MorphoSys
Annual Report 2013

Plain-text annual report

A N N U A L R E P O R T 2013 the of Product Pipeline MorphoSys’s Product Pipeline, as of 31 December 2013 Pro gram P ar t ner IndIc at Ion Phase 1 Phase 2 Phase 3 marke t MOR103 GSK Rheumatoid arthritis Multiple sclerosis MOR208 Unpartnered Chronic lymphocytic leukemia MOR202 Bimagrumab Celgene Novartis Acute lymphoblastic leukemia Non-Hodgkin’s lymphoma Multiple myeloma Sporadic inclusion body myositis Cachexia (cancer) Sarcopenia Mechanically ventilated patients Cachexia (chronic obstructive pulmonary disease) Gantenerumab Roche Prodromal Alzheimer’s disease Genetically predisposed for Alzheimer’s disease Japanese Alzheimer’s disease patients CNTO3157 Janssen Asthma Safety/pharmacokinetic CNTO6785 Janssen Chronic obstructive pulmonary disease Guselkumab Janssen Psoriasis Rheumatoid arthritis Rheumatoid arthritis Palmoplantar pustulosis BHQ880 Novartis Multiple myeloma (with renal insufficiency) LFG316 Novartis Wet age-related macular degeneration Smoldering multiple myeloma LJM716 Novartis Esophageal squamous cell carcinoma Age-related macular degeneration Multifocal choroiditis and panuveitis HER2+ Cancer HER2+ Cancer (combination with trastuzumab) NOV-3 VAY736 Novartis Novartis Solid tumors n.d. Pemphigus vulgaris OMP-59R5 Oncomed Pancreatic cancer Small cell lung cancer BAY94-9343 Bayer BI-836845 BI NOV-7 Novartis Vantictumab Oncomed Solid tumors Solid tumors Cancer Cancer Eye disease Solid tumors Breast cancer PF-05082566 Pfizer Cancer Non-small cell lung cancer l e g e n d : o u t - l i c e n s e d t o pa r t n e r p r o p r i e ta r y p r o g r a m c o - d e v e l o p m e n t/ c o - p r o m o t i o n pa r t n e r e d p r o g r a m s Additionally, MorphoSys currently has various proprietary and part- nered programs in the discovery or preclinical phase (31 Dec. 2013: 40 programs in dis- covery, 22 programs in preclinic). EnginEEring the m EdicinEs of tomorrow morphosys has built a reputation in the pharmaceutical industry as the partner of choice in the search for new antibody drugs. A number of very successful research alliances and proprietary development activities have led to more than 20 therapeutic antibodies in clinical trials. we will build on this success and continue to develop and expand our proprietary portfolio. we believe that successful drug development is not a matter of chance, but based on a profound understanding of disease biology, extensive experience in the selection, characterization, and development of compound candidates, and also on excellent technologies. we have applied our skills and knowledge to build a proprietary portfolio of drug candidates and will concentrate even more on proprietary product development in the future. in 2013, we gained two prestigious partners, celgene and glaxosmithKline, for the further development of two candidates from our portfolio. l E Arn morE in our onl inE mA g A z inE reports.morphosys.com/2013/ 02 O N L I N E - M A G A Z I N E Engineering the Medicines of Tomorrow ENGINEERING The foundation for the success or failure of a therapeutic project is, in many cases, set at the very start. Correctly interpreting the biology of the disease and selecting the best approach for treatment, form the scientifi c prerequisites. But even with the right treatment approach, it’s the quality of the compound that is often decisive for the success or failure of the project. D I S C O V E R H O W W E S E L E C T C O M P O U N D S I N O U R O N L I N E M A G A Z I N E MEDICINES Due to their unique properties, therapeutic antibodies are still one of the fastest growing drug classes in human medicine. Until a com- pound is approved as a medication on the market, it must withstand a highly critical examination in clinical trials and fulfi ll numerous requirements and governmental requests. MorphoSys has acquired extensive knowledge in order to plan and perform the clinical trials of its proprietary programs internationally. D I S C O V E R H O W W E D E V E L O P D R U G S I N O U R O N L I N E M A G A Z I N E 03 O N L I N E - M A G A Z I N E Engineering the Medicines of Tomorrow TOMORROW In many ways, future drugs must be better than the prepara- tions that are currently available. Clearly diff erentiated compounds that stand out from the mass of approaches and break new ground will form the key value drivers in the pharmaceutical industry. MorphoSys’s technologies and the expertise of its people support the search for drug candidates with unique properties. F I N D O U T W H AT T H E D R U G S O F T O M O R R O W A R E E X P E C T E D T O A C H I E V E I N O U R O N L I N E M A G A Z I N E 04 C o n t e n t s Annual Report contEnts AnnuAl rEport t h e C o m p An y m a n ag e m e n t b oa r d o f m o r p h o sy s ag l e t t e r to t h e s h a r e h o l d e rs t h e m o r p h o sys s h a r e 0 6 1 1 3 2 G r o u p m AnA G e m e n t re p o r t o p e r at i o n s a n d b u s i n e s s e n v i r o n m e n t a n a ly s i s o f n e t a s s e t s , f i n a n c i a l p o s i t i o n , a n d r e s u lt s o f o p e r at i o n s s u s ta i n a b i l i t y r e p o r t r i s ks a n d o p p o r t u n i t y r e p o r t s u b s e q u e n t e v e n t s o u t lo o k a n d f o r e c a s t s tat e m e n t o n c o r p o r at e g ov e r n a n c e a n d c o r p o r at e g ov e r n a n c e r e p o r t 1 4 3 8 5 0 5 8 6 8 6 9 74 r E f E r E n c E t o f i g u r E s r E f E r E n c E t o tA b l E s 05 C o n t e n t s Annual Report f i nAn C i Al s tAt e m e n t s c o n s o l i dat e d s tat e m e n t o f i n c o m e (i f rs) c o n s o l i dat e d s tat e m e n t o f c o m p r e h e n s i v e i n c o m e (i f r s) c o n s o l i dat e d b a l a n c e s h e e t (i f r s) c o n s o l i dat e d s tat e m e n t o f c h a n g e s i n s to c k h o l d e rs ’ e q u i t y (i f rs) c o n s o l i dat e d s tat e m e n t o f c a s h f lo w s (i f rs) n ot e s r e s p o n s i b i l i t y s tat e m e n t au d i to r ’s r e p o r t 9 4 9 5 9 6 9 8 1 0 0 1 0 2 1 4 8 1 4 9 Ad d i t i o nAl i n f o rmAt i o n 1 5 0 1 5 4 1 5 6 1 5 8 1 6 0 1 6 2 1 6 4 r e p o r t o f t h e s u p e r v i s o ry b oa r d s u p e r v i s o ry b oa r d o f m o r p h o sys ag s e n i o r m a n ag e m e n t g ro u p o f m o r p h o sys ag g lo s s a ry i n d e x l i s t o f f i g u r e s a n d ta b l e s i m p r i n t 06 t h e C o m p A n y Management Board of MorphoSys AG Management Board of MorphoSys AG dr. simon morone y C hief exeCu t ive of f iC er jens hol s t ein C hief f inAnC iAl of f iC er dr. Arnd t s C ho t t el ius C hief devel opmen t of f iC er dr. mArl ie s sprol l C hief s C ien t if iC of f iC er 07 T H E C O M P A N Y Management Board of MorphoSys AG DR. SIMON MORONE Y CHIEF EXECU T IVE OF F ICER “MorphoSys has successfully completed the transition from a technology provider to a true biopharmaceutical company with capabilities and assets spanning technology and product development. We are investing in R&D to build a proprietary portfolio of differentiated drugs – biopharmaceuti- cals that can really make a difference in areas of unmet medical need.” 08 T H E C O M P A N Y Management Board of MorphoSys AG JENS HOL S T EIN CHIEF F INANC IAL OF F ICER “The progress in our product pipeline was also reflected in a very success- ful year financially. We intend to use our financial resources in order to seize any opportunities which may arise, whether in-licensing of com- pounds, joint development projects, or company acquisitions.” 09 T H E C O M P A N Y Management Board of MorphoSys AG DR. ARND T S C HO T T EL IUS CHIEF DEVEL OP MEN T OF F ICER “The alliances with Celgene and GlaxoSmithKline for the further advance- ment of MOR202 and MOR103 have clearly demonstrated our development capabilities and have secured the next stages of development for these pro- grams. We made great progress in developing MOR208, with three phase 2 studies being commenced, adding to the breadth of our portfolio.” 10 T H E C O M P A N Y Management Board of MorphoSys AG DR. MARL IE S SPROL L CHIEF S C IEN T IF IC OF F ICER “With its diversity and breadth, the MorphoSys pipeline is one of the strongest in the biopharmaceutical industry. The next stage of the pipeline’s maturity – regulatory approval of fi rst HuCAL antibodies – is approaching. We are therefore well on track to make the medicines of tomorrow a reality.” 11 T H E C O M P A N Y Letter to the Shareholders Letter to the Shareholders The eff ort and investment that have gone into our proprietary research and development over the past several years paid off handsomely in 2013. Through licensing agreements with Celgene and GlaxoSmithKline, we demonstrated our ability to develop drug candidates from target molecule to lucrative partnership. These advances in our proprietary portfolio were the main drivers of the Company’s value in 2013. The remarkable progress we’ve made in product development is a gratifying reward for the decision to increase our focus in this area. We are committed to building a rich pipeline of drug candidates and to maximizing our participation in the value these products generate. The alliances with Celgene and GlaxoSmithKline for the further advancement of MOR202 and MOR103 have secured the next stages of development for these two programs. MorphoSys has benefi ted already from up-front payments and investments totaling approximately € 140 million. In the longer term, given success in developing each compound, we can look forward to potentially lucrative milestone and royalty payments. The alliance with Celgene brings the added benefi t of a co-promotion option for MOR202 with a 50 % profi t share in the European market. This gives MorphoSys the opportunity to mature into a commercial organiza- tion in a foreseeable time frame. During 2013, we also made great progress in developing MOR208, with three new phase 2 studies being com- menced. This is currently the most advanced compound in our portfolio that has yet to be partnered. The clinical results we have seen thus far give us confi dence that MOR208 has the potential to become a valuable treatment option for a number of B-cell malignancies. 10 T H E C O M P A N Y Management Board of MorphoSys AG The progress in our Partnered Discovery pipeline was also remarkable in 2013. The HuCAL antibody gan- tenerumab, which is being developed by Roche for the treatment of Alzheimer’s disease, continues to attract attention. Needless to say, any therapy that improves outcomes for Alzheimer’s disease patients would be a major advance. Beyond gantenerumab, other drug candidates in our partnered pipeline that address pressing medical problems have also advanced. Bimagrumab, for example, is an antibody that was developed in our alliance with Novartis to treat various diseases and conditions associated with loss of muscle function. In 2013, bimagrumab became the fi rst HuCAL antibody to receive breakthrough-therapy designation from the U.S. Food and Drug Administration. Programs with this status enjoy a number of advantages from the regulatory agency as they move through development. A few weeks after receiving the breakthrough-therapy desig- nation, Novartis brought bimagrumab into a pivotal phase 2/3 study in sporadic inclusion body myositis. Currently, our partnered pipeline comprises 16 antibodies in clinical trials. These are being developed 37 dif- ferent clinical studies. In addition to the pivotal studies being conducted on gantenerumab and bimagrumab, 9 antibodies are in phase 2 studies and 5 antibodies are in phase 1. With its diversity and breadth, the MorphoSys pipeline is one of the strongest in the biopharmaceutical industry. The next stage of the pipeline’s maturity – regulatory approval of the fi rst HuCAL antibody and receipt of the fi rst royalties – is approaching. The progress in our product pipeline was also refl ected in a very successful year fi nancially. The direct pro- ceeds from our alliances with GSK and Celgene, those from the sale of AbD Serotec, and a capital increase all contributed to a rise in our liquidity to approximately € 400 million. This strong cash position supports the ambitious plans we have for our proprietary portfolio. We will develop our advanced projects MOR202 and MOR208 as broadly and as quickly as possible, in the case of MOR202, in cooperation with our partner Celgene. We also want to intensify our early-stage research activities, with the objective of developing and applying our technologies to the generation of new drug candidates. Additionally, we aim to in-license more mature projects as we have already done successfully in the case of MOR208. We intend to pursue all of these activities while retaining our fi nancial fl exibility in order to seize any opportunities that may arise, whether in-licensing, joint development, or company acquisitions. 11 t h e C o m p A n y Letter to the Shareholders Letter to the Shareholders After several years during which the Company’s share price only partially reflected its progress, the MorphoSys share increased in value by 87 % in 2013. On top of the strong performance in 2012, this substantial revalua- tion of the Company reflects the progress we’ve made, particularly with our proprietary portfolio. We consider this further confirmation that our shareholders attribute much more value to innovative, proprietary drug candidates than to short-term optimization of financial results. On the whole, 2013 was an outstandingly successful year for MorphoSys, and we look forward to an equally exciting 2014. Clinical data from the ongoing MOR202 and MOR208 trials, as well as from numerous partnered programs, plus activities which will strengthen our proprietary portfolio even further, will be the key events to watch for in the year to come. We will continue to intensify our focus on proprietary drug development, with innovative technology as a foundation. Our success is only possible thanks to the commitment, loyalty, and creativity of our employees, to whom I would like to extend my heartfelt appreciation. I would also like to thank you, our shareholders, for your continued support. I am sure you will join me in wishing our Company a successful 2014. Dr. Simon Moroney Chief Executive Officer 12 13 C o n t e n t s group mAnAgEmEnt rEport o p e r at i o n s a n d b u s i n e s s e n v i r o n m e n t a n a ly s i s o f n e t a s s e t s , f i n a n c i a l p o s i t i o n , a n d r e s u lt s o f o p e r at i o n s s u s ta i n a b i l i t y r e p o r t r i s k a n d o p p o r t u n i t y r e p o r t s u b s e q u e n t e v e n t s o u t l o o k a n d f o r e c a s t s tat e m e n t o n c o r p o r at e g o v e r n a n c e a n d c o r p o r at e g o v e r n a n c e r e p o r t 1 4 3 8 5 0 5 8 6 8 6 9 74 14 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment In the year 2013, MorphoSys concluded two landmark agreements within the Proprietary Development business segment. The alliances with Celgene and GlaxoSmithKline improve the Company’s prospects of forging ahead with the development of MOR202 and MOR103 as well as expanding and advancing additional clinical development candidates. Operations and Business Environment organizational structure orGAniZAt ion of t he morphosy s Group The MorphoSys Group, consisting of MorphoSys AG and its subsid- iaries, develops and commercializes high-quality antibodies* for therapeutic applications. Leading proprietary technologies form the basis of the business segments’ operating activities. The Part- nered Discovery segment operates therapeutic development pro- grams for drug candidates in cooperation with renowned biotech- nology and pharmaceutical companies. In this segment, MorphoSys works together with its partners on solutions for the most urgent health issues. Proprietary, innovative therapeutic antibodies are currently being developed in the second segment Proprietary De- velopment. At a certain point in their clinical development, these antibodies could be out-licensed to partners or co-developed in fu- ture cooperations. s e e f i G u r e 1, organiz ational structure of the morphosys group page 2 2 At the end of 2012, MorphoSys announced the sale of substantially all of the AbD Serotec operating segment1 to Bio-Rad Laboratories, Inc. (Bio-Rad). The closing of the transaction was dependent upon the fulfillment of certain conditions which were complied with on 10 January 2013 (closing date). Substantially all of the AbD Serotec segment was sold as of this date. Thus, in the first ten days of the reporting year, the complete AbD Serotec operating segment was still part of the MorphoSys Group. This third operating segment, which had specialized in the production and sale of diagnostic an- tibodies and research applications*, was sold upon the completion of this transaction. All of the following information in this report refers exclusively to the continuing operations of the Partnered Discovery and Proprietary Development segments. The completion of the transaction with Bio-Rad included the trans- fer of the four locations in Puchheim, Germany, Düsseldorf, Ger- many, Kidlington, Great Britain, and Raleigh, USA, to Bio-Rad. Thus, for the remainder of the 2013 financial year, MorphoSys only operated MorphoSys AG’s parent company location in Martinsried near Munich, Germany. The Partnered Discovery and Proprietary 1 Bio-Rad acquired the AbD Serotec segment excluding the Poole Real Estate Ltd. subsidiary, and without the Slonomics technology. 15 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment Development segments are located at this site, as are the central Group functions of accounting, controlling, personnel, legal, pat- ents, corporate communications and investor relations. l eGAl s t ruC t ure of t he morphosy s Group GROUP MANAGEMENT AND SUPERVISION MorphoSys AG is the parent company of the MorphoSys Group, a German stock corporation listed in the Prime Standard segment of the Frankfurt Stock Exchange. In accordance with the German Stock Corporation Act, the Company has a dual management structure with the Management Board as the leading body and its four members appointed and monitored by the Supervisory Board. More detailed information concerning the Group’s management and control as well as corporate governance in general may be found in the Corporate Governance Report. The Senior Manage- ment Group supports the management of MorphoSys AG and con- sists of 19 managers from various departments. The completion of the transaction with Bio-Rad on 10 January 2013 greatly simplified the Group’s structure in comparison to the previous year. Along with the AbD Serotec operating segment, three subsidiaries – MorphoSys UK Ltd., MorphoSys US, Inc., and MorphoSys AbD GmbH – left the Group. As a result, four subsid- iaries, in addition to the parent company MorphoSys AG, remained part of the MorphoSys Group (MorphoSys USA, Inc., Poole Real Estate Ltd., MorphoSys IP GmbH, Sloning Biotechnology GmbH). The remaining two operating segments are concentrating exclu- sively on therapeutic antibody research and development. The an- tibody business for the diagnostic range was discontinued with the sale of substantially all of the AbD Serotec research and diag- nostic segment. Business AC t ivi t ies DRUG DE VELOPMENT MorphoSys develops drugs together with its partners in the phar- maceutical and biotechnology industries and through its proprie- tary development activities. In the 2013 financial year, the Com- pany was able to start three new partnerships in these areas with Celgene, GlaxoSmithKline and Heptares. The revenues from these partnerships provide MorphoSys with substantial cash flow which is invested in the Company’s own research and development. MorphoSys commands one of the broadest pipelines in the indus- try and currently has a total of 81 individual therapeutic antibody candidates and 43 clinical trials, of which the most advanced trials are in phase 3. s e e f i G u r e 3 , c l i n i c a l s t u d i e s w i t h m o r p h o s y s a n t i b o d i e s pa g e 2 3 TECHNOLOGIES MorphoSys has developed a number of technologies that offer di- rect access to fully human antibodies for the treatment of diseases. MorphoSys’s most widely-known technologies include HuCAL*, which is a collection of billions of fully human antibodies. Ylanthia*, the next generation of antibody technologies from MorphoSys, is currently the largest known antibody library* in Fab format* and is based on an innovative concept for the generation of highly spe- cific and fully human antibodies. MorphoSys believes Ylanthia will shape a new standard in the pharmaceutical industry’s de- velopment of therapeutic antibodies in this decade and beyond. Slonomics* supplies MorphoSys with a patented, fully-automated technology for gene synthesis and modification for the generation of highly diverse gene libraries in a controlled process. INNOVATION CAPITAL* MorphoSys invests in promising start-ups and their technologies and products when they coincide with the interests of MorphoSys. MorphoSys combines cooperative elements with a classic approach to investing and acting as an industry partner. Currently, the port- folio consists of one investment: privately-owned Lanthio Pharma. Lanthio Pharma specializes in the research and development of lantipeptides*. Lantipeptides are an innovative class of therapeu- tic substances demonstrating a high level of target molecule selec- tivity* and improved compound properties. The market for therapeutic antibodies continues to be one of the fastest growing markets in human medicine and also one of the most competitive. In 2013, the fully human* monoclonal antibody*, adalimumab (Humira®), led the list of top-selling drugs worldwide for the second consecutive time. In total, more than 15 of the 40 approved antibody-based drugs achieved annual revenues of more than US$ 1 billion and reached blockbuster status as a result. s e e f i G u r e 4 , t o ta l m a r k e t f o r a n t i b o d i e s pa g e 2 3 According to the pharmaceutical database Citeline, there are cur- rently close to 420 monoclonal antibody candidates in clinical de- velopment. This makes antibodies the largest category of biologi- cally generated drug candidates. Traditionally, the most important fields of application of antibodies – oncology and autoimmune, in- flammatory and infectious diseases – are increasingly augmented by new indications such as Alzheimer’s disease, osteoporosis, mus- cular atrophy, or elevated cholesterol levels. In addition, emerging technologies such as antibody drug conjugates (ADCs*), bispecific* and trifunctional* antibodies, antibodies with modified Fc parts*, as well as other antibody formats, will shape the diversity of the antibody market. *s e e G l o s s A r y pa g e 1 5 8 16 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment t op 5 mono C l onAl An t iB od y druGs Generic name Brand® Company Adalimumab Humira Abbott Rituximab Mabthera/Rituxan Infliximab Remicade Roche, Biogen Idec/Genentech J&J, Merck, Mitsubishi Tanabe Trastuzumab Herceptin Bevacizumab Avastin Roche Roche Source: Datamonitor 1 indications (fdA*/emA* approved) revenues estimate for 2013 in us$ billion Rheumatoid arthritis*, juvenile idiopathic arthritis, psoriatic arthritis, Bekhterev’s disease (also referred to as ankylosing spondylitis), Crohn’s disease, plaque psoriasis* Non-Hodgkin’s lymphoma, chronic lymphocytic leukemia, rheumatoid arthritis, Wegener’s granulomatosis and microscopic polyangiitis Crohn’s disease, pediatric Crohn’s disease, ulcerative colitis, pediatric ulcerative colitis, rheumatoid arthritis, Bekhterev’s disease (also referred to as ankylosing spondylitis), psoriatic arthritis, plaque psoriasis Adjuvant breast cancer, metastatic breast cancer, metastatic gastric cancer Metastatic colorectal cancer, non-small cell lung cancer, glioblastoma, metastatic renal cell carcinoma 10.34 7.35 6.53 6.45 6.31 In commercializing its antibody technologies, MorphoSys is com- peting with various providers which can be divided into two cate- gories: • antibody and antibody fragment technologies, • technologies based on antibody-like structures (scaffolds*). Market data which thoroughly describes the promotion of tech- nologies within the field of antibody development is not available. MorphoSys had 18 antibody candidates in the clinical pipeline at the end of 2013 that are based on the HuCAL technology giving it the lead in the field of antibody technologies. MorphoSys competes with a number of companies in the field of therapeutic antibody development and in the out-licensing of clini- cal development candidates. In the 2013 financial year, MorphoSys was able to conclude lucrative licensing agreements for two of its proprietary development candidates, MOR103 and MOR202. The direct payments received by the Company in the 2013 financial year from these agreements amounted to more than € 130 million. Both agreements provide further performance-related milestones totaling more than € 1 billion, as well as tiered, double-digit royal- ties* and, in the case of MOR202, a 50 % share in the profits gener- ated in Europe. PAR TNERED DISC OVERY The Partnered Discovery segment uses MorphoSys’s technologies for the research, development, and optimization of therapeutic anti- bodies as drug candidates in extensive partnerships with pharma- ceutical and biotechnology companies. While the development costs are borne by the respective partners, MorphoSys is rewarded in the form of research financing, milestone payments, and potential royalties from the product sales of successful programs. The Company’s largest alliance to date is the strategic alliance with Novartis – a pharmaceutical partner with a steady growing pipeline of biotechnologically developed drugs – which was closed in 2007. This collaboration was extended in November 2012 by an additional cooperation agreement. As part of the agreement, both companies will use MorphoSys’s next generation antibody plat- form, Ylanthia, to create therapeutic antibodies. In the future, MorphoSys plans to leverage the technology to gain access to new innovative target molecules for possible in-licensing and co-devel- opment. Drug development carried out with partners allows MorphoSys to be also involved in indications where it would normally not pursue a program itself due to Company’s lack of proprietary expertise in that area. In the following, examples will be provided by discuss- ing a number of areas. 17 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment DISE ASES OF THE CE NTR AL NERVOUS SYSTEM –AL ZHEIMER ’S DISE ASE With the antibody compound gantenerumab, developed by its part- ner Roche, MorphoSys has a promising treatment for Alzheimer’s disease in its pipeline. The HuCAL-based antibody is recognized as one of the most advanced compounds today. Currently, there are no other drugs available which can fundamentally slow the pro- gression of Alzheimer’s disease. In the 2013 reporting year, Roche finished the recruitment of patients for its ongoing pivotal phase 2/3 trial in up to 770 patients who are in the early stages of this disease. Data release is expected for 2016. Additionally, the Roche compound is being tested in an independent clinical trial by the “Dominantly Inherited Alzheimer Network” (DIAN), which is test- ing up to 210  patients for the competing antibody compound solanezumab. Early 2014, Roche announced that a second phase 3 study in up to 1,000 patients with mild Alzheimer’s disease will be initiated. MUSCULOSKELE TAL DISORDE RS – SP OR ADIC INCLUSION BODY MYOSITIS With the antibody compound bimagrumab, developed by its part- ner Novartis, MorphoSys has a promising treatment in its pipeline for sporadic inclusion body myositis* and other diseases of muscle weakness. During the 2013 reporting year, Novartis announced the achievement of a regulatory milestone as it received break- through-therapy designation from the US Food and Drug Adminis- tration (FDA). Meanwhile, pivotal phase 2/3 trials have already started. In addition, the antibody received “orphan drug designa- tion” for the indication of sporadic inclusion body myositis in Europe and the USA. PROPRIE TARY DE VELOPME NT An important goal of the Company is to generate additional value by developing innovative proprietary antibody products. MorphoSys’s scientists concentrate on indications such as in- flammatory and auto-immune disorders*, as well as on cancer and infectious diseases. The signing of the contracts in the 2013 finan- cial year is evidence of this strategy’s potential. s e e f i G u r e 5 , s a l e s p o t e n t i a l o f p r o p r i e ta r y p r o g r a m s pa g e 2 3 ONC OLOGY The ability of monoclonal antibodies to bind specific antigens* has led to their dominant position in the field of targeted cancer thera- pies. The global market for innovative biological therapies for cancer treatment is growing rapidly and steadily. Specifically, BCC Research expects that the size of the biotherapeutic segment of oncology will reach the level of US$ 50  billion in 2014. With MOR202 and MOR208, MorphoSys has brought two proprietary cancer programs into clinical trials* in the last two years and part- nered with Celgene for the further development of MOR202 in the 2013 financial year. MorphoSys’s antibody MOR208 is directed against the CD19* tar- get molecule*, which is of particular interest with regard to many B-cell tumors. According to the market research firm Decision Resources, the therapeutic market for B-cell malignancies has a size of approximately US$ 4 to 5 billion. Current biological thera- pies for the treatment of B-cell malignancies, including the block- buster Rituxan® (rituximab) and the antibody Gazyva® (obinutu- zumab), approved in 2013, are directed against the CD20* target molecule. Since the CD19 target molecule is expressed by a larger number of B-cell subtypes in comparison to CD20, the CD19 anti- bodies are considered an alternative approach. In addition, MOR208 was further improved by changing the constant Fc part of the an- tibody. This modification leads to both a higher antibody-depen- dent cell-mediated cytotoxicity (ADCC*), as well as improved anti- body-dependent cellular phagocytosis (ADCP*). MOR208 successfully completed a clinical phase 1/2a trial in chronic lymphocytic leukemia (CLL*) in 2012. The first clinical data was presented in December 2012 at the annual meeting of the American Society of Hematology. In 2013, further data from this trial was presented that confirmed the positive impression given by the first set of data. MorphoSys initiated further clinical phase 2 trials for MOR208 in non-Hodgkin’s lymphoma (NHL*) and in acute lymphoblastic leukemia (ALL*). In addition, MorphoSys an- nounced the start of a so-called investigator-sponsored trial (IST*), a phase 2 trial for the treatment of chronic lymphocytic leukemia in which MOR208 is being tested in combination with the com- pound lenalidomide. It is a clinical trial initiated by doctors of a US research center, in which the entire responsibility (sponsor func- tion) is carried by the clinical center and not by a pharmaceutical company, MorphoSys in this case. The most advanced therapeutic approach targeting CD19 is a bi- specific antibody which is currently in phase  2 testing for the treatment of ALL. Other clinical programs directed against the same target molecule use different approaches to enhance the an- tibody’s efficacy, e.g. using an antibody drug conjugate or chang- ing the glycosylation pattern of the antibody molecule. As one of the few independent providers, MorphoSys has a clinically tested CD19 antibody that is still available to commercial partners for li- censing on the market. Another recent approach is the so-called CAR-T technologies*. In this immunotherapy, immune cells (T cells) are obtained from the patient’s blood. Subsequently, the T cells are modified outside the body, so that they are better able to identify and target the tumor cells of the patient. When these T cells are then re-introduced to the patient’s blood by infusion, they bind to the targeted cancer cells and destroy them. *s e e G l o s s A r y pa g e 1 5 8 18 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment mArk e t dAtA on sel eC t ed p Ar t nered pro GrAms in C l iniC Al phA se s 2 And 3 program name morphosys- partner indication market potential 2 Gantenerumab Roche Alzheimer’s Disease • High medical need due to lack of disease-modifying drugs • High market growth potential due to aging population, earlier and improved diagnosis, and the advent of accompanying immune therapies that are prescribed in addition to existing therapies • Expected CAGR* of 10.7 % with a total market volume of approximately US$ 9.8 billion in 2021 Bimagrumab/BYM338 Novartis Inclusion Body Myositis, Cachexia Inclusion Body Myositis: • Slowly progressive degenerative inflammatory disease of the skeletal muscles with very low prevalence of 1-9/100,000 (orphan disease) • No curative therapy available thus far Cachexia: • Emaciation through degradation of muscle and fatty tissue • 80 % of patients with advanced cancer are affected; responsible for at least 20 % of deaths in cancer patients Guselkumab/ CNTO1959 Janssen/J&J Psoriasis*, Rheumatoid Arthritis Psoriasis: • Lifelong disease with high morbidity; has a negative influence on the quality BHQ880 Novartis Multiple Myeloma LFG316 Novartis Age-related Macular Degeneration (AMD), Uveitis OMP-59R5 OncoMed/GSK Pancreatic Cancer CNTO3157 Janssen/J&J Asthma CNTO6785 Janssen/J&J Rheumatoid Arthritis of life • Expected revenue growth from US$ 3.9 billion in 2010 to over US$ 7.4 billion in 20201) Rheumatoid Arthritis: • Inflammatory autoimmune disease which leads to restricted mobility • In the year 2010, there were nearly 4.6 million people1) with rheumatoid arthritis • Expected annual growth rate of 4.3 %1) and a potential market of US$ 18 billion in the year 2020 • Malignant tumor of the bone marrow (also called: plasmacytoma) • A potential market of close to US$ 10 billion is expected in 2015 • Incidence: 102,000 patients worldwide, prevalence: 210,000 patients worldwide AMD: • Main cause of severe, irreversible visual impairment in the industrial nations • 7.5 million AMD patients1 • In 2011, wet AMD accounted for 32 % of the global market for ophthalmology (total market of approx. US$ 10 billion); by 2018 it is expected to reach a share of 37 % Uveitis (inflammation of the iris): • Inflammation of the uvea, which can be caused by autoimmune diseases (also through rheumatoid arthritis) • Affects approx. 1 out of 4,500 people and appears more often in people between 20 and 60 years of age; affects men and women equally • High mortality rate (relative five-year survival rate is 5 %) • Limited therapeutic treatment possibilities • Incidence: Approx. 280,000 worldwide (2008) • Expected market potential in 2022: US$ 1.3 million • Worldwide, the daily lives of 300 million people are severely affected by asthma • 2011: there are 62.9 million diagnosed cases of asthma1, estimate for 2021: 64.8 million • Market potential in 2012: US$ 15 million; 2021: US$ 17 million (CAGR: 1.5 %) • Inflammatory autoimmune disease that leads to restricted mobility • In the year 2010, there were nearly 4.6 million people1) with rheumatoid arthritis • Expected annual growth rate of 4.3 %1) and a potential market of US$ 18 billion in the year 2020 Sources: Datamonitor, Decision Resources, www.pharmatimes.com, Visiongain, Globocan, GBI Research, www.bioportfolio.net, Decision Resources 1 Seven key markets: USA, Japan, France, Germany, Italy, Spain, and Great Britain *s e e G l o s s A r y pa g e 1 5 8 19 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment In the area of B-cell disorders, various approaches are developed using so-called small molecules*. MorphoSys’s antibody, MOR202, is currently being developed for the treatment of multiple myeloma* (MM) and is directed against the CD38* target molecule. This project was successfully brought into a partnership with Celgene in the 2013 financial year. Here, MorphoSys was able to use the pharmaceutical industry’s growing interest in CD38 as a target molecule for the treatment of MM and thus had a better negotiating position as one of the few indepen- dent providers of a CD38 antibody. Measured in terms of the frequency of occurrence, MM is a rela- tively small area of oncology. Nevertheless, the MM market has shown impressive revenue figures in recent years and represents a potential market of up to US$ 9 billion. Significant achievements in clinical practice and the introduction of effective and high- priced pharmaceutical products have led to an expansion of the market. However, compared with the compounds currently avail- able, there is still untapped market potential in terms of forms of therapy for improving the chances of survival and reducing side effects. Despite significantly higher survival rates, the disease is seldom curable, and the majority of patients experience a relapse. Therefore, alternative treatments, such as those that target the CD38 surface antigen, are particularly in high demand. Next to MOR202, there are two other clinical development programs tar- geting CD38 in the industry. INFL AMMATORY AND AUTOIMMUNE DISE ASES Chronic inflammatory and autoimmune diseases affecting mil- lions of patients worldwide, pose considerable social and economic burdens. The IMS Institute for Healthcare Informatics is forecast- ing a world market for the treatment of autoimmune diseases of US$ 33 to US$ 36 billion in the year 2016. MorphoSys’s antibody program, MOR103, is targeted against the GM-CSF* (granulocyte macrophage colony-stimulating factor) tar- get molecule, a central factor in the emergence of inflammatory disease, such as rheumatoid arthritis and multiple sclerosis* (MS). In 2013, MorphoSys brought this project into a lucrative partner- ship with GlaxoSmithKline (GSK). MorphoSys will complete the ongoing phase 1b trial in MS in the first half of 2014. GSK will take over further development of MOR103. The RA market offers significant commercial opportunities; bio- technologically-produced drugs already account for more than 80 % of total revenues. The overall market is growing steadily and Datamonitor expects the market to reach US$ 18 billion by the year 2020. On the MS market, biotechnologically-produced drugs today al- ready represent a majority of the disease-modified treatment methods – both in terms of revenues and according to the number of approved therapies. Differences in relation to the development and severity of multiple sclerosis lead to the disease being largely segmented into several subtypes, including the relapsing-remit- ting form of MS as well as primary and secondary progressive forms. This segmentation opens up a variety of access routes to markets for new therapeutic compounds. Currently, the best-sell- ing MS drugs have combined annual revenue of approximately US$ 11 billion and the market is expected to continue to grow. MOR103 has the potential to become the first member of the anti- GM-CSF antibody class of drugs. Comparable drugs currently in development also target the GM-CSF molecule or its receptor. New mechanisms of action for treating inflammatory diseases such as rheumatoid arthritis, osteoporosis, and osteoarthritis are being examined in cooperation with the Belgian Galapagos NV. The aim is to develop new antibody therapies against these dis- eases. As part of the alliance, both partners will contribute their core technologies and expertise. Under the terms of the agree- ment, Galapagos and MorphoSys equally share the research and development costs as well as all future revenues. INFLUENCING FAC TORS Proper medical care for the public is the stated objective of many states and the need continues to grow for new forms of therapy in the face of demographic change. However, cost cutting could slow down the development of the industry. As part of their austerity measures, governments in Europe, in the United States, and in Asia have stepped up their controls in health care and the reim- bursement of drugs is examined very carefully. As already seen in the field of small molecule drugs, generic com- petition is now becoming an increasing challenge in the biotech- nology industry due to the expiry of patent protection for drugs. Nevertheless, the technical barriers to copying bioengineered drugs remain high. However, many drug manufacturers, particu- larly those from Europe and Asia, are now penetrating this market and increasing the competitive pressure on established biotech- nology companies. According to a study by the IMS Institute for Healthcare Informatics, the global market for biogenerics* will grow from US$ 693 million in 2011 to a range of US$ 4 billion to US$ 6 billion by the year 2016. *s e e G l o s s A r y pa g e 1 5 8 20 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment imp or tAn t AdvAnCes mAde By morphosy s in 2013 The following events had a decisive influence on the Company’s business development in 2013: In January 2013, MorphoSys completed the sale of AbD Serotec to Bio-Rad for a total consideration of close to € 53 million. The total amount includes the purchase price, compensation of € 5.3 million for the cash reserves of the AbD Serotec companies, and a license payment for the use of MorphoSys’s HuCAL technology in the market for research reagents and diagnostics. Transaction costs of €  1.8  million were incurred in the reporting year in connection with the sale of the AbD Serotec segment. As part of the divest- ment, a disposal profit after deduction of transactional costs of €  6.2  million was realized in 2013. Through this transaction, MorphoSys sharpened its focus on the therapeutic core business. In February 2013, MorphoSys and Heptares agreed to cooperate in the development of therapeutic antibodies against G-protein-cou- pled receptors (GPCRs). This cooperation will provide access to new target molecules for therapeutic antibodies based on the Ylanthia library. The phase 1/2a trial of the CD19 antibody MOR208 was finalized for the treatment of chronic lymphocytic leukemia (CLL). The final trial results showed an acceptable safety profile with an overall response rate of approximately 30 %. In the spring of 2013, MorphoSys began two phase 2 trials with the CD19 antibody MOR208 in the area of non-Hodgkin’s lymphoma (NHL) and in acute lymphoblastic B-cell leukemia (B-ALL). In June 2013, MorphoSys signed a global licensing agreement with GlaxoSmithKline for the compound MOR103. This contract pro- vides for secured and performance-related payments of up to € 445 million as well as tiered double-digit royalties on net sales. The program had completed a clinical phase 1b/2a trial in patients with mild-to-severe rheumatoid arthritis in the 2012 financial year. MorphoSys is committed to completing the ongoing phase 1b safety trial in multiple sclerosis with increasing dosages. There- after, GlaxoSmithKline will solely be responsible for the drug’s further development. Also in June 2013, MorphoSys signed a global development alli- ance with Celgene for the MOR202 compound. This agreement gives MorphoSys the opportunity to participate in the future value of the MOR202 program via co-development and promotion in Eu- rope. On 10 August 2013, the development cooperation with Cel- gene for MOR202 came into effect after receiving antitrust clear- ance. With the signing of the contract, Celgene acquired 797,150 new MorphoSys shares at a price of € 57.90 per share. By the end of 2013, Celgene held approximately 3 % of MorphoSys’s registered share capital. Additionally, in September 2013 a capital increase from authorized capital was carried out bringing gross proceeds of approximately € 84 million. Nearly 1.5 million new shares were issued to interna- tional institutional investors at a price of € 55.76 per share, which was the closing price of the day prior to the announcement. The proceeds shall be used to fund the clinical development of MOR208 and MOR202. It is also planned to use the funds to advance the development of other proprietary programs and to make potential acquisitions of businesses, technologies, or products that would meaningfully complement the business model and expand the portfolio. In October 2013, MorphoSys’s partner, Novartis, began a phase 2/3 clinical trial with the HuCAL-based antibody compound bimagrumab (BYM338) in the area of sporadic inclusion body myo- sitis. As a result, there are two partner programs in the final stage of clinical development that are based on MorphoSys’s core tech- nology. Detailed information on MorphoSys’s business development dur- ing the reporting year can be found in the sections titled “Re- search and Development” and “Business Development”. 21 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment proprie tAr y C l iniC Al produC t C AndidAt e s Compound mor103 HuCAL antibody directed against the cytokine GM-CSF (granulocyte-macro- phage colony-stimulating factor), a target molecule for a broad spectrum of anti-inflammatory therapies Characteristics • Aimed at both monocytes and macrophages • Extremely high binding affinity • Rapid onset of therapeutic effect Financing Worldwide licensing agreement with GSK • GSK is responsible for all further development and commercialization of MOR103 in all indications • Up-front payment to MorphoSys in the 3 mor202 HuCAL antibody directed against CD38, a target molecule for the treatment of multiple myeloma and certain types of leukemia • Binds to a unique epitope • Causes death of the cancer cells through cytotoxic effects • Preclinical* trials show synergistic effects with bortezomib and lenalidomide • Administered by two-hour infusion Co-development and co-promotion with Celgene • Both companies co-develop MOR202 worldwide, cost-sharing 2/3 Celgene, 1/3 MorphoSys amount of € 22.5 million in 2013 • Up-front payment in the amount of • Eligible to receive additional milestone payments from GSK amounting to up to € 423 million as well as tiered double-digit royalties on net sales € 70.8 million, plus equity investment of € 46.2 million • Milestone-related payments of up to € 511 million • Marketing in Europe results in 50:50 division of earnings, outside of this market, MorphoSys receives tiered double-digit royalties on net sales Current Status • Successfully completed phase 1b/2a • Ongoing phase 1/2a trial in patients mor208 Humanized, Fc-optimized anti-CD19 anti body for the treatment of malignant diseases of B cells, in-licensed in 2010 • Fc optimization triggers a significantly increased immune response using anti- body-dependent cellular cytotoxicity (ADCC) • Favorable schedule of administration • Uncomplicated production Completely under MorphoSys’s control • Funding currently entirely through MorphoSys Start of 3 new phase 2 clinical trials in 2013: • ALL trials in 30 patients, data in RA patients • Phase 1b trial in multiple sclerosis is ongoing, data expected for H1/2014 *s e e G l o s s A r y pa g e 1 5 8 with multiple myeloma, data expected in H2/2014 • Further studies, including combination expected in H2/2014 studies, being planned • NHL trial with four subtypes • Combination study of lenalidomide in CLL, performed independently of MorphoSys (IST) 22 compAny ovErviEw orgAnizAt ionAl struc turE of thE morphosys group p h a s e 1 p h a s e 2 p h a s e 3 Abbildung 1 1 m o r p hosys Ag s E g m Ents i E l d s of usE f Sale of substantially all of the AbD Serotec operating segment with a closing date of 10 Jan. 2013 s e g m e n t : a b d s e r o t e c f i e l d o f u s e : r e s e a r c h a n d d i a g n o s t i c s s e g m e n t s : pa r t n e r e d d i s c o v e r y p r o p r i e ta r y d e v e l o p m e n t f i e l d s o f u s e : t h e r a p e u t i c a n t i b o d i e s rEvEnuEs of thE morphosys group by sEgmEnt (in million €) t o ta l r e v e n u e a b d s e r o t e c pa r t n e r e d d i s c o v e r y p r o p r i e ta r y d e v e l o p m e n t 2 Abbildung 2 81.0 87.0 82.1* 51.9* 78.0* 61.7 19.3 1.0 2009 66.3 20.2 1.8 2010 * Group revenues from continuing operations 79.3 2.4 2011 44.7 7.0 2012 51.0 26.9 2013 cl inicAl studiEs wi th morphosys Ant ibodiEs (31 December) 24 16 11 12 11 4 4 6 6 1 3 2009 2010 2011 2012 2013 totAl mArKE t for Ant ibodiEs of propriE tAry progrAms* sAlEs potEnt iAl 5 g l o b a l s a l e s o f m o n o c l o n a l a n t i b o d i e s a p p r o v e d t h e r a p e u t i c a n t i b o d i e s o n t h e m a r k e t 3.2 billion us$ (in billion US$) number 4 31 53.9 41 67.2 36 61.7 27 49.7 24 45.2 120 100 80 60 40 20 2.1 billion us$ 1.4 billion us$ 790 million us$ 350 million us$ 250 million us$ 2009 2010 2011 2012 2013* Rheumatoid Arthritis Multiple Myeloma NHL CLL ALL mor103 mor202 mor208 mor208 mor208 Source: Datamonitor * Estimate Source: Defi ned Health * Information is based on an external study commissioned by MorphoSys, using publicly available information; the numbers given do not represent company guidance. 3 8 48 40 32 24 16 8 orgAnizAt ionAl struc turE of thE morphosys group p h a s e 1 p h a s e 2 p h a s e 3 23 cl inicAl studiEs wi th morphosys Ant ibodiEs (31 December) 3 11 12 11 8 4 4 6 24 16 6 1 3 2009 2010 2011 2012 2013 Abbildung 3 totAl mArKE t for Ant ibodiEs sAlEs potEnt iAl of propriE tAry progrAms* 4 5 g l o b a l s a l e s o f m o n o c l o n a l a n t i b o d i e s a p p r o v e d t h e r a p e u t i c a n t i b o d i e s o n t h e m a r k e t 3.2 billion us$ (in billion US$) number 120 100 80 60 40 20 41 67.2 36 61.7 31 53.9 27 49.7 24 45.2 48 40 32 24 16 8 2.1 billion us$ 1.4 billion us$ 790 million us$ 350 million us$ 250 million us$ Abbildung 4 Abbildung 5 2009 2010 2011 2012 2013* Rheumatoid Arthritis Multiple Myeloma NHL CLL ALL mor103 mor202 mor208 mor208 mor208 Source: Datamonitor * Estimate Source: Defi ned Health * Information is based on an external study commissioned by MorphoSys, using publicly available information; the numbers given do not represent company guidance. compAny ovErviEw m o r p hosys Ag s E g m Ents i E l d s of usE f 1 2 Sale of substantially all of the AbD Serotec operating segment with a closing date of 10 Jan. 2013 s e g m e n t : a b d s e r o t e c f i e l d o f u s e : r e s e a r c h a n d d i a g n o s t i c s s e g m e n t s : pa r t n e r e d d i s c o v e r y p r o p r i e ta r y d e v e l o p m e n t f i e l d s o f u s e : t h e r a p e u t i c a n t i b o d i e s t o ta l r e v e n u e a b d s e r o t e c pa r t n e r e d d i s c o v e r y p r o p r i e ta r y d e v e l o p m e n t 61.7 19.3 1.0 2009 66.3 20.2 1.8 2010 * Group revenues from continuing operations rEvEnuEs of thE morphosys group by sEgmEnt (in million €) 81.0 87.0 82.1* 51.9* 78.0* 79.3 2.4 2011 44.7 7.0 2012 51.0 26.9 2013 24 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment strategy and performance management s t rAt eGy Based on its high-performance technologies, MorphoSys develops innovative drug candidates, whereby its focus is on antibody- based compounds. Revenues are generated in partnerships with pharmaceutical and biotechnology companies to create a stable financial base and to develop proprietary drug candidates. This business model promotes the steady expansion of the product pipe- line and provides long-term value growth to the Company’s share- holders. The Partnered Discovery segment develops optimized therapeutic antibodies for partners in the pharmaceutical industry. With 75 individual antibodies in partnered programs at the end of the 2013 financial year, MorphoSys has one of the broadest antibody pipe- lines in the industry. The contractually agreed payments that re- sult include licenses for technologies and funded research services as well as performance-based milestone payments and royalties on product sales. Cash flows that are generated in this manner can be reinvested in the Proprietary Development segment. The devel- opment of proprietary antibody programs is based on the same technology platform. The compounds in this segment, however, are initially developed in-house. Only in the course of the clinical phase are these compounds either out-licensed to a pharmaceuti- cal or biotech company for further development and commercial- ization, or brought into a cooperation with a partner (co-develop- ment). Under certain conditions, individual projects can also be developed in-house for an extended period of time; possibly even up to the point where they are marketable. MorphoSys’s corporate strategy is largely dependent on the Com- pany’s innovative technologies. The antibody platforms serve both as a generator of collaborations with pharmaceutical and biotech- nology companies, as well as the basis for successful proprietary developments. The growth drivers are mainly HuCAL – the most successful antibody library in the pharmaceutical industry to date – and the follow-up platform Ylanthia, which is currently the largest known antibody library in Fab format. With regard to future business development, MorphoSys monitors the international biotechnology industry very closely to ensure sustainable growth via attractive acquisitions and in-licensing. Cash reserves available at the end of 2013 are allocated for invest- ments in proprietary research and development, as well as for stra- tegic transactions that may strengthen MorphoSys’s technology base and its therapeutic pipeline. The stated objective is to further increase the enterprise value while maintaining financial disci- pline and stringent cost control through significant investments in the Company’s proprietary development activities. perf ormAnCe mAnAGemen t MorphoSys uses both financial and non-financial indicators to achieve sustainable business growth and enhance value for its shareholders. These indicators help monitor the success of strate- gic decisions in daily operations and to take appropriate counter- measures in a timely manner when necessary. FINANCIAL PERFORMANCE INDICATORS The financial indicators used to evaluate the Company’s operating performance are mainly key ratios such as revenue and profit from operations. Performance is measured on a monthly basis and bud- get planning for the current financial year is reviewed and up- dated quarterly for all segments. Additionally, a medium-term budget is prepared annually that covers the subsequent three years. Detailed cost analyses are carried out on an ongoing basis. This is the basis used by the Company to monitor its adherence to financial targets and conduct comparisons to previous periods. Selling, general, and administrative expenses (S, G&A) as well as research and development (R&D) expenses are monitored partic- ularly closely. MorphoSys’s business performance is influenced by factors such as milestone and license payments, research and development ex- penses, operating cash flows, liquidity, and working capital. These indicators are also evaluated and compared on a regular basis, whereby the main focus is on cash management, the impact of cur- rency effects, and the attractive investment opportunities that present themselves. The net present values of investments are de- termined using discounted cash flow models*. *s e e G l o s s A r y pa g e 1 5 8 NON - FINANCIAL PERFORMANCE INDICATORS In order to illustrate the full scope of the Company’s value chain, non-financial performance indicators and financial-related consid- erations are treated as equal components; for example the prog- ress of the product pipeline, the management of partnerships, or employee-related key ratios (staff turnover rate, length of service, workforce absence rates, etc.). s e e f i G u r e s 8 –12 , e m p l o y e e f i g u r e s at a g l a n c e pa g e s 3 6 t o 3 7 The following presentation of non-financial performance indica- tors is enhanced and elaborated by the explanations found in the Sustainability Report (pp. 50 to 55) with the appropriate refer- ences made to the related sections. 25 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment devel opmen t of f inAnC iAl perf ormAnC e indiC At ors 4 in million € 2013 2012 2011 2010 2009 MorphoSyS G roup Revenues from continuing operations1 EBIT (Earnings before interest and taxes) from continuing operations 2 partnered diSc overy Segment revenues Segment result proprie tary de velopMent Segment revenues Segment result abd Serotec Segment revenues Segment result 78.0 9.9 51.0 25.4 26.9 (0.5) 0.6 0.1 51.9 2.4 44.7 23.0 7.0 (11.0) 18.0 0.3 82.1 9.8 79.3 55.7 2.4 (32.2) 19.3 0.9 87.0 9.8 66.3 42.7 1.8 (24.5) 20.2 1.2 81.0 11.4 61.7 39.6 1.0 (18.3) 19.3 1.0 1 Revenues of discontinued operations 2013: € 0.6 million (2012: € 17.7 million; 2011: € 18.7 million); 2009 through 2010: total Group revenues 2 2009 through 2010: profit from operations MorphoSys’s ambition is to develop world-class antibody technolo- gies and maintain its leading position in the market for therapeu- tics by virtue of its broad product pipeline. To achieve this goal, the Company’s strategy is directed at the steady development of its product pipeline, both in terms of the number of therapeutic anti- bodies as well as in terms of their quality and maturity. Since suc- cessful products are based on world-class technologies, the prog- ress of the technological development is also a key performance indicator. For more information on R&D at the MorphoSys Group, please refer to the section titled “Research and Development” (pp. 29 to 31). In addition to the quality of the research and development work, the professional management of the partnerships also stands at the center of our success. Next to new contracts, this includes the strategic development of existing alliances. For more information on our partnered projects, please refer to the section titled “Re- search and Development with Partners” (p. 30). Non-financial performance indicators that are also crucial for sus- tainable corporate success: Well-trained and dedicated employees are the prerequisites for long-term success in an R&D driven industry such as biotech- nology. The Company can only secure and expand its competitive edge by employing a performance-oriented and forward-looking human resources strategy. Therefore, human resources manage- ment plays a key strategic role. The aim is to create enthusiasm for MorphoSys among promising talents and bind key performers to the Company in addition to continuously and systematically train- ing the employees. A sign of the personnel management’s success in recent years is MorphoSys’s highly-qualified and experienced workforce. Information on personnel management at MorphoSys, may be found under the section titled “Human Resources” (pp. 35 to 37) and in our Sustainability Report (pp. 54 to 55). Responsible behavior is a hallmark of MorphoSys’s corporate gov- ernance. It is crucial to always observe strict ecological and social principles. For this reason, all processes and products are tested in terms of their impact on environmental protection and occupa- tional safety. Equally essential to a progressive business strategy is rigorous quality assurance. This ensures that both our own high quality standards are met as well as those of our partners and customers. Particular attention is paid to the quality requirements in clinical trials. Having the highest quality and safety standards ensures that MorphoSys always meets these requirements in a flawless manner – a critical success factor for sustainable business success. Further details may be found in the Sustainability Report (p. 50 to 55). 26 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment sustAinABle development of key performAnCe indiCAtors (sd-kpis) At morphosys (3 1 dEcEmbEr) 5 perforMance in proprie tary reSe arch & de velopMent1 (nuMber of individual antibodieS) Programs in Discovery Programs in Preclinic Programs in Phase I Programs in Phase II total perforMance in partnered pro G r aMS1 (nuMber of individual antibodieS) Programs in Discovery Programs in Preclinic Programs in Phase I Programs in Phase II Programs in Phase III total r&d e xpenSeS ac c ordinG to SeG Ment (in Million € ) Partnered Discovery Proprietary Development Technology Development total 2013 2012 2011 2010 2009 3 0 1 2 6 37 22 6 8 2 75 17.5 27.5 4.2 49.2 2 0 1 2 5 34 20 8 6 1 69 16.0 18.1 3.6 37.7 2 0 2 1 5 30 24 9 6 0 69 19.1 33.9 2.9 55.9 5 1 1 1 8 32 20 10 4 0 66 18.9 25.9 2.1 46.9 3 1 0 1 5 32 27 4 2 0 65 19.2 19.1 0.7 39 1 The method of counting proprietary and partnered programs has been adapted compared to the 2012 Annual Report: Individual antibodies are counted, regardless of the number of indications for which they are developed. Professional procurement and supply management ensures a con- sistent level of high quality of goods, consultancy, and other services at the best price/performance ratio for the Company. Established bidding contests and rating processes facilitate the evaluation of products and services. Suitable guidelines ensure that best-practice solutions are taken into account in procurement processes group-wide. For more information on purchasing and procurement management, please refer to our Sustainability Re- port (p. 52). LE ADING INDICATORS MorphoSys monitors leading indicators relating to the macroeco- nomic environment, the industry, and the Company itself on a monthly basis. On a company level, economic data on the progress of individual programs is gathered for the therapeutic segments. For macroeconomic leading indicators, MorphoSys relies on gen- eral market data from external financial studies, which is reviewed for industry transactions, changes in the legal environment, and the availability of research funds. For each active collaboration, a joint steering committee meets regularly to update and monitor the programs’ progress and the emergence of any potential milestone payments. As part of the al- liance management, this continual review allows early interven- tion in cases of potential failures, and provides information on ex- pected milestone payments at a very early stage. In the case of inactive collaborations, a report is provided by the partner which helps MorphoSys track the status of the ongoing therapeutic pro- grams. 