MorphoSys Annual Report 2015

Plain-text annual report

Annual Report 2015 Engineering the Medicines of Tomorrow M O S T A D V A N C E D D E V E L O P M E N T S TA G E Y R E V O C S I D C I N I L C E R P 1 2 3 E S A H P E S A H P E S A H P T E K R A M Product Pipeline MorphoSys’s Product Pipeline, as of December 31, 2015 M O S T A D V A N C E D D E V E L O P M E N T S TA G E Y R E V O C S I D C I N I L C E R P 1 2 3 E S A H P E S A H P E S A H P T E K R A M P R O G R A M / P A R T N E R I N D I C AT I O N Bimagrumab/BYM338 ( Novartis) sIBM (musculoskeletal) Guselkumab/CNTO1959 (Janssen/J&J) Psoriasis Gantenerumab (Roche) Alzheimer’s disease MOR208 (not partnered) CLL, NHL MOR202 (not partnered) Multiple myeloma MOR103/GSK3196165 ( GlaxoSmithKline) Rheumatoid Arthritis (RA) Anetumab Ravtansine/BAY94-9343 (Bayer) Mesothelioma BHQ880 (Novartis) Multiple myeloma BPS804 (Mereo/Novartis) Brittle bone syndrome CNTO3157 (Janssen/J&J) Inﬂ ammation CNTO6785 (Janssen/J&J) Inﬂ ammation LFG316 (Novartis) Eye diseases LJM716 (Novartis) Cancer Tarextumab/OMP-59R5 (OncoMed) Solid tumors VAY736 (Novartis) Inﬂ ammation MOR209/ E S 414 (Emergent) Prostate cancer P R O G R A M / P A R T N E R I N D I C AT I O N BAY1093884 (Bayer) Hemophilia BI-836845 (BI) Solid tumors NOV-7 (Novartis) Eye diseases NOV-8 (Novartis) Inﬂ ammation NOV-9 (Novartis) Diabetic eye diseases NOV-10 (Novartis) Cancer NOV-11 (Novartis) Blood disorders PF-05082566 (Pﬁ zer) Solid tumors Vantictumab/OMP-18R5 (OncoMed) Solid tumors MOR106 ( Galapagos) Inﬂ ammation MOR107/ L P2 (not partnered) Fibrosis 25 partnered programs Various Immuno-oncology program (Merck Serono) Cancer Immuno-oncology program (Immatics) Cancer 6 MOR programs Various 43 partnered programs Various L E G E N D : m o r p r o g r a m o u t - l i c e n s e d m o r p r o g r a m pa r t n e r e d d i s c o v e r y p r o g r a m Product Pipeline MorphoSys’s Product Pipeline, as of December 31, 2015 P R O G R A M / P A R T N E R I N D I C AT I O N Bimagrumab/BYM338 ( Novartis) sIBM (musculoskeletal) Guselkumab/CNTO1959 (Janssen/J&J) Psoriasis MOR103/GSK3196165 ( GlaxoSmithKline) Rheumatoid Arthritis (RA) Anetumab Ravtansine/BAY94-9343 (Bayer) Gantenerumab (Roche) Alzheimer’s disease MOR208 (not partnered) CLL, NHL MOR202 (not partnered) Multiple myeloma Mesothelioma BHQ880 (Novartis) Multiple myeloma BPS804 (Mereo/Novartis) Brittle bone syndrome CNTO3157 (Janssen/J&J) Inﬂ ammation CNTO6785 (Janssen/J&J) Inﬂ ammation LFG316 (Novartis) Eye diseases LJM716 (Novartis) Cancer Tarextumab/OMP-59R5 (OncoMed) Solid tumors VAY736 (Novartis) Inﬂ ammation MOR209/ E S 414 (Emergent) Prostate cancer P R O G R A M / P A R T N E R I N D I C AT I O N BAY1093884 (Bayer) Hemophilia BI-836845 (BI) Solid tumors NOV-7 (Novartis) Eye diseases NOV-8 (Novartis) Inﬂ ammation NOV-9 (Novartis) Diabetic eye diseases NOV-10 (Novartis) Cancer NOV-11 (Novartis) Blood disorders PF-05082566 (Pﬁ zer) Solid tumors Vantictumab/OMP-18R5 (OncoMed) Solid tumors MOR106 ( Galapagos) Inﬂ ammation MOR107/ L P2 (not partnered) Fibrosis 25 partnered programs Various Immuno-oncology program (Merck Serono) Immuno-oncology program (Immatics) Cancer Cancer 6 MOR programs Various 43 partnered programs Various L E G E N D : m o r p r o g r a m o u t - l i c e n s e d m o r p r o g r a m pa r t n e r e d d i s c o v e r y p r o g r a m M O S T A D V A N C E D D E V E L O P M E N T S TA G E Y R E V O C S I D C I N I L C E R P 1 2 3 E S A H P E S A H P E S A H P T E K R A M M O S T A D V A N C E D D E V E L O P M E N T S TA G E Y R E V O C S I D C I N I L C E R P 1 2 3 E S A H P E S A H P E S A H P T E K R A M 103 Programs in Total 1 13 89 Out-licensed Program Proprietary Programs Partnered Discovery Programs 25 Clinical Product Candidates 10 in Phase 1 12 in Phase 2 3 in Phase 3 In addition, 8 proprietary programs and 43 partnered discovery programs are in discovery stage, 2 proprietary and 25 partnered discovery programs are in preclinic. o i l o f t r o P – E N I L E P I P T C U D O R P 103 Programs in Total 1 13 89 Outlicensed Program Proprietary Programs Partnered Discovery Programs o i l o f t r o P – E N I L E P I P T C U D O R P 25 Clinical Product Candidates 10 in Phase 1 12 in Phase 2 3 in Phase 3 In addition, 8 proprietary programs and 43 partnered discovery programs are in discovery stage, 2 proprietary and 25 partnered discovery programs are in preclinic. Engineering the Medicines of Tomorrow Our mission is to build the most valuable pipeline of biopharmaceuticals in the biotechnology industry. We are driven by an ambition to develop excep- tional new treatments for patients suffering from serious diseases. Innovative technologies and smart development strategies are central to our approach. Success is based on our people living the Company’s core values. By focusing on inno vation, collaborating closely across disciplines, and moving quickly, we can make the medicines of tomorrow a reality. CONTENTSMorphoSys at a glance Figures, data, facts (as of December 31, 2015) P R O G R A M S I N discovery 51 P R O G R A M S I N phase 1 P R O G R A M S I N preclinic 27 P R O G R A M S I N phase 2 P R O G R A M S I N phase 3 12 10 3 >50 active clinical studies >10,000 patients have been and are going to be treated in the near future with MorphoSys antibodies in clinical trials >35 partnerships with leading pharmaceutical and biotechnology companies as well as research organizations Increase in R&D expenses F R O M 2 0 0 5 T O 2 015 I N T O TA L 479% € million 56.0 € million 78.7 € million 13.6 2005 2014 2015 13.5 years average period from project start through to market approval Project start Market approval 4.5 years discovery and preclinic 9 years clinical development 365 employees F ROM 29 nations 52 % oncology Drug candidates in clinical development F O R T H E F O L L O W I N G I N D I C AT I O N S 27 % autoimmune and inflammatory diseases 11 % musculoskeletal diseases 6 % eye diseases 4% neurological diseases CONTENTS Nearly one million people worldwide were diagnosed with blood cancer in 2015. our rese arch: fighting blood cancer Learn more in our Online Magazine CONTENTSAntibodies attack blood cancer cells in a targeted manner. our antibody mor 2 0 8: mode of action Learn more in our Online Magazine CONTENTS New developments in the treatment of blood cancer bene fiting patients. the mor 2 0 8 antibody in clinical de v elopment Learn more in our Online Magazine CONTENTS 10 A N N U A L R E P O R T 2 0 1 5 Contents Contents A N N U A L R E P O R T 2 0 1 5 Contents 11 t h e c o m pa n y Management Board of MorphoSys AG Letter to the Shareholders g r o u p m a n ag e m e n t r e p o r t Operations and Business Environment Analysis of Net Assets, Financial Position and Results of Operations Outlook and Forecast Shares and the Capital Market Sustainable Business Development Risk and Opportunity Report Statement on Corporate Governance and Corporate Governance Report Subsequent Events S T N E T N O C 12 12 19 33 41 45 48 53 61 83 f i n a n c i a l s tat e m e n t s Consolidated Statement of Income (IFRS) 86 87 Consolidated Statement of Comprehensive Income (IFRS) Consolidated Balance Sheet (IFRS) 88 Consolidated Statement of Changes in Stockholders’ Equity (IFRS) 90 92 Consolidated Statement of Cash Flows (IFRS) 94 Notes 132 Responsibility Statement a d d i t i o n a l i n f o r m at i o n Auditor’s Report Report of the Supervisory Board Supervisory Board of MorphoSys AG Senior Management Group of MorphoSys AG Glossary List of Figures and Tables Imprint 133 134 138 140 142 145 146 12 T H E C O M P A N Y Management Board of MorphoSys AG Management Board of MorphoSys AG DR. SIMON MORONE Y Chief Executive Officer T H E C O M P A N Y Management Board of MorphoSys AG 13 » Excellent progress over the last JENS HOL S T EIN Finanzvorstand year means that today our pipeline is broader and more mature than ever before. The first therapeutic antibodies are nearing market approval, bringing us closer to a productbased revenue stream. Meanwhile, our proprietary develop ment portfolio is expanding and the two most advanced programs are approaching decisive stages of clinical development. Across our entire pipeline, we see many pro grams with outstanding therapeu tic potential, to the benefit of all of our stakeholders, not least the patients who they will help. « Letter to the Shareholders 12 T H E C O M P A N Y Management Board of MorphoSys AG Management Board of MorphoSys AG Letter to the Shareholders I am very pleased to present our 2015 Annual Report following a year of solid progress for MorphoSys. Comprising 103 programs in 60 active clinical trials, our product pipeline – the primary source of the Company’s value – is broader and more mature than ever before. The first therapeutic antibodies are nearing market approval, bringing us closer to a product-based revenue stream that we expect to grow significantly in the years ahead. Meanwhile, our propri- etary development portfolio is expanding and the two most advanced programs are approach- ing the decisive stage of clinical development. Across our entire pipeline, we see many pro- grams which have the potential to transform the treatment of the diseases they address, to the benefit of all of our stakeholders, not least, the patients who they will help. DR. SIMON MORONE Y Vorstandsvorsitzender MOR208 is our most advanced proprietary program and our key focus. We are developing this antibody to treat B cell malignancies and are aiming to offer patients in this area of substantial unmet medical need a new, effective and durable treatment option. In the past year, MOR208 has delivered compelling phase 2 clinical data in two indications, confirming the progress we are making and the outstanding potential of the program. Based on our findings, we have initiated a campaign of several clinical studies to drive MOR208’s development forward in the settings where it can make the greatest difference to current medical practice. At the center of this campaign are two studies in diffuse large B cell lymphoma, one of which we expect to transition directly into phase 3 in 2017. This could become the first pivotal study within our proprietary development activities and would mark yet another major milestone in the history of MorphoSys. Chronic lymphocytic leukemia is a second focus indication for MOR208, spe- cifically in patients who no longer respond to ibrutinib, for whom the prognosis is very poor. In both of these indications, the medical need is great, and the options are few. T H E C O M P A N Y Management Board of MorphoSys AG 13 MOR202, our second clinical antibody for blood cancers, also made encouraging progress in the reporting year. Despite an unexpected setback in March 2015 when our partnership with Celgene ended, we reported very encouraging clinical data in December. Based on all the effi- cacy and safety data we have collected so far, MOR202 is shaping up to be a genuine advance in the treatment of multiple myeloma. JENS HOL S T EIN Finanzvorstand The two most advanced programs in our proprietary development portfolio were augmented in 2015 by a third clinical candidate, MOR209/ES414. This bispecific antibody is being devel- oped to treat prostate cancer, in partnership with the U.S. biotechnology company Emergent BioSolutions. Shortly after MOR209/ES414 entered the clinic, our acquisition of Lanthio Pharma brought us MOR107, a product of their highly innovative lanthipeptide platform, which we aim to take into clinical trials in 2016. Furthermore, we are fast approaching the start of clinical development of MOR106, an exciting antibody from our collaboration with Galapagos. By year-end 2016, our Proprietary Development segment could comprise six clinical programs, which would be an all-time high, and validation of our efforts to build a sustainable thera- peutic portfolio. As we advance our proprietary programs, we are nearing the first market introductions of prod- ucts emerging from our partnered discovery alliances. Novartis’s bimagrumab could become the first therapeutic antibody to reach the market from our proprietary HuCAL platform. In the first half of this year, we expect decisive phase 3 data with this agent in sporadic inclusion body myositis – a rare disease for which there is no effective treatment. We are also looking for- ward to phase 3 results for guselkumab, a HuCAL antibody for the treatment of psoriasis, being developed by Janssen. As I write this, there are 89 programs in our Partnered Discovery segment, 12 of which are in phase 2 or phase 3 clinical development. 