MorphoSys' (MPSYF) CEO Simon Moroney on Q2 2016 Results - Earnings Call Transcript

| About: MorphoSys AG (MPSYF)

MorphoSys AG (OTCPK:MPSYF) Q2 2016 Results Earnings Conference Call August 1, 2016 8:00 AM ET

Executives

Claudia Gutjahr-Löser - Head of Corporate Communications & Investor Relations

Simon Moroney - Member of the Management Board, Chief Executive Officer

Jens Holstein - Chief Financial Officer, Member of the Management Board

Analysts

James Gordon - JPMorgan

Gunnar Romer - Deutsche Bank

Anastasia Karpova - Kempen

Operator

Ladies and gentlemen, welcome to the MorphoSys half-yearly results conference call Q2 2016. Please note, that for the duration of the presentation, all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions].

Now, I would like to turn the conference over to Dr. Gutjahr-Löser. Please go ahead.

Claudia Gutjahr-Löser

Good afternoon and good morning and welcome to our Q2 2016 conference call. I am Claudia Gutjahr-Löser, Head of Corporate Communications and Investor Relations of MorphoSys.

With me today are Simon Moroney, our Chief Executive Officer and Jens Holstein, our Chief Financial Officer. Simon will start by giving you an operational overview of the second quarter. Before we open the call for your questions Jens will review the financial results of the first six months of 2016. Afterwards, Simon and Jens will answer questions on these topics. For those on the conference call, you will find the slide deck for this presentation on our corporate website.

Before we start the presentation, I have to remind you that during this conference call we will present and discuss certain forward-looking statements concerning the development of MorphoSys core technologies, the progress of its current research programs and the initiation of additional programs. Should actual conditions differ from the company's assumptions, actual results and actions may differ from those anticipated. You are therefore cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

I would now like to hand over to Simon Moroney.

Simon Moroney

Thanks Claudia and also from me a warm welcome to the call. As always Q2 was dominated by ASCO and the data that was presented there. I will talk a little about that but also highlight some of the other developments in our pipeline of which there were a number during the quarter.

At ASCO, we presented updated clinical data from our most advanced program MOR208. One of the features that is emerging is the long duration of response shown by some patients in both DLBCL and indolent NHL patients who have with seen cases of long-lasting responses of up to 26 months and a PFS rate of more than 40% at 12 months. This is very encouraging considering the clinical trial population comprises patients who are refractory to or have relapsed after previous lines of therapy.

We initiated our so called L-MIND Phase 2 clinical trial of MOR208 in April. This open label study is evaluating MOR208 at the recommended dose of 12mg/kg in combination with lenalidomide in 80 patients suffering from relapsed or refractory DLBCL.

A second phase 2 study of MOR208 in DLBCL will start soon. This trial called B-MIND will evaluate MOR208 plus bendamustine in approximately 330 patients with relapsed or refractory disease. It will start with a safety run-in as agreed with the regulatory authorities. Research sites have been opened already and we expect to enroll the fist patients shortly. Assuming that this part of the study is completed successfully, we will transition into the pivotal part of the study in 2017 comparing MOR208 plus bendamustine to rituximab plus bendamustine.

A third Phase 2 combination trial for MOR208 was named COSMOS. This study will investigate MOR208 together with a combination partner in chronic lymphocytic leukemia, in particular ibrutinib-refractory CLL. Our original plan to use idelalisib as a combo partner for MOR208 was impacted by the temporary discontinuation of several idelalisib combo studies and the imposition of clinical holds by the regulatory authorities in Europe. EMA has very recently lifted the hold. We expect to finalize our preparations for the intended study quickly and hope to be kicking off the trial during the second half of 2016.

At ASCO, we also presented updated data from the ongoing Phase 1/2a study of MOR202 in multiple myeloma. Of r most significant here were the two complete responses we saw in the four patients who were treated per protocol who received 8 mg/kg of MOR202 plus pomalidomide and dexamethasone. In this setting, complete response rates for pomalidomide and dexamethasone alone are typically in the low single digit percent range. We are therefore very encouraged by the apparent extra activity being contributed by MOR202. Also the 75% ORR in patients who received 8 mg/kg of MOR202 plus pomalidomide and dexamethasone provides more evidence of the power of combining MOR202 with an IMiD.