27 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment In the area of business development, market analyses serve as early indicators and help determine the market’s demand for new technologies. Permanent monitoring of the market allows MorphoSys to react to trends and demands at an early stage and initiate its own new activities and partnerships. Prior to the development of a therapeutic product, a Target Product Profile (TPP)* is created. This procedure provides an early indica- tion of the properties a product must attain in order to be success- fully placed on the market. Key questions are also clarified within this process, such as the level of efficacy to be achieved, whether an improvement in the safety profile is at the heart of development, and if the focus should be on a modified administration of the drug candidate. A detailed description of the possible positioning in the market and the relevant patient groups is also part of the TPP. Permanent monitoring of the criteria and their fulfillment ensures that, in the course of product development, the most important fac- tors are always considered and that changes can be responded to in a timely manner. developments in the business Environment The effects of the debt crisis began to ease gradually in the euro- zone. To avoid stifling the economic recovery from the start, the European Central Bank (ECB) maintained its low interest rate strategy. The key interest rate remained at a record low of 0.25 %. Nevertheless, the economy in the euro area has only seen a slow recovery since the recession ended in the spring of 2013. The unemployment rate continued to rise and was recently near 12 %. The Organisation for Economic Co-operation and Development (OECD) estimates that in 2013, gross domestic product (GDP*) in the eurozone contracted again by around 0.4 %. One negative eco- nomic factor came from Cyprus, where the extensively discussed austerity plan envisaged making even small savers liable. The fear of other EU states adopting similar measures led to increased un- certainty and put pressure on the stock markets. In April, Portu- gal’s Constitutional Court also declared key parts of the austerity budget as unconstitutional. The German economy, however, was able to again record a slight year-on-year rise in GDP growth of about 0.5 %. This growth was due to robust private consumption in Germany. Additionally, positive signals came from strong German export data. In October, the sale of goods abroad worth € 99.1 bil- lion even set a new record. *s e e G l o s s A r y pa g e 1 5 8 In 2013, the US experienced restrained economic growth and, according to OECD estimates, GDP grew 1.7 %. Federal budget con- solidation and a sluggish business and consumer climate stag- nated growth and the budget crisis intensified even further over the course of the 2013 financial year. The temporary compromise found among Democrats and Republicans in late 2012 did not result in a final agreement and the automatic budget cuts, the so- called fiscal cliff, occurred in March 2013. The situation escalated during the year and resulted in a day-long shutdown of the public administration (government shutdown) in early October, which brought public life to a standstill. However, towards year’s end, the parties could at least temporarily avoid the next looming budget crisis by agreeing to a minimum compromise. News from Asia elicited expectations of a further ease in monetary policy. However, a sharp rise in interest rates on the Chinese inter- banking market sparked temporary worries among market par- ticipants that the recovering economy may be seeing renewed weakness and thus impact the momentum of the global economy in the months to come. Some observers saw this as a sign of trou- ble in the Chinese financial sector. Consequently, the stability of some of the banks was critically questioned. The OECD expects Japan to report GDP growth of 1.8 % in 2013 and expects strong GDP growth in China of 7.7 %. The development of the global economy does not usually have an immediate effect on the business development of MorphoSys. Dur- ing the period under review, had the US budget crisis and the forced leave of absence of the US Federal Administration escalated further, it may have had a limited impact on MorphoSys’s business development. Such events could cause delays in the work of the US Food and Drug Administration (FDA) as well as delays at the re- search centers of the National Institutes of Health (NIH), which would also ultimately affect the processes of drug development projects. However, there was no evidence that the above caused a noticeable change in MorphoSys’s business performance in 2013. CurrenC y devel opmen t s Despite weak economic data from the eurozone, the common cur- rency demonstrated excellent performance in 2013. The euro expe- rienced strong growth – particularly in the second half of the year – and not only against the US dollar. At only € 0.72 per dollar in October 2013, the US currency traded at its lowest level in over two years. At year’s end, trading activity on international financial markets was marked by solidifying hopes of leading central banks continuing to provide ample liquidity. 28 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment The interest rate decision by the ECB and positive economic data from the United Kingdom in 2013 were responsible for ensuring that the British pound could gain some ground against the euro. Changes in these three currencies affect the costs and revenues of MorphoSys although to a lesser extent than in previous years fol- lowing the disposal of AbD Serotec. In 2013, MorphoSys predomi- nantly accounts in euro. A detailed description of the currency impact in the course of 2013 may be found in the financial analysis on page 38. devel opmen t s in t he phArmACeu t iC Al And Bio t eChnol oGy indus t ry According to estimates by the US market research institute, IMS Institute for Healthcare Informatics, the pharmaceutical sector achieved revenues of approximately US$ 830  billion worldwide last year and is expected to grow to over US$ 1 trillion in 2017. More than two-thirds of this amount are derived from the pharma- ceutical industry in the eight largest markets: the US, Germany, France, Italy, the UK, Spain, Japan, and China. The US market re- mained the largest single pharmaceutical market in 2013. The emerging countries are considered to be the decisive growth drivers. Although per capita expenditure on drugs is still rela- tively low, incomes are growing and health insurance systems were or are expected to be implemented. The so-called pharmerg- ing markets, which include China, India, Brazil, and Turkey, are expected to comprise about two thirds of total revenue growth by 2017 and represent approximately 35 % of the global pharmaceu- tical market. According to IMS, the Chinese market alone is ex- pected to double to a range of US$ 160 – 190  billion by the year 2017. The pharmaceutical industry continues to see significant chal- lenges due to the expiry of patent protection for blockbuster prod- ucts and from the competition presented by generics – compound copies of the original drugs. The term “patent cliff” describes the closely spaced patent expiration dates for pharmaceutical block- busters in the years 2009 to 2015 and their impact on the pharma- ceutical industry. Whereas in the past, competition from generics mainly concerned chemically-produced drugs, generic versions of biopharmaceuticals – so-called biosimilars – are also finding their way into the future markets. Due to the complexity of biopharma- ceuticals, including antibodies, their barriers to market entry con- tinue to be substantially higher than those for generic versions of chemically-produced drugs, due in large part to regulatory ap- proval requirements. This is reflected in the pricing of biosimilars, which have significantly lower price discounts. According to the National Venture Capital Association and Price- waterhouseCoopers, venture capital investments – the key source of capital for privately owned companies and start-ups – grew 8 % in the US life sciences sector* and amounted to US$ 4.5 billion. Europe was not able to join this trend according to Dow Jones Ven- tureSource. *s e e G l o s s A r y pa g e 1 5 8 devel opmen t s in t he An t iBod y indus t ry In the USA, the compound Kadcyla® (trastuzumab emtansine) was approved in the first quarter of 2013 as a new antibody drug con- jugate for the treatment of HER2-positive metastatic breast cancer. In the fourth quarter of 2013, the FDA approved Gazyva® (obinutu- zumab), which is an antibody developed for the treatment of pa- tients with previously untreated chronic lymphocytic leukemia (CLL). Both drugs are marketed by the Roche pharmaceutical com- pany. The compound Inflectra®, a generic drug of the compound Remi- cade® (infliximab), became the first biogenerically produced mono- clonal antibody to receive regulatory approval in Europe. Inflectra was approved for the treatment of inflammatory diseases such as rheumatoid arthritis and psoriasis. In terms of research results, therapeutic antibodies were amongst the approaches highlighted at ASCO 2013, the most important con- ference in the field of cancer research. The antibodies nivolumab and lambrolizumab, both directed against the target molecule PD-1, which regulates the immune system’s ability to fight cancer, attracted particular attention due to positive clinical data. In terms of licensing agreements, the contracts concluded by MorphoSys with GlaxoSmithKline and Celgene counted among the most extensive collaborations across the entire industry in the 2013 business year. Furthermore, the pharmaceutical companies Bayer, Pfizer, and Astellas also signed large collaboration agree- ments, geared more toward immunoconjugates, with the biotech companies Seattle Genetics, Cytomyx, and Ambryx. In the first quarter of 2013, the biotechnology company Biogen Idec had an- nounced it was purchasing all of the rights to the multiple sclerosis antibody Tysabri from its development partner Elan Corp. Biogen paid Elan US$ 3.25 billion for these rights. In terms of acquisitions, the purchase of Onyx Pharmaceuticals Inc. for approximately US$ 10 billion by biotechnology giant Amgen, was the most relevant transaction in the industry during the re- porting year. Onyx specializes in the development of anticancer drugs and is involved in the treatment of multiple myeloma with 29 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment the compound Kyprolis® (carfilzomib). Through its subsidiary Medimmune, the British pharmaceutical company AstraZeneca acquired the biotech company Spirogen for an initial US$ 200 mil- lion and further performance-related payments of up to US$ 240 million. Spirogen specializes in cancer antibodies. In August 2013, the FDA granted breakthrough-therapy designa- tion to the HuCAL antibody developed by Novartis, bimagrumab (formerly: BYM338). This may result in MorphoSys receiving roy- alties from product sales earlier than expected. reGul At ory environmen t The healthcare sector is highly regulated in terms of pricing, reim- bursement, and regulatory approval. In 2013, pressure from health care systems and reimbursers on the pharmaceutical industry re- mained high to sumbit drugs for regulatory approval that show evidence of providing significant additional benefits. From a posi- tive point of view, these challenges the pharmaceutical companies are facing can be considered beneficial in terms of the willingness to innovate and take on more risk. In the 2013 financial year, the US supervisory and regulatory au- thority (FDA) granted approval for 27 new drugs, which was far less than in the previous year. In 2013, the FDA introduced a new and greatly accelerated approval process, the so-called break- through-therapy designation. This status allows compounds with significant medical potential a quicker pathway to regulatory ap- proval and allows closer cooperation with the authorities, which holds out the prospect for faster approval. By the end of 2013, the FDA had awarded this status to 37 preparations. Among them were five therapeutic antibodies, one of which was based on anti- body technology from MorphoSys. research and development MorphoSys is a specialist in innovative products and technologies in the field of drug development. Therefore, its long-term economic success is largely based on the successful work carried out in re- search and development. MorphoSys’s technology platforms are continually being improved and expanded with additional mod- ules. Additionally, MorphoSys conducts research primarily in the areas of cancer and inflammatory diseases for proprietary drug candidates, whose properties must be studied in very elaborate, and in some cases, multi-year clinical trials. As a research-driven company, MorphoSys is committed to con- serving resources and ensuring a sustainable business through optimized processes in laboratory operation. More information on this subject may be found in the Sustainability Report starting on page 50. MorphoSys continuously invests in the improvement of laboratory equipment to maintain its long-term competitiveness. The largest investments in 2013 may be found in the following table: CApi tAl expendi ture on fixed Asset s in 2013 ( sEl Ec t ion of mA j or invE s t mEn t s ) 6 in 000’s € Enterprise Resource Planning (ERP) Software1 Corporate Performance Management (CPM) Software1 Flow cytometer (lab equipment) Autosampler (lab equipment) Micro plate reader (lab equipment) Light scattering detector (lab equipment) 1 Software solutions for improving corporate management and consolidation: ERP: Detailed control of business processes, CPM: Financial consolidation, budgeting, controlling 2013 359 230 160 136 91 80 30 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment pAr t nered disCovery In the course of the 2013 financial year, the number of distinct therapeutic antibodies1 based on MorphoSys technology, being developed by partners, rose to 75 (31 December 2012: 69 indi- vidual antibodies). Of those, currently 16 antibodies are in clinical development, 22 in pre-clinical development, and 37 are in the discovery phase. In view of the progress of the projects, a new phase 1 investiga- tional drug, three projects that were progressing from phase 1 to phase 2 clinical development, and another program in a pivotal phase 2/3 trial, the year 2013 marks one of the most successful business years in the Company’s history. In May 2013, MorphoSys announced the start of a clinical trial with a new antibody com- pound as part of the cooperation with Novartis. The relevant fully human HuCAL antibody is being developed for therapeutic use in the field of ophthalmology. MorphoSys’s partner, Janssen, began with two new phase 2 clinical trials for HuCAL antibodies in the third quarter of 2013. A trial with the HuCAL antibody CNTO3157 was started with asthma patients, and a second trial began with the HuCAL antibody CNTO6785 in patients with active rheumatoid arthritis. In the fourth quarter of 2013, Novartis began phase 2/3 clinical trials with the HuCAL-based antibody compound bimagrumab (BYM338) against sporadic inclusion body myositis. In August 2013, Novartis received the FDA’s so-called breakthrough-therapy designation for this indication for bimagrumab. Using this status, the FDA internally prioritizes the most innovative and promising compounds. In addition, a Novartis project in phase 2 took a step forward; VAY736 is a HuCAL antibody against a skin disease caused by an autoimmune reaction. In addition to the sheer number of programs, the partners also expanded the clinical trial programs of existing active compounds. About 20 new clinical trials were initiated in the 2013 financial year. On 23 May 2013, Johnson & Johnson (J&J) organized a Pharmaceu- ticals Business Review. During the event, the first promising data was presented on guselkumab (CNTO1959), a HuCAL antibody specific to IL-23. The antibody was developed in collaboration with Janssen Biotechnology and is in phase 2 clinical trials for psoriasis and rheumatoid arthritis. The trials will be completed in 2014. On 30 January 2014, Roche announced the initiation of an addi- tional phase 3 trial for gantenerumab. The clinical trial is expected to start with patient recruitment in the second quarter of 2014, and will treat approximately 1,000 patients with a mild expression of Alzheimer’s disease with gantenerumab (compared to placebo) over a period of 100 weeks. This trial will run until March 2019. proprie tAry devel opmen t In the 2013 financial year, MorphoSys pursued three proprietary antibody compounds in clinical trials: • The MOR103 antibody in the areas of rheumatoid arthritis (RA) and multiple sclerosis (MS), directed against the GM-CSF target molecule; • the HuCAL antibody MOR202 in the field of multiple myeloma (MM), directed against the target molecule CD38; • MOR208, an Fc-engineered, humanized antibody in the field of malignant B-cell diseases and directed against the CD19 target molecule. MOR103 and MOR202 are already part of larger partnerships, while MOR208 is still developed entirely in-house. In the 2013 financial year, the ongoing clinical trials continued as planned for the preparations of MOR103 for the treatment of MS and MOR202 in the area of multiple myeloma. MorphoSys continues to be responsible for these trials as part of the partnerships with GlaxoSmithKline and Celgene. Final data for MOR208 was announced after completion of the clinical phase 1/2a trial in patients with relapsed or refractory chronic lymphocytic leukemia (CLL/SLL). First data on the safety and objective response, according to the original eight-week treat- ment plan, was presented at the annual meeting of the American Society of Hematology in December 2012. Due to the first signs of efficacy in this difficult to treat patient group, the study protocol was expanded to treat patients, who benefited from treatment, in the highest dosage group for a longer duration. Eight patients qualified for longer treatment and were given up to four additional cycles of treatment with MOR208, including an extended follow-up on the response to the treatment. The final study results, including the extended treatment arm, showed an overall response rate of 29.6 % (according to the criteria of the IWCLL* 2008) based on the total number of treated participants in the study (n = 27) – a dou- bling of the previously published response rate of 14.8 %. A de- tailed analysis of the trial results will be published in a scientific publication. *s e e G l o s s A r y pa g e 1 5 8 1 The method of counting proprietary and partnered programs has been adapted compared to the 2012 Annual Report: Individual antibodies are counted, regardless of the number of indications for which they are developed. 31 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment The patient dosage of MOR208 began in two new phase 2 clinical trials, in order to verify the compound’s potential for indications of non-Hodgkin’s lymphoma (NHL) and acute lymphoblastic leuke- mia (ALL). In addition, a so-called investigator-sponsored trial (IST) was started. This is a phase 2 clinical trial for the treatment of chronic lymphocytic leukemia, in which MOR208 is being tested in combination with the compound lenalidomide. ISTs are clinical trials, initiated by physicians of a research institute, in which the total responsibility (sponsor function) rests with the clinical cen- ter and not with a pharmaceutical company, MorphoSys in this case. With regard to projects at the preclinical development stage, MorphoSys decided to discontinue an early research program in the area of infectious diseases. The program launched in Septem- ber 2010 in conjunction with the British biopharmaceutical com- pany, Absynth Biologics, examined various antibodies to combat Staphylococcus aureus type pathogens. In February 2013, MorphoSys and British Heptares Therapeutics Ltd, a leader in the field of compound discovery against G-protein- coupled receptors (GPCRs), agreed to a collaboration for the devel- opment of novel therapeutic antibodies against membrane-bound GPCR proteins. GPCRs are crucial for a variety of biological pro- cesses and diseases. Under the terms of the agreement, Heptares will develop stabilized receptors as antigens for a set of GPCR tar- get molecules selected by MorphoSys. MorphoSys will then apply its Ylanthia antibody library to develop therapeutic compound candidates against these target molecules. MorphoSys has the right to sublicense partners’ access to these target molecules in combination with therapeutic antibody programs. Heptares will receive upfront payments and further research funding payments and participate in MorphoSys’s future revenues from related li- cense agreements. Heptares also chose to develop a therapeutic antibody against a GPCR target molecule based on MorphoSys’s Ylanthia library. In this context, MorphoSys is eligible to receive license fees, milestone payments, and royalties. Currently, MorphoSys is pursuing various programs which are in the early discovery phase. Included in these programs is the co- development program with Galapagos NV, as well as two programs which are in part being carried out in cooperation with external research institutions. business development During the past financial year, MorphoSys significantly strength- ened its pipeline in its two business segments Partnered Discov- ery and Proprietary Development. The contracts with GlaxoSmith- Kline and Celgene strengthened the Proprietary Development segment. The partnered pipeline matured further and now in- cludes numerous projects in advanced stages of clinical develop- ment. pAr t nered disCovery In 2013, MorphoSys’s partnered pipeline has matured signifi- cantly. Four of the five clinical advances achieved with partners in the 2013 financial year, were directly recognized in revenues as a result of linked milestone payments. The progress of the projects bimagrumab/BYM338 and NOV-7 (both of Novartis: start of a phase 2/3 trial for BYM338 and the start of a phase 1 trial for NOV-7) as well as CNTO 3157 and CNTO 6785 (both of Janssen, both start of phase 2 trials) triggered clinical milestone payments. The sum of the performance-based payments achieved during the fiscal year 2013 amounted to € 3.0 million and exceeded the previ- ous year’s level. The phase 2 start of the VAY736 project was not linked to milestone payments. proprie tAry devel opmen t MorphoSys significantly strengthened its proprietary develop- ment portfolio during the 2013 financial year and won two part- nerships for the further development of its clinical portfolio. On 3 June 2013, MorphoSys announced a global agreement with GlaxoSmithKline (GSK) for the development and commercializa- tion of MOR103. MOR103 is a proprietary HuCAL antibody directed against the GM-CSF target molecule which completed a clinical phase 1b/2a trial in patients with mild to moderate rheumatoid arthritis. Under the terms of the agreement, GSK assumes respon- sibility for the entire development and commercialization of MOR103. Also under the agreement, MorphoSys received an im- mediate upfront payment of €  22.5  million. Depending on the achievement of certain developmental stages, as well as regula- tory, commercial, and revenue-related milestones, MorphoSys is eligible to receive additional payments from GSK in the amount of up to € 423 million, as well as tiered double-digit royalties on net sales. The alliance with the US biotechnology company Celgene Corpora- tion for the MOR202 program announced in the second quarter of 2013 became effective on 10 August 2013 following the approval of the US antitrust agencies under the Hart-Scott-Rodino Act. MorphoSys received an upfront payment of € 70.8 million. Celgene also acquired 797,150 new MorphoSys shares at € 57.90 per share. This represents a premium of 5.0 % to the closing share price on 9 August 2013. Compared to the share price prior to the coopera- tion announcement on 26 June 2013, this is a premium of approxi- mately 53 %. Currently, Celgene holds about 3 % of MorphoSys’s registered share capital. 32 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment MorphoSys and Celgene will jointly drive the further development of MOR202 for the treatment of multiple myeloma and other indica- tions and share development costs in a ratio of 1/3 (MorphoSys) to 2/3 (Celgene). MorphoSys may receive additional development- related as well as regulatory and sales-related milestones as part of the cooperation. The Company has a 50 : 50 co-promote in Europe and gets tiered, double-digit royalties on net sales outside of Eu- rope. The total volume of the contract could reach up to € 628 mil- lion if all development-dependent, regulatory, and revenue-related milestones be achieved. The phase 1/2a trial in CLL for the MOR208 program was com- pleted in the 2013 financial year. MorphoSys’s partner Xencor was sponsor of this program. MorphoSys is now solely responsible for this program’s further development and commercialization. The phase 2 trials in acute lymphoblastic B-cell leukemia (B-ALL) and non-Hodgkin’s lymphoma (NHL) began in the second quarter of 2013 with patient recruitment, with MorphoSys as sponsor. The beginning of recruitment for the B-ALL indication triggered a milestone payment to Xencor. the morphosys share The extremely successful 2013 financial year for MorphoSys was also reflected in the development of the share price. In early Octo- ber 2013, the share penetrated the 60 euro level, reaching a twelve- year high. The shares received a particular boost from the an- nouncement of two collaborations for proprietary drug candidates: The signing of a global licensing agreement with GlaxoSmithKline for MOR103 in early June, and especially the strategic alliance with Celgene for MOR202, which was announced at the end of June, resulted in significant increases in the share price. By year end 2013, MorphoSys shares closed with a gain of 87 %. During the same period, the TecDAX rose 38 % and the NASDAQ Biotech Index rose 60 %. s t oCk mArke t devel opmen t Historically low interest rates boosted stock markets worldwide in 2013. Particularly in the US, the sentiment on the capital markets with regard to biotechnology companies was still very positive. During the year, 46 initial public offerings of biotech companies on the NASDAQ alone raised funds of approximately US$ 3.5 billion. This value has only been exceeded in the year 2000 when there was a total of 63 IPOs for almost US$ 6 billion. In addition to the US markets, the European stock market environment also bene- fited from well-filled development pipelines and various successful approvals in the industry. However, since the greatest interest in investing in biotechnology companies still resides in the US, MorphoSys significantly expanded its investor relations activities in the US market in 2013. l iQuidi t y And index memBership In 2013, the average daily trading volume of the MorphoSys share on all trading platforms more than tripled compared to the previ- ous year, increasing 354 % to € 6.9 million. This development can be attributed to an increase in both the share price and the num- ber of shares traded. In the TecDAX, the index of the 30 largest technology stocks on the Frankfurt Stock Exchange, the trading volume of the shares traded on average also increased by over 40 %. MorphoSys was able to continue to consolidate its position in the TecDAX* and improve its position at the end of 2013: Measured by market capitalization* MorphoSys took 7th place (year-end 2012: 12th place); based on trading volume, it held 11th place (year-end 2012: 14th place). *s e e G l o s s A r y pa g e 1 5 8 Common s t oCk The Company’s share capital increased in 2013 to 26,220,882 shares, € 26,220,882.00 respectively. The reason for this increase was the exercise of 551,438 stock options and convertible bonds as well as two capital increases from authorized capital: As part of the alliance for MOR202, Celgene acquired 797,150 new shares at a price of €  57.90 per share, which corresponded to a premium of 5.0 % to the closing share price on 9 August 2013. In September 2013, MorphoSys issued 1,514,066 new shares from authorized capital to international institutional investors at a price of € 55.76 per share. This share price corresponded to the closing price of the previous trading day, 18 September 2013. 33 17 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment perf ormAnC e of t he morpho s y s shAre in 2013 (1 jAnuAr y 2013 = 10 0 %) 6 m o r p h o s y s n a s d a q b i o t e c h n o l o g y i n d e x t e c d a x Abbildung 6 hiGhes t level +105.0 % 10/02/2013 puBl iCAt ion of license agreement with gsK for mor103 +26.6 % 06/03/2013 +45.2 % 06/27/2013 l oWes t level – 2.1 % 03/04/2013 puBl iCAt ion of strategic alliance with celgene for mor202 +24.2 % 06/26/2013 240 220 200 180 160 140 120 100 80 60 jAn feB mAr Apr mAy jun jul AuG sep oCt nov deC Comp Ari s on of t he morpho s y s shAre priC e devel opmen t Wi t h BenC hmArk indiC e s Be t Ween 2009 And 2013 (1 jAnuAr y 20 0 9 = 10 0 %) 7 m o r p h o s y s n a s d a q b i o t e c h n o l o g y i n d e x t e c d a x Abbildung 7 400 350 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 34 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment k e y dAtA f or t he morpho s y s shAre (A s of 31 dEc EmbEr of E A c h y E Ar ) 7 Total Stockholders’ Equity (in million €) Number of Shares Issued (number) Market Capitalization (in million €) Closing Price in € (Xetra) Average Daily Trading Volume (in million €)1 Average Daily Trading Volume (in % of Share Capital)1 2013 352.1 2012 202.0 2011 197.1 2010 185.9 2009 173.9 26,220,882 23,358,228 23,112,167 22,890,252 22,660,557 1,464 55.85 6.9 0.59 685 29.30 1.9 0.38 405 17.53 1.8 0.38 424 18.53 1.1 0.26 386 17.04 1.3 0.34 1 Figures from 2009 to 2011 only include trading on Xetra and German regional exchanges. MorphoSys issued stock options and non-interest bearing convert- ible bonds under its employee participation program until 2010. In 2011, this was changed to a performance share plan. The com- pany repurchases shares for this share plan. A detailed descrip- tion of this program can be found in the Corporate Governance Report included in this Annual Report (pp. 78 to 86). In April 2013, 449,999 convertible bonds and 61,600 performance shares were granted to the Management Board and the Senior Management Group under the third long-term incentive program (LTI plan). De- tailed information on this issue may be found in the Notes (see section 7). No further stock options were issued to the Manage- ment Board, members of the Senior Management Group, or the workforce during the reporting year. GroWinG Amoun t of in t ernAt ionAl inves t ors During the year, various voting right notifications were issued ac- cording to Sections 21, 25, or 26 of the German Securities Trading Act (WpHG). These were published on the MorphoSys website un- der the heading Media & Investors > Stock Information > Share- holder Structure. According to the definition given by the Deutsche Börse, 92.7 % of the shares of MorphoSys AG were in free float at the end of the re- porting year. The share of international investors has continued to increase. According to the latest voting rights announcement, Massachusetts Mutual Life Insurance (Oppenheimer Funds) is currently our largest single investor with a stake of about 7 %. Dur- ing the reporting year, Celgene Corporation acquired a sharehold- ing of approximately 3 % as part of the alliance for MOR202 (status as of 31 December 2013). MorphoSys was also able to increase the amount of international institutional investors through the issue of 1,514,066 new shares from authorized capital in September 2013. An overview over the current shareholder structure is also acces- sible on the Company’s website (Media & Investors > Stock Infor- mation > Shareholder Structure). AnnuAl GenerAl mee t inG On 4 June 2013, the Management and Supervisory Boards of MorphoSys AG welcomed shareholders to the Company’s 15th Annual General Meeting in Munich. The shareholders and prox- ies attending represented nearly 42 % of the common stock of MorphoSys AG. All six agenda items submitted for resolution were adopted by a clear majority. This year, the Annual General Meeting is scheduled for 23 May 2014 and will take place once again in Munich. inves t or rel At ions AC t ivi t ies In the 2013 financial year, MorphoSys further intensified its com- munication with the capital markets. The company presented at 26 international investor conferences and at a number of road- shows and individual meetings in Europe and the US. The greatest interest was registered in the US, where a large number of special- ized healthcare investors have their headquarters. At the publica- tion of annual, half-yearly, and quarterly results, telephone confer- ences were also held in which the Management Board reported on past and future business developments and answered questions from analysts and investors. 35 G r o u p m A n A G e m e n t r e p o r t Operations and Business Environment AnAly s t reCommendAt ions ( As of 31 dEc EmbEr 2013) Buy/overweight 8 Buy/Overweight; Hold; Sell; n/a = not available (no rating) 8 hold 2 sell 0 n/a 1 The main topics at the investor meetings, aside from the progress of the drug pipeline, were the recent partnerships for the proprie- tary programs and their development possibilities. At the end of the year, eleven analysts observed and evaluated MorphoSys’s share development (2012: ten analysts). More detailed information on the MorphoSys share, financial ra- tios, the Company’s strategic direction, as well as the latest devel- opments in the Group may be found on the Company’s website (“Media & Investors”). the Managing Board. The annual bonus is then linked exclusively to the achievement of corporate goals. Additionally, a newly intro- duced spot bonus promptly rewards (on the spot) the outstanding achievements of employees. The new compensation system took effect on 1 January 2014. In the Sustainability Report on page 50, you will find a detailed overview of the development of the workforce and MorphoSys’s activities with regard to long-term successful work in human re- sources. human resources Group heAdCoun t devel opmen t MorphoSys’s corporate success is based on its highly-trained staff and their creativity and motivation. As of 31 December 2013, there were 299 people employed at MorphoSys (31 December 20121: 421 employees), of which 118 hold a PhD degree (31 December 20121: 142). During 2013, the MorphoSys Group employed 290 people on average (20121: 422). s e e f i G u r e 8 , h e a d c o u n t o f t h e m o r p h o s y s g r o u p pa g e 3 6 A competitive and attractive remuneration system is a crucial fac- tor when competing for the best employees. In order to compete successfully as an employer, MorphoSys conducts an annual com- parison of its remuneration versus remuneration paid in the bio- technology industry and other comparable sectors. If necessary, the salary structure is adapted accordingly. In order to meet the requirements of a state-of-the-art compensation system in the fu- ture, MorphoSys decided to make an adjustment to its existing re- muneration system during the reporting year. This adjustment defers part of the variable remuneration in favor of fixed remu- neration which is valid for all employees except for the members of 1 Including employees of the AbD Serotec research and diagnostic segment. The sale of AbD Serotec was completed on 10 January 2013. Abbildung 8 36 EmployEE figurEs At A glAncE hEAdcount of thE morphosys group (31 December)* 8 EmployEEs by gEndEr 10 2013 totAl 36% Previous year:* 40 % mAl E (number) trainees f EmAl E (number) trainees 464 446 421* 404 299 2009 2010 2011 2012 2013 * 2009 to 2012 includes employees of research and diagnostic segment AbD Serotec, which was sold as of 10 Jan. 2013 (closing date); 2012: 135 AbD Serotec employees Executives Executives 6 Previous year:* 5 22 Previous year:* 22 64% Previous year:* 60 % 4 Previous year:* 5 39 Previous year:* 47 Empl o yEEs by sEgmEn t** pa r t n e r e d d i s c o v e r y p r o p r i e ta r y d e v e l o p m e n t a b d s e r o t e c u n a l l o c at e d 184 193 135 54 48 60 46 0 278 253 Empl o yEEs by f unc t ion** 143 46 e m p l o y e e s i n s , g & a e m p l o y e e s i n r & d 30 0 250 20 0 150 10 0 50 0 2012 2013 2012 2013 ** 2012 includes employees of research and diagnostic segment AbD Serotec, which was sold as of 10 Jan. 2013 (closing date) Abbildung 9 9 EmployEE AbsEncE rAtEs 4 d Ay s 3 d Ay s 2 d Ay s 1 d Ay 2.0 1.7 2.7 2.7 3.0 2009 2010 2011 2012 2013 Numbers refer only to sites located in Germany only. occupAt ionAl AccidEn ts In the reporting year the number of occupational accidents declined from 3 (2012) to 2 occupAt ionAl AccidEn ts * Including AbD Serotec t rAining of Empl o yEEs on codE of conduc t 100% of all employees have been trained on the Code of Conduct in 2012; additional training sessions in 2013 for all new employees. lAbor turnovEr rAtE (in %) (average duration in years) sEniorit y 11 6.98 5.81 5.07 5.39 12 6 5 4 3 2 1 0 2012 2013 2012 2013 EmployEE figurEs At A glAncE hEAdcount of thE morphosys group (31 December)* 8 30 0 250 20 0 150 10 0 50 0 464 446 421* 404 299 2009 2010 2011 2012 2013 * 2009 to 2012 includes employees of research and diagnostic segment AbD Serotec, which was sold as of 10 Jan. 2013 (closing date); 2012: 135 AbD Serotec employees 278 253 Empl o yEEs by f unc t ion** 184 193 135 143 54 48 60 46 46 0 e m p l o y e e s i n s , g & a e m p l o y e e s i n r & d 2012 2013 2012 2013 ** 2012 includes employees of research and diagnostic segment AbD Serotec, which was sold as of 10 Jan. 2013 (closing date) Empl o yEEs by sEgmEn t** pa r t n e r e d d i s c o v e r y p r o p r i e ta r y d e v e l o p m e n t a b d s e r o t e c u n a l l o c at e d EmployEE AbsEncE rAtEs 9 4 d Ay s 3 d Ay s 2 d Ay s 1 d Ay 2.0 1.7 2.7 2.7 3.0 2009 2010 2011 2012 2013 Numbers refer only to sites located in Germany only. occupAt ionAl AccidEn ts In the reporting year the number of occupational accidents declined from 3 (2012) to 2 occupAt ionAl AccidEn ts 37 EmployEEs by gEndEr 10 2013 totAl 36% Previous year:* 40 % mAl E (number) trainees f EmAl E (number) trainees 6 Previous year:* 5 Executives Executives 22 Previous year:* 22 64% Previous year:* 60 % Abbildung 10 4 Previous year:* 5 39 Previous year:* 47 * Including AbD Serotec t rAining of Empl o yEEs on codE of conduc t 100% of all employees have been trained on the Code of Conduct in 2012; additional training sessions in 2013 for all new employees. lAbor turnovEr rAtE (in %) sEniorit y (average duration in years) 11 12 Abbildung 11 Abbildung 12 6.98 5.81 5.07 5.39 6 5 4 3 2 1 0 2012 2013 2012 2013 38 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations Analysis of Net Assets, Financial Position, and Results of Operations At the end of 2012, MorphoSys announced the sale of substantially all of the AbD Serotec business to Bio-Rad Laboratories, Inc. (Bio- Rad). As of 31 December 2012, substantially all of the AbD Serotec operating segment represented a discontinued operation within the meaning of IFRS 5. The Partnered Discovery and Proprietary Development operating segments, along with the continuing op- erations of the AbD Serotec segment, were classified as continuing operations as of the balance sheet date of 31 December 2012. The closing of the transaction was dependent upon the fulfillment of certain conditions that were met on 10 January 2013 (closing date). Hence, substantially all of the AbD Serotec segment was sold as of this date. Therefore, the financial implications of the discontinued operations of AbD Serotec, owned by the MorphoSys Group until 10 January 2013, are explained below. As of 31 December 2013, the companies MorphoSys UK Ltd., Oxford, Great Britain, MorphoSys US, Inc., Raleigh, USA, and MorphoSys AbD GmbH, Düsseldorf, were no longer included in the MorphoSys Group’s scope of consolidation. revenues Compared to the previous year, Group revenues from continuing operations rose 50 % to € 78.0 million (2012: € 51.9 million). This increase was primarily attributed to the out-licensing of the MOR103 antibody program to GlaxoSmithKline, as well as to li- cense income in connection with the sale of the AbD Serotec seg- ment to Bio-Rad. As part of this sale, a non-exclusive license for the use of the HuCAL technology in the market for research re- agents and diagnostics was also transferred to Bio-Rad. The in- crease also resulted from the global agreement with Celgene Cor- poration in the co-development of the MOR202 cancer program and its joint commercialization (co-promotion) in Europe. From a geographical viewpoint, MorphoSys achieved 11 % or € 8.8 million of its commercial revenues with biotechnology and pharmaceutical companies and non-profit organizations head- quartered in North America, and 89 % or € 69.2 million with cus- tomers primarily located in Europe and Asia. In the comparable period of the previous year, these shares were 5 % and 95 %, re- spectively. s e e f i G u r e 13 , r e v e n u e o f t h e m o r p h o s y s g r o u p b y r e g i o n pa g e 4 8 pAr t nered disCovery And proprie tAry devel opmen t seGmen t s Revenues from the Partnered Discovery segment included €  48.0  million in funded research and licensing fees (2012: € 42.7 million) and € 3.0 million (2012: € 1.9 million) in success- based payments. Success-based payments amounted to 4 % (2012: 4 %) of the total revenues of the Partnered Discovery and Proprie- tary Development segments. Funded research and licensing fees grew overall due to the transfer of a non-exclusive license for the use of the HuCAL technology in the market for research reagents and diagnostics in the context of the sale of substantially all of the AbD Serotec segment to Bio-Rad. s e e f i G u r e d e v e l o p m e n t pa g e 4 8 14 , r e v e n u e s pa r t n e r e d d i s c o v e r y a n d p r o p r i e ta r y In 2013, the Proprietary Development segment achieved revenues of € 26.9 million (2012: € 7.0 million). In comparison to last year, this increase was mainly affected by the recognition of an upfront payment as part of the out-licensing of the MOR103 antibody pro- gram to GlaxoSmithKline, and by the pro-rated recognition of an upfront payment under the contract for the co-development of the MOR202 antibody program with Celgene. Revenues from funded research in this segment declined to € 0.5 million (2012: € 7.0 mil- lion), as the co-development activities with Novartis were termi- nated. Approximately 88 % of Group revenues were attributable to our customers Novartis, GlaxoSmithKline, and Bio-Rad (2012: 97 % with Novartis, Pfizer, and Roche). 39 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations Assuming the average foreign exchange rates of 2012, revenues of the Partnered Discovery and Proprietary Development segments would have amounted to € 78.1 million. operating Expenses In 2013, operating expenses increased 36 % to € 67.9 million (2012: € 49.8 million). The € 18.1 million increase is attributable to a rise in research and development expenses of 31 %, or € 11.5 million, to € 49.2 million, and the increase in selling, general, and adminis- trative expenses of 55 %, or € 6.7 million, to a total of € 18.8 million. Operating expenses rose not only in the Partnered Discovery seg- ment (2013: €  25.5  million; 2012: €  21.8  million) but also in the Proprietary Development segment (2013: €  27.5  million; 2012: € 18.1 million). Personnel expenses resulting from share-based payments are included in selling, general, and administrative expenses, as well as in research and development expenses. These amounted to € 5.1 million (2012: € 1.3 million) and represent a non-cash expen- diture. The rise is primarily due to an adjustment of the LTI pro- grams for the years 2011 and 2012, and to the new LTI and con- vertible bond programs which were both granted in Q2 2013. reseArCh And devel opmen t expenses In 2013, research and development expenses rose by € 11.5 mil- lion to € 49.2 million (2012: € 37.7 million). Higher costs for exter- nal laboratory services (2013: € 13.0 million; 2012: € 7.2 million) and higher personnel expenses (2013: €  21.2  million; 2012: € 17.9 million) were the main reasons. Research and development expenses also included impairment of licenses in the amount of € 0.7 million and impairment of property, plant, and equipment in the amount of € 0.5 million. s e e f i G u r e 16 , s e l e c t e d r & d e x p e n s e s pa g e 4 9 In 2013, the Company incurred expenses for proprietary product development of € 27.5 million (2012: € 18.1 million) and expenses for technology development of € 4.2 million (2012: € 3.6 million) (see the following Table 9). s e e f i G u r e 15 , d i s t r i b u t i o n o f r & d e x p e n s e s pa g e 4 9 di s t riBu t ion of r&d expense s 9 in million € 2013 2012 2011 2010 2009 R&D Expenses on behalf of Partners Proprietary Development Expenses Technology Development Expenses r&d total 17.5 27.5 4.2 49.2 16.0 18.1 3.6 37.7 19.1 33.9 2.9 55.9 18.9 25.9 2.1 46.9 19.2 19.1 0.7 39.0 40 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations sel l inG, GenerAl , And Admins t rAt ive expenses In comparison to the same period in the prior year, sales, general, and administrative expenses rose 55 %, or €  6.7  million, and amounted to € 18.8 million (2012: € 12.1 million), mainly as a re- sult of higher personnel expenses (2013: €  11.3  million; 2012: €  7.4  million), and expenses for third-party services (2013: € 4.1 million; 2012: € 2.2 million). Selling, general, and adminis- trative expenses also comprised an impairment of patents amount- ing to € 0.3 million. other income and Expenses Other income amounted to € 0.8 million (2012: € 0.4 million) and mainly consisted of service income from the support of Bio-Rad in the integration of the AbD Serotec business, as well as government grants. Other expenses of € 0.9 million (2012: € 0.1 million) were primarily composed of currency losses, impairments of receiv- ables and research grants which have to be repaid. taxes In 2013, continuing operations reported an income tax expense of € 3.3 million (2012: € 0.7 million) which is composed of current tax expenses of € 3.7 million and deferred tax income of € 0.4 million. profit for the year from continuing operations In 2013, continuing operations achieved a net profit for the period of € 7.4 million (2012: € 2.4 million). The resulting basic net profit per share in 2013 amounted to € 0.30 (2012: € 0.10). results from discontinued operations Ebit Earnings before interest and taxes (EBIT) from continuing opera- tions amounted to € 9.9 million compared to an EBIT of € 2.5 mil- lion in the previous year. By segment, EBIT from continuing opera- tions of the Partnered Discovery and Proprietary Development segments amounted to €  25.4  million (2012: €  23.0  million) and € -0.5 million (2012: € –11.0 million), respectively. The sale of substantially all of the AbD Serotec business to Bio-Rad was completed on 10 January 2013. Upon deconsolidation, a dis- posal gain of € 8.0 million was achieved. After deduction of trans- action costs, the disposal gain amounted to € 6.2 million. Net profit for the period from discontinued operations amounted to € 6.0 million (2012: € –0.4 million). The result from discontinued operations is comprised as follows. finance income and Expenses In the first ten days of 2013, discontinued operations generated revenues of € 0.6 million (2012: € 17.7 million). Finance income amounted to € 0.9 million (2012: € 0.7 million) and largely included realized gains from securities that were sold dur- ing the reporting period, as well as interest income. Finance ex- penses of € 0.1 million (2012: € 0.1 million) mainly resulted from bank fees, losses from currency hedging transactions, and inter- est expenses. Operating expenses totaled €  2.3  million (2012: €  18.1  million), including cost of goods sold in the amount of € 0.2 million (2012: €  6.2  million). Selling, general, and administrative expenses of € 2.1 million (2012: € 10.0 million) included transaction costs of € 1.8 million (2012: € 0.5 million) related to the sale of the AbD Serotec business. 41 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations re sult of di s Con t inued operAt ions 10 in 000’s € Revenues Cost of Goods Sold Research and Development Selling, General and Administrative Total Operating Expenses Other Income/(Expenses) Earnings before Interest and Taxes (EBIT) Finance Income/(Expenses) Other Income from Sale of Assets and Liabilities of Disposal Group Classified as Held for Sale Profit before Taxes Income Tax (Expenses)/Income from Discontinued Operations Income Tax Expenses in connection with the Sale of Assets and Liabilities of the Disposal Group Classified as Held for Sale Profit/(Loss) for the Year from Discontinued Operations 1 Comprises the period from 1 January to 10 January 2013 20131 2012 603 158 6 2,101 2,265 10 (1,652) (5) 8,001 6,344 (35) (358) 5,951 17,690 6,238 1,845 10,010 18,093 (153) (556) (85) 0 (641) 217 0 (424) The significant decrease in revenues and operating expenses in comparison to the previous year was caused by the MorphoSys Group’s disposal of substantially all of the AbD Serotec segment on 10 January 2013. consolidated net profit/loss for the period The discontinued operations of the AbD Serotec segment gener- ated EBIT of € –1.7 million in 2013 (2012: € –0.6 million). In 2013, continuing operations achieved a net profit for the period of € 13.3 million (2012: € 1.9 million). The resulting basic net profit per share in 2013 amounted to € 0.54 (2012: € 0.08). Profit before taxes amounted to €  6.3  million (2012: €  –0.6  mil- lion). In 2013, income tax expenses amounted to €  0.4  million (2102: income of € 0.2 million). This amount included income tax expenses of € 0.4 million related to the disposal gain from the dis- continued operations. financial position prinC ipl es of f inAnC iAl mAnAGemen t At MorphoSys, the primary objective of financial management is to provide sufficient liquidity reserves for industry-specific fluctua- tions and for the continued growth of the Company at all times. The main sources for this are the operational business activities of the various parts of the Company and the resulting cash flows. Scenario projections and cash flow projections are used to deter- mine the liquidity requirement. 42 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations multiple-year overview – income statement in million € Revenues Cost of Goods Sold Gross Profit Research and Development Expenses Selling, General and Administrative Expenses Other Income/Expenses2 EBIT2,3 Finance Income/Expenses2 Income Tax Expenses Profit for the Year from Continuing Operations Profit/(Loss) for the Year from Discontinued Operations1 Consolidated Net Profits 11 20131 20121 20111 2010 2009 78.0 0 78.0 49.2 18.8 (0.1) 9.9 0.8 (3.3) 7.4 6.0 13.3 51.9 0 51.9 37.7 12.1 0.3 2.5 0.6 (0.7) 2.4 (0.4) 1.9 82.1 0 82.1 55.9 14.9 (1.5) 9.8 1.4 (3.0) 8.2 0.01 8.2 87.0 7.3 79.7 46.9 23.2 0.2 9.8 3.4 (4.0) 9.2 0 9.2 81.0 6.7 74.3 39.0 23.9 0.1 11.4 1.6 (4.1) 9.0 0 9.0 1 Due to the sale of substantially all of the AbD Serotec business agreed in December 2012, line items in the income statement related to this transaction are recorded in a single line titled “Results from discontinued operations” from the year 2011 onwards. Other line items contain the results of the continuing operations. See also section 4.5 of the Notes. 2 To improve comparability with the peer group, MorphoSys changed the structure of its income statement in 2012 and now reports EBIT instead of the results from normal business activities. 3 2009 – 2010: Result from operating activities multiple-year overview – financial situation in million € Net Cash Provided by/Used in Operating Activities1 Net Cash Provided by/Used in Investing Activities Net Cash Provided by Financing Activities1 Cash and Cash Equivalents (as of 31 December)2 Available-for-sale Financial Assets Bonds, Available-for-sale Financial Assets Categorized as “Loans and Receivables” 12 2013 89.1 (193.9) 130.6 71.9 188.4 11.1 119.3 2012 1.8 (12.1) 1.6 40.7 79.7 0 10.0 2011 27.1 (18.1) 1.3 54.6 79.8 0 0 2010 2009 1.9 (2.0) 2.3 44.1 64.3 0 0 (1.0) 0.6 1.4 41.3 93.9 0 0 1 In 2011, purchases of derivative financial instruments and proceeds from the sale of derivative financial instruments were reclassified from financing activities to operating activities in the statement of cash flows. In order to provide comparative information for the previous year, the figures for 2010 have been adjusted accordingly. 2 In 2012, € 5.3 million in cash and cash equivalents was recorded under assets of disposal group classified as held for sale. 43 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations C Ash fl oWs The net cash inflow from operating activities totaled € 89.1 million in 2013 (2012: cash inflow of € 1.8 million). Of this amount, a net cash outflow of € 1.9 million in 2013 was attributable to discontin- ued operations (2012: cash inflow of € 1.0 million), while continu- ing operations achieved a cash inflow from operating activities of € 91.1 million (2012: cash inflow of € 0.7 million). In 2013, the Company invested in various financial assets such as available for sale securities and bonds, short-term commercial pa- per, and fixed-term deposits. These investments resulted in a cash outflow of €  193.9  million (2012: cash outflow of €  12.1  million) which included a cash inflow of € 36.6 million from discontinued operations (2012: cash outflow of € 0.3 million) and a cash outflow of € 230.5 million from continuing operations (2012: cash outflow of € 11.8 million). In 2013, cash flow from financing activities amounted to a cash inflow of € 130.6 million (2012: cash inflow of € 1.6 million) which was entirely attributable to continuing operations. inves t men t s In 2013, MorphoSys carried out investments in property, plant, and equipment of € 1.0 million (2012: € 1.0 million) for continu- ing operations. Depreciation of property, plant, and equipment amounted to € 1.5 million in 2013 compared with € 2.3 million in 2012. In the fourth quarter of 2013, impairment of € 0.5 million was carried out on laboratory equipment. In 2013, the Company invested € 4.5 million in intangible assets for continuing operations (2012: € 1.3 million). Amortization of intangible assets amounted to € 3.3 million in 2013 and was thus below the level of the prior year (2012: € 4.0 million). In the third quarter of 2013, impairment of patents and licenses amounting to € 1.1 million was recognized. l iQuidi t y On 31 December 2013, the Company held liquid funds and market- able securities, as well as other financial assets, in the amount of € 390.7 million, compared to € 135.7 million on 31 December 2012. This amount included cash and cash equivalents of € 71.9 million (31 December 2012: €  40.7  million), marketable securities and bonds amounting to € 199.5 million (31 December 2012: € 79.7 mil- lion), as well as other financial assets of € 119.3 million (31 Decem- ber 2012: € 10.0 million) which were reported in other receivables under the category “loans and receivables”. As of 31 December 2012: additional liquid funds of €  5.3  million were presented in assets of a disposal group classified as held for sale. The rise in liquidity compared to the previous year primarily re- sulted from the contract with Celgene (one-off upfront payment of €  70,8  million and the purchase of MorphoSys shares in the amount of € 46,2 million), from the capital increase carried out in September (€ 84,4 million), from the proceeds from the purchase price of the divested AbD Serotec business (€ 53,2 million, includ- ing the amount accrued on an escrow account), as well as from the contract with GlaxoSmithKline (one-off upfront payment of € 22,5 million). net Assets Asse t s As of 31 December 2013, total assets amounted to € 447.7 million, or € 223.4 million higher than on 31 December 2012 (€ 224.3 mil- lion). The €  263.7  million increase in current assets mainly re- sulted from the cash proceeds in connection with the Celgene con- tract, the capital increase carried out in September, the proceeds from the purchase price of the divested AbD Serotec business, as well as the contract with GlaxoSmithKline. The majority of the cash proceeds was invested in various securi- ties. As of 31 December 2013, a sum of € 188.4 million (31 Decem- ber 2012: € 79.7 million) was invested in various money market funds which were recorded under the line item “securities, avail- able for sale”. The line item “bonds, available for sale” contained bonds amounting to a total of € 11.1 million (31 December 2012: € 0 million). 44 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations Other receivables grew from €  10.3  million as of 31 December 2012 to € 119.5 million. This line item is primarily composed of various investments, which were allocated to the category “loans and receivables” (€ 114.6 million), as well as a partial amount of € 4.7 million of the purchase price for the divested AbD Serotec business held in an escrow account. Compared to 31 December 2012, non-current assets slightly in- creased by € 0.5 million. The increase in the line item “in-licensed research programs” resulting from the capitalization of milestone payments in the amount of € 2.3 million and the € 0.8 million con- tribution to Lanthio Pharma B.V. were partially offset by a decrease in licenses and patents of € 1.7 million and € 0.8 million, respec- tively, due to amortization and impairment. l iABil i t ies The increase in current liabilities from € 11.9 million as of 31 De- cember 2012 to €  35.4  million on 31 December 2013 essentially resulted from a higher current portion of deferred revenues (€ +14.7 million) as a result of the deferred upfront payment from Celgene. Accounts payable and accrued expenses rose by € 6.5 mil- lion in comparison to 31 December 2012, mainly driven by higher accrued expenses for external laboratory services. Additionally, tax liabilities increased by € 2.1 million due to the earnings situation. Non-current liabilities changed significantly compared to the re- porting date of 31 December 2012 and increased by € 53.5 million, primarily due to deferred revenues in connection with the upfront payment from Celgene. s t oCkhol ders’ eQui t y As of 31 December 2013, Group equity totaled € 352.1 million com- pared to € 202.0 million on 31 December 2012. As of 31 December 2013, the number of shares issued totaled 26,220,882, of which 25,880,992 shares were outstanding (31 De- cember 2012: 23,358,228 and 23,102,813 shares, respectively). In connection with the capital increase in September 2013 and the purchase of MorphoSys shares by Celgene, a total of 2,311,216 new shares were issued. Compared to 31 December 2012, the number of authorized ordinary shares fell from 43,142,455 to 36,614,174 since the Authorized Capital 2008-I from the 2008 Annual General Meeting expired on 30 April 2013 and had not been used. As part of a cash capital increase in connection with the Celgene Transaction, 797,150 shares were issued on 27 August 2013 from “Authorized Capital 2012-II”. As part of another cash capital in- crease, 1,514,066 additional shares were issued on 23 September 2013 from “Authorized Capital 2012-II”. Accordingly, “Authorized Capital 2012-II” was fully utilized. In the course of the second quarter of 2013, the Company repur- chased 84,475 own shares on the stock exchange and increased its holding in treasure shares accordingly. The shares are used to serve the Company’s long-term incentive plan for members of the management. financing As of 31 December 2013, the Company’s equity ratio amounted to 79 % compared to 90 % on 31 December 2012. Despite the capital measures mentioned, the lower equity ratio in comparison to the previous year resulted from the significant increase in current and non-current deferred revenues since upfront payments re- ceived in the Celgene transaction are deferred over several periods (see Notes, p. 113 – Capital Management). Presently, the Group is not carrying financial liabilities. off-balance sheet financing MorphoSys does not use any off-balance sheet financing instru- ments such as the sale of receivables, asset-backed securities, sale-and-leaseback transactions, or contingent liabilities in combi- nation with non-consolidated special purpose entities. credit rating Currently, MorphoSys is not being assessed for its creditworthi- ness by any agency. 45 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations multiple-year overview – balance sheet structure 13 in million € 12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009 12/31/2008 Assets Current Assets Non-current Assets Assets of Disposal Group Classified as Held for Sale Total Equity and Liabilities Current Liabilities Non-current Liabilities Liabilities of Disposal Group Classified as Held for Sale Stockholders’ Equity Total 406.6 41.1 0 447.7 35.4 60.1 0 352.1 447.7 142.9 40.6 40.9 224.3 11.9 6.6 3.7 202.0 224.3 153.9 73.7 0.8 228.4 23.8 7.5 0 197.1 228.4 132.5 77.3 0 209.8 21.4 2.5 0 185.9 209.8 155.6 50.5 0 206.1 24.3 7.9 0 173.9 206.1 150.1 53.2 0 203.3 27.4 13.9 0 162.0 203.3 comparison of Actual business results to forecasts In the 2013 reporting year, MorphoSys demonstrated very solid financial performance. The revenue and earnings targets pub- lished at the beginning of 2013 was raised repeatedly by the Com- pany, on the occasion of the licensing contract for MOR103 with GlaxoSmithKline, the cooperation agreement with Celgene, and lower-than-expected costs for the development of MOR202 in 2013. A detailed comparison of our forecast targets with the actual re- sults may be found in table 14. 46 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations Comp Ari s on of projeC t ed And AC t uAl Busine ss perf ormAnC e 14 2013 targets 2013 results Financial Targets Group revenues at the upper end of the range of € 74 million to € 78 million (initial guidance was € 48 million to € 52 million; guidance raised to € 68 million to € 72 million after licensing agreement with GSK in June and again in August to € 74 million to € 78 million after the transaction with Celgene; final adjustment was made at the end of October) Group revenues of € 78.0 million Investment in proprietary R&D of € 32 million to € 37 million Investment in proprietary R&D of € 31.7 million EBIT of € 7 million to € 10 million (initial guidance was € (18) million to € (22) million; guidance raised to € (2) million to € 2 million after licensing agreement with GSK in June and again in August to € 2 million to € 6 million after the transaction with Celgene; final adjustment was made at the end of October) EBIT of € 9.9 million Proprietary R&D MOR103 • Selection of a partner for the continuation of clinical MOR103 • Signing of a global licensing agreement with GlaxoSmithKline development for inflammatory diseases • Continuation of recently initiated phase 1b trials in MS • Continuation of the phase 1b trial. Data is expected in the first as a second indication half of 2014 MOR202 Continuation of the phase 1/2a trial in multiple myeloma MOR208 Initiation of two phase 2 trials in NHL and ALL Partner Pipeline Continuation of partnered development programs Up to five clinical milestones MOR202 Signing of a strategic alliance with Celgene for the continued development and co-promotion of the CD38 cancer program MOR208 • Initiation of a phase 2 trial in patients with relapsed/refractory B-cell leukemia (B-ALL) • Initiation of a phase 2 trial in patients with relapsed/refractory non-Hodgkin’s lymphoma (NHL) • Initiation of a phase 2 trial with MOR208 in combination with the medication lenalidomide (Revlimid®) in patients with CLL. The investigator-sponsored trial is being conducted by the Ohio State University (OSU) • Announcement of promising data following successful completion of expanded phase 1/2a trials in CLL/SLL financed by Xencor • Net increase of six partnered programs • Pipeline continued to mature and added one further phase 1 program, three phase 2 programs, and one phase 3 program Four clinical milestones were achieved in 2013: • Initiation of a phase 1 trial of a HuCAL antibody by our partner, Novartis, for the indication of ophthalmology • Janssen Biotech begins phase 2 clinical trial in asthma patients with the HuCAL antibody CNTO 3157 • Initiation of a phase 1 trial with the HuCAL antibody CNTO 6785 in patients with active rheumatoid arthritis by our partner, Janssen • Phase 2/3 milestones by Novartis with the start of a clinical trial of bimagrumab (BYM338) in the disease area of sporadic inclusion body myositis 47 G r o u p m A n A G e m e n t r e p o r t Analysis of Net Assets, Financial Position, and Results of Operations Accounting judgments In the 2013 consolidated financial statements, no accounting poli- cies were applied or related options exercised that differed from those in prior years and that, if applied or exercised differently, would have had a material effect on net assets, the financial posi- tion, or on the balance sheet structure. Information on the effects of the Management Board’s use of estimates, assumptions, and judgments, can be found in the Notes to the Consolidated Financial Statements. the management board’s general Assessment of business performance Once again the Management Board can look back on a very suc- cessful business development of the MorphoSys Group in the 2013 financial year. The targets set at the beginning of 2013 have been met to a great extent and, in some cases, have even been ex- ceeded. As intended, a strong financial partner was won with GlaxoSmithKline for the further development of the MOR103 com- pound. In terms of MOR202, MorphoSys was able to enter into a financially and strategically attractive alliance with Celgene, in the absence of any available clinical data, by using the favorable market situation and increased interest in MOR202’s approach to therapy. In the 2013 financial year, revenues from continuing operations of the MorphoSys Group amounted to € 78.0 million or 50 % above the adjusted comparable value of the previous year. With an EBIT of €  9.9  million, the Company remained profitable once again. An equity ratio of 79 %, liquidity of € 390.7 million, and the absence of financial debt, underscore the very solid financial situation of the Company. The Partnered Discovery segment made the largest contribution to the operation’s success again in this reporting year. For the first time, the Proprietary Development segment generated notable rev- enues due to the conclusion of contracts with GlaxoSmithKline and Celgene. As a result of the positive business performance of both segments, MorphoSys was able to continue to invest signifi- cantly in proprietary products and technology development. De- spite the continued high level of investment, the Company was still able to report solid operating profits. Investments in research and development are reflected in our ever-maturing product pipeline. MorphoSys’s proprietary com- pounds are showing excellent progress, including further clinical efficacy data on MOR208 and the advancements made by this drug candidate in three phase 2 trials. In 2013, with bimagrumab, the second HuCAL program progressed to a phase 3 trial. The sale of the AbD Serotec segment to Bio-Rad was executed swiftly and smoothly and the closing of the transaction was an- nounced shortly after the start of 2013. Abbildung 13 Abbildung 14 48 KEy finAnciAl rAtios At A glAncE rEvEnuE of thE morphosys group by rEgion (in %) 13 18 19 6 5 11 82 81 94 95 89 n o r t h a m e r i c a 2009 2010 2011 2012 2013 e u r o p e a n d a s i a 18.1 t o tAl r& d 37.7 3.6 25.9 2.1 t o tAl r& d 46.9 rEvEnuEs pArtnErEd discovEry And propriE tAry dEvElopmEnt (in million €) 14 t o tAl 81.0* t o tAl 87.0* t o tAl 82.1** t o tAl 78.0** 57.2 48.6 t o tAl 51.9** 42.7 48.0 46.6 32.7 partne re d discove ry segme nt : f u n d e d r e s e a r c h a n d l i c e n s i n g f e e s partne re d discove ry segme nt : s u c c e s s - b a s e d pay m e n t s proprie tary de ve l- opme nt segme nt 26.9 13.1 1.0 9.1 1.8 2.4 7.0 1.9 3.0 * thereof AbD Serotec: 2009: 19.3; 2010: 20.1 ** Group revenues from continuing operations sElEc tEd r&d EXpEnsEs (in million €)* t o tAl 39.0 t o tAl 46.9 t o tAl 55.9 20.7 18.3 14.8 17.9 13.3 10.5 11.4 11.7 25 20 15 10 5 0 13.6 7.2 13.0 12.8 11.1 2.3 4.0 3.3 1.6 2.2 * Due to the sale of substantially all of the AbD Serotec operating segment with of closing date of 10 Jan. 2013, the fi gures for the years 2011 to 2013 refer only to continuing operations. t o tAl 49.2 21.2 e x t e r n a l l a b o r at o r y f u n d i n g p e r s o n n e l c o n s u m a b l e s o t h e r 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 distribut ion of r&d EXpEnsEs (in million €) t e c h n o l o g y d e v e l o p m e n t e x p e n s e s r &d e x p e n s e s o n b e h a l f o f pa r t n e r s p r o p r i e ta r y d e v e l o p m e n t e x p e n s e s t o tAl r& d 49.2 4.2 t o tAl r& d 39.0 0.7 27.5 19.1 17.5 19.2 3 2 0 1 20 0 9 2 1 0 2 16.0 2 0 1 0 18.9 15 2011 19.1 33.9 2.9 t o tAl r& d 55.9 16 t o tAl 37.7 17.8 KEy finAnciAl rAtios At A glAncE rEvEnuE of thE morphosys group by rEgion (in %) 18 19 6 5 11 13 (in million €) 14 82 81 94 95 89 n o r t h a m e r i c a 2009 2010 2011 2012 2013 e u r o p e a n d a s i a rEvEnuEs pArtnErEd discovEry And propriE tAry dEvElopmEnt 49 distribut ion of r&d EXpEnsEs (in million €) t e c h n o l o g y d e v e l o p m e n t e x p e n s e s r &d e x p e n s e s o n b e h a l f o f pa r t n e r s p r o p r i e ta r y d e v e l o p m e n t e x p e n s e s t o tAl r& d 49.2 4.2 15 t o tAl r& d 39.0 0.7 27.5 19.1 17.5 2 0 1 3 19.2 20 0 9 Abbildung 15 t o tAl 81.0* t o tAl 87.0* t o tAl 82.1** 57.2 48.6 t o tAl 51.9** 42.7 48.0 46.6 32.7 t o tAl 78.0** partne re d disc ove ry segme nt : f u n d e d r e s e a r c h a n d l i c e n s i n g f e e s partne re d disc ove ry segme nt : s u c c e s s - b a s e d pay m e n t s proprie tary de ve l- opme nt segme nt 26.9 13.1 1.0 9.1 1.8 2.4 7.0 1.9 3.0 * thereof AbD Serotec: 2009: 19.3; 2010: 20.1 ** Group revenues from continuing operations 25 20 15 10 5 0 2 1 0 2 16.0 18.1 t o tAl r& d 37.7 3.6 2 0 1 0 18.9 25.9 2.1 t o tAl r& d 46.9 2011 19.1 33.9 2.9 t o tAl r& d 55.9 sElEc tEd r&d EXpEnsEs (in million €)* 16 t o tAl 37.7 17.8 t o tAl 49.2 21.2 e x t e r n a l l a b o r at o r y f u n d i n g p e r s o n n e l c o n s u m a b l e s o t h e r Abbildung 16 t o tAl 39.0 t o tAl 46.9 t o tAl 55.9 20.7 18.3 14.8 17.9 13.3 10.5 11.4 11.7 13.6 7.2 13.0 12.8 11.1 2.3 4.0 3.3 1.6 2.2 * Due to the sale of substantially all of the AbD Serotec operating segment with of closing date of 10 Jan. 2013, the fi gures for the years 2011 to 2013 refer only to continuing operations. 