12 T H E C O M P A N Y Management Board of MorphoSys AG Management Board of MorphoSys AG MorphoSys has entered a very exciting stage of its corporate development. Over the past several years you have seen us progress from being one of the leading providers of antibody technology to become a drug discovery and development organization with a highly attractive therapeutic portfolio. Our proprietary development programs, led by our cancer antibody MOR208, are now approaching an important stage of development and now is the time to scale our investment to ensure that we capture the full value of our portfolio. Our long-term ambition is to become a fully-integrated, commercial biopharmaceutical company marketing its own products. We are convinced that this is how we can best build substantial value for our stakeholders and are well-positioned to execute this strategy. DR. SIMON MORONE Y Vorstandsvorsitzender Since the beginning of 2016, MorphoSys’s shares and those of many other biotechnology companies have been affected by the tremendous volatility that has hit stock markets globally. Nevertheless, MorphoSys, with financial resources of EUR 298 million at the end of the reporting year, is in a position of strength. Our solid financial foundation, combined with our well-known disciplined approach to investment, provides a firm basis from which we can build future value. T H E C O M P A N Y Management Board of MorphoSys AG 13 We owe our success to the efforts of our highly dedicated employees. I would like to thank them for their consistent hard work on behalf of the MorphoSys Management Board and all of our important stakeholders, including our partners, investors, and, increasingly, patients. I would also like to thank you, our shareholders, for your continued support. I am sure you will join JENS HOL S T EIN me in wishing our Company a successful 2016. Finanzvorstand DR. SIMON MORONEY Chief Executive Officer 12 T H E C O M P A N Y Management Board of MorphoSys AG Management Board of MorphoSys AG » With financial resources of close to EUR 300 million at yearend 2015, MorphoSys continues to operate from a position of strength. Our solid financial base has been the foundation for MorphoSys’s successful develop ment over the years, allowing us to continue making targeted investments and grow the Com pany’s value without losing sight of our prudent and efficient use of resources. « DR. SIMON MORONE Y Vorstandsvorsitzender T H E C O M P A N Y Management Board of MorphoSys AG 13 JENS HOL S T EIN Chief Financial Officer 14 T H E C O M P A N Y Management Board of MorphoSys AG DR. MARL IE S SPROL L Chief Scientific Officer T H E C O M P A N Y Management Board of MorphoSys AG 15 » During 2015, our product pipeline DR. ARND T S CHO T T EL IUS Chief Development Officer became broader and more mature than ever before. Our partnered programs are on the cusp of reap ing the first rewards of our long time efforts. In 2016, Novartis’s bimagrumab and Janssen’s gusel kumab will be the first HuCAL anti bodies to deliver phase 3 data, and we may see the first MorphoSys antibody reach the market before yearend – another exciting year is lying ahead. « 14 T H E C O M P A N Y Management Board of MorphoSys AG DR. MARL IE S SPROL L Chief Scientific Officer » In 2015 we generated encouraging clinical data with our proprietary cancer agents. We are now expand ing these programs and moving them, stepbystep, towards ap proval and commercial viability. At the center of this campaign will be the start of three combination studies with our most advanced antibody MOR208 in DLBCL and CLL in 2016, one of which is expected to progress directly into a pivotal study next year, marking yet an other major milestone in the history of MorphoSys. « T H E C O M P A N Y Management Board of MorphoSys AG 15 DR. ARND T S CHO T T EL IUS Chief Development Officer 16 G R O U P M A N A G E M E N T R E P O R T Contents Group Management Report G R O U P M A N A G E M E N T R E P O R T Contents 17 1 Operations and Business Environment 2 Analysis of Net Assets, Financial Position and Results of Operations 3 Outlook and Forecast 4 5 6 Risk and Opportunity Report 7 Shares and the Capital Market Sustainable Business Development Statement on Corporate Governance and Corporate Governance Report Subsequent Events 8 19 33 41 45 48 53 61 83 1234567818 G R O U P M A N A G E M E N T R E P O R T During the 2015 financial year, MorphoSys vigorously pursued its strategy of building a broad and advanced pipeline of valuable biopharmaceutical compounds. The Company’s emphasis is in- creasingly shifting towards the development of proprietary drug candidates. During the financial year we presented promising results from our antibody programs MOR208 and MOR202 in several hematological indications. Our partnered discovery programs also delivered positive performance and generated solid success-based revenues. Two of these compounds are expected to deliver decisive clinical data in 2016, which could lead to the first regulatory approvals of antibodies based on MorphoSys’s technology. After the end of the partnership with Celgene in March 2015 MorphoSys continued the clinical development of MOR202 independently and went on to publish compelling clinical data by year-end. We have initiated an ambitious investment program for 2016 so that we can further accelerate the clinical development of our proprietary candi- dates MOR208, MOR202 and MOR209/ES414 and begin clinical development of MOR106 and MOR107. This will mark another step forward on our path to becoming a fully integrated, commercial biopharmaceutical company with our own products on the market. 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 19 Operations and Business Environment Strategy and Group Management S T RAT EGY AND OBJEC T IVES MorphoSys’s goal is to build the most valuable biopharmaceutical pipeline in the biotech industry. In line with this goal, the Com- pany is successfully transitioning from a technology provider to a drug development organization. The Company’s powerful technol- ogy platform for generation of therapeutic antibodies has led to more than 100 drug candidates in development, three of which are in phase 3 studies. The majority of development programs are con- ducted in partnership with pharmaceutical and biotechnology companies. The revenues generated from these partnerships are used to expand MorphoSys’s proprietary development portfolio. This segment, which currently comprises 14 programs, is gaining in importance and builds on top of an even bigger pipeline of pro- grams generated on behalf of partners. With so many development programs ongoing, any potential setbacks that may arise during the lengthy drug development process can be compensated and the value of our technology can be maximized. The Proprietary Development segment is focused on developing therapeutic agents based on the Company’s proprietary technol- ogy platforms as well as candidates in-licensed from other compa- nies. During clinical development, the Company decides whether and at which point it will pursue a partnership for later develop- ment and commercialization. The drug candidate can then be either completely out-licensed or developed further in cooperation with a pharmaceutical or biotechnology company (co-development). In se- lected cases, individual projects may be developed on a proprietary basis until they are ready for commercialization. In the Partnered Discovery segment, MorphoSys’s role is limited to generating antibody* candidates for partners in the pharmaceutical and biotechnology industries. MorphoSys receives contractual pay- ments including license fees for technologies and funded research as well as success-based milestone payments and royalties* on product sales. The funds generated from these partnerships sup- port the Company’s long-term business model and help fund its proprietary development activities. 1 Both segments are based on the Company’s innovative technolo- gies. The foremost growth drivers are HuCAL*, the industry’s most successful antibody library* measured by the number of clinical development candidates it has produced and the follow-on plat- form Ylanthia*, which is today’s largest known antibody library based on antibody Fab fragments. Through the acquisition of the biopharmaceutical company Lanthio Pharma B.V. in the reporting year, MorphoSys added an innovative and complementary plat- form of therapeutic peptides. Additionally, the Company uses its financial resources to expand and deepen its technological base, for example through in-licensing. *S E E G L O S S A R Y – page 142 Along with investing in proprietary development and new technol- ogies, MorphoSys supplements its long-term growth by in-licens- ing. The in-licensed programs MOR208 and MOR209/ES414 and the acquisition of Lanthio Pharma are good examples of how we are successfully implementing this strategy. The Company’s goal is to maximize the portfolio’s full value by investing in proprietary drug candidates while maintaining finan- cial discipline and strict cost control to ensure enterprise value growth. GROUP MANAGEMEN T AND PERF ORMANCE INDIC AT ORS MorphoSys uses both financial as well as non-financial indicators to steer the Group, monitor the success of strategic decisions and give the Company the opportunity to take corrective action promptly when necessary. Additionally, management monitors and evaluates selected early indicators to thoroughly assess a pro ject’s progress and act quickly if there are any undesirable developments. 234567820 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 FINANCIAL PERFORMANCE INDICATORS Our financial performance indicators are described in detail in the section “Analysis of Net Assets, Financial Position and Results of Operations.” Revenues and earnings before interest and taxes (EBIT) are the key financial indicators used to measure operational business performance. The performance of the segments is re- viewed monthly and the current financial year’s budget is revised and updated on a quarterly basis. The Company prepares a mid- term plan once a year that encompasses the following three years. A thorough cost analysis is made regularly and is used to monitor the Company’s adherence to financial targets and make compari- sons with previous periods. 01 T A B L E Development of Financial Performance Indicators 1 MorphoSys’s business performance is influenced by factors such as milestone and license payments, research and development ex- penses, other operating cash flows*, existing liquidity resources, expected cash inflows and working capital. These indicators are also routinely analyzed and evaluated with special attention being given to the statement of income, existing and future liquidity and available investment opportunities. The net present value of investments is calculated using discounted cash flow models*. in million € 2015 2014 2013 2012 2011 MORPHOSYS G ROUP Revenues from continuing operations2 EBIT (Earnings before interest and taxes) from continuing operations3 PROPRIE TARY DE VELOPMENT Segment revenues Segment result PARTNERED DISC OVERY Segment revenues Segment result 106.2 17.2 59.9 10.7 46.3 20.4 64.0 (5.9) 15.0 (18.4) 49.0 25.9 78.0 9.9 26.9 (0.5) 51.0 25.4 51.9 2.4 7.0 (11.0) 44.7 23.0 82.1 9.8 2.4 (32.2) 79.3 55.7 1 Differences due to rounding 2 Revenues from discontinued operations 2013 – 2011: 2013: € 0.6 million, 2012: € 17.7 million, 2011: € 18.7 million 3 Contains unallocated expenses (see also item 3.3 of the Notes): 2015: € 13.9 million, 2014: € 13.4 million, 2013: € 15.0 million, 2012: € 9.6 million, 2011: € 13.7 million NON - FINANCIAL PERFORMANCE INDICATORS Non-financial performance indicators are equally important for managing the Company. For reporting purposes, MorphoSys uses the Sustainable Development Key Performance Indicators (SD KPIs*) recommended by the SD KPI standard that include success in pro- prietary research and development (SD KPI 1) and achievements in partnered programs as benchmarks for the commercialization rate (SD KPI 2). In the past five years, there have been no product recalls, fines or settlements as the result of product safety or prod- uct liability disputes (SD KPI 3). *S E E G L O S S A R Y – page 142 To secure its lead in the market for therapeutics, MorphoSys relies on the steady progress of its product pipeline, not only in terms of the number of therapeutic antibody candidates – 103 at the end of the reporting year – but also based on the progress of its develop- ment pipeline and prospective market potential. Since successful products are based on superior technologies, another key perfor- mance indicator is the progress of the Company’s technology de- velopment. In addition to the quality of our research and develop- ment, our professional management of partnerships is also at the heart of our success. This refers to new contracts as well as the continued strategic development of existing alliances. Details on these performance indicators can be found in the section “Re- search and Development and Business Development” (page 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 21 The non-financial performance indicators described in the section “Sustainable Business Development” (page 48) are also used to manage the MorphoSys Group successfully. 02 T A B L E Sustainable Development of Key Performance Indicators (SD KPIs) at MorphoSys (December 31) PROPRIE TARY DE VELOPMENT (NUMBER OF INDIVIDUAL ANTIBODIES) Programs in Discovery Programs in Preclinic Programs in Phase I Programs in Phase II1 TOTAL1 PARTNERED DISC OVERY (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 (IN MILLION € ) R&D Expenses on behalf of Partners Proprietary Development Expenses Expenses for Technology Development TOTAL 1 Thereof one out-licensed program: MOR103, out-licensed to GSK 2015 2014 2013 2012 2011 8 2 1 3 14 43 25 9 9 3 89 5 2 1 2 10 40 25 8 8 3 84 3 0 1 2 6 37 22 6 8 2 75 2 0 1 2 5 34 20 8 6 1 69 2 0 2 1 5 30 24 9 6 0 69 22.1 54.1 2.5 78.7 19.6 33.5 2.9 56.0 17.5 27.5 4.2 49.2 16.0 18.1 3.6 37.7 19.1 33.9 2.9 55.9 LE ADING INDICATORS MorphoSys monitors a variety of leading indicators for the macro- economic environment, the industry and the Company itself on a monthly basis. At the Company level, economic data is gathered on the progress of the segments’ individual programs. MorphoSys uses general market data from external financial reports as macro- economic leading indicators. The Company carefully reviews these reports and looks for information on industry transactions, changes in the legal environment and the availability of research funds. For active collaborations, there are joint steering committees that meet regularly to update and monitor the programs’ progress. These ongoing reviews give the Company a chance to intervene early when there are any negative developments and provide it with information on expected milestones and related payments well in advance. Partners in non-active collaborations report to MorphoSys regularly in writing so that we can follow the progress of ongoing therapeutic programs. 