Safety and convenience continued to look best-in-class. We have a short infusion time of two hours with very moderate infusion related reactions of grades one and two in only 14% of patients treated. In the meantime, we have initiated the final treatment cohorts of 16 mg/kg MOR202 for which we expect to have data later this year.

Beyond these two most advanced programs in our proprietary portfolio, we took another program into the clinic during the quarter. MOR106 has emerged from our 50-50 discovery and development collaboration with Galapagos. This program, an antibody from our Ylanthia platform, directed against the target implicated in inflammatory diseases entered Phase 1 developments in healthy volunteers in April. We expect to be able to announce the safety results from this part of the study in the second half of this year and transition to the phase 1b part which will study MOR106 in patients.

MOR103, out licensed to GSK and now known as GSK3196165 rounds out the news on clinical programs from our proprietary development segment. In addition to the Phase 2b study that GSK is conducting in rheumatoid arthritis, they recently initiated a Phase 2 study in patients with inflammatory hand osteoarthritis. Furthermore, a second clinical studies in RA will start soon.

In May we announced a strategic alliance with the University of Texas MD Anderson Cancer Center which is focused on the discovery and development of therapeutic antibodies against cancer. MD Anderson will use our Ylanthia platform to discover therapeutic antibody candidates against potential cancer targets. MorphoSys will have options on resulting programs.

In summary, our proprietary development segment comprises 14 therapeutic programs, one of which MOR103 is out licensed. Of these 14, five are in clinical development, one in preclinical development and eight are in the discovery stage.

Turning to our partner discovery segment. We have very recently announced receipt of a milestone payment from Novartis. This payment was triggered by their initiation of a Phase 1 clinical study of the novel HuCAL antibody for the prevention of thrombosis. The program became the 12th from our collaboration to enter clinical development.

The most advanced program from this collaboration is bimagrumab, a HuCAL antibody for various muscle wasting diseases. In April, Novartis confirmed that a Phase 2b3 study examining bimagrumab in sporadic Inclusion Body Myositis failed to meet its primary endpoint. Following this finding, all Phase 3 studies in this indication were concluded. Novartis is currently reviewing the data in further detail. Nevertheless clinical studies with the antibody including three Phase 2 studies in Sarcopenia and a Phase 2 study in muscular atrophy after hip operations continue as planned.

Our partner Pfizer is developing a HuCAL antibody against the checkpoint target 4-1BB. This antibody called Utomilumab which is already in five clinical trials was recently taken into a Phase 1/2 study called JAVELIN Medley looking at a triple antibody combination. The goal of this new study is to evaluate safety and preliminary antitumor activity of Utomilumab in combination with the PD1 antibody avelumab and OX40 antibody in patients with locally advanced or metastatic solid tumors. The primary purpose is to assess the safety and early signs of efficacy of various combinations of immunotherapies.

Altogether the pipeline emerging from our partner discovery activities now comprises 90 programs, 22 in the clinical of which two are in Phase 3, 11 are in Phase 2 and nine are in Phase 1 clinical development. And the end of the quarter, our overall product pipeline comprised a total of 104 therapeutics, 27 of which are in clinical development.

Looking ahead to the rest of the year, we are on track to meet our development goals for all of our programs. In terms of potential news flow in the months ahead we anticipate among other news data from Janssen's Phase 3 studies of Guselkumab and a potential regulatory filing as well as updated clinical data for MOR202.

That completes my review of the quarter. And with that, I will hand over to Jens for the financial overview.

Jens Holstein

Thanks very much Simon. Also from my end good morning and good afternoon and thanks for participating in the call. Let me start the review of the first six months of 2016 with an overview of the most important financial figures.