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 50 G r o u p m A n A G e m e n t r e p o r t Sustainability Report Sustainability Report For MorphoSys, sustainability means ecological and social respon- sibility for the benefit of today’s and future generations. As a re- search-driven Company in the field of biotechnology, compliance with the highest ecological, social, and ethical standards goes hand in hand with long-term economical success. The Sustainabil- ity Report details the measures taken during the reporting year in order to meet these standards. Information of the management structure and corporate governance practices of MorphoSys can be found in the Corporate Governance Report. sustainable corporate management at morphosys A hallmark of MorphoSys’s corporate management is sustainable and responsible behavior to generate essential added value to the society. This is true at all levels of management for both the short and long-term. This endeavor has already been reflected in the core activity of the Company to develop even more effective and safer drugs. In daily operations, a high value is always placed on working in harmony with strict ecological and social principles. Therefore, MorphoSys pursues a business model aimed at sustain- able growth, which protects the interests of its shareholders, cre- ates long-term value, and evaluates processes with regard to their effects on the environment, society, patients, and employees. A forward-looking human resources policy, which takes the needs of the employees seriously, reflects this business model internally. MorphoSys bases its long-term and sustainable business success on targeted and innovative research and development. Biotechnol- ogically-produced drugs have an increasing share in the health care of a growing and aging population. Comprehensive health care is one of the main challenges of the future. MorphoSys can make a valuable contribution through its drug candidates. In man- agement’s opinion, MorphoSys’s present business model does not contain any components which are contrary to the sustainable in- vestment interests of the shareholders. A comprehensive risk management system ensures that factors which could threaten sustainable corporate performance are iden- tified at an early stage, and appropriate countermeasures are taken, if necessary. MorphoSys only assumes a risk if simulta- neously an opportunity is offered to increase the company’s value. At the same time, tremendous effort is being made to systemati- cally identify new opportunities and to leverage our business success (for more information on risks and opportunities please refer to page 58). The entire Management Board, chaired by the Chief Executive Of- ficer, monitors Group-wide compliance with the sustainability strategy. The Credo as part of the Code of Conduct regulates the implementation of the strategy by employees in daily operations. It is valid for all employees of the Group and is available in both the German and English languages. Routine employee training on the Code of Conduct in general, and on specific sections, ensure that the guidelines are understood and implemented. The Code of Con- duct Committee consists of four members (Chairperson and three other members), and is at the disposal of and may be contacted by all employees. In addition, a Compliance Officer coordinates the Compliance Management System of MorphoSys since the end of 2013. If preferred, each employee can receive advice on an anony- mous basis on all matters relating to legal compliance and corpo- rate responsibility, and report suspected cases or violations. Breaches of compliance are consistently pursued and the appropri- ate countermeasures are taken. However, no such violation has been reported to date, and the Company believes serious offenses that could materially affect the Group’s net assets, financial posi- tion, and results of operations are unlikely in the future. 51 G r o u p m A n A G e m e n t r e p o r t Sustainability Report When reporting on sustainability, MorphoSys uses the so-called Sustainable Development Key Performance Indicators (SD-KPIs), which are also recommended by the SD-KPI standard. These in- clude performance in proprietary R&D (SD-KPI 1) and performance in partnered programs as benchmarks for the commercialization rate (SD-KPI 2) (see “Strategy and Performance Management”). In the last five years, no products have been recalled and there were no fines or settlements imposed that were caused by disputes (SD- KPI 3). The following report on the implementation of MorphoSys’s corporate strategy and sustainable corporate development is based on the recommendations of the German Sustainability Code, which was proposed by the German Council for Sustainable Development in October 2011. sustainable performance at morphosys e t hiC Al s tAndArds And CommuniC At ion Wi t h s tAkehol ders The highest scientific and ethical principles when conducting hu- man clinical trials or animal testing are anchored in MorphoSys’s Code of Conduct. The Company adheres, in particular, to the Dec- laration of Helsinki of the World Medical Association (WMA). Strict compliance with national and internationally applied regula- tions is mandatory for all MorphoSys employees as well as for sub- contractors. Since European legislation requires the use of animal testing in order to determine the toxicity*, pharmacokinetics*, and pharma- codynamics* of a compound candidate, the biotechnology industry cannot currently forgo such testing. MorphoSys does not have its own suitable research laboratories for these types of trials, there- fore the Company passes these animal studies on to contract re- search organizations (CROs). In the course of its product develop- ment activities, MorphoSys contracts out animal trials, according to the principles of good animal welfare and respectful treatment of animals as set out in national and European regulations. MorphoSys has launched a quality assurance and control system with written standard operating procedures (SOPs*). This system is maintained and continually improved to ensure that only those contract research organizations that follow the local, national, and international regulations are contracted for animal studies. Princi- pally, trials are carried out only after the approval of the relevant ethics committee concerned and only under the constant supervi- sion of a veterinarian. *s e e G l o s s A r y pa g e 1 5 8 Institutes cooperating with MorphoSys, must comply with the le- gal requirements for research involving animals, and also possess the quality assurance verification of Good Laboratory Practice (GLP) and/or an accreditation of the AAALAC (Association for As- sessment and Accreditation of Laboratory Animal Care). This is how MorphoSys ensures it fulfills its moral obligation for the re- spectful treatment of animals. In addition, as part of auditing, the trial sites, contract research institutes, the training and compe- tency of relevant staff, as well as animal welfare are verified on location and conducted before the final award of the contract. The Declaration of Helsinki mentioned above, also defines the eth- ical principles followed by MorphoSys in dealing with healthy vol- unteers and with patients during clinical trials. These trials are also carried out in compliance with the relevant provisions on pri- vacy and confidentiality. Respect for the rights, safety, and welfare of all participants involved in clinical trials have highest priority at MorphoSys. Clinical trials are initiated only after approval by the independent ethics committee concerned and/or the institu- tional review panel. Before participating in a clinical trial, each participant must submit an informed consent on a voluntary basis. The aim of the business activities of MorphoSys is to improve the health of patients through its scientific work. However, the com- pany can only achieve this objective if its activities also find social acceptance. This requires a continuous and open dialogue with stakeholders in order for MorphoSys to understand the potential concerns regarding biotechnological approaches, and so that it may explain its activities and their benefits. Consequently, MorphoSys is active in a variety of ways, for example by participat- ing in public information events, and by actively supporting the Communication and Public Relations task force of BIO Deutsch- land e.V. 52 G r o u p m A n A G e m e n t r e p o r t Sustainability Report proCuremen t The Central Purchasing & Logistics department was created in 2012 to support the business and is responsible for Group procure- ment and ensuring the uninterrupted supply of external goods, services, consulting, and logistics services. The department man- ages relationships with suppliers to ensure a consistent high qual- ity of goods and services that meet the required standards. The department is constantly striving to improve the efficiency and effectiveness of procurement processes. In the course of the re- porting year, partnerships with suppliers have been strengthened by the introduction of special framework agreements. All suppli- ers selected by MorphoSys are committed to the observance of human rights and internationally recognized labor standards. The activities of the central purchasing department secured savings in the reporting year of approximately 9 % of the corresponding ex- penditures in 2013. environmen tAl pro t eC t ion And oCCupAt ionAl sAfe t y In a strictly regulated industry such as the biotechnology industry, the environmental protection and occupational safety department plays a material role in the Company. The department centrally monitors compliance with all relevant provisions within the MorphoSys Group. Beyond the Company’s strict compliance with all legal requirements, MorphoSys undertakes a variety of efforts throughout the Group for sustainable environmental management and the reliable protection of its employees. s e e f i G u r e 17, o c c u pat i o n a l s a f e t y at m o r p h o s y s pa g e 5 6 The conservation of resources is a key task. Thus, as the renova- tion of office space was initiated in 2013, special attention was paid to the use of sustainable materials. The textile floor coverings, for example, were purchased from a European manufacturer who was one of the first to receive an independent Environmental Product Declaration (EPD). Local workshops were commissioned for the necessary renovations. In addition, MorphoSys led various mea- sures for energy savings and waste reduction. These measures not only had a positive impact on the environment, but also reduced costs in the reporting year. In 2013, as in prior years, MorphoSys participated in the survey conducted by the Carbon Disclosure Project (CDP) for monitoring internal resource consumption. For the fifth consecutive year, the Company took part in the study of this independent non-profit organization which aims to reduce greenhouse gases and promote sustainable water usage. As in pre- vious years, the study’s results showed that there was no need for action on the part of the Company. Nevertheless, MorphoSys uses the annual results for the routine and structured monitoring of its consumption, and thus would be in a position to promptly take action in the case of any excessive consumption. Successful re- source-saving measures established in the past were pursued con- sistently; for example, energy and cost-saving monitor screens, energy-efficient laboratory equipment, and measures for the eco- nomical use of paper and printer toner. In 2013, MorphoSys supported the joint initiative Bike to Work sponsored by a German health insurance company and the Ger- man Bicycle Club (ADFC). Because of this commitment, MorphoSys has been certified as a bicycle-friendly operation for the third con- secutive time. In addition to this initiative, there were extensive offers for all employees on preventative health care and the promo- tion of health. These included offers such as autogenic training, Pilates, ball sports, participation in running events, etc. In Sep- tember 2013, MorphoSys organized a Health Day under the slogan: “It’s about your health!”, and encouraged the Group’s workforce to participate voluntarily. Approximately 60 % of employees partici- pated in the lectures and campaigns. The employees were also made aware of the subjects of pressure and stress in psychologi- cally accompanied seminars. With only two reportable accidents in the reporting year, the num- ber of accidents fell below the level of the previous year (three re- portable accidents). Thus, the rate at MorphoSys of approximately three accidents per 1,000 employees is well below the average rate in Germany (about 26 accidents per 1,000 employees according to the latest survey in 2011). MorphoSys attempts to minimize the amount of contaminants used in laboratory work. Only a specially trained group of people are permitted to deal with toxins, and work with infectious patho- gens may only be carried out in secured laboratories. MorphoSys only commissions companies certified for the disposal of chemical waste. MorphoSys avoids using radioactive substances for labeling antibodies. 53 G r o u p m A n A G e m e n t r e p o r t Sustainability Report QuAl i t y AssurAnCe The adherence to the highest safety and quality standards is a special responsibility of biopharmaceutical companies. MorphoSys pursues detailed procedures and strict rules in order to avoid secu- rity risks in drug development that may pose a serious threat to patients and the economic situation of the company. In this man- ner, the Company guarantees the quality of the investigational medicinal products, keeps the risks to subjects of clinical trials as low as possible, and ensures that the data can be collected reliably and correctly processed. In order to control and regulate these processes, MorphoSys estab- lished an integrated quality management system for its Proprie- tary Development department, which complies with the principles of Good Manufacturing Practice (GMP*), as well as those of Good Clinical Practice (GCP*) and Good Laboratory Practice (GLP*). An independent quality assurance department ensures that all devel- opment activities comply with national and international laws, rules, and guidelines. The head of quality assurance reports and coordinates all activities directly with the Management Board. In this manner, MorphoSys achieves high quality standards, ensures product quality and data integrity, and guarantees the safety of the test subjects. s e e f i G u r e *s e e G l o s s A r y pa g e 1 5 8 18 , q u a l i t y m a n a g e m e n t s y s t e m at m o r p h o s y s pa g e 5 7 The quality assurance department creates a verification plan using a risk-based approach. On the basis of this plan, an audit is con- ducted on the selection of the contract research institutes, suppli- ers, and research sites participating in the clinical trials. For its Proprietary Development activities, MorphoSys possesses a manufacturing license for the release of investigational medicinal products and was awarded a certificate for compliance with the standards and guidelines of Good Manufacturing Practice (GMP) by the government of Upper Bavaria which is the responsible Ger- man authority. technologies and in t el l eC t uAl proper t y Proprietary the resulting products are MorphoSys’s most valuable capital. Therefore, it is critical to the success of the Company to secure a strong patent position for its technology portfolio and its MOR103, MOR202, and MOR208 development programs. In the case of partnered programs, the partner companies file patent applications for individual drugs in cooperation with MorphoSys’s patent department. Such drug de- velopment programs possess additional patent protection, the du- ration of which far exceeds that of the underlying technologies, such as HuCAL or Ylanthia. In 2013, the Company systematically expanded and focused its patent portfolio. In terms of technology, decisive steps were taken to efficiently protect the new Ylanthia antibody platform. The first patents have already been granted. Additionally, MorphoSys pos- sesses a variety of other technology patents, which serve as the basis for the Company’s growth and aid the drug development pro- grams. Patent protection for the Ylanthia platform will run at least until the year 2031. s e e f i G u r e 19 , pat e n t l i f e t i m e f o r k e y p l at f o r m t e c h n o l o g i e s pag e 5 7 The Company’s proprietary development programs are closely monitored under patent law. For example, the most advanced pro- grams, MOR103 and MOR202, which have been brought into part- nerships, are each protected by more than a half dozen different patent applications that cover the most varied aspects of these compounds and thus provide effective protection. The various pat- ents and associated protection certificates are not expected to ex- pire until 2031. The program MOR208 is also protected by various patents. In the fourth quarter, MorphoSys for example announced the receipt of a new US patent and a European patent to protect the cancer compound MOR208. The new patents granted include the protein and gene sequences of the antibody, as well as the pharma- ceutical preparations comprising these. They have a scheduled expiry date of 2029 for the US patent, and 2027 in the case of the European patent excluding any possible patent office or regulatory extensions. 54 G r o u p m A n A G e m e n t r e p o r t Sustainability Report Presently, MorphoSys patent attorneys attend to approximately 40 different patent families globally, in addition to the numerous patent families pursued by the Company together with its part- ners. The patent portfolio is routinely analyzed and adapted to the corporate strategy of the Company. personnel The Company relies on a forward-looking human resources policy in order to promote Company loyalty among its professionally and personally suitable employees in various disciplines. In an indus- try such as biotechnology, in which success is highly dependent upon the creativity and commitment of the workforce, employee retention and satisfaction are key factors of success. At the end of the reporting year, MorphoSys’s workforce comprised employees of 18 different nationalities (2012: 16), who have been with the Company for 5.4 years on average (2012: 5.1 years). s e e f i G u r e s 8 –12 , e m p l o y e e f i g u r e s at a g l a n c e pa g e s 3 6 t o 3 7 A comprehensive range of further training, internal and external training programs, and special training and development pro- grams are available for the employees of the different depart- ments. Along with professional development, MorphoSys enhances the personal development of its employees and in some individual cases, supports them through individualized coaching. The quar- terly management workshops, initiated in 2012, also continued with great success in 2013. These workshops offer all executives concrete support in addressing management tasks. Uniform regu- lations serve as guidance within the context of sustainable human resources management. In July 2013, managers at all levels met for a workshop which had four main topics: • promoting an understanding of the actions of the different areas of the Group; • creating awareness of leadership issues; • emphasizing the importance of responsible interdisciplinary co- operation; • advising on ways to optimize the current compensation system. The resulting proposals served the Management Board as an aid in decision making during the conversion of the remuneration sys- tem as of 1 January 2014. MorphoSys offers the opportunity for in-house vocational training in order to provide young people with promising future career prospects. As of 31 December 2013, MorphoSys employed three trainees in the IT department, six biology laboratory technician apprentices, and one human resources services trainee (31 De- cember 2012: three IT apprentices and six biology laboratory tech- nician trainees, one human resources service trainee). Transparent communication within the workforce is a fundamen- tal component of MorphoSys’s corporate culture, as described in the ethical principles (The Credo) of the Company. Every two weeks, “General Meetings” are held, in which the Management Board describes all of the Company’s recent developments to the employees. Employees also present selected projects and open- ended questions are answered. Questions or feedback from the workforce can be made either directly in the meeting or in ad- vance and submitted in written form. If preferred, this may also be done anonymously. In addition, the Company intranet and its inte- grated document management system provide updated and rele- vant information in a structured manner for all employees. New employees take part in a two-day introductory course to fa- miliarize themselves with the Group. Hereby, employees can ob- tain extensive information on business processes on the basis of individual lectures held by all departments. Sports and relaxation options, such as Pilates lessons and courses in autogenic training, are free of charge and encourage health and the social exchange of employees across all departments. 55 G r o u p m A n A G e m e n t r e p o r t Sustainability Report Effective concepts for reconciling professional development with personal life planning is a strategic success factor for future-ori- ented companies. Therefore, for many years, MorphoSys has of- fered its employees various options in this regard, such as flexible working hours and special part-time options. Modern IT equip- ment also facilitates trouble-free working during business trips or on home office days. MorphoSys offers assistance to employees with families through special options for reentering their profes- sional life and supports them in the coordination of work and fam- ily. MorphoSys is cofounder and sponsor of BioKids daycare in Martinsried, and there are special agreements with a German ser- vice provider offering additional services for employed family members. MorphoSys is making every effort to protect employees from work- place hazards and to maintain their health through preventive measures. The extremely low number of accidents in the workplace proves the success of our strict monitoring of all occupational health and safety measures. In the reporting year, MorphoSys was able to reduce that number once again: only two occupational ac- cidents (2012: three occupational accidents) occurred. Using poli- cies and training courses from the Department of Health & Occu- pational Safety, and also by offering regular medical examinations, MorphoSys tries to keep the number of accidents at this low level, and the safety and wellbeing of all employees at the highest level possible. The low level of absenteeism of MorphoSys’s workforce underscores the success of the Company’s efforts: During the year, absenteeism fell to 2.7 % (2012: 3.0 %). The employee turnover rate also declined in 2013 to 5.8 % (2012: 7.0 %). This is a further sign of the high level of employee identification with the Company. Abbildung 17 56 sustAinAbility At morphosys occupAt ionAl sAfE t y At morphosys 17 o n ly s p e C i A l ly t r A i n e d e m p l o y e e s A r e A l l o W e d t o W o r k W i t h t o x i C s u B s tA n C e s p At h o G e n i C o r G A n i s m s A r e p r o C e s s e d i n l A B o r At o r i e s W i t h p A r t i C u l A r s A f e t y s tA n d A r d s l o W e s t p o s s i B l e A m o u n t s o f h A Z A r d o u s s u B s tA n C e s u s e d i n t r o d u C t i o n o f h A Z A r d o u s m At e r i A l s f o r r & d p u r p o s e s : • A dedicated biosafety team as defi ned by the “Gentechnik Sicherheitsverordung” (German Genetic Engineering Safety Directive) and other safety professionals perform an internal audit to assess the risk involved • Specifi c safety and evacuation training for the employees working with the substances • Assurance that all safety measures are imple- mented before actual work commences o n ly C e r t i f i e d C o m p A n i e s A r e A u t h o r i Z e d B y m o r p h o s y s t o d i s p o s e o f C h e m i C A l W A s t e huCAl slonomics ylanthia* * First patent granted in the USA in January 2013 2023+ 2031 QuAl i t y mAnAgEmEnt systEm At morphosys 18 m A n A G e m e n t B o A r d C o r p o r At e r e Q u i r e m e n t s / d e p A r t m e n tA l r e Q u i r e m e n t s r e G u l At o r y r e Q u i r e m e n t s Training and Qualifi cation Q u A l i t y m A n A G e m e n t s y s t e m s Self Inspection/Internal Audits SOP System* External Audits (CMO,* CTO,* CRO,* clinical trial sites) Documentation System Batch Record Review/Batch Release pAtEnt l ifE t imE for KEy pl Atform tEchnologiEs Handling of Deviations, Change Control, Complaints, Out of Specifi cation (OOS) and Recalls 19 2016 sustAinAbility At morphosys occupAt ionAl sAfE t y At morphosys 17 o n ly s p e C i A l ly t r A i n e d e m p l o y e e s A r e A l l o W e d t o W o r k W i t h t o x i C s u B s tA n C e s p At h o G e n i C o r G A n i s m s A r e p r o C e s s e d i n l A B o r At o r i e s W i t h p A r t i C u l A r s A f e t y s tA n d A r d s l o W e s t p o s s i B l e A m o u n t s o f h A Z A r d o u s s u B s tA n C e s u s e d i n t r o d u C t i o n o f h A Z A r d o u s m At e r i A l s f o r r & d p u r p o s e s : • A dedicated biosafety team as defi ned by the “Gentechnik Sicherheitsverordung” (German Genetic Engineering Safety Directive) and other safety professionals perform an internal audit to assess the risk involved • Specifi c safety and evacuation training for the employees working with the substances • Assurance that all safety measures are imple- mented before actual work commences 57 QuAl i t y mAnAgEmEnt systEm At morphosys 18 m A n A G e m e n t B o A r d Abbildung 18 C o r p o r At e r e Q u i r e m e n t s / d e p A r t m e n tA l r e Q u i r e m e n t s r e G u l At o r y r e Q u i r e m e n t s Training and Qualifi cation Q u A l i t y m A n A G e m e n t s y s t e m s External Audits (CMO,* CTO,* CRO,* clinical trial sites) Self Inspection/Internal Audits SOP System* Documentation System Batch Record Review/Batch Release Handling of Deviations, Change Control, Complaints, Out of Specifi cation (OOS) and Recalls *s e e G l o s s A r y pa g e 1 5 8 pAtEnt l ifE t imE for KEy pl Atform tEchnologiEs o n ly C e r t i f i e d C o m p A n i e s A r e A u t h o r i Z e d B y m o r p h o s y s t o d i s p o s e o f C h e m i C A l W A s t e huCAl slonomics ylanthia* * First patent granted in the USA in January 2013 19 2016 2023+ 2031 Abbildung 19 58 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report Risk and Opportunity Report MorphoSys is part of an industry that is characterized by constant change and progress. The challenges and opportunities in the healthcare industry are influenced by very different factors. Global demographic changes, medical advances, and the desire for an in- creasing quality of life provide solid growth prospects for the pharmaceutical and biotechnology industries. However, increases in regulatory requirements in the areas of drug development and, in particular, the cost pressures on health systems must also be considered. MorphoSys is making major efforts to systematically identify new opportunities and use them for its business success to increase the Company’s long-term value. However, entrepreneurial success is not possible without consciously taking risks. Through its world- wide operations, MorphoSys is subject to a number of risks that can affect the course of business. The Company’s risk manage- ment system identifies these risks, evaluates them, and takes the appropriate measures to prevent risks and to achieve the corpo- rate goals. A regular review of the strategy ensures that opportu- nities and risks are well balanced. MorphoSys only assumes a risk if, simultaneously, an opportunity is offered to increase the com- pany’s value. risk management system The risk management system is a central component of MorphoSys’s corporate management and serves to ensure the principles of good corporate governance and regulatory compliance. MorphoSys has established a comprehensive system to identify, assess, communicate, and cope with risks in all areas of the Com- pany. MorphoSys’s risk management identifies risks at an early stage, allowing the appropriate action to limit operating losses and avoid risks that could jeopardize the Company’s existence. All mea- sures to mitigate a risk are assigned to individual risk managers who chiefly belong to the Senior Management Group of MorphoSys. As part of a systematic risk assessment process, all significant risks are evaluated with regard to MorphoSys’s various business units and with respect to the Company as a whole. Such risk as- sessments are carried out biannually. Risks are assessed by com- paring their quantifiable impact on the MorphoSys Group with their probability of occurrence both with and without employing a damage mitigation process. This methodology is applied for an evaluation period of twelve months and a medium term of three years in order to include obligations under proprietary develop- ment having longer maturities. In addition, the expanded strategic risk assessment is based on a long-term period of more than three years. The strategic risk assessment process is described in the section titled “Expansion of the Risk and Opportunity Manage- ment System”. An overview of the current risk assessment con- ducted by MorphoSys is presented in diagram 21. In addition, in the past financial year the IT-based risks and opportunity management system introduced in the prior year was fully operational. This allowed risk officers to enter their risks on the Group-wide IT platform, which made monitoring, analysis, and documentation much easier. This risk management system differ- entiates between risk owners and risk managers. The risk owner is typically the responsible head of department. The respective employees of the department may be risk managers if the risks captured by the risk management system fall within their area of responsibility. The risk owners and risk managers are asked to update their risks and the corresponding ratings in six month intervals. The accompanying process is coordinated and managed by the Corporate Finance & Corporate Development department, which also oversees the assessment process, summarizes the es- sential contents, and routinely reports it to the Management and Supervisory Boards. The entire assessment process is based on standardized forms and charts used for evaluation. Risk manage- ment and the monitoring of operations are carried out by the re- spective managers. Changes in the risk profile resulting from the measures are recorded in a regular cycle. A routine audit by exter- nal consultants ensures that the risk management system is con- tinually evolving, so that it always complies with any changes. Expansion of the risk and opportunity management system In the 2013 financial year, the existing risk and opportunity man- agement system was enhanced in the field of strategic risks and opportunities by introducing a top-down approach. In addition to risk identification using the bottom-up method, which should iden- 59 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report tify short and medium-term risks, global strategic risks and op- portunities will now be systematically identified in order to com- plete the picture of opportunities and risks. Examples of this were environmental and industry risks, personnel risks, and risks that may result from the public perception of the Company. For this occasion, a workshop has been introduced that involves select members of the Senior Management Group and in which strategic risks and opportunities across the various corporate divisions are recognized and discussed, even for a period of more than three years. The assessment is carried out qualitatively. Therefore these risks are not included in the Figures on page 66. The workshop takes place twice a year at the same time as other risk gathering activities. principles of risk and opportunity management MorphoSys is always confronted with both risks and opportuni- ties. This may cause a tangible impact on net assets and financial position as well as a direct influence on intangible assets, such as the Company’s image within the industry or the Company’s trade- mark. MorphoSys defines risk as internal or external events having an immediate impact on the Company. Hereby, the potential financial impact on the Company’s targets is assessed. Opportunities are in direct relation to risk. Seizing opportunities has a positive influ- ence on the Company’s targets and the occurrence of risks has a negative influence. responsibilities in the risk and opportunity management system The Management Board of MorphoSys AG is responsible for the risk and opportunity management system. The Management Board ensures that all opportunities and risks are presented, eval- uated, and monitored in a comprehensive manner. The Depart- ment of Corporate Finance & Corporate Development coordinates the implementation of the measures and routinely reports to the Management Board. The Supervisory Board has appointed the Audit Committee to monitor the effectiveness of the Group’s risk management system. The Audit Committee routinely reports the results to the entire Supervisory Board, which is informed addi- tionally by the Management Board twice a year. s e e f i G u r e m o r p h o s y s pa g e 6 5 2 0 , t h e r i s k a n d o p p o r t u n i t y m a n a g e m e n t s y s t e m at Accounting-related internal control system MorphoSys uses extensive internal controls, Group-wide reporting guidelines, and other measures, including employee training and continuing education, with the aim of ensuring accurate book- keeping and accounting as well as reliable financial reporting in the consolidated financial statements and the Group Management Report. This integral component of the Group’s accounting com- prises preventive, surveillance, and detection measures, which are intended to ensure the safety and control in accounting and in the operational functions. For more information on the internal control system in relation to financial reporting, please refer to the Corporate Governance Report. risks risk C At eGories MorphoSys assigns the most important risks to the following six categories: s e e f i G u r e 21, d e s c r i p t i o n o f m a j o r r i s ks at m o r p h o s y s pa g e 6 6 • Financial risks (for example, those resulting from bankruptcies and payment defaults, lower-than-anticipated and planned li- cense fees, research funding and milestone payments as well as risks associated with any form of financing and financial instru- ments, such as cash investments, bank failures, currencies, in- terest rates, taxes, and debt collection). • Operational risks (for example, procurement/production, distri- bution/logistics, customers, personnel and, with respect to the biotechnology industry, risks from the results of pre-clinical or clinical trials). • Strategic risks (for example, M&A*, interests in entities, R&D, corporate image, superior competing products, portfolio develop- ment). • External risks (risks beyond the Company’s control, such as eco- nomic, political, and legal risks as well as risks associated with companies in the biotechnology and pharmaceutical industry such as the protection of intellectual property and the regulatory environment when seeking the approval of new drugs). • Organizational risks (such as IT risk, facilities management, succession planning, business interruption, process delays as a result of exaggerated complexity and an excessive number of projects). • Compliance risks (for example, breach of US FDA and European EMA regulations, quality management policies, accounting standards, corporate governance, and breach of the German Stock Corporation Act). *s e e G l o s s A r y pa g e 1 5 8 60 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report FINANCIAL RISKS Financial risk management at MorphoSys aims to limit financial risks and reconcile these risks with the requirements of our busi- ness activities. Financial risks may arise within the context of licensing agree- ments, for example, when projects (products or technologies) are delayed or do not materialize, or are out-licensed to a different ex- tent than planned. A corresponding risk also arises when revenue does not reach the level forecast or when costs are higher than budgeted due to higher resource requirements. Detailed project preparation, for example, through an intensive exchange with in- ternal and external partners and consultants, ensures optimal po- sitioning early in the process and thus represents an important measure for minimizing risk. Financial risks associated with the Company’s proprietary programs were lowered considerably, in the course of the reporting year, through the successful introduc- tion of MOR103 and MOR202 into partnerships. However, financial risks relating to the MOR208 program are retained by MorphoSys. In some cases, MorphoSys retains risks that relate to the clinical development of programs introduced into partnerships. Due to the continually difficult European economic situation, the potential for bank insolvencies continues to present a financial risk. Therefore, as far as possible, MorphoSys continues to invest only in funds and products from banks, that are considered safe and have a consistently high rating, and/or are backed by a strong partner. Furthermore, the Company simulated different scenarios and then decided upon the appropriate contingency plans. Due to the sale of the AbD Serotec segment the foreign exchange risk could be reduced slightly. OPER ATIONAL RISKS Operational risks include risks related to the exploration and de- velopment of proprietary drug candidates, as well as those risks affiliated with the central Procurement and Logistics department. Personnel risks, such as the recruitment of suitable employees, or the loss of highly qualified and experienced employees, are also included in this category. The failure of clinical trials – whereby the failure of a trial does not necessarily mean the failure of an entire program – prior to out-licensing to partners may arise if the trial data does not show the expected results or demonstrates unexpected adverse side effects. The design of clinical trials and development plans are always undertaken with the utmost care. This gives trials in the course of clinical testing the greatest chance to present clinically relevant data, and thus to convince regulatory agencies and poten- tial partners. Next to the existing internal knowledge, external specialists are also involved. Special committees have been formed for monitoring the progress of clinical programs. In terms of procurement and logistics, close cooperation with sup- pliers is maintained in order to avoid delivery delays, bottlenecks, and the resulting increase in costs. This is supported by a routine supplier assessment that identifies potential problems and deter- mines solutions. These are then communicated both internally and externally to the respective managers responsible. Personnel risks occur in the area of recruitment and in the event of the loss of so-called top performers. When recruiting, this is particularly evident in terms of the difficulty in finding candidates with appropriate qualifications. The loss of top performers occurs when experienced and highly-qualified employees resign. To counter such risks, the Company’s human resources department seizes every opportunity – including collaborations with external organizations – to optimize the recruitment process. MorphoSys begins to search for suitable employees as early as possible. In ad- dition, the Company’s attractiveness as an employer with an open and innovative corporate culture is portrayed publicly through advertisements and at trade shows. Along with recruitment, staff retention represents one of the key elements of human resources management. Through continuous comparisons with industry- standard compensation systems, MorphoSys ensures that its em- ployees are paid fairly and competitively. Moreover, appropriate salary components and employee interviews cater to a performance- based incentive system and support the long-term aim of binding the employee to the Company. Corporate celebrations, team build- ing activities, as well as sports and social events, also contribute to a positive work environment. 61 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report STR ATEGIC RISKS In the reporting year, MorphoSys took an expanded approach to compiling strategic risks for the first time. A detailed explanation may be found in the section titled “Expansion of the Risk and Op- portunity Management System” (page 58). Strategic risks arise in the area of therapeutic molecules within the proprietary portfolio. The enhancement of the portfolio has be- come the key focus, once again, after MorphoSys was able to suc- cessfully bring two of the three existing proprietary programs into partnerships in the reporting year. In this context, risks can arise when there is a lack of access to attractive target molecules and compounds or to innovative technologies. These risks also ap- ply to missed or failed M&A transactions that could create access to strategically important assets. To counter such risks, a multidis- ciplinary team was established whose task is to expand the Com- pany’s portfolio and identify suitable therapeutic molecules that can be in-licensed. A New Discovery team was also created. This team searches for suitable target molecules in order to develop new therapeutic molecules for proprietary or external technologi- cal platforms. In order to obtain long-term options to new technolo- gies or therapeutic molecules, MorphoSys has additionally estab- lished the Innovation Capital program which invests venture capital in innovative start-up companies. Another strategic risk is that in the distant future, therapeutic an- tibodies will no longer be competitive because of the existence of potentially better molecules or more favorable therapeutic ap- proaches. This risk can also be classified as an industry risk. Again, through Innovation Capital, MorphoSys has created a suitable tool for identifying new trends at an early stage, so it can invest in these innovations, and thereby participate in their development. The Company’s own scouting team is searching worldwide for new and innovative technologies and also analyzes MorphoSys’s com- petitors at regular intervals. E X TERNAL RISKS For MorphoSys, external risks arise predominantly in relation to its intellectual property. Patent protection of MorphoSys’s propri- etary technologies is especially important. To mitigate the risks in this area, MorphoSys is continuously on the lookout for published patents and patent applications, the Company analyzes and moni- tors appropriate findings, and develops circumvention strategies for patents, that may potentially become relevant before they are issued. By following this strategy, MorphoSys has achieved increasing success over the years and has been able to secure sufficient lee- way over the long term for its proprietary technology platforms. Another area in which external risks may occur, is the collabora- tion with service providers in pre-clinical and clinical develop- ment. A minor or bad performance in this area could lead to delays in the development process and thus to financial losses. As a global biotechnology company with numerous partnerships and a proprietary research and development department for the development of drug candidates, the MorphoSys Group is exposed to numerous legal risks, particularly in the areas of patent law, li- ability claims arising from existing collaborations, competition and antitrust law, tax assessments and environmental matters. Future proceedings are conceivable but cannot be predicted at the moment. It is therefore possible that legal or regulatory judgments or future settlements could give rise to expenses that are not cov- ered, or not fully covered, by insurers’ compensation payments and could significantly affect our revenues and earnings. ORGANIZ ATIONAL RISKS Organizational risks occur in the areas of Partnered Discovery, Technical Operations, and IT. In the Partnered Discovery area, loss of quality or delays may occur within the organization due to an increase in the number of programs or the complexity of pro- grams. To reduce the complexity and thus the risks, uniform pro- cesses were introduced and their compliance is checked by regu- lar audits. Risks in Technical Operations affect operations and may lead to sustained damages and business interruptions, as well as acci- dents involving hazardous substances or pollutants. To avoid such disruptions, appropriate measures are taken, such as the routine inspection and maintenance of equipment and facilities, as well as training and tutorials for the employees concerned. Suitable electronic monitoring systems decrease such risks even further. Financial risks affecting this area are generally covered by insur- ance. Further information on MorphoSys’s operating environment may be found in the Sustainability Report. 62 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report Business activities can be exposed to risks that result from fail- ures of the IT infrastructure or IT security. These risks are man- aged using security copies created several times daily, as well as through the use of highly reliable firewall and antivirus scanning systems to ensure the safety and stability of the data. Additionally, MorphoSys minimizes the risks associated with the availability, reliability, and efficiency of its IT systems through continuous test- ing (for example, simulated, gradual hacker attacks), and updates of the software and hardware systems. The IT strategy is also re- viewed and adjusted on an annual basis. C OMPLIANCE RISKS Compliance risks may arise when quality standards are not met or business processes, from a legal standpoint, are not handled prop- erly. To counter these risks, MorphoSys is committed to meeting the highest quality standards in its business operations, as set out in the Sustainability Report. To minimize risk, the system is also routinely reviewed by external experts and subjected to routine inspections by an internal, independent quality assurance depart- ment. Specific risks could arise, for example, when the internal quality management system does not meet the legal requirements, or when there is a failure to implement internal systems for detecting quality defects. If internal controls are not able to detect guideline violations of the Good Manufacturing Practice (GMP), Good Clini- cal Practice (GCP), or Good Laboratory Practice (GLP), this would also constitute a compliance risk. Annual General Meetings performed incorrectly could lead to le- gal disputes with shareholders. The consequences of this would cause significant costs by attempting to either avert a challenge of the Annual General Meeting or, if this is not possible, to repeat the Annual General Meeting. In addition, capital measures up for reso- lution (for example, a capital increase) could possibly be at risk. To minimize this risk, the preparation and execution of the Annual General Meeting as well as all relevant documents and processes are closely monitored and examined both by the internal depart- ments responsible, and by external lawyers and auditors. t he mAnAGemen t BoArd’s evAluAt ion of t he overAl l risk si t uAt ion At t he morphosy s Group The Management Board of the MorphoSys Group considers the risk to be appropriate overall and trusts the effectiveness of the risk management system with regard to the changes in the environ- ment and the needs of the current business. It is the Management Board’s view that the continued existence of the MorphoSys Group is not jeopardized. This assessment applies to each individual Group company as well as to the MorphoSys Group as a whole. This assessment is based on a variety of factors which are sum- marized below: • the MorphoSys Group has an exceptionally high equity ratio and has successfully confirmed its corporate objectives, as it has in the past; • the Management Board of the Group is confident that MorphoSys is well positioned to cope with any adverse events which may occur; • the Group has a broad portfolio of preclinical and clinical pro- grams in partnerships with a number of large pharmaceutical companies, as well as a strong technological base for the further expansion of the proprietary portfolio. opportunities Leading antibody technologies, excellent know-how, and a broad portfolio of validated clinical programs, have made MorphoSys one of the world’s leading biotechnology companies in the field of therapeutic antibodies. Because this therapeutic class of molecules is now one of the most successful and best-selling drugs in cancer therapy, a significant number of pharmaceutical and biotechnol- ogy companies are active in the field of antibodies who could be- come future customers and partners for MorphoSys’s products and technologies. Due to this fact, and because of its long-standing expertise in the field of technology and product development, MorphoSys has identified a number of growth opportunities for the years to come. For the development and optimization of therapeutic antibody can- didates, MorphoSys’s antibody technologies offer crucial advan- tages that can lead to higher success rates and shorter develop- ment times in the drug development process. The transfer and the application of MorphoSys’s core areas of expertise, also outside of the antibody segment, present the Group with new opportunities because many classes of compounds are similar in their molecular structure. The Innovation Capital initiative can seize opportuni- ties which were previously unavailable, whereby MorphoSys can act as a strategic investor in young, innovative companies and thus effectively use synergies. 63 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report opp or t uni t y mAnAGemen t sy s t em The opportunity management system is an important part of cor- porate governance at MorphoSys. It serves to identify opportuni- ties at an early stage and to generate added value for the Company. mArke t opp or t uni t ies MorphoSys believes that its HuCAL, Ylanthia, and Slonomics anti- body platforms can be used to develop products that address con- siderable, unmet medical needs. Opportunity management relies on four pillars: • a routine discussion forum of the Management Board and se- lected members of the Senior Management Group; • the business development activities of the Company; • a Technology Scouting team; and • the Innovation Capital initiative. During the discussion forums, selected opportunities are dis- cussed and, where applicable, actions are agreed upon for seizing these opportunities. The meetings and their results are recorded in detail and further actions are examined and monitored. The Group’s Business Development team has participated in numerous conferences and identified various opportunities that can contrib- ute to the Company’s growth. These are presented in the discus- sion forum and assessed through evaluation processes. The Tech- nology Scouting team seeks to identify innovative technologies that can generate synergies with the technological infrastructure of MorphoSys and that are suitable for the identification of new therapeutic molecules. These results are also discussed and evalu- ated by internal committees existing across all departments. The Innovation Capital initiative, which has already been described, also allows MorphoSys to participate in early innovations and uti- lize these for the benefit of the Company in the future. An estab- lished opportunity evaluation process ensures a qualitative and reproducible assessment of opportunities. GenerAl s tAt emen t on opp or t uni t ies Increased life expectancy in industrialized countries and the changing income situation and lifestyle in emerging countries are expected to drive demand for additional and innovative treatment options and advanced technologies. Scientific and medical prog- ress have led to a better understanding of the biological processes of disease, which in turn leads to new therapeutic approaches. Innovative therapies, such as fully human antibodies, have reached market maturity in recent years and have led to the devel- opment of commercially successful medical products. In addition, therapeutic compounds based on proteins* – also known as bio- logical compounds or biologics – are threatened less by competi- tion from generics than chemically produced molecules because the production of biological compounds is far more complex. Therefore, the demand for antibodies and the interest in this cate- gory of drugs have risen sharply over the past 36 months as dem- onstrated by the various acquisitions and significant licensing agreements in this field. *s e e G l o s s A r y pa g e 1 5 8 t herApeu t iC An t iBodies – pAr t nered disCovery By cooperating with numerous partner companies in drug devel- opment, MorphoSys has been able to more widely diversify the risk that is inextricably linked to the development of individual drugs. With more than 70 unique therapeutic antibodies currently in development programs with partners, the chances are ever higher for MorphoSys to participate financially in the marketing of drugs. In 2013, already two antibodies are in clinical phase 3. In the case of positive clinical trial results, regulatory approval could be conceivable in the near future. Partner Novartis has announced that an application for the regulatory approval of the bimagrumab antibody may be submitted in 2016. MorphoSys will continue to expand its partnered antibody pipe- line. In addition, MorphoSys may enter into further partnerships on a fee-for-service basis. t herApeu t iC An t iBodies – proprie tAry devel opmen t The pharmaceutical industry is likely to further intensify its in- licensing of new compounds in order to refuel its pipelines and replace previous key products and revenue generators that have lost their patent protection. With its most advanced compounds MOR103, MOR202, and MOR208, MorphoSys is in a good position to capitalize on the needs of the pharmaceutical groups. The alli- ances for MOR103 and MOR202, which have been started success- fully in 2013, underline this position. The proceeds secured over the coming years from the Partnered Discovery segment place MorphoSys in a position to continually strengthen its proprietary portfolio. MorphoSys is expanding its proprietary portfolio through additional clinical trials with its key drug candidates, with which, for example, new areas of disease can be investigated. MorphoSys plans to add programs to its port- folio and may take advantage of existing and future co-develop- ment opportunities to do this. Furthermore, the Company is seek- ing opportunities to in-license interesting drug candidates. The co-operation with Celgene for MOR202 could, for the first time, open the chance for MorphoSys to bring a drug to market. 64 G r o u p m A n A G e m e n t r e p o r t Risk and Opportunity Report t eChnol oGy devel opmen t MorphoSys continues to invest in its existing and new technolo- gies in order to maintain its top position as a technological leader. Through Ylanthia, MorphoSys has established a new technology platform, which, unlike its predecessor HuCAL, is available for broader licensing to different partners. In 2012, MorphoSys began with the commercialization of the Ylanthia antibody library. Technological advances of this kind put the Company in a position to expand its list of partners and not only increase the speed, but also the success rate of partnered and proprietary drug develop- ment programs. New technology modules could also open up new areas of disease, where antibody-based treatments are still under- represented, by allowing the production of antibodies for new classes of target molecules. The development of technologies is driven by a team of scientists who concentrate on the further development of MorphoSys technol- ogies. In addition to in-house technology development, MorphoSys also relies on external sources to strengthen its technological ca- pacities. The cooperation and equity investment in Lanthio Pharma, a Dutch company dealing with the development of lantipeptides, is a good example of such activities. ACQuisi t ion opp or t uni t ies In the past, MorphoSys has proven its ability to make acquisitions and use these to accelerate its growth. Potential acquisition candi- dates are systematically presented, discussed, and evaluated within the scope of the routine meetings of the Management Board and members of the Senior Management Group already described. Subsequent to these meetings, promising candidates are exam- ined for strategic synergies and evaluated by an internal specialist committee. Protocols are completed on all candidates and assess- ments, and are then systematically archived for observation and follow-up. A proprietary database helps in administering this in- formation and keeping it available. MorphoSys plans to continue to drive its strategy forward in the new year to expand its market share, complement its existing port- folio and technology platform, and to secure access to patents and licenses for the development of new proprietary technologies and products. f inAnC iAl opp or t uni t ies Favorable exchange rate and interest rate developments can have a positive effect on the Group’s financial results. The developments in the interest rate and financial markets are continuously moni- tored in order to immediately identify and utilize any opportunities. risK And opportunity mAnAgEmEnt At A glAncE thE risK And opportuni t y mAnAgEmEnt systEm At morphosys 20 Corporate Governance supervisory Board management Board Compliance management risk management opportunity management internal Control system defi ne objectives Assess risk discussion forum Business development monitor system implement measures technology scouting innovation Capital internal Audit 65 risK And opportunity mAnAgEmEnt At A glAncE thE risK And opportuni t y mAnAgEmEnt systEm At morphosys Abbildung 20 20 Corporate Governance supervisory Board management Board Compliance management risk management opportunity management internal Control system defi ne objectives Assess risk discussion forum Business development monitor system implement measures technology scouting innovation Capital internal Audit 66 DESCRIP T ION OF MAJOR RISKS AT MORPHOSYS (Quantifi cation in points, defi nition of color code on page 67: “scoring system in points”) 21 F INANCIAL RISKS OPERAT IONAL RISKS ST RAT EGIC RISKS Risks resulting from not reaching revenues as expected, derived from existing business with partners in proprietary programs Risks inherent to proprietary antibody discovery and development as well as development with partners Risks resulting from a lack of possibilities to in-license therapeutic molecules 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E Risks resulting from bank insolvencies Risks resulting from purchasing and logistics-related issues Risks resulting from missed opportunities for acquisitions EX T ERNAL RISKS ORGANIZAT IONAL RISKS COMPL IANCE RISKS Risks resulting from IP-related issues Risks resulting from increased amount and complexity of programs Risks resulting from quality-related issues due to legal requirements 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E 1 -Y E A R E S T I M AT E 3 -Y E A R E S T I M AT E Risks resulting from external service providers Risks resulting from technical operations issues Risks resulting from legal issues 67 SCORING SYST EM IN P OIN TS IMPACT LOW MEDIUM HIGH VERY HIGH CATASTROPHIC LIKELIHOOD VER Y UNL IK ELY UNL IK ELY M O D E R AT E L IK E LY AL M O S T C E R TAIN 1 2 3 4 5 2 4 6 8 3 6 9 4 8 5 10 12 15 12 16 20 10 15 20 25 C AL C UL AT IO N O F P OI N T S Impact x Likelihood = Points S C O R IN G low risk acceptable risk 1–2 points 3–4 points 5–9 points 10–12 points 15–25 points high risk Risks valued at 1 to 4 points represent a low risk (low probabil- ity, minor eff ects). Risks valued at 5 to 12 points represent acceptable risks (medium probability, moderately severe eff ects). For risks valued at 15 to 25 points, risk minimization measures must be implemented (high probability, severe eff ects). 