2345678 22 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 business development area uses market analyses to get an indication of the market’s demand for new technologies. By con- tinuously monitoring the market, MorphoSys can quickly respond to trends and requirements and initiate its own activities or partnerships. Before a therapeutic product is developed, a target product profile* (TPP) is created and continually updated during the development process. This approach gives an early indication of the properties the product needs to be successful in the market and answers im- portant questions, such as the level of efficacy to be achieved and whether development should be focused on improving the safety profile or changing the drug candidate’s dosage form. The TPP also includes a detailed description of how the product could be posi- tioned in the market and the relevant patient groups. By continu- ously monitoring the criteria and their fulfillment, the Company can always take the key factors into account during product devel- opment and respond promptly to any changes. Business Activities DRUG DEVEL OPMEN T MorphoSys develops drugs using its own research and develop- ment (R&D) and in cooperation with pharmaceutical and biotech- nology partners. Our core business activity is developing new treatments for patients suffering from serious diseases. The Com- pany possesses one of the broadest pipelines in the biotechnology industry and had a total of 103 individual therapeutic antibody programs at the end of 2015, three of which are in phase 3 trials. T ECHNOL OGIES MorphoSys has developed a number of technologies that provide direct access to fully human* antibodies for treating diseases. One of the most widely known MorphoSys technologies is HuCAL, which is a collection of billions of fully human antibodies and a system for their optimization. Another is Ylanthia, which rep- resents the next generation of antibody technology and is cur- rently the largest known antibody library in Fab format* based on an innovative concept for generating highly specific and fully human antibodies. MorphoSys expects Ylanthia to influence the pharmaceutical industry’s development of therapeutic antibodies in this decade and beyond. Slonomics* gives MorphoSys a patented, fully automated technology for gene synthesis and modification for generating highly diverse gene libraries in a controlled process. The lanthipeptide* technology developed by Lanthio Pharma B.V., and fully acquired in the reporting year, is a valuable addition to our existing library of antibodies and opens up new possibilities for discovering potential drugs based on stabilized peptides. ›› S E E F I G U R E 01 – Revenues of the MorphoSys Group by Segment ›› S E E F I G U R E 0 2 – MorphoSys’s Product Pipeline PROPRIE TARY DEVEL OPMEN T An important goal of MorphoSys is to increase enterprise value through the proprietary development of innovative antibodies, focusing on cancer and inflammatory diseases. ONC OLOGY The ability of monoclonal antibodies* to bind specific antigens* has led to their dominant role in targeted cancer therapies. Referring to a study by IMS Institute for Healthcare Informatics expenditure in oncology is expected to amount up to US$ 83 – 88 billion world- wide in 2016 and thus represent the largest therapy class in the healthcare sector. Within this sector innovative biological thera- pies show an important option for cancer treatment. The Company is currently investing in the clinical development of three cancer programs: MOR208, MOR202 and MOR209/ES414. MOR208 is directed against the target* molecule CD19*, which is of particular interest for many B cell malignancies. The market research firm Decision Resources expects the therapeutic market for the B cell malignancy non-Hodgkin’s lymphoma (NHL*) to reach approximately US$ 10 billion in 2022. Current biological therapies for the treatment of B cell malignancies, including the blockbuster rituximab (trade name Rituxan®), obinutuzumab (trade name Gazyva®), and ofatumumab (trade name Arzerra®) are di- rected against the CD20* target molecule. Because the target molecule CD19 is expressed on a larger number of B cell subtypes in comparison to CD20, the CD19 antibodies may offer a better therapeutic approach. The activity of MOR208 is enhanced by a change in the constant Fc part* of the antibody, which leads to higher antibody-dependent cell-mediated cytotoxicity (ADCC*) and an improvement in antibody-dependent cellular phagocytosis (ADCP*). The most advanced therapeutic approach against CD19 is the bispecific* antibody blinatumomab (trade name Blincyto®), which is approved for acute lymphoblastic leukemia (ALL*). Other clinical programs directed against the same target molecule use alternative approaches to increase the antibody’s efficacy, for ex- ample, by coupling with toxic substances or changing the anti- body’s glycosylation pattern. Another therapeutic approach against CD19 is the CAR-T* technology. This therapy extracts a certain type of immune cells (T cells*) from the patients’ blood that are then altered outside of the body so that they can be better directed to the patients’ tumor cells and kill them. When these T cells are later re-administered into the patients’ blood via infusion, they subsequently bind and destroy targeted cancer cells. Alternative approaches using small molecules* are also being developed in the field of B cell malignancies. *S E E G L O S S A R Y – page 142 01 F I G U R E T O TA L MOR202 is currently being developed for the treatment of mul- tiple myeloma* (MM) and is directed against the CD38* target Revenues of the MorphoSys Group by Segment (in million €) molecule. After MorphoSys regained its rights to MOR202 from Celgene in March 2015, the Company continued developing MOR202 independently. Although MM is a relatively small area of oncology in terms of frequency of occurrence, the MM market has shown impressive growth. Significant achievements in clinical practice and the introduction of effective new treatments have helped the market expand. However, there is still untapped market potential in terms of therapy forms that have better survival rates and lower 82.11 side effects compared to the compounds currently available. De- spite significantly higher survival rates, the disease is seldom cur- able and a majority of patients experience a relapse. This has in- creased the attractiveness of alternative treatments, such as those 79.3 targeting CD38. The approval by the FDA* (Food and Drug Admin- istration) in November 2015 of the CD38 antibody daratumumab (trade name Darzalex®) validated this treatment approach. 78.01 51.91 51.0 49.0 44.7 7.0 2.4 26.9 2011 In March 2015, MorphoSys and Emergent BioSolutions announced the commencement of a phase 1 clinical study to investigate the safety, tolerability and clinical activity of MOR209/ES414 in pa- tients suffering from metastatic castration-resistant prostate can- cer (mCRPC*). MOR209/ES414 is a bispecific anti-PSMA/anti-CD3* antibody based on Emergent’s ADAPTIR™ platform (modular pro- tein technology). The immunotherapeutic protein* activates the body’s T cell immune response against prostate cancer cells bear- ing prostate specific membrane antigen (PSMA), an antigen com- monly over-expressed in this tumor. The anti-CD3 binding do- mains of the molecule selectively bind to the T cell receptor on cytotoxic T cells, which become activated when the anti-PSMA binding domains crosslink them to the cancer cells. Prostate cancer is the most commonly occurring cancer in men with approximately 900,000 new cases annually worldwide. As preclinical* in vitro and in vivo studies have shown, MOR209/ES414 redirects T cell cytotoxicity towards prostate cancer cells expressing PSMA. 2013 2012 partnered disc ov ery proprie tary de v elopment 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 23 INFL AMMATORY AND AUTOIMMUNE DISE ASES* Chronic inflammatory and autoimmune diseases affect millions of patients worldwide and impose an enormous social and economic burden. The IMS Institute for Healthcare Informatics (IMS Health) expects the global market for the treatment of autoimmune dis- eases to reach US$ 33 – 36 billion in the year 2016. 64.0 106.2 MOR103, the antibody fully out-licensed by MorphoSys to GlaxoSmithKline (GSK) in 2013, targets GM-CSF* (granulocyte macrophage colony-stimulating factor) – a central factor in the emergence of inflammatory diseases, such as rheumatoid arthri- tis* (RA). The market for drugs treating rheumatoid arthritis has tremendous commercial potential and biotechnologically produced drugs already comprise the majority of this market’s total reve- nue. The overall RA market is growing steadily and Datamonitor expects that it will reach US$ 18 billion in the year 2020. MOR103 has the potential to become the first antibody in the anti-GM-CSF antibody class of drugs. Comparable drugs currently in develop- ment are targeted against the GM-CSF target molecule or the GM- CSF receptor. 46.3 59.9 New mechanisms for treating inflammatory diseases are being 15.0 examined in cooperation with the Belgian company Galapagos NV with the goal of developing new antibody therapies to treat these diseases. MOR106 is the first drug candidate from this coopera- tion to enter preclinical development and is scheduled to enter clinical development in 2016. Under this alliance both partners contribute their core technologies and expertise and have an equal share in research and development costs and all future revenues. 2015 2014 The acquisition of the Dutch pharmaceutical company Lanthio Pharma B.V. in May 2015 enhanced MorphoSys’s proprietary port- folio with the addition of MOR107 (formerly LP2), a novel lanthi- peptide in development for diabetic nephropathy* and fibrotic dis- eases. MOR107 has demonstrated potent angiotensin II type 2 (AT2) receptor-dependent activity in preclinical in vivo studies. *S E E G L O S S A R Y – page 142 1 Group revenues from continuing operations; Sale of AbD Serotec to Bio-Rad was announced in 2012, and therefore respective revenues were reclassifi ed as discontinued operations in accordance with IFRS 5 234567822 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’s Product Pipeline (as of December 31, 2015) The business development area uses market analyses to get an indication of the market’s demand for new technologies. By con- tinuously monitoring the market, MorphoSys can quickly respond to trends and requirements and initiate its own activities or partnerships. 02 F I G U R E P R O G R A M / P A R T N E R I N D I C AT I O N S Bimagrumab ( Novartis) sIBM* (RESILIENT) sIBM* (extension study) sIMB* (long-term study) Hip fracture surgery Cachexia (COPD) Sarcopenia (dose-making) Sarcopenia (extension study) Before a therapeutic product is developed, a target product profile* (TPP) is created and continually updated during the development process. This approach gives an early indication of the properties the product needs to be successful in the market and answers im- portant questions, such as the level of efficacy to be achieved and whether development should be focused on improving the safety profile or changing the drug candidate’s dosage form. The TPP also includes a detailed description of how the product could be posi- Guselkumab (Janssen/J&J) Psoriasis (VOYAGE 1) tioned in the market and the relevant patient groups. By continu- Psoriasis (VOYAGE 2) ously monitoring the criteria and their fulfillment, the Company Psoriasis (NAVIGATE) can always take the key factors into account during product devel- Pustular or erythrodermic psoriasis opment and respond promptly to any changes. Moderate to serious Plaque Psoriasis Palmoplantar pustulosis Active psoriatic arthritis Business Activities Gantenerumab (Roche) Mild Alzheimer’s disease (Marguerite RoAD) Prodromal Alzheimer’s disease Genetically predisposed individuals (DIAN) DRUG DEVEL OPMEN T MorphoSys develops drugs using its own research and develop- ment (R&D) and in cooperation with pharmaceutical and biotech- nology partners. Our core business activity is developing new treatments for patients suffering from serious diseases. The Com- pany possesses one of the broadest pipelines in the biotechnology industry and had a total of 103 individual therapeutic antibody programs at the end of 2015, three of which are in phase 3 trials. MOR208 ( Not partnered) NHL* CLL* MOR202 ( Not partnered) Multiple myeloma MOR103/GSK3196165 ( GlaxoSmithKline) Rheumatoid arthritis* (RA) Anetumab Ravtansine (Bayer HealthCare) Mesothelioma Advanced malignancies (Japan) Solid tumors Advanced solid tumors BHQ880 (Novartis) Multiple myeloma (renal insuﬃ ciency) Smoldering multiple myeloma T ECHNOL OGIES MorphoSys has developed a number of technologies that provide direct access to fully human* antibodies for treating diseases. One of the most widely known MorphoSys technologies is HuCAL, which is a collection of billions of fully human antibodies and a system for their optimization. Another is Ylanthia, which rep- resents the next generation of antibody technology and is cur- rently the largest known antibody library in Fab format* based on an innovative concept for generating highly specific and fully human antibodies. MorphoSys expects Ylanthia to influence the pharmaceutical industry’s development of therapeutic antibodies in this decade and beyond. Slonomics* gives MorphoSys a patented, fully automated technology for gene synthesis and modification for generating highly diverse gene libraries in a controlled process. The lanthipeptide* technology developed by Lanthio Pharma B.V., and fully acquired in the reporting year, is a valuable addition to our existing library of antibodies and opens up new possibilities for discovering potential drugs based on stabilized peptides. ›› S E E F I G U R E 01 – Revenues of the MorphoSys Group by Segment ›› S E E F I G U R E 0 2 – MorphoSys’s Product Pipeline BPS804 (Mereo/Novartis) Osteoporosis Hypophosphatasia (HPP) Brittle bone disease (OI) CNTO6785 (Janssen/J&J) COPD* Rheumatoid arthritis* (RA) CNTO3157 (Janssen/J&J) Asthma Safety/Pharmacokinetics LFG316 (Novartis) Age related macular degeneration Geographic atrophy (combo with CLG561) Panuveitis Paroxysmal