plant and equipment). As the Group decided to sublet the property, a change in classifi cation to investment property was necessary in 2007. For the period ended December 31, 2007, an amount of w 0.3 million was recognized as rental income in the statement of operations. Investment Property is measured at depreciated cost. No valuation by an independent valuer has been prepared as of December 31, 2007. The buildings are depreciated straight-line at a 2 % depreciation rate. In 2007 there have been no costs directly attrib utable to investment property. The fair value of the investment property is not reliably determinable on a continuing basis because comparable market transactions are infrequent and alternative reliable estimates of fair value (for example cash fl ow projections) are not available.
The future minimum lease payments under the non-cancellable lease amount to w 0.3 million (maturity less than one year) and w 0.3 million (maturity between one and fi ve years).
ASSETS CLASSIFIED AS HELD FOR SALE 12
Assets classifi ed as held for sale in the amount of w 0.3 million (2006: w 0.7 million) comprise property of the subsidiary MorphoSys US, Inc., in Brentwood, New Hampshire, USA. Efforts to sell the property have commenced and a sale is expected within one year. An external, independent real estate company, having appropriate recognized professional qualifi cations and recent experience in the location and category of property being valued, has valued the property in the fourth quarter 2007. An impairment loss of w 0.2 million on the remeasurement of the property to the lower of its carrying amount and its fair value less costs to sell has been recognized in profi t and loss in other operating expenses.
- Statement of Operations 75 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
Notes to the Financial Statements
In December 2007, MorphoSys sold its property of the subsidiary MorphoSys UK Ltd. located in Kidlington, UK. As of December 31, 2006, an amount of w 0.2 million had been classifi ed as held for sale for this item. The transaction resulted in a minor gain.
PURCHASE PRICE ALLOCATION 13
In 2005 and 2006, MorphoSys established purchase price allocations (PPA) required by IFRS 3 "Business Combinations" under IFRS accounting. The Company assigned PriceWaterhouseCoopers for identifi cation and valuation of assets acquired. IFRS permits the adjustment of fair value amounts identifi ed within twelve months post-acquisition without affecting the Group's profi ts. As of December 31, 2007, no fair value adjustments have been identifi ed.
As of October 31, 2007, goodwill was tested as required by IAS 36.134. On the basis of the cash-generating unit, the AbD segment, the value in use was determined to be reasonably higher than the carrying amount. Therefore, no detailed sensitivity analysis was deemed necessary. Based on the updated outlook to cash fl ows for the upcoming fi ve years, the value in use was calculated as follows: beta factor of 1.49, income tax rate of 36 %, WACC of 11.15 % and a conservative growth rate of 3 % of perpetual annuity. The values assigned to the assumptions represent Management's estimates of future trends and are based on internal planning scenarios as well as external sources.
Accounts payable are non-interest-bearing and are normally settled within 30 days. License payables are partly settled within 30 days.
The liabilities are listed in the table below:
| TOTAL | 13,441 | 10,456 |
|---|---|---|
| of which Related to Social Security |
0 | 0 |
| of which Taxes | 379 | 670 |
| Other Liabilities | 531 | 754 |
| Accrued Expenses | 11,621 | 6,376 |
| Accounts Payable | 1,289 | 3,326 |
| in 000's E | 2007 | 2006 |
Accounts payable include accruals, which mainly contain accrued expenses for payments to employees and management of w 2.0 million (2006: w 1.8 million). Also included in accrued expenses are amounts for outstanding invoices including consulting fees in the amount of w 5.6 million (2006: w 2.2 million), external lab funding of w 0.6 million (2006: w 0.2 million), w 2.5 million for license compensation (2006: w 1.5 million), w 0.3 million for Supervisory Board members' compensation (2006: w 0.2 million), w 0.2 million for audit fees and costs related thereto (2006: w 0.2 million) and w 0.4 million for legal services (2006: w 0.2 million).
At the Company's Annual Shareholders' Meeting in May 2007, the Supervisory Board was authorized to appoint KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschafts prüfungsgesellschaft as its auditor. In 2007 and 2006, the auditing company and its partner companies within the international KPMG network were remunerated by MorphoSys in the amount of w 312,972 and w 303,353, including audit fees of w 228,071 (2006: w 185,915), audit-related fees of w 45,936 (2006: w 110,658), fees for tax consultancy of w 5,000 (2006: w 6,230) and fees for other services of w 33,965 (2006: w 550). Accrued expenses for audit fees in the amount of w 141,211 (2006: w 159,419) are included in these fi gures.
The fees for KPMG Deutsche Treuhand-Gesellschaft Aktien gesell schaft Wirtschaftsprüfungsgesellschaft amounted to w 196,328 (2006: w 172,824), including audit fees of w 144,572 (2006: w 118,496), audit-related fees of w 45,936 (2006: w 47,548), fees for tax consultancy of w 5,000 (2006: w 6,230) and fees for other services of w 820 (2006: w 550).
PROVISIONS 15
As of December 31, 2007 and 2006, the Company recorded provisions of w 539,311 and w 1,144,805 respectively.
Provisions for taxes mainly comprise expenses for income tax. Provisions remain uncertain with respect to their amounts as of December 31, 2007, and are expected to be settled in 2008.
Provisions changed during the fi scal year 2007 as follows:
| in 000's E | 01/01/2007 | additions | utilized | released | 12/31/2007 |
|---|---|---|---|---|---|
| Taxes | 1,004 | 1,068 | 1,117 | 479 | 476 |
| Other Obligations | 141 | 6 | 78 | 6 | 63 |
| TOTAL | 1,145 | 1,074 | 1,195 | 485 | 539 |
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT 16
In addition to the risks highlighted in the Management Report, the Company has identifi ed the following risks:
CREDIT AND LIQUIDITY RISK
Financial instruments that potentially subject the Company to concentrations of credit and liquidity risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company's cash and cash equivalents are principally denominated in euros and US dollars. Marketable securities are placed in high-quality securities. Cash, cash equivalents and marketable securities are maintained principally with three high-quality fi nancial institutions in Germany. The Company continually monitors its positions with, and the credit quality of the fi nancial institutions, which are counterparties to its fi nancial instruments, and does not anticipate non-performance.
It is the Group's policy that all customers who wish to trade on credit terms are subject to credit verifi cation procedures. However, the Company's revenues and accounts receivable are subject to credit risk as a result of customer concentration. The Group's most signifi cant customer accounts for w 3.8 million of the trade receivables carrying amount at December 31, 2007 (2006: w 0.8 million). This customer individually accounted for approximately 40 % of the Group's 2007 accounts receivable balance. In addition, three customers individually accounted for 25 %, 14 %, and 8 % of the Company's total revenues in the
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
year 2007. On December 31, 2006, one customer accounted for 20 % of the prior year's accounts receivable balance and three customers individually accounted for 25 %, 12 %, and 5 % of the Company's revenues in 2006. Based on the management's assessment, allowances of w 65,498 and w 189,103 in relation to the AbD business segment were necessary as of December 31, 2007 and 2006. The carrying amount of fi nancial assets represents the maximum credit exposure.
The maximum exposure for credit risk for trade receivables at the reporting date by geographic region was:
| in E | 2007 | |
|---|---|---|
| Europe and Asia | 6,504,707 | |
| USA and Canada | 2,775,052 | |
| Other | 182,073 | |
| TOTAL | 9,461,832 | |
The ageing of trade receivables at the reporting date was as follows:
| FOR IMPAIRMENT | 8,546,578 | 822,362 | 92,892 | 9,461,832 |
|---|---|---|---|---|
| ACCOUNTS RECEIVABLE, NET OF ALLOWANCE | ||||
| Allowance for impairment | 0 | 0 | (65,498) | (65,498) |
| Accounts Receivable | 8,546,578 | 822,362 | 158,390 | 9,527,330 |
| in E; A/R are due in | 0 (30) days | 30 (60) days | 60 + days | total |
| 2007 | 2007 | 2007 | 2007 |
The contractual maturities and the related contractual cash fl ows of fi nancial liabilities are within one year. The convertible bonds due to related parties in the amount of w 0.1 million have a term until December 31, 2009. For derivate fi nancial instruments and the related timing and amout of cash infl ows and outfl ows, we refer to the Notes to the Consolidated Financial Statements -section 6.
MARKET RISK
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group's income or the value of its holdings in fi nancial instruments. The Group is exposed to currency and interest rate risk.