68 G r o u p m A n A G e m e n t r e p o r t Subsequent Events Subsequent Events On 22 January 2014 an updated statutory share capital was entered in the Commercial Register (Handelsregister B München). The new share capital at 22 January 2014 amounts to € 26,220,882.00, di- vided into 26,220,882 no-par value bearer shares. No further significant changes took place after the conclusion of the 2013 financial year. Other events with a significant effect on the net assets, financial position and results of operations also did not occur after the conclusion of the financial year. 69 G r o u p m A n A G e m e n t r e p o r t Outlook and Forecast Outlook and Forecast The MorphoSys Group develops new antibody drugs and tech- nologies. Through the sale of the research antibody segment, AbD Serotec, in early 2013, MorphoSys has strengthened its focus on the development of therapeutic compounds. The out-licensing of MOR103 and the alliance for MOR202 in 2013 affirm the potential for the appreciation in value this strategic direction can bring. The management of MorphoSys intends to further expand its port- folio of proprietary drug candidates and will invest in this area accordingly. In addition, MorphoSys will continue to focus on the use and expansion of its technologies in fast-growing areas of the healthcare sector driven by innovation. overall statement on Expected development The strategic focus of MorphoSys lies in the development of a broad and sustainable pipeline of innovative drug candidates, both on a proprietary basis and with partners. This foundation is formed by established and proven technologies, and the Company contin- ues to invest in their development. In the therapeutic area, the commercialization of these technologies provides cash flows se- cured by contracts from long-term partnerships with large phar- maceutical companies. Additionally, MorphoSys profits from the successful development of drug candidates, not only through mile- stone payments, but also through royalties from product sales as soon as the drugs reach the market. The Group’s stable cash flows* and strong liquidity make it possible to expand business activities through investment in the proprie- tary development of drugs and technologies. In the year 2014, the Management Board expects the following developments: • MorphoSys will expand its proprietary portfolio through in-li- censing, company acquisitions and/or development collabora- tions, as well as through new developments; • MorphoSys will continue to invest in technology development in order to maintain its top position in the field of antibodies and related technologies. The Company expects to sign new strategic agreements on the basis of the Slonomics and Ylanthia proprie- tary technologies, in order to, for example, obtain access to in- novative target molecules and compounds; • the demand for antibodies for use in new methods of treatment continues to remain high and allows the Company to continue to expand its pipeline of therapeutic antibodies within its partner- ships; • the pharmaceutical industry continues to use the in-licensing of compounds to gain access to promising product candidates. Suc- cessful out-licensing of proprietary drug candidates could result in lucrative cash flows. *s e e G l o s s A r y pa g e 1 5 8 strategic outlook MorphoSys’s business model is based on its proprietary technolo- gies, including the HuCAL antibody library, the Slonomics plat- form, the Ylanthia antibody library, as well as the Company’s abil- ity to develop innovative drug candidates. The Partnered Discovery segment generates cash flows secured by contracts based on long-term collaborations. The development of therapeutic antibodies within partnerships will remain a central pillar of MorphoSys’s strategy. The therapeutic pipeline should continue to grow and mature in the years to come and lead to fur- ther milestone payments. The broad pipeline promises an impres- sive number of market-ready, therapeutic antibodies in the coming years and consequently financial participation in the form of roy- alty payments from product sales. In the Proprietary Development segment, MorphoSys is develop- ing therapeutic antibodies in the area of inflammatory disease and oncology on a proprietary basis. MorphoSys will consider entering into alliances for the further development of its proprietary candi- dates on a case-by-case basis. Under certain conditions, individual projects could also be developed in-house for an extended period of time, possibly even up to the point where they are marketable. At the end of 2013, the MOR103, MOR202, and MOR208 clinical pro- grams were the main assets in MorphoSys’s proprietary develop- ment portfolio. Agreements were announced in the 2013 financial year for MOR202 and MOR103. Currently, the Company is not seeking a partner for MOR208 but prefers to continue with the further clinical development on a proprietary basis. 70 G r o u p m A n A G e m e n t r e p o r t Outlook and Forecast In the foreseeable future, MorphoSys will invest the majority of its financial resources in its own research and development in order to expand its portfolio of proprietary compound candidates and strengthen its technology platform. Fairly rapid growth for the world economy as a whole is expected in 2014. However, the OECD has lowered their forecasts in re- sponse to the braking effect of emerging economies, which pro- vided additional tensions in the markets as well as capital out- flows. The OECD now expects global GDP growth of 3.6 %. Expected Economic development The global economy is expected to experience subdued growth in the year 2014. The crisis countries in the eurozone, such as Spain, which have already undergone far-reaching reforms, should see the benefits of their efforts. Other countries, however, threaten to fall further behind, causing the euro area as a whole to see only a slow recovery from the severe recession. According to the esti- mates of financial analysts, the ECB may possibly ease monetary policy even further. Under a new federal government in Germany, with the large coali- tion comprising the CSU/CDU and SPD, the labor market reforms of the Agenda 2010 are likely to be scaled back, which could have a negative impact on the country’s long-term economic growth. Nonetheless, the German economy will stand out as the top growth gainer of the eurozone since the low ECB interest rate of currently 0.25 % is likely to fan the domestic economy. According to esti- mates, companies will increase their investments again and ex- ports will benefit from the somewhat stronger demand from other eurozone countries. For 2014, analysts expect growth of 1.7 %. The US was able to strengthen its economic equilibrium in the past year. The real estate bubble lost its steam, continuous im- provement in the labor market is set to strengthen private con- sumption, and the government budget deficit could be vastly re- duced despite precarious discussions. This should lead to economic growth of about 2.8 % in 2014, according to estimates by financial experts of Commerzbank. Asia is also expected to have strong growth in 2014. Despite a planned increase in sales tax, Japan is expected to have stable growth and a continued loose monetary policy of the central bank. The Chinese economy is expected to grow 7.5 % in 2014 – similar to the rate in 2013. Owing to a far-reaching reform program ap- proved at the end of the year, experts expect China’s growth to prove to be very stable. Expected development of the life sciences sector Historically, the pharmaceutical and healthcare industries have been relatively immune to economic downturns. An aging popula- tion in the developed nations and rising living standards in the former developing countries call for new and innovative treat- ments. However, the government budgets’ need for drastic cost- cutting measures have led to upheavals in the international health system. These have a direct impact on reimbursement policies and, accordingly, on pharmaceutical companies. The patent expiry of high-revenues drugs continues to pose a problem for the phar- maceutical industry, whereby the lion’s share of patent expirations has probably been overcome. However, pharmaceutical companies still suffer from a lack of innovation and a lack of new products. The outlook for the biotechnology industry is still very favorable. Pharmaceutical companies are still willing to invest large sums in the development of innovative and promising product candidates by in-licensing of such programs from biotechnology companies. The impact of the enacted Patient Protection and Affordable Care Act on the US healthcare industry is not yet quantifiable. As of 1 January 2014, every American must obtain health insurance. Ac- cording to media reports, approximately three million new health insurance contracts were concluded in the first weeks following the healthcare reform. A study by IMS Health predicts that this broad access to health services in combination with lower patent expirations in 2014 will lead to higher spending on US healthcare. Expected business development With the contractually guaranteed proceeds from the Novartis agreement until at least the end of 2017, the financial impact of the contract with Celgene, and new commercial opportunities through proprietary technology platforms such as Slonomics and Ylanthia, MorphoSys will continue to focus on expanding its partnered pipe- line and increasing the value of its proprietary portfolio. 71 G r o u p m A n A G e m e n t r e p o r t Outlook and Forecast In the Partnered Discovery segment, for the next few years, the Company expects to be able to start close to ten new partner pro- grams annually on average. However, due to the attrition rates in drug development, the net growth of the overall pipeline will be somewhat lower. Additional partnerships with pharmaceutical and biotechnology companies based on the Ylanthia technology are expected to occur. These partnerships are intended to provide the additional benefit of access to new target molecules and therapeu- tic programs. In June 2013, MOR103 was out-licensed to GlaxoSmithKline (GSK). The phase 1b trial in patients with multiple sclerosis, which has already started, will be completed by MorphoSys and the results will be presented in the first half of 2014. Thereafter, GSK will as- sume further development of the compound. In June 2013, a strategic alliance was concluded with Celgene for MOR202. Currently, a joint development plan for the compound is being completed. MorphoSys and Celgene share the global devel- opment costs at a ratio of one third to two thirds. Upon successful development of MOR202, MorphoSys has secured the option to commercialize the drug together with Celgene in Europe. For the time being, MorphoSys will continue to develop MOR208 in-house. Decisions on a possible partnering or out-licensing of the compound will be based on the clinical results as well as on the developments in the market for this class of blood cancer drugs. The approval of a therapeutic antibody on the basis of proprietary technology is not expected before 2016/2017. As one of the first partners, Novartis has announced publicly that the therapeutic antibody bimagrumab (BYM338) could be submitted for approval in 2016. Guselkumab (CNTO1959), an antibody compound being developed by Janssen, may also enter the market in 2016/2017. Expected personnel development The Group’s workforce in the two segments Partnered Discovery and Proprietary Development should remain at approximately the same level as in the 2013 financial year. The need for additional personnel could arise through entering into new development collaborations or from the in-licensing of new technologies or de- velopment candidates. future research and development The Company’s R&D budget for proprietary drug development will rise significantly in 2014 compared to the previous year. The majority of these investments will flow to the clinical develop- ment of the most advanced drug candidates. Further investments are planned in the areas of target validation and antibody develop- ment as well as in the area of technology development. The steps planned for the Company’s proprietary portfolio in 2014 steps are expected to include: • completion of the phase 1b safety study in multiple sclerosis for MOR103 as the second indication; • completion of the ongoing phase 1/2a trial for MOR202 in mul- tiple myeloma; • initiation of new trials within the partnership with Celgene for MOR202; • continuation of two phase 2 clinical trials for MOR208 in NHL and B–ALL; • continuation of the joint development programs with Galapagos; • in-licensing of one or more target molecules or compounds for strengthening the proprietary development portfolio; • cooperation with Lanthio Pharma for creating high-quality and highly diverse lantipeptide libraries; • initiation of de novo discovery programs. Expected development of the financial position and liquidity MorphoSys has a solid financial base and predictable revenues, mainly due to its collaboration with Novartis. In the 2013 financial year, two compound candidates were brought into partnerships leading to revenues, and licensing fees were recognized in relation to the sale of the AbD Serotec business. After this operationally very positive year, the Management Board expects Group revenues of € 58 million to € 63 million in 2014. The Partnered Discovery segment is a highly profitable business unit. Until the end of 2017, the Company will receive contractually secured cash flows, particularly from the agreement with Novartis. The Proprietary Development segment is expected to incur a loss in 2014 following the successful, revenue-generating contracts for two proprietary programs. This will occur as a result of intensive investment in the development of the proprietary drug candidate 72 G r o u p m A n A G e m e n t r e p o r t Outlook and Forecast MOR208, as well as from pro-rated investments in MOR202’s de- velopment in collaboration with Celgene. Furthermore, MorphoSys is planning to use its financial resources to strengthen the propri- etary portfolio, through the identification and development of fur- ther product candidates and also through potential in-licensing and acquisition of interesting product candidates. Based on the management’s current forecasts, the R&D expenses for proprietary programs and technology development are expected to be in the range of € 36 million to € 41 million. MorphoSys in- tends to conclude the MOR103 trial in multiple sclerosis (MS), as well as continue the MOR202 trial with Celgene in multiple my- eloma. The Company will also continue the phase 2 clinical trials of MOR208 in acute B-cell lymphocytic leukemia (B-ALL) and non- Hodgkin’s lymphoma (NHL). In addition, the Company plans to in- license one or more drug candidates in the years that follow. The financial guidance for 2014 does not include additional develop- ment expenses for any newly in-licensed program. The Company expects an EBIT in the range of approximately € – 11 million to € – 16 million in 2014. In the coming years, non-recurring events will have an increasing impact on the net assets and financial position, as was clearly seen in the year 2013. Such non-recurring events may include the out- licensing of proprietary products and larger milestone payments and royalties related to the achievement of market maturity of partnered HuCAL antibodies. Such events could again lead to substantially surpassing our financial targets. Similarly, failures in drug development can have negative consequences for the MorphoSys Group. In the near future, revenue growth will depend on the Company’s ability to enter into new partnerships, and/or out-license proprietary programs. Medium term, royalties on mar- keted products could contribute to revenue growth. At the end of the 2013 financial year, the liquidity position of MorphoSys amounted to €  390.7  million (31 December 2012: €  135.7  million). The significant strengthening of the liquidity position is a result of the sale of MorphoSys’s business unit AbD Serotec, the license agreements with GSK and Celgene, and a suc- cessful capital increase in September 2013. MorphoSys sees its strong liquidity position as an advantage that can be used for stra- tegic measures such as the in-licensing of compounds and partici- pation in promising companies to accelerate its future growth. Furthermore, the liquid funds could be used for more investment in the Company’s proprietary portfolio of therapeutic antibodies. dividends In its financial statements according to German accounting prin- ciples, MorphoSys AG reports an accumulated profit, which could be used for distribution. Nevertheless, in line with the current practice in the biotechnology industry, MorphoSys does not antici- pate paying a dividend in the foreseeable future. To continue to create shareholder value and provide new growth opportunities for the Company, our profits are reinvested to a large extent in op- erating activities – primarily in the development of proprietary drugs. As in 2013, the Company intends to repurchase treasury shares on the market. The treasury shares can be used for the long-term incentive programs for the Management Board and the Senior Management Group and for all other legally permitted purposes. This outlook is based on the assumptions of the Management Board and takes into account all factors that were known at the date when this annual report was prepared and that could affect our business in 2014 and the years that follow. Future results may differ materially from expectations, which are described in the section “Outlook and Forecast”. The most important risks are dis- cussed in the risk report. Signifi cant rise of r&d budget for proprietary drug development in 2014 22 Completion of the phase 1b safety study in multiple sclerosis for MOR103 as the second indication Initiation of new trials within the partnership with Celgene for MOR202 Continuation of the joint development programs with Galapagos Cooperation with Lanthio Pharma for creating high-quality and highly diverse lantipeptide libraries Initiation of de novo discovery programs Completion of the ongoing phase 1/2a trial for MOR202 in multiple myeloma Continuation of two phase 2 clinical trials for MOR208 in NHL and B–ALL In-licensing of one or more target molecules or compounds for strengthening the proprietary development portfolio 73 Signifi cant rise of r&d budget for proprietary drug development in 2014 Abbildung 22 22 Initiation of de novo discovery programs Completion of the ongoing phase 1/2a trial for MOR202 in multiple myeloma Continuation of two phase 2 clinical trials for MOR208 in NHL and B–ALL In-licensing of one or more target molecules or compounds for strengthening the proprietary development portfolio Completion of the phase 1b safety study in multiple sclerosis for MOR103 as the second indication Initiation of new trials within the partnership with Celgene for MOR202 Continuation of the joint development programs with Galapagos Cooperation with Lanthio Pharma for creating high-quality and highly diverse lantipeptide libraries 74 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report Statement on Corporate Governance and Corporate Governance Report The Statement on Corporate Governance and the Corporate Gover- nance Report are also published on the Company’s website under Media & Investors > Corporate Governance. 3. MorphoSys AG will continue to comply with the recommenda- tions of the “Government Commission on the German Corporate Governance Code” in the Code version dated 13 May 2013 – with the exceptions described below under item no. 4. statement on corporate governance pursuant to sec. 289a of the german commercial code (hgb) for the 2013 financial year In the Declaration on Corporate Governance pursuant to Sec. 289a of the German Commercial Code (HGB), the Management Board and Supervisory Board report on corporate governance. In addi- tion to the annual Declaration of Conformity in accordance with Sec. 161 of the German Stock Corporation Act (AktG), it also in- cludes relevant information on corporate governance practices and other aspects of corporate governance, particularly a description of the working practices of the Management Board and Supervi- sory Board. deCl ArAt ion of Conf ormi t y of t he mAnAGemen t BoArd And the supervisory BoArd of morphosys AG reGArdinG the GermAn CorporAte GovernAnCe Code ( the “Code” ) The Management Board and the Supervisory Board of MorphoSys AG declare pursuant to Sec. 161 of the German Stock Corporation Act: 1. Since the last Declaration of Conformity on 7 December 2012, MorphoSys AG has complied with the recommendations of the “Government Commission on the German Corporate Gover- nance Code” – with the exceptions described below under item no. 4. – in the Code version dated 15 May 2012. 2. On 13 May 2013, the “Government Commission on the German Corporate Governance Code” submitted a new version of the Code. MorphoSys AG has also complied with the recommenda- tions of this new version of the Code – with the exceptions de- scribed below under item no. 4. 4. Exceptions: • Remuneration of Management Board members does not pro- vide for a cap, neither overall nor for individual compensation components (see item 4.2.3 Para. 2 Sentence 6 of the Code). In view of existing limitation possibilities of the Supervisory Board concerning the variable components of the Manage- ment Board and of its annual allocation, the Supervisory Board does not believe that an additional cap is required. • The Supervisory Board has refrained from full application of the recommendations of item 5.4.1 Para. 2 and Para. 3 Sen- tence 1 of the Code. Pursuant to item 5.4.1 Para. 2, the Super- visory Board shall specify concrete objectives regarding its composition, which in particular shall stipulate an appropri- ate degree of female representation. According to item 5.4.1 Para. 3 Sentence 1, proposals by the Supervisory Board to the competent election bodies shall take these objectives into ac- count. The Supervisory Board has determined concrete objec- tives regarding its composition and thereby has also decided to strive for an adequate representation of women on the Su- pervisory Board. A concrete quota for female members of the Supervisory Board has not been provided. However, the quali- fication and not the gender should be the decisive criteria in the individual cases for appointment to the Supervisory Board. Martinsried/Planegg, 6 December 2013 MorphoSys AG For the Management Board: Dr. Simon Moroney Chief Executive Officer For the Supervisory Board: Dr. Gerald Möller Chairman of the Supervisory Board 75 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report rel evAn t inf ormAt ion on Corp orAt e GovernAnCe prAC t iCes MorphoSys ensures compliance with the laws and rules of con- duct, especially through the use of a Group-wide Code of Conduct, as well as through supplementary internal guidelines. MorphoSys’s “Code of Conduct” sets out the fundamental principles and key policies and practices for behavior in business. The Code serves as a valuable tool for employees and management staff particularly in business, legal, and ethical situations of conflict. In addition, the Code of Conduct strengthens transparency and consistent management principles as well as the strengthening the trust in the Company of the financial markets, business part- ners, employees, and the public. Compliance with the Code of Con- duct is carefully monitored. The Group-wide implementation of the Code is accompanied by the Code of Conduct Committee. The Code of Conduct can be downloaded from the internet at Media & Inves- tors > Corporate Governance. Comp osi t ion of t he mAnAGemen t BoArd And t he supervisory BoArd MANAGEMENT BOARD The Management Board of MorphoSys AG consists of the Chief Executive Officer and three other members. In the schedule of responsibilities, the various areas of responsibility are defined as follows: • Dr. Simon Moroney, Chief Executive Officer, is responsible for Strategy and Planning; Compliance and Quality Assurance; In- ternal Audit; Human Resources; Business Development & Port- folio Management; Legal; and the coordination of individual areas of the Management Board; and representation of the Man- agement Board to the Supervisory Board. • Jens Holstein, Chief Financial Officer, is responsible for Account- ing and Taxes; Controlling; Corporate Finance & Corporate De- velopment; Risk Management; IT & Technical Operations; Pro- curement and Logistics; Corporate Communications & Investor Relations. • Dr. Arndt Schottelius, Chief Development Officer, is responsible for Preclinical Development; Clinical Research; Clinical Opera- tions; Drug Safety & Pharmacovigilance; Regulatory Affairs; and Project Management. • Dr. Marlies Sproll, Chief Scientific Officer, is responsible for Development Partnerships & Technology Development; Target Molecule & Antibody Research; Protein Chemistry; Alliance Management; and Intellectual Property. SUPERVISORY BOARD As of 31 December 2013, the Supervisory Board of MorphoSys AG consisted of six members, who oversee and advise the Manage- ment Board. The present Supervisory Board consists of profes- sionally qualified members representing the shareholders of MorphoSys AG. Dr. Gerald Möller, acting as Chairman of the Supervisory Board, coordinates the Board’s work, chairs the Super- visory Board meetings, and represents the concerns of the Super- visory Board externally. All members of the Supervisory Board are independent in the meaning of the Code and possess many years of experience in the biotechnology and pharmaceutical industries. They are duly elected by the shareholders in the course of the An- nual General Meeting. The Chairman of the Supervisory Board is not a former member of the Management Board of MorphoSys AG. The precise composition of the Supervisory Board and its commit- tees is contained in the following table. Comp o si t ion of t he supervi s or y B oArd 15 position initial Appointment end of period1 Audit Committee remunera- tion and nomination Committee science and technology Committee Dr. Gerald Möller Dr. Geoffrey Vernon Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham Chairman Deputy Chairman Member Member Member Member 1999 2015 1999 2007 2002 2012 2012 2015 2014 2015 2015 2015 2 Independent Financial Expert   Chairman   Member 1 Period ends with termination of Annual General Meeting  2 Since 30 July 2013. 76 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report Management Board and the Supervisory Board is held annually, in which the strategic orientation of MorphoSys is discussed in par- ticular. The Management Board’s rules of procedure set out that important business transactions are subject to the agreement of the Supervisory Board. Further information on the collaboration between the Management Board and the Supervisory Board and on important topics discussed in the 2013 financial year may be found in the Report of the Supervisory Board. The Supervisory Board shall hold at least two meetings per calen- dar half-year, and at least six per calendar year. In addition to the provisions of the Articles of Association, the Supervisory Board has added rules of procedure with regard to its duties: The Super- visory Board Chairman coordinates the work of the Supervisory Board, chairs its meetings, and represents the affairs of the Board externally. The Supervisory Board usually makes its decisions in meetings. However, decisions can also be made by telephone, video conference, or outside of the meetings. The Supervisory Board constitutes a quorum when at least two thirds of its members (including either the Chairman or the Dep- uty Chairman of the Supervisory Board) participate in the vote. Generally, resolutions of the Supervisory Board shall be adopted by a simple majority of the votes cast, unless the law prescribes a different majority. In the event of a tied vote, the vote of the Super- visory Board Chairman will decide. Supervisory Board meetings are recorded. Resolutions which are taken outside of the meetings are also recorded. A copy of the min- utes and the resolutions adopted outside of meetings is provided to all members of the Supervisory Board. In accordance with the rec- ommendation in item no. 5.6 of the Code, the Supervisory Board evaluates the efficiency of its work on a regular basis. Comp osi t ion And Work inG prAC t iCes of t he mAnAGe- men t BoArd’s And supervisory BoArd’s Commi t t ees The Management Board has not established any committees. The Supervisory Board has three committees: the Audit Commit- tee, the Remuneration and Nomination Committee, and the Sci- ence and Technology Committee. The three committees formed by the Supervisory Board are occupied by professionally qualified members. Work inG prAC t iCes of t he mAnAGemen t BoArd And supervisory BoArd To ensure good corporate governance, open and complete informa- tion on a routine basis is a guiding principle for the cooperation of the Management Board and Supervisory Board of MorphoSys AG. The dual management system required by the German Stock Cor- poration Act, explicitly differentiates between the management and the supervision of a company. The responsibilities of both boards are clearly defined by the legislator and by the Boards’ by- laws and the Articles of Association. MorphoSys AG’s Management and Supervisory Boards work closely together and act and make decisions for the benefit of the Company. Their stated objective is the sustainable increase in the Company’s value. Each Management Board member has their own area of responsi- bility, which is defined in the schedule of responsibilities. Each member reports regularly on their respective area of responsibil- ity to their Management Board colleagues. The collaboration of Management Board members is governed by the bylaws. Both, the schedule of responsibilities and the bylaws were enacted by the Supervisory Board. The meetings of the Management Board typi- cally take place once a week and are chaired by the Chief Execu- tive Officer. At the meetings, resolutions related to actions and transactions are passed that, under the rules of procedure, require the approval of the entire Management Board. In order to pass resolutions, at least half of the members of the Management Board must participate in the vote. Resolutions of the Management Board are passed by a simple majority. In the event of a tied vote, the vote of the Chief Executive Officer decides. In the case of significant events, each member of the Management Board or the Supervisory Board may convene an extraordinary meeting of the Management Board as a whole. Resolutions of the Management Board may also be passed outside of its meetings by voting verbally, by telephone, or in writing (including email). A written record is made of each meeting of the full Management Board. This protocol is then sub- mitted for approval at the subsequent meeting of the full Manage- ment Board and signed by the Chief Executive Officer. In addition to the regular Management Board meetings, a Manage- ment Board strategy workshop is held annually. In this workshop, the Management Board prioritizes the strategic objectives across the Group and develops the future strategy. The Management Board informs the Supervisory Board with re- spect to planning, business development, and the position of the Group, including risk management and compliance issues, in a timely and comprehensive manner in writing as well as at the Su- pervisory Board meetings. An extraordinary meeting of the Super- visory Board shall be convened if necessary in case of a material event. The Management Board involves the Supervisory Board in the strategy and planning, as well as in all decisions of fundamen- tal importance for the Company. In addition to the regular Super- visory Board meetings, a further strategy meeting between the 77 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report p Ar t iC ip At ion of supervi s or y B oArd memBers 16 supervi s or y B oArd mee t inGs at t e n d e d i n p e r s o n pa r t i c i pat e d b y p h o n e by phone 01/16 2013 by phone 03/21 2013 02/26 2013 by phone by phone offsite meeting 06/03 2013 07/30 2013 08/10 2013 09/18-19 2013 10/14-15 2013 11/05 2013 12/18 2013 – name Dr. Gerald Möller Dr. Geoffrey Vernon Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham mee t inGs of t he Audi t Commi t t ee name 02/26/2013 03/21/2013 05/02/2013 07/30/2013 11/05/2013 12/18/2013 by phone by phone Dr. Daniel Camus Karin Eastham Dr. Geoffrey Vernon mee t inGs of t he remunerAt ion And nominAt ion Commi t t ee name Dr. Gerald Möller Dr. Marc Cluzel Karin Eastham (Member since July 2013) 02/26/2013 06/03/2013 07/30/2013 11/05/2013 12/18/2013 mee t inG of t he s C ienC e And t eC hnol o G y Commi t t ee name Dr. Walter Blättler Dr. Marc Cluzel 02/26/2013 06/03/2013 07/30/2013 11/05/2013 12/18/2013 78 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report AUDIT C OMMIT TEE The central task of the Audit Committee is to assist the Super- visory Board in carrying out its supervisory duties with respect to the accuracy of the annual financial statements and the consoli- dated financial statements, the activities of the external auditors, the internal control functions, particularly risk management, com- pliance, and internal audit. In addition, the Audit Committee pre- pares the award of the audit mandate to the auditor. Members of the Audit Committee are Dr. Daniel Camus (Chairman), Ms. Karin Eastham, and Dr. Geoffrey Vernon. All three members are inde- pendent financial experts. REMUNER ATION AND NOMINATION C OMMIT TEE The Remuneration and Nomination Committee is responsible for the preparation and annual review of the Management Board’s compensation system before its final approval. In addition, the Committee monitors, when necessary, the search for suitable can- didates for appointment as Management Board members or as Supervisory Board members and submits proposals to the Super- visory Board in this regard. The Committee also prepares contracts with Management Board members. The members of the Remunera- tion and Nomination Committee are Dr. Gerald Möller (Chairman), Dr. Marc Cluzel, and Ms. Karin Eastham. SCIENCE AND TECHNOLO GY C OMMIT TE E The Science and Technology Committee advises the Supervisory Board on matters concerning proprietary drugs and technology development and also prepares the relevant Supervisory Board resolutions. The members of the Science and Technology Commit- tee are Dr. Walter A. Blättler (Chairman), and Dr. Marc Cluzel. The biographies of the Supervisory Board members can be found on MorphoSys’s website under Company > Management > Super- visory Board. corporate governance report MorphoSys makes responsible, sustainable, and value-oriented corporate governance its highest priority. Good corporate gover- nance is a central component of the corporate management at MorphoSys. It forms the framework for the management and supervision of the Group, including its organization, commercial principles, and guidance and control measures. With the creation of the German Corporate Governance Code (the “Code”), a standard was established for transparent monitoring and control of enterprises, and which is particularly oriented to- wards the interests of shareholders. Many of the principles con- tained in the Code on Corporate Governance have been practiced at MorphoSys for a long period of time. Individual issues relating to corporate governance at MorphoSys AG are detailed in the Dec- laration on Corporate Governance pursuant to Sec. 289a of the Ger- man Commercial Code (HGB). This also includes the annual Decla- ration of Conformity, relevant information on corporate governance practices, and a description of the working practices of the Man- agement Board and Supervisory Board. Additional information may be found in this Corporate Governance Report. CommuniC At ion Wi t h t he C Api tAl mArke t s One of the most important foundations of MorphoSys’s corporate communication is to inform institutional investors, private share- holders, financial analysts, employees, and all other stakeholders simultaneously and comprehensively regarding the situation of the Company. This is accomplished through routine, transparent, and timely communication. All essential information is published on the internet. The company is strictly committed to the principle of fair disclosure. A central component of Investor Relations at MorphoSys is regular meetings with analysts and investors in the course of roadshows and individual meetings. Conference calls accompany the publi- cation of the quarterly results and allow analysts and investors to directly address their questions on the development of the Com- pany. The Company presentations prepared for on-site events are accessible to all interested parties on the Company website. Video and audio recordings of key events can always be found on the Company website. Transcripts of the conference calls are also promptly made available. MorphoSys uses its corporate website as a central platform for pro- viding current information on the Company and its progress. The MorphoSys financial calendar contains the publication dates of periodic financial reports and the date of the next Annual General Meeting well in advance. 79 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report es tABl ishmen t of speC if iC tArGe t s f or t he Comp osi- t ion of t he supervis ory BoArd The Supervisory Board of MorphoSys AG has a total of six mem- bers. In view of the Company’s international orientation and to ensure a fair share of diversity, the Supervisory Board maintains a ratio of at least two non-German Supervisory Board members or at least two members having particular international experience. This ratio is currently being met. The Company also strives to have at least four independent mem- bers represented on our Supervisory Board. This ratio is also cur- rently being met. Substantial and not merely temporary conflicts of interest should be avoided; particularly with tasks at important competitors. This is currently the case. Furthermore, it is intended that an adequate proportion of women shall be represented on the Supervisory Board. The Supervisory Board is aware that such an adequate proportion of women may not be reached with immediate effect. Nevertheless, the Super- visory Board intends that the assessment of potential candidates for positions on the Supervisory Board to become vacant will in- clude qualified women. A prerequisite for the proposal of election of female candidates shall be their qualification and concrete suit- ability for the Company. With regard to the last election to the Supervisory Board that took place at the Annual General Meeting 2012, Ms. Karin Eastham was elected as new Supervisory Board member. The provision regarding the age limit of 75 years that is contained in the rules of procedure of the Supervisory Board is currently respected. However, the Supervisory Board may approve an excep- tion therefrom in individual cases. The Supervisory Board intends to consider the targets mentioned above for future nominations. direC t or’s hol dinG of mAnAGemen t And supervisory BoArd The members of the Management Board and the Supervisory Board hold more than 1 % of the stocks issued by the Company. All shares, performance shares, stock options, and convertible bonds held by each member of the Management Board and the Super- visory Board are listed below. rel At ed p Ar t ie s shAre s ManaG eMent board Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll total SuperviSory board Dr. Gerald Möller Dr. Geoffrey Vernon Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham total 17 01/01/2013 Additions forfeitures sales 12/31/2013 419,885 6,500 2,000 7,105 435,490 7,500 0 2,019 0 0 0 9,519 191,445 0 90,000 102,867 384,312 1,500 0 0 0 0 1,000 2,500 0 0 0 0 0 0 0 0 0 0 0 0 158,445 0 90,000 82,602 331,047 0 0 0 0 0 0 0 452,885 6,500 2,000 27,370 488,755 9,000 0 2,019 0 0 1,000 12,019 80 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report 01/01/2013 Additions forfeitures exercises 12/31/2013 191,445 0 90,000 102,867 384,312 0 0 0 0 0 0 0 0 0 0 191,445 0 90,000 102,867 384,312 0 0 0 0 0 01/01/2013 Additions forfeitures exercises 12/31/2013 58,800 0 33,000 33,000 88,386 90,537 60,537 60,537 124,800 299,997 0 0 0 0 0 0 0 0 0 0 147,186 90,537 93,537 93,537 424,797 01/01/2013 Additions forfeitures exercises 12/31/2013 36,652 25,104 25,104 25,104 111,964 12,024 8,235 8,235 8,235 36,729 0 0 0 0 0 0 0 0 0 0 48,676 33,339 33,339 33,339 148,693 s t o C k op t ions ManaG eMent board Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll total Conver t iBl e B ond s ManaG eMent board Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll total perf ormAnC e shAre s ManaG eMent board Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll total direC t ors’ deAl inGs Members of the Management Board and Supervisory Board of MorphoSys AG, as well as closely related persons to such mem- bers, are obligated to disclose trading in MorphoSys in accordance with the German Securities Trading Act (WpHG). During the year, MorphoSys received the following notifications pursuant to Sec. 15a of the German Securities Trading Act (WpHG), which are listed in the following table. preven t inG Conf l iC t s of in t eres t Members of the Management Board and the Supervisory Board are obliged to refrain from actions that could lead to conflicts of inter- est with their functions performed at MorphoSys AG. Such trans- actions or secondary employment of the Management Board must be disclosed immediately to the Supervisory Board and are subject to its approval. The Supervisory Board, in turn, must inform the Annual General Meeting of any conflicts of interest and their treat- ment. In the 2013 financial year, no conflicts of interest occurred. 81 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report direC t ors’ deAl inGs in 2013 party subject to the notification requirement function date of transaction in 2013 Dr. Simon Moroney CEO 11/21/2013 Dr. Simon Moroney CEO 11/20/2013 Dr. Simon Moroney CEO 11/19/2013 Dr. Simon Moroney CEO 11/19/2013 Member of the 18 type of transaction Sale; stock options were converted into MorphoSys AG shares and subsequently sold Sale; stock options were converted into MorphoSys AG shares and subsequently sold Purchase; stock options were converted into MorphoSys AG shares; Dr. Moroney is holding the shares received Sale; stock options were converted into MorphoSys AG shares and subsequently sold number of stocks/ derivatives Average share price transaction volume 18,840 54.39 € 1,024,707.60 € 860 55.00 € 47,300.00 € 33,000 12.81 € 422,730.00 € 28,300 55.85 € 1,580,555.00 € Karin Eastham Supervisory Board 09/20/2013 Purchase 1,000 76.68 US-$ 76,680.00 US-$ Dr. Simon Moroney CEO 07/16/2013 Dr. Arndt Schottelius CDO 07/16/2013 Dr. Marlies Sproll CSO 07/16/2013 Dr. Marlies Sproll CSO 07/16/2013 Dr. Marlies Sproll CSO 07/16/2013 Sale; stock options were converted into MorphoSys AG shares and subsequently sold Sale; stock options were converted into MorphoSys AG shares and subsequently sold Sale; stock options were converted into MorphoSys AG shares and subsequently sold Sale; stock options were converted into MorphoSys AG shares and subsequently sold Purchase; stock options were converted into MorphoSys AG shares; Dr. Sproll is holding the shares received 110,445 49.00 € 5,411,805.00 € 90,000 49.00 € 4,410,000.00 € 46,002 49.00 € 2,254,098.00 € 36,600 49.00 € 1,793,400.00 € 20,265 13.03 € 264,052.95 € Dr. Gerald Möller Chairman of the Supervisory Board 07/10/2013 Purchase 1,500 50.65 € 75,975.00 € 82 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report shArehol der ApprovAl of eQui t y-BAsed CompensAt ion pl Ans; s t oCk repurChAses By resolution of the Annual General Meeting of 19 May 2011, and in accordance with § 71 Para 1 no. 8 AktG, MorphoSys is autho- rized to repurchase its own shares in an amount of up to 10 % of the existing common stock. This authorization may be exercised in whole or in part, once or on several occasions, by the Company or a third party on behalf of the Company, for the purposes specified in the authorizing resolution. It is at the discretion of the Manage- ment Board, as to whether the repurchase is carried out on the stock exchange, by a public offer, or a public call to tender. In the period of April - May 2013, MorphoSys has repurchased 84,475 of its own shares on the basis of this authorization. The Company plans to use these treasury shares for the Management Board’s and Senior Management Group’s long-term incentive plans. However, this authorization also allows the shares to be used for all other lawful purposes. inf ormAt ion And CommuniC At ion During the 2013 financial year, the updating and expansion of the ERP software (ERP = Enterprise Resource Planning) implemented was carried out successfully within the planned project budget and time frame. In addition, the Corporate Performance Manage- ment System (CPM), introduced in 2012, was extended with new features for supporting key business processes. The CPM system’s consolidation features were successfully audited by external audi- tors. By introducing a unified communication system, it was pos- sible to reduce current IT costs and raise internal collaboration to the latest state-of-the-art level. Based on advanced IT security technologies, MorphoSys expanded its technical controls to ensure the protection of its information. Organizational controls for ensur- ing the protection of information at MorphoSys are defined in the relevant guidelines. Compl iAnCe sy s t em INTERNAL C ONTROL AND RISK MANAGEMENT SYSTEM WITH REGARD TO THE AC C OUNTING PROCES S In the 2013 reporting year, MorphoSys routinely updated its docu- mentation of the existing internal control and risk management system to maintain adequate internal control over its financial re- porting. MorphoSys has described the main features of its ac- counting-related internal control and risk management system in accordance with § 289 Para. 5 and § 315 Para. 2 no. 5 HGB, and pursuant to § 107 Para. 3 AktG. This ensures the presence of all inspections in order to report financial data as accurately and as precisely as possible. The COSO (Committee of Sponsoring Organi- zations of the Treadway Commission) defines the relevant COSO framework (“Internal Control – Integrated Framework”). This is the basis most commonly used for internal controlling of financial reporting and is also used by MorphoSys. In view of system-inherent limitations, there is no absolute guar- antee that the internal controls will be able to prevent or fully un- cover misrepresentations in the context of financial reporting at all times. The internal controls can only give reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements consistent with the IFRS* standards adopted by the European Union for external purposes. *s e e G l o s s A r y pa g e 1 5 8 To ensure the correctness of the key financial figures reported and the underlying execution of all accounting processes, MorphoSys has implemented a strict four-eye principle. In addition, the effec- tiveness and efficiency of these processes are controlled and re- viewed regularly by external service providers. The consolidated financial statements undergo a high number of preparation, audit, and control processes in order that they can be reported promptly to the market and shareholders. This is carried out according to a plan agreed upon by the management which also provides for the corresponding internal and external resources. Furthermore, a set of rules and guidelines ensure the strict sepa- ration of planning, posting, and execution of financial transac- tions. The adherence to and implementation of these policies is reviewed regularly. For all IT systems used, this separation of functions is ensured by the appropriate allocation of rights. Predictions of future events are not part of the internal control and risk management system. However, MorphoSys does employ a risk management system that ensures the early identification and as- sessment of business-specific risks. Appropriate countermeasures are used to eliminate, or at least reduce the risks identified to an acceptable level. Special attention is given to those risks that could jeopardize the Company’s existence. The Management Board ensures the permanent and responsible dealing of risks and keeps the Supervisory Board informed of all existing risks and their development. Detailed information on MorphoSys’s opportunities and risks may be found in the “Risks and Opportunities Report” (page 58). 83 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report INTERNAL AUDIT The task of Internal Audit is to assist the MorphoSys Group with a systematic and consistent approach to evaluating and improving the effectiveness of risk management, and to support the manage- ment and monitoring functions in their fulfillment of the set goals. The accounting and consulting firm, KPMG, was appointed in 2013 for the internal audit and was appointed as co-sourcing partner for the performance of the audit. The internal audit is based on a risk-oriented internal audit plan which is largely based on the results of the most recent risk stud- ies. Audit requirements and recommendations of the Management Board and the Audit Committee of the Supervisory Board also fil- ter into this audit plan. The Internal Audit Department reports to the Management Board at regular intervals. The Head of Internal Audit and the Chief Ex- ecutive Officer report to the Audit Committee of the Supervisory Board twice annually, or immediately, if necessary. In the course of 2013, six audits were successfully conducted. Some areas requiring action were identified and appropriate cor- rections were initiated and performed. In the case of complaints, appropriate countermeasures were initiated during the reporting year. The 2014 audit plan of the Internal Audit department pre- scribes a number of tests similar to the number in 2013. ACCoun t inG And ex t ernAl Audi t MorphoSys AG prepares its financial statements in accordance with the provisions of the German Commercial Code (HGB) and the Stock Corporation Act (AktG). The consolidated financial state- ments are prepared in accordance with the International Financial Reporting Standards (IFRS), as applicable in the European Union. For the election of the Company auditor, the Audit Committee of the Supervisory Board submits a nomination proposal. At the 2013 Annual General Meeting, PricewaterhouseCoopers AG Wirtschafts- prüfungsgesellschaft was appointed auditor for the 2013 financial year. As evidence of its independence, the auditor submitted a Dec- laration of Independence to the Supervisory Board. remunerAt ion rep or t The Remuneration Report presents the principles, structure, and amount of compensation paid to the Management Board and Supervisory Board. It reflects the legal provisions and gives con- sideration to the recommendations of the Code. REMUNER ATION OF THE MANAGEMENT BOARD The remuneration system for the Management Board is intended to provide an incentive for performance-oriented and sustainable corporate management. Therefore, the aggregate compensation of Management Board members is comprised of different compo- nents such as fixed components, an annual cash bonus based on the achievement of individual and corporate targets (short-term incentive – STI), as well as a variable compensation component with a long-term incentive (long-term incentive – LTI), and of other compensation components. The variable remuneration component with long-term incentive consists basically of a performance share plan and, specifically in 2013, a convertible bond plan. The Man- agement Board members also receive fringe benefits in the form of non-cash benefits. These benefits essentially consist of a company car, telephone, and insurance premiums. As a component of remu- neration, the fringe benefits of each Management Board member are taxable. All total remuneration packages are reviewed annu- ally by the Remuneration and Nomination Committee for their scope and appropriateness and compared to the results of an an- nual management board compensation analysis. The amount of compensation paid to Management Board members highly de- pends on the areas of responsibility of the respective Management Board member, his or her personal achievement of goals, business performance, as well as success and the economic prospects of the Company in relation to the competition. All decisions concerning any adjustments to the total remuneration packages are taken by the entire Supervisory Board. The salaries were last adjusted in July 2013. OVERVIE W In the 2013 financial year, the total remuneration of the Manage- ment Board amounted to € 5,842,393 (2012: € 3,157,068). Of this total remuneration, €  2,837,809 was cash remuneration, and € 3,004,584, or 51 %, resulted from stock-based compensation for 2013 (performance share plan, stock option plan and convert- ible bond plan) (remuneration with long-term incentive – LTI). The following shows a detailed and individualized table of the Management Board’s compensation. 84 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report Compens At ion of t he mAnAGemen t B oArd in 2013 19a fixed Compensation short-term incentive Compensation long-term incentive Compensation (target Attainment depends on Company Goals)1 total Compen- sation2 Base salary in € 412,049 279,531 279,531 279,531 1,250,642 Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll total other Compen- satory Benefits in € 179,3533 106,3154 107,4375 99,7496 492,854 variable Compen- sation in € no, of performance shares Granted no, of Convertible Bonds Granted 360,543 244,590 244,590 244,590 1,094,313 12,024 8,235 8,235 8,235 36,729 88,386 90,537 60,537 60,537 personal expenses regarding stock-Based Compen- sation 2013 953,834 750,964 651,773 648,013 299,997 3,004,584 in € 1,905,779 1,381,400 1,283,331 1,271,883 5,842,393 1 The remuneration with a long-term incentive effect is dependent upon the achievement of the company objectives. This remuneration is presented in accordance with IAS 24.17e in an amount which corresponds to the past financial year. 2 The total remuneration shown for 2013 includes the respective bonus accruals for 2013 which will be paid out in February 2014. 3 Includes € 112,221 in contributions to individual pension plans and allowances for insurances 4 Includes € 78,177 in contributions to individual pension plans and allowances for insurances 5 Includes € 78,294 in contributions to individual pension plans and allowances for insurances 6 Includes € 78,170 in contributions to individual pension plans and allowances for insurances Compens At ion of t he mAnAGemen t B oArd in 2012 19b fixed Compensation short-term incentive Compensation long-term incentive Compensation (target Attainment depends on Company Goals)1 total Compen- sation2 Base salary in € 401,980 271,867 272,700 272,700 1,219,247 Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll total other Compen- satory Benefits in € 139,5553 129,8364 103,8415 96,6096 469,841 variable Compen- sation in € no, of performance shares Granted 226,689 176,890 164,155 162,653 730,387 18,976 12,997 12,997 12,997 57,967 personal expenses regarding stock-Based Compen- sation 2012 274,075 113,175 185,199 165,144 737,593 in € 1,042,299 691,768 725,895 697,106 3,157,068 1 The remuneration with a long-term incentive effect is dependent upon the achievement of the company objectives. This remuneration is presented in accordance with IAS 24.17e in an amount which corresponds to the past financial year. 2 The total remuneration shown for 2012 includes the respective bonus accruals for 2012 which were paid out in February 2013. 3 Includes € 109,882 in contributions to individual pension plans and allowances for insurances 4 Includes € 72,999 in contributions to individual pension plans and allowances for insurances 5 Includes € 76,898 in contributions to individual pension plans and allowances for insurances 6 Includes € 76,789 in contributions to individual pension plans and allowances for insurances 85 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report Members of the Management Board have exercised convertible bonds and stock options in the course of 2013. All transactions in connection with trading in MorphoSys shares were reported as required by law and published in the Corporate Governance Re- port and on the Company’s website. FIXED C OMPENSATION The non-performance related remuneration of the Management Board is composed of fixed remuneration and additional other ben- efits which mainly include the use of company cars, and also sub- sidies for health, welfare, and disability insurance. In the 2013 financial year, Management Board member Jens Holstein was reimbursed €  1,961 for relocation costs for his move to Munich. Furthermore, the Company provides payments to Management Board members of up to 10 % of each Management Board member’s fixed annual salary plus taxes to be paid. These payments are to be used by the Management Board members for their individual retirement plans. These payments are included in other compen- sation. In addition, all Management Board members participate in a pension plan in the form of a provident fund, which was intro- duced in cooperation with Allianz Pensions-Management e.V. The pension obligations of this provident fund are met by Allianz Pen- sions-Management e.V. PE RFORMANCE - BASE D C OMPENSATION (SHOR T-TERM INCENTIVE – STI) As performance-based remuneration, each Management Board member receives an annual cash bonus amounting to up to 70 % of the gross base salary upon the 100 % achievement of objectives. These bonus payments are dependent upon the achievement of cor- porate and personal objectives which are determined by the Super- visory Board at the beginning of each financial year. Corporate targets comprise two-thirds of performance-based remuneration and are based on the business development in terms of revenue, operating results, progress of the partnered pipeline, and on the Company’s proprietary portfolio. Personal targets comprise one- third of performance-based remuneration and include the fulfill- ment of operational targets for which the respective Management Board member is responsible. At the start of the year, the Super- visory Board assesses as to what degree the corporate and per- sonal objectives were achieved in the prior year, and determines the corresponding bonus accordingly. The bonus is subject to a ceiling of 125 % of the target amount (corresponding to 87.5 % of gross basic salary). If targets are not achieved, the performance- based remuneration may be completely omitted. The bonus for the 2013 financial year will be paid in February 2014. LONG -TERM INCENTIVE C OMPE NSATION (LTI) MorphoSys has already introduced a new, long-term incentive plan (Performance Share Plan) for the Management Board and mem- bers of the Senior Management Group in 2011. The LTI program is based on the allocation of shares which are linked to the achieve- ment of certain pre-defined performance targets over a four-year period. The Supervisory Board decides annually on the number of perfor- mance shares to be allocated to the Management Board, which in turn determines the allocation of shares to the members of the Senior Management Group. On 1 April 2013, 36,729 performance shares were awarded to the Management Board and 24,872 perfor- mance shares were granted to members of the Senior Management Group. On 1 October 2013, an additional 549 shares were allocated to the members of the Senior Management Group; hereby each member received an entitlement to a certain number of shares. For more details, please refer to item 7.4.3 of the Notes to the consoli- dated financial statement and the explanations on share repur- chases found in the Corporate Governance Report. The Supervisory Board has also set long-term performance targets through the allotment of shares in specific years. For the 2013 LTI program, the target was defined as the share price performance of the MorphoSys share, compared to a benchmark index that was comprised equally of the NASDAQ Biotech Index and the TecDAX index. Performance shares are awarded annually on the basis of a daily comparison of the MorphoSys share with the benchmark in- dex. For the price performance of a specific year, there is a hurdle of 50 % and an upper limit of 200 %. This means that shares may not be exercised when MorphoSys’s share performance is less than 50 % of the performance of the benchmark index. In contrast, when the share’s performance exceeds that of the index by more than 200 %, no additional shares are issued. The final number of performance shares allocated to the beneficia- ries of the LTI program is determined after completion of the pro- gram, specifically, after a period of four years. This calculation in- corporates the number of shares initially allocated, after adjusting the Company’s share price performance, versus the benchmark index and the discretion of the Supervisory Board with regards to a so-called “company factor”. The company factor is a number be- tween zero and two and is determined by the Supervisory Board depending on the Company’s situation. The predefined default value of the company factor is one. In addition to the performance share program as a regular variable remuneration component with long-term incentive effects, the Management Board also participated in a convertible bond plan of the Company on 1 April 2013. The circumstances of this additional remuneration under the Company’s convertible bond plan the MorphoSys’s positive operating development. 