nocturnal hemoglobinuria PH AS E 1 2 3 M1 PROPRIE TARY DEVEL OPMEN T An important goal of MorphoSys is to increase enterprise value through the proprietary development of innovative antibodies, focusing on cancer and inflammatory diseases. P R O G R A M / P A R T N E R I N D I C AT I O N S PH AS E 1 2 3 M1 ONC OLOGY The ability of monoclonal antibodies* to bind specific antigens* has LJM716 (Novartis) led to their dominant role in targeted cancer therapies. Referring ESCC*, combo with BYL719 HER2+ cancer to a study by IMS Institute for Healthcare Informatics expenditure (combo with BYL719 & trastuzumab) in oncology is expected to amount up to US$ 83 – 88 billion world- HER2+ cancer, combination with trastuzumab wide in 2016 and thus represent the largest therapy class in the Tarextumab (OncoMed) healthcare sector. Within this sector innovative biological thera- Pancreatic cancer (ALPINE) pies show an important option for cancer treatment. The Company Small cell lung cancer (PINNACLE) is currently investing in the clinical development of three cancer Solid tumors programs: MOR208, MOR202 and MOR209/ES414. MOR209/ E S 414 ( Emergent BioSolutions) Metastatic, castration-resistant prostate cancer (mCRPC*) VAY736 (Novartis) Pemphigus Vulgaris MOR208 is directed against the target* molecule CD19*, which is Primary Sjögren’s syndrome Primary Sjögren’s syndrome of particular interest for many B cell malignancies. The market research firm Decision Resources expects the therapeutic market for the B cell malignancy non-Hodgkin’s lymphoma (NHL*) to reach approximately US$ 10 billion in 2022. Current biological therapies for the treatment of B cell malignancies, including the BAY1093884 (Bayer HealthCare) blockbuster rituximab (trade name Rituxan®), obinutuzumab (trade Bleeding disorders (hemophilia) name Gazyva®), and ofatumumab (trade name Arzerra®) are di- BI-836845 (Boehringer Ingelheim) rected against the CD20* target molecule. Because the target Solid tumors, Japanese patients (EGFR*) Mutant Non-small Cell Lung Cancer molecule CD19 is expressed on a larger number of B cell subtypes Breast cancer in comparison to CD20, the CD19 antibodies may offer a better Castration-resistant Prostate Cancer therapeutic approach. The activity of MOR208 is enhanced by a (CRPC) + enzalutamide change in the constant Fc part* of the antibody, which leads to Various solid cancer Advanced solid tumors higher antibody-dependent cell-mediated cytotoxicity (ADCC*) and an improvement in antibody-dependent cellular phagocytosis (ADCP*). The most advanced therapeutic approach against CD19 is the bispecific* antibody blinatumomab (trade name Blincyto®), which is approved for acute lymphoblastic leukemia (ALL*). Other clinical programs directed against the same target molecule use alternative approaches to increase the antibody’s efficacy, for ex- ample, by coupling with toxic substances or changing the anti- body’s glycosylation pattern. Another therapeutic approach against CD19 is the CAR-T* technology. This therapy extracts a certain type of immune cells (T cells*) from the patients’ blood that are then altered outside of the body so that they can be better directed to the patients’ tumor cells and kill them. When these T cells are PF-05082566 (Pfi zer) Solid tumors, combination with avelumab later re-administered into the patients’ blood via infusion, they Solid tumors, NHL (+rituximab) subsequently bind and destroy targeted cancer cells. Alternative Solid tumors, combination with approaches using small molecules* are also being developed in PD-1 inhibitor MK-3475 the field of B cell malignancies. Advanced solid tumors, combination with mogamulizumab *S E E G L O S S A R Y – page 142 NOV-9 (Novartis) Diabetic eye disease NOV-10 (Novartis) Cancer NOV-11 (Novartis) Blood disorders NOV-7 (Novartis) Eye disease NOV-8 (Novartis) Infl ammation Vantictumab (OncoMed) Solid tumors Breast cancer Pancreatic cancer Non-small-cell lung carcinoma L E G E N D : p r o p r i e ta r y p r o g r a m o u t - l i c e n s e d p r o g r a m pa r t n e r e d p r o g r a m 1 m a r k e t *S E E G L O S S A R Y – page 142 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 23 MOR202 is currently being developed for the treatment of mul- tiple myeloma* (MM) and is directed against the CD38* target molecule. After MorphoSys regained its rights to MOR202 from Celgene in March 2015, the Company continued developing MOR202 independently. Although MM is a relatively small area of oncology in terms of frequency of occurrence, the MM market has shown impressive growth. Significant achievements in clinical practice and the introduction of effective new treatments have helped the market expand. However, there is still untapped market potential in terms of therapy forms that have better survival rates and lower side effects compared to the compounds currently available. De- spite significantly higher survival rates, the disease is seldom cur- able and a majority of patients experience a relapse. This has in- creased the attractiveness of alternative treatments, such as those targeting CD38. The approval by the FDA* (Food and Drug Admin- istration) in November 2015 of the CD38 antibody daratumumab (trade name Darzalex®) validated this treatment approach. In March 2015, MorphoSys and Emergent BioSolutions announced the commencement of a phase 1 clinical study to investigate the safety, tolerability and clinical activity of MOR209/ES414 in pa- tients suffering from metastatic castration-resistant prostate can- cer (mCRPC*). MOR209/ES414 is a bispecific anti-PSMA/anti-CD3* antibody based on Emergent’s ADAPTIR™ platform (modular pro- tein technology). The immunotherapeutic protein* activates the body’s T cell immune response against prostate cancer cells bear- ing prostate specific membrane antigen (PSMA), an antigen com- monly over-expressed in this tumor. The anti-CD3 binding do- mains of the molecule selectively bind to the T cell receptor on cytotoxic T cells, which become activated when the anti-PSMA binding domains crosslink them to the cancer cells. Prostate cancer is the most commonly occurring cancer in men with approximately 900,000 new cases annually worldwide. As preclinical* in vitro and in vivo studies have shown, MOR209/ES414 redirects T cell cytotoxicity towards prostate cancer cells expressing PSMA. INFL AMMATORY AND AUTOIMMUNE DISE ASES* Chronic inflammatory and autoimmune diseases affect millions of patients worldwide and impose an enormous social and economic burden. The IMS Institute for Healthcare Informatics (IMS Health) expects the global market for the treatment of autoimmune dis- eases to reach US$ 33 – 36 billion in the year 2016. MOR103, the antibody fully out-licensed by MorphoSys to GlaxoSmithKline (GSK) in 2013, targets GM-CSF* (granulocyte macrophage colony-stimulating factor) – a central factor in the emergence of inflammatory diseases, such as rheumatoid arthri- tis* (RA). The market for drugs treating rheumatoid arthritis has tremendous commercial potential and biotechnologically produced drugs already comprise the majority of this market’s total reve- nue. The overall RA market is growing steadily and Datamonitor expects that it will reach US$ 18 billion in the year 2020. MOR103 has the potential to become the first antibody in the anti-GM-CSF antibody class of drugs. Comparable drugs currently in develop- ment are targeted against the GM-CSF target molecule or the GM- CSF receptor. New mechanisms for treating inflammatory diseases are being examined in cooperation with the Belgian company Galapagos NV with the goal of developing new antibody therapies to treat these diseases. MOR106 is the first drug candidate from this coopera- tion to enter preclinical development and is scheduled to enter clinical development in 2016. Under this alliance both partners contribute their core technologies and expertise and have an equal share in research and development costs and all future revenues. The acquisition of the Dutch pharmaceutical company Lanthio Pharma B.V. in May 2015 enhanced MorphoSys’s proprietary port- folio with the addition of MOR107 (formerly LP2), a novel lanthi- peptide in development for diabetic nephropathy* and fibrotic dis- eases. MOR107 has demonstrated potent angiotensin II type 2 (AT2) receptor-dependent activity in preclinical in vivo studies. *S E E G L O S S A R Y – page 142 234567824 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 INFLUENCING FAC TORS Many countries strive to provide proper medical care for the public as the need for new forms of therapy continues to grow in the face of demographic change. Cost-cutting could slow down the indus- try’s development. As part of their austerity measures, govern- ments in Europe, the United States and Asia have stepped up their healthcare restrictions and are closely monitoring drug reimbursement. Generic competition, which is already common in the field of small molecule drugs, now poses an increasing challenge to the biotech- nology industry because of drug patent expiries. The technical barriers for generic biopharmaceuticals, so-called biosimilars*, will remain high. Nevertheless, many drug manufacturers, particu- larly those from Europe and Asia, are now penetrating this market and placing more competitive pressure on established biotech- nology companies. In the US, the approval of biosimilars as an alternative form of treatment has been very slow; however, they are gaining more attention because of increasing pressure in the healthcare sector to reduce costs. According to industry experts, the global market for biosimilars is expected to reach US$ 20 bil- lion in 2025. PAR T NERED DISCOVERY In the Partnered Discovery segment, MorphoSys applies technolo- gies for the research, development and optimization of therapeutic antibodies as drug candidates in partnership with pharmaceutical and biotechnology companies. While the development costs are borne by the respective partners, MorphoSys profits from research financing, milestone payments and potential royalties on the sales of products from successful programs. The Company’s largest alliance to date is the strategic alliance formed in 2007 with Novartis – a pharmaceutical partner with a growing pipeline of biotechnologically developed drugs. This alli- ance was expanded in 2012 through a supplementary cooperation agreement under which the companies will collaborate on creating therapeutic antibodies using MorphoSys’s next generation anti- body platform Ylanthia in addition to HuCAL. Developing drugs with partners gives MorphoSys the opportunity to be involved in indications where it lacks proprietary expertise and typically would not pursue a program on its own. Examples of this include: The HuCAL antibody bimagrumab, being developed by MorphoSys’s partner Novartis for sporadic inclusion body myositis* (sIBM*) and other muscle-wasting disorders, is one of the most promising treatments in MorphoSys’s pipeline. This antibody is currently in a phase 3 trial and received “breakthrough therapy designation” from the US Food and Drug Administration (FDA*) and “orphan drug designation” (in Europe and the USA) for sIBM. Novartis announced that it may file for regulatory approval of this antibody in 2016. Guselkumab, a HuCAL antibody against psoriasis* developed by MorphoSys’s partner Janssen, is currently in six phase 3 clinical trials* and in a phase 2 trial in psoriatic arthritis. Data are ex- pected from the first completed phase 3 trials in 2016, which could lead to a filing for regulatory approval in 2016. *S E E G L O S S A R Y – page 142 The HuCAL antibody gantenerumab, developed by MorphoSys’s partner Roche, adds a promising treatment for Alzheimer’s dis- ease to MorphoSys’s pipeline. This compound is being investi- gated in three clinical studies to see if there is a positive effect from intervening at an early stage in the disease’s progression. In one of these studies, Roche is evaluating the compound in around 1,000 patients with mild Alzheimer’s disease. This study is ongo- ing as an open label study, in which higher doses of gantenerumab are being tested. A second trial with roughly 800 patients with prodromal Alzheimer’s disease was converted into an open-label study after being discontinued temporarily at the end of 2014. A further study, run by the Dominantly Inherited Alzheimer Net- work (DIAN), is assessing the safety, tolerability and biomarker efficacy in individuals with a genetic predisposition to Alzheimer’s disease. There are currently no drugs that fundamentally improve the course of Alzheimer’s disease, which means there is still a very high medical need for new treatment options in this indication. 