Turning to slide 10 now, the income statement. You can see here the total group revenues amounted to €24.3 million for the first six months of 2016. Revenues in the comparable period of 2015 contained a one-off effect in the amount of approximately €59 million from the termination of the partnership with Celgene to co-develop and co-promote MOR202. In relations to our published guidance for March 2, our revenues are fully in line with our revenues guidance of €47 million to €52 million.

Total operating expenses increased as anticipated to €43.5 million. The expenses thereof for research and development increased to €36.7 million as compared to €33.9 million for the first half of 2015. General and administrative expenses decreased slightly compared to the same period of the previous year and amounted to €6.9 million. In line with our guidance, expenses in proprietary product and technology development increased to €28.3 million. So for the first six months of 2016, the EBIT amounted to minus €19.2 million in comparison to a profit of €46.1 million for the first six months of 2016. The group presents a net loss after taxes of €18.8 million in the first half of 2016, compared to a net profit of €36.5 million in the previous year. The decline in EBIT and net profit is mainly caused by the positive one-off effect in 2016 as explained before.

Let's turn to the slide 11, the segment reporting. The proprietary development segment achieved revenues of €0.3 million compared to €59.6 million for January to June 2015, again reflecting the terminated corporation agreement with Celgene. Operating expenses in this segment increased to €28.3 million. The segment EBIT amounted to minus €27.8 million compared to a positive €40.2 million for the same period of 2015. Operating expenses in this segment declined from January to June 2015 to €8.8 million. The segment EBIT amounted to €15.1 million compared to €12.5 million in the first half of the previous year.

Turning to the balance sheet on slide 12. On June 30, 2016, the group held liquid funds in marketable securities as well as other financial assets in the amount of €297.7 million compared to €289.4 million on December 31, 2015. The decrease is mainly the result of the use of cash for operating activities during the first six months of this year and for the repurchase of shares for the group's long-term incentive plan.

Turning to the guidance. Before we open the call for your questions, we would like to reconfirm our financial guidance for 2016 which was published in connection with the presentation of our 2015 annual report. For 2016, MorphoSys anticipates total group revenues in the range of €47 million to €52 million and an EBIT in the range of minus €58 million to minus €68 million. Proprietary R&D expenses are expected to rise to between €76 million and €83 million.

Ladies and gentlemen, that concludes my review of the first six months of 2016 and I will now hand back to Claudia for the Q&A session. Thank you.

Claudia Gutjahr-Löser

Thank you. We will now open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. First question comes from the line of James Gordon from JPMorgan. Please go ahead.

James Gordon

Hello. Thanks for taking my questions. One pipeline and one financial question, please. On the pipeline, mechanistic MOR202 differentiation, I understood the full [indiscernible] could be to NK cell sparing, but in the released data there was a reference to preserving CD38 expression. So just which of those do you think is more important? Or could they both be important? And which one do you think would have more of an impact in the clinic? And the financial question is just on the tax charge. So that was a bit higher than I and consensus had expected for this quarter. I think it's because of how you are now going to account for tax credit, so you are going to stop accruing them. So what should we assume for the tax rate for the rest of year and beyond? And why has there been the change in how tax credits are booked?

Simon Moroney

Thanks James. Let me start with the first one and then Jens will take the second one. I think it's a bit early to say which of those two mechanisms are important. We think that they could both be significant. We think that both features the fact that MOR202 spares NK cells and the CD38 expression seems to be maintained, both distinct those features from other CD38 antibodies which we think makes MOR202 particularly interesting. But we always have to cautious, of course, in extrapolating what we see preclinically to what actually happens in the clinic and therefore I think at this stage it is probably premature to say which is the most important to think. But we feel of both of them could be significant for MOR202.

James Gordon

Thanks.

Jens Holstein

And then coming to the financial questions to the tax question. Well James, as opposed to Q1, we have decided to not account for deferred tax assets on any tax losses incurred year-to-date in 2016 and our expectation is that we will remain with this until at least year-end 2016 and there is some freedom in how you can deal with this under [indiscernible] and then we decided to really go forward here on a conservative approach. In terms of the long-term view here, I think that might change again. It's a bit tough to give clear guidance here for 2017 and 2018. It might be that basically the tax rate will be zero going forward for 2017 but we might also change that. It depends a little bit on our further view. We just wanted to make sure that we don't have very high tax assets on the books, on the balance sheet. And we felt it's more prudent maybe to just do not account for any deferred tax assets here. That's the reason for the change.