86 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report MISCELL ANEOUS In the reporting year, no credits, loans or similar benefits were granted to members of the Management Board. In the year under review, the Management Board members received no benefits from third parties that were either promised or granted in view of their position as members of the Management Board. TERMINATION OF MANAGE ME NT BOARD E MPLOYMENT C ONTR AC TS/CHANGE OF C ONTROL If a Management Board member’s service contract terminates as a result of the death, his/her spouse or his/her life partner are enti- tled to the fixed monthly salary for the month of death and the following twelve months thereafter. In the event of a change in control, each Management Board member is entitled to exercise the extraordinary termination of his/her employment contract, in- cluding an entitlement to outstanding fixed salary for the remain- der of the agreed contract period. Moreover, in such a case, all stock options, convertible bonds, and performance shares granted will become vested immediately and are exercisable after the expi- ration of the statutory vesting period or blackout periods. A change in control occurs particularly when: (i) MorphoSys transfers assets or a substantial part of its assets to unaffiliated third parties, (ii) MorphoSys merges with a non-affiliated company, or (iii) a share- holder or third party holds 30 % or more of the voting rights in MorphoSys. REMUNER ATION OF THE SUPERVISORY BOARD The remuneration of the members of the Supervisory Board is gov- erned by the Company’s Articles of Association or by a correspond- ing resolution on Supervisory Board remuneration of the Annual General Meeting. The members of the Supervisory Board received a fixed remuneration in the 2013 financial year and attendance fees for their participation in Supervisory Board and Committee meetings. According to the resolution of the Annual General Meet- ing of 31 May 2012, each Supervisory Board member receives an annual flat compensation (€ 85,400 for the Chairman, € 51,240 for the Vice Chairman, and € 34,160 for all other members) for their membership in the Supervisory Board. The Chairman receives €  3,000 for each Supervisory Board meeting he chairs, and the remaining members receive €  1,500 each time they attend a Supervisory Board meeting. For Committee work, the Committee Chairman receives € 9,000 and the remaining committee mem- bers each receive € 6,000. In addition, Committee members re- ceive € 1,000 for each Committee meeting they participate in. The compensation is paid quarterly on a pro-rated basis. Supervisory Board members are also reimbursed for travel costs and the value-added taxes (VAT) due on their remuneration. Over- all compensation takes into account the responsibilities and scope of the tasks of the Supervisory Board members. In the 2013 financial year, Supervisory Board members received a total of € 458,280 (2012: € 478,197), excluding the reimbursement of travel expenses. This amount is comprised of the fixed remu- neration and attendance fees. No loans were granted to Supervisory Board members. The following table shows the remuneration of the Supervisory Board in detail: Compens At ion of t he supervi s or y B oArd 20 in € 2013 2012 2013 2012 2013 2012 fixed Compensation Attendance fees total Compensation Dr. Gerald Möller Dr. Geoffrey Vernon Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham Prof. Dr. Jürgen Drews1 Dr. Metin Colpan1 G eSaMt 94,400 57,240 43,160 43,160 46,160 40,160 0 0 94,400 51,549 43,160 41,939 27,116 23,591 26,264 16,678 32,000 19,500 17,000 19,500 23,500 22,500 0 0 37,000 22,000 21,500 23,500 19,000 15,000 9,500 6,000 126,400 131,400 76,740 60,160 62,660 69,660 62,660 0 0 73,549 64,660 65,439 46,116 38,591 35,764 22,678 324,280 324,697 134,000 153,500 458,280 478,197 1 retired from the Supervisory Board of MorphoSys AG on 31 May 2012 87 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report disclosures pursuant to §§ 289 para. 4, 315 para. 4 hgb and Explana- tory report of the management board pursuant to § 176 para. 1 sentence 1 Aktg Comp osi t ion of Common s t oCk As of 31 December 2013, the statutory common stock amounted to € 25,669,444.00 and was divided into 25,669,444 no-par value bearer shares. With the exception of 339,890 treasury shares held by the Company, this concerns bearer shares with voting rights, whereby each share carries one vote at the Annual General Meeting. res t riC t ions AffeC t inG vo t inG riGh t s or t he t rAnsfer of shAres The Management Board is not aware of any restrictions which affect voting rights or the transfer of shares. This also relates to restric- tions which might arise from agreements between shareholders. reappointment or extension of the term of office is permitted up to a maximum of five years in each case. The Supervisory Board may revoke the appointment of a Management Board member or the nomination to Chief Executive Officer, for good cause within the meaning of § 84 Para 3 AktG. If a required member of the Manage- ment Board is absent, one will be appointed by the court in cases of urgency pursuant to § 85 AktG. In principle, the Articles of Association may only be amended by a resolution of the Annual General Meeting in accordance with § 179 Para. 1 Sentence 1 AktG. Pursuant to § 179 Para. 2 Sentence 2 AktG in conjunction with § 20 of the Articles of Association. The Annual General Meeting of MorphoSys resolves amendments to the Articles of Association generally through a simple majority of the votes cast and a simple majority of the common capital repre- sented. To the extent that the law stipulates a mandatory greater majority of votes or capital, this shall be applied. Amendments to the Articles of Association which solely concern their wording, may be resolved by the Supervisory Board pursuant to § 179 Para. 1 Sentence 2 AktG in conjunction with § 12 Para. 3 of the Articles of Association. Furthermore, restrictions on voting rights could also arise from the provisions of the German Stock Corporation Act (AktG), such as according to § 136 AktG or for treasury shares pursuant to § 71b AktG. p oWers of t he mAnAGemen t BoArd t o issue shAres The Management Board’s power to issue shares arises from § 5 Para. 5 to Para. 6e of the Articles of the Association of the Company as of 31 December 2013 and the statutory provisions: shArehol dinGs in t he Common s t oCk exCeedinG 10 % 1. Authorized Capital of t he vo t inG riGh t s MorphoSys has not been notified of or is aware of any direct or in- direct interests in the common stock of the Company which exceed 10 % of the voting rights. shAres Wi t h speC iAl riGh t s ConferrinG p oWers of Con t rol Shares with special rights conferring powers of control do not exist. Con t rol over vo t inG riGh t s Wi t h reGArds t o empl o yee oWnership in t he C Api tAl Employees who hold shares in the Company, like other sharehold- ers, exercise their voting rights directly in accordance with the statutory provisions and the Articles of Association. App oin t men t And dismissAl of memBers of t he mAnAGemen t BoArd As Wel l As Amendmen t s t o t he Ar t iCl es of AssoC iAt ion The determination of the number of Management Board members, their appointment and dismissal, and the nomination of the Chief Executive Officer, are carried out by the Supervisory Board in ac- cordance with § 6 of the Articles of Association and § 84 AktG. The Management Board of the Company currently consists of the Chief Executive Officer and three other members. Management Board members may be appointed for a maximum period of five years. A According to § 5 Para. 5 of the Articles of Association, the Man- agement Board is authorized, with the consent of the Super- visory Board, to increase the Company’s common stock on one or more occasions by up to € 2,335,822.00 for cash contribution/ or contributions in kind by issuing up to 2,335,822 new, no-par value bearer shares until and including 30 April 2018 (Autho- rized Capital 2013-I). If there is a capital increase, the shareholders are generally en- titled to subscription rights. The shares may also be subscribed for by one or several credit institutions with the obligation to offer the shares to shareholders for subscription. However, the Management Board is authorized to exclude preemptive rights of shareholders with the consent of the Supervisory Board: aa) in the case of a capital increase for cash contribution, to the extent that this is necessary for avoiding fractional shares; or bb) in the case of a capital increase against contribution in kind, to the extent that the capital increase is used for the acquisi- tion of companies, interests in companies, patents, or other intellectual property rights or license rights; or of assets which constitutes a business in its entirety; or cc) in the case of a capital increase for cash contribution, to the extent that the new shares are placed on a domestic and/or foreign stock exchange in the context of a listing. 88 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report The Management Board is authorized, with the consent of the Supervisory Board, to determine the further details of the capi- tal increase and its implementation. The previous Authorized Capital 2012- II in accordance with § 5 Para. 6 of the Articles of Association was utilized in its entirety as part of the capital increase carried out in September 2013 and thus cancelled. 2. Conditional Capital a. According to § 5 Para. 6a of the Articles of Association, the Company’s common stock is conditionally increased by € 70,329.00, divided into up to 70,329 no par-value bearer shares (Conditional Capital 1999 -I). The conditional capital increase of € 3,255.00 (Conditional Capital II a) will only be executed to the extent that the holders of option rights, which were conferred by MorphoSys until 20 July 2004 under the authorization of the Annual General Meeting of 21 July 1999, make use of their right of exercise. Regarding an amount of € 5,229.00 (Conditional Capital II bb), the con- ditional capital increase will only be affected to the extent that holders of option rights, which were conferred by MorphoSys from 21 July 2004 until 30 April 2009 under the authorization of the Annual General Meeting of 11 May 2004, make use of their right of exercise. The conditional capital increase for an amount of € 61,845.00 (Conditional Capital II b) will only be executed to the extent that the hold- ers of option rights, which were conferred by MorphoSys until 4 June 2006 under the authorization of the Annual General Meeting of 5 July 2001, make use of their right to exercise. The new shares, to the extent that they are created through exercise by the beginning of the Annual General Meeting, participate in the Company’s profits from the be- ginning of the previous financial year, or otherwise from the beginning of the financial year in which they are created through the exercise of subscription rights. b. According to § 5 Para. 6b of the Articles of Association, the Company’s common stock is conditionally increased to a maximum of €  6,600,000.00, divided into a maximum of 6,600,000 no par-value bearer shares (Conditional Capital 2011-I). The conditional capital increase will only be exe- cuted to the extent that the holders of warrants or conver- sion rights resulting from convertible bonds or bonds with warrants, which were conferred by MorphoSys until 30 April 2016 under the authorization of the Annual General Meeting of 19 May 2011, exercise their subscription rights or that the holders of convertible bonds, issued by the Company or one of its direct or indirect domestic or foreign wholly owned subsidiaries until 30 April 2016, and who are subject to a conversion obligation, meet their obligation to convert. The new shares participate in the Company’s profits from the beginning of the financial year in which they arise through the exercise of conversion rights or the fulfillment of conver- sion obligations. c. According to § 5 Para. 6c of the Articles of Association, the Company’s common stock is conditionally increased to a maximum of € 725,064.00, divided into 725,064 new no par- value bearer shares (Conditional Capital 2003-II). The condi- tional capital increase will only be executed to the extent that holders of convertible bonds issued, exercise their con- version rights for conversion into ordinary shares of the Company. The new shares are first entitled to dividends in the financial year, for which there was no resolution of the Annual General Meeting on the appropriation of accumu- lated income at the time of issuance. The Management Board is authorized, with the consent of the Supervisory Board, to determine the further details of the capital increase and its implementation. d. According to § 5 Para. 6d of the Articles of Association, the Company’s common stock is conditionally increased by € 763,515.00, divided into up to 763,515 no par-value bearer shares (Conditional Capital 2008-II). The conditional capital increase will only be executed to the extent that holders of option rights, which were conferred by the Company until 30 April 2013 under the authorization of the Annual General Meeting, make use of their right of exercise. The new shares participate in the Company’s profits from the beginning of the financial year in which they arise through the exercise of conversion rights or the fulfillment of conversion obliga- tions. e. According to § 5 Para. 6e of the Articles of Association, the Company’s common stock is conditionally increased by up to €  450,000.00, divided into up to 450,000 new no par- value bearer shares (Conditional Capital 2008-III). The con- ditional capital increase will only be executed to the extent that holders of convertible bonds issued exercise their con- version rights for conversion into ordinary shares of the Company. The new shares participate in the Company’s profits from the beginning of the financial year, for which there was no resolution on the appropriation of accumulated income at the time of issuance. The Management Board is authorized, with the consent of the Supervisory Board, to determine the further details of the capital increase and its implementation. p oWer of t he mAnAGemen t BoArd t o repurChAse shAres The Management Board’s power to repurchase own shares arise from §§ 71 AktG and the authorization by the Annual General Meeting of 19 May 2011: 89 G r o u p m A n A G e m e n t r e p o r t Statement on Corporate Governance and Corporate Governance Report Until 30 April 2016, the Management Board is authorized to repur- chase its own shares totaling up to 10 % of the common stock exist- ing at the time of the resolution (or possibly the lower amount of common stock at the time of use of the authorization) for any pur- pose permitted under the statutory limits. The repurchase takes place, at the discretion of the Management Board, either on the stock exchange or through a public offer or a public invitation to submit a bid. The authorization may not be used for the purpose of trading in own shares. The intended use of treasury shares ac- quired under this authorization may be found under agenda item 7 of the Annual General Meeting of 19 May 2011. In particular, the shares may be used as follows: a. The shares may be redeemed without the redemption or its im- plementation requiring a further resolution of the Annual Gen- eral Meeting. b. The shares may be sold in ways other than via the stock ex- change or via an offer to shareholders if the shares are sold for cash payment at a price that is not significantly below the mar- ket price of Company shares of the same class at the time of the sale. c. The shares may be sold for contribution in kind, particularly in conjunction with the acquisition of companies, parts of compa- nies, interests in companies, or mergers of companies. d. The shares may be used for the fulfillment of conversion rights of convertible bonds issued by the Company or its affiliated com- panies. e. The shares may be sold to employees of the Company and em- ployees of affiliated companies as well as to members of the Company’s management and/or for the fulfillment of commit- ments concerning the purchase or the obligation to purchase Company shares which were granted to employees of the Com- pany and employees of affiliated companies as well as members of the Company’s management. If shares are used for the purposes mentioned above, the preemp- tive rights of shareholders are excluded, with the exception of re- demption of shares. The Supervisory Board may specify that measures taken by the Management Board on the basis of this authorization may only be implemented with Supervisory Board’s consent. mAt eriAl AGreemen t s mAde By t he CompAny t hAt fAl l under t he Condi t ion of A ChAnGe of Con t rol result- inG from A tAkeover Bid In 2012, MorphoSys and Novartis Pharma AG expanded their orig- inal collaboration agreement. Under this agreement, in specific cases of a change of control, Novartis Pharma AG is entitled, but not obliged, to take various measures, which include the partial or complete termination of the collaboration agreement. A change of control includes, in particular, the acquisition of 30 % or more of the voting rights in the Company within the meaning of §§ 29 and 30 of the German Securities Acquisition and Takeover Act (WpÜG). In June 2013, MorphoSys entered into an agreement with Celgene to jointly develop the anti-cancer antibody MOR202 globally and to co-promote MOR202 in Europe. Pursuant to this agreement, Cel- gene may terminate the co-promotion rights of MorphoSys in the event of a business combination of MorphoSys with a third party. Such business combination is defined to be an acquisition of 50 % or more of the voting shares of MorphoSys, a merger of the third party with MorphoSys or a transfer of substantially all of the as- sets of MorphoSys to the third party. Furthermore, in the event of such a business combination with a third party that has a compet- ing pharmaceutical program to MOR202 but is not a violation of the non-compete clause, the research and development activities required under the agreement with Celgene shall be conducted separately from any research and development activities of the competing pharmaceutical program. CompensAt ion AGreemen t s ConCluded By t he CompAny Wi t h memBers of t he mAnAGemen t BoArd or t he empl o yees in t he even t of A tAkeover Bid Following a change of control, each member of the Management Board may terminate his/her employment contract and demand the fixed salary still outstanding until the end of the contract pe- riod. Moreover, in such a case, all stock options, convertible bonds, and performance shares granted will become vested immediately and are exercisable after the expiration of the statutory waiting times or blackout periods. Following a change of control, each member of the Senior Manage- ment Group may also terminate his/her employment contract and demand a severance payment equal to one annual gross fixed sal- ary. Moreover, in such a case, any stock options, convertible bonds, and performance shares granted will also become vested immedi- ately and are exercisable after the expiration of the statutory wait- ing times or blackout periods. A change of control includes in particular the following cases: (i) MorphoSys transfers the Company’s assets, in whole or in sub- stantial part, to unaffiliated entity, (ii) MorphoSys merges with a non-affiliated entity, or (iii) a shareholder or third party directly or indirectly holds 30 % or more of the voting rights in MorphoSys. 90 Abbildung 23 corporAtE govErnAncE At morphosys thE morphosys compl iAncE systEm 24 risK-bAsEd intErnAl Audi t pl An 23 viii Follow-up vii Documentation and communi cation of results vi v iv iii ii i Defi ning and carrying out the necessary audit steps Evaluation of the Internal Control System Risk analysis and evaluation of audit objective Defi nition of audit objective (process analysis) Risk analysis within audit area Risk analysis and planning of the annual audit plan i QuAl i t y mAnA Gemen t viii vii vi v iv iii ii morphosy s, based on audit plan s up p o r t f ro m indep enden t Audi t o rs ( k mp G ) corporate governance regulations 1 2 3 declaration of compliance with the German Corporate Governance Code (sec. 161 of the German stock Corporation Act [AktG]) Changes in management reporting supervisory Board and Audit (sec. 289 of the German Commercial Committee Code [hGB]) • Statement on Corporate Governance • Report on accounting-related Internal Control System + on risk management • Establishment of an Audit Committee • Posts filled with independent financial experts • Specification of monitoring tasks • Cooperation with the external auditor specifi cation of monitoring tasks tasks that the Supervisory board may delegate (some or all) to the audit committee (Sec. 107 [3], para. 2 of the German Stock corporation act [aktG]) Supervisory board remains responsible for these tasks primary tasks of the Supervisory board • Monitoring of financial reporting • Monitoring the effectiveness - of the Internal Control System - of the Risk Management System - of internal auditing • Monitoring external audits, especially - The independence of the external auditor - Additional services provided by the external auditor corporAtE govErnAncE At morphosys risK-bAsEd intErnAl Audi t pl An 23 viii Follow-up vii Documentation and communi cation of results vi Defi ning and carrying out the necessary audit steps v Evaluation of the Internal Control System iv Risk analysis and evaluation of audit objective iii Defi nition of audit objective (process analysis) Risk analysis within audit area ii i Risk analysis and planning of the annual audit plan i QuAl i t y mAnA Gemen t viii vii vi v iv iii ii morphosy s, based on audit plan s up p o r t f ro m indep end en t Audi t o rs ( k mp G ) 91 thE morphosys compl iAncE systEm 24 Abbildung 24 corporate governance regulations 1 2 3 declaration of compliance with the German Corporate Governance Code (sec. 161 of the German stock Corporation Act [AktG]) Changes in management reporting (sec. 289 of the German Commercial Code [hGB]) • Statement on Corporate Governance • Report on accounting-related Internal Control System + on risk management supervisory Board and Audit Committee • Establishment of an Audit Committee • Posts filled with independent financial experts • Specification of monitoring tasks • Cooperation with the external auditor specifi cation of monitoring tasks tasks that the Supervisory board may delegate (some or all) to the audit committee (Sec. 107 [3], para. 2 of the German Stock corporation act [aktG]) Supervisory board remains responsible for these tasks primary tasks of the Supervisory board • Monitoring of financial reporting • Monitoring the effectiveness - of the Internal Control System - of the Risk Management System - of internal auditing • Monitoring external audits, especially - The independence of the external auditor - Additional services provided by the external auditor 92 c o n t e n t s Financial statements c o n s o l i dat e d s tat e m e n t o f i n c o m e (i f r s) c o n s o l i dat e d s tat e m e n t o f c o m p r e h e n s i v e i n c o m e (i f r s) c o n s o l i dat e d b a l a n c e s h e e t (i f r s) c o n s o l i dat e d s tat e m e n t o f c h a n g e s i n s t o c k h o l d e r s ’ e q u i t y (i f r s) c o n s o l i dat e d s tat e m e n t o f c a s h f l o w s (i f r s) 9 4 9 5 9 6 9 8 1 0 0 93 n o t e s t o t h e c o n s o l i dat e d f i n a n c i a l s tat e m e n t s n o t e s t o t h e c o n s o l i dat e d s tat e m e n t o f c a s h f l o w s g e n e r a l i n f o r m at i o n s u m m a r y o f s i g n i f i c a n t a c c o u n t i n g p o l i c i e s s e g m e n t r e p o r t i n g n o t e s t o t h e i n c o m e s tat e m e n t n o t e s t o t h e a s s e t s o f t h e b a l a n c e s h e e t n o t e s t o e q u i t y a n d l i a b i l i t i e s o f t h e b a l a n c e s h e e t r e m u n e r at i o n s y s t e m f o r t h e m a n a g e m e n t b o a r d a n d e m p l oy e e s o f t h e g r o u p a d d i t i o n a l n o t e s 1 0 1 1 0 2 1 0 2 1 1 8 1 2 0 1 2 6 1 3 3 1 3 6 1 4 5 94 f i n a n c i a l s t a t e m e n t s Consolidated Statement of Income (IFRS) Consolidated Statement of Income (IFRS) in € Continuing Operations Revenues Operating Expenses Research and Development Selling, general and Administrative Total Operating Expenses Other Income Other Expenses Earnings before Interest and Taxes (EBIT) Finance Income Finance Expenses Income Tax Expenses Profit for the Year from Continuing Operations (Loss)/Profit for the Year from Discontinued Operations Consolidated Net Profit Basic Net Profit per Share thereof from Continuing Operations thereof from Discontinued Operations Diluted Net Profit per Share thereof from Continuing Operations thereof from Discontinued Operations Shares Used in Computing Basic Net Profit per Share Shares Used in Computing Diluted Net Profit per Share note 2013 2012 2.7.1, 4.1 77,960,057 51,916,986 2.7.2, 4.2.2 2.7.2, 4.2.3 2.7.3, 4.3 2.7.4, 4.3 2.7.5, 4.3 2.7.6, 4.3 2.7.7, 4.4 4.5 2.7.9, 4.6 2.7.9, 4.6 2.7.9, 4.6 2.7.9, 4.6 2.7.9, 4.6 2.7.9, 4.6 2.7.9, 4.6 2.7.9, 4.6 49,151,721 18,769,991 67,921,712 797,252 911,050 9,924,547 867,511 111,161 (3,310,077) 7,370,820 5,951,110 13,321,930 0.54 0.30 0.24 0.54 0.30 0.24 37,673,345 12,081,649 49,754,994 415,477 85,454 2,492,015 658,991 98,931 (685,812) 2,366,263 (424,118) 1,942,145 0.08 0.10 (0.02) 0.08 0.10 (0.02) 24,504,031 24,763,094 23,004,894 23,260,360 95 f i n a n c i a l s t a t e m e n t s Consolidated Statement of Comprehensive Income (IFRS) Consolidated Statement of Comprehensive Income (IFRS)1 in € Consolidated Net Profit Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds (Thereof Reclassifications of Unrealized Gains and Losses to Profit and Loss) Change of Current Tax Effect on Fiscal Balancing Item on Available-for-sale Financial Assets and Bonds Deferred Taxes Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds, Net of Deferred Tax Effects from Equity-related Recognition of Deferred Taxes Foreign Currency Gain from Consolidation Comprehensive Income thereof from Continuing Operations thereof from Discontinued Operations 2013 2012 13,321,930 (357,632) 482,018 259,878 (176,706) (274,460) 28,098 1,302,421 14,377,989 13,001,310 1,376,679 1,942,145 (178,483) 420,546 0 46,995 (131,488) 6,005 182,460 1,999,122 2,234,775 (235,653) 1 In financial years 2013 and 2012, the statement of comprehensive income only comprised components, which will be reclassified in terms of IAS 1.82A(b) to profit or loss in subsequent periods when specific conditions are met. 96 f i n a n c i a l s t a t e m e n t s Consolidated Balance Sheet (IFRS) Consolidated Balance Sheet (IFRS) in € AS SE TS Current Assets Cash and Cash Equivalents Available-for-sale Financial Assets Bonds, Available-for-sale Accounts Receivable Tax Receivables Other Receivables Inventories, Net Prepaid Expenses and Other Current Assets Total Current Assets Non-current Assets Property, Plant and Equipment, Net Patents, Net Licenses, Net In-licensed Research Program Software, Net Goodwill Shares available for Sale, net of Current Portion Deferred Tax Asset Prepaid Expenses and Other Assets, Net of Current Portion Total Non-current Assets Assets of Disposal Group Classified as Held for Sale ToTAl AS SE TS note 12/31/2013 12/31/2012 2.8.1, 5.1 2.8.1, 5.2 2.8.1, 5.2 2.8.2, 5.3 2.8.2, 5.5 2.8.2, 5.4 2.8.3, 5.5 2.8.4, 5.5 2.8.5, 5.6 2.8.6, 5.7.1 2.8.6, 5.7.2 2.8.6, 5.7.3 2.8.6, 5.7.4 2.8.6, 5.7.5 2.8.7, 5.8 2.8.7, 4.4 2.8.8, 5.9 2.8.9 71,873,696 188,360,354 11,102,087 10,270,322 77,743 119,458,330 731,009 4,693,943 40,689,865 79,722,222 0 8,924,197 109,789 10,297,901 757,386 2,357,163 406,567,484 142,858,523 2,168,189 7,834,711 5,396,516 3,191,837 8,666,367 7,128,425 12,807,800 10,513,100 1,758,026 7,352,467 1,726,633 313,372 1,731,548 41,089,262 0 1,351,932 7,352,467 881,633 0 1,489,063 40,574,825 40,855,433 447,656,746 224,288,780 97 f i n a n c i a l s t a t e m e n t s Consolidated Balance Sheet (IFRS) in € note 12/31/2013 12/31/2012 lIAB IlITIES AND STo CK HolDERS' EQUIT Y Current Liabilities Accounts Payable and Accrued Expenses Tax Liabilities Provisions Current Portion of Deferred Revenue Total Current Liabilities Non-current Liabilities Provisions, Net of Current Portion Deferred Revenue, Net of Current Portion Convertible Bonds due to Related Parties Deferred Tax Liabilities Total Non-current Liabilities Liabilities of Disposal Group Classified as Held for Sale Total Liabilities Stockholders' Equity Common Stock  Ordinary Shares Authorized (36,614,174 and 43,142,455 for 2013 and 2012, respectively)  Ordinary Shares Issued (26,220,882 and 23,358,228 for 2013 and 2012, respectively)  Ordinary Shares Outstanding (25,880,992 and 23,102,813 for 2013 and 2012, respectively) Treasury Stock (339,890 and 255,415 shares for 2013 and 2012, respectively), at Cost Additional Paid-in Capital Revaluation Reserve Translation Reserve Accumulated Income Total Stockholders' Equity ToTAl lIAB IlITIES AND STo CKHolDER ’S EQUIT Y 2.9.1, 6.1 2.9.2, 6.2 2.9.1, 6.2 2.9.3, 6.3 2.9.4, 6.2 2.9.4, 6.3 2.9.5 2.9.6 2.9.7, 6.4 2.9.8, 6.5.1 2.9.8, 6.5.2 2.9.8, 6.5.4 2.9.8, 6.5.5 2.9.8, 6.5.6 2.9.8, 6.5.7 2.9.8, 6.5.8 17,190,021 2,690,282 260,000 15,266,877 35,407,180 636,941 59,168,599 298,606 0 60,104,146 0 10,660,090 629,686 0 628,167 11,917,943 187,521 5,915,102 73,607 452,074 6,628,304 3,732,516 95,511,326 22,278,763 26,220,882 23,358,228 (6,418,018) 310,963,651 240,381 192,556 20,945,968 (3,594,393) 175,245,266 486,743 (1,109,865) 7,624,038 352,145,420 202,010,017 447,656,746 224,288,780 98 f i n a n c i a l s t a t e m e n t s Consolidated Statement of Changes in Stockholders’ Equity (IFRS) Consolidated Statement of Changes in Stockholders’ Equity (IFRS) BAl ANCE AS of 1 JANUARY 2012 Compensation Related to the Grant of Stock Options, Convertible Bonds and Performance Shares Exercise of Options and Convertible Bonds Issued to Related Parties, Net of Issuance Costs of € 15,000 (Net of Tax Effects) Repurchase of Treasury Stock Reserves: Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Deferred Tax Effects from Equity-related Recognition of Deferred Taxes Foreign Currency Gains and Losses from Consolidation Consolidated Net Profit Comprehensive Income BAl ANCE AS of 31 DECEMBER 2012 BAl ANCE AS of 1 JANUARY 2013 Compensation Related to the Grant of Stock Options, Convertible Bonds and Performance Shares Exercise of Options and Convertible Bonds Issued to Related Parties, Net of Issuance Costs of € 11,419 (Net of Tax Effects) Repurchase of Treasury Stock Capital Increase, Net of Issuance Cost of € 1,698,232 (Net of Tax Effects) Reserves: Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Deferred Tax Effects from Equity-related Recognition of Deferred Taxes Foreign Currency Gains and Losses from Consolidation Consolidated Net Profit Comprehensive Income BAl ANCE AS of 31 DECEMBER 2013 common stock shares € 23,112,167 23,112,167 0 0 246,061 246,061 0 0 0 0 0 0 0 0 0 0 0 0 23,358,228 23,358,228 0 23,358,228 23,358,228 0 551,438 0 551,438 0 2,311,216 2,311,216 0 0 0 0 0 0 0 0 0 0 26,220,882 26,220,882 339,890 (6,418,018) 310,963,651 20,945,968 352,145,420 treasury stock Paid-in capital Reserve Reserve income additional Revaluation translation accumulated stockholders’ shares 163,915 (1,756,841) 170,778,474 612,226 (1,292,325) 5,681,893 197,135,594 € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,268,792 3,198,000 91,500 (1,837,552) 255,415 255,415 (3,594,393) (3,594,393) 84,475 (2,823,625) 175,245,266 175,245,266 4,742,092 6,606,570 124,369,723 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 0 € 0 0 0 0 0 0 0 0 0 0 0 0 0 total equity € 1,268,792 3,444,061 (1,837,552) (131,488) 6,005 182,460 1,942,145 1,999,122 202,010,017 202,010,017 4,742,092 7,158,008 (2,823,625) 126,680,939 (274,460) 28,098 1,302,421 13,321,930 14,377,989 € 0 0 0 0 0 0 0 0 0 0 0 0 0 182,460 182,460 (1,109,865) (1,109,865) 1,942,145 1,942,145 7,624,038 7,624,038 1,302,421 1,302,421 192,556 13,321,930 13,321,930 € 0 0 0 0 0 0 0 0 0 0 0 (131,488) 6,005 (125,483) 486,743 486,743 (274,460) 28,098 (246,362) 240,381 99 f i n a n c i a l s t a t e m e n t s Consolidated Statement of Changes in Stockholders’ Equity (IFRS) BAl ANCE AS of 1 JANUARY 2012 23,112,167 23,112,167 163,915 (1,756,841) 170,778,474 612,226 (1,292,325) 5,681,893 197,135,594 treasury stock additional Paid-in capital Revaluation Reserve translation Reserve accumulated income total stockholders’ equity shares € € € € € € 0 0 0 0 1,268,792 3,198,000 91,500 (1,837,552) 0 0 0 0 0 0 0 0 0 0 255,415 255,415 (3,594,393) (3,594,393) 0 0 0 0 84,475 (2,823,625) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 175,245,266 175,245,266 4,742,092 6,606,570 0 124,369,723 0 0 0 0 0 26,220,882 26,220,882 339,890 (6,418,018) 310,963,651 0 0 0 (131,488) 6,005 0 0 (125,483) 486,743 486,743 0 0 0 0 (274,460) 28,098 0 0 (246,362) 240,381 0 0 0 0 0 182,460 0 182,460 (1,109,865) (1,109,865) 0 0 0 0 0 0 1,302,421 0 1,302,421 192,556 0 0 0 0 0 0 1,942,145 1,942,145 7,624,038 7,624,038 0 0 0 0 0 0 0 13,321,930 13,321,930 1,268,792 3,444,061 (1,837,552) (131,488) 6,005 182,460 1,942,145 1,999,122 202,010,017 202,010,017 4,742,092 7,158,008 (2,823,625) 126,680,939 (274,460) 28,098 1,302,421 13,321,930 14,377,989 20,945,968 352,145,420 Compensation Related to the Grant of Stock Options, Convertible Bonds and Performance Shares Exercise of Options and Convertible Bonds Issued to Related Parties, Net of Issuance Costs of € 15,000 Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Deferred Tax (Net of Tax Effects) Repurchase of Treasury Stock Reserves: Effects from Equity-related Recognition of Deferred Taxes Foreign Currency Gains and Losses from Consolidation Consolidated Net Profit Comprehensive Income BAl ANCE AS of 31 DECEMBER 2012 BAl ANCE AS of 1 JANUARY 2013 (Net of Tax Effects) Repurchase of Treasury Stock Reserves: Effects from Equity-related Recognition of Deferred Taxes Foreign Currency Gains and Losses from Consolidation Consolidated Net Profit Comprehensive Income BAl ANCE AS of 31 DECEMBER 2013 Compensation Related to the Grant of Stock Options, Convertible Bonds and Performance Shares Exercise of Options and Convertible Bonds Issued to Related Parties, Net of Issuance Costs of € 11,419 Capital Increase, Net of Issuance Cost of € 1,698,232 (Net of Tax Effects) 2,311,216 2,311,216 Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Deferred Tax common stock shares 246,061 246,061 23,358,228 23,358,228 23,358,228 23,358,228 551,438 551,438 € 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 0 0 100 f i n a n c i a l s t a t e m e n t s Consolidated Statement of Cash Flows (IFRS) Consolidated Statement of Cash Flows (IFRS) in € opER ATIN g AC TIvITIES: Consolidated Net Profit Adjustments to Reconcile Net Profit to Net Cash Provided by Operating Activities: note 2013 2012 13,321,930 1,942,145 Impairment of Assets Depreciation and Amortization of Tangible and Intangible Assets Net Gain on Sales of Financial Assets Purchases of Derivative Financial Instruments Unrealized Net Loss on Derivative Financial Instruments Loss on Sale of Property, Plant and Equipment/Intangible Assets Net Gain on Sale of Assets Classified as Available for Sale Recognition of Deferred Revenue Stock-based Compensation Income Tax Expenses Changes in Operating Assets and Liabilities: Accounts Receivable Prepaid Expenses, Other Assets and Tax Receivables Accounts Payable and Accrued Expenses and Provisions Other Liabilities Deferred Revenue Interest Paid Interest Received Income Taxes Paid Net Cash Provided by Operating Activities thereof from Continuing Operations thereof from Discontinued Operations INvESTINg AC TIvITIES: Purchases of Financial Assets Proceeds from Sales of Financial Assets Purchase of Bonds, Available-for-sale Purchase of Assets Classified as Loans and Receivables Proceeds from Sale of Assets Classified as Loans and Receivables Purchase of Shares Classified as Available for Sale Purchases of Property, Plant and Equipment Proceeds from Disposals of Property, Plant and Equipment Purchases of Intangible Assets Proceeds from Disposal of Assets Classified as Available for Sale Net Cash Used in Investing Activities thereof from Continuing Operations thereof from Discontinued Operations 5.6, 5.7 5.6, 5.7 5.2 5.4 5.4 4.5 6.3 4.2.4, 7 4.4 5.3 5.4, 5.5 6.1, 6.2 6.1 6.3 2.8.9, 5.2 2.8.9, 5.2 2.8.9, 5.2 2.8.2, 5.4 2.8.2, 5.4 2.8.7, 5.8 5.6 5.7 4.5 1,624,255 4,834,447 (520,730) (22,800) 22,800 6,791 (8,000,712) (23,989,809) 5,145,455 3,699,337 (1,500,912) (3,157,708) 6,524,350 526,350 91,860,930 (24,591) 167,797 (1,379,563) 89,137,617 91,005,448 (1,867,831) 180,237 6,310,535 (480,912) (40,870) 40,870 4,319 (5,547) (20,088,086) 1,348,167 467,199 1,575,045 (495,812) (8,461,445) 101,112 19,680,503 (744) 179,588 (466,290) 1,790,014 740,608 1,049,406 (192,261,784) 83,823,406 (11,138,742) (30,768,599) 31,053,715 0 (173,185,607) (10,000,000) 68,729,122 (845,000) (1,049,566) 5,950 (4,513,991) 36,579,511 (193,856,701) (230,437,417) 36,580,716 0 (881,633) (1,016,539) 0 (1,294,661) 816,591 (12,091,126) (11,824,020) (267,106) 101 f i n a n c i a l s t a t e m e n t s Consolidated Statement of Cash Flows (IFRS) in € fINANC IN g AC TIvITIES: Repurchase of Treasury Stock Proceeds of Share Issuance Proceeds from the Exercise of Options and Convertible Bonds Granted to Related Parties Net of Proceeds and Payments from the Issuance of Convertible Bonds Granted to Related Parties Cost of Share Issuance Net Cash Provided by Financing Activities thereof from Continuing Operations thereof from Discontinued Operations Effect of Exchange Rate Differences on Cash Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Period thereof included in Cash and Cash Equivalents thereof included in Assets of Disposal Group Classified as Held for Sale Cash and Cash Equivalents at the End of the Period thereof included in Cash and Cash Equivalents thereof included in Assets of Disposal Group Classified as Held for Sale note 2013 2012 6.5.4 6.4 7.1 7.2.2 6.5.5 (2,823,625) 128,379,156 7,169,564 225,000 (2,323,688) 130,626,407 130,626,407 0 (4,467) 25,902,856 45,970,840 40,689,865 5,280,975 71,873,696 71,873,696 0 (1,837,552) 0 3,444,061 0 0 1,606,509 1,606,509 0 69,344 (8,625,259) 54,596,099 54,596,099 0 45,970,840 40,689,865 5,280,975 notes to the consolidated statement of cash Flows The Group’s cash and cash equivalents increased from € 40.7 million by €  31.2 million to €  71.9 million compared to prior year. This is due to different effects in operating, investing, and financing activities which are explained below. The operating cash flow includes cash inflow and cash outflow from operat- ing activities and represents the company’s ability to generate cash from its operations during the financial year. The increase in cash inflows from operating activities is affected mainly by changes in the balance sheet item “Deferred Revenue”. The increase in this line item is driven by the upfront payment received from Celgene, which is deferred over several periods. The cash flow from investing activities indicates growth or stagnation of a company. The negative cash flow shows that investments exceed divestments which can generally be interpreted as company growth. The negative cash flow from investing activities is mainly influenced by the increase in money market funds and the increase of investments classified as loans and receivables. Proceeds arise primarily from the sale of finan- cial assets, from the sale of investments classified as loans and receivables and from the disposal of assets classified as available for sale. The cash flow from financing activities provides information regarding the external financing of a company. The cash inflow from financing ac- tivities in the amount of €  131 million is mainly impacted by proceeds from the issuance of equity. 102 Notes 1 General information BUsine ss anD comPanY oVeRVieW MorphoSys AG (“the Company” or “MorphoSys”) is one of the leading anti- body companies focused on research and development of fully human an- tibodies. MorphoSys’s proprietary state-of-the-art technologies, and its over 16 years of focused antibody research and optimization expertise are successfully applied to the development of therapeutics for its commercial partners and proprietary use. The Group 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 completed its initial public offering on Germany’s “Neuer Markt”, the segment of the Deutsche Börse designated for high-growth companies. On 15 January 2003, MorphoSys AG was admitted to the Prime Standard segment of the Frankfurt Stock Exchange. 2 summary of significant accounting Policies 2.1 Basi s of anD cHanGe s in accoUn t inG s tanDaRD s 2 .1.1 BASIS OF APPLICATION These consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), London, taking into account the recommendations of the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC), as adopted by the European Commission. The commercial law pro- visions of Sec. 315a para 1 of the German Commercial Law (HGB) have also been applied. These consolidated financial statements as of 31 December 2013 com- prise MorphoSys AG and its subsidiaries (collectively referred to as the “MorphoSys Group” or the “Group”). In preparing the consolidated financial statements in accordance with IFRS, the Management Board is required to make certain estimates and assumptions which have an effect on the amounts recognized in the con- solidated financial statements and the accompanying notes. The actual results may differ from these estimates. The estimates and the underlying assumptions are subject to continuous review. Any changes in estimates are recognized in the period in which the changes are made and in all relevant future periods. The consolidated financial statements have been prepared in euro – the MorphoSys Group’s functional currency. The statements are prepared on the basis of historical cost, except for the following assets and liabilities recognized at their respective fair value: derivative financial instruments and available-for-sale financial assets. All figures in this report are rounded to the nearest euro, thousand euros, or million euros. To provide improved transparency, the presentation of reserves in the bal- ance sheet is divided into “Revaluation Reserve” and “Translation Re- serve”. Unless stated otherwise, the accounting policies set out below have been applied consistently to all periods presented in these consolidated finan- cial statements. 2 .1.2 CHANGE S IN AC C OUNTING P OLICIES AND DISCLOSURE P U B LIS HED NE W A N D A M ENDED STA N DA RDS A ND IN T ERPRE TAT I O NS W HI C H W ERE N OT Y E T M A NDATO RY IN FIN A N C I A L Y E A R 2012 A ND W HI C H W ERE A PPLIED F O R T HE FIN A N C I A L Y E A R STA R T IN G O N 1 JA N UA RY 2013 • IFRS 7 “Financial Instruments: Disclosures”: IFRS 7 governs disclosure requirement regarding financial instruments. The amendment con- cerns the offsetting of financial assets and financial liabilities and ap- plies to all recognized financial instruments which are offset pursuant to IAS 32.42. According to the new disclosure requirements of IFRS 7, both the gross amount prior to offsetting and the net amount after offset- ting pursuant to IAS 32.42 are to be disclosed. In addition, to ensure the improved traceability of offsetting activities, financial instruments must also be disclosed when their settlement is subject to actionable global offsetting agreements or similar liabilities. • IFRS 13 “Fair Value Measurement”: The objective of the endorsement adopted by the EU is to increase consistency when determining fair value and to reduce complexity by providing a uniform initial definition of fair value for all IFRS requirements and by creating a single source for the measurement and disclosure requirements of fair value. The amendment addresses the question of how fair value measurement should be performed. The individual IFRS requirements applicable for the respective issue or balance sheet item provide regulations as to which items are to be measured. • IAS 1 “Presentation of Financial Statements”: The main impact of the IAS 1 amendment is the requirement for entities to categorize the items presented in other comprehensive income, dependent upon the possibil- ity of whether they can be reclassified to profit and loss at a later point in time (reclassification adjustments). The amendment does not address which items are included in other comprehensive income. The presenta- tion of OCI components to be reclassified to profit and loss in subsequent periods shall be separated from the components which are not to be re- classified. The same applies to income taxes incurred in cases of pre-tax presentation. Thus, income taxes are also to be presented separately as classifiable and non-classifiable items. The option to present OCI items before or after taxes remains unchanged. The amendment to IAS 1 must be applied to financial years beginning on or after 1 July 2012. financial statementsNotes103 • IAS 12 “Income Taxes”: With few exceptions, an entity is required to recognize deferred tax liabilities/deferred tax assets to the extent that the recovery of the carrying amount of the asset or the liability would result in higher/lower tax payments in the future. The amendment of- fers a practical solution to the question whether the carrying amount is recovered by way of usage or disposal. It is a rebuttable presumption that the recovery of the carrying amount usually occurs by way of dis- posal. • IAS 19 “Employee Benefits”: The most important amendment to IAS 19 is the direct recognition of unexpected future fluctuations in pension obligations as well as in any plan assets, so-called “actuarial gains and losses”, in other comprehensive income (OCI). The previous option of immediate recognition in profit and loss, in other comprehensive income (OCI), or the deferred recognition according to the so-called corridor method has been abolished. • Improvements to International Financial Reporting Standards (May 2012): The amendments were published on 28 March 2013 and must be applied to financial years beginning on or after 1 January 2013. P U B LISHED NE W A ND A MENDED STA NDA RDS A ND IN T ERPRE TAT I O NS W HI C H A RE N OT E X PEC T ED TO H AV E A N IMPAC T O N T HE G RO U P • Amendment to IFRS 1 “First-Time Adoption”– Government Grants: The amendment was published in the Official Journal on 5 March 2013 and must be applied to financial years beginning on or after 1 January 2013. The Group has evaluated the impacts of IFRS 1. The adoption of the pro- visions has no effect on the Group. • IFRS 1 “First-Time Adoption”: The objective of IFRS 1 is to introduce a new exemption clause for the scope of IFRS 1: Entities which have been subject to severe hyperinflation are allowed to recognize their assets and liabilities at fair value in the IFRS opening balance sheet rather than at acquisition or production cost. Additionally, the amendment re- moved the previous reference to the fixed date of application (1 January 2004) and replaced it by the general wording “date of transition to IFRS”. The Group has evaluated the impacts of IFRS 1. The adoption of the pro- visions has no effect on the Group. • Amendment to IFRS 7 “Financial Instruments: Disclosures”, with regard to additional disclosure requirements concerning the offsetting of finan- cial assets and financial liabilities, have no effect on the Group. • IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”: The amendment must be applied to financial years beginning on or after 1 January 2013. The interpretation deals with the recognition and measurement of stripping costs incurred during the production phase of a surface mine. P U B LISHED NE W A ND A MENDED STA NDA RDS A ND IN T ERPRE TAT I O NS W HI C H A RE P U B LISHED B U T N OT Y E T M A NDATO RILY A PPLI CA B LE IN T HE FIN A N C I A L Y E A R B EG INNIN G O N 1 JA N UA RY 2013 A ND W HI C H A RE N OT B EIN G A PPLIED IN A DVA N C E • IFRS 10 “Consolidated Financial Statements”: This standard replaces the consolidation guideline of IAS 27 and SIC-12 by introducing a single consolidation model for all entities on the basis of control, regardless of the type of investment recipient (i.e., regardless whether the entity is controlled by the voting rights of the investors or through other contrac- tual agreements as is customary in the case of special purpose entities). The standard replaces the provisions of IAS 27 “Consolidated and Sepa- rate Financial Statements” and SIC-12 “Consolidation – Special Purpose Entities”. Therefore, IAS 27 only deals with the provisions for separate financial statements and is referred to as “Separate Financial State- ments”. IFRS 10 focuses on the introduction of a uniform consolidation model for all entities that is based on the control of a subsidiary. Newly introduced is the concept of having a uniform definition of the term “control” to determine whether or not an entity must be consolidated in the future. This definition includes provisions as to how a reporting company (investor) can control another company (investment) and how consolidation is to be performed. The Group is still assessing the full impact of IFRS 10 and intends to adopt IFRS 10 no later than the report- ing period beginning on or after 1 January 2014. • IFRS 11 “Joint Arrangements”: IFRS 11 introduces new accounting pro- visions for joint arrangements and replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities – Non-Monetary Con- tributions by Venturers”. The new standard stipulates new require- ments for the identification, classification, and accounting of jointly con- trolled operations. The option to apply the proportionate consolidation method for jointly controlled entities has been cancelled. In addition, IFRS 11 abolished the concept of jointly controlled assets. The concepts of joint operations and joint ventures remained. The classification is now based on an economic approach which focuses on the type of rights and obligations arising from the agreement. The Group is still assessing the full impact of IFRS 11 and intends to adopt IFRS 11 no later than the reporting period beginning on or after 1 January 2014. • IFRS 12 “Disclosure of Interest in Other Entities”: IFRS 12 combines the revised disclosure requirement for all forms of interests in other enti- ties, including joint arrangements, associated companies, special pur- pose entities, and other non-consolidated interests. IFRS 12 requires improved disclosures for consolidated and non-consolidated entities in which the company holds an interest. IFRS 12 requires more extensive as well as more informative disclosures in the notes than IAS 27. For example, information regarding the type, size, and importance of the existing relationships to other entities must be disclosed, including those regarding consolidated and non-consolidated structured compa- nies (special purpose entities). The Group is still assessing the full im- pact of IFRS 12 and intends to adopt IFRS 12 no later than the reporting period beginning on or after 1 January 2014. • Amendments to IFRS 10 “Consolidated Financial Statements”, to IFRS 12 “Disclosure of Interest in Other Entities”, and IAS 27 “Separate Fi- nancial Statements” – Investment Entities: The amendments were pub- lished on 21 November 2013 and must be applied to financial years be- ginning on or after 1 January 2014. • Amendments to the transitional provisions of IFRS 10 “Consolidated Fi- nancial Statements”, IFRS 11 “Joint Arrangements”, and IFRS 12 “Dis- closure of Interest in Other Entities”: The amendments were published on 5 April 2013 and are expected to be applied to financial years begin- ning on or after 1 January 2014. • IAS 27 “Separate Financial Statements”: IAS 27 (revised 2011) includes the remaining provisions applying to the separate financial statements following the inclusion in the new IFRS 10 “Consolidated Financial Statements” of former IAS 27 provisions regarding consolidation. Addi- tionally, changes to IFRS 12 also have an impact on IAS 27. The Group is still assessing the full impact of IAS 27 and intends to adopt IAS 27 no later than the reporting period beginning on or after 1 January 2014. financial statementsNotes104 f i n a n c i a l s t a t e m e n t s Notes • IAS 28 “Investments in Associates”: IAS 28 (revised 2011) includes pro- visions regarding interests in joint venture and associated companies that are consolidated using the equity method pursuant to IFRS 11. In the future, joint ventures are always accounted using the equity method pursuant to IAS 28 as the proportionate consolidation of jointly operated entities was abandoned in IFRS 11. For the fi rst time, additional amend- ments to IAS 28 provide that in the case of a planned partial sale of as- sociated companies or joint ventures, the interest held for sale must be accounted for pursuant to IFRS 5 “Non-Current Assets Held for Sale and Discontinued Operations” when the classifi cation requirements of IFRS 5 are met. The Group is still assessing the full impact of IAS 28 and in- tends to adopt IAS 28 no later than the reporting period beginning on or after 1 January 2014. • IAS 32 “Financial Instruments – Presentation”: IAS 32 governs the pre- sentation and disclosure of all types of fi nancial instruments. In order to facilitate a comparison with US standards, additional disclosure re- quirements come into eff ect that are included in IFRS 7. The established model for off setting remains in place. The modifi cation concerns both of the off setting requirements of IAS 32.42: – The right to off set a fi nancial asset or a fi nancial liability should not depend on future events and must be preserved even in the case of default, insolvency, or bankruptcy of the business partner. – If transactions involving fi nancial instruments are settled via settle- ment systems (e.g. clearing houses), the off setting of fi nancial assets and fi nancial liabilities requires that the transaction takes place with- out the emergence of credit and liquidity risk and within a settlement process or cycle. The amendments of IAS 32 are to be applied retrospectively by adjust- ing the comparative fi gures for fi nancial years beginning on or after 1 January 2014. The Group is still assessing the full impact of IAS 32 and intends to adopt IAS 32 no later than the reporting period beginning on or after 1 January 2014. P U B LISHED NE W A ND A MENDED STA NDA RDS W HI C H H AV E N OT Y E T B EEN A D O P T ED BY T HE EU RO PE A N U NI O N (“ END O RSEMEN T ” ) • IFRS 9 “Financial Instruments”, amendments to IFRS 9 “Financial In- struments” and to IFRS 7 “Financial Instruments: Disclosures” – Man- datory Eff ective Date and Transition Disclosures: The amendments are expected to be applied to fi nancial years beginning on or after 1 January 2015. The Group is still assessing the full impact of IFRS 9 and its amendments. • IFRS 9 “Financial Instruments: Classifi cation and Measurement”: Fi- nancial Assets (November 2009) and “Financial Instruments: Classifi ca- tion and Measurement”: Financial Liabilities (October 2010): The amend- ments to IFRS 9 include new provisions on hedge accounting in the form of a new general model for the accounting of hedging relationships. The amendment was included in IFRS 9 as Section 6 and replaces the cor- responding provisions on hedge accounting in IAS 39. However, in ap- plying the new hedge-accounting provisions, IFRS 9 provides the option to continue applying the special regulations for portfolio fair value hedges of interest rate risk found in IAS 39. The newly introduced IASB model provides entities with more fl exibility in presenting their risk management activities. The amendments to IFRS 9 also provide the op- portunity of prior adoption of the recognition of fair value changes out- side of profi t and loss resulting from credit risk related fair value changes of liabilities which are measured at fair value, without applying all the requirements of IFRS 9. The IASB has also removed the previous 1 January 2015 mandatory eff ective date of IFRS 9 for fi rst-time applica- tions. A new mandatory eff ective date will only be determined once the standard is completed. EU endorsement will also be sought upon com- pletion. • Amendments to IAS 36 “Recoverable Amount Disclosures for Non-Fi- nancial Assets”: In the development of IFRS 13 “Measurement at Fair Value”, the IASB decided to modify IFRS 36 to make it mandatory to disclose information on impaired assets. It became clear, however, that the amendments to IAS 36 resulted in the obligation to provide such information for all cash-generating units when they contain a material proportion of goodwill and regardless of whether or not they are im- paired. The amendments also contain more specifi ed disclosures when an asset is impaired and the recoverable amount was determined on the basis of its fair value less costs to sell. For example, information should be provided on the accounting policies applied and with regard to the level of the fair value hierarchy pursuant to IFRS 13, upon which the measurement of the fair value was based. The amendments must be ap- plied to fi nancial years beginning on or after 1 January 2014. Early adop- tion is permitted as long as IFRS 13 has already been adopted. The Group is still assessing the full impact of IAS 36 and intends to adopt IAS 36 no later than the reporting period beginning on or after 1 Janu- ary 2014. • Amendments to IAS 39 “Financial Instruments: Recognition and Mea- surement”: On 27 June 2013, the IASB adopted “Novation of Derivatives and Continuation of Hedge Accounting” whereby derivatives continue to be designated as a hedging instrument in an existing hedging relation- ship despite novation. Novation is defi ned as circumstances in which the initial derivative counterparties agree that a central counterparty (CCP) may stand as a substitute for the respective counterparties. A fun- damental prerequisite for novation is that the involvement of a central counterparty or central contracting party has occurred as a result of legal or regulatory requirements. The amendments must be applied for the fi rst time in fi nancial years beginning on or after 1 January 2014. Early adoption is permitted. The Group is still assessing the full impact of IAS 39 and intends to adopt IAS 39 no later than the reporting period beginning on or after 1 January 2014. • IFRIC 21 “Levies”: This interpretation provides guidance on how and when to recognize levies pursuant to IAS 37 “Provisions, contingent li- abilities and contingent assets”, that are imposed by a government and are not within the scope of another IFRS. In German law, the so-called “bank levy” is an example of such a levy. According to the current inter- pretation, an obligation must be recognized in the fi nancial statements once the obligating event has occurred that triggers the payment obliga- tion of the levy in accordance with the relevant legislation. The interpre- tation must be applied to fi nancial years beginning on or after 1 January 2014. The Group is still assessing the full impact of IFRIC 21 and in- tends to adopt IFRIC 21 no later than the reporting period beginning on or after 1 January 2014. 2.2 cons ol iDat ion PRinc iPl e s Intercompany balances and transactions and any unrealized gains arising from intercompany transactions are eliminated when preparing consoli- dated fi nancial statements pursuant to IAS 27.20. Unrealized losses are eliminated in the same manner as unrealized gains; however, they are considered an indication of a possible impairment of the transferred asset. Accounting policies have been applied consistently for all subsidiaries. 105 f i n a n c i a l s t a t e m e n t s Notes 2 .2 .1 C ONSOLIDATE D C OMPANIES AND SC OPE OF C ONSOLIDATION MorphoSys AG has four wholly owned subsidiaries (collectively referred to as the “MorphoSys Group” or the “Group”). In January 2007, Serotec Ltd. and Serotec, Inc. were renamed MorphoSys UK Ltd. and MorphoSys US, Inc. In March 2007, Serotec GmbH was re- named MorphoSys AbD GmbH. MorphoSys USA Inc., Charlotte, North Carolina, USA, was incorporated in the USA on 16 February 2000. The subsidiary’s business purpose was to support MorphoSys AG in the sale and licensing of its products. In Novem- ber 2002, MorphoSys USA Inc. ceased its operating activities. In October 2010, MorphoSys acquired all of the shares in Sloning BioTech- nology GmbH, a private company located in Puchheim near Munich, Ger- many. MorphoSys IP GmbH, Martinsried, Germany, was registered on 6 Novem- ber 2002 in the commercial register in Munich and commenced its operat- ing business on 31 December 2002. The company’s purpose is the pur- chase, maintenance, and administration of certain intangible assets belonging to MorphoSys Group. The company is located on the premises of MorphoSys AG. In January 2005, MorphoSys acquired Biogenesis Ltd., Poole, UK, and Bio- genesis, Inc., New Hampshire, USA. Biogenesis Ltd. was initially renamed MorphoSys UK Ltd. and in 2007 was again renamed Poole Real Estate Ltd. Biogenesis, Inc. was renamed MorphoSys US, Inc. and merged into Sero- tec, Inc. Subsequently, the absorbing entity resumed the name MorphoSys US, Inc. and has its registered offi ce in Raleigh, North Carolina, USA. In January 2006, MorphoSys AG acquired Serotec Ltd., Oxford, UK, with its subsidiaries Serotec, Inc., Raleigh, North Carolina, USA, Serotec GmbH, Düsseldorf, Germany, and Oxford Biotechnology Ltd., Oxford (together re- ferred to as the “Serotec Group”). Hence, Serotec Ltd. became a wholly owned subsidiary of MorphoSys AG. The Serotec Group has been inte- grated into MorphoSys’s existing AbD segment. Oxford Biotechnology Ltd. was dissolved in fi nancial year 2009. 18 G R o U P m a n a G e m e n t R e P o R t Operations and Business Environment On 16 December 2012, MorphoSys AG and a subsidiary of Bio-Rad Labora- tories, Inc., Hercules, California, USA (Bio-Rad Inc.), agreed upon the ac- quisition of all shares of MorphoSys UK Ltd., Oxford, UK (MorphoSys UK). This agreement also comprised all shares of both MorphoSys UK’s subsid- iaries, MorphoSys AbD GmbH, Düsseldorf, Germany and MorphoSys US, Inc., Raleigh, USA. Additionally, on 16 December 2012, MorphoSys AG and a further subsidiary of Bio-Rad agreed upon the acquisition of individual assets (trademarks) of the AbD Serotec segment of MorphoSys AG and the purchase of a non-exclusive license for the use of the HuCAL technology in the market for research reagents and diagnostics. Furthermore, it was agreed to transfer all remaining assets and liabilities of the AbD Serotec segment of MorphoSys AG to MorphoSys AbD GmbH. MorphoSys AG’s interest in Poole Real Estate Ltd., Poole, UK, was not sold. The closing of the transaction was contingent upon certain conditions which were met on 10 January 2013 (closing date). Hence, substantially all of the AbD Serotec segment was sold as of this date. Therefore, substantially all of MorphoSys AG’s AbD Serotec operating segment represented a discontin- ued operation within the meaning of IFRS 5. As of the reporting date, the Partnered Discovery and Proprietary Development operating segments, along with the non-discontinued operations of the AbD Serotec segment, were classifi ed as continuing operations. l eGal s t RUc t URe of t He moRPHo s Y s GRoUP s u b s i d i a r i e s : m o r p h o s y s u s a , i n c . p o o l e r e a l e s tat e lt d . m o r p h o s y s i p g m b h s l o n i n g b i o t e c h n o l o g y g m b h 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 25 m o r phosys aG s U B s i D iaRies a b d s e r o t e c : m o r p h o s y s u k lt d . m o r p h o s y s u s , i n c . m o r p h o s y s a b d g m b h 1 0 0 % 1 0 0 % 1 0 0 % a b D a b D m u n i c h s e r o t e c s h a r e d e a l s c o p e o f t r a n s a c t i o n a s s e t d e a l 106 As of 31 December 2013, the entities MorphoSys UK Ltd., Oxford, UK, MorphoSys US, Inc., Raleigh, USA, and MorphoSys AbD GmbH, Düssel- dorf, are no longer included in the MorphoSys Group’s scope of consolida- tion. MorphoSys IP GmbH has made use of the option of exemption of Sec. 264 para 3 of the German Commercial Code (HGB). For this reason, no separate financial statements were published in the Bundesanzeiger (German Fed- eral Gazette) for MorphoSys IP GmbH for the year 2013. The consolidated financial statements for the year ended 31 December 2013, were prepared by the Management Board by a resolution of the Management Board on 20 February 2014. The Management Board is com- posed of Dr. Simon Moroney (Chief Executive Officer), Jens Holstein (Chief Financial Officer), Dr. Marlies Sproll (Chief Scientific Officer), and Dr. Arndt Schottelius (Chief Development Officer). The Supervisory Board is allowed to amend the financial statements approved by the Management Board. The registered offices of the MorphoSys Group’s headquarters are located at Lena-Christ-Straße 48, 82152 Martinsried, Germany. 2 .2 .2 C ONSOLIDATION ME THODS The following Group’s subsidiaries are included in the scope of consolida- tion as shown in the following table. company established in/ Purchase of shares included in Basis of consoli- dation since MorphoSys USA, Inc. Poole Real Estate Ltd. MorphoSys IP GmbH Sloning BioTechnology GmbH February 2000 January 2005 November 2002 October 2010 01/01/2000 01/01/2005 01/01/2002 01/01/2010 As these subsidiaries are wholly owned, they are fully consolidated. There are no entities which are consolidated proportionately or by using the eq- uity method. There are also no entities upon which the Group exercises a controlling influence in the meaning of IAS 27 “Separate and Consolidated Financial Statements” – Influence on the Financial and Operating Policy Decisions. Interests in such entities would be measured at fair value or at historic cost in accordance with the regulations of IAS 39. Assets and liabilities of domestic and international entities which are fully consolidated are recognized using Group-wide uniform accounting and valuation methods. The consolidation methods applied have not changed compared to the previous year. Consolidation is carried out using the purchase method as per the time of the acquisition. Assets and liabilities of subsidiaries are recognized at fair value. In the consolidated financial statements, receivables and liabilities, as well as expenses and income among consolidated entities, are eliminated. In- tercompany deliveries and services are based on transfer prices that are compared to third party conditions. Any resulting intercompany profits are eliminated to the extent that inventories include assets from inter- company deliveries. 