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 25 03 T A B L E Market Data from Selected Phase 3 Partnered Programs Program name MorphoSys partner Indication Market potential Bimagrumab/BYM338 Novartis Sporadic inclusion body myositis, cachexia, sarcopenia, muscle wastage after hip fracture surgery Sporadic inclusion body myositis: • Slowly progressive degenerative inflammatory disease of the skeletal muscles with very low prevalence of 4.9 to 9.3/1,000,000 (orphan disease) • No curative therapy available • Indication’s peak sales potential: US$ 400 to 890 million Cachexia: • Emaciation through degradation of muscle and fatty tissue • Indication’s peak sales potential: US$ 1.0 to 2.0 billion Peak sales potential of all indications in clinical testing (sporadic inclusion body myositis, cachexia, sarcopenia, muscular atrophy after hip fracture surgery): US$ 2.6 to 4.9 billion Guselkumab/CNTO1959 Janssen/J&J Psoriasis, psoriatic arthritis Psoriasis: • Lifelong disease with high morbidity; has a negative influence on the quality of life • Prevalence: 16 million patients1 in 2015 Psoriatic arthritis: • Inflammatory joint disease, usually accompanied by psoriasis • up to 30 % of psoriasis patients are affected Peak sales potential (psoriasis, psoriatic arthritis): US$ 2.8 billion 1 Seven key markets: USA, Japan, France, Germany, Italy, Spain and Great Britain Sources: Defined Health, Decision Resources, Medscape 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. The activities of the Group’s two business segments are based on leading-edge proprietary technologies. The Proprietary Development segment combines all of the Company’s proprietary research and development of therapeutic compounds. MorphoSys initially develops its proprietary and in-licensed com- pounds independently with the option to bring them into partner- ships or out-license them. The second business segment, Partnered Discovery, uses MorphoSys’s cutting-edge technologies to make human antibody-based therapeutics on behalf of partners in the pharmaceutical industry. This segment encompasses all business activities related to these collaborations and most of the techno- logical development. INNOVAT ION C API TAL* MorphoSys started its Innovation Capital initiative to combine the traditional investment approach of an industry partner with the cooperative elements of compound development as flexibly as pos- sible. Under this initiative, the Company intends to invest selec- tively in promising start-ups who have products and technologies that interest MorphoSys. Activities are focused on antibodies, technologies to generate antibody-like structures (scaffolds*), pro- teins and peptides. The initiative set the stage for the acquisition of the Dutch pharma- ceutical company Lanthio Pharma B.V. in May 2015. MorphoSys had initially acquired a 19.98 % interest in the company in 2012 under the Innovation Capital initiative. In 2014, MorphoSys exer- cised its option and acquired the technology and, in this past financial year, went on to purchase all of the remaining shares in Lanthio Pharma B.V., which is specialized in the research and development of lanthipeptides*. Lanthipeptides are a novel class of therapeutics demonstrating high target molecule selectivity* and improved compound properties. This transaction adds MOR107 (formerly LP2) to MorphoSys’s proprietary portfolio and three other earlier-stage molecules. MOR107 is a novel lanthipeptide with potential to treat diabetic nephropathy and fibrotic diseases. *S E E G L O S S A R Y – page 142 2345678 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 MorphoSys AG acquired the remaining interest in the Dutch bio- pharmaceutical company Lanthio Pharma B.V., headquartered in Groningen, the Netherlands, for a price of € 20.0 million on May 7, 2015. Prior to the acquisition, the Company held 19.98 % of Lanthio Pharma B.V. The company Lanthio Pharma B.V. wholly owns LanthioPep B.V., which is also headquartered in Groningen. These companies were consolidated by the MorphoSys Group for the first time as of May 7, 2015. Poole Real Estate Ltd. was liquidated and the remaining assets were distributed to MorphoSys AG as the sole shareholder on December 9, 2015. In the 2015 financial year, the Group maintained both the regis- tered office of the parent company, MorphoSys AG, in Martinsried near Munich and the registered office of Lanthio Pharma B.V. and LanthioPep B.V. in Groningen, the Netherlands. The Martinsried office houses the central Group functions such as accounting, con- trolling, human resources, legal, patents, corporate communica- tions and investor relations, as well as the Proprietary Develop- ment and Partnered Discovery segments. The subsidiary Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. in Groningen, the Netherlands, are largely autonomous and independently managed. These subsidiaries have their own research and development labo- ratories, general management and administration functions, as well as human resources, accounting and business development departments. Research and Development and Business Development 2015 BUSINESS PERF ORMANCE MorphoSys strongly focuses its business activities on advancing its therapeutic programs in research and development to increase the Company’s enterprise value. The clinical development of pro- prietary drug candidates is at the core of the Company’s focus. In this context, the Company strives to gain access to novel disease- specific target molecules, advanced product candidates and inno- vative technology platforms to expand its proprietary development pipeline. MorphoSys also participates in the development success of its partners’ therapeutic programs. The first of these antibodies based on MorphoSys’s technology are approaching the market. To MorphoSys, the fundamental measures for success in pharma- ceutical research and development include: • industry partnerships which create a broad development pipe- line, leverage the MorphoSys technology platform and/or enable the commercialization of its therapeutic programs • focused progression of its development programs • clinical and preclinical results • regulatory guidance of health authorities to pursue commercial- ization of individual therapeutic programs • robust patent protection to secure MorphoSys’s market position Additional information on consolidated companies can be found in the Notes (Item 2.2.1). COL L ABORAT IONS AND PAR T NERSHIP S New contracts and contract terminations in 2015 almost exclu- sively involved the Proprietary Development segment. L EGAL S T RUC T URE OF T HE MORPHOSY S GROUP : GROUP MANAGEMEN T AND SUPERVISION MorphoSys AG, a German stock corporation listed in the Prime Standard segment of the Frankfurt Stock Exchange, is the parent company of the MorphoSys Group. In accordance with the German Stock Corporation Act, the Company has a dual management struc- ture with the Management Board as the governing body whose four members are appointed and supervised by the Supervisory Board. The Supervisory Board is elected by the Annual General Meeting and currently consists of six members. Detailed infor- mation concerning the Group’s management and control and its corporate governance principles can be found in the Corporate Governance Report (page 67). The Senior Management Group, made up of 20 managers from various departments, supports the Management Board of MorphoSys AG. At the end of March 2015, MorphoSys and Celgene Corporation agreed to end the existing co-development and co-promotion agreement for MOR202. Following this termination, MorphoSys regained the rights to MOR202. We expect lucrative opportunities to open up – such as a new partnership – provided that sufficiently competitive clinical efficacy and safety data can be generated. The Company is no longer entitled to receive royalties and milestone payments announced under this alliance. MorphoSys is continuing the compound’s clinical development as planned in a phase 1/2a study in patients with relapsed/refractory multiple myeloma with MOR202 alone and in combination with the compounds lenalidomide and pomalidomide, which are provided to MorphoSys by Celgene. Active Clinical Studies with MorphoSys Antibodies (31 December) 03 F I G U R E P HA SE 1 2 3 24 16 27 24 29 19 12 8 12 8 11 6 1 3 2011 2012 2013 2014 2015 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 27 MorphoSys concluded transactions with several industry part- ners in 2015, including the purchase of the remaining shares in the Dutch biopharmaceutical company Lanthio Pharma B.V. for € 20.0 million in May. This purchase added new development candidates to the Company’s proprietary portfolio, including LP2 for various fibrotic diseases. Following the acquisition, LP2 was renamed MOR107. MOR107 is a lanthipeptide with potential to treat diabetic nephropathy and fibrotic diseases. Lanthipeptides are a novel class of therapeutics demonstrating high target mole- cule selectivity and drug-like properties. Their high specificity is expected to open up new therapeutic applications with potential in indications that are not usually targeted with antibodies. Prior to the acquisition, MorphoSys held 19.98 % of Lanthio Pharma, which it had acquired under its Innovative Capital initiative in 2012 as part of Lanthio Pharma’s Series A funding. In August 2015, MorphoSys and Swiss-based G7 Therapeutics AG announced a new collaboration to develop novel antibody thera- peutics targeting G protein-coupled receptors (GPCRs*) and other potentially disease-related transmembrane proteins, such as ion channels. Under this agreement, G7 Therapeutics will give MorphoSys a choice of various receptors that can be linked to the emergence of a variety of diseases. MorphoSys will use its propri- etary Ylanthia antibody library to identify and develop antibodies directed against these receptors. MorphoSys has the right to sub- license access to these target molecules in conjunction with thera- peutic antibody programs. In August 2015, MorphoSys also announced a strategic alliance in the field of immuno-oncology* with the German company Immatics Biotechnologies GmbH. The alliance was formed to develop novel antibody-based therapies against a variety of cancer antigens that are recognized by T cells. The agreement gives MorphoSys access to several of Immatics’s proprietary tumor- associated peptides (TUMAPs). In return, Immatics receives the right to develop MorphoSys’s Ylanthia antibodies against several TUMAPs. The companies will pay each other milestone payments and royalties on commercialized products based on the compa- nies’ development progress. *S E E G L O S S A R Y – page 142 PROJEC T INI T IAT IONS AND PROGRESS, T RIAL EX T ENSIONS During the 2015 financial year, the number of individual therapeu- tic antibodies in the MorphoSys pipeline grew to a total of 103 (December 31, 2014: 94 individual antibodies) Proprietary Devel- opment and Partnered Discovery projects. At the end of 2015, MorphoSys had 14 projects (December 31, 2014: ten) in its Propri- etary Development portfolio, four of which were in clinical devel- opment and ten in preclinical development or the discovery phase. The number of programs being pursued by our partners in the Partnered Discovery segment grew to a total of 89 (December 31, 2014: 84), 21 of which were in clinical development, 25 in preclin- ical development and 43 in the discovery phase. MorphoSys’s partnered and proprietary clinical pipeline currently comprises 25 unique antibody molecules which are being evaluated in more than 50 clinical trials. ›› S E E F I G U R E 0 3 – Active Clinical Studies with MorphoSys Antibodies PROPRIE TARY DE VELOPME NT When the bispecific antibody MOR209/ES414 entered a phase 1 trial in 2015, it became the fourth clinical-stage drug candidate in MorphoSys’s Proprietary Development segment. In early March 2015, MorphoSys and its development partner Emergent BioSolu- tions announced the commencement of a phase 1 clinical study with MOR209/ES414 in up to 130 patients suffering from meta- static castration-resistant prostate cancer (mCRPC). The study is being conducted in clinical centers in the USA and Australia and will evaluate the safety, tolerability and clinical activity of the compound in two stages. Stage one’s main objective is to identify the maximum tolerated dose (MTD) and stage two’s objective is to investigate the clinical activity. The study’s launch triggered a milestone payment to Emergent of € 4.7 million. The existing coop- eration agreement was updated in the past financial year. After a joint examination of the initial data, the companies decided to ad- just the dosing regimen and administration of MOR209/ES414. Clinical development will continue in 2016 with an adapted clini- cal development plan. Under the terms of the updated agreement, the parties have reduced MorphoSys’s cost sharing in the years 2016 to 2018 and have reduced future milestone payments pay- able by MorphoSys to Emergent BioSolutions to a total of up to US$ 74 million. Other financial terms and the split of the commer- cial rights remain unchanged. 234567826 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 03 F I G U R E MorphoSys AG acquired the remaining interest in the Dutch bio- pharmaceutical company Lanthio Pharma B.V., headquartered in Groningen, the Netherlands, for a price of € 20.0 million on May 7, 2015. Prior to the acquisition, the Company held 19.98 % of Lanthio Pharma B.V. The company Lanthio Pharma B.V. wholly owns LanthioPep B.V., which is also headquartered in Groningen. These companies were consolidated by the MorphoSys Group for the first time as of May 7, 2015. P HA SE 1 2 3 8 Poole Real Estate Ltd. was liquidated and the remaining assets were distributed to MorphoSys AG as the sole shareholder on December 9, 2015. 12 11 6 In the 2015 financial year, the Group maintained both the regis- tered office of the parent company, MorphoSys AG, in Martinsried near Munich and the registered office of Lanthio Pharma B.V. and LanthioPep B.V. in Groningen, the Netherlands. The Martinsried office houses the central Group functions such as accounting, con- trolling, human resources, legal, patents, corporate communica- tions and investor relations, as well as the Proprietary Develop- ment and Partnered Discovery segments. The subsidiary Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. in Groningen, the Netherlands, are largely autonomous and independently managed. These subsidiaries have their own research and development labo- ratories, general management and administration functions, as well as human resources, accounting and business development departments. 2011 2012 Active Clinical Studies with MorphoSys Antibodies (31 December) Research and Development and Business Development 24 27 2015 BUSINESS PERF ORMANCE MorphoSys strongly focuses its business activities on advancing its therapeutic programs in research and development to increase the Company’s enterprise value. The clinical development of pro- 24 prietary drug candidates is at the core of the Company’s focus. In this context, the Company strives to gain access to novel disease- specific target molecules, advanced product candidates and inno- vative technology platforms to expand its proprietary development pipeline. MorphoSys also participates in the development success of its partners’ therapeutic programs. The first of these antibodies 1 based on MorphoSys’s technology are approaching the market. 