James Gordon

Thank you.

Operator

Thank you James. So the next question comes from the line of Gunnar Romer from Deutsche Bank. Please go ahead.

Gunnar Romer

Gunnar Romer, Deutsche Bank. Thanks for taking my questions. A couple of questions, please. Firstly on the Novartis tier, I was wondering whether there is any update here or when you would expect to share some additional details about the future of that contract? I think it's expiring at the end of 2017. I was just wondering when you think you would be the position to update the market on a potential extension or the end of the contract? Then secondly on the patent litigation with Genmab, same question here. Any idea as to when you would expect to share an update with us in that regard? And then on bimagrumab, again similar question here, whether there is any communication you can share with us as to when Novartis may publish the detailed data and make a decision on the future of the program? And then last but not least, on MOR202, I was wondering whether you -- at ASH you were then expecting to share with us the full data package, including the 16 mg/kg cohort and whether then upon those data, assuming they are in line with your expectations, you would go for a larger confirmation trial on your own or whether you would already be looking for partner for this? Thank you.

Simon Moroney

Okay. Thanks Gunnar. I think I am going to have to disappoint you on at least three of those four questions, unfortunately. I am sorry. Starting with Novartis, just to get the facts out there as a reminder, it's schedule to run out at the beginning of December next year and they have an option to extend for further two years. At this stage, it's premature to say what's going to happen at that time. So unfortunately, I can't give you any update on that one.

The same goes for patent litigation. We are in the phase of kind of legal interchange, let's call it that, at the moment. This is a very formalistic part of the process. And again, there is really no news that we can share with you at this stage of any significance on that process. It's simply going through it's normal course that is expected for processes of this type.

Bimagrumab, that's the third one I have to let you down. Sorry. No news at this stage. As far as we are aware, Novartis is reviewing the data from the Inclusion Body Myositis trial and I believe that they intend to publish that data at some stage at a conference. But we are not sure when that will be. So unfortunately no update there.

Regarding 202, maybe a little bit more color on this one. Indeed, we hope to present some of the 16 mg/kg data at ASH. I would add the caveat here though that what we have seen in the other cohorts is that response has really deepened over time. So it can be that if you take a snapshot of a particular time and see a certain level of response, you may look again month or two later and the response would have deepened significantly. We saw that with the complete responses. We saw in the 8 mg/kg plus Pom cohort. But it really took some time for those two complete responses to appear. So whatever we show at ASH and we will certainly show some 16 mg data, you should not take that necessarily as being the final stages of those responses.

Again, a decision about whether we would continue to a Phase 2b or Phase 2/3 study on our own, it really depends on how strong the data is and of course the level of interest in particular of potential partners in the program. So at this stage, it's premature to say anything but of course we are looking forward to that 16 mg data which we think will be significant for the future of 202.

Gunnar Romer

Great. Thanks. And then maybe one follow-up regarding Guselkumab. I was just wondering whether as far as you know, the timelines provided by J&J earlier still holds, i.e. a potential filing still in the current year which would mean, I think she should mean, that readout or some presentation of data in the next few months?

Simon Moroney

Exactly. To the best of our knowledge, that is still the case. We would expect to see data in the second half of the year and we understand that there is an intention on their part to file also this year.

Gunnar Romer

Great. Thank you very much guys.

Operator

Thank you Gunnar. Next question comes from the line of Anastasia Karpova from Kempen. Please go ahead.

Anastasia Karpova

Good afternoon and thank you for taking my question. I have three. First regarding MOR202 and the possible data presentation at ASH. Given the start of the recruitment in 16 mg/kg arm, what is average treatment period you expect to present at ASH? So how long patients will be on treatment approximately by December 12? Then what is your partnering strategy for MOR208? And would you progress to pivotal study without a partner? And lastly, have you had any update on the Gantenerumab program from Roche?