CURRENCY RISK
The Group accounts are administered in euros. While the expenses of MorphoSys are pre-dominantly paid in euros, a signifi cant part of the revenues depends on the current exchange rate of the US dollar and the euro. The Company examines the necessity of hedging foreign exchange transactions to minimize currency risk during the year and addresses this risk by using derivative fi nancial instruments.
The Group's exposure to foreign currency risk was as follows based on carrying amounts:
| TOTAL | 110,358,706 | 2,647,202 | 1,833,780 | 100,879 | 114,940,567 |
|---|---|---|---|---|---|
| Trade Payables | (507,286) | (270,394) | (620,898) | (21,603) | (1,420,181) |
| Trade Receivables | 6,921,385 | 1,908,302 | 509,663 | 122,482 | 9,461,832 |
| Avaliable-for-sale assets | 57,293,734 | 0 | 1,198,118 | 0 | 58,491,852 |
| Cash and Cash Equivalents | 46,650,873 | 1,009,294 | 746,897 | 0 | 48,407,064 |
| as of December 31, 2007; in E | eur | usd | gbp | other | total |
A 10 percent increase of the Euro against the USD as of December 31, 2007 would have decreased earnings by w 0.3 million (assumed that interest rates remain constant). A 10 percent weakening of the Euro against the USD would have increased earnings by w 0.3 million. A 10 percent increase of the Euro against the GBP as of December 31, 2007 would have decreased earnings by w 0.1 million (assumed that interest rates remain constant). A 10 percent weakening of the Euro against the GBP would have increased earnings by w 0.2 million.
If the foreign exchange rates for USD against Euro and GBP against Euro would have remained constant at the average rate of 2006, total group revenues would have been higher in the amount of w 1.0 million.
INTEREST RATE RISK
The exposure of the Group to changes in interest rates relates mainly to investments in available-for-sale debt securities. Changes in the general level of interest rates may lead to an increase or decrease in the fair value of these investments. The risk of a decrease in fair value is limited due to fair value guarantees given by the issuing fi nancial institutions. These guarantees are renewed every six months. With regard to the liabilities shown in the balance sheet, the Group is currently not subject to signifi cant interest rate risks.
FAIR VALUES
The carrying value of fi nancial assets and liabilities such as cash and cash equivalents, marketable securities, accounts receivable and accounts payable approximates their fair value due to the short-term maturities of these instruments. The fair value of marketable securities is based upon quoted market prices (see Notes to the Consolidated Financial Statements – section 4). The fair value of license payables is determined by the effective interest method. Convertible bonds are recorded at their accreted values, which approximate the cash outlay that is due upon the note settlements.
STOCKHOLDERS' EQUIT Y 17
COMMON STOCK
On December 31, 2007, the common stock of the Company including treasury shares amounted to w 22,160,259. This represented an increase of w 2,014,293 compared to December 31, 2006 (w 20,145,966). Each share of common stock is entitled to one vote. An increase of w 1,956,564, or 652,188 shares, arose as a result of a capital increase executed in May 2007. Through the conversion and exercise of 19,243 convertible bonds and options issued to employees, common stock increased by an additional w 57,729 in 2007.
- Statement of Operations 79 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
Notes to the Financial Statements
On December 31, 2006, the common stock of the Company amounted w 20,145,966. An increase of w 625,680, or 208,560 shares, was the result of a capital increase in connection with the Serotec acquisition executed on January 11, 2006. A capital increase executed on March 29, 2006, increased common stock by w 1,153,014, or 384,338 shares. Through the conversion and exercise of 96,561 convertible bonds and options issued to employees, common stock increased by an additional w 289,683 in 2006.
On December 31, 2007, treasury shares amounted to w 9,811 (26,732 shares) compared to w 10,703 (29,162 shares) on December 31, 2006.
AUTHORIZED CAPITAL
On May 9, 2007, a total of 652,188 shares of Authorized Capital II were issued for a capital increase against contribution in cash.
Unused Authorized Capital I remained unchanged on December 31, 2007, compared to December 31, 2006, to create a maximum of 2,493,769 new shares.
Authorized Capital II is completely consumed on December 31, 2007 (December 31, 2006: 652,188 shares).
CONDITIONAL CAPITAL
In 2007, a total of 2,500 shares were raised from Conditional Capital I through the exercise of the same number of options by employees, increasing the subscribed capital by w 7,500. Furthermore, 300 shares were raised from Conditional Capital II through the exercise of the same number of options by employees, increasing the subscribed capital by w 900, and 9,743 shares were raised from Conditional Capital IV through the exercise of the same number of convertible bonds by employees, increasing the subscribed capital by w 29,229. Finally, 6,700 shares were raised from Conditional Capital V through the exercise of the same number of options by employees, increasing the subscribed capital by w 20,100.
In 2006, a total of 2,445, 31,265, 49,351 and 13,500 shares had been raised from Conditional Capital I, II, IV and V respectively with subscribed capital increasing by w 7,335, w 93,795, w 148,053 and w 40,500 from respective Conditional Capitals.
On May 17, 2006, the Annual Shareholders' Meeting authorized the Company to create additional shares for Conditional Capital III and V up to a maximum of 1,829,562 and 343,987 shares respectively.
ANNUAL SHAREHOLDERS' MEETING AND SHARE SPLIT
The appellate court did not follow our legal counsel's reasoning, and, consequently, the share-split (topic 5 of the Annual Shareholders' Meeting agenda), topic 7 (increase of the Authorized Capital 2006-I pursuant to § 5 para. 5 of the Articles), topic 9 (creation of a new Conditional Share Capital 2007-I pursuant to § 5 para. 6 b of the Articles) as well as topic 10 (increase of the Conditional Share Capital 2003-III pursuant to § 5 para. 6 d of the Articles) will not be registered into the commercial register.
DIVIDENDS
Dividends may only be declared and paid from the accumulated retained earnings (after deduction of certain reserves) shown in the Company's annual German statutory accounts. Such amounts differ from the total of additional paid-in capital and accumulated defi cit as shown in the accompanying consolidated fi nancial statements as a result of the adjustments made to present the consolidated fi nancial statements in accordance with IFRS. The Company's German statutory accounts showed taxable income in 2007; however, as of December 31, 2007 and 2006, they refl ected no accumulated earnings available for distribution and the Company's ability to pay dividends will therefore depend upon its future earnings.
ADDITIONAL PAID-IN CAPITAL
On December 31, 2007, additional paid-in capital amounted to w 155,376,343 (December 31, 2006: w 123,878,001). The total increase of roughly w 31.5 million is due to stock-based compensation in the amount of w 1,430,406, including the intrinsic value of convertible bonds granted as well as w 29,437,180 from a capital increase in May 2007. An increase of w 630,756 arose from the exercise and conversion of options and convertible bonds in the year 2007.
In 2006, the additional paid-in capital had increased by w 27.5 million resulting from stock-based compensation of w 1,250,892 as well as w 7,997,500 (including w 32,060 issuance costs) as a result of the capital increase against contribution in kind stemming from the Serotec acquisition and w 15,477,143 (including costs in connection with the transaction of w 756,916) stemming from a capital increase on March 29, 2006, netted by a deferred tax asset of w 284,032. A further increase of w 2,739,618 came from the exercise and conversion of options and convertible bonds in the year 2006.
CONVERTIBLE BONDS 18
At the Company's Annual Shareholders' Meeting in July 2002, the Company had been authorized to issue up to 300,000 noninterest-bearing convertible bonds with a par/nominal value of w 1.00 each to employees and members of the Management Board of the Company and its affi liates until June 30, 2006. The preemptive rights of the stockholders were excluded. On May 16, 2003, and May 11, 2005, the Annual Shareholders' Meeting had authorized the Company to grant an additional 150,269 shares until April 30, 2010, each. On January 15, 2006, 38,418 convertible bonds were granted to Management Board members and employees of MorphoSys AG. The exercise price for the convertible bonds was w 44.12.
The convertible bonds cannot be transferred or encumbered, other than through inheritance/death. In the event of inability to work, the Management Board can allow the transfer with good cause.
The conversion rights may only be exercised if the termination of the employment agreement with the owner of the convertible bonds has not been declared at the time of exercise and a mutual termination agreement has not been entered into. In the event of non-exercise of the conversion rights, benefi ciaries are refunded the amount paid to acquire the convertible bonds (i.e., w 1.00 per bond/share).
The benefi ciaries may only exercise the conversion rights after the expiration of a waiting period of one year after the grant date. Each convertible bond with a nominal value of w 1.00 can be exchanged for one share of ordinary no-par value common stock of the Company against payment of the exchange price. The convertible bonds can not be exercised beyond December 31, 2008.