29 19 16 8 3 12 2013 To MorphoSys, the fundamental measures for success in pharma- ceutical research and development include: 2014 2015 • industry partnerships which create a broad development pipe- line, leverage the MorphoSys technology platform and/or enable the commercialization of its therapeutic programs • focused progression of its development programs • clinical and preclinical results • regulatory guidance of health authorities to pursue commercial- ization of individual therapeutic programs • robust patent protection to secure MorphoSys’s market position Additional information on consolidated companies can be found in the Notes (Item 2.2.1). COL L ABORAT IONS AND PAR T NERSHIP S New contracts and contract terminations in 2015 almost exclu- sively involved the Proprietary Development segment. L EGAL S T RUC T URE OF T HE MORPHOSY S GROUP : GROUP MANAGEMEN T AND SUPERVISION MorphoSys AG, a German stock corporation listed in the Prime Standard segment of the Frankfurt Stock Exchange, is the parent company of the MorphoSys Group. In accordance with the German Stock Corporation Act, the Company has a dual management struc- ture with the Management Board as the governing body whose four members are appointed and supervised by the Supervisory Board. The Supervisory Board is elected by the Annual General Meeting and currently consists of six members. Detailed infor- mation concerning the Group’s management and control and its corporate governance principles can be found in the Corporate Governance Report (page 67). The Senior Management Group, made up of 20 managers from various departments, supports the Management Board of MorphoSys AG. At the end of March 2015, MorphoSys and Celgene Corporation agreed to end the existing co-development and co-promotion agreement for MOR202. Following this termination, MorphoSys regained the rights to MOR202. We expect lucrative opportunities to open up – such as a new partnership – provided that sufficiently competitive clinical efficacy and safety data can be generated. The Company is no longer entitled to receive royalties and milestone payments announced under this alliance. MorphoSys is continuing the compound’s clinical development as planned in a phase 1/2a study in patients with relapsed/refractory multiple myeloma with MOR202 alone and in combination with the compounds lenalidomide and pomalidomide, which are provided to MorphoSys by Celgene. 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 27 MorphoSys concluded transactions with several industry part- ners in 2015, including the purchase of the remaining shares in the Dutch biopharmaceutical company Lanthio Pharma B.V. for € 20.0 million in May. This purchase added new development candidates to the Company’s proprietary portfolio, including LP2 for various fibrotic diseases. Following the acquisition, LP2 was renamed MOR107. MOR107 is a lanthipeptide with potential to treat diabetic nephropathy and fibrotic diseases. Lanthipeptides are a novel class of therapeutics demonstrating high target mole- cule selectivity and drug-like properties. Their high specificity is expected to open up new therapeutic applications with potential in indications that are not usually targeted with antibodies. Prior to the acquisition, MorphoSys held 19.98 % of Lanthio Pharma, which it had acquired under its Innovative Capital initiative in 2012 as part of Lanthio Pharma’s Series A funding. In August 2015, MorphoSys and Swiss-based G7 Therapeutics AG announced a new collaboration to develop novel antibody thera- peutics targeting G protein-coupled receptors (GPCRs*) and other potentially disease-related transmembrane proteins, such as ion channels. Under this agreement, G7 Therapeutics will give MorphoSys a choice of various receptors that can be linked to the emergence of a variety of diseases. MorphoSys will use its propri- etary Ylanthia antibody library to identify and develop antibodies directed against these receptors. MorphoSys has the right to sub- license access to these target molecules in conjunction with thera- peutic antibody programs. In August 2015, MorphoSys also announced a strategic alliance in the field of immuno-oncology* with the German company Immatics Biotechnologies GmbH. The alliance was formed to develop novel antibody-based therapies against a variety of cancer antigens that are recognized by T cells. The agreement gives MorphoSys access to several of Immatics’s proprietary tumor- associated peptides (TUMAPs). In return, Immatics receives the right to develop MorphoSys’s Ylanthia antibodies against several TUMAPs. The companies will pay each other milestone payments and royalties on commercialized products based on the compa- nies’ development progress. *S E E G L O S S A R Y – page 142 PROJEC T INI T IAT IONS AND PROGRESS, T RIAL EX T ENSIONS During the 2015 financial year, the number of individual therapeu- tic antibodies in the MorphoSys pipeline grew to a total of 103 (December 31, 2014: 94 individual antibodies) Proprietary Devel- opment and Partnered Discovery projects. At the end of 2015, MorphoSys had 14 projects (December 31, 2014: ten) in its Propri- etary Development portfolio, four of which were in clinical devel- opment and ten in preclinical development or the discovery phase. The number of programs being pursued by our partners in the Partnered Discovery segment grew to a total of 89 (December 31, 2014: 84), 21 of which were in clinical development, 25 in preclin- ical development and 43 in the discovery phase. MorphoSys’s partnered and proprietary clinical pipeline currently comprises 25 unique antibody molecules which are being evaluated in more than 50 clinical trials. ›› S E E F I G U R E 0 3 – Active Clinical Studies with MorphoSys Antibodies PROPRIE TARY DE VELOPME NT When the bispecific antibody MOR209/ES414 entered a phase 1 trial in 2015, it became the fourth clinical-stage drug candidate in MorphoSys’s Proprietary Development segment. In early March 2015, MorphoSys and its development partner Emergent BioSolu- tions announced the commencement of a phase 1 clinical study with MOR209/ES414 in up to 130 patients suffering from meta- static castration-resistant prostate cancer (mCRPC). The study is being conducted in clinical centers in the USA and Australia and will evaluate the safety, tolerability and clinical activity of the compound in two stages. Stage one’s main objective is to identify the maximum tolerated dose (MTD) and stage two’s objective is to investigate the clinical activity. The study’s launch triggered a milestone payment to Emergent of € 4.7 million. The existing coop- eration agreement was updated in the past financial year. After a joint examination of the initial data, the companies decided to ad- just the dosing regimen and administration of MOR209/ES414. Clinical development will continue in 2016 with an adapted clini- cal development plan. Under the terms of the updated agreement, the parties have reduced MorphoSys’s cost sharing in the years 2016 to 2018 and have reduced future milestone payments pay- able by MorphoSys to Emergent BioSolutions to a total of up to US$ 74 million. Other financial terms and the split of the commer- cial rights remain unchanged. 234567828 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 MOR103 was fully out-licensed to GlaxoSmithKline (GSK) in 2013. In the third quarter of 2015, GSK announced the commencement of a phase 2 study with MOR103 (re-named GSK3196165) for rheu- matoid arthritis. GSK also plans to initiate a second phase 1b/2a study in hand osteoarthritis during 2016. In 2015, an ongoing investigator-initiated clinical trial with the anti-CD19 antibody MOR208 for patients with relapsed/refractory chronic lymphocytic leukemia (CLL*) conducted at the Ohio State University was expanded to include patients with Richter’s trans- formation*, a particularly aggressive sub-type of CLL. These patients will be treated with a combined therapy of MOR208 and ibrutinib. A phase 2 clinical trial of MOR208 as monotherapy for patients with acute lymphoblastic leukemia (ALL) was terminated in the first quarter in order to focus on a planned investigator-initiated pediatric study* using MOR208 in combination with an immune cell transplantation. This study is scheduled to begin in 2016. PAR TNERED DISC OVERY In early April 2015, MorphoSys announced its receipt of a clinical milestone payment from its partner Janssen. This payment was triggered by the initiation of a phase 2 clinical study with the HuCAL antibody guselkumab (CNTO1959) in a new indication, psoriasis arthritis, and was recognized in the first quarter of 2015. In July 2015, MorphoSys announced the receipt of a clinical mile- stone payment from its partner Novartis. The payment was trig- gered by the initiation of a phase 1 study of a HuCAL antibody in the field of blood disorders. This became the 11th therapeutic anti- body based on MorphoSys’s technologies that Novartis is evaluat- ing in clinical trials. The milestone payment was recognized in the second quarter of 2015. In July 2015, MorphoSys also announced that its partner Heptares Therapeutics, a wholly owned subsidiary of Japan’s Sosei Group Corporation, exercised an option to initiate its own therapeutic an- tibody program under the research alliance entered into by the companies in February 2013. The program will use MorphoSys’s Ylanthia technology to generate antibody candidates against dis- ease-relevant molecules targeting G protein-coupled receptors (GPCRs). Heptares intends to pursue the subsequent development and later commercialization of a program with MorphoSys receiv- ing research funding and development-dependent milestone pay- ments as well as royalties on sales of the resulting therapeutic antibodies. In October 2015, MorphoSys announced the receipt of a milestone payment from its partner Bayer HealthCare for the initiation of a phase 1 clinical trial of a HuCAL antibody (BAY1093884) in the field of bleeding disorders. The antibody targets the tissue factor pathway inhibitor (TFPI), a major inhibitor of tissue factor-initiated blood clotting. The study is focused on for the treatment of hemo- philia A, the most common type of hemophilia, which affects ap- proximately 400,000 people worldwide. In January 2016, MorphoSys’s partner Bayer initiated a phase 2 clinical study in mesothelioma with the mesothelin-targeting anetumab ravtansine antibody (BAY94-9343). The objective is to support registration of the compound based on the study’s results if successful. The related milestone payment was recognized in the first quarter of 2016. CL INIC AL S T UD Y DATA FROM CURREN T PROJEC T S PROPRIE TARY DE VELOPME NT In 2015, MorphoSys announced interim data from clinical studies for its proprietary drug programs MOR202 and MOR208 at several industry conferences. Advanced and progressively more detailed data from the ongoing phase 2a study with the anti-CD19 antibody MOR208 in patients with subtypes of relapsed or refractory non-Hodgkin’s lymphoma (NHL) were presented at the 2015 American Society of Clinical Oncology (ASCO) Annual Meeting in May/June, the European He- matology Association (EHA) congress in June 2015 and the annual American Society of Hematology (ASH) meeting in December 2015. In this open-label multicenter study, MOR208 was tested as a single-agent in 92 patients with diffuse large B cell lymphoma (DLBCL*), follicular lymphoma (FL*), mantle cell lymphoma (MCL*) and other indolent NHLs (iNHL). MOR208 monotherapy was well tolerated in the study and showed encouraging clinical activity. The data presented at the ASH annual meeting in December showed an overall response rate (ORR) of 28 % across all four NHL sub- types, reaching 36 % in the DLBCL subgroup (both based on evalu- able patients). At the time of the most recent analysis, several patients – a total of 9 out of 21 – had an ongoing response to the single-agent treatment. The longest response duration exceeded 20 months in both DLBCL and FL. Based on these results, MorphoSys is planning to initiate combination studies of MOR208 in 2016. *S E E G L O S S A R Y – page 142 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 29 The first promising results on safety and clinical activity from an- other ongoing phase 2 study with MOR208 were announced at the ASH annual conference in December. In this investigator-initiated clinical trial conducted by scientists at the Ohio State University, combination of MOR208 and the immunomodulator lenalidomide is being evaluated in relapsed/refractory and treatment-naïve chronic lymphocytic leukemia (CLL) patients. Patient recruitment was still underway in both patient groups at the time of the presen- tation, whereby 16 patients were already enrolled and 11 evalu- ated. The combination of MOR208 with lenalidomide was generally well tolerated. In patients with relapsed/refractory CLL, three pa- tients showed a partial response (PR) and two patients showed stable disease (SD). Four of the treatment-naïve CLL patients showed partial responses (PR). Patient response generally deepened over time, and five patients were able to complete a 12-week therapy cycle with MOR208. MorphoSys’s anti-CD38 antibody MOR202 is currently being eval- uated in an ongoing phase 1/2a clinical study. Meaningful and encouraging interim data from this safety and tolerability study were released at a number of conferences in 2015, including the ASCO annual conference in May/June, the EHA congress in June, the Multiple Myeloma Workshop in September and the ASH an- nual meeting in December. The study evaluates MOR202 at esca- lating doses alone and in combination with the immunomodula- tory drugs lenalidomide and pomalidomide in a total of 52 heavily pretreated patients with relapsed/refractory multiple myeloma. In