Simon Moroney

Okay. Thanks. Let me take those three. First of all 202. Remember that there are three arms in this study, what we call 202 on its own, which is 202 plus dexamethasone. 202 plus lenalidomide plus dexamethasone. And 202 plus pomalidomide plus dexamethasone. And the maturity of the data will vary in each case because those arms at starting at different point in time. So I can't give you a single a single number there.

The most recent data will be from the two IMiD combo arms and that data will be, I think, a couple to a few months of maturity by the time you see it in ASH. And I just want to add what I said earlier which is, we really see responses deepening over time. So whatever we see at ASH may not be the final story on how the response rates are from that 16 mg cohort.

In terms of 208 partnering strategy, we are always interested in looking at ways to maximize value from all of our programs actually and 208 as well. And so if we see an opportunity to partner the program in a way that would create value and allow us to fulfill our goals around that program, then we would certainly entertain those discussions. We are not in a position where we absolutely need to partner anytime soon, but if we see a great opportunity then we would certainly consider that.

Regarding Gantenerumab, I think there is not a lot of new news. I think the latest information that Roche has announced publicly is that they are currently looking to increase the dose. They believe that the earlier trial was simply dosed too low and they are therefore working their way up to a higher dose with a view, we understand, to then conducting a new study at the establish higher dose, should it turn out to be safe. So we feel very optimistic that Gantenerumab is alive and well. There seems to be renewed interest in this mechanism based on some data seen with some of the other antibodies and we look forward to seeing data when at such time as Roche would chose to announce it.

Anastasia Karpova

And maybe a follow-up on MOR202 question. When would be the final cutoff for the trial? Where would you expect to present the final data?

Simon Moroney

From this particular study, it's probably going to be closer to ASCO next year, I guess, until such time -- well, let me take a step back. To the extent that we would keep patients in the trial in an extension study, it may take even longer than that until those extension cohorts are really completed. But I think, as I was referring to before, responses deepen over time from the 3+3 dose escalation stage of the study, I think that data will be mature by ASCO of next year, but the extension cohorts probably will take a little bit longer than that. But I think by ASH this year we should have a much better picture than we have right now. By ASCO next year, we will have a pretty complete picture on the dose escalation phase of the trial and then probably later next year the trial in its entirety will be completed.

Anastasia Karpova

Thank you for taking my questions.

Operator

We currently have no questions coming through. [Operator Instructions]. So the next question comes again from the line of Gunnar Romer. Please go ahead.

Gunnar Romer

Thanks for taking my follow-up. It's just a question on your proprietary R&D budget. I think this allows for a significantly higher spend in the second half. I was just wondering whether you can run it through the potential savings of the spending. What are the main drivers? And into which programs are these dollars flowing basically? Thank you.

Jens Holstein

Yes. Thanks Gunnar. I am happy to give some more light to this and the lion share of our spend will go into 208 and we have kicked off the L-MIND study. We are about to also extend all activities around B-MIND study. So the lion share, really, of our investment will go into 208 and then 202 and the other programs. Towards the spending amounts for Q3 and Q4, the lion share again of the amount that we so far have spent towards what our guidance has been on R&D spend for proprietary activities will be probably rather in Q4 than in Q3. But we will stick to the guidance in terms of our spend and therefore also to our EBIT guidance here. So there is no reasoning for any change.

Gunnar Romer

All right. Thank you Jens.

Operator

Thank you Gunnar. And thank you all. We have no further questions coming through. So I will now hand you back over to Simon Moroney to wrap up today's call.

Simon Moroney

Thank you. To complete the call, I would like to remind you of the key take away messages. First, we are very encouraged by the clinical data that we are seeing for both MOR208 and MOR202. In addition, other programs are advancing nicely and we are on track to meet both our development and financial goals for the year.

Claudia Gutjahr-Löser

That concludes our call. If any of you would like to follow-up, we are in the office for the remainder of the day. Thank you very much for your participation on the call and goodbye.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.

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