The exchange price for the convertible bonds issued in the year 2006 was w 44.12, representing the market price in the fi nal Xetra auction at the Frankfurt Stock Exchange on the trading day preceding the issuance of the convertible bonds.
The conversion rights can only be exercised if the stock exchange price on at least one day during the lifetime of the convertible bonds has amounted to 110 % of the market price in the fi nal Xetra auction at the Frankfurt Stock Exchange on the trading day preceding the issuance of the convertible bonds.
Shares which are issued by virtue of the conversion rights may participate in the profi ts of the Company for the fi rst time in the business year for which no stockholders' resolution on the distribution of profi ts has been passed at the time of the issuance.
In the year 2007, 9,743 bonds of the 2006 grant were converted into shares of ordinary no-par value common stock with the same amount by employees of the Company.
In the year 2007, an additional grant to Management Board members and employees was made under the 2002 Plan, with terms identical to the 2002 stock convertible bonds grants. On January 15, 2007, 52,818 convertible bonds were granted to Management Board members and employees of MorphoSys AG. The exercise price for the convertible bonds is w 55.10, representing the market price in the fi nal Xetra auction at the Frankfurt Stock Exchange on the trading day preceding the issuance of the convertible bonds.
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows Notes to the Financial Statements
A summary of the activity under the Company's employee incentive convertible bonds plan for the years ended December 31, 2007 and 2006, is represented as follows:
| convertible bonds |
weighted average price (R) |
||
|---|---|---|---|
| OUTSTANDING ON JANUARY 1, 2006 |
49,541 | 38.40 | |
| Granted | 38,418 | 44.12 | |
| Exercised | (49,351) | 38.40 | |
| Forfeited | (237) | 44.12 | |
| Expired | (190) | 38.40 | |
| OUTSTANDING ON DECEMBER 31, 2006 |
38,181 | 44.12 | |
| OUTSTANDING ON JANUARY 1, 2007 |
38,181 | 44.12 | |
| Granted | 52,818 | 55.10 | |
| Exercised | (9,743) | 44.12 | |
| Forfeited | (2,191) | 54.95 | |
| Expired | 0 | – | |
| OUTSTANDING ON DECEMBER 31, 2007 |
79,065 | 51.15 |
Convertible bonds exercisable on December 31, 2007 and 2006, amounted to 28,408 and 0 shares respectively. The weighted average exercise prices of exercisable convertible bonds were w 44.12 and w 0 on December 31, 2007 and 2006, respectively.
The following table presents the weighted average price and information about the contractual life for signifi cant convertible bond groups outstanding on December 31, 2007:
| 79,065 | 1.64 | R 51.15 | 28,408 | R 44.12 | ||
|---|---|---|---|---|---|---|
| W 44.13 – W 55.10 | 50,657 | 2.00 | W 55.10 | 0 | – | |
| W 10.00 – W 44.12 | 28,408 | 1.00 | W 44.12 | 28,408 | W 44.12 | |
| range of exercise prices | outstanding | life (in years) | price | exercisable | price | |
| number | contractual | exercise | number of | exercise | ||
| remaining | average | average | ||||
| weighted | weighted | |||||
The Company accounts for stock-based compensation in accordance with the provisions of IFRS 2 and IAS 32.28. The equity portion of the bonds has to be separated and presented as additional paid-in capital. The equity component is deducted from the fair value of the bonds. The remaining value is recognized as stock-based compensation. The compensation expense recorded in 2007 and 2006 in connection with convertible bonds was w 699,261 and w 535,635 respectively. The fair value of the convertible bonds issued in 2007 was calculated using the Black-Scholes option pricing model based on the following assumptions: risk-free interest rate of 3.95 %; dividend yield of 0 %; 40.00 % expected volatility based on historic data; and an expected life of 2 years. The weighted average fair value of bonds granted during 2007 is estimated to be w 14.02 accordingly.
Valuation models require the input of highly subjective assumptions. Because changes in the subjective input assumptions can materially affect the fair value estimate, the management does not consider that the existing models necessarily provide a reliable single measure of the fair value of its employee convertible bonds.
STOCK OPTIONS 19
1998 EMPLOYEE STOCK OPTION PROGRAM
Effective June 15, 1998, the Company introduced an incentive stock option plan ("1998 Plan") which provides for the grant of options to purchase shares of the Company's common stock to key employees and members of the Company's Management Board. The 1998 Plan authorized the grant of options to personnel for 96,075 shares of the Company's common stock in the form of 45,450 registered warrants, each equal to one share of common stock, and 50,625 shares deliverable upon exercise of non-warrant option rights. The Company reserved 55,350 common shares plus 68,650 shares of treasury stock for stock options. All option rights granted under this 1998 Plan have a ten-year term.
Each warrant entitles the holder to receive one share. Upon exercise of a warrant, the exercise price, which equals the fair value of the shares on the date of grant, is due and payable. Warrant holders can exercise up to the full amount of warrants six months after the date of grant. Warrant holders also have the right to sell them. The warrants or shares obtained upon exercise vest annually on a graded basis over three years.
The non-warrant option rights are granted by the Company to the employee by way of an option agreement. For all grants commencing after June 1998, a two-year holding period is required after the date of grant, after which the holder of nonwarrant option rights can exercise up to the amount of vested option rights.
For the years 2007 and 2006, 4,930 and 2,445 options from the 1998 Plan were exercised respectively.
1999 EMPLOYEE STOCK OPTION PROGRAM
Effective July 21, 1999, the Company amended the incentive stock option plan ("1999 Plan") authorizing the additional grant of options to employees for up to 300,250 shares, arising from Conditional Capital, and deliverable upon exercise of non-warrant option rights. On October 31, 1999, a grant of 98,100 shares was made to Company employees, the Management Board and the Supervisory Board. The option rights are nontransferable and have a maximum life of fi ve years. Additionally, a two-year holding period is required after the date of grant, after which the holder of the option rights can exercise up to the amount of vested option rights, on condition that the value of the underlying stock has appreciated 10 % per annum, cumulatively, in the year of exercise. On October 14, 2004, the Management Board and the Supervisory Board decided to extend the exercise period of 54,900 options granted to employees and the Management Board until October 31, 2009.
In the year 2002, additional grants to employees were made under the 1999 Plan with terms identical to the 1999 stock option grants. 5,500 options were granted on January 15, 2002, to employees of MorphoSys AG. As of January, 15, 2007, the unexercised options expired.
Statement of Operations 83 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
Statement of Cash Flows Notes to the Financial Statements
In the year 2003, additional grants to Management Board members were made under the 1999 Plan, with terms identical to the 1999 stock option grants. 36,000 options were granted on July 1, 2003, to Management Board members of MorphoSys AG.
For the years 2007 and 2006, 300 and 31,265 options from the 1999 Plan were exercised respectively.
2002 EMPLOYEE STOCK OPTION PROGRAM
Effective June 6, 2002, the Company amended the incentive stock option plan ("2002 Plan") authorizing the additional grant of options to employees for up to 74,556 shares, arising from Conditional Capital, and deliverable upon exercise of nonwarrant option rights. The terms are very similar to those of the "1999 Employee Stock Option Program". On May 16, 2003, May 11, 2004, May 11, 2005, and May 17, 2006, the Annual Shareholders' Meeting authorized the Company to grant additional 36,891, 58,816, 74,017 and 116,957 shares respectively under the "2002 Employee Stock Option Program" with identical terms.
In the year 2003, grants to employees were made under the 2002 Plan, with terms identical to the 1999 and 2002 stock option grants. 2,500 options and 15,000 options were granted to employees of MorphoSys AG on January 15, 2003, and July 1, 2003, respectively.
On January 15, 2004, 35,000 options were granted to employees with terms identical to the 1999, 2002 and 2003 stock option grants.
In the year 2005, an additional grant to Management Board members and employees were made under the 2002 Plan, with terms identical to the 2002 stock option grants. 97,358 options were granted on July 1, 2005, to Management Board members and employees of MorphoSys.
In the year 2006, grants to employees and a member of the Management Board were made under the 2002 Plan, with terms identical to the 1999 and 2002 stock option grants. 40,000 options and 7,500 options were granted to employees and Management Board of MorphoSys AG on January 15, 2006, and July 1, 2006, respectively.
On July 1, 2007, 60,000 options were granted to employees under the 2002 Plan with terms identical to the prior years stock option grants.
For the years 2007 and 2006, 6,700 and 13,500 options from the 2002 Plan were exercised.