this study, MOR202 showed encouraging clinical activity, an ex- cellent safety profile and best-in-class infusion tolerability with just a two-hour infusion time. The data presented at the ASH con- ference in December showed the following clinical efficacy: Among the patients receiving MOR202 alone, three out of nine in groups with clinically relevant dose regimens showed an objective tumor response (ORR = 33 %) and the other six patients showed stable disease. In the combination therapy at 8 mg/kg MOR202 with lenalidomide or pomalidomide, one of the six patients showed a very good partial response (VGPR), two showed partial responses (PR) and one showed a minimal response (MR). Other patients were scheduled to receive 16 mg/kg MOR202 in combination with pomalidomide or lenalidomide. Further patient therapy is planned to validate the recommended dose of MOR202 alone and in combi- nation with pomalidomide or lenalidomide. At the 2015 ASH conference, MorphoSys also presented promis- ing preclinical data on MOR202 which demonstrated synergy of MOR202 in combination with different compounds commonly used in the treatment of multiple myeloma. Another set of pre- clinical experiments focused on MOR202’s ability to kill targeted cells via antibody-dependent cell-mediated cytotoxicity (ADCC). MOR202 showed a level of killing of multiple myeloma cells via ADCC equivalent to that of surrogates of the competing anti-CD38 antibodies daratumumab and isatuximab, but exhibited signifi- cantly reduced killing of natural killer cells (NK cells*) from the body’s own immune system. NK cells, as effector cells, are needed for the killing of the tumor cells. These results suggest that MOR202 may show a more durable clinical response than other compounds of its class by sparing the NK cells needed for ADCC. PAR TNERED DISC OVERY MorphoSys’s partners continued developing their antibody pro- grams in the reporting year and presented their progress at vari- ous scientific conferences. At the 2015 American Society of Clinical Oncology (ASCO) An- nual Meeting at the end of May/early June in Chicago, several of MorphoSys’s partners presented clinical data for a number of HuCAL antibodies. Pfizer presented phase 1 data from its study of anti-4-1BB antibody PF-05082566 in patients with non-Hodgkin’s lymphoma (NHL). The combination of PF-05082566 with rituximab was well tolerated and showed anti-tumor activity as well as biomarker modulation. Novartis presented results from its phase 1 combination trial eval- uating the HuCAL antibody LJM716 in combination with BYL719 and trastuzumab in patients with HER2-positive metastatic breast cancer. The study created a safety profile for the combination ther- apy and demonstrated the therapy’s anti-tumor activity. Novartis presented preclinical data at the annual American Association for Cancer Research (AACR) conference in April 2015 showing that LJM716 successfully inhibited the target molecules HER3* and EGFR* in lung squamous cell carcinoma* cell lines and showed preclinical anti-tumor activity. *S E E G L O S S A R Y – page 142 234567830 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 OncoMed published the final results of its phase 1a study of tarextumab (OMP-59R5) in combination with an etoposide and platinum-based therapy (EP) in small cell lung cancer (PINNACLE trial). The combination was well tolerated and showed encouraging anti-tumor activity. Additionally, a dosage was determined that is currently being tested in an ongoing, randomized placebo-con- trolled phase 2 study. At the World Conference on Lung Cancer in September 2015, OncoMed announced new biomarker data and updated its clinical phase 1 data for tarextumab (OMP-59R5). MorphoSys’s partner Bayer also presented new clinical results from a phase 1 study at the World Conference on Lung Cancer in September 2015. The study evaluated different doses of the HuCAL antibody anetumab ravtansine (BAY94-9343) in 77 patients with advanced mesothelioma and other solid tumors. Anetumab ravtan- sine is an antibody drug conjugate (ADC*) directed against the mesothelin target molecule. The study determined the maximum tolerated dose (MTD) that showed encouraging efficacy in meso- thelioma patients. *S E E G L O S S A R Y – page 142 REGUL AT ORY EVEN T S PAR TNERED DISC OVERY In the first quarter of 2015, MorphoSys announced that its partner OncoMed had received orphan drug status from the US Food and Drug Administration for the HuCAL antibody tarextumab in pan- creatic cancer and small cell lung cancer. The program is currently in clinical development for both indications. There were no regulatory decisions announced relevant to the Partnered Discovery segment. PAT EN T S During the 2015 financial year, MorphoSys continued to consoli- date and expand the patent protection of its development programs and its growing technology portfolio, which are the Company’s most important value drivers. At the end of the financial year, the Company maintained roughly 50 different proprietary patent families worldwide in addition to the numerous patent families it pursues with its partners. Group Headcount Development The success of MorphoSys is based on highly qualified, dedicated employees who are creative and motivated. On December 31, 2015, the MorphoSys Group had 365 employees (December 31, 2014: 329), 145 of whom hold PhD degrees (December 31, 2014: 124). The MorphoSys Group employed an average of 356 employees in 2015 (2014: 315). ›› S E E F I G U R E 0 4 – Headcount of the MorphoSys Group A competitive and attractive remuneration system is a decisive factor when competing for the best employees. To be a competitive employer, MorphoSys compares the Company’s compensation with that paid by other companies in the biotech industry and similar sectors and makes adjustments when necessary. The remunera- tion system at MorphoSys includes fixed compensation and a vari- able annual bonus that is linked to the achievement of corporate goals. Individual goals promote both the employees’ personal de- velopment and the achievement of key corporate goals. A “spot bonus” (given “on the spot”) is promptly awarded to em- ployees for exceptional accomplishments. A detailed overview of headcount development and MorphoSys’s activities to promote successful long-term human resource devel- opments can be found in the section “Sustainable Business Development.” Changes in the Business Environment The global economy lost more steam in 2015. In its latest forecast in January 2016, the International Monetary Fund (IMF) expects global growth to be a modest 3.1 % in 2015 following 3.4 % in 2014. Weak growth in China, the fall in commodity prices and geopolitical tensions, particularly in Russia and the Middle East, will continue to weigh on global growth. 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 31 04 F I G U R E Headcount of the MorphoSys Group (31 December)1 While the advanced economies had another year of slightly in- creasing growth momentum and reported 1.9 % growth in 2015 (2014: 1.8 %), the expansion in emerging markets and developing economies slowed significantly with growth reported at 4.0 % (2014: 4.6 %). Growth in the eurozone rose 1.5 % (2014: 0.9 %) compared to the previous year due to a boost in exports because of the weak euro. Germany’s growth held fairly steady at 1.5 % (2014: 1.6 %). Growth momentum in the USA was again much stronger with the economy growing 2.5 % (2014: 2.4 %). T O TA L The industry is also subject to potential pricing restrictions be- cause of the dominant role played by cost savings in the healthcare system’s regulatory requirements. References to overpricing and potentially more stringent price control in the US drug market made by presidential candidate Hillary Clinton during the US pri- maries in September 2015 stirred up uncertainty in the biotech Serotec, which was sold as of 10 January 2013 (closing date) and related sectors. 1 2011 to 2012 includes employees of research and diagnostic segment AbD 446 421 China, which has been the driving force of the world economy, continued to falter and reported growth in 2015 of 6.9 % (2014: 7.3 %). The pace of growth and the outlook during the year deterio- rated progressively, which placed tremendous pressure on both the Chinese and global financial markets in the fourth quarter. The two large emerging countries, Russia (2015: – 3.7 % versus 2014: 0.6 %) and Brazil (2015: – 3.8 % versus 2014: 0.1 %) were in deep recession in 2015. 299 Economists expect the ongoing risks to keep the economy vulner- able to setbacks. Global economic uncertainty and rising geopolit- ical tensions are also a threat to the growth of the global pharma- ceutical and biotechnology industries, particularly because fading euphoria in the capital markets and less favorable financing condi- tions can have an adverse impact on sectors heavily reliant on re- 2013 2012 search financing, such as the biotechnology sector. 2011 E M P L O Y E E S B Y S E G M E N T MorphoSys takes into account all potential macroeconomic risks and opportunities when conducting business activities. Political uncertainty in the global markets did not cause the Company to refrain from or change any of its key activities in the past financial year. MorphoSys’s operations were also not affected by any fluctu- ations within individual countries and, therefore, in this respect, were not directly impacted by global economic developments. 169 176 REGUL AT ORY ENVIRONMEN T The healthcare industry’s regulatory environment is dominated by ever-increasing product quality, safety and efficacy requirements and places high demands on companies. Novel drugs need to demonstrate a significant benefit over existing therapies in order to be approved, gain the market’s acceptance and be reimbursed 57 by the healthcare system. 132 55 105 55 Despite the high demands placed on the sector, the market’s situa- tion continues to be positive, particularly in the USA. The US Food and Drug Administration granted approval to 45 drugs in 2015, surpassing the already high number of approvals in the previous year (2014: 41). From 2006 to 2014, the FDA approved an average of 28 new compounds every year, which corroborates the impor- tance of the industry’s commitment to innovation for developing technologically better products and optimizing approved treat- ment methods. 365 329 The FDA supports compounds with exceptional medicinal poten- tial through measures such as the “breakthrough therapy desig- nation,” introduced in 2013, and the “fast-track” program, both of which help expedite product development and testing. MorphoSys received fast-track status for its proprietary compound MOR208, which is currently undergoing phase 2 clinical evaluation for patients suffering from diffuse large B cell lymphoma (DLBCL). Closer cooperation with the regulatory authorities facilitates the antibody’s targeted development and may help bring it more quickly to the market. 2015 2014 E M P L O Y E E S B Y F U N C T IO N DEVEL OPMEN T OF T HE PHARMACEU T IC AL AND 305 BIO T ECHNOL OGY SEC T ORS The global pharmaceutical industry had a stellar year in 2015. After years of stagnating sales, the 20 largest global pharmaceuti- 274 cal companies saw the reemergence of sustainable sales growth: On a constant currency basis, Group sales increased 7 % on average. Experts believe two key factors are responsible for this positive performance: First, companies have overcome the impact of expir- ing patents and related sales declines, and second, the sector has seen tremendous success in terms of research and development and regulatory approvals for products. 60 2014 2015 2014 2015 proprie tary de v elopment partnered disc ov ery unallo cated employ ees in gener al and adminis tr ati v e employ ees in r&d 234567830 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 OncoMed published the final results of its phase 1a study of tarextumab (OMP-59R5) in combination with an etoposide and platinum-based therapy (EP) in small cell lung cancer (PINNACLE trial). The combination was well tolerated and showed encouraging anti-tumor activity. Additionally, a dosage was determined that is currently being tested in an ongoing, randomized placebo-con- trolled phase 2 study. At the World Conference on Lung Cancer in September 2015, OncoMed announced new biomarker data and updated its clinical phase 1 data for tarextumab (OMP-59R5). MorphoSys’s partner Bayer also presented new clinical results from a phase 1 study at the World Conference on Lung Cancer in September 2015. The study evaluated different doses of the HuCAL antibody anetumab ravtansine (BAY94-9343) in 77 patients with advanced mesothelioma and other solid tumors. Anetumab ravtan- sine is an antibody drug conjugate (ADC*) directed against the mesothelin target molecule. The study determined the maximum tolerated dose (MTD) that showed encouraging efficacy in meso- thelioma patients. *S E E G L O S S A R Y – page 142 REGUL AT ORY EVEN T S PAR TNERED DISC OVERY In the first quarter of 2015, MorphoSys announced that its partner OncoMed had received orphan drug status from the US Food and Drug Administration for the HuCAL antibody tarextumab in pan- creatic cancer and small cell lung cancer. The program is currently in clinical development for both indications. There were no regulatory decisions announced relevant to the Partnered Discovery segment. PAT EN T S During the 2015 financial year, MorphoSys continued to consoli- date and expand the patent protection of its development programs and its growing technology portfolio, which are the Company’s most important value drivers. At the end of the financial year, the Company maintained roughly 50 different proprietary patent families worldwide in addition to the numerous patent families it pursues with its partners. Group Headcount Development The success of MorphoSys is based on highly qualified, dedicated employees who are creative and motivated. On December 31, 2015, the MorphoSys Group had 365 employees (December 31, 2014: 329), 145 of whom hold PhD degrees (December 31, 2014: 124). The MorphoSys Group employed an average of 356 employees in 2015 (2014: 315). ›› S E E F I G U R E 0 4 – Headcount of the MorphoSys Group A competitive and attractive remuneration system is a decisive factor when competing for the best employees. To be a competitive employer, MorphoSys compares the Company’s compensation with that paid by other companies in the biotech industry and similar sectors and makes adjustments when necessary. The remunera- tion system at MorphoSys includes fixed compensation and a vari- able annual bonus that is linked to the achievement of corporate goals. Individual goals promote both the employees’ personal de- velopment and the achievement of key corporate goals. A “spot bonus” (given “on the spot”) is promptly awarded to em- ployees for exceptional accomplishments. A detailed overview of headcount development and MorphoSys’s activities to promote successful long-term human resource devel- opments can be found in the section “Sustainable Business Development.” Changes in the Business Environment The global economy lost more steam in 2015. In its latest forecast in January 2016, the International Monetary Fund (IMF) expects global growth to be a modest 3.1 % in 2015 following 3.4 % in 2014. Weak growth in China, the fall in commodity prices and geopolitical tensions, particularly in Russia and the Middle East, will continue to weigh on global growth. 