2 .2 .3 BUSINES S C OMBINATIONS/AC QUISITIONS AND DISC ONTINUE D OPE R ATIONS The Group applies IFRS 3 (revised) “Business Combinations” (effective from 1 July 2009). The revised standard continues to stipulate the applica- tion of the purchase method for business combinations, with some signifi- cant changes. For example, all payments in connection with the purchase of a business are to be recorded at fair value on the acquisition date, while contingent payments are classified as debt and are subsequently revalued through profit and loss. All acquisition-related costs are expensed. In January of the past financial year, the sale of substantially all of the AbD Serotec segment was completed. Accordingly, as of 31 December 2013, the entities MorphoSys UK Ltd., Oxford, UK, MorphoSys US, Inc., Raleigh, USA, and MorphoSys AbD GmbH, Düsseldorf, Germany, are no longer in- cluded in the MorphoSys Group’s scope of consolidation. s coPe of cons ol iDat ion a s of 31 Dec emBeR 2013 name and corporate seat of the company C oMpAN Y C oNSolIDATED (ApART fRoM pARENT C oMpAN Y ) MorphoSys USA, Inc., Charlotte, North Carolina, USA MorphoSys IP GmbH, Munich, Germany Poole Real Estate Ltd., Poole, UK Sloning BioTechnology GmbH, Puchheim, Germany exchange Rate on Dec 31, 2012 one Unit of euro in local currency local currency US $ € £ € 1.37760 – 0.84481 – share of share capital in total assets in total liabilities in total Revenue in Profit/loss in capital % local currency local currency local currency local currency local currency 100 100 100 100 2,000 25,000 200 951,660 10,286 3,305,140 801,699 13,880,384 0 3,280,357 5,000 3,307,435 0 0 3,343,800 3,180,726 (1,139) (2,409) (12,108) 1,958,510 financial statementsNotes 107 After initial purchase of shares in Dutch Lanthio Pharma B.V. in 2012, the Group made an additional contribution in financial year 2013 and contin- ues to hold an interest of 19.98 % in this company. At the time the share in the company was acquired, the initial recognition was carried out at acquisition costs including transaction costs. Short-term value changes in the share are recognized directly in other comprehensive income. In contrast, permanent impairment is recognized in profit and loss. The shares in unquoted subsidiaries and stock corporations are classified as “Available for Sale Financial Assets” and carried at acquisition cost since their fair value cannot be determined due to the absence of a market. 2 .2 .4 BASIS OF FORE IGN CURRE NCY TR ANSL ATION IAS 21 “The Effects of Changes in Foreign Exchange Rates” governs ac- counting for transactions and balances denominated in foreign curren- cies. Transactions denominated in foreign currencies are translated at the exchange rate prevailing on the date of the transaction. Translation differ- ences are recognized in profit and loss. On the reporting date, assets and liabilities are translated at the closing rate and income and expenses are translated at the average exchange rate for the financial year. Any good- will arising from the acquisition of a foreign operation and any fair value adjustments to the carrying amounts arising from the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate. Any foreign exchange rate differences deriving from these translations are recognized in profit and loss. Any further foreign exchange rate differences at the Group level are recognized in the “Trans- lation Reserve” (stockholders’ equity). 2.3 f inanc ial ins t RUmen t s anD f inanc ial Ri sK manaGemen t 2 .3.1 CRE DIT RISK AND LIQUIDIT Y RISK Financial instruments that may potentially subject the Group to concen- trations of credit and liquidity risk consist primarily of cash, cash equiva- lents, marketable securities, derivative financial instruments, and ac- counts receivable. The Group’s cash and cash equivalents are principally denominated in euros. Marketable securities are placed in high-quality securities. Cash, cash equivalents, and marketable securities are main- tained with several renowned financial institutions in Germany. The Group continuously monitors its positions with, and the credit rating of, the financial institutions which are counterparts to its financial instru- ments and does not expect a risk of non-performance. One of the Group’s policies requires that all customers who wish to trade on credit terms are subject to a creditworthiness assessment, which is based on external ratings. Nevertheless, the Group’s revenues and ac- counts receivables are subject to a credit risk as a result of customer con- centration. The Group’s most significant single customer accounted for € 8.2 million of trade receivables as of 31 December 2013 (31 December 2012: € 8.3 million). This customer accounted for approximately 80 % of the Group’s accounts receivable from continuing operations at the end of 2013. Three individual customers of the Group accounted for 53 %, 27 %, and 8 % of the total revenues from continuing operations in 2013. On 31 December 2012, one customer had accounted for 92 % of the Group’s accounts receiv- ables and three customers individually had accounted for 91 %, 3 %, and 3 % of the Group’s revenues in 2012. Based on the Management Board’s assess- ment, allowances in an amount of € 238,900 were required in financial year 2013 which related to the Partnered Discovery segment. As of 31 December 2012 and based on the Management Board’s assessment, allow- ances in the amount of € 79,196 were required in the discontinued AbD Serotec segment. The carrying amounts of financial assets represent the maximum credit risk. The credit risk of trade receivables at the reporting date by geographic region was composed as follows. in € 12/31/2013 12/31/2012 Europe and Asia USA and Canada Total from Continuing Operations 8,538,478 1,731,844 10,270,322 8,683,001 241,197 8,924,198 Total from Discontinued Operations ToTAl 0 10,270,322 1,703,450 10,627,647 s coPe of cons ol i Dat ion a s of 31 Dec emBeR 2013 name and corporate seat of the company C oMpAN Y C oNSol IDATED (Ap AR T fRoM pARENT C oMpAN Y ) MorphoSys USA, Inc., Charlotte, North Carolina, USA MorphoSys IP GmbH, Munich, Germany Poole Real Estate Ltd., Poole, UK Sloning BioTechnology GmbH, Puchheim, Germany exchange Rate on Dec 31, 2012 one Unit of euro local currency in local currency US $ 1.37760 € £ € 0.84481 – – share of capital % share capital in local currency total assets in local currency total liabilities in local currency total Revenue in local currency Profit/loss in local currency 100 100 100 100 2,000 25,000 200 951,660 10,286 3,305,140 801,699 13,880,384 0 3,280,357 5,000 3,307,435 0 3,343,800 0 3,180,726 (1,139) (2,409) (12,108) 1,958,510 financial statementsNotes 108 The term structure of trade receivables at the reporting date was com- posed as follows. in €; a/R are due in Accounts Receivable Allowance for Impairment Total from Continuing Operations Total from Discontinued Operations Accounts Receivable, Net of Allowance for Impairment in €; a/R are due in Accounts Receivable Allowance for Impairment Total from Continuing Operations Total from Discontinued Operations Accounts Receivable, Net of Allowance for Impairment As of 31 December 2013, the Group’s accounts receivable included overdue receivables in the amount of € 0.2 million, for which an allowance for im- pairment was required based on the Management Board’s assessment. Additionally, accounts receivable comprised an insignificant amount, for which impairment was not deemed necessary as the receivables were not overdue by more than 60 days. As of 31 December 2013 and 31 December 2012, the Group was not ex- posed to a credit risk from derivative financial instruments. The maxi- mum credit risk of financial guarantees (rent deposits) at the reporting date amounted to € 1.3 million (31 December 2012: € 1.3 million). The contractually agreed maturities and the corresponding cash flows of financial liabilities are within one year and five years, respectively. The convertible bonds due to related parties have a term until 31 December 2015 and 31 March 2020 (maximum credit risk: € 0.3 million). 12/31/2013 0 (30) days 12/31/2013 30 (60) days 12/31/2013 60 + days 12/31/2013 total 8,760,788 (238,900) 8,521,888 0 8,521,888 45,771 0 45,771 0 45,771 1,702,663 0 1,702,663 0 1,702,663 10,509,222 (238,900) 10,270,322 0 10,270,322 12/31/2012 0 (30) days 12/31/2012 30 (60) days 12/31/2012 60 + days 12/31/2012 total 5,141,303 0 5,141,303 1,438,486 6,579,789 2,147,236 0 2,147,236 183,536 2,330,772 1,635,658 0 1,635,658 81,428 1,717,086 8,924,197 0 8,924,197 1,703,450 10,627,647 2 .3.2 MARKE T RISK Market risk is the risk that changes in market prices, such as foreign ex- change rates, interest rates, and equity prices, will affect the Group’s re- sults of operations or the value of the financial instruments held. The Group is also exposed to currency and interest rate risks. 2 .3.3 CURRE NCY RISK The consolidated financial statements are prepared in euros. While the expenses of MorphoSys are predominantly incurred in euros, a part of the revenues is dependent upon the current exchange rates of the US dollar and the pound sterling. The Group examines the necessity of hedging for- eign exchange rates to minimize currency risk during the year and ad- dresses this risk by using derivative financial instruments. financial statementsNotes109 The Group’s exposure to foreign currency risk based on carrying amounts was composed as follows. as of 31 December 2013; in € eUR UsD GBP total Cash and Cash Equivalents Available-for-sale Financial Assets Bonds, Available-for-sale Accounts Receivable Accounts Payable and Accrued Expenses ToTAl 70,885,679 188,360,354 11,102,087 10,270,322 17,260,346 297,878,788 24,643 0 0 0 (60,316) (35,673) 963,374 0 0 0 (10,009) 953,365 71,873,696 188,360,354 11,102,087 10,270,322 17,190,021 298,796,480 as of 31 December 2012; in € eUR UsD GBP total Cash and Cash Equivalents Available-for-sale Assets Accounts Receivable Accounts Payable and Accrued Expenses ToTAl Different foreign exchange rates and their impact on assets and liabilities were simulated in a detailed sensitivity analysis in order to determine the resulting effects on income. A 10 % increase of the euro against the US dollar as of 31 December 2013 would have slightly increased the Group’s profit from continuing operations (assuming stable interest rates). A 10 % decline of the euro against the US dollar would have slightly decreased the Group’s profit from continuing operations. A 10 % increase of the euro against the British pound as of 31 December 2013 would have reduced the Group’s profit from continuing operations by € 0.1 million (assuming sta- ble interest rates). A 10 % decline of the euro against the British pound would have increased the Group’s profit from continuing operations by € 0.1 million. A 10 % increase of the euro against the US dollar as of 31 December 2012 would have reduced the Group’s profit from continuing operations by €  0.1 million (assuming stable interest rates). A 10 % reduction in the euro against the US dollar would have increased the Group’s profit from continuing operations by € 0.2 million. A 10 % increase of the euro against the British pound as of 31 December 2012 would have reduced the Group’s profit from continuing operations by € 0.1 million (assuming stable inter- est rates). A 10 % decline of the euro against the British pound would have increased the Group’s profit from continuing operations by € 0.1 million. 38,460,777 79,722,222 8,697,667 10,594,593 137,475,259 1,233,596 0 226,530 57,576 1,517,702 995,492 0 0 7,921 1,003,413 40,689,865 79,722,222 8,924,197 10,660,090 139,996,374 If the foreign exchange rates for the US dollar against the euro and the British pound against the euro had remained unchanged at the average rate of 2012, the Group’s revenues from continuing operations would have been higher by € 0.1 million (2012: Group revenues would have been € 0.4 million lower). 2 .3.4 INTE REST R ATE RISK The Group’s risk exposure to changes in interest rates relates mainly to available for sale securities/investments. Changes in the general level of interest rates may lead to an increase or decrease in the fair value of these securities/investments. The Group’s investment focus places the security of an investment ahead of its return. The interest rate risk is mitigated due to the fact that all securities/investments can be liquidated within a max- imum of two years and the vast majority even within three months. The Group is currently not subject to significant interest rate risks from liabil- ities recorded in the balance sheet. financial statementsNotes110 HIER A RC H Y LE V EL 1 The fair value of financial instruments, which are traded in active mar- kets, is based upon quoted market prices as of the reporting date. A mar- ket is considered an active market if quoted prices are available from an exchange, dealer, broker, industry group, pricing service, or a regulatory body that is easily and regularly accessible and these prices reflect cur- rent and regularly occurring market transactions at arm’s length condi- tions. For assets held by the Group, the appropriate quoted market price is the buyer’s bid price. These instruments are included in Level 1 (see also item 5.2 of these Notes*). *c R o s s - R e f e R e n c e t o pa g e 1 2 7 HIER A RC H Y LE V EL 2 The fair value of financial instruments, which are not traded in active markets, can be determined using measurement procedures. In this case, fair value is estimated on the basis of the results of a valuation method that makes maximum use of market data, and relies as little as possible on entity-specific inputs. If all inputs required for measuring fair value are observable, the instrument is allocated to Level 2. If important inputs are not based on observable market data, the instrument is allocated to Level 3. None of the financial assets and liabilities were allocated to hierarchy levels 2 or 3. The fair value of licenses payable is determined by the effective interest method. Convertible bonds are recorded at ascribed values, which approximate the amount becoming due upon settlement. There were no transfers from one fair value hierarchy level to another in 2013 and 2012. The fair values of financial assets and liabilities and the carrying amounts presented in the consolidated balance sheet were composed as follows. 2 .3.5 FAIR VALUE HIE R ARCHY AND ME ASURE ME NT PRO CE DURES IFRS 13 “Fair Value Measurement” guidelines must always be applied when another IAS/IFRS requires, respectively permits, measurement at fair value, or when disclosures regarding measurement at fair value are required. The fair value is the amount to be achieved on the valuation date upon the sale of an asset in an arm’s length transaction between indepen- dent market participants or the amount to be paid for the transfer of a lia- bility (disposal or exit price). Accordingly, the fair value of a liability re- flects the default risk (i.e., own credit risk). Measuring fair value requires that the sale of the asset or the transfer of the liability takes place on the principal market or, if such a principal market is not available, on the most advantageous market. The principal market is the market with the highest volume and the highest level of activity to which the company has access. Fair value is measured by using the same assumptions and taking into account the same characteristics of the asset or liability as would an inde- pendent market participant. Fair value is a market-based, not an entity- specific measurement. For non-financial assets, fair value is determined based on the highest and best use of the asset as determined by a market participant. For financial instruments, the use of bid prices for assets and ask prices for liabilities is permitted, but not required if those prices most suitably reflect fair value in the respective circumstances. For simplifica- tion purposes, the use of mean rates is also permitted. Thus, IFRS 13 not only applies to financial assets, but also to all assets and liabilities. MorphoSys uses the following hierarchy for determining and disclosing the fair value of financial instruments. Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities to which the Company has access. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e., as prices) or indirectly (i.e. derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, marketable securities, accounts receivable, and accounts payable approximate their fair value due to their short-term maturities. financial statementsNotes111 31 December 2013 (in 000’s €) Cash and Cash Equivalents Accounts Receivable Other Receivables Shares available for Sale, net of Current Portion Available-for-sale Financial Assets Bonds, Available-for-sale Convertible Bonds – Liability Component Accounts Payable and Accrued Expenses * Declaration waived in line with IFRS 7.29 (a) 31 December 2012 (in 000’s €) Cash and Cash Equivalents Accounts Receivable Other Receivables Shares available for Sale, net of Current Portion Available-for-sale Financial Assets Assets of Disposal Group Classified as Held for Sale Convertible Bonds – Liability Component Accounts Payable and Accrued Expenses Liabilities of Disposal Group Classified as Held for Sale note loans and Receivables available for sale other financial liabilities total carrying amount fair value 5.1 5.3 5.4 5.8 5.2 5.2 7.2 6.1 71,874 10,270 119,458 0 0 0 0 1,727 0 0 201,602 188,360 11,102 201,189 0 0 0 0 0 0 0 71,874 10,270 119,458 1,727 188,360 11,102 402,791 71,874 * 119,458 * 188,360 11,102 390,794 0 0 0 0 0 0 (299) (299) (299) (17,190) (17,489) (17,190) (17,489) (17,190) (17,489) note loans and Receivables available for sale other financial liabilities total carrying amount fair value 5.1 5.3 5.4 5.8 5.2 5.10 7.2 6.1 6.4 40,690 8,924 10,298 0 0 0 59,912 0 0 0 0 0 0 0 882 79,722 40,855 121,459 0 0 0 0 0 0 0 0 0 40,690 8,924 10,298 882 40,690 8,924 10,298 882 79,722 79,722 40,855 181,371 40,855 181,371 (74) (74) (74) (10,660) (10,660) (10,660) (3,733) (3,733) 0 (10,734) (3,733) (14,467) (3,733) (14,467) 2.4 imP aiRmen t 2 .4.1 NON - DE RIVATIVE FINANCIAL INSTRUME NT S A financial instrument not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence to show that it is impaired. A financial instrument is impaired if objective evidence indicates that an event has occurred after the initial recognition of the asset that resulted in a loss and that the event could have negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial instruments (including equity securi- ties) are impaired can include default or delinquency of a debtor, indica- tions that a debtor or issuer will enter insolvency, adverse changes in the payment status of borrowers or issuers in the Group, and economic condi- tions that correlate with defaults or the disappearance of an active market for a security. In addition, a significant or prolonged decline in an equity security’s fair value below its acquisition cost is objective evidence of im- pairment. financial statementsNotes 112 2 .4.2 RECE IVABLES The Group considers evidence of impairment of receivables both at an in- dividual and collective level. All individually significant receivables are tested specifically for impairment. All individually significant receivables found not to be specifically impaired are then collectively tested for any impairment that occurred but was not yet identified. Individually non sig- nificant receivables are collectively tested for impairment by grouping to- gether receivables with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of default probabilities, of the timing of impairment reversals, and of the amount of loss incurred adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. For a financial instrument measured at amortized cost less impairment, impairment is calculated as the difference between its carrying amount and the present value of the estimated future cash flows. Cash flows are discounted at the asset’s original effective interest rate. Losses are recog- nized in profit or loss and reflected in an allowance account against receiv- ables. Interest on the impaired asset continues to be recognized. When a subsequent event (e.g. repayment by a debtor) causes the amount of im- pairment to decrease, the impairment is reversed through profit and loss. 2 .4.3 FINANCIAL AS SE TS AVAIL ABLE FOR SALE Impairment of financial assets available for sale is recognized by reclas- sifying the accumulated losses from the revaluation reserve in equity to profit and loss. The accumulated loss that is reclassified from equity to profit and loss is the difference between the acquisition cost, less amorti- zation and any principal repayment, and the current fair value, less any impairment recognized previously in profit or loss. If, in a subsequent period, the fair value of an impaired financial asset available for sale in- creases and the increase can be related objectively to an event occurring after the impairment was recognized in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an available for sale financial instrument is recognized in equity in other comprehensive income. 2 .4.4 NON - FINANCIAL AS SE TS The carrying amounts of the Group’s non-financial assets, inventories and deferred tax assets are reviewed at each reporting date for any indication of impairment. The asset’s recoverable amount is estimated if such indica- tion exists. For goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is esti- mated at the same time each year. Impairment is recognized if the carry- ing amount of an asset or the cash generating unit (CGU) exceeds its esti- mated recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the esti- mated future after-tax cash flows are discounted to their present value using an after-tax discount rate that reflects current market assessments with regard to the time value of money and the risks specific to the asset or CGU. For the purposes of impairment testing, assets that cannot be tested individually are grouped into the smallest group of assets that gen- erates cash flows from continuing use that are largely independent of the cash flows of other assets or CGUs. For the purposes of goodwill impair- ment testing, a ceiling test for the operating segment must be carried out. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash flows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and are tested for impairment as part of the impairment testing of the CGU, to which the corporate asset was allocated. Impairment losses are recognized in profit and loss. Goodwill impairment is not reversible. For all other assets, impairment recognized in prior peri- ods is assessed at each reporting date for any indications that the losses decreased or no longer exist. Impairment can be reversed when there has been a change in the estimates used to determine the recoverable amount. Impairment loss can only be reversed to the extent that the asset’s carry- ing amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment had been recognized. 2.5 aDDi t ional inf oRmat ion 2 .5.1 KE Y ESTIMATES AND AS SUMP TIONS Estimates and judgments are continually evaluated and are based on his- torical experience and other factors which include expectations of future events that are believed to be realistic under the current circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting-related estimates will, by definition, seldom corre- spond to the actual results. The estimates and assumptions bearing a sig- nificant risk of causing material adjustments to the carrying amounts of assets and liabilities in the next financial year are addressed below. G O O DW ILL On an annual basis, the Group tests whether goodwill is subject to impair- ment, in accordance with the accounting policies discussed in item 2.4.4*. The recoverable amounts of cash-generating units have been determined on the basis of value-in-use calculations. These calculations require the use of estimates (see also item 5.7.6 of the Notes*). *c R o s s - R e f e R e n c e t o pa g e 1 1 2 a n d pa g e 1 3 2 For the AbD Serotec segment no further goodwill impairment testing was necessary at the end of financial year 2013 since this segment was sold in January 2013. Therefore, the corresponding goodwill was no longer part of MorphoSys Group due to deconsolidation. A sensitivity analysis was performed for the technology development ac- tivities within the Partnered Discovery segment, which represent the cash-generating unit also comprising the goodwill from the acquisition of Sloning BioTechnology GmbH. A 30 % increase in the weighted average cost of capital (WACC) or a 30 % decrease in future cash flows would not result in impairment of the cash-generating unit. IN C O ME TA X ES The Group is subject to income taxes in numerous tax jurisdictions. Sig- nificant judgment is required in determining the Group’s provision for income taxes. There are many transactions and calculations which are accompanied by uncertainty with respect to the calculation of taxes actu- ally occurring. financial statementsNotes113 As of 31 December 2013, deferred tax assets on tax loss carryforwards in the amount of € 1.8 million were recognized as a result of positive busi- ness expectations at Sloning BioTechnology GmbH for financial years 2014 to 2018. No deferred tax assets were reported for corporate tax loss car- ryforwards in the amount of € 2.4 million of the and trade tax loss carry- forwards in the amount of € 2.3 million since the application of these tax loss carryforwards is deemed uncertain with regard to German tax regu- lation (Sec. 8 para. 4, of the German Corporation Tax Act ( KStG -former version) and Sec. 8c of the German Corporation Tax Act (KStG)). If a por- tion of the total tax loss carryforwards may not be utilized as a result of a tax audit, the Group would be required to pay higher income taxes for fu- ture periods at an earlier point in time since the tax loss carryforwards would be consumed sooner than expected. 2 .5.2 CAPITAL MANAGE ME NT Concerning capital management, the Management Board’s policy is to pre- serve a strong and sustainable capital base in order to maintain investor, business partner, and market confidence and to support future business development. The capital base was strengthened further in August 2013 through a capital increase having a volume of more than € 46 million as part of the Celgene transaction. A further capital increase (private place- ment) was carried out in September 2013 with a volume of approximately € 84 million which also strengthened the capital base. On 31 December 2013, the equity ratio amounted to 78.6 % (31 December 2012: 90.1 %; see table below). Despite the capital measures mentioned, the lower equity ratio in comparison to the previous year resulted from a marked increase in current and non-current deferred revenues since the upfront payments received from Celgene are deferred over several periods. Presently, the Group is not carrying financial debt. Pursuant to the respective incentive plans resolved by the Annual General Meeting, the Management Board and employees may participate in the Group’s performance through long-term performance-related remunera- tion components consisting of convertible bonds and stock options. In ad- dition, MorphoSys has established a long-term incentive program (LTI plan) in the years 2011, 2012, and 2013. These programs are based on the performance-related issuance of shares, so called “performance shares”, which are granted when certain predefined success criteria have been achieved (for more information, please refer to item 7.4 of the Notes*). There were no changes in the Group’s approach to capital management in the course of the year. *c R o s s - R e f e R e n c e t o pa g e 1 3 9 in 000’s € 12/31/2013 12/31/2012 Stockholders’ Equity In % of Total Capital Debt In % of Total Capital ToTAl CApITAl 352,145 78.6 % 95,511 21.4 % 447,657 202,010 90.1 % 22,279 9.9 % 224,289 uses the interest rates of German government bonds having a term of three years at grant date. 2.7 accoUn t inG P ol ic ie s aPPl ieD on t He l ine i t ems of t He income s tat emen t 2 .7.1 RE VE NUE S AND RE VE NUE REC O GNITION The Group’s revenues include license fees and milestone payments, ser- vice fees and revenue from the sale of goods. Pursuant to IAS 18.9, reve- nues are measured at the fair value of the consideration received or receiv- able. In accordance with IAS 18.20b, revenues are only recognized to the extent that it is sufficiently probable that the Company will receive the economic benefits associated with the transaction. LI C ENS E FEES A ND MILESTO NE PAY M EN TS Revenues related to non-refundable fees for providing access to technolo- gies, fees for the use of technologies, and license fees are recognized on a straight line basis over the period of the agreement unless a more appro- priate method of revenue recognition is available. The period of the agree- ment usually corresponds to the contractually agreed term of the research project, or in the case of contracts without an agreed term of the project, it correlates to the expected term of the collaboration. If all IAS 18.14 criteria are met, revenue is recognized immediately and in full. Revenues from milestone payments are recognized upon achievement of certain contrac- tual criteria. SERV I C E FEES Service in the context of research and development collaborations are rec- ognized in the period in which the services are provided. SA LE O F G O O DS Revenue from the sale of goods in the AbD Serotec segment is measured at the fair value of the consideration received or receivable, net of returns, trade discounts, and volume rebates. Revenue is recognized when there is persuasive evidence that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be esti- mated reliably, there is no continuing managerial involvement with the goods, and the amount of revenue can be measured reliably. This evidence is usually in the form of a signed sales contract. If it is probable that discounts will be granted and that their amount can be reliably determined, then the discount is recognized as a reduction in revenue at the time of the revenue recognition. The timing of the transfer of risks and rewards varies depending upon the individual terms of the sales contract. In accordance with IAS 18.21 and 18.25, revenue from multiple-element transactions is recognized by allocating the total consid- eration among the separately identifiable components based on their re- spective fair values and by applying IAS 18.20; the applicable revenue recognition criteria are assessed separately for each component. Deferred revenues consist of payments received from customers which may not yet be recognized as revenue since the related services specified in the contract have not yet been rendered. 2.6 Use of in t eRe s t in t He Val Uat ion The Group uses interest rates to measure fair values. When calculating stock-based compensation, MorphoSys uses the interest rates of German government bonds having a term of five or seven years at grant date for the fair value of convertible bonds, whereas for stock options, the Company 2 .7.2 OPE R ATING E XPE NSES C OST O F G O O DS SO LD Cost of goods sold comprises the cost of goods to be manufactured and the acquisition cost of purchased goods which have been sold and were only incurred in the discontinued operations of the AbD Serotec segment. financial statementsNotes114 PERSO NNEL E X PENSES RESU LT IN G FRO M STO C K O P T I O NS The Group applies the provisions of IFRS 2 “Share-based Payment”. IFRS 2 requires the Group to recognize stock options and other share-based payment at fair value as of the valuation date as a compensation expense over the period in which the beneficiary renders the services associated with the award. RESE A RC H A ND DE V ELO PMEN T Research costs are expensed in the period in which they occurred. Gener- ally, development costs are expensed as incurred in accordance with IAS 38.5 and IAS 38.11 to 38.23. Development costs are recognized as an in- tangible asset when the criteria of IAS 38.21 (probability of expected fu- ture economic benefits, reliability of cost measurement) are met, and if the Group can provide evidence pursuant to IAS 38.57. SELLIN G , G ENER A L , A ND A DMINIST R AT I V E This line item includes personnel expenses, consumables, operating costs, amortization of intangible assets, expenses for external services, infra- structure costs, and depreciation. O PER AT IN G LE ASE PAY MEN TS Payments made under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. According to SIC-15, all incentive agreements in the context of operating leases are rec- ognized as an integral part of the net consideration agreed for the use of the leased asset. The total amount of income resulting from incentives is recognized as a reduction in lease expenses on a straight line basis over the term of the rental. All lease agreements in the Group are to be classified exclusively as oper- ating leases. The Group did not engage in any finance lease arrangements in which the Group, as lessee, capitalized the assets at the start of the lease with the lower of fair value or the net present value of the minimum lease payments and then depreciated the assets on a straight-line basis over its economic life. 2 .7.3 OTHE R INC OME G OV ERNMEN T G R A N TS Grants received from governmental agencies for the support of specific research and development projects are recognized in the income state- ment in the separate line item “other income” to the extent that the related expenses have already occurred. Under the terms of the grants, govern- mental agencies generally have the right to audit the use of the funds granted to the Group. Basically, government grants are cost subsidies for which recognition through profit and loss is limited to the corresponding costs. In financial year 2013, there were no payments granted that were required to be clas- sified as investment subsidies. 2 .7.6 FINANCE E XPE NSE S Borrowing costs are expensed in the period they occur and are included in finance expenses in the income statement. 2 .7.7 INC OME TA X E XPE NSES Income taxes comprise current and deferred taxes. Income taxes are rec- ognized in the income statement unless the income taxes relate to items recognized directly in equity or other comprehensive income. Current taxes are the expected taxes payable on the taxable income for the year, using the prevailing tax rates or those adopted on the reporting date, as well as any adjustments to taxes payable with respect to previous years. The calculation of deferred taxes is based on the balance sheet liability method and results in temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation pur- poses. Deferred taxes are calculated depending on the realization method expected for the carrying amount of assets and the repayment of liabili- ties. The calculation is also based on the prevailing tax rates or those adopted on the reporting 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 imposed by the same tax authority on the same taxable entity, or on different tax entities that intend to settle current tax assets and liabilities on a net basis, or when their tax assets and liabilities are to be realized simultaneously. Deferred tax assets are only recognized to the extent that it is likely that future taxable income 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 benefit will be realized. 2 .7.8 RESULT S FROM DISC ONTINUE D OPE R ATIONS The result from discontinued operations relates to the substantial part of the AbD Serotec segment. Financial statements reflecting the business performance from the beginning of the year until 10 January 2013 were prepared for these discontinued operations. 2 .7.9 E ARNINGS PE R SHARE The Group reports basic and diluted earnings per share. Basic earnings per share is computed by dividing the net profit or loss attributable to par- ent company shareholders by the weighted average number of ordinary shares outstanding during the reporting period. Diluted earnings per share is calculated in the same manner however, the net profit or loss at- tributable to parent company shareholders and the weighted average num- ber of ordinary shares outstanding are adjusted for any dilutive effects resulting from convertible bonds and stock options granted to the Manage- ment Board and employees. 2 .7.4 OTHE R E XPE NSES The line item “other expenses” comprises mainly currency losses from the operating business. 2.8 accoUn t inG P ol ic ie s aPPl ieD t o asse t s of t He Bal anc e sHee t 2 .8.1 CASH AND CASH EQUIVALE NT S 2 .7.5 FINANCE INC OME Interest income is recognized in the income statement as it occurs and takes into account the effective rate of interest for the asset. LI Q U ID AS S E TS The Group considers all cash at banks and on hand, as well as short-term deposits with an original maturity of three months or less, to be cash or cash equivalents. The Group invests most of its cash and cash equiva- lents in deposits at several major financial institutions: Commerzbank, HypoVereinsbank, Bayern LB , LBBW, BNP Paribas and Deutsche Bank. financial statementsNotes115 The Group recognizes cash and cash equivalents at nominal value. Securi- ties are recognized and measured at fair value. Any fluctuations in the fair value of securities, which are primarily composed of money market funds, are directly recognized in equity. Permanent impairment, however, is rec- ognized in profit and loss. N O N - DERI VAT I V E FIN A N C I A L INST RU MEN TS Depending upon their classification in the categories of “loans and receiv- ables” or “available for sale financial assets”, existing financial instru- ments are either measured at amortized cost (category “loans and receiv- ables”) or at fair value (category “available for sale financial assets”). The amortized cost of current receivables and current liabilities generally cor- responds to either the nominal amount or the repayment amount. flows and clearly identifiable receivables which can be collected within a twelve-month period. The use of derivative financial instruments is subject to a Group policy approved by the Management Board representing a guideline set out in writing for dealing with derivative financial instruments. Any changes in the fair value of derivative financial instruments are documented. 2 .8.2 AC C OUNT S RECE IVABLE , INC OME TA X RECE IVABLES , AND OTHE R RECE IVABLES Accounts receivable are measured at amortized cost less any impairment, for example, allowances for doubtful accounts (see items 5.3 and 2.4.2 of the Notes*). *c R o s s - R e f e R e n c e t o pa g e 1 2 8 a n d pa g e 1 1 2 All non-derivative financial instruments are initially recognized at fair value, which is defined as the fair value of the consideration provided net of transaction costs. Income tax receivables mainly include receivables due from tax authori- ties in the context of capital gain taxes withheld. The Group applies IAS 39 for financial instruments in the form of debt and equity instruments. At the time of purchase, the Management Board de- termines the classification of the financial instrument and reviews the classification at each reporting date. The classification depends on the pur- pose for which the financial instruments were acquired. On 31 December 2013 and on 31 December 2012, some financial instruments held by the Group were classified as “available for sale”. These financial instruments are recognized or derecognized as of the date on which the Group commits to the purchase or sale of the financial instruments. Following initial rec- ognition, available for sale financial assets are measured at fair value and any resulting gain or loss is reported directly in the revaluation reserve within equity until the financial instruments are sold, redeemed, or other- wise disposed of, or considered impaired, at which time the accumulated loss is reported in profit and loss. Guarantees granted for rent deposits, which have been collateralized with available for sale securities and obligations from convertible bonds issued to employees are recorded under other assets as restricted cash, as they are not available for use in the Group’s operations. This also applies to the portion of the sales price from the sale of AbD Serotec business unit, that is currently deferred on an escrow account. In November 2012, MorphoSys acquired an interest in Lanthio Pharma B.V., a privately held company headquartered in Groningen, the Nether- lands. Furthermore, a contribution was made to Lanthio Pharma B.V. in September 2013. On 31 December 2013, the Group’s share in Lanthio Pharma B.V.’s share capital amounted to 19.98 % and remained unchanged. This share is measured at amortized cost and the financial instrument is reported in the category “available for sale”. DERI VAT I V E FIN A N C I A L INST RU MEN TS The Group uses derivative financial instruments to hedge its exposure to foreign exchange rate risk. In accordance with IAS 39.9, all derivative fi- nancial instruments are held exclusively for trading and are initially rec- ognized at fair value. Subsequent to their initial recognition, derivative financial instruments are measured at fair value, which is defined as their quoted market price on the reporting date. Any resulting gain or loss from derivatives is recognized in profit and loss, because the Group does pres- ently not apply hedge accounting. According to the Group’s foreign cur- rency hedging policy, the Group only hedges highly probable future cash Other non-derivative financial instruments are measured at amortized cost using the effective interest method, less any impairment. In 2013, investments were carried out in various financial assets which were allo- cated to the category “loans and receivables” pursuant to IAS 39 “Finan- cial Instruments”. Significant non-interest bearing or low interest-bearing non-current loans are recognized at their present value. 2 .8.3 INVE NTORIE S Inventories are measured at the lower value of production or acquisition costs and net realizable value pursuant to the FIFO method. The acquisi- tion costs comprise all costs of purchase and all costs incurred in bringing the inventories into operating condition, while taking into account reduc- tions in the purchase price, such as bonuses and discounts. Net realizable value is the estimated selling price less the estimated expenses necessary for completion and sale. The production costs of self-produced inventories comprise all costs that are directly attributable and an appropriate portion of overheads. Produc- tion costs comprise production-related full cost (direct costs) plus an ap- propriate share of necessary material and manufacturing overheads as well as production-induced depreciation and administration overheads which can be allocated to the production process. Inventories may be clas- sified as raw materials and supplies, work in progress, and finished goods. 2 .8.4 PRE PAID E XPE NSES AND OTHE R CURRE NT AS SE T S Prepaid expenses include expenses that result in an outflow of cash prior to the reporting date, but which are only recognized as expenses in the subse- quent financial year. Such expenses mainly relate to maintenance contracts, sublicenses, and prepayments for external laboratory services not yet per- formed. Other current assets comprise receivables from the tax authorities as a result of value-added taxes. This item is recognized at nominal value. 2 .8.5 PROPE R T Y, PL ANT, AND EQUIPME NT Property, plant, and equipment is recorded at historical cost less accumu- lated depreciation (see also item 5.6 of the Notes*) and any impairment (see item 2.4.4 of the Notes*). Historical cost includes expenditure directly related to the purchase at the time of the acquisition. Replacements, build- ing alterations, and improvements are capitalized, while repair and main- financial statementsNotes116 tenance expenses are charged to expenses as they are incurred. Property, plant, and equipment is depreciated over its useful life on a straight-line basis (see table below). Leasehold improvements are depreciated over the estimated useful lives of the assets on a straight-line basis. *c R o s s - R e f e R e n c e t o pa g e 1 2 9 a n d pa g e 1 1 2 nology identified in the purchase price allocation in the acquisition of Sloning BioTechnology GmbH is recorded at fair value at the time of acqui- sition, less accumulated amortization (useful life of ten years). *c R o s s - R e f e R e n c e t o pa g e 1 1 2 asset class Computer Hardware Low-value Laboratory and Office Equipment below € 150 Low-value Laboratory and Office Equipment between € 150 and € 1,000 Permanent Improvements to Property/Buildings Office Equipment Laboratory Equipment Useful life 3 years Immediately 5 years 10 years 8 years 4 years Depreciation Rates 33 % 100 % 20 % 10 % 13 % 25 % An asset’s residual value and useful life are reviewed at the end of each reporting period, and adjusted if appropriate. Borrowing costs that can be directly attributed to the acquisition, con- struction, or production of a qualifying asset, are not included in the ac- quisition or production cost since the Group finances the entire operating business through the use of equity. 2 .8.6 INTANGIBLE AS SE TS Purchased, intangible assets are capitalized at acquisition cost and intan- gible assets are exclusively amortized over their useful lives on a straight- line basis. Internally generated intangible assets are recognized to the extent that the recognition criteria set out in IAS 38 are met. Development costs are capitalized as intangible assets provided that the capitalization criteria described in IAS 38 have been met, namely, clear specification of the product or procedure, technical feasibility, intention of completion, use, commercialization, coverage of development costs through future free cash flows, reliable determination of these free cash flows, availability of sufficient resources for completion of development and sale. Amortization is recorded in research and development expenses. Expenses to be classified as research expenses are allocated to research and development expenses within the meaning of IAS 38. Subsequent expenditures for capitalized intangible assets are only capi- talized when they substantially increase the future economic benefits em- bodied in the specific asset to which they relate. All other expenditures are expensed as incurred. LI C ENS E RI G H TS The Group has acquired license rights from third parties by making up- front license payments, paying annual fees to maintain the license, and paying fees for sub-licenses. The Group amortizes upfront license pay- ments on a straight-line basis over the estimated useful life of the ac- quired license (eight to ten years). The amortization period and the amor- tization method are reviewed at the end of each financial year pursuant to IAS 38.104. Annual fees to maintain the license are amortized over the term of each annual agreement. Sub-license fees are amortized on a straight-line basis over the term of the contract or the estimated useful life of the collaboration for those contracts without a stipulated term. IN - LI C ENSED RES E A RC H PRO G R A MS This line item contains a capitalized upfront payment from the in-licens- ing of a compound for the Proprietary Development segment as well as a milestone payment for this compound which was paid at a later time. The asset is recorded at acquisition cost and is not yet available for use and therefore not subject to amortization. The asset was tested for impairment on the reporting date as required by IAS 36. SO F T WA RE Software is recorded at acquisition cost less accumulated amortization (see below) and any impairment (see item 2.4.4 of the Notes*). Amortiza- tion is recognized in profit and loss on a straight-line basis over the esti- mated useful life of three to five years. Software is amortized from the date the software is operational. *c R o s s - R e f e R e n c e t o pa g e 1 1 2 K N OW - H OW A ND C USTO MER LISTS MorphoSys has carried out purchase price allocations as required by IFRS 3 “Business Combinations”. The identified intangible assets consist of technologies (useful life of ten years), customer lists (useful life of six to ten years), know-how (useful life of eight to ten years), customer relation- ships (useful life of ten years), and distributor networks (useful life of ten years). These assets are recorded at fair value at the time of acquisition, less accumulated amortization. G O O DW ILL The goodwill recognized is attributable to expected synergies to be achieved and to the skills of the acquired workforce. Goodwill is tested annually for impairment as required by IAS 36 (see also item 5.7.6 of the Notes*). *c R o s s - R e f e R e n c e t o pa g e 1 3 2 intangible asset class Useful life PAT EN TS Patents obtained by the Group are recorded at acquisition cost, less accu- mulated amortization (see below), and any impairment (see item 2.4.4 of the Notes*). Patent costs are amortized on a straight-line basis over the lower of the estimated useful life of the patent (ten years) and the remain- ing patent term. Amortization commences when the patent is issued. Tech- Patents License Rights In-licensed Research Program Software Know-how and Customer List Goodwill 10 years 8 (10) years Not yet amortized 3 (5) years 6 (10) years Impairment amortization Rates 10 % 10 % (13) % – 20 % or 33 % 10 % (17) % – financial statementsNotes117 2 .8.7 SHARES AVAIL ABLE FOR SALE The interest in Lanthio Pharma B.V. is recognized at amortized cost. The financial instrument is recorded in the category “available for sale”. (stock appreciation rights). All items are measured at the lower of fair value or nominal value. Due to its low level of materiality, this line item is not discounted to its present value in the financial year despite its long- term maturity. 2 .8.8 PRE PAID E XPE NSES AND OTHE R NON - CURRE NT AS SE TS The non-current portion of expenses occurring prior to the reporting date but to be recognized in subsequent financial years, is also recorded under prepaid expenses. This line item contains maintenance contracts and sub- licenses. In addition, this line item also includes other non-current assets which are recognized at fair value. Other non-current assets comprise restricted cash such as rent deposits. 2 .8.9 AS SE TS OF DISP OSAL GROUP CL AS SIFIE D AS HE LD FOR SALE Disposal groups are classified as “held for sale” when it is expected that the carrying amount of the disposal group will be recovered through a sales transaction and a sale is regarded as highly probable. The disposal group is measured at the lower of its carrying amount and the fair value less costs of disposal. 2.9 accoUn t inG P ol ic ie s aPPl ieD t o t He eQUi t Y anD l iaBil i t Y i t ems of t He Bal ance sHee t 2 .9.1 AC C OUNTS PAYABLE , OTHE R LIABILITIES , AND PROVISIONS Trade payables and other liabilities are recognized at amortized cost. Lia- bilities with a term exceeding one year are discounted to their net present value. Liabilities of uncertain timing or amount are recorded as provi- sions. IAS 37 requires the recognition of provisions for obligations to third par- ties arising from past events. Provisions furthermore are recognized for legal or factual obligations to third parties if the occurrence of the event is more likely than not. Provisions are recognized at the amount required to settle the respective obligation and discounted to the reporting date if the interest effect is material. The amount required to settle the obligation also includes expected price and cost increases. The interest portion of the addition to provisions is recorded in the finance result. The measurement of provisions is based on past experience and considers the circumstances in existence at the reporting date. 2 .9.2 TA X LIABILITIES Tax liabilities are recognized and measured at their nominal value. Ac- crued income taxes contain obligations from current taxes, excluding de- ferred taxes. Accruals for trade tax, corporate tax, and similar taxes on income are determined based on the taxable income of the companies in- cluded, less any prepayments made. 2 .9.3 CURRE NT P OR TION OF DE FE RRE D RE VE NUE Upfront payments from customers for services to be rendered by the Group are recognized as deferred revenue in accordance with IAS 18.13 and measured at the lower of fair value or nominal value. The correspond- ing rendering of services and revenue recognition occurs within the twelve month period following the reporting date. 2 .9.4 DE FE RRE D RE VE NUE AND PROVISIONS , NE T OF CURRE NT P OR TION This line item includes the non-current portion of deferred upfront pay- ments from customers in accordance with IAS 18.13 and non-current pro- visions for personnel expenses resulting from stock-based compensation 2 .9.5 C ONVE R TIBLE BONDS DUE TO RE L ATE D PAR TIES The Group issued convertible bonds to the Management Board and to em- ployees of the Group. In accordance with IAS 32.28, the equity component of a convertible bond must be recorded separately under additional paid-in capital. The equity component is determined by deducting the amount de- termined for the liability component separately from the fair value of the convertible bond. Any impact arising from the equity component is recog- nized in profit and loss in personnel expenses resulting from share-based payment, whereas any impact on profit and loss arising from the liability component is recognized as interest expense. The Group applies the provi- sions of IFRS 2 “Share-based Payment” for all convertible bonds granted to the Management Board and the Group’s employees. 2 .9.6 DE FE RRE D TA X LIABILITIE S The recognition and measurement of deferred taxes are based on the pro- visions of IAS 12. Deferred tax assets and liabilities are calculated using the liability method, which is common practice internationally. Under this method, the taxes expected to be paid or recovered in subsequent finan- cial years are based on the applicable tax rate at the time of recognition. Deferred tax assets and liabilities are recorded separately in the balance sheet. Deferred tax liabilities take into account the future tax effects of temporary differences between the valuation of assets and liabilities in the balance sheet and tax loss carryforwards. Deferred tax assets are offset against deferred tax liabilities if the taxes are levied by the same taxation authority and have matching terms. Pur- suant to IAS 12, deferred tax assets and liabilities may not be discounted. 2 .9.7 LIABILITIES OF DISP OSAL GROUP CL AS SIFIE D AS HE LD FOR SALE These liabilities are related to the sale of the AbD Serotec business seg- ment. The agreement was signed on 16 December 2012 and the closing of the transaction was on 10 January 2013. Although the sale of the business segment is no longer subject to the 2013 financial statements, the item is provided for information purposes. Liabilities are recognized at the lower of fair value and redemption amount. 2 .9.8 STO CKHOLDE RS ’ EQUIT Y C O M M O N STO C K Ordinary shares are classified as stockholders’ equity. Incremental costs directly attributable to the issuance of ordinary shares and stock options are recognized as a deduction from equity, net of any tax effects. When common stock which was recorded as stockholders’ equity is repurchased, the amount of consideration paid, including directly attributable costs, is recognized as a deduction from stockholders’ equity, net of taxes, and is classified as treasury shares. When treasury shares are subsequently sold or reissued, the proceeds are recognized as an increase in stockholders’ equity, and the profit or loss resulting from the transaction is offset against accumulated income. T RE ASU RY STO C K The repurchase of own shares at the price quoted on an exchange or at market value is recorded in this line item. financial statementsNotes118 A D DIT I O N A L PA ID - IN CA PI TA L Additional paid-in capital primarily includes personnel expenses result- ing from the granting of stock options, convertible bonds, and perfor- mance shares and the proceeds from newly created shares in excess of their nominal value. RE VA LUAT I O N RESERV E The revaluation reserve mainly consists of unrealized gains and losses on available for sale securities, which are measured directly in equity until they are sold. T R A NS L AT I O N RESERV E The translation reserve comprises all foreign exchange differences which are not recognized in profit and loss. AC C U M U L AT ED IN C O ME The “accumulated income” line item comprises the accumulated consoli- dated net profits/losses. A separate measurement of this item is not con- ducted. 3 segment Reporting MorphoSys Group applies IFRS 8 “Segment Reporting” (in effect as of 1 January 2009). An operating segment is defined as a component of an en- tity that engages in business activities from which it may earn revenues and incur expenses and whose operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete fi- nancial information is available. Segment information is presented with respect to the Group’s operating segments. The operating segments are based on the Group’s management and internal reporting structures. The segment results and segment as- sets include items that can be either directly attributed to the individual segment or can be allocated to the segments on a reasonable basis. Inter- company pricing is determined on an arm’s length basis according to a Group policy. The Management Board determines the economic success of the segments based on key figures which are chosen to include all income and expenses. The EBIT, the operating earnings before interest and taxes, is the key benchmark for measuring and evaluating the operating results. The EBIT margin reflects the ratio of EBIT to revenues. for the twelve-month Period ended 31 December (in 000’s €) External Revenues Intersegment Revenues RE vENUES , ToTAl Cost of Goods Sold Other Operating Expenses Inter-segment Costs ToTAl opER ATIN g E xpENSES Other Income Other Expenses SEg MENT EB IT Finance Income Finance Expenses Other Income from Sale of Assets and Liabilities of Disposal Group Classified as Held for Sale pRofIT BEfoRE TA xES Income Tax (Expenses)/Income Income Tax Expenses in connection with the Sale of Assets and Liabilities of the Disposal Group Classified as Held for Sale NE T pRofIT/(loS S) Current Assets Non-current Assets ToTAl SEg MENT AS SE T S 1 Current Liabilities Non-current Liabilities Stockholders’ Equity ToTAl SEg MENT lIAB IlITIES AND EQUIT Y Capital Expenditure Depreciation and Amortization Partnered Discovery 2013 2012 Proprietary Development 2012 2013 Unallocated elimination Group Discontinued operations continuing operations 2013 2012 2013 2012 2013 2012 2012 2013 2012 thereof from thereof from 51,044 0 51,044 0 25,537 0 25,537 80 227 25,360 0 0 0 25,360 0 0 25,360 24,036 19,807 43,843 3,681 5,283 0 8,964 1,883 3,291 44,667 0 44,667 0 21,738 43 21,781 131 0 23,017 0 0 0 23,017 0 0 23,017 20,707 21,621 42,328 3,554 5,915 0 9,469 794 3,534 26,909 0 26,909 0 27,500 0 27,500 129 0 (462) 0 0 0 (462) 0 0 (462) 2,783 15,601 18,384 23,436 53,885 0 77,321 3,150 1,010 6,988 0 6,988 0 18,127 0 18,127 187 0 (10,952) 0 0 0 (10,952) 0 0 (10,952) 704 14,519 15,223 3,779 0 0 3,779 614 1,106 78,563 69,607 17,690 77,960 51,917 (16,626) (10,128) 1,937 (1,652) 9,924 2,493 70,187 67,848 2,265 18,093 67,922 49,755 610 0 610 158 16,992 0 17,150 600 686 867 115 8,001 (7,873) (3,345) (358) (11,576) 379,749 5,681 385,430 8,290 936 352,146 361,372 530 534 17,952 43 17,995 6,238 21,745 0 27,983 102 242 670 196 0 (9,654) (469) 0 (10,123) 132,302 34,435 166,737 7,910 1,120 202,010 211,040 899 1,670 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 (43) (43) (43) (43) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 78,563 158 70,029 0 0 8,272 809 913 867 115 8,001 17,025 (3,345) (358) 13,322 406,568 41,089 447,657 35,407 60,104 352,146 447,657 5,563 4,835 69,607 6,238 61,610 0 0 420 242 670 196 0 2,411 (469) 0 1,942 153,713 70,575 224,288 15,243 7,035 202,010 224,288 2,307 6,310 2013 603 0 603 158 2,107 8,001 6,344 (35) (358) 5,951 0 12 2 0 5 0 0 0 0 0 0 0 6 22 17,690 6,238 11,855 0 0 4 157 (556) 11 97 0 (642) 217 0 (425) 10,855 30,001 40,856 3,325 407 0 3,732 542 1,060 77,960 51,917 67,922 49,755 0 0 0 797 911 867 110 0 10,681 (3,310) 0 7,371 406,568 41,089 447,657 35,407 60,104 352,146 447,657 5,557 4,813 0 0 0 416 85 659 99 0 3,053 (686) 0 2,366 142,858 40,574 183,433 11,918 6,628 202,010 220,556 1,765 5,250 1 The difference of € 40.9 million between the total assets of the reportable segments in 2012 and the total assets in the balance sheet originated from the assets held for sale of discontinued operations (see also item 5.10 of the Notes). financial statementsNotes 119 The Group consists of the following operating segments. 3.1 P aR t neReD Di s coVeRY MorphoSys possesses one of the leading technologies for the generation of therapeutics based on human antibodies. The Group markets this technol- ogy commercially via partnerships with numerous pharmaceutical and biotechnology companies. This segment encompasses all operational ac- tivities relating to these commercial agreements, as well as the majority of the technological development. 3.2 PRoPRie taRY DeVel oPmen t This segment comprises all of the activities relating to the proprietary development of therapeutic antibodies. Presently, the activities of this seg- ment comprise the clinical development of the proprietary program MOR208, the co-development of MOR202 with Celgene, as well as the com- pleting clinical development of the program MOR103 within the coopera- tion with GSK. In addition, MorphoSys is pursuing further programs in earlier stages in proprietary development or as co-development. 3.3 aBD seRo t ec Until the sale of substantially all of the AbD Serotec business on 10 Janu- ary 2013 to Bio-Rad came into effect, the AbD Serotec segment utilized the HuCAL technology for the tailored generation of research antibodies and generated revenues with catalogue antibodies and the production of anti- bodies in industrial quantities. With the disposal of substantially all of the segment, the quantitative and qualitative criteria of IFRS 8.12 f. are no longer fulfilled so that this segment is no longer a reportable segment under IFRS 8.11. The results generated by the AbD Serotec segment until 10 January 2013 were reclassified to “Unallocated”. The previous year’s figures were adjusted accordingly for comparative purposes. 3. 