A summary of the activity under the Company's employee incentive stock option plans for the years ended December 31, 2007 and 2006, is represented as follows:
| shares | weighted average price (R) |
|
|---|---|---|
| OUTSTANDING ON JANUARY 1, 2006 |
251,459 | 23.34 |
| Granted | 47,500 | 43.80 |
| Exercised | (47,210) | 24.03 |
| Forfeited | (10,604) | 31.35 |
| Expired | (2,100) | 44.27 |
| OUTSTANDING ON DECEMBER 31, 2006 |
239,045 | 26.73 |
| OUTSTANDING ON JANUARY 1, 2007 |
239,045 | 26.73 |
| Granted | 60,000 | 48.30 |
| Exercised | (11,930) | 22.54 |
| Forfeited | (5,625) | 44.12 |
| Expired | (1,000) | 59.51 |
| OUTSTANDING ON DECEMBER 31, 2007 |
280,490 | 31.05 |
Stock options exercisable on December 31, 2007 and 2006, amounted to 130,865 and 88,670 shares respectively. The weighted average exercise prices of exercisable stock options were w 20.30 and w 17.83 on December 31, 2007 and 2006, respectively.
The following table presents the weighted average price and information about the contractual life for signifi cant option groups outstanding on December 31, 2007:
| 280,490 | 2.55 | R 31.05 | 130,865 | R 20.30 | |
|---|---|---|---|---|---|
| W 40.00 – W 48.30 | 101,875 | 3.94 | W 46.43 | 0 | – |
| W 30.00 – W 39.99 | 73,000 | 2.50 | W 31.35 | 34,000 | W 31.35 |
| W 20.00 – W 29.99 | 49,350 | 1.83 | W 20.80 | 49,350 | W 20.80 |
| W 10.88 – W 19.99 | 56,265 | 0.72 | W 11.82 | 47,515 | W 11.87 |
| range of exercise prices | outstanding | life (in years) | price | exercisable | price |
| number | contractual | exercise | number | exercise | |
| remaining | average | average | |||
| weighted | weighted |
The Company accounts for stock-based compensation in accordance with the provisions of IFRS 2 "Share-based Payment". Compensation expense recorded in 2007 and 2006 in connection with stock options was w 720,254 and w 707,336 respectively.
The fair value of the options issued in 2007 was calculated using the Black-Scholes option pricing model based on the following assumptions: risk-free interest rate of 4.45 %; dividend yield of 0 %; 42 % expected volatility based on historic data; and an expected option life of 3.0 years. For option grants in 2006, the following assumptions were made: risk-free interest rate of 2.89 %; dividend yield of 0 %; 55 % to 60 % expected volatility; and the same option life as in 2007. The weighted average fair value of options granted during 2007 and 2006 is estimated to be w 16.09 and w 18.33 respectively.
Option valuation models require the input of highly subjective assumptions. Because changes in the subjective input assumptions can materially affect the fair value estimate, the management does not consider that the existing models necessarily provide a reliable single measure of the fair value of its employee stock options.
PERSONNEL EXPENSES 20
| TOTAL | 20,228 | 19,368 |
|---|---|---|
| Other | 490 | 601 |
| Temporary Staff (External) |
91 | 22 |
| Stock-based Compensation Expense |
1,420 | 1,243 |
| Social Security Contributions |
2,500 | 1,612 |
| Wages and Salaries | 15,727 | 15,890 |
| in 000's E | 2007 | 2006 |
The average number of employees during the year ended December 31, 2007, was 291 (2006: 265). Of the 295 employees as of December 31, 2007, 164 worked in research and development and 131 in sales, general and administration (December 31, 2006: 155 employees in R&D, and 124 employees in S,G&A).
- Statement of Operations 85 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows Notes to the Financial Statements
INCOME TAXES 21
The Company and its German subsidiaries MorphoSys IP GmbH and MorphoSys AbD GmbH are subject to corporate tax, solidarity surcharge and trade tax. Since 2001, a corporate tax rate of 25 % plus 5.5 % solidarity surcharge applies. Considering the multiplier rate ("Hebesatz") of 300 % for municipal trade tax (for MorphoSys AG and MorphoSys IP GmbH), the trade tax rate amounts to approximately 13.04 % of the taxable income and is deductible in the calculation of the corporate tax. With regard to affi liated companies in foreign countries, income tax rates of 30 % and 39 % apply to the UK and the USA respectively.
The German "Bundesrat" passed the corporation tax reform 2008 on July 6, 2007. As part of the regulations becoming effective as of January 1, 2008, the corporation tax rate will be reduced from 25 % to 15 % with a constant solidarity surcharge of 5.5 % and a moderate rise in the effective trade tax rate from 9.6 % to 10.5 %. One of the refi nancing measures is a limit with regard to the deductibility of business expenses. These new regu lations will have effects on the Group and are recognized within this fi nancial report.
The income tax for the current fi scal year comprises as follows:
| in 000's E | 2007 | 2006 |
|---|---|---|
| Current Tax Expense (Thereof Income Tax Expense Accounted Directly in Equity | ||
| According to IAS 32.35: 438; 2006: 284) | (1,809) | (1,177) |
| Deferred Tax Benefi t | 4,066 | 1,919 |
| Total Income Tax | 2,257 | 742 |
| Total Amount of Deferred Taxes Resulting from Entries Directly Recognized in Equity | (978) | (821) |
Deferred taxes are recognized only to the extent that it is more likely than not that the related tax benefi ts will be realized. As of December 31, 2007, the Company recognized deferred tax assets in the amount of w 4.9 million due to business expectations for the fi nancial years 2008 to 2012.
The recognition of deferred tax assets on previously unrecognized deferred tax assets amounted to w 5.6 million (2006: w 2.1 million). The current assessment with regard to the usability of deferred tax assets can change dependent on the income situation of future years and may result in higher or lower valuation allowances.
The following table reconciles the statutory income tax expense to the actual income tax expense presented in the consolidated fi nancial statements. To calculate the statutory income tax expense in fi scal year 2007, the combined income tax rate of 36 % (2006: 36 %) was applied to income before taxes. The tax rate applied in the reconciliation statement includes corporate tax and solidarity surcharge, and amounts to 26.38 % plus the effective trade tax rate based on the multiplier rate ("Hebesatz") of 300 % for municipal trade tax, which amounts to 9.60 % taking into account that the trade tax is deductible in the calculation of the corporate tax.
| in 000's E | 2007 | 2006 |
|---|---|---|
| PROFIT BEFORE INCOME TAXES | 9,218 | 5,286 |
| Expected Tax Rate | 36 % | 36 % |
| EXPECTED INCOME TAX | (3,318) | (1,903) |
| TAX EFFECTS RESULTING FROM: | ||
| Deferred Income Tax Arising from the Recognition of DTA* on Previously Unrecognized DTA with Regard to Future Reversal of Differences Between |
||
| IFRS and Tax Balance Sheet | 2,072 | 919 |
| Non-recognition of DTA on Current Year Tax Losses | (167) | 0 |
| First-time Recognition of DTA on Tax Loss Carry-forwards | 3,580 | 1,186 |
| Deferred Income Tax Arising from the Recognition of DTA on Previously Unrecognized DTA on Tax Loss Carry-forwards |
236 | 1,309 |
| Stock-based Compensation | (511) | (448) |
| Non-tax-deductible Items | (149) | (235) |
| Tax Rate Differences | 295 | (31) |
| Prior Year Taxes | 131 | 0 |
| Other Effects | 88 | (55) |
| ACTUAL INCOME TAX | 2,257 | 742 |
* Deferred Tax Asset
In 2006, no deferred tax asset was reported for corporate tax loss carry-forwards in the amount of w 14.5 million and German trade tax loss carry-forwards in the amount of w 13.8 million. The remaining tax loss carry-forwards amounted to w 13.9 million for corporation tax and to w 13.2 million for trade tax, respectively, as of December 31, 2007. As of the balance sheet date, w 3.6 million of previously unrecognized tax losses were
recognized as deferred tax assets since management considered it probable that future taxable profi ts will be available against which the tax losses can be utilized. Management revised its estimates of future profi tability as a consequence of the closing of the Novartis cooperation. The tax loss carry-forwards may be carried forward indefi nitely and in unlimited amounts. From 2004 onwards, German tax law restricts the offset of taxable
Statement of Operations 87 Balance Sheet
-
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
income against existing tax loss carry-forwards to an amount of w 1.0 million plus 60 % of taxable income above w 1.0 million. As of December 31, 2006, no deferred tax asset with regard to future reversal of differences between IFRS and tax balance sheet in the amount of w 2.7 million had been recognized. The deferred income tax benefi t arising from the recognition of DTA on previously unrecognized DTA with regard to the future reversal of differences between IFRS and tax balance sheet amounts to w 2.1 million as of December 31, 2007.