4 cRo ss -seGmen t Di s cl o sURe s In case of cross-segment disclosures, segment revenues are based on the customers’ geographical locations. The information on segment assets is based on the relevant location of the assets. for the twelve-month Period ended 31 December Partnered Discovery Proprietary Development 2013 2012 2013 Unallocated 2013 elimination Group 2012 2013 2012 2013 2012 610 0 610 158 16,992 0 17,150 600 686 (16,626) 867 115 8,001 (7,873) (3,345) (358) (11,576) 379,749 5,681 385,430 8,290 936 352,146 361,372 530 534 17,952 43 17,995 6,238 21,745 0 27,983 102 242 (10,128) 670 196 0 (9,654) (469) 0 (10,123) 132,302 34,435 166,737 7,910 1,120 202,010 211,040 899 1,670 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 0 (43) (43) 0 0 (43) (43) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 78,563 0 78,563 158 70,029 0 70,187 809 913 8,272 867 115 8,001 17,025 (3,345) (358) 13,322 406,568 41,089 447,657 35,407 60,104 352,146 447,657 5,563 4,835 69,607 0 69,607 6,238 61,610 0 67,848 420 242 1,937 670 196 0 2,411 (469) 0 1,942 153,713 70,575 224,288 15,243 7,035 202,010 224,288 2,307 6,310 (in 000’s €) External Revenues Intersegment Revenues RE vENUES , ToTAl Cost of Goods Sold Other Operating Expenses Inter-segment Costs ToTAl o pER ATIN g E xpENSES Other Income Other Expenses SE g MENT EB IT Finance Income Finance Expenses pRofIT BE foRE TA xES Income Tax (Expenses)/Income NE T pRof IT/(loS S) Current Assets Non-current Assets ToTAl SE g MENT AS SE T S 1 Current Liabilities Non-current Liabilities Stockholders’ Equity ToTAl SEg MENT lIAB I lITIES AND EQUIT Y Capital Expenditure Depreciation and Amortization 51,044 44,667 26,909 51,044 44,667 26,909 6,988 21,738 43 21,781 131 27,500 18,127 27,500 129 18,127 187 25,360 23,017 (462) (10,952) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 23,017 20,707 21,621 42,328 3,554 5,915 0 9,469 794 3,534 (462) 2,783 15,601 18,384 23,436 53,885 0 77,321 3,150 1,010 (10,952) 704 14,519 15,223 3,779 3,779 614 1,106 25,537 25,537 80 227 0 0 0 0 0 0 0 0 25,360 24,036 19,807 43,843 3,681 5,283 0 8,964 1,883 3,291 2012 6,988 0 0 0 0 0 0 0 0 0 0 0 Other Income from Sale of Assets and Liabilities of Disposal Group Classified as Held for Sale 25,360 23,017 (462) (10,952) Income Tax Expenses in connection with the Sale of Assets and Liabilities of the Disposal Group Classified as Held for Sale 1 The difference of € 40.9 million between the total assets of the reportable segments in 2012 and the total assets in the balance sheet originated from the assets held for sale of discontinued operations (see also item 5.10 of the Notes). thereof from Discontinued operations 2012 2013 thereof from continuing operations 2013 2012 603 0 603 158 2,107 0 2,265 12 2 (1,652) 0 5 8,001 6,344 (35) (358) 5,951 0 0 0 0 0 0 0 6 22 17,690 0 17,690 6,238 11,855 0 18,093 4 157 (556) 11 97 0 (642) 217 0 (425) 10,855 30,001 40,856 3,325 407 0 3,732 542 1,060 77,960 0 77,960 0 67,922 0 67,922 797 911 9,924 867 110 0 10,681 (3,310) 0 7,371 406,568 41,089 447,657 35,407 60,104 352,146 447,657 5,557 4,813 51,917 0 51,917 0 49,755 0 49,755 416 85 2,493 659 99 0 3,053 (686) 0 2,366 142,858 40,574 183,433 11,918 6,628 202,010 220,556 1,765 5,250 financial statementsNotes 120 The segment result is defined as segment revenues less the segment’s op- erating expenses. The Partnered Discovery segment provided a compen- satory payment in 2012 in the amount of € 0.04 million to the AbD Serotec segment as compensation for therapeutic revenues from contracts that were originally initiated by the AbD Serotec segment. This payment was based on a revenue sharing agreement concluded between the two seg- ments in 2007. In the period ending on 10 January 2013, there was no such compensatory payment. In financial year 2013, impairments totaling € 1.6 million were recognized. Of this amount, € 1.0 million was attributable to the Proprietary Development segment and € 0.6 million to the Partnered Discovery segment (2012: impairment of € 0.2 million in the Proprietary Development segment). The Group’s key customers are assigned to the Partnered Discovery seg- ment as well as the Proprietary Development segment. As of 31 December 2013, the most important single customer accounted for a carrying amount of € 8.2 million of total accounts receivables (31 December 2012: € 8.3 mil- lion). Three individual customers of the Group who are predominantly as- signed to the Proprietary Development segment, contributed € 41.6 mil- lion, € 21.3 million, and € 6.0 million to total revenues in 2013. In 2012, three customers mainly assigned to the Partnered Discovery segment ac- counted for € 47.3 million, € 1.7 million, and € 1.5 million of the Group’s total revenues. In 2013, “unallocated” other operating expenses primarily included per- sonnel expenses (2013: €  9.2 million; 2012: €  6.1 million), costs for external services (2013: € 3.0 million; 2012: € 2.2 million), and costs for infrastructure (2013: €  1.2 million; 2012: €  1.2 million). Current assets categorized as “unallocated” mainly composed of cash and cash equiva- lents, securities and bonds available for sale, as well as other receivables (31 December 2013: € 377.5 million; 2012: € 107.9 million). Current liabili- ties categorized as “unallocated” included mainly accounts payable and accrued expenses (31 December 2013: € 5.4 million; 31 December 2012: € 4.3 million) as well as provisions (31 December 2013: € 2.9 million; 31 December 2012: € 0.2 million). The following overview shows the regional distribution of the Group’s rev- enues. in 000’s € Germany Europe and Asia USA and Canada Other Total from Continuing Operations Total from Discontinued Operations ToTAl 2013 4 69,140 8,816 0 77,960 603 78,563 2012 0 49,203 2,714 0 51,917 17,690 69,607 There were no revenues from Asia in 2013 (2012: 1 %). The following overview shows the regional distribution of the Group’s non- current assets, excluding deferred tax assets. in 000’s € 12/31/2013 12/31/2012 Germany UK USA Total from Continuing Operations Total from Discontinued Operations ToTAl 40,776 0 0 40,776 0 40,776 40,574 0 0 40,574 29,884 70,458 The following overview shows the regional distribution of the Group’s in- vestments. in 000’s € Germany UK USA Total from Continuing Operations Total from Discontinued Operations ToTAl 2013 5,554 0 0 5,554 6 5,560 2012 1,765 0 0 1,765 542 2,307 4 notes to the income statement 4 .1 ReVenUe s 2013, revenues from continuing operations included license fees and mile- stone payments totaling €  57.8 million (2012: €  25.0 million). The Part- nered Discovery segment contributed revenues of €  31.4 million (2012: €  24.8 million), and the Proprietary Development segment contributed revenues of € 26.4 million (2012: € 0.0 million). In 2012, an amount of € 0.3 million was attributable to the continuing operations of the AbD Serotec segment. Of the service fees totaling € 20.2 million (2012: € 26.9 million), an amount of € 19.6 million (2012: € 19.9 million) was attributable to the Partnered Discovery segment, whereas an amount of € 0.5 million (2012: € 7.0 mil- lion) was attributable to the Proprietary Development segment. The 2012 revenues of the Proprietary Development segment had included a one-off payment from Novartis. Revenues of the discontinued operations of the AbD Serotec segment amounted to € 0.6 million until 10 January 2013 (2012: € 17.7 million). financial statementsNotes121 4 .2 oPeRat inG eXPense s 4.2 .1 C OST OF GO ODS SOLD Cost of goods sold comprises the production costs of the manufactured goods and the acquisition costs of purchased and sold goods. No costs have been reported in the financial year since all of the cost of goods sold had resulted from the discontinued operation of the AbD Serotec segment (see items 2.7.2 and 4.5 of the Notes*). *c R o s s - R e f e R e n c e t o pa g e 1 1 3 a n d pa g e 1 2 4 4.2 .2 RESE ARCH AND DE VE LOPME NT Research and development expenses include the following items. 2013 21,218 2,157 2,312 5,070 14,137 4,258 49,152 6 49,158 in 000’s € Personnel Expenses Consumable Supplies Other Operating Expenses Amortization and Other Costs of Intangible Assets External Services Depreciation and Other Costs for Infrastructure Total from Continuing Operations Total from Discontinued Operations ToTAl in million € R&D Expenses on behalf of Partners Proprietary Development Expenses Technology Development Expenses R&D ToTAl 2012 17,800 1,550 1,440 5,091 7,887 3,905 37,673 1,845 39,518 2013 17.5 27.5 4.2 49.2 2012 16.0 18.1 3.6 37.7 2011 19.1 33.9 2.9 55.9 2010 2009 18.9 25.9 2.1 46.9 19.2 19.1 0.7 39.0 financial statementsNotes4.2 .3 SE LLING , GE NE R AL , AND ADMINISTR ATIVE Selling, general, and administrative expenses include the following items. in 000’s € Personnel Expenses Consumable Supplies Other Operating Expenses Amortization and Other Costs of Intangible Assets External Services Depreciation and Other Costs for Infrastructure Total from Continuing Operations Total from Discontinued Operations ToTAl 2013 11,282 29 1,219 972 4,072 1,196 18,770 2,101 20,871 4.2 .4 PE RSONNE L E XPE NSE S Personnel expenses include the following items: in 000’s € Wages and Salaries Social Security Contributions Stock-based Compensation Expense Temporary Staff (External) Other Total from Continuing Operations Total from Discontinued Operations ToTAl 2013 23,327 3,288 5,145 647 93 32,500 523 33,023 2012 7,410 70 846 416 2,153 1,187 12,082 10,010 22,092 2012 20,159 3,226 1,291 424 284 25,384 7,902 33,286 122 not allocated to any specific segment (31 December 2012: 184 employees in the Partnered Discovery segment, 54 in the Proprietary Development segment, 135 in the AbD Serotec segment; and 48 employees were not al- located). Costs for the defined-contribution plans amounted to € 0.3 mil- lion in 2013 (2012: € 0.3 million). As a result of the agreement with Bio-Rad for the acquisition of the discon- tinued operations, the number of Group employees decreased by 135 em- ployees in 2013. 4 .3 o t HeR income anD eXPense s, f inance income anD f inanc e eXPense s The item “other income and expenses, finance income and finance ex- penses” includes the following items. in 000’s € 2013 2012 Grant Income Gain on Exchange Miscellaneous Income Other Income Loss on Exchange Impairment of Accounts Receivable Repayment of Grant Income Miscellaneous Expenses Other Expenses Gain on Marketable Securities Interest Income Finance Income Interest Expenses Loss on Derivatives Bank Fees Finance Expenses Total from Continuing Operations Total from Discontinued Operations 209 130 458 797 (359) (239) (101) (212) (911) 521 347 868 (22) (33) (56) (111) 643 5 648 277 94 45 416 (66) 0 0 (19) (85) 481 178 659 (8) (41) (50) (99) 891 (239) 652 In 2013 and 2012, other personnel expenses mainly included recruitment costs. ToTAl The average number of employees during the financial year 2013 was 290 (2012: 422). Of the 299 employees engaged on 31 December 2013, 253 employees were active in research and development (31 December 2012: 278) and 46 employees were engaged in selling, general, and administra- tive functions (31 December 2012: 143 employees). On 31 December 2013, there were 193 employees in the Partnered Discovery segment and 60 employees in the Proprietary Development segment; 46 employees were income taX eXPense s/ income 4 .4 MorphoSys AG and its German subsidiaries MorphoSys IP GmbH and Sloning BioTechnology GmbH, are subject to corporate taxes, solidarity surcharge, and trade taxes. The Company’s corporate tax rate of 15 %, soli- darity surcharge of 5.5 %, and effective trade tax rate of 10.5 % have all re- mained unchanged. financial statementsNotes123 The income tax of the continuing operations for the past financial year is comprised as follows. in 000’s €1 in 000’s € 2013 2012 Current Tax Expense (Thereof Regarding Prior Years: k€ 60; 2012: Tax Income of k€ 12) Deferred Tax Income Total Income Tax Total Amount of Current Taxes Resulting from Entries Directly Recognized in Equity Total Amount of Current Taxes Resulting from Entries Directly Recognized in Other Comprehen- sive Income Total Amount of Deferred Taxes Resulting from Entries Directly Recognized in Other Comprehen- sive Income Total Amount of Tax-Effects Resulting from Entries Directly Recognized in Equity or Other Comprehensive Income (3,753) 443 (3,310) 611 (260) (1,064) 378 (686) 0 0 159 (212) 510 (212) In 2013, a tax effect in the amount of € 0.6 million was directly recorded in equity for costs in connection with the capital increases in an amount of € 2.3 million which were, pursuant to IFRS, deducted from equity. Deferred tax liabilities in the amount of € 0.1 million (2012: € 0.2 million) were recorded in other comprehensive income. This amount is substan- tially connected with the revaluation of available for sale financial instru- ments. Furthermore, current taxes in the amount of € 0.3 million and de- ferred tax assets in the amount of €  0.3 million were recorded in other comprehensive income. These items relate to a tax adjustment item for accumulating income from available for sale financial instruments. The following table reconciles the expected income tax expense to the ac- tual income tax expense as presented in the consolidated financial state- ments. The combined income tax rate of 26.33 % in financial year 2013 (2012: 26.33 %) was applied to profit before taxes to calculate the statutory income tax expense. This tax rate includes, in addition to 15.00 % corpo- rate income tax, the solidarity surcharge of 5.50 % on the corporate tax, and the average trade tax of 10.50 % applicable to the MorphoSys Group. Profit Before Income Taxes Expected Tax Rate Expected Income Tax Tax Effects Resulting from: Deferred Tax Asset on Tax Loss Carry-forwards Stock-based Compensation Non-tax-deductible Items Permanent differences due to tax-exempts Tax Rate Differences Release of DTL Arising from Temporary Differences Prior Year Taxes Other Effects Actual Income Tax 2013 10,681 26.33 % (2,812) 200 (533) (160) 1 0 0 (40) 34 (3,310) 2012 3,051 26.33 % (803) 317 (110) (125) 0 (19) 49 12 (7) (686) 1 Reconciliation of the income tax rate for continuing operations MorphoSys AG was subject to tax audits for financial years 2004 to 2007. Tax loss carryforwards have been confirmed in their recognized amount. As of 31 December 2013, deferred tax assets on tax loss carryforwards in the amount of € 1.8 million were recognized as a result of positive busi- ness expectations at Sloning BioTechnology GmbH for financial years 2014 to 2018. No deferred tax assets were reported for a portion of the corporate tax loss carryforwards in the amount of € 2.4 million and trade tax loss carryforwards in the amount of € 2.3 million as the usability of these tax loss carryforwards is deemed uncertain with regard to German tax regu- lation (Sec. 8 para. 4 of the German Corporation Tax Act (KStG-former version) and Sec. 8c of the German Corporation Tax Act (KStG)) (see also item 2.9.6 of the Notes*). The tax loss carryforwards may be carried for- ward indefinitely and in unlimited amounts. As of 2004, German tax law restricts the offsetting of taxable income against existing tax loss carry- forwards to an amount of € 1.0 million plus 60 % of taxable income exceed- ing € 1.0 million. *c R o s s - R e f e R e n c e t o pa g e 1 1 7 financial statementsNotes 124 Deferred tax assets and liabilities for the continuing operations are com- posed as follows. in 000’s €, as of December 31 Dta 2013 Dta 2012 Dtl 2013 Dtl 2012 Intangible Assets Non-recognition of DTA on Intangible Assets Property, Plant and Equipment Land Building Other Equipment, Furniture, Fixtures Shares in Affiliated Companies Inventories Advanced Payments Receivables and Other Assets Treasury Stock Prepaid Expenses and Deferred Charges Short-term Securities Investments Other Accrual/Provisions Trade Accounts Payable Bonds, thereof Convertible Other Liabilities Tax Losses 0 0 0 0 0 43 0 0 0 0 0 0 260 428 0 0 0 1,731 2,462 0 0 0 0 0 93 0 0 0 0 0 0 0 0 0 0 0 2,015 2,108 As of 31 December 2013, deferred tax liabilities of € 2.1 million were offset against deferred tax assets. In 2012, deferred tax assets of € 2.1 million were offset against deferred tax liabilities. The corresponding deferred tax assets and deferred tax liabilities concerned the same taxable entity and were imposed by the same tax authority. As of 31 December 2013, there were no temporary differences in connec- tion with investments in subsidiaries (so-called outside basis differences), which could have resulted in deferred tax liabilities. 4 .5 PRof i t/ l o ss f Rom Di s con t inUeD oPeRat ions As of 31 December 2013, there are no reportable matters with regard to IFRS 5. On 16 December 2012, MorphoSys AG and Bio-Rad agreed upon the acqui- sition of substantially all of the research and diagnostic antibodies seg- ment of AbD Serotec. In accordance with IFRS 5, the AbD Serotec seg- ment’s result from operating activities was recorded in the results from discontinued operations. The previous year’s figures of the income state- ment and segment report have been adjusted accordingly. The closing of this transaction took place on 10 January 2013. The profit/loss from discontinued operations relates to the AbD Serotec business and is composed as follows. in 000’s € Revenues Cost of Goods Sold Research and Development Selling, general and Administrative Total Operating Expenses Other Income/(Expenses) Earnings before Interest and Taxes (EBIT) Finance Income/(Expenses) Other Income from Sale of Assets and Liabilities of Disposal Group Classified as Held for Sale Profit/(Loss) before Taxes Income Tax (Expenses)/Income from Discontinued Operations Income Tax Expenses in connec- tion with the Sale of Assets and Liabilities of the Disposal Group Classified as Held for Sale Profit/(Loss) for the Year from Discontinued Operations 2,049 0 0 0 0 0 0 0 0 0 0 0 100 0 0 0 0 0 2,149 2013 603 158 6 2,101 2,265 10 (1,652) (5) 8,001 6,344 (35) (358) 5,951 2,373 0 0 0 0 0 0 0 0 0 0 3 184 0 0 0 0 0 2,560 2012 17,690 6,238 1,845 10,010 18,093 (153) (556) (85) 0 (641) 217 0 (424) financial statementsNotes 125 The disposal profit less transaction costs is composed as follows. The weighted average number of ordinary shares was calculated as follows. in 000’s € Cash and Cash Equivalents Inventories, Net Other Current Assets Goodwill Property, Plant and Equipment, Net Intangible Assets, Net Other Non-current Assets Accounts Payable and Accrued Expenses Other Current Liabilities Deferred Tax Liabilities Foreign Currency Effects Previously Recognized in Equity Net Assets Purchase Price in Cash (without License Payment) Open Receivable (Escrow Account) Transaction Costs Purchase Price, Net of Transaction Costs Purchase Price in Cash Transferred Cash and Cash Equivalents Net Cash-Inflow Disposal Profit Disposal Profit after Deduction of Transaction Costs 2013 5,560 2,763 2,920 26,788 1,519 1,528 168 (2,490) (933) (427) 1,427 38,823 42,141 4,682 (1,816) 45,007 42,141 (5,560) 36,581 8,001 6,184 2013 2012 SHARES IS SUED oN JANUARY, 1 Effect of Treasury Shares Held 23,358,228 (255,415) 23,112,167 (163,915) Effect of Repurchase of Treasury Stock Effect of Share Issuance Effect of Shares Issued in January Effect of Shares Issued in February Effect of Shares Issued in March Effect of Shares Issued in April Effect of Shares Issued in May Effect of Shares Issued in June Effect of Shares Issued in July Effect of Shares Issued in August Effect of Shares Issued in September Effect of Shares Issued in October Effect of Shares Issued in November Effect of Shares Issued in December WEIg HTED - AvER Ag E NUMBER of SHARES of C oMMoN STo CK (56,458) 1,242,621 0 0 0 0 0 21,567 170,075 9,502 1,492 1,884 9,662 873 (64,813) 0 15,731 19,313 3,579 45,087 0 16,860 447 336 14,495 3,341 620 1,645 24,504,031 23,004,894 Diluted earnings per share is calculated by taking into account the poten- tial increase in the Group’s ordinary shares as the result of granted stock options and convertible bonds. 4 .6 eaRninGs/cons ol iDat eD ne t PRof i t PeR sHaRe Basic earnings per share is computed by dividing the consolidated net profit of financial year 2013 in the amount of €  13,321,930 (2012: € 1,942,145) by the weighted average number of ordinary shares outstand- ing during the year (2013: 24,504,031; 2012: 23,004,894). financial statementsNotes 126 The following table shows the reconciliation of basic and diluted earnings per share (in €, except for disclosure per share). 5 notes to the assets of the Balance sheet 5.1. c asH anD c asH eQUiVal en t s Numerator Profit for the Year from Continuing Operations (Loss)/Profit for the Year from Discontinued Operations Consolidated Net Profit Denominator Weighted-average Shares Used for Basic EPS Dilutive Shares Arising from Stock Options Dilutive Shares Arising from Convertible Bonds ToTAl DENoMINAToR Earnings per Share (in €) Basic thereof from Continuing Operations thereof from Discontinued Operations Diluted thereof from Continuing Operations thereof from Discontinued Operations 2013 2012 7,370,820 2,366,263 5,951,110 13,321,930 (424,118) 1,942,145 24,504,031 23,004,894 0 204,132 259,063 24,763,094 51,334 23,260,360 0.54 0.30 0.24 0.54 0.30 0.24 0.08 0.10 (0.02) 0.08 0.10 (0.02) in 000’s € 12/31/2013 12/31/2012 Bank Balances and Cash in Hand Term Deposits Restricted Cash Total from Continuing Operations Total from Discontinued Operations Cash and Cash Equivalents 71,874 964 (964) 71,874 0 71,874 40,690 984 (984) 40,690 5,281 45,971 The increase in cash and cash equivalents resulted mainly from the trans- actions with GlaxoSmithKline and Celgene and the capital increase in September 2013 as well as from the sale of substantially all of the AbD Serotec segment. Restricted cash in the amount of €  1.0 million consists of rent deposits (2012: € 1.0 million). financial statementsNotes 127 f inanc ial asse t s/secURi t ie s 5.2 As of 31 December 2013 and 2012, available for sale financial assets are comprised as follows. in 000’s € 31 DECEMBER 2013 Money Market Funds Restricted Cash ToTAl 31 DECEMBER 2012 DB Money Cash Restricted Cash ToTAl maturity cost Gains losses market Value Gross Unrealized Holding daily 188,305 daily 79,345 378 699 0 0 188,683 (323) 188,360 80,044 (322) 79,722 The Group’s gross unrealized holding gains in the amount of € 377,872 as of 31 December 2013 and € 698,848 as of 31 December 2012, respectively, were recorded as a separate item within stockholders’ equity (revaluation reserve). In 2013, the Group recorded a gain in the amount of € 520,730 from the disposal of financial assets in the income statement, which was previously recognized in stockholders’ equity (2012: €  480,912). Re- stricted cash in the amount of €  0.3 million consisted of rent deposits (2012: € 0.3 million). As of 31 December 2013 and 2012, bonds available for sale were comprised as follows. in 000’s € 31 DECEMBER 2013 Bonds ToTAl 31 DECEMBER 2012 Bonds ToTAl maturity cost Gains losses market Value Gross Unrealized Holding daily daily 11,139 0 5 0 42 0 11,102 11,102 0 0 The Group’s gross unrealized holding losses of € 41,750 as of 31 December 2013 with regard to bonds available for sale and the unrealized holding gross profit of € 5,095 were recorded as a separate item within stockhold- ers’ equity (revaluation reserve). In 2013, the Group did not report any gains or losses in the income statement from these financial assets since no assets were sold. Further information on the accounting of financial assets is provided in item 2.8.1 of the Notes*. *c R o s s - R e f e R e n c e t o pa g e 1 1 4 financial statementsNotes 128 5.3 accoUn t s ReceiVaBl e All accounts receivable are non-interest bearing and generally have pay- ment terms of between 30 and 45 days. As of 31 December 2013 and 2012, accounts receivable included unbilled receivables amounting to € 1,597,498 and € 1,592,679, respectively. In some cases, the Group agreed with its customers on the collateral for the discontinued operations of the AbD Serotec segment in order to avoid outstanding receivables. As of 10 January 2013, this amount was insignificant. Based on the Management Board’s estimate, a net loss of € 238,900 for allowances for doubtful receivables was recognized in profit and loss in 2013 (2012: net loss of € 60,119). In 2013, this loss was attributed to the Partnered Discovery segment and in 2012 to discontinued operations. 5.4 o t HeR ReceiVaBl e s In accordance with the Group’s hedging policy, highly probable cash flows and definite foreign-currency receivables, which are collectable within a twelve-month period, are tested as to whether they should be hedged. As of 2003, MorphoSys started entering into foreign currency options and forwards in order to hedge its foreign exchange risk against US dollar re- ceivables. These derivatives are recorded as “other receivables” at their fair values. As of 31 December 2013, the Company held financial assets amounting to € 119.3 million (31 December 2012: € 10.0 million) which were allocated to the category “loans and receivables” in accordance with IAS 39 “Financial Instruments”. These include various investments (€ 114.6 million) and an amount of € 4.7 million of the purchase price for the divested AbD Serotec business held in an escrow account. Interest income of € 273,207 (2012: € 82,534) is recognized in the finance result. The risks associated with these financial instruments mainly result from credit risks of banks. There was no indication of impairment in financial year 2013. As of 31 December 2013 and 2012, no unsettled option contracts were outstanding. Therefore, there were no unrealized gains or losses recog- nized in profit and loss in both 2013 and 2012. At the beginning of the year, the Group entered into two option contracts reaching maturity dur- ing financial year 2013. A realized loss of €  0.02 million (2012: loss of € 0.04 million) was recorded in finance expenses. 5.5 PReP aiD eXPense s, income taX ReceiVaBl e s, o t HeR cURRen t asse t s, anD inVen t oRie s As of 31 December 2013, prepaid expenses consisted of prepaid fees for sublicenses amounting to € 0.1 million (31 December 2012: € 0.1 million) and other prepayments amounting to €  3.2 million (31 December 2012: € 1.3 million). As of 31 December 2013, tax receivables amounted to €  0.7 million (31 December 2012: € 0.1 million) and comprised mainly receivables in con- nection with capital gains taxes withheld. Discontinued operations re- corded tax receivables in the amount of € 0.3 million for the 2012 financial year. Inventories amounting to €  0.7 million as of 31 December 2013 were stored at the Martinsried location. As of 31 December 2013, inventories consisted of raw materials and supplies of € 0.6 million and work in prog- ress of € 0.2 million. As in the previous year, there were no inventories carried at fair value less selling costs at the reporting date. Inventories amounting to €  0.8 million as of 31 December 2012 were stored at the Martinsried location. As of 31 December 2012, inventories consisted of raw materials and supplies of € 0.6 million and work in prog- ress of € 0.2 million. financial statementsNotes129 5.6 PRoPeR t Y, Pl an t, anD eQUiPmen t in 000’s € Cost 1 JANUARY 2013 Additions Disposals 31 DECEMBER 2013 Accumulated Depreciation 1 JANUARY 2013 Depreciation Charge for the Year Write-offs for the Year Disposals 31 DECEMBER 2013 Carrying Amount 1 JANUARY 2013 31 DECEMBER 2013 Cost 1 JANUARY 2012 Additions Disposals Foreign Exchange Variance Reclassification to Assets of Disposal Group Classified as Held for Sale 31 DECEMBER 2012 Accumulated Depreciation 1 JANUARY 2012 Depreciation Charge for the Year Write-offs for the Year Disposals Foreign Exchange Variance Reclassification to Assets of Disposal Group Classified as Held for Sale 31 DECEMBER 2012 Carrying Amount 1 JANUARY 2012 31 DECEMBER 2012 land and Buildings office and laboratory equipment furniture and fixtures 0 0 0 0 0 0 0 0 0 0 0 1,191 15 0 25 (1,231) 0 452 83 0 0 10 (545) 0 739 0 12,436 1,004 (1,279) 12,161 9,485 1,435 522 (1,269) 10,173 2,951 1,988 15,071 980 (420) 18 (3,213) 12,436 10,273 2,027 178 (418) 14 (2,589) 9,485 4,798 2,951 1,892 39 (64) 1,867 1,651 84 16 (64) 1,687 241 180 2,650 21 (51) 5 (733) 1,892 2,081 139 0 (51) 7 (525) 1,651 569 241 total 14,328 1,043 (1,343) 14,028 11,136 1,519 538 (1,333) 11,860 3,192 2,168 18,912 1,016 (471) 48 (5,177) 14,328 12,806 2,249 178 (469) 31 (3,659) 11,136 6,106 3,192 financial statementsNotes 130 In financial year 2013, impairment of property, plant, and equipment amounted to € 0.5 million (2012: € 0.2 million) and related to laboratory equipment in the Partnered Discovery segment. The impairment was caused by the fact that there was no longer an economic benefit expected from these assets. In financial year 2013, impairment in the amount of €  0.2 million was recognized, mainly for laboratory equipment which could no longer be utilized as a result of the finalization of clinical trials for the proprietary HuCAL antibody program MOR 103. No borrowing costs were capitalized during the reporting period. There were neither restrictions on retention of title nor property, plant and equipment pledged as security for liabilities. The Group capitalized expen- ditures for assets under construction in an insignificant amount. There were no material contractual commitments for the purchase of property, plant, and equipment as of the reporting date. Depreciation is included in the following line items of the income state- ment. in 000’s € Research and Development Research and Development (Write-off) Selling, general and Administrative Total from Continuing Operations Profit/(Loss) for the Year from Discontinued Operations ToTAl 2013 1,155 538 364 2,057 13 2,070 2012 1,344 178 385 1,907 530 2,437 financial statementsNotes131 5.7 in tanGiBl e asse t s in 000’s € Patents license Rights in-licensed Research Program Know-how and software customer list Goodwill total Cost 1 JANUARY 2013 Additions Disposals 31 DECEMBER 2013 Accumulated Depreciation 1 JANUARY 2013 Depreciation Charge for the Year Write-offs for the Year Disposals 31 DECEMBER 2013 Carrying Amount 1 JANUARY 2013 31 DECEMBER 2013 Cost 1 JANUARY 2012 Additions Disposals Foreign Exchange Variance Reclassification to Assets of Disposal Group Classified as Held for Sale 31 DECEMBER 2012 Accumulated Depreciation 1 JANUARY 2012 Depreciation Charge for the Year Disposals Foreign Exchange Variance Reclassification to Assets of Disposal Group Classified as Held for Sale 31 DECEMBER 2012 Carrying Amount 1 JANUARY 2012 31 DECEMBER 2012 14,902 568 0 15,470 6,236 1,075 324 0 7,635 8,666 7,835 14,659 245 (2) 0 0 14,902 5,200 1,036 0 0 0 6,236 9,459 8,666 24,410 591 0 25,001 17,281 1,576 747 0 19,604 7,129 5,397 25,207 91 (3) 19 (904) 24,410 15,655 2,146 (1) 9 (528) 17,281 9,552 7,129 10,513 2,295 0 12,808 0 0 0 0 0 10,513 12,808 10,513 0 0 0 0 10,513 0 0 0 0 0 0 10,513 10,513 3,350 1,061 (35) 4,376 1,999 640 15 (35) 2,619 1,351 1,757 2,884 956 (17) 5 (478) 3,350 1,828 486 (16) 5 (304) 1,999 1,056 1,351 0 0 0 0 0 0 0 0 0 0 0 5,525 0 0 49 7,352 0 0 7,352 0 0 0 0 0 7,352 7,352 34,107 0 0 34 60,528 4,515 (35) 65,008 25,516 3,291 1,086 (35) 29,858 35,012 35,150 92,895 1,292 (22) 107 (5,574) 0 (26,788) 7,353 (33,744) 60,528 4,184 382 0 30 (4,596) 0 1,341 0 0 0 0 0 0 0 34,107 7,353 26,867 4,050 (17) 44 (5,428) 25,516 66,028 35,012 financial statementsNotes 132 As of 31 December 2013, in-licensed research programs were subject to an impairment test as required by IAS 36. This test did not reveal any impair- ment. 5.7.5 KNOW - HOW AND CUSTOME R LIST S Since the end of financial year 2012, no items were reported in the line item know-how and customer lists. Amortization is included in the following line items of the income state- ment. In the previous year, this line item’s residual carrying amount of €  1.0 million was allocated to assets of disposal group classified as held for sale in the prior year. 5.7.6 G O ODWILL On 30 September 2013, goodwill in the amount of € 7.4 million from the acquisition of Sloning Bio Technology GmbH in the year 2010 was subject to an impairment test as required by IAS 36. The recoverable amount of the cash-generating unit, the team for technology development within the Partnered Discovery segment, has been determined on the basis of value in use calculations, whereby the value in use turned out to be higher than the carrying amount of the cash-generating unit. In addition, a detailed sensitivity analysis was performed (see item 2.4.4 of the Notes*). The cash flow forecasts are based on a period of ten years, as the Management Board believes that the commercialization by means of licensing agree- ments, comprising upfront payments, milestone payments, funded re- search, and royalties, will fully pay off in the medium to longer term. For this reason, a planning horizon of ten years is considered appropriate for the value in use calculation. Cash flow forecasts are mainly based on the central assumption that the currently developed technology will prove to be very beneficial for new and existing customers and will lead to a num- ber of new agreements. The values of the underlying key assumptions were determined using both internal (past experience) and external sources of information (market information). On the basis of the updated cash flow forecast for the next ten years, the value in use was determined as follows: A beta factor of 1.3, a tax rate of 26.33 %, WACC of 9.8 % (2012: 8.26 %), as well as a perpetual growth rate of 1 %. The fair value assump- tions correlate to the Management Board’s forecasts in term of future de- velopment and are based on internal planning scenarios as well as exter- nal sources of information. *c R o s s - R e f e R e n c e t o pa g e 1 1 2 At the end of financial year 2013, an impairment test with respect to good- will was not necessary with regard to the AbD Serotec segment since the AbD Serotec business was sold in January 2013. The associated goodwill was no longer part of MorphoSys Group as a result of the deconsolidation in January 2013. The agreed purchase price had not led to any impairment on 31 December 2012. 5.8 sHaRe s aVail aBl e f oR sal e Shares available for sale comprise the 19.98 % share in Dutch Lanthio Pharma B.V. The investment was increased in financial year 2013 by a contribution in the amount of € 0.8 million to a total of € 1.7 million. in 000’s € Research and Development Research and Development (Write-off) Selling, general and Administrative Selling, general and Administrative (Write-Off) Cost of Goods Sold Total from Continuing Operations Profit/(Loss) for the Year from Discontinued Operations ToTAl 2013 3,068 760 223 326 0 4,377 12 4,389 2012 3,262 0 141 0 115 3,518 530 4,048 5.7.1 PATE NTS In financial year 2013, the carrying amount of patents declined by € 0.9 million from € 8.7 million to € 7.8million. This was the result of additions amounting to € 0.6 million for patent applications, particularly for propri- etary programs such as MOR208, which were offset by straight-line amor- tization of € 1.1 million, as well as by impairment of € 0.3 million. 5.7.2 LICE NSES The carrying amount of licenses declined by € 1.7 million from € 7.1 mil- lion to € 5.4 million in 2013. Additions during the financial year concerned one-time payments for the access to target molecules which amounted to € 0.6 million. Amortization and impairment amounted to € 1.6 million and € 0.7 million, respectively. In the prior year, licenses with a carrying amount of € 0.4 million were allocated to assets of a disposal group classified as held for sale. 5.7.3 IN - LICE NSE D RESE ARCH PRO GR AMS The carrying amount of in-licensed research programs amounted to € 12.8 million and increased in comparison to the prior year as a result of capital- ized milestone payments (2012: € 10.5 million). The in-licensed compound, which was reported at the acquisition cost, is currently not available for use and therefore was not yet amortized. 5.7.4 SOF T WARE In financial year 2013, additions to this line item totaled € 1.1 million. The carrying amount increased by € 0.4 million from € 1.4 million in 2012 to € 1.8 million in 2013. Additions were offset by amortization in the amount of € 0.6 million and minor software disposals. Software with a carrying amount of € 0.2 million was allocated to assets of disposal group classified as held for sale in the prior year. financial statementsNotes133 5.9 PReP aiD eXPense s anD o t HeR a sse t s This line item includes the non-current portion of prepaid expenses and other assets. The Group has classified certain line items in other assets as “restricted cash” which are not available for use in the Group’s operations (see items 2.8.1, 5.1 and 5.2 of the Notes*). As of 31 December 2013 and 2012, the Group’s restricted cash amounted to € 1.3 million and € 1.3 mil- lion, respectively, for guarantees granted and in the amount of € 298,606 and € 73,607, respectively, for convertible bonds granted to employees. This line item is composed as follows. *c R o s s - R e f e R e n c e t o pa g e 1 1 4 , pa g e 1 2 6 a n d pa g e 1 2 7 6 notes to equity and liabilities of the Balance sheet 6.1 accoUn t s P aYaBl e anD accRUeD eXPense s Accounts payable are non-interest-bearing and, under normal circum- stances, have payment terms of no more than 30 days. Accounts payable are listed in the following table. in 000’s € 12/31/2013 12/31/2012 Prepaid Expenses, Net of Current Portion Other Current Assets ToTAl 51 1,681 1,732 47 1,442 1,489 in 000’s € 12/31/2013 12/31/2012 Trade Accounts Payable Licenses Payable Accrued Expenses Other Liabilities Total from Continuing Operations Total from Discontinued Operations ToTAl 1,078 120 15,076 916 17,190 0 17,190 738 170 9,232 520 10,660 2,424 13,084 5.10 asse t s of Di sP o sal GRoUP c l a ssif ieD a s Hel D f oR sal e As of 31 December 2013, there are no reportable matters with regard to IFRS 5. On 16 December 2012, MorphoSys AG and Bio-Rad agreed upon the acqui- sition of substantially all of the research and diagnostic antibodies seg- ment of AbD Serotec. In accordance with IFRS 5, the assets of the discon- tinued AbD Serotec business were recorded as assets held for sale from discontinued operations as of the reporting date 31 December 2012. The closing of this transaction took place on 10 January 2013. Accrued expenses of the continuing operations mainly include accrued personnel expenses for payments to employees and the management amounting to € 5.6 million (31 December 2012: € 3.7 million), provisions for outstanding invoices in the amount of € 1.8 million (31 December 2012: € 1.2 million), external laboratory services in the amount of € 6.8 million (31 December 2012: € 2.9 million), license payments in the amount of € 0.5 million (31 December 2012: € 1.1 million), audit fees and other audit-re- lated costs in the amount of € 0.1 million (31 December 2012: € 0.1 mil- lion), and € 0.3 million for legal advice (31 December 2012: € 0.4 million). The following assets were recorded in the balance sheet as “assets of dis- posal group classified as held for sale” as of 31 December 2012. At the Company’s Annual General Meeting in June 2013, the Supervisory Board was given authorization to appoint PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft (PwC AG), Munich, as the auditor. In the financial year 2013, PwC AG received compensation from MorphoSys in the amount of € 372,277, including audit fees in the amount of € 319,123, fees for other audit-related and valuation services of € 26,591, fees for tax services in the amount of € 10,400 as well as fees for other services in the amount of € 16,154. in 000’s € 12/31/2012 Cash and Cash Equivalents Accounts Receivable Inventories, Net Other Current Assets Total Current Assets Property, Plant and Equipment, Net Licenses, Net Software, Net Know-how and Customer Lists, Net Goodwill Other Non-current Assets Total Non-current Assets Assets of Disposal Group Classified as Held for Sale 5,281 1,703 2,769 1,101 10,855 1,519 376 174 978 26,788 166 30,001 40,855 financial statementsNotes134 6.2 PRoVi sions anD taX l iaBil i t ie s As of 31 December 2013, the Group recorded provisions and tax liabilities of € 3.6 million for continuing operations (2012: € 0.8 million for the entire Group). Tax provisions mainly comprise income tax expenses. As of 31 December 2013, provisions and tax liabilities were uncertain in terms of their amount and are expected to be utilized in 2014. Accrued expenses mainly comprise personal expenses regarding share- based payments for stock appreciation rights which are settled in cash. The provisions and tax liabilities for the continuing operations developed as follows in financial year 2013. in 000’s € Taxes Other Obligations ToTAl 01/01/2013 additions Utilized Released 12/31/2013 630 187 817 2,595 719 3,314 505 0 505 30 9 39 2,690 897 3,587 6.3 Def eRReD ReVenUe s Deferred revenues relate to payments received from customers for which the services have not been rendered. For continuing operations, this line item developed as follows. 6.4 l iaBil i t ie s of Di sP o sal GRoUP cl assif ieD as Hel D f oR sal e As of 31 December 2013, there are no reportable matters with regard to IFRS 5. in 000’s € 12/31/2013 12/31/2012 opENINg BAl ANCE Prepayments Received in 2013 Revenue Recognized through Release of Prepayments in line with Services Performed in 2013 CloSIN g BAl ANCE thereof short-term thereof long-term 6,543 91,860 (23,968) 74,435 15,267 59,168 6,767 18,742 (18,966) 6,543 628 5,915 On 16 December 2012, MorphoSys AG and Bio-Rad agreed upon the acqui- sition of substantially all of the research and diagnostic antibodies seg- ment of AbD Serotec. In accordance with IFRS 5, the liabilities of the dis- continued AbD Serotec business were recorded as liabilities held for sale from discontinued operations as of the reporting date 31 December 2012. The closing of this transaction took place on 10 January 2013. The following liabilities were recorded in the balance sheet as “liabilities of disposal group classified as held for sale” as of 31 December 2012. in 000’s € 12/31/2012 Accounts Payable and Accrued Expenses Current Portion of Deferred Revenue Other Current Liabilities Total Current Liabilities Deferred Tax Liabilities Total Non-current Liabilities Liabilities of Disposal Group Classified as Held for Sale 2,424 435 466 3,325 407 407 3,733 financial statementsNotes135 6.5 s t o c KHol DeRs’ eQUi t Y 6.5.1 C OMMON STO CK On 31 December 2013 the Company had common stock amounting to € 26,220,882, including treasury stock, which represents an increase of € 2,862,654 in comparison to the level of € 23,358,228 on 31 December 2012. Each no-par value share is entitled to one vote. Common stock in- creased by € 2,311,216 or 2,311,216 shares as a result of the newly created shares from the capital increase (1,514,066 shares) carried out in Septem- ber 2013 and the purchase of MorphoSys shares by Celgene (797,150 shares). In addition, common stock increased by € 551,438 in 2013 through the exercise of 551,438 stock options granted to the Management Board and the Senior Management Group. The weighted average exercise price per exercised stock option amounted to € 13.00. As of 31 December 2013, the Company held 339,890 shares in treasury stock in the amount of € 6,418,018, which corresponds to an increase of € 2,823,625 compared to 31 December 2012 (255,415 shares, € 3,594,393). This increase was the result of the repurchase of 84,475 own stocks on the stock exchange. The treasury stock may be used for all purposes named in the authorization of the Annual General Meeting of 19 May 2011, and par- ticularly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also, however, be redeemed. 6.5.2 AUTHORIZE D CAPITAL The “Authorized Capital 2008-I”, which was not yet utilized, expired on 30 April 2013. On 31 December 2012, this capital could have been served to create up to 8,864,103 new shares. At the 2013 Annual General Meeting, a new “Authorized Capital 2013-I” was resolved, which will serve to issue up to 2,335,822 new shares. This authorization has not yet been utilized. As part of a cash capital increase in connection with the Celgene Transac- tion, 797,150 shares were issued on 27 August 2013 from “Authorized Capital 2012-II”. As part of another cash capital increase, 1,514,066 addi- tional shares were issued on 23 September 2013 from “Authorized Capital 2012-II”. Accordingly, “Authorized Capital 2012-II” was fully utilized. 6.5.3 C ONDITIONAL CAPITAL In 2013, a total of 551,438 shares were created from “Conditional Capital V” (2008-II) through employees’ exercise of the same number of options. Thus, common stock increased by a corresponding € 551,438. In 2012, a total of 16,704 shares were created from “Conditional Capital II bb” (1999-I) through employees’ exercise of the same number of options. Thus, common stock increased by a corresponding € 16.704. In addition, 229,357 shares were created from “Conditional Capital V” (2008-II) through employees’ exercise of the same number of options. Thus, com- mon stock increased by a corresponding € 229,357. 6.5.4 TRE ASURY STO CK In the years 2012 and 2013, the Group repurchased own shares. Composi- tion and development of this line item can be found in the following table. As of 12/31/2010 Purchase in 2011 As of 12/31/2011 Purchase in 2012 As of 12/31/2012 Purchase in 2013 As of 12/31/2013 number of shares 79,896 84,019 163,915 91,500 255,415 84,475 339,890 Value 9,774 1,747,067 1,756,841 1,837,552 3,594,393 2,823,625 6,418,018 The average stock price at the time of the repurchases carried out in 2013, amounted to € 33.42 per share (2012: € 20.08 per share). Treasury stocks are recognized at acquisition cost. 6.5.5 ADDITIONAL PAID - IN CAPITAL On 31 December 2013, additional paid-in capital amounted to € 310,963,651 (31 December 2012: €  175,245,266). The total increase of €  135,718,385 was primarily the result of the capital increase in September 2013 as well as in the context of the agreement with Celgene (€ 124,369,723 net of issu- ance costs and the respective taxes in the total amount of € 1,698,232). A further increase of € 6,606,570 (net of issuance costs and the respective taxes in the total amount of € 11,419) resulted from the exercise of stock options granted. Furthermore, additional paid-in capital increased by €  4,742,092 from personnel expenses resulting from share-based pay- ment. In 2012, additional paid-in capital increased by € 4,466,792 due to person- nel expenses resulting from stock options in the amount of € 1,268,792, as well as the exercise of options in the amount of € 3,198,000. IFRS 2 “Share-based Payment” requires the consideration of the effects of share-based payments if the Group acquires goods or services in ex- change for stocks or stock options (settlement in equity instruments) or other assets that represent the value of a specific number of stocks or stock options (cash settlement). The key impact of IFRS 2 on the Group arises from the expense of using an option pricing model in connection with stock options and other share-based incentives for employees and the Management Board. In compliance with IFRS 2.54, the Group has applied IFRS 2 to share-based payments settled in equity instruments for those granted on or after 1 January 1999. Therefore, in accordance with IFRS 2.56, stock options granted before January 1, 1999 are not recognized as an expense, but still furnish the information required by IFRS 2.44 and 2.45. Further information may be found under items 7.1, 7.2, 7.3 and 7.4 of the Notes*. *c R o s s - R e f e R e n c e t o pa g e 1 3 6 - 1 3 9 financial statementsNotes 136 6.5.6 RE VALUATION RESE RVE On 31 December 2013, the revaluation reserve amounted to €  240,381 (31 December 2012: €  486,743). The reduction amounting to a total of € 246,362 arose from a change in the unrealized gains on available for sale securities and bonds of € 274,460, net of deferred taxes of € 83,172, and the disposal of the equity-related recognition of deferred taxes in the amount of € 28,098 related to the discontinued operations of AbD Serotec. 6.5.7 TR ANSL ATION RESE RVE The translation reserve increased by € 1,302,421 to € +192,556 on 31 De- cember 2013 in comparison to minus € 1,109,865 on 31 December 2012. This item includes exchange rate differences arising from the revaluation of assets and liabilities denominated in foreign currencies as per 31 De- cember 2013, as well as differences between the exchange rates used in the balance sheet and the income statement. These differences resulted primarily from the entities of the discontinued operations of AbD Serotec which were led in foreign currencies. The change compared to the previ- ous year is mainly a result of the disposal of currency translation differ- ences in connection with the sale of substantially all of the AbD Serotec business on 10 January 2013. 6.5.8 AC CUMUL ATE D INC OME The consolidated net profit amounting to € 13,321,930 is reported in ac- cumulated income. Thus, accumulated income rose from €  7,624,038 in 2012 to € 20,945,968 in 2013. 7 Remuneration system for the manage- ment Board and employees of the Group s t o cK oP t ions 7.1 The general conditions of the stock option plans that existed during the reporting period are shown in the following table; all options must be settled by the physical delivery of shares. Grant Date/employees entitled stock options Vesting Period Granted 25 January 2008 to Management Board and employees 283,335 25 January 2008 to employees October 1, 2008 to employees 29,070 92,664 1 April 2010 to Management Board and employees 422,200 In 2013 and 2012, 551,438 and 246,061 options were exercised, respec- tively. 2 years 50 %, 3 years 75 %, 4 years 100 % 2 years 50 %, 3 years 75 %, 4 years 100 % 2 years 50 %, 3 years 75 %, 4 years 100 % 2 years 50 %, 3 years 75 %, 4 years 100 % Vesting conditions (share Price in comparison to strike Price) Increase of 20 % on at least one trading day during the lifetime Cumulative increase of more than 10 % per annum Increase of 20 % on at least one trading day during the lifetime Increase of 20 % on at least one trading day during the lifetime contractual life of options 5 years 5 years 5 years 5 years financial statementsNotes137 The following table shows the development of the stock option plans for employees of the Group in 2013 and 2012. oU TSTANDIN g oN 1 JANUARY 2012 Granted Exercised Forfeited Expired oU TSTANDIN g oN 31 DECEMBER 2012 oU TSTANDIN g oN 1 JANUARY 2013 Granted Exercised Forfeited Expired oU TSTANDIN g oN 31 DECEMBER 2013 shares 797,502 0 (246,061) 0 0 551,441 551,441 0 (551,438) 0 (3) 0 Weighted- average Price (€) 13.31 0.00 14.00 0.00 0.00 13.00 13.00 0.00 13.00 0.00 12.80 0 On 31 December 2013 and 2012, there were zero and 451,391 exercisable stock options, respectively. The Group recognizes personnel expenses resulting from stock options in accordance with IFRS 2 “Share-based Payment”. In the years 2013 and 2012, compensation expense related to stock options amounted to € 28,181 and € 168,044, respectively. 7.2 conVeR t iBl e B onD s 7.2 .1 2010 PRO GR AM On 1 April 2010, 352,800 convertible bonds were granted to members of the Management Board and members of the Senior Management Group. The exercise price of the convertible bonds was € 16.79 and equaled the Company’s share price in the XETRA closing auction of the Frankfurt Stock Exchange on the trading day preceding the issuance of the convert- ible bonds. Each convertible bond having a par value of € 0.33 entitles the conversion into one no-par value bearer share of the Group against pay- ment of the exercise price. The beneficiaries may only exercise their con- version rights following a vesting period of four years beginning after the grant date. Exercise of the conversion rights is only possible if, on one trading day during the lifetime of the convertible bond, the share price reached at least 110 % of the exercise price as of the grant date. After 31 December 2015, these convertible bonds can no longer be exercised. If the conversion rights are not exercised, the beneficiaries receive a reimburse- ment of the amount paid to acquire the conversion rights (€ 0.33 per con- vertible bond/share). Convertible bonds are recorded at their accreted value, which closely approximates to the principal amount on their due date. 7.2 .2 2013 PRO GR AM On 1 April 2013, MorphoSys AG granted convertible bonds with equal rights in a total nominal value of €  225,000 and divided into 449,999 bearer bonds from “Conditional Capital 2008-III” to the Management Board and members of the Senior Management Group. The beneficiaries have the right to convert the bonds granted to them into shares of the Company. Each convertible bond may be exchanged for one of the Compa- ny’s bearer shares equal to the proportional amount of common stock, which currently stands at €  1. The exercise of the convertible bonds is subject to several conditions; such as achieving performance targets, the expiration of a vesting period, the exercisability of the conversion rights, the existence of an employment or service contract which is not under notice, and the commencement of the exercise period. The conversion price amounted to € 31.88 and was derived from the Com- pany’s share price in the XETRA closing auction of the Frankfurt Stock Exchange on the trading day preceding the issuance of the convertible bonds. The exercise of the conversion rights is admissible if, on at least one trading day during the lifetime of the convertible bonds, the share price of the Company has amounted to more than 120 % of the price in the XETRA closing auction of the Frankfurt Stock Exchange on the trading day pre- ceding the issuance of the convertible bonds. The exercise of the conversion rights is only admissible after the expira- tion of a four-year vesting period from the grant date. In the event of a change of control, the vesting period will be shortened to two years from the grant date. For every year without a notice of termination of the em- ployment relationship with the Company or an affiliated company, 25 % of the conversion rights will become vested. In the event of a change of con- trol, all unvested conversion rights become vested. If an employment or service contract of a beneficiary is terminated without notice, no further conversion rights can be vested in line with the above mentioned vesting scheme. Thus, upon rendition of the notice, all conver- sion rights still unvested by this time will expire without substitution. In the event of a contractual notice of termination of such employment or service contract with the beneficiary, or a mutually agreed dissolution contract, the previous sentence applies and is effective as of the date of termination of the employment or service contract. financial statementsNotes 138 The following table shows the development of the convertible bond plans for employees of the Group in financial years 2013 and 2012. oU TSTANDIN g oN 1 JANUARY 2012 Granted Exercised Forfeited Expired oU TSTANDIN g oN 31 DECEMBER 2012 oU TSTANDIN g oN 1 JANUARY 2013 Granted Exercised Forfeited Expired oU TSTANDIN g oN 31 DECEMBER 2013 convertible Bonds Weighted- average Price (€) 328,050 0 0 (7,500) 0 320,550 320,550 449,999 0 (3,750) 0 766,799 16.79 0.00 0.00 16.79 0.00 16.79 16.79 31.88 0.00 16.79 0.00 25.65 Exercisable convertible bonds on 31 December 2013 and 2012 amounted to zero shares, respectively. The following overview includes the weighted average exercise price as well as information on the contract duration of significant groups of con- vertible bonds as of 31 December 2013. Range of exercise Prices € 10.00 – € 25.00 € 25.01 – € 40.00 number outstanding Remaining contractual life (in Years) Weighted- average number Weighted- average exercise Price (€) exercisable exercise Price (€) 316,800 449,999 766,799 2.00 6.25 4.50 16.79 31.88 25.65 0 0 0 0.00 0.00 0.00 The Group recognizes personnel expenses resulting from convertible bonds in accordance with IFRS 2 and IAS 32.28. The equity component of the convertible bonds is separately presented in additional paid-in capital. The corresponding amount is recognized as personnel expenses from con- vertible bonds. In 2013 and 2012, compensation expenses related to con- vertible bonds amounted to € 1,997,414 and € 331,079, respectively. s t o cK aPPRec iat ion RiGH t s 7.3 On 1 October 2010, employees of MorphoSys AG were granted 15,000 stock appreciation rights at the same conditions as the convertible bonds granted on 1 April 2010. Convertible bonds are settled via the physical transfer of shares, whereas stock appreciation rights are settled in cash. The closing price of the stock appreciation rights was € 55.85 on 31 De- cember 2013. Compensation expenses amounted to €  449,420 in 2013, while the related non-current provision amounted to € 593,597 on 31 De- cember 2013. After 30 June 2016, the stock appreciation rights may no longer be exercised. financial statementsNotes 139 l onG -t eRm inc en t iVe PRo GRams 7.4 The total increase in recognized personnel expenses from share-based payments compared to the prior year mainly resulted from a modification of the LTI programs 2011 and 2012. For the LTI program 2011, vesting periods were modified such that the beneficiaries’ claims become vested by one quarter on a yearly basis. However, in the case of the LTI program 2012, claims become vested on a pro-rata basis. With this modification, changes in the interpretation and development of labor law were taken into account. As a result of the adaptation, personnel expenses are ac- counted for comparatively earlier within the four-year period, resulting in an increase of personnel expenses compared to the previous year. 7.4.1 2011 LONG -TE RM INCE NTIVE PRO GR AM On 1 June 2011, MorphoSys established a long-term incentive plan (LTI plan) for the Management Board and the Senior Management Group. Ac- cording to IFRS, this program is considered a share-based payment pro- gram with settlement in equity instruments and is accounted for accord- ingly. The LTI plan is a performance-related share plan and will be paid out in ordinary shares of MorphoSys AG if predefined key performance criteria have been achieved. These criteria are assessed and approved an- nually by the Supervisory Board. These key performance criteria pres- ently consist of revenues, the EBIT, and the number of projects in the R&D portfolio. The grant date was 1 June 2011 and the vesting period is four years. 25 % of the performance shares will become vested in each year of the four-year vesting period, provided that the performance criteria set for the respec- tive period were met by 100 %. The annual number of vested shares shall be reduced to the extent that the performance criteria of the relevant year have been fulfilled only between 50 % and 99 %, and increased to the ex- tent that the performance criteria were met by more than 100 % (maximum 110 %). In consideration of these conditions, the ordinary shares of MorphoSys AG will be delivered to the beneficiaries after the four-year vesting period. In any case, the maximum pay-out at the end of the four- year period is limited by a factor determined by the Group which generally amounts to “1”. The Supervisory Board may depart from this factor, for example, if the level of payments was considered to be inappropriate given the general development of the Group. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office within MorphoSys Group prematurely before expiration of the four year perfor- mance period, the Management Board member (or his/her heirs) is enti- tled to performance shares determined on a precise daily pro-rata basis. If a member of the Management Board ceases to hold an office within MorphoSys Group for good reason within the meaning of Sec. 626 para. 2 of the German Civil Code (BGB) prematurely before expiration of the four year performance period, the beneficiary will not be entitled to an alloca- tion of performance shares. If a change of control occurs during the course of the four-year vesting period, all performance shares are considered fully vested. In every above named case, the allocation of the performance shares only occurs at the end of the four-year vesting period. In June 2011, MorphoSys repurchased 84,019 of its own shares on the stock exchange at an average price of € 20.79 per share for the LTI plan 2011. These 84,019 shares were granted to the beneficiaries retroactively on 1 June 2011. These included 53,997 shares for the Management Board (for further information please see item 7.5*) and 30,022 shares for the Senior Management Group. The fair value of the performance shares was € 21.34 per share on the grant date (1 June 2011). In determining the fair value of the shares repurchased, no dividends were considered as the Group does not intend to distribute any dividends in the foreseeable fu- ture. Since the grant date until 31 December 2013, three beneficiaries have left MorphoSys and thus 5,326 performance shares forfeited. *c R o s s - R e f e R e n c e t o pa g e 1 4 1 In 2013, personnel expenses resulting from stock options under the Group’s 2011 LTI plan amounted to € 778,124 (2012: € 436,232). 7.4.2 2012 LONG -TE RM INCE NTIVE PRO GR AM On 1 April 2012, MorphoSys established a second long-term incentive plan (LTI plan) for the Management Board and the Senior Management Group. According to IFRS 2, this program is considered a share-based payment program with settlement in equity instruments and is accounted for ac- cordingly. The LTI plan is a performance-related share plan and will be paid out in ordinary shares of MorphoSys AG if predefined key perfor- mance criteria have been achieved. These criteria are approved annually by the Supervisory Board. The grant date was 1 April 2012 and the vesting period is four years. One fourth of the performance shares will become vested in each year of the four-year vesting period, provided that the performance criteria set for the respective period were met in full. The annual number of vested shares shall be reduced to the extent that the performance criteria of the relevant year have been fulfilled only between 50 % and 99 %, and increased to the extent that the performance criteria were met by more than 100 % (maxi- mum 200 %). If in one year the specified performance criteria are achieved by less than 50 %, no shares will become vested in that year. In any case, the maximum pay-out at the end of the four-year period is limited by a factor determined by the Group which generally amounts to “1”. However, in justified cases, the Supervisory Board may set this factor freely be- tween “0” and “2”, for example, if the level of payment is regarded as un- reasonable with regard to the general development of the Company. The right to receive a certain allocation of shares under the LTI plan, however, only occurs at the end of the four-year vesting period. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office within MorphoSys Group prematurely before expiration of the four year perfor- mance period, the Management Board member (or his/her heirs) is enti- tled to performance shares determined on a precise daily pro-rata basis. If a member of the Management Board ceases to hold an office within MorphoSys Group for good reason within the meaning of Sec. 626 para. 2 of the German Civil Code (BGB) prematurely before expiration of the four year performance period, the beneficiary will not be entitled to an alloca- financial statementsNotes140 tion of performance shares. If a change of control occurs during the course of the four-year vesting period, all performance shares are considered fully vested. In every above named case, the right to receive a certain al- location of shares under the LTI plan only occurs at the end of the four-year vesting period. In April 2012, MorphoSys repurchased 91,500 of its own shares on the stock exchange at an average price of € 20.08 per share for the 2012 LTI plan. These 91,500 shares were granted to the beneficiaries retroactively on 1 April 2012. These included 57,967 shares for the Management Board (for further information, please see the table titled “Performance Shares”* in item 7.5 “Related Parties”) and 33,533 shares for the Senior Manage- ment Group. The fair value of the performance shares was €  19.24 per share on the grant date (1 April 2012). In determining the fair value of the shares repurchased, no dividends were considered as the Group does not intend to distribute any dividends in the foreseeable future. Since the grant date until 31 December 2013, two beneficiaries have left MorphoSys and thus 4,289 performance shares forfeited. *c R o s s - R e f e R e n c e t o pa g e 1 4 2 On 1 October 2012, MorphoSys established a further long-term incentive plan (LTI plan) for members of the Senior Management Group. The terms of the plan were identical to the program of 1 April 2012. 2,292 shares were granted. The fair value was € 24.00 per share on the grant date. In 2013, personnel expenses resulting from stock options under the Group’s 2012 LTI plan amounted to € 974,997 (2012: € 333,438). 7.4.3 2013 LONG -TE RM INCE NTIVE PRO GR AM On 01 April 2013, MorphoSys established a further long-term incentive plan (LTI plan) for the Management Board and the Senior Management Group. According to IFRS 2, this program is considered a share-based pay- ment program with settlement in equity instruments and is accounted for accordingly. The LTI plan is a performance-related share plan and will be paid out in ordinary shares of MorphoSys AG if predefined key perfor- mance criteria have been achieved. These criteria are evaluated annually by the Supervisory Board. The grant date was 1 April 2013 and the vest- ing/performance period is four years. If the predefined key performance criteria for the respective period are met by 100 %, 25 % of the performance shares become vested in each year of the four-year vesting period. The number of shares vested each year will be reduced or increased to the extent that the performance criteria of the respective year have only been achieved between 50 % and 99.9 % (<100 %) or that the achievement of the performance criteria has exceeded 100 % (maximum 200 %). If in one year the performance criteria are achieved by less than 50 %, “0” shares will become vested in that year. In any case, the maximum pay-out at the end of the four-year period is limited by a factor determined by the Group which generally amounts to “1”. However, in justified cases, the Super- visory Board may set this factor freely between “0” and “2”, for example, if the level of payment is regarded as unreasonable in view of the general development of the Company. The right to receive a certain allocation of shares under the LTI plan, however, only occurs at the end of the four-year vesting period. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office within MorphoSys Group prematurely before expiration of the four year perfor- mance period, the Management Board member (or his/her heirs) is enti- tled to performance shares determined on a precise daily pro-rata basis. If a member of the Management Board ceases to hold an office within MorphoSys Group for good reason within the meaning of Sec. 626 para. 2 of the German Civil Code (BGB) prematurely before expiration of the four year performance period, the beneficiary will not be entitled to an alloca- tion of performance shares. If a change of control occurs during the course of the four-year vesting period, all performance shares are considered fully vested. In every above named case, the right to receive a certain al- location of shares under the LTI plan only occurs at the end of the four-year vesting period. In April and May 2013, MorphoSys repurchased 84,475 of its own shares on the stock exchange at an average price of € 33.43 per share. The repur- chased shares may be used for all purposes named in the authorization of the Annual General Meeting of 19 May 2011, and particularly for any ex- isting or future employee participation schemes and/or to finance acquisi- tions. The shares may also be redeemed. Of these shares, 61,600 were granted to the beneficiaries retroactively effective 1 April 2013. This in- cluded 36,729 shares for the Management Board (for further information, please see the table titled “Performance Shares”* in item 7.5 “Related Parties”) and 24,871 shares for the Senior Management Group. The fair value of the performance shares was € 31.88 per share on the grant date (1 April 2013). In determining the fair value of the shares repurchased no dividends were considered as the Group does not intend to distribute any dividends in the foreseeable future. Since the grant date until 31 Decem- ber 2013, no beneficiary has left MorphoSys and no performance shares have forfeited. For the calculation of the personnel expenses resulting from share-based payments under the 2013 LTI plan, it was assumed that one beneficiary will leave the Company during the four-year period. *c R o s s - R e f e R e n c e t o pa g e 1 4 2 financial statementsNotes141 On 1 October 2013, MorphoSys established a further long-term incentive plan (LTI plan) for members of the Senior Management Group. The terms of the plan were identical to the program of 1 April 2013. A total of 549 shares were granted and the fair value on the grant date was € 57.39 per share. In 2013, personnel expenses resulting from stock options under the Group’s 2013 LTI plan amounted to € 917,319. 7.5 Rel at eD PaR t ie s The Group engages in commercial relationships with the members of the Management Board and the members of the Supervisory Board as related parties. In addition to cash compensation, the Group has granted the Man- agement Board stock options, convertible bonds, and performance shares. The tables below show the shares, stock options, convertible bonds and performance shares held by the members of the Management Board and Supervisory Board, as well as the changes in their ownership during fi- nancial year 2013. sHaRe s MANAg EMENT B oARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll ToTAl SUpERvISoRY B oARD Dr. Gerald Möller Dr. Geoffrey Vernon Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham ToTAl s t o c K oP t ions MANAg EMENT B oARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll ToTAl 01/01/2013 additions forfeitures sales 12/31/2013 419,885 6,500 2,000 7,105 435,490 7,500 0 2,019 0 0 0 9,519 191,445 0 90,000 102,867 384,312 1,500 0 0 0 0 1,000 2,500 0 0 0 0 0 0 0 0 0 0 0 0 158,445 0 90,000 82,602 331,047 0 0 0 0 0 0 0 452,885 6,500 2,000 27,370 488,755 9,000 0 2,019 0 0 1,000 12,019 01/01/2013 additions forfeitures exercises 12/31/2013 191,445 0 90,000 102,867 384,312 0 0 0 0 0 0 0 0 0 0 191,445 0 90,000 102,867 384,312 0 0 0 0 0 financial statementsNotes 142 conVeR t iBl e B onD s MANAg EMENT B oARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll ToTAl PeRf oRmanc e sHaRe s MANAg EMENT B oARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll ToTAl 01/01/2013 additions forfeitures exercises 12/31/2013 58,800 0 33,000 33,000 124,800 88,386 90,537 60,537 60,537 299,997 0 0 0 0 0 0 0 0 0 0 147,186 90,537 93,537 93,537 424,797 01/01/2013 additions forfeitures exercises 12/31/2013 36,652 25,104 25,104 25,104 111,964 12,024 8,235 8,235 8,235 36,729 0 0 0 0 0 0 0 0 0 0 48,676 33,339 33,339 33,339 148,693 The Supervisory Board of MorphoSys AG does not hold any stock options, convertible bonds, or performance shares. The remuneration of the Management Board consists of fixed and variable components, as well as other remuneration. For a six-months period after the expiration of the contract term, the Management Board Member is restrained by a non-competition clause. For this period, the Management Board Member is entitled to a waiting allowance equaling 100 % of the pro rata contractual fixed compensation. In 2013, the total remuneration of the Supervisory Board, excluding reimbursement for travel costs, amounted to € 458,280 (2012: € 478,197). financial statementsNotes 143 The tables below show the remuneration of the Management Board and Supervisory Board in detail. manaGemen t B oaRD RemUneRat ion f oR t He Y eaR 2013: fixed compensation short-term incentive compensation long-term incentive compensation (target attainment Depends on company Goals)1 total compensation2 Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll ToTAl Base salary in € 412,049 279,531 279,531 279,531 1,250,642 other compensatory Benefits in € Variable compensation in € no. of Performance shares Granted no. of convertible Bonds Granted Personal expenses Regarding stock-Based compensation 2013 179,3533 106,3154 107,4375 99,7496 492,854 360,543 244,590 244,590 244,590 1,094,313 12,024 8,235 8,235 8,235 36,729 88,386 90,537 60,537 60,537 299,997 953,834 750,964 651,773 648,013 3,004,584 in € 1,905,779 1,381,400 1,283,331 1,271,883 5,842,393 1 The remuneration with a long-term incentive effect is dependent upon the achievement of the company objectives. This remuneration is presented in accordance with IAS 24.17e in an amount which corresponds to the past financial year. 2 The total remuneration shown for 2013 includes the respective bonus accruals for 2013 which will be paid out in February 2014. 3 Includes 112,221 € in contributions to individual pension plans and allowances for insurances 4 Includes 78,177 € in contributions to individual pension plans and allowances for insurances 5 Includes 78,294 € in contributions to individual pension plans and allowances for insurances 6 Includes 78,170 € in contributions to individual pension plans and allowances for insurances manaGemen t B oaRD RemUneRat ion f oR t He Y eaR 2012: fixed compensation short-term incentive compensation long-term incentive compensation (target attainment Depends on company Goals)1 total compensation2 other compensatory Benefits in € Variable compensation in € no. of Performance shares Granted 139,5553 129,8364 103,8415 96,6096 469,841 226,689 176,890 164,155 162,653 730,387 18,976 12,997 12,997 12,997 57,967 Base salary in € 401,980 271,867 272,700 272,700 1,219,247 Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll ToTAl Personal expenses Regarding stock-Based compensation 2012 274,075 113,175 185,199 165,144 737,593 in € 1,042,299 691,768 725,895 697,106 3,157,068 1 The remuneration with a long-term incentive effect is dependent upon the achievement of the company objectives. This remuneration is presented in accordance with IAS 24.17e in an amount which corresponds to the past financial year. 2 The total remuneration shown for 2012 includes the respective bonus accruals for 2012 which were paid out in February 2013. 3 Includes 109.882 € in contributions to individual pension plans and allowances for insurances 4 Includes 72.999 € in contributions to individual pension plans and allowances for insurances 5 Includes 76.898 € in contributions to individual pension plans and allowances for insurances 6 Includes 76.789 € in contributions to individual pension plans and allowances for insurances financial statementsNotes 144 sUPeRVi s oR Y B oaRD RemUneRat ion f oR t He Y eaRs 2013 anD 2012: in € 2013 2012 2013 2012 2013 2012 fixed compensation attendance fees total compensation Dr. Gerald Möller Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham Dr. Geoffrey Vernon Prof. Dr. Jürgen Drews1 Dr. Metin Colpan1 ToTAl 94,400 43,160 43,160 46,160 40,160 57,240 0 0 324,280 94,400 43,160 41,939 27,116 23,591 51,549 26,264 16,678 324,697 32,000 17,000 19,500 23,500 22,500 19,500 0 0 134,000 37,000 21,500 23,500 19,000 15,000 22,000 9,500 6,000 153,500 126,400 60,160 62,660 69,660 62,660 76,740 0 0 458,280 131,400 64,660 65,439 46,116 38,591 73,549 35,764 22,678 478,197 1 Departed the Supervisory Board of MorphoSys AG on 31 May 2012 There are presently no other agreements with current or former members of the Supervisory Board. On 31 December 2013, the Senior Management Group held no stock op- tions (31 December 2012: 150,026 units), 300,002 convertible bonds (31 December 2012: 180,000 units), 15,000 stock appreciation rights (SARs) (31 December 2012: 15,000) and 77,558 performance shares (31 December 2012: 63,184), which were granted by the Company. In 2013, an additional long-term incentive program as well as an additional convertible bond pro- gram were issued to the Senior Management Group. As part of these pro- grams, the Senior Management Group was granted 25,420 performance shares and 150,002 convertible bonds. 150,026 of the stock options were exercised in 2013. During the same period, no convertible bonds or stock appreciation rights exercised. In 2013, 11,045 performance shares and 3,750 convertible bonds forfeited because beneficiaries left MorphoSys. These individuals continue to hold 26,250 convertible bonds. financial statementsNotes145 8 additional notes 8.1 oBl iGat ions aRi sinG f Rom Ren tal , oPeRat inG l ease s, anD o t HeR con t Rac t s The Group leases facilities and equipment under long-term operating leases. In financial years 2013 and 2012, leasing expenses amounted to €  1,795,316 and €  1,713,477. Key leasing agreements mainly concerned leased buildings. The majority of these contracts can be renewed on a yearly or quarterly basis. Some of these agreements may be terminated prematurely. Future minimum payments under non-terminable operating leases, insur- ance contracts, as well as other services for continuing operations are composed as follows. in 000’s € leasing 2013 leasing 2012 other 2013 other 2012 total 2013 total 2012 Rent and Rent and Up to One Year Between One and Five Years More than Five Years ToTAl 2,536 2,690 0 5,226 1,562 2,114 0 3,676 830 27 857 1,245 24 0 1,269 3,366 2,717 0 6,083 2,807 2,138 0 4,945 In financial years 2013 and 2012, total expenses for operating leases, in- surance contracts, as well as other services amounted to a total of € 3,366,291 and € 3,311,122, respectively. The Management Board is unaware of any proceedings that may result in a significant obligation for the Group and may lead to a material adverse effect on the Group’s net assets, financial position, and results of opera- tions. Furthermore, the following future payments may become due from cur- rently active, terminable contracts for outsourced studies. However, these amounts may be substantially lower due to the respective contractual clauses in the event of the early termination of the study. If certain milestones are achieved in the Proprietary Development seg- ment, such as the application for an investigational new drug (IND) with regard to specific target molecules, this may trigger milestone payments to licensors. However, no further details can be published, since the timing and the achievement of such milestones are uncertain. in 000’s € Up to One Year Between One and Five Years More than Five Years ToTAl total 2013 18,612 17,950 0 36,562 If a partner achieves certain milestones in the Partnered Discovery seg- ment, such as the application for an investigational new drug (IND) with regard to specific target molecules, or the transfer of a technology, this may trigger milestone payments to MorphoSys. However, no further de- tails can be published, since the timing and the achievement of such mile- stones are uncertain. 8.2 con t inGen t a sse t s /con t inGen t l iaBil i t ie s Contingent liabilities are potential obligations based on past events whose existence is confirmed only when one or more uncertain future events oc- cur which are beyond the control of the Company. Current obligations may represent a contingent liability if there is not sufficient probability of an outflow of resources to justify the recognition of a provision. Moreover, it is not possible to make a sufficiently reliable estimate of the amount of the obligations. 8.3 coRP oRat e G oVeRnance The Group has submitted the Declaration of Conformity with the recom- mendations of the Government Commission on the German Corporate Governance Code for financial year 2013 pursuant to Sec. 161 of the Ger- man Stock Corporation Act (AktG). This declaration was published on 6 December 2013 on the Group’s website (www.morphosys.com) and made permanently available to the public. financial statementsNotes 146 8.4 Re seaRcH anD DeVel oPmen t aGReemen t s The Group has entered numerous research and development agreements as part of its partnered research strategy and its proprietary research and development activities. 8.4.1 PAR TNE RE D DISC OVE RY SEGME NT In its commercial partnerships in the Partnered Discovery segment, MorphoSys receives various types of payment which are spread over the term of the agreements or recognized in full as revenue when reaching a predefined target or milestone. These payments include upfront payments upon signature, annual license fees in exchange for access to MorphoSys’s technologies, and payments for funded research to be performed by MorphoSys on behalf of the partner. In addition, MorphoSys is entitled to development-related milestone payments and royalties on product sales for specific antibody compound programs. Prior to financial year 2013, active collaborations with a number of part- ners were already concluded since as the original term of the agreements had expired. However, drug development programs initiated in this active phase are designed so that they may continue at the partner’s operations and thus result in performance-based payments for the achievement of the milestones defined. For more detailed information on individual drug can- didates within the various alliances and limited to the information avail- able to the public, please refer to the section of this annual report entitled the “Research and Development” and to the overview of the Group’s drug pipeline. More detailed information on the Group’s individual research al- liances is available on the Group’s website. Partnerships in the Partnered Discovery segment which were completed before the beginning of 2013, but under which drug development pro- grams were still being pursued, included ( in alphabetical order): Astellas, Bayer HealthCare Pharmaceuticals, Boehringer Ingelheim, Daiichi San- kyo, F. Hoffmann-La Roche, GPC Biotech, Immunogen, Janssen Biotech, Merck & Co., OncoMed Pharmaceuticals, Pfizer, Fibron Ltd. (transfer of the Prochon Biotech Ltd. agreement), and Schering-Plough (a subsidiary of Merck & Co.). Partnerships that were still active in 2013 included (in alphabetical order): ContraFect, GeneFrontier Corporation/Kaneka, and Novartis. Of these partnerships, none of the active collaborations were terminated in 2013. MorphoSys currently is in an arbitral procedure with ContraFect Corp. regarding the contract concluded in 2011. The procedure, which was initi- ated by MorphoSys, is in a very early stage and the Company currently does not assume that any major risks/impacts arise for the Group’s net assets, financial position and results of operations. An alliance with British Heptares Therapeutics Ltd. is a newly concluded cooperation which took place in February 2013. This cooperation should pave the way for novel therapeutic antibodies against membrane-constant G protein coupled-receptors (GPCRs). GPCRs are crucial for a variety of biological processes and diseases. Under the terms of the agreement, Heptares will generate stabilized receptors (StaRs) as antigens for a set of GPCR target molecules proposed by MorphoSys. MorphoSys will subse- quently apply its Ylanthia antibody library to develop therapeutic anti- body compounds against these target molecules. MorphoSys has the right to sublicense third parties the access to these target molecules in conjunc- tion with therapeutic antibody programs. Heptares will receive upfront and research funding payments and will participate in MorphoSys’s future revenues from related license agreements. Heptares also decided to develop a therapeutic antibody against a proprietary GPCR target mole- cule based on MorphoSys’s Ylanthia library. In this context, MorphoSys can receive license fees, milestone payments, and royalties. The Group’s currently most extensive alliance is with Novartis AG. Both parties started working together in 2004, which has led to the creation of several ongoing therapeutic antibody programs against a number of dis- eases. In December 2007, MorphoSys and Novartis significantly expanded their previous relationship and forged one of the most comprehensive stra- tegic alliances in the discovery and development of biopharmaceuticals. The contractually guaranteed annual payments for technology access, in- ternalization charges and R&D services amount to more than € 400 mil- lion over the contractual term of ten years. The total amount of guaranteed payments and probability-weighted performance-based milestones, con- tingent upon the successful clinical development and regulatory approval of several products, could exceed the threshold of € 650 million at the full contractual term of the successful collaboration. In addition to these pay- ments, MorphoSys is also entitled to royalties and/or profit sharing on any future product sales. In November 2012, MorphoSys and Novartis entered into a cooperation agreement on the use of the new Ylanthia technology platform. This exten- sion of the existing strategic cooperation represents the start of the com- mercialization of Ylanthia and should still produce improved antibody candidates that can be developed faster than previously possible. 8.4.2 PROPRIE TARY DE VE LOPME NT SEGME NT In the Proprietary Development segment, the partnerships are geared to- wards the objectives of the Group’s proprietary drug development pro- grams in its core areas of oncology, inflammatory diseases, and infectious diseases. These partnerships include (in alphabetical order): Celgene, Galapagos, GlaxoSmithKline, and Xencor. The cooperation with Absynth Biologics was completed in financial year 2013. This cooperation was started in September 2010 and had been designed to target molecules in the field of infectious diseases. financial statementsNotes147 In June 2013, MorphoSys and Celgene Corporation announced a global agreement on the joint development of the MOR202 cancer program and its co-promotion in Europe. MOR202 is a fully human monoclonal antibody aimed at the CD38 target molecule for the treatment of multiple myeloma and other blood cancers. The compound was in a phase 1/2a clinical trial in 2013 in patients with relapsed/refractory multiple myeloma. MorphoSys and Celgene are co-promoting the further development of MOR202 for the treatment of multiple myeloma and other indications and share the devel- opment costs in a ratio of 1/3 to 2/3. This agreement provided for a upfront payment to MorphoSys in the amount of € 70.8 million, and Celgene ac- quired additional shares in MorphoSys amounting to € 46.2 million. As part of this cooperation, MorphoSys may receive additional development- related and regulatory and revenue-related milestones as well as tiered, double-digit royalties on net sales outside of the co-promotion activities carried out in select European markets. MorphoSys will receive 50 % of the revenues from the co-promotion activities carried out in select European markets. In June 2010, MorphoSys AG and the US-based biopharmaceutical com- pany, Xencor, signed a exclusive global licensing and cooperation agree- ment. As a result of this agreement, MorphoSys receives exclusive global licensing rights to the antibody XmAb5574/MOR208 for the treatment of cancer and other indications. Under the agreement, the companies will jointly conduct a phase 1/2a trial in the US in patients with chronic lym- phocytic leukemia (CLL). MorphoSys is now solely responsible for the fur- ther clinical development after the successful completion of the phase 1 clinical trial. Xencor received an upfront payment of US$ 13 million (€ 10.5 million) from MorphoSys, which was capitalized to the in-licensed research programs. Xencor is entitled to development, regulatory and commercially-related milestone payments as well as tiered royalties on product sales. In financial year 2013, Xencor presented the clinical data of the com- pleted phase 1/2a study. In 2013, MorphoSys continued the clinical phase 2 studies. In November 2008, MorphoSys and Galapagos announced the beginning of a long-term joint drug discovery and development cooperation. The goal of the cooperation is to explore novel mechanisms for the treatment of inflammatory diseases and to develop antibody therapies against these diseases. The agreement covers all activities ranging from the probing of target molecules to the completion of clinical trials for novel therapeutic antibodies. Subsequent to the demonstration of clinical efficacy in humans, the programs will be out-licensed to partners for further development, approval, and commercialization. Both companies provided their core technologies and expertise within the scope of the alliance. Along with the use of its adenovirus-based platform for the exploration of new target molecules for the development of antibodies, Galapagos provided access to already identified target molecules that are associated with bone and joint diseases. MorphoSys provided access to its HuCAL antibody technologies used for generating fully human antibodies directed against these target molecules. Under the terms of agreements, both Galapagos and MorphoSys bear the costs of research and development. In June 2013, MorphoSys announced that it had entered into a global agreement with GlaxoSmithKline (GSK) to develop and commercialize MOR103. MOR103 is a proprietary HuCAL antibody from MorphoSys against the GM-CSF target molecule. Under the terms of the agreement, GSK assumes responsibility for the entire development and commercial- ization of MOR103. Under the agreement, MorphoSys received an immedi- ate upfront payment of € 22.5 million. Depending on the achievement of certain developmental stages, as well as regulatory, commercial, and rev- enue-related milestones, MorphoSys is eligible to receive additional pay- ments from GSK in the amount of up to € 423 million, as well as tiered double-digit royalties on net sales. As the first activity within the context of the Innovation Capital Initiative, in November 2012, MorphoSys announced a partnership with the pri- vately held biopharmaceutical company, Lanthio Pharma, a Dutch com- pany that specializes in the research and development of lantipeptides. Lantipeptides are an innovative class of therapeutic substances demon- strating high target molecule selectivity and improved active substance properties. The LanthioPep technology of Lanthio Pharma is used to iden- tify peptides that act on the disease’s specific point of attack and stabilizes it in the optimal conformation for binding it to this receptor. As part of their collaboration, MorphoSys and Lanthio Pharma will use their tech- nologies to work together to create high quality and diverse lantipeptide libraries. MorphoSys will receive preferential rights to the exclusive in-li- censing of the LanthioPep technology for compound discovery. 8.5 sUBseQUen t eVen t s On 22 January 2014, an updated statutory nominal capital was registered at commercial register B, Munich. The updated nominal capital on 22 Janu- ary 2014 amounts to € 26,220,882, divided into 26,220,882 no-par value bearer shares. Subsequent to the end of financial year 2013, there have not been any significant changes in the industry environment. Other events of material impact on the net assets, financial position, and results of operations have also not occurred since the end of the financial year. financial statementsNotes148 8.6 Re sP onsiBil i t Y s tat emen t We confirm to the best of our knowledge and in accordance with the ap- plicable reporting principles, that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position, and results of operations of the Group, and that the Group Management Report includes a fair review of the development of the business including the results and the position of the Group, together with a description of the principal opportunities and risks associated with the expected develop- ment of the Group. Martinsried, 20 February 2014 Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer financial statementsNotes149 Auditor’s Report Auditor’s Report We have audited the consolidated financial statements prepared by MorphoSys AG, Martinsried, comprising the consolidated income statement, consolidated statement of comprehensive income, con- solidated balance sheet, consolidated statement of changes in stock- holders’ equity, consolidated statement of cash flows and notes, together with the group management report for the business year from January 1, 2013 to December 31, 2013. The preparation of the consolidated financial statements and the group management re- port in accordance with IFRS, as adopted by the EU, the additional requirements of German commercial law pursuant to Article 315a Section 1 German Commercial Code and supplementary provisions of the articles of incorporation are the responsibility of the Parent Company’s Board of Managing Directors. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Article 317 German Commercial Code and Ger- man generally accepted standards for the audit of financial state- ments promulgated by the Institute of Public Auditors in Germany. Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consoli- dated financial statements in accordance with the applicable finan- cial 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 ac- count in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial state- ments and the group management report are examined primarily on a test basis within the framework of the audit. The audit in- cludes assessing the annual financial statements of those entities included in consolidation, the determination of the entities to be included in consolidation, the accounting and consolidation prin- ciples used and significant estimates made by the Company’s Board of Managing Directors, as well as evaluating the overall pre- sentation of the consolidated financial statements and the group management report. We believe that our audit provides a reason- able basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit the consolidated financial statements comply with IFRS as adopted by the EU, the additional requirements of German commercial law pursuant to Article 315a Section 1 German Commercial Code and supplemen- tary provisions of the articles of incorporation and give a true and fair view of the net assets, financial position and results of opera- tions 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, 20 February 2014 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Stefano Mulas Wirtschaftsprüfer (German Public Auditor) Dietmar Eglauer Wirtschaftsprüfer (German Public Auditor) 150 Report of the Supervisory Board Report of the Supervisory Board In this report, the Supervisory Board describes the performance of its functions and its work during the 2013 financial year. Its discussions focused on the financial situation of the Group, the cooperation agreements for its proprietary programs MOR103 and MOR202, investments in the proprietary portfolio and the technologies of the Company as well as strategic perspectives for the Group. Cooperat ion of the ManageMent Board and SuperviSory Board During the 2013 financial year, the Supervisory Board thoroughly performed the duties assigned to it by law, the Articles of Associa- tion, and its own Rules of Procedure. With a few exceptions, the Supervisory Board also took into account the recommendations of the German Corporate Governance Code (hereinafter referred to as “Code”). We regularly advised and continually observed the Management Board in its management of the Company and dealt extensively with the operational and strategic development of the Group. The Management Board fulfilled its duty to inform and fur- nish us with periodic written and verbal reports containing timely and detailed information on all business transactions and events of significant relevance to the Company. These reports were pre- pared by the Management Board in collaboration with the respec- tive departments. In our committee meetings and plenary ses- sions, we had the opportunity to discuss the reports and the proposed resolutions of the Management Board in detail. Our questions on the strategic topics impacting the Company were an- swered with a great level of detail by the Management Board. In this context, the Management Board also submitted the relevant documents in a timely manner. Any deviations from the business plan were thoroughly explained to us. Thus, we were directly involved at an early stage in all decisions which were of fundamen- tal relevance to the Company. A corresponding resolution was passed if the approval of the Supervisory Board for individual actions was required by law, the Articles of Association, or by the Rules of Procedure. The Supervi- sory Board members routinely prepared resolutions for actions of the Management Board requiring Supervisory Board approval on the basis of documentation provided in advance by the Manage- ment Board. If appropriate, the Supervisory Board was supported by the relevant committees and discussed together with the Man- agement Board any proposition up for decision. All matters requir- ing approval were submitted for review to the Supervisory Board on a timely basis. In the time intervals between meetings of the Supervisory Board plenum and the committees, the Chairman of the Supervisory Board regularly exchanged information and ideas with the Man- agement Board, and in particular with its Chief Executive Director, Dr. Simon Moroney. The Supervisory Board Chairman was also kept informed of the current business situation and of any signifi- cant business transactions. In consultation with the Management Board, discussions also took place between the Chairman of the Supervisory Board and members of the Senior Management Group. priMary t opiC S and SuperviSory Board Mee t ingS in f inanC ial year 2013 Nine Supervisory Board meetings were held in financial year 2013, four of which were conducted by telephone. With one excep- tion, all Supervisory Board meetings were fully attended. Outside of the meetings and in urgent cases, the Supervisory Board passed resolutions by written procedure. In addition to the above, in October 2013, a meeting of one and a half days took place between the Management Board and the Supervisory Board which was primarily concerned with the fol- lowing topics: • the Company’s strategic focus; • further development of the Company’s portfolio; • the results of an efficiency review, conducted in 2013, regarding the work of the Supervisory Board. In financial year 2013, the Supervisory Board was particularly focused on the following topics and after a detailed examination and discussion passed resolutions on these topics in the Super- visory Board plenum: • evaluation of the Company’s objectives for financial year 2012 and determination of the Company’s objectives for financial year 2014; • review and update of the Rules of Procedure of the Supervisory Board and its committees; 151 Report of the Supervisory Board • the agenda and recommended resolutions of the 2013 Annual General Meeting; • conclusion of a global license agreement with GlaxoSmithKline for the anti-inflammatory program MOR103; • conclusion of a strategic alliance with Celgene for the develop- ment of the CD38 cancer program MOR202 for patients with multiple myeloma including a resolution for a capital increase from authorized capital via the issue of 797,151 new shares to Celgene as part of the strategic alliance; • execution of a capital increase from authorized capital through the issue of 1,514,066 new shares to international institutional shareholders as part of a private placement; • liquidation of the non-operating subsidiaries Poole Real Estate Ltd. in England and MorphoSys U.S.A., Inc. in the U.S. • review and update of the Management Board’s Rules of Proce- dure and its schedule of responsibilities; • the budget for the 2014 financial year. Additionally, we passed a resolution in the Supervisory Board ple- num on the remuneration of Management Board members for the period from July 1, 2013 to June 30, 2014 based on external bench- marking. We also evaluated the achievement of the agreed-upon, individual bonus targets of the members of the Management Board for 2012 and set their respective individual bonus targets for 2014. We had the appropriateness of the Management Board’s compensa- tion confirmed by an independent remuneration consultant. We also dealt with the conditions of a convertible bond program for members of the Management Board and Senior Management Group and resolved to issue the corresponding convertible bonds to the Management Board members. Moreover, we have prepared and adopted new service agreements for all members of the Man- agement Board. The new service agreements have a term of three years and will take effect July 1, 2014 immediately following the end of the terms of the current contracts. We also discussed and adopted the key performance indicators of the Long-term Incentive Plan for both the Management Board and the Senior Management Group. Furthermore, relating to the 2012 financial year we approved the financial statements and the Management Board’s proposal for appropriation of profits and also dealt with the Corporate Gover- nance Report. The focus of our regular discussions in the Supervisory Board’s plenary meetings were MorphoSys’s revenue and profit develop- ment, financial reports, the progress of the two business segments Partnered Discovery and Proprietary Development, the results and progress of the clinical programs for the development of pro- prietary drugs and the further development strategy as well as the development of new technologies. Finally, we have also kept our- selves regularly informed on the subjects of risk management, the internal control system, and on the results of the internal audit. Confl iC t S of in t ereS t in t he SuperviSory Board In the 2013 financial year, no conflicts of interest in the Super- visory Board occurred. aC t ivi t ieS and Mee t ingS of SuperviSory Board CoMMi t t eeS In order to efficiently perform its duties, the Supervisory Board has established a total of three committees that prepare subjects fall- ing within their respective areas of competence for the Super- visory Board plenum: the Audit Committee, the Remuneration and Nomination Committee, and the Science and Technology Commit- tee. In each Supervisor Board meeting, the committee chairmen report to the Supervisory Board on the work of the committees and the minutes of the committee meetings are made available to all Supervisory Board members. The composition of these committees may be found in the “Declaration on Corporate Management”, which is available on the Company’s web site under the heading Media & Investors > Corporate Governance > Declaration on Corpo- rate Management and can also be found in the Annual Report on pages 74 – 78. All committee meetings were fully attended. The Audit Committee met six times in the 2013 financial year (including twice by telephone). This Committee dealt mainly with accounting issues, the quarterly reports, and the financial state- ments and consolidated financial statements. The Committee discussed these topics with the Management Board and recom- mended their approval to the Supervisory Board. The auditor attended three Audit Committee meetings and informed its mem- bers of the audit results. In addition, the Audit Committee made a recommendation to the Supervisory Board for its proposal at the Annual General Meeting for the election of the independent audi- tor. Furthermore, the Committee deliberated on the investment recommendations of the Management Board, on the implementa- tion of a new accounting, consolidation and financial planning sys- tem, on the risk management system, and on the results of the in- ternal audit carried out in financial year 2013. In addition, the Committee deliberated on the strategy for financial investments of the Company. The Committee also received a report on activities, the potential savings identified and the results of the savings achieved by the Procurement and Logistics department which was established in early 2012. Finally, the Committee dealt with the preparation and the results of the random examination of the con- solidated financial statements for the 2012 financial year per- formed by the German Financial Reporting Enforcement Panel and which resulted in no objections. For efficiency reasons, there is a common Remuneration and Nom- ination Committee, which meets in its respective function. This Committee met on five occasions in financial year 2013 and mainly dealt with the Management Board’s remuneration system and the level of the Management Board’s compensation. In this context, the Committee also commissioned an independent remuneration 152 Report of the Supervisory Board expert with the task of preparing a Management Board remunera- tion report to verify the appropriateness of the Management Board’s remuneration. On the basis of this report, the Committee prepared a recommendation as to the future structure of the Man- agement Board’s compensation and submitted this to the Super- visory Board for approval. The Committee also reviewed the ratio of compensation between the Management Board and the Senior Management Group as well as the staff overall and asked the com- missioned remuneration expert to verify the appropriateness of the vertical compensation ratios, which was confirmed. The Com- mittee also dealt with the individual bonus targets of the Manage- ment Board members as well as with the Company’s objectives and provided respective recommendations to the Supervisory Board for approval. In addition, the Committee discussed the key performance indicators of the Long-term Incentive Plan for the Management Board and the Senior Management Group and pre- pared the resolution on the issuance of convertible bonds to Man- agement Board members. Finally, this Committee prepared the re-appointment of Management Board members and proposed the corresponding new Management Board service agreements and submitted these to the Supervisory Board for approval. The Science and Technology Committee met on five occasions in the 2013 financial year. This Committee mainly attended to the further progress and expansion of the Company’s portfolio, the development of new technologies, and the Company’s drug devel- opment plans including the budget resources necessary for this. Discussed in particular were the start of new development pro- grams, the results of on-going clinical studies for the development of proprietary drug candidates, development plans of current and planned clinical studies, as well as the development strategy. In addition, the Committee also addressed the production of clinical trial materials for the Company’s proprietary drug candidates, the competitive and patent situations of the Company’s proprietary product candidates, and discussed the Management Board’s rec- ommendations on strengthening the portfolio. Corp orat e governanCe The Supervisory Board dealt with the further development of cor- porate governance at MorphoSys while taking into account the amendments made in the Code in May 2013 by the Government Commission German Corporate Governance Code. The detailed Corporate Government Report, including the Declaration on Cor- porate Management according to Sec. 289a HGB (German Com- mercial Code), may be found on the Company’s web site under the heading “Media & Investors > Corporate Governance > Corporate Governance Report” and can also be found in the Annual Report on pages 74 – 91. In addition, we discussed with the Management Board the compli- ance with the Code’s recommendations by the Company and, in justified cases, resolved a few exceptions to the Code’s recommen- dations. On the basis of this consultation, the Management Board and the Supervisory Board submitted the annual Declaration of Conformity on December 6, 2013. The current version of the an- nual Declaration of Conformity can be found in this Annual Report and is permanently available to MorphoSys shareholders on the Company’s web site under the heading Media & Investors > Corpo- rate Governance > Declaration of Conformity. ChangeS in t he CoMp oSi t ion of t he ManageMen t Board and SuperviSory Board There were no changes in the composition of the Management Board or in the Supervisory Board in the reporting period. audi t of t he f inanC ial S tat eMen t S In 2013, the Company commissioned PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft, Munich (hereinafter “PwC”) as its auditor. The audit contract was awarded by the Supervisory Board in accordance with the resolution of the Annual Sharehold- er’s Meeting on June 4, 2013. In accordance with Item 7.2.1 of the Code, the Supervisory Board obtained a declaration of indepen- dence from the auditor in advance. The financial statements and the consolidated financial statements of MorphoSys AG as well as the Management Report and Group Management Report for financial year 2013 were properly audited by PwC and issued with an unqualified Auditor’s Report. The key audit topics for the consolidated and separate financial statements for the 2013 financial year were in particular the deconsolidation of the AbD Serotec segment and the determination of the corre- sponding disposal gain; revenue recognition in the context of com- plex contracts; audit of the long-term share-based compensation program and the convertible bonds granted; the audit of the capital increases executed; the evaluation of the carrying amounts of in- tangible assets; the calculation of current and deferred taxes; the completeness of other provisions for outstanding invoices; and the audit of the completeness and correctness of the Notes. In addition, the auditor confirmed that the Management Board has established an appropriate reporting and monitoring system which is suitable in its design and administration for the early detection of developments that could threaten the Company’s exis- tence. 153 Report of the Supervisory Board The audit reports and documents relating to the financial state- ments and consolidated financial statements were provided on a timely basis to all Supervisory Board members for review. The au- dit report and the consolidated financial statements and the MorphoSys Group’s Management Report were discussed in detail in the Audit Committee meeting on February 27, 2014 and at the Supervisory Board meeting on the same day. The audit report, the financial statements, and the Management Report of MorphoSys AG were discussed in detail in the Audit Committee meeting on March 24, 2014 and at the subsequent meeting of the Supervisory Board on the same day. The auditor attended all meetings concerning the financial statements and reported on the key results of his audit. He also explained the scope and focus of the audit and was avail- able to both the Audit Committee and the Supervisory Board to answer questions and provide further information. The Audit Committee discussed the audit results in detail and rec- ommended to the Supervisory Board that it approve the financial statements prepared by the Management Board. The Supervisory Board also took note of the audit results and, in turn, reviewed the financial statements and management reports in accordance with the statutory provisions. Following its own examination, the Su- pervisory Board has also determined that it sees no cause for ob- jection. The financial statements and consolidated financial state- ments prepared by the Management Board and reviewed by the auditor as well as the Management Report and Group Management Report were subsequently approved by the Supervisory Board. Thus, the financial statements were adopted. In addition, the Su- pervisory Board also reviewed the Management Board’s proposal for the appropriation of profits and agreed with this proposal. reCogni t ion f or dediC at ed ServiCe On behalf of the entire Supervisory Board, I would like to thank the members of the Management Board and the employees of MorphoSys for their achievements and their dedicated service, as well as for the motivational culture experienced this past financial year. Through their efforts, MorphoSys’s portfolio has continued to mature and important milestones have been achieved. Martinsried/Planegg, March 24, 2014 Dr. Gerald Möller Chairman of the Supervisory Board 154 Supervisory Board of MorphoSys AG Supervisory Board of MorphoSys AG DR. GERAL D MÖL L ER C HAIRMAN Heidelberg, Germany DR. GEOF F RE Y VERNON DEP U T Y C HAIRMAN Devon, UK DR. WALT ER BL ÄT T L ER MEMBER Brookline, MA, USA MEMBER OF T HE SUPERVI S OR Y MEMBER OF T HE SUPERVI S OR Y NO O T HER SUPERVI S OR Y B OARD B OARD OF: • 4sigma, Inc.*, Bermuda (Chairman) • Adrenomed AG, Germany (Member) • Defi niens AG, Germany (Chairman) • Genticel SA*, France (Director) • Illumina, Inc.*, USA (Director) • Invendo Medical GmbH*, Germany (Chairman) B OARD OF: • Cornwall Farmers Ltd.*, UK (Deputy Chairman) • Veryan Medical Ltd.*, UK (Non-Executive Chairman) • XL TechGroup, Inc.*, USA (Non-Executive Chairman) • Ziggus Holdings Ltd.*, UK (Non-Executive Chairman) MEMBERSHIP S * Membership in comparable domestic and foreign supervisory boards of commercial enterprises 155 Supervisory Board of MorphoSys AG DR. DANIEL C AMUS MEMBER Geneva, Switzerland DR. MARC C L UZEL MEMBER Paris, France K ARIN EA S T HAM MEMBER Rancho Santa Fe, CA, USA MEMBER OF T HE SUPERVI S OR Y NO O T HER SUPERVI S OR Y B OARD MEMBER OF T HE SUPERVI S OR Y B OARD OF: • Cameco Corp.*, Canada (Director) • SGL Group SE, Germany (Member) • Valéo SA*, France (Member) • Vivendi SA*, France (Member) MEMBERSHIP S B OARD OF: • Geron Inc.*, USA (Director) • Illumina, Inc.*, USA (Director) • Veracyte, Inc.*, USA (Member) 156 Senior Management Group of MorphoSys AG Senior Management Group of MorphoSys AG S A S C HA AL IL OVIC Head of Corporate Finance & Corporate Development MAR T IN C L ARK Head of Purchasing & Logistics K L AUS DE WAL L Head of Accounting & Tax SILVIA DERMIE T ZEL Head of Human Resources DR. GABRIEL E EL BL Head of Regulatory Aff airs DR. MARKUS ENZEL BERGER Head of Discovery Alliances & Technologies DR. CLAUDIA GUTJAHR-LÖSER Head of Corporate Communi- cations & Investor Relations DR. S T EF F EN HEEGER Head of Clinical Research DR. BERND HU T T ER Head of Intellectual Property DR. BARBARA K REBS -P OHL Head of Business Development 157 Senior Management Group of MorphoSys AG DR. L UD GER L ANGER Head of Clinical Operations & Project Management C HARL O T T E L OHMANN General Counsel DR. RAL F O S T END ORP Head of Protein Sciences & CMC L ARA SMI T H-WEBER Head of Controlling DR. S T EFAN S T EIDL Head of Preclinical Development DR. HARAL D WAT ZK A Head of Alliance Management DR. ARMIN WEIDMANN Head of Compliance & Quality Assurance DR. D OMINIK A WEINELT Head of Drug Safety & Pharmacovigilance DR. GÜN T ER WEL L NHOF ER Head of Technical Operations & IT 158 Glossary Glossary C Cagr – Compound annual growth rate F fab format – The antigen binding fragment of the antibody A adC – Antibody drug conjugate; combination of a therapeutic antibody with a second molecule adCC – Antibody-dependent cell-mediated cytotoxicity; a mechanism of cell-mediated immunity whereby an effector cell of the immune system actively destroys a target cell that has been bound by specific antibodies Car-t technology – New therapeutic ap- proach in which immune cells are repro- grammed Cash flow – Key performance indicator in the cash flow statement used to assess the financial and earning capacity adCp – Antibody-dependent cellular phago- cytosis Cd19 – Therapeutic target for the treatment of B-cell lymphomas and leukemias all – Acute lymphoblastic leukemia; a form of cancer of the white blood cells character- ized by excess lymphoblasts antibody – Proteins of the immune system that recognize antigens, thereby triggering an immune response antibody library – A collection of genes that encode corresponding human antibodies antigen – Foreign substance stimulating antibody production; binding partner of anti- body autoimmune disease – Disease caused by an immune response by the body against one of its own tissues, cells or molecules B Biosimilars – Term used to describe official- ly approved new versions of innovator bio- pharmaceutical products, following patent expiration Cd20 – Therapeutic target for the treatment of B-cell lymphomas and leukemias Cd38 – Therapeutic target for the treatment of multiple myeloma and certain leukemias Clinical trial – Clinical trials allow safety and efficacy data to be collected for new drugs or devices; depending on the type of product and the stage of its development, investiga- tors enroll healthy volunteers and/or patients into small pilot studies initially, followed by larger-scale studies in patients Cll – Chronic lymphocytic leukemia; most common type of cancer of the blood and bone marrow, affecting the B-cells CMo – Contract manufacturing organization Cro – Contract research organization Cto – Contract testing organization Bispecific – Antibody consisting of parts from two different antibodies D discounted cash flow analysis – Method of valuing assets, especially for due diligence E eMa – European Medicines Agency fc-engineered – Modification within the Fc part of an antibody to improve effector func- tion fc part – Constant part of an antibody known as the Fc (fragment, crystallizable) region fda – Food and Drug Administration; US federal agency for the supervision of food and drugs G gCp – Good clinical practice; an inter national ethical and scientific quality standard for designing, conducting, recording and report- ing trials that involve the participation of human subjects gdp – Gross domestic product; monetary value of all finished goods and services pro- duced within a country’s borders in one year glp – Good laboratory practice; a formal framework for the implementation of safety tests on chemical products gM-CSf – Granulocyte-macrophage colony- stimulating factor; underlying target molecule of MOR103 program gMp – Good management practice; term for the control and management of manufacturing and quality control testing of pharmaceutical products and medical devices 159 Glossary H huCal – Human Combinatorial Antibody Library; proprietary antibody library enabling rapid generation of specific human antibodies for all applications (explanation of GOLD/ PLATINUM) human – Of human origin M Market capitalization – Value of a com- pany’s outstanding shares, as measured by shares times current price R research reagents – Substances used in research applications M&a – Mergers & Acquisitions Monoclonal antibody – Homogeneous anti- body originating from a single clone, pro- duced by a hybridoma cell rheumatoid arthritis – Inflammatory dis- ease of the joints; abbreviation: RA royalties – Percentage share of ownership of the revenue generated by drug products I ifrS – International Financial Reporting Standards; future EU-wide standards pro- duced by the IASB Multiple myeloma – Type of cancer that de- velops in a subset of white blood cells called plasma cells formed in the bone marrow S Scaffolds – Proteins with antibody - like capabilities inclusion body myositis – Inflammatory myopathy inflammatory diseases – Inflammatory tissue modification, often caused by autoim- mune reactions innovation capital – Investments in start- ups with technologies and product candi- dates being close to MorphoSys’s areas of in- terest iSt – Investigator-sponsored trial; clinical study in which the entire responsibility (sponsor function) is carried by the clinical center and not by a pharmaceutical company iWCll – International workshop on chronic lymphocytic leukemia; selection of criteria for diagnosing chronic lymphocytic leukemia and analyzing clinical study results L lantipeptides – Novel class of therapeutics with high target selectivity and improved drug-like properties life sciences – All branches of science that study all organisms, especially living ones Multiple sclerosis – Disease of the central nervous system characterized by the destruc- tion of nerve fibers Slonomics – DNA engineering and protein library generation platform acquired by MorphoSys in 2010 N nhl – Non-Hodgkin lymphomas; diverse group of blood cancers that include any kind of lymphoma except Hodgkin’s lymphomas P pharmacodynamics – Study of the effects of drugs on the body pharmacokinetics – Determination of the fate of substances administered externally to a living organism preclinic – Preclinical stage of drug develop- ment; tests in animal models as well as in laboratory essays protein – Polymer consisting of amino acids, e. g. antibodies and enzymes psoriasis – A chronic, non-contagious auto- immune disease which affects the skin and joints Small molecules – Low molecular com- pounds T target – Target molecule for thera peutic in- tervention, e.g. on the surface of diseased cells target product profile (tpp) – Summary of specifications on a planned therapeutic product target selectivity – Criteria to describe to what degree an antibody binds to other structures besides its target molecule tecdaX – Index of the 30 largest technology companies listed on the Frankfurt Stock Ex- change toxicity – Poisonousness trifunctional antibodies – Modified anti- body binding three target structures Y ylanthia – The novel next-generation anti- body platform of MorphoSys 160 Index Index A Annual General Meeting Assets Auditor’s report 34 43, 96 149 E Earnings per share EBIT Employees 114, 126 40 35 et seq., 54 et seq., 60, 71 52 44, 98, 113, 117, 133 Environmental protection Equity B Balance sheet Bimagrumab Bio-Rad BYM338 45, 96 et seq., 126 et seq. 17 et seq., 20, 29 et seq., 46 et seq., 71 14, 38, 40, 105, 119, 124, 133, 134 see bimagrumab C Cash flows Cash flow statement Capital expenditure CD38 Change of control CNTO1959 Committees of the Supervisory Board Competition Convertible bonds 76 et seq., 151 et seq. 27 et seq. 32, 79 et seq., 83 et seq., 117 74 et seq. 40 et seq., 113, 121 44 108 Corporate Governance Report Cost of goods sold Credit rating Currency risk D Declaration of Conformity 74 Declarations pursuant to sec. 315, para. 4, of the German Commercial Code (HGB) Directors’ dealings Dividend 87 80 et seq. 72 F Financial analysis 2014 Financial calendar Forecast 38 et seq. Back cover 69 et seq. 43 94 29, 43 19 86, 89, 137 et seq. see guselkumab G Gantenerumab Glossary GM-CSF Goodwill Guselkumab 17 et seq., 30 158 19, 21, 30 et seq. 112 et seq., 116 18, 30, 71 H Human resources 38, 54, 60, 71 I Income taxes Information required under takeover law Intellectual property 112, 114 87 et seq. 53, 61, 96, 116 K Key figures Back cover L Letter to the shareholders Liabilities Liquidity 11 et seq. 41, 44, 97, 111 32, 43, 71 et seq. M Management Board 6 et seq. 15 Management of the Group 13 et seq. Management report 53 Manufacturing license Market capitalization 32 Milestone payments 16 et seq., 21, 24, 26, 31, 44, 46, 59, 69, 72, 113, 120, 146 et seq. 16, 19, 20 et seq., 30 et seq., 38, 45 et seq., 53, 63, 69, 71 et seq., 147, 150 16 et seq., 19 et seq., 30, 32, 38, 45 et seq., 53, 60, 63, 69, 71, 72, 89, 119, 147, 150 et seq. 17, 20 et seq., 30 et seq., 46 et seq., 53, 69, 71, 119, 132 MOR208 MOR202 MOR103 N Net Profit 94 et seq., 98, 114, 118, 125 O Operating expenses 39 et seq., 113 et seq. 114, 145 62 et seq. 69 et seq. Operating leases Opportunities Outlook P Patents Pipeline Procurement Provisions 53, 61, 96, 116 Front cover 52 97, 117, 134 Q Quality management 53, 90 161 Index R Remuneration report 83 Remuneration, Supervisory Board 86, 144 Remuneration, Management Board 83, 143 Supervisory Board Report 74 29 et seq., 121 Research and development 148 Responsibility statement 38 Revenues Revenue recognition 113 58 et seq. Risks Risk management 58 T Taxes Trading volumes Training W WACC WpHG 40 32 54 112, 132 34, 80 S Sales, general and Segment Proprietary Development administrative expenses Segment Partnered Discovery 40 14, 24, 39, 47, 69, 71 et seq., 119, 146 14, 31, 38, 69, 119, 146 118 et seq. 14, 38, 119 Segment reporting Segment Research Antibodies Shareholdings, Management and Supervisory Boards 79 et seq., 141 et seq. 33 Share price development Share, repurchase 82 50 Social responsibility Statements of changes in shareholders’ equity Stock options 98 32, 79 et seq., 83 et seq., 136 et seq. 68, 147 14 et seq., 105 74 et seq. 50 et seq. Subsequent events Subsidiaries Supervisory Board Sustainability 162 List of Figures List of Figures 1: 2: 3: 4: 5: 6: 7: Organizational Structure of the MorphoSys Group Revenues of the MorphoSys Group by Segment Clinical Studies with MorphoSys Antibodies Total Market for Antibodies Sales Potential of Proprietary Programs Performance of the MorphoSys Share in 2013 Comparison of the MorphoSys Share Price Development with Benchmark Indices between 2009 and 2013 Headcount of the MorphoSys Group Employee Absence Rates Employees by Gender Labor Turnover Rate Seniority 8: 9: 10: 11: 12: 13: Revenue of the MorphoSys Group by Region 14: Revenues Partnered Discovery and Proprietary Development 15: Distribution of R&D Expenses 16: Selected R&D Expenses 17: Occupational Safety at MorphoSys 18: Quality Management System at MorphoSys 19: 20: 21: Description of Major Risks at MorphoSys 22: Rise of R&D Budget for Proprietary Drug Development in 2014 23: Risk-Based Internal Audit Plan 24: 25: Patent Lifetime for Key Platform Technologies The Risk and Opportunity Management System at MorphoSys The MorphoSys Compliance System Legal Structure of the MorphoSys Group 22 22 23 23 23 33 33 36 36 37 37 37 48 48 49 49 56 57 57 65 66 73 90 91 105 163 List of Tables List of Tables 1: Top 5 Monoclonal Antibody Drugs 2: Market Data on Selected Partnered Programs in Clinical Phases 2 and 3 3: Proprietary Clinical Product Candidates 4: Development of Financial Performance Indicators 5: Sustainable Development of Key Performance Indicators (SD-KPIs) at MorphoSys 6: Capital Expenditure on Fixed Assets in 2013 7: Key Data for the MorphoSys Share 8: Analyst Recommendations 9: Distribution of R&D Expenses 10: Result of Discontinued Operations 11: Multiple-Year Overview – Income Statement 12: Multiple-Year Overview – Financial Situation 13: Multiple-Year Overview – Balance Sheet Structure 14: Comparison of Projected and Actual Business Performance 15: Composition of the Supervisory Board 16: 17: 18: Directors’ Dealings in 2013 19a: Compensation of the Management Board in 2013 19B: Compensation of the Management Board in 2012 20: Compensation of the Supervisory Board Participation of Supervisory Board Members Related Parties 16 18 21 25 26 29 34 35 39 41 42 42 45 46 75 77 79 81 84 84 86 164 Imprint Imprint Concept and design 3st kommunikation GmbH, Mainz photos Andreas Pohlmann, Munich translation Klusmann Communications, Niedernhausen editorial office Friedrichs & Friends, Hamburg typesetting and lithography Knecht GmbH, Ockenheim printer Westdeutsche Verlags- und Druckerei GmbH, Mörfelden-Walldorf Copy deadline 24 March 2014 (except financial statements) MorphoSys ag Lena-Christ-Str. 48 82152 Martinsried/Planegg Germany Phone: +49-89-89927-0 Fax: Email: info@morphosys.com www.morphosys.com +49-89-89927-222 Corporate Communications and investor relations Phone: +49-89-89927-404 Fax: Email: +49-89-89927-5404 investors@morphosys.com This financial report is also published in German and is available for download from our website (PDF, HTML). HuCAL®, HuCAL GOLD®, HuCAL PLATINUM®, CysDisplay®, RapMAT®, arYla®, Ylanthia® and 100 billion high potentials® are registered trademarks of MorphoSys AG. Slonomics® is a registered trademark of Sloning BioTechnology GmbH, a subsidiary of MorphoSys AG. Key Figures (IFRS) MorphoSys Group (in million €, if not stated otherwise) Results1 Revenues Cost of Goods Sold R&D Expenses S, G&A Expenses Personnel Expenses (Excluding Stock-Based Compensation) Capital Expenditure Depreciation of Tangible Assets Amortization of Intangible Assets EBITDA EBIT Net Profit/(Loss) Net Profit/(Loss) from Discontinued Operations Bal ance shee t 2 Total Assets Cash, Marketable Securities and Other Financial Assets Intangible Assets Total Liabilities Stockholders’ Equity Equity Ratio (in %) MoRphosys shaRe 12/31/13 12/31/12 12/31/11 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 12/31/05 12/31/04 78.0 0.0 49.2 18.8 27.4 5.6 1.5 3.3 16.4 9.9 13.3 51.9 0.0 37.7 12.1 24.1 1.8 1.7 3.5 7.9 2.5 1.9 82.1 0.0 55.9 14.9 27.7 2.9 1.7 3.8 15.5 9.8 8.2 87.0 7.3 46.9 23.2 29.6 13.8 2.1 4.0 19.2 13.1 9.2 81.0 6.7 39.0 23.9 26.1 3.8 1.6 3.8 18.1 12.8 9.0 71.6 7.1 27.6 20.5 21.5 3.8 1.5 4.8 21.9 16.5 13.2 62.0 7.9 22.2 24.8 18.8 12.0 1.5 3.7 13.3 8.3 11.5 53.0 8.0 17.5 21.4 18.1 4.0 1.5 3.4 10.3 5.4 6.0 6.0 –0.4 0.0 – – – – – 33.5 2.5 14.0 10.8 10.8 0.7 0.9 2.7 8.6 5.3 4.7 – 22.0 0.95 11.45 7.55 9.1 1.7 0.7 2.0 3.2 0.5 0.3 – 447.7 224.3 228.4 209.8 206.1 203.3 184.7 127.8 80.1 55.8 390.7 35.1 95.5 352.1 79 % 135.74 134.44 108.44 35.0 22.3 202.2 90 % 66.0 31.3 197.1 86 % 69.2 23.9 185.9 89 % 135.1 17.4 32.2 173.9 84 % 137.9 19.7 41.3 162.0 80 % 106.9 22.3 39.2 145.5 79 % 66.0 14.8 27.8 100.1 78 % 53.6 12.4 16.1 64.0 80 % 37.2 12.8 16.4 39.4 71 % Number of Shares Issued 26,220,882 23,358,228 23,112,167 22,890,252 22,660,557 22,478,787 22,160,259 20,145,966 18,077,589 16,316,556 Group Earnings/(Loss) per Share, Diluted (in €) Dividend (in €) Share Price (in €) peRsonnel Data 0.54 - 55.85 0.08 - 29.30 0.36 - 17.53 0.40 - 18.53 0.40 - 17.04 0.59 - 18.75 0.53 - 16.10 0.31 - 18.12 0.28 - 13.77 0.02 - 12.70 Total Group Employees (Number) 299 4213 446 464 404 334 295 279 172 132 1 Due to the agreement between Bio-Rad and MorphoSys, signed in December 2012, to acquire substantially all of the AbD Serotec segment, for the years 2013, 2012 and 2011, revenues, income and expenses in connec- tion with the transaction are shown in the line item “Net Profit/(Loss) from Discontinued Operations”. All other line items consist of amounts from continuing operations. 2 Due to the agreement between Bio-Rad and MorphoSys, signed in December 2012, to acquire substantially all of the segment AbD Serotec, for the year 2012, the line item “Total Assets” includes current and non-current assets in connection with the transaction in the amount of € 40.9 million. For the year 2012, the line item “Total Liabilities” includes current and non-current liabilities in connection with the transaction in the amount of € 3.7 million. 3 The total amount includes 135 employees from the discontinued operations of AbD Serotec. 4 Including cash reserves of the discontinued AbD Serotec segment in the amount of € 5.3 million. 5 Excludes stock-based compensation. F I N A N C I A L C A L E N D A R 28 February 2014 p u b l i c at i o n o f 2 0 1 3 y e a r - e n d r e s u lt s 29 april 2014 p u b l i c at i o n o f 2 0 1 4 t h r e e m o n t h s’ r e p o r t 23 may 2014 2 0 1 4 a n n u a l g e n e r a l m e e t i n g i n m u n i c h 28 July 2014 p u b l i c at i o n o f 2 0 1 4 s i x m o n t h s’ r e p o r t 7 november 2014 p u b l i c at i o n o f 2 0 1 4 n i n e m o n t h s’ r e p o r t morphosys ag Lena-Christ-Str. 48 82152 Martinsried / Planegg Germany Phone: +49-89-89927- 0 Fax: www.morphosys.com +49-89-89927-222 

Continue reading text version or see original annual report in PDF format above