Signifi cant components of the deferred tax assets and liabilities are as follows:
| in 000's E | dta 2007 | dta 2006 | dtl 2007 | dtl 2006 |
|---|---|---|---|---|
| Intangible Assets | 2,110 | 3,858 | 2,276 | 3,020 |
| Non-recognition of DTA on Intangible Assets | 0 | (2,673) | 0 | 0 |
| Property, Plant and Equipment | 0 | 41 | 37 | 80 |
| Land | 0 | 0 | 160 | 277 |
| Building | 0 | 0 | 73 | 132 |
| Inventory | 77 | 219 | 5 | 184 |
| Advanced Payments | 0 | 7 | 0 | 0 |
| Receivables and Other Assets | 0 | 0 | 18 | 56 |
| Prepaid Expenses and Deferred Charges | 1 | 3 | 0 | 0 |
| Short-term Securities Investments | 0 | 0 | 848 | 679 |
| Other Accrual/Provisions | 25 | 34 | 66 | 1 |
| Trade Accounts Payable | 0 | 0 | 4 | 15 |
| Bonds, therof Convertible | 0 | 0 | 0 | 14 |
| Other Liabilities | 0 | 2 | 0 | 0 |
| Tax Losses | 3,633 | 1,261 | 0 | 0 |
| 5,846 | 2,752 | 3,487 | 4,458 |
Due to the fi scal unity of MorphoSys AG and MorphoSys IP GmbH, an amount of w 0.9 million of deferred tax assets and deferred tax liabilities have been netted in the balance sheet. Deferred tax liabilities in the amount of w 0.8 million have been recognized directly in equity. The amount relates to the revaluation of available-for-sale fi nancial assets. Income taxes recognized directly in equity amounts to w 0.4 million and relates to the costs of the capital increase in 2007.
EARNINGS PER SHARE 22
The calculation of basic profi t per share is based on the net profi t for the year of w 11,475,030 (2006: w 6,027,934) and the weighted-average number of shares of common stock outstanding for the respective years (2007: 7,115,890; 2006: 6,379,046).
The weighted-average number of shares of common stock was calculated as follows:
| 2007 | 2006 | |
|---|---|---|
| SHARES ISSUED ON JANUARY, 1 | 6,715,322 | 6,025,863 |
| Effect of Treasury Shares Held | (29,162) | (29,162) |
| Effect of Shares Issued in January | 7,276 | 162,990 |
| Effect of Shares Issued in February | 2,993 | 9,136 |
| Effect of Shares Issued in March | 400 | 203,299 |
| Effect of Shares Issued in April | 0 | 525 |
| Effect of Shares Issued in May | 418,517 | 172 |
| Effect of Shares Issued in June | 133 | 0 |
| Effect of Shares Issued in July | 0 | 1,342 |
| Effect of Shares Issued in August | 0 | 1,221 |
| Effect of Shares Issued in September | 0 | 518 |
| Effect of Shares Issued in October | 0 | 2,626 |
| Effect of Shares Issued in November | 0 | 174 |
| Effect of Shares Issued in December | 411 | 342 |
| WEIGHTED-AVERAGE NUMBER OF SHARES OF COMMON STOCK | 7,115,890 | 6,379,046 |
The diluted profi t per share is calculated taking into account the Company's potential common shares from outstanding stock options and convertible bonds.
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
The table below illustrates the reconciliation from basic to diluted earnings per share (amounts in euros, except per share data):
| 2007 | 2006 | |
|---|---|---|
| Numerator | ||
| Net Profi t of the Year | 11,475,030 | 6,027,934 |
| Denominator | ||
| Weighted-Average Shares Used for Basic EPS | 7,115,890 | 6,379,046 |
| Dilutive Shares Arising from Stock Options | 95,211 | 90,793 |
| Dilutive Shares Arising from Convertible Bonds | 0 | 0 |
| TOTAL DENOMINATOR | 7,211,101 | 6,469,839 |
| Earnings per Share (in E) | ||
| Basic | 1.61 | 0.94 |
| Diluted | 1.59 | 0.93 |
OPERATING LEASES 23
The Company leases facilities and equipment on long-term operating leases. Total rent expense amounted to w 1,770,942 and w 1,672,888 for the years ended December 31, 2007 and 2006, respectively. In January 2004, MorphoSys amended the existing lease agreement for its facilities. The new lease agreement will expire in September 2009. From September 2009 onwards, MorphSys has the possibility to extend the lease agreement annually for one year. A yearly increase will be settled by the "Verbraucherindex for Germany".
Future minimum payments under non-cancellable operating leases, insurances and other services are as follows:
| in 000's E | 2007 | 2006 |
|---|---|---|
| Up to One Year | 2,876 | 2,921 |
| Between One and | ||
| Five Years | 3,577 | 5,263 |
| More than Five Years | 5,942 | 7,229 |
| TOTALS: | 12,395 | 15,413 |
The Company's total expenses due to operating leases, insurances and other services in the years ended December 31, 2007 and 2006, totaled w 3,200,067 and w 2,896,961 respectively.
CONTINGENCIES 24
The management is not aware of any matters that could give rise to any material liability to the Company that would have a material adverse effect on the Company's fi nancial condition or results of operations.
RELATED PARTIES 25
The Group has related party transactions with its management and with members of the Supervisory Board. In addition to the cash remuneration, the Company has issued stock options and convertible bonds to the Management Board. 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 members of the Management Board and the Supervisory Board during the year 2007:
SHARES
| 01/01/2007 | additions | forfeitures | sales | 12/31/2007 | |
|---|---|---|---|---|---|
| MANAGEMENT BOARD | |||||
| Dr. Simon E. Moroney | 113,461 | 0 | 0 | 0 | 113,461 |
| Dave Lemus4 | 100 | 0 | 0 | 0 | 100 |
| Dr. Marlies Sproll | 35 | 0 | 0 | 0 | 35 |
| TOTAL | 113,596 | 0 | 0 | 0 | 113,596 |
| SUPERVISORY BOARD | |||||
| Dr. Gerald Möller | 2,500 | 0 | 0 | 0 | 2,500 |
| Prof. Dr. Jürgen Drews1 | 0 | 2,430 | 0 | 0 | 2,430 |
| Dr. Walter Blättler2 | 0 | 0 | 0 | 0 | 673 |
| Dr. Daniel Camus | 0 | 0 | 0 | 0 | 0 |
| Dr. Metin Colpan | 0 | 0 | 0 | 0 | 0 |
| Prof. Dr. Andreas Plückthun3 | 59,300 | 0 | 0 | 0 | 59,300 |
| Dr. Geoffrey N. Vernon | 0 | 0 | 0 | 0 | 0 |
| TOTAL | 61,800 | 2,430 | 0 | 0 | 64,903 |
1) Prof. Dr. Drews exercised his options and held the shares received
2) Entered as per May 16, 2007; shares were bought by Dr. Blättler prior to election to the Supervisory Board
3) Retired as per May 16, 2007
4) Held by his spouse
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
STOCK OPTIONS
| 01/01/2007 | additions | 12/31/2007 | ||
|---|---|---|---|---|
| 83,000 | 0 | 0 | 0 | 83,000 |
| 48,000 | 0 | 0 | 0 | 48,000 |
| 26,250 | 0 | 0 | 0 | 26,250 |
| 157,250 | 0 | 0 | 0 | 157,250 |
| 0 | 0 | 0 | 0 | 0 |
| 2,430 | 0 | 0 | 2,430 | 0 |
| 0 | 0 | 0 | 0 | 0 |
| 0 | 0 | 0 | 0 | 0 |
| 0 | 0 | 0 | 0 | 0 |
| 0 | 0 | 0 | 0 | 0 |
| 0 | 0 | 0 | 0 | 0 |
| 2,430 | 0 | 0 | 2,430 | 0 |
| forfeitures exercises |
1) Prof. Dr. Drews exercised his options and held the shares received
2) Entered as per May 16, 2007
3) Retired as per May 16, 2007
CONVERTIBLE BONDS
| 01/01/2007 | additions | forfeitures | exercises | 12/31/2007 | |
|---|---|---|---|---|---|
| MANAGEMENT BOARD | |||||
| Dr. Simon E. Moroney | 5,699 | 5,549 | 0 | 0 | 11,248 |
| Dave Lemus | 4,749 | 4,624 | 0 | 0 | 9,373 |
| Dr. Marlies Sproll | 3,800 | 3,700 | 0 | 0 | 7,500 |
| TOTAL | 14,248 | 13,873 | 0 | 0 | 28,121 |
| SUPERVISORY BOARD | |||||
| Dr. Gerald Möller | 0 | 0 | 0 | 0 | 0 |
| Prof. Dr. Jürgen Drews | 0 | 0 | 0 | 0 | 0 |
| Dr. Walter Blättler2 | 0 | 0 | 0 | 0 | 0 |
| Dr. Daniel Camus | 0 | 0 | 0 | 0 | 0 |
| Dr. Metin Colpan | 0 | 0 | 0 | 0 | 0 |
| Prof. Dr. Andreas Plückthun3 | 0 | 0 | 0 | 0 | 0 |
| Dr. Geoffrey N. Vernon | 0 | 0 | 0 | 0 | 0 |
| TOTAL | 0 | 0 | 0 | 0 | 0 |
2) Entered as per May 16, 2007
3) Retired as per May 16, 2007
Compensation for both the Management Board and the Supervisory Board consisted of fi xed and variable components as well as other compensatory benefi ts. In the event of a non-reappointment and non-prolongation of the service agreement, each member of the Management Board is entitled to receive a severance payment in the amount of one annual fi xed salary. Total compensation for the Supervisory Board excluding reimbursements of travel expenses amounted to w 298,500 in 2007 (2006: w 259,000). The tables below show the detailed compensation for the Management Board and the Supervisory Board:
MANAGEMENT BOARD
| fixed compensation |
variable compensation |
other compensatory benefits |
total compensation |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||
| Dr. Simon Moroney | 320,250 | 290,000 | 198,360 | 139,024 | 83,882 | 77,313 | 602,492 | 506,337 | ||
| Dave Lemus | 225,225 | 204,750 | 140,049 | 104,973 | 113,309 | 99,456 | 478,583 | 409,179 | ||
| Dr. Marlies Sproll | 211,860 | 181,500 | 124,146 | 13,052 | 56,356 | 46,347 | 392,362 | 240,899 | ||
| TOTAL | 757,335 | 676,250 | 462,555 | 257,049 | 253,547 | 223,116 | 1,473,437 | 1,156,415 |
SUPERVISORY BOARD
| fixed compensation |
variable compensation |
total compensation |
||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |
| Dr. Gerald Möller | 40,000 | 40,000 | 35,000 | 24,500 | 75,000 | 64,500 |
| Prof. Dr. Jürgen Drews | 30,000 | 30,000 | 19,000 | 11,000 | 49,000 | 41,000 |
| Dr. Daniel Camus | 25,000 | 25,000 | 21,000 | 20,000 | 46,000 | 45,000 |
| Dr. Metin Colpan | 25,000 | 25,000 | 16,000 | 7,500 | 41,000 | 32,500 |
| Prof. Dr. Andreas Plückthun1 | 8,878 | 23,500 | 4,500 | 7,500 | 13,378 | 31,000 |
| Dr. Geoffrey N. Vernon | 26,500 | 26,500 | 21,000 | 18,500 | 47,500 | 45,000 |
| Dr. Walter Blättler2 | 14,622 | 0 | 12,000 | 0 | 26,622 | 0 |
| TOTAL | 170,000 | 170,000 | 128,500 | 89,000 | 298,500 | 259,000 |
Entered as per May 16, 2007
2 Retired as per May 16, 2007
- Statement of Operations 93 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows Notes to the Financial Statements
At the Annual Shareholders' Meeting on May 17, 2006, phan- 27 tom stocks were granted to all members of the Supervisory Board. The Chairman of the Supervisory Board has received 2,500 stock appreciation rights, the Deputy Chairman 2,000 stock appreciation rights and the members of the Supervisory Board 1,500 stock appreciation rights each.
In 2006, MorphoSys entered into consulting agreements with the former member of the Supervisory Board Prof. Dr. Andreas Plückthun and another scientist of Prof. Dr. Plückthun's research team at the University of Zurich, Switzerland, ending December 2008. According to the agreements, the consultants shall provide consulting services in the antibody and scaffold fi elds. Under this agreement, Dr. Andreas Plückthun may receive payments of up to w 14,000 per year, depending on the extent to which the Company draws on his consultancy. In 2007, no payments were made to Prof. Plückthun and his research team. The sponsored research agreement with the University of Zurich, represented by Prof. Dr. Andreas Plückthun, was terminated by the end of 2006.
No other consultancy agreements with current or former members of the Supervisory Board are currently in place.
CORPORATE GOVERNANCE 26
The Company issued its statement according to section 161 of the German Stock Corporation Act (Aktiengesetz). This declaration was published and made accessible to stockholders accordingly on December 19, 2007.
RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has a signifi cant number of research and development agreements relating to its discovery and development strategy. The following is a brief description of these agreements, which have had, or may have, a signifi cant fi nancial impact (in alphabetical order). For partnerships signed or amended signifi cantly during the fi scal year 2007, please refer also to the section Commercial Development of the Management Report.
ASTELLAS PHARMA INC.
MorphoSys and Astellas Pharma Inc., Japan's second largest ethical pharmaceutical company, entered into a license agreement for the use of MorphoSys's HuCAL technology in March 2007. Under the terms of the agreement, MorphoSys grants Astellas access to its HuCAL GOLD antibody library for use in its internal pharmaceutical drug discovery programs. In return, MorphoSys received an upfront payment and will receive annual user fees during the life span of the agreement. The agreement may have a duration of up to fi ve years.
BAYER SCHERING PHARMA AG
The active collaboration with Bayer Schering Pharma AG (Germany/USA) was concluded by the end of 2007. Under the terms of the previous agreement, Bayer Schering paid annual license fees for access to MorphoSys's technologies as well as support for research and development conducted at MorphoSys. Several therapeutic antibody programs are currently in development and could result in future development-dependent milestone payments and royalties on product sales.
BOEHRINGER INGELHEIM PHARMA GMBH & CO. KG
MorphoSys and Boehringer Ingelheim (Germany/USA) signed a collaboration in the fi eld of therapeutic antibodies in February 2003. In exchange to certain target rights for ICAM-1 (intercellular adhesion molecule), Boehringer Ingelheim received exclusive licenses for therapeutic antibodies against two undisclosed target molecules. In November 2003 and in August 2004, Boehringer Ingelheim exercised these options for the development of therapeutic antibodies against target molecules involved in cardiovascular diseases and infl ammatory diseases respectively.
In February 2005, both companies agreed to expand the existing cooperation involving both research and therapeutic applications. Under the new contract, Boehringer Ingelheim acquired an option to receive several exclusive licenses on new therapeutic antibody programs. Additionally, Boehringer Ingelheim obtained access to MorphoSys's HuCAL GOLD library for research purposes at a number of its research facilities, e.g. Boehringer Ingelheim's site in Vienna, Austria. Under the terms of the current agreement, MorphoSys received a technology access fee, and receives annual license fees and optional R&D funding over the fi ve-year collaboration term. For therapeutic antibodies emerging from the collaboration, Boehringer Ingelheim will pay milestone fees and royalties to MorphoSys.
In total, several therapeutic antibody programs are currently in development and could result in future development-dependent milestone payments and royalties on product sales.
CENTOCOR, INC.
The active collaboration with Centocor, Inc. (USA), a wholly owned subsidiary of Johnson & Johnson, was concluded by the end of 2007. Under the terms of the previous agreement, Centocor paid annual license fees for access to MorphoSys's technologies as well as support for research and development conducted at MorphoSys. Presently several therapeutic antibody programs are in different stages of development in several indications and could result in future development-dependent milestone payments and royalties on product sales.
DAIICHI SANKYO COMPANY, LIMITED
In March 2006, MorphoSys and Sankyo Company, Limited, a wholly owned subsidiary of Daiichi Sankyo Company, Limited, (Japan) entered into a license agreement and therapeutic antibody collaboration for an initial two-year term with the option of an extension of up to three more years. During the lifetime of the agreement, Daiichi Sankyo will have access to the MorphoSys HuCAL GOLD library at its research site in Tokyo. Additionally, MorphoSys will apply its proprietary HuCAL GOLD technology to generate antibodies against targets provided by Daiichi Sankyo. In 2007, Daiichi Sankyo has initiated one therapeutic antibody program with MorphoSys and has an option for further programs. If extended after the initial twoyear period, the contract provides Daiichi Sankyo with access to additional MorphoSys capabilities, such as target validation, antibody optimization and pre-clinical development. Such an extension would trigger an additional upfront payment and result in increased research funding for MorphoSys.
ELI LILLY AND COMPANY
In September 2005, MorphoSys AG signed a cross license agreement with US pharmaceutical company Eli Lilly and Company ("Lilly") on the use of certain recombinant protein technologies. Under the agreement, MorphoSys received a license under the Kauffman patent estate to generate and screen certain recombinant peptide and protein libraries and to commer cialize any resulting products. The agreement also provided Lilly access to the MorphoSys HuCAL GOLD technology for Lilly's internal research and 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 agreement was part of a settlement to resolve patent litigation initiated by Applied Molecular Evolution (AME), a wholly owned subsidiary of Lilly, involving several US patents of the Kauffman patent family.
- Statement of Operations 95 Balance Sheet
- Statement of Changes in
- Stockholders' Equity
- Statement of Cash Flows
- Notes to the Financial Statements
F. HOFFMANN-LA ROCHE AG
MorphoSys and F. Hoffmann-La Roche AG based in Basel (Switzerland), announced the signing of an agreement in September 2000 under which the companies collaborate on the development of human therapeutic antibodies for a Roche biological target associated with Alzheimer's disease. Under the terms of the collaboration MorphoSys selected several antibodies from its HuCAL library against the Alzheimer target amyloid beta-peptide, which forms abnormal build-ups in cerebral tissue. These build-ups are typical of Alzheimer's patients, and the antibody is intended to help remove them.
In January 2006, Roche has fi led all necessary applications to commence a European phase 1 clinical trial for the HuCALderived antibody program R1450 to treat Alzheimer's disease. The applications fi ling to commence clinical trials triggered a clinical milestone payment from Roche to MorphoSys. At yearend 2007 phase 1 clinical testing of the antibody was ongoing. In the context of the development program R1450, MorphoSys may receive additional development-related milestone payments and royalties on any marketed products emerging from the collaboration.
Expanding on the relationship in Alzheimer's disease, MorphoSys and Roche announced a new collaboration to develop additional therapeutic antibodies in oncology in March 2006. Roche may elect two new target molecules against which MorphoSys will generate antibodies using its HuCAL GOLD technology. MorphoSys is also eligible to receive license and milestone payments on projects in clinical development, and royalties on any end-products emerging from the collaboration.
GENEFRONTIER CORPORATION
Building on a 2004 marketing agreement, MorphoSys and Tokyo-based GeneFrontier Corp. (Japan) announced at two occasions the expansion of their existing alliance during the course of 2007. Under the terms of the current agreements, GeneFrontier utilizes MorphoSys's HuCAL GOLD antibody library to generate novel HuCAL antibodies against targets provided by leading Japanese research institutes and universities. For this purpose, the HuCAL antibody technology was installed at GeneFrontier's research laboratories within a research facility in Tokyo. Gene-Frontier provides MorphoSys with annual license fees for access to the HuCAL technology.
GPC BIOTECH AG
An agreement between MorphoSys and GPC Biotech AG (Germany) was signed in April 1999. In the context of its partnership with GPC Biotech, MorphoSys selected and optimized a fully human antibody against a GPC Biotech target molecule by using its HuCAL technology. The antibody 1D09C3 is aimed at the selective recognition and destruction of activated, reproducing MHC class II positive tumor cells — including those in B-cell and T-cell lymphomas.
In February 2005, MorphoSys announced that GPC Biotech has commenced a phase 1 clinical trial with the cancer antibody 1D09C3. In total, the clinical trials involved three different sites in Europe and fi rst commenced at the Oncology Institute of Southern Switzerland (IOSI), a world-renowned oncology center that has been involved in numerous previous Phase 1 studies. At year-end 2007, phase 1 clinical testing of the antibody was ongoing. In the context of the collaboration, MorphoSys may receive additional development-related milestone payments and royalties on any marketed products emerging from the collaboration.
IMMUNOGEN, INC.
In September 2000, MorphoSys entered into a cooperation with ImmunoGen, Inc. (USA) focused on the development of human antibodies for the treatment of cancer. In the cooperation, MorphoSys applied its HuCAL technology to discover and optimize fully human antibodies against an unspecifi ed Immuno-Gen cell-surface target associated with a number of forms of cancer. In the context of the collaboration, MorphoSys may receive additional development-related milestone payments and royalties on any marketed products emerging from the collaboration. The active term of the collaboration was concluded in May 2006.
MERCK & CO., INC.
In December 2005, MorphoSys AG signed a fi ve-year license agreement with US pharmaceutical company Merck & Co., Inc. for the use of MorphoSys's HuCAL GOLD and AutoCAL technologies in research and development of human therapeutic antibodies. The agreement enables Merck to develop up to 10 HuCAL-derived therapeutic antibodies in a range of indications. MorphoSys received an upfront payment, and receives annual user fees and R&D funding. MorphoSys is also eligible to receive license and milestone payments on projects in clinical development, and royalties on any end-products emerging from the collaboration.
NOVARTIS AG
MorphoSys and Novartis AG (Switzerland/USA) started working together in 2004 in a collaboration that has resulted to date in multiple active therapeutic antibody programs across various diseases and the fi rst IND-fi ling in September 2007 – just three years after initiation. In December 2007, MorphoSys and Novartis substantially enlarged their previous relationship and forged one of the most comprehensive strategic alliances in the discovery and development of bio-pharmaceuticals. Based on a 10-year term, committed total annual payments sum to more than US \$ 600 million in technology access, internalization fees and R&D funding, excluding reimbursement of R&D costs related to early stage development activities. Total payments under the agreement, including committed payments and probability-weighted success-based milestones, contingent upon successful clinical development and market approval of multiple products, could potentially exceed US \$ 1 billion, assuming the collaboration successfully runs its maximum term. In addition to these payments, MorphoSys would also be entitled to royalty payments and/or profi t sharing on any future product sales.
ONCOMED PHARMACEUTICALS, INC.
MorphoSys AG and U.S. based biopharmaceutical company OncoMed Pharmaceuticals, Inc. announced in June 2006 the signing of a license agreement on the use of MorphoSys's HuCAL technology in the research and development of human therapeutic antibodies for the treatment of various cancers, including breast, lung, colon and prostate by targeting cancer stem cells. OncoMed Pharmaceuticals is discovering and developing monoclonal antibodies and proteins capable of destroying "cancer stem cells", a recently discovered type of cell believed to seed the growth of cancers and underlie cancer's ability to spread and take root in tissues. Under the terms of the agreement, MorphoSys grants OncoMed access to its proprietary antibody library HuCAL GOLD for use by OncoMed in its drug discovery programs. The initial two-year contract includes an option for OncoMed to develop HuCAL-derived therapeutic antibodies. MorphoSys received an upfront payment, and receives annual user fees.
PFIZER, INC.
In December 2003 MorphoSys and U.S. pharmaceutical company Pfi zer Inc. entered an initial fi ve-year collaboration for the development of therapeutic antibodies. In December 2006, both parties agreed an early expansion of their collaboration until the end of 2011. The extension triggered a one-off payment from Pfi zer to MorphoSys. Under the extended agreement, Pfi zer has the option to begin new therapeutic antibody projects with MorphoSys resulting in an increased level of programs to be performed within the collaboration. MorphoSys is using its HuCAL GOLD library to generate therapeutic antibodies against multiple targets from Pfi zer. Pfi zer will carry out the pre-clinical and clinical development and the subsequent marketing of resultant products. The potential value to MorphoSys in research funding and potential developmental milestone payments increased to more than US \$ 100 million, not including royalties.
PROCHON BIOTECH LTD.
An agreement between MorphoSys and ProChon Biotech Ltd., an Israeli biotechnology Company and spin-off of the Weizmann Institute, was signed in May 2000. Under the agreement, MorphoSys applied its innovative HuCAL antibody library to generate human antibodies against a human growth factor receptor associated with various skeletal disorders including achondroplasia, the most common form of human dwarfi sm, as well as certain cancers. MorphoSys is also eligible to milestone payments on projects in clinical development, and royalties on any end-products emerging from the collaboration.
SCHERING-PLOUGH CORPORATION
In May 2006, MorphoSys AG and the US pharmaceutical company Schering-Plough Corporation signed an initial two-year license agreement. Under the terms of the agreement, which also provides Schering-Plough with the option of an extension of up to three more years, MorphoSys grants access to its proprietary antibody library HuCAL GOLD to Schering-Plough for use in its drug discovery programs at one research site. Furthermore, the contract provides Schering-Plough with the option to develop HuCAL-derived therapeutic antibodies against up to 10 disease-related targets. MorphoSys received an upfront payment, and receives annual user fees and optional R&D funding. For therapeutic antibody projects undertaken by Schering-Plough, MorphoSys is eligible to receive license and milestone payments related to the successful advancement of projects in clinical development, and royalties on HuCAL antibodies developed under the agreement.
SHIONOGI & CO., LTD.
MorphoSys AG and Shionogi & Co., Ltd. (Japan) signed a threeyear license agreement on the use of MorphoSys's HuCAL technology in September 2005. 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. During the three-year term of the agreement, Shionogi will have access to the MorphoSys HuCAL GOLD library at one of its research sites. In return, MorphoSys received an upfront payment and receives annual user fees during the life span of the agreement. The agreement is scheduled to expire in September 2008.
APPENDIX 1: DETAILED ROLL-FORWARD FIXED ASSETS IFRS – MORPHOSYS GROUP
| acquisition and production cost | |||||||
|---|---|---|---|---|---|---|---|
| in E | 01/01/2007 | additions | disposals | f/x variance | 12/31/2007 | ||
| I. PROPERT Y AND EQUIPMENT | |||||||
| Land and Buildings | 3,023,390 | 78,088 | 1,786,568 | (241,067) | 1,073,843 | ||
| Offi ce and Laboratory Equipment | 7,398,495 | 866,796 | 308,414 | (50,595) | 7,906,282 | ||
| Furniture and Fixtures | 2,219,251 | 129,174 | 185,213 | (46,989) | 2,116,223 | ||
| 12,641,136 | 1,074,058 | 2,280,195 | (338,651) | 11,096,348 | |||
| II. INTANGIBLE ASSETS | |||||||
| Patents | 3,844,555 | 110,747 | 0 | 0 | 3,955,302 | ||
| Software | 1,668,580 | 627,564 | 5,572 | (9,931) | 2,280,641 | ||
| Know How and Customer List | 6,478,449 | 0 | 0 | (518,656) | 5,959,793 | ||
| License Rights | 12,740,965 | 10,201,676 | 84,815 | (42,685) | 22,815,141 | ||
| Goodwill | 27,002,591 | 0 | 0 | (48,727) | 26,953,864 | ||
| 51,735,140 | 10,939,987 | 90,387 | (619,999) | 61,964,741 |
APPENDIX 2: CHART OF THE CONSOLIDATED ENTITY AS OF DECEMBER 31, 2007
| exchange | |||
|---|---|---|---|
| rate on | |||
| dec 31, 2007 | |||
| one unit of | |||
| euro in | |||
| foreign | |||
| name and corporate seat of the company | currency | currency | |
| COMPANY CONSOLIDATED (APART FROM PARENT COMPANY) | |||
| MorphoSys USA Inc., Charlotte, North Carolina, USA | US \$ | 1.44370 | |
| MorphoSys IP GmbH, Munich, Germany | E | – | |
| MorphoSys UK Ltd., Oxford, UK | £ | 0.72900 | |
| MorphoSys US Inc., Raleigh, North Carolina, USA | US \$ | 1.44370 | |
| MorphoSys AbD GmbH, Düsseldorf, Germany | E | – | |
| Poole Real Estate Ltd., Poole, UK | £ | 0.72900 | |
* Before elimination of intercompany transactions
- Statement of Operations 99 Balance Sheet
- Statement of Changes in
- Stockholders' Equity Statement of Cash Flows
- Notes to the Financial Statements
| accumulated depreciation | net book values | ||||||
|---|---|---|---|---|---|---|---|
| 01/01/2007 | additions | write-off | disposals | f/x variance | 12/31/2007 | 12/31/2007 | 12/31/2006 |
| 100,299 | 65,339 | 0 | 21,017 | (8,040) | 136,581 | 937,262 | 2,923,091 |
| 4,505,279 | 1,185,725 | 0 | 272,219 | (14,444) | 5,404,341 | 2,501,941 | 2,893,216 |
| 1,141,446 | 228,889 | 0 | 33,247 | (10,705) | 1,326,383 | 789,840 | 1,077,805 |
| 5,747,024 | 1,479,953 | 0 | 326,483 | (33,189) | 6,867,305 | 4,229,043 | 6,894,112 |
| 1,894,401 | 466,152 | 0 | 0 | 0 | 2,360,553 | 1,594,749 | 1,950,154 |
| 1,424,767 | 226,831 | 0 | 0 | (3,410) | 1,648,188 | 632,453 | 243,813 |
| 1,644,160 | 763,625 | 0 | 0 | (134,505) | 2,273,280 | 3,686,512 | 4,834,289 |
| 4,964,591 | 1,467,027 | 0 | 42,215 | (5,143) | 6,384,260 | 16,430,881 | 7,776,374 |
| 0 | 0 | 0 | 0 | 0 | 0 | 26,953,864 | 27,002,591 |
| 9,927,919 | 2,923,635 | 0 | 42,215 | (143,058) | 12,666,281 | 49,298,459 | 41,807,221 |
| share | total | total | total | |||
|---|---|---|---|---|---|---|
| capital | assets in | liabilities | revenue in | profit/loss | ||
| share of | in foreign | foreign | in foreign | foreign | in foreign | |
| capital % | currency* | currency* | currency* | currency* | currency* | |
| 100 | 2,000 | 16,122 | 41,335 | 0 | (11,667) | |
| 100 | 25,000 | 9,027,482 | 10,198,903 | 4,085,127 | 426,415 | |
| 100 | 100 | 6,600,360 | 3,880,052 | 8,616,010 | 353,549 | |
| 100 | 50,000 | 2,702,416 | 2,569,216 | 9,157,873 | (593,594) | |
| 100 | 25,000 | 1,415,705 | 524,433 | 3,551,777 | 469,330 | |
| 100 | 200 | 1,137,010 | 107,598 | 0 | 106,530 | |
Responsibility Statement
To the best of our knowledge, and in accordance with the applicable reporting principles, the Consolidated Financial Statements give a true and fair view of the assets, liabilities, fi nancial position and profi t or loss of the Group, and the Group Management Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group.
Martinsried/Planegg, February 11, 2008
Dr. Simon E. Moroney Mr. Dave Lemus Chief Executive Offi cer Chief Financial Offi cer
Dr. Marlies Sproll Chief Scientifi c Offi cer
Auditor's Report
We have audited the consolidated fi nancial statements prepared by the MorphoSys AG, Martinsried, comprising the balance sheet, the statement of operations, the statement of Cash Flows, the statement of changes in stockholders' equity and the notes to the consolidated fi nancial statements, together with the Group management report for the business year from January 1 to December 31, 2007. The preparation of the consolidated fi nancial statements and the Group management report in accordance with IFRSs, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a (1) HGB are the responsibility of the parent company's management. Our responsibility is to express an opinion on the consolidated fi nancial statements and on the group management report based on our audit.
We conducted our audit of the consolidated fi nancial statements in accordance with § 317 HGB [Handelsgesetzbuch; "German Commercial Code"] and German generally accepted standards for the audit of fi nancial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, fi nancial position and results of operations in the consolidated fi nancial statements in accordance with the applicable fi nancial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated fi nancial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual
fi nancial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and signifi cant estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements and group management report. We believe that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
In our opinion, based on the fi ndings of our audit, the consolidated fi nancial statements comply with IFRSs, as adopted by the EU, the additional requirements of German commercial law pursuant to § 315a (1) HGB and give a true and fair view of the net assets, fi nancial position and results of operations of the Group in accordance with these requirements. The Group management report is consistent with the consolidated fi nancial statements and as a whole provides a suitable view of the Group's position and suitably presents the opportunities and risks of future development.
Munich, February 12, 2008
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
Maurer Rahn Wirtschaftsprüfer Wirtschaftsprüfer
[German Public Auditor] [German Public Auditor]
MorphoSys AG
82152 Martinsried/Planegg Germany Tel.: +49-89-89927-0 Fax: +49-89-89927-222
HuCAL® , HuCAL GOLD® , AutoCAL® , CysDisplay® and RapMAT® are registered trademarks of MorphoSys AG. HuCAL Platinum™, AgX™ and SAS™ are trademarks of MorphoSys AG.