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 31 While the advanced economies had another year of slightly in- creasing growth momentum and reported 1.9 % growth in 2015 (2014: 1.8 %), the expansion in emerging markets and developing economies slowed significantly with growth reported at 4.0 % (2014: 4.6 %). Growth in the eurozone rose 1.5 % (2014: 0.9 %) compared to the previous year due to a boost in exports because of the weak euro. Germany’s growth held fairly steady at 1.5 % (2014: 1.6 %). Growth momentum in the USA was again much stronger with the economy growing 2.5 % (2014: 2.4 %). China, which has been the driving force of the world economy, continued to falter and reported growth in 2015 of 6.9 % (2014: 7.3 %). The pace of growth and the outlook during the year deterio- rated progressively, which placed tremendous pressure on both the Chinese and global financial markets in the fourth quarter. The two large emerging countries, Russia (2015: – 3.7 % versus 2014: 0.6 %) and Brazil (2015: – 3.8 % versus 2014: 0.1 %) were in deep recession in 2015. Economists expect the ongoing risks to keep the economy vulner- able to setbacks. Global economic uncertainty and rising geopolit- ical tensions are also a threat to the growth of the global pharma- ceutical and biotechnology industries, particularly because fading euphoria in the capital markets and less favorable financing condi- tions can have an adverse impact on sectors heavily reliant on re- search financing, such as the biotechnology sector. MorphoSys takes into account all potential macroeconomic risks and opportunities when conducting business activities. Political uncertainty in the global markets did not cause the Company to refrain from or change any of its key activities in the past financial year. MorphoSys’s operations were also not affected by any fluctu- ations within individual countries and, therefore, in this respect, were not directly impacted by global economic developments. REGUL AT ORY ENVIRONMEN T The healthcare industry’s regulatory environment is dominated by ever-increasing product quality, safety and efficacy requirements and places high demands on companies. Novel drugs need to demonstrate a significant benefit over existing therapies in order to be approved, gain the market’s acceptance and be reimbursed by the healthcare system. The industry is also subject to potential pricing restrictions be- cause of the dominant role played by cost savings in the healthcare system’s regulatory requirements. References to overpricing and potentially more stringent price control in the US drug market made by presidential candidate Hillary Clinton during the US pri- maries in September 2015 stirred up uncertainty in the biotech and related sectors. Despite the high demands placed on the sector, the market’s situa- tion continues to be positive, particularly in the USA. The US Food and Drug Administration granted approval to 45 drugs in 2015, surpassing the already high number of approvals in the previous year (2014: 41). From 2006 to 2014, the FDA approved an average of 28 new compounds every year, which corroborates the impor- tance of the industry’s commitment to innovation for developing technologically better products and optimizing approved treat- ment methods. The FDA supports compounds with exceptional medicinal poten- tial through measures such as the “breakthrough therapy desig- nation,” introduced in 2013, and the “fast-track” program, both of which help expedite product development and testing. MorphoSys received fast-track status for its proprietary compound MOR208, which is currently undergoing phase 2 clinical evaluation for patients suffering from diffuse large B cell lymphoma (DLBCL). Closer cooperation with the regulatory authorities facilitates the antibody’s targeted development and may help bring it more quickly to the market. DEVEL OPMEN T OF T HE PHARMACEU T IC AL AND BIO T ECHNOL OGY SEC T ORS The global pharmaceutical industry had a stellar year in 2015. After years of stagnating sales, the 20 largest global pharmaceuti- cal companies saw the reemergence of sustainable sales growth: On a constant currency basis, Group sales increased 7 % on average. Experts believe two key factors are responsible for this positive performance: First, companies have overcome the impact of expir- ing patents and related sales declines, and second, the sector has seen tremendous success in terms of research and development and regulatory approvals for products. 234567832 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 market for cancer drugs, which is the most important market for MorphoSys’s pipeline development, is one of the most attractive and fastest-growing segments in pharmaceuticals. The US market research institute IMS Health estimates that in 2014, global sales of oncological compounds exceeded US$ 100 billion for the first time and will continue to grow on average by 6 to 8 % annually until 2018. The aging global population has sustained this growth trend. The World Health Organization (WHO) expects the number of new cancer cases to rise 70 % in the next 20 years. Antibodies in the field of cancer immunotherapy continued to dominate headlines in 2015. Clinical data was shown that further corroborated the efficacy of the anti-PD1 and anti-PD-L1 antibodies which act by blocking immune checkpoints. These compounds, which reactivate the body’s immune system for identifying and kill- ing tumor cells, was also a dominant theme at the May/June 2015 ASCO conference, the world’s premier cancer conference. Compa- nies presented promising clinical study results particularly in the areas of skin cancer (melanoma) and lung cancer. However, there are also factors that could slow down the pharma- ceutical market. Political and public opposition to higher drug prices became abundantly evident in 2015, particularly in connec- tion with the launch of a new hepatitis C drug by Gilead Sciences priced at US$ 1,000 per pill. Price pressure on biotechnology drugs emerged with the successful development of generically manufactured, patent-free imitation products. Experts also expect pharmaceutical prices to come under pressure due to competition within the biotech and pharmaceutical industry as a result of the global expansion of research pipelines. The number of mergers and acquisitions in the pharmaceutical and biotechnology sectors has grown dramatically. In the first half of 2015, transactions reached a record US$ 210 billion and were triple their level in the same period of the previous year; at the end of the full year, transactions in the medical sector had reached US$ 724 billion, or one-seventh of the aggregate volume of merg- ers and acquisitions worldwide. More information on the development of the stock market can be found in the section “Shares and the Capital Market” on page 45. DEVEL OPMEN T OF T HE AN T IBOD Y SEC T OR The year 2015 marked a very successful year for the clinical devel- opment of therapeutic antibodies. The FDA set a record with its approval of nine antibodies. According to the scientific publica- tion, mAbs Journal, there are currently 53 antibodies in phase 3 clinical studies and 16 of those are to treat cancer. The “Antibodies to Watch in 2016” list presented by mAbs Journal at the Antibody Engineering Conference in San Diego in December 2015 included guselkumab which is derived from MorphoSys’s technology plat- form and is being developed by Janssen. Results are expected in 2016 from a phase 3 clinical study of this compound in psoriasis. Additionally, the following antibodies received approval in 2015: • Secukinumab (trade name Cosentyx®), the first monoclonal anti- body targeting IL 17a for treating patients with moderate to se- vere psoriasis was approved in the USA and EU. • Daratumumab (trade name Darzalex®) targeting the CD 38 anti- gen became the first antibody to receive FDA approval for treat- ing patients with multiple myeloma, a form of bone cancer. • Elotuzumab (trade name Empliciti®), another potent antibody for treating multiple myeloma targeting glycoprotein SLAMF7 (Signaling Lymphocytic Activation Molecule Family Member 7) received FDA approval. CURRENC Y DEVEL OPMEN T S The European debt crisis, a faster-growing US economy and a stronger US dollar on the back of the US key interest rate increase in December resulted in an even weaker euro. Falling energy prices brought down European inflation rates, which raised the monetary regulator’s deflationary concerns, and the European Cen- tral Bank reinforced its expansionary monetary policy, putting additional pressure on the euro. At the end of 2015, the euro was quoted at US$ 1.09, or roughly 10 % lower than its level at the start of the year. According to experts, the euro will continue to move closer to parity with the dollar. Changes in these currencies could have an effect on MorphoSys’s future costs and revenues because most of the Company’s busi- ness is transacted in euros and US dollars. The ongoing weakness in the euro versus the US dollar has a direct influence on the Com- pany’s operating results because a growing share of its clinical study costs are incurred in the USA. 05 F I G U R E Revenue of the MorphoSys Group by Region (in %) N O R T H AMERIC A EURO P E AND A SIA Analysis of Net Assets, Financial Position and Results of Operations 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 33 % 94 95 6 5 2011 2012 89 11 2013 71 29 59 41 2014 2015 106.2 59.9 06 F I G U R E Revenues Proprietary Development and Partnered Discovery (in million €) T O TA L 82.1 46.6 32.7 78.0 64.0 51.9 42.7 48.0 43.6 42.3 26.9 2.4 7.0 1.9 3.0 15.0 5.4 4.0 2011 2012 2013 2014 2015 partnered disc ov ery s egment – funded research and licensing fees partnered disc ov ery s egment – success-based payments proprie tary de v elopment segment The MorphoSys Group’s scope of consolidation changed as of December 31, 2015. The consolidated financial statements as of December 31, 2015 include MorphoSys AG, Sloning BioTechnology GmbH, Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. Further information on the Group’s organizational structure can be found on page 25. PAR T NERED DISCOVERY SEGMEN T The revenues generated by the Partnered Discovery segment in- cluded € 42.3 million in funded research and license fees (2014: € 43.6 million) and € 4.0 million in success-based payments (2014: € 5.4 million). ›› S E E F I G U R E 0 6 – Revenues Proprietary Development and Partnered Discovery 2 Based on the average foreign exchange rates in 2014, the revenues of the Proprietary Development and Partnered Discovery segments would have totaled € 106.1 million. Operating Expenses In 2015, operating expenses increased 34 % to € 93.7 million (2014: € 70.1 million). Expenses consisted of research and development expenses of € 78.7 million (2014: € 56.0 million) and general and administrative expenses of € 15.1 million (2014: € 14.1 million). Research and development expenses increased as planned due to ongoing projects. Operating expenses in the Proprietary Development segment rose from € 33.5 million to € 54.1 million and in the Partnered Discov- ery segment increased to € 25.9 million (2014: € 23.0 million). Personnel expenses from share-based payments are included in general and administrative expenses and research and develop- ment expenses. These expenses amounted to € 3.6 million in 2015 (2014: € 4.0 million). Revenues Group revenues increased 66 % year-on-year to € 106.2 million (2014: € 64.0 million). This increase mainly originated from the realization of deferred revenue resulting from the termination of the MOR202 co-development and co-promotion agreement with Celgene. Success-based payments amounted to 4 % (2014: 8 %) of total revenue. On a regional basis, MorphoSys generated 59 %, or € 62.2 million, of its commercial revenues with biotechnology and pharmaceutical companies and non-profit organizations headquartered in North America and 41 %, or € 44.0 million, with customers headquar- tered primarily in Europe and Asia. In the same period of the pre- vious year the distribution was 29 % and 71 %, respectively. ›› S E E F I G U R E 0 5 – Revenue of the MorphoSys Group by Region Roughly 97 % of Group revenues are attributable to activities with our partners Celgene, Novartis and Pfizer (2014: 92 % with Novartis, Celgene and Centocor). PROPRIE TARY DEVEL OPMEN T SEGMEN T The Proprietary Development segment achieved revenues of € 59.9 million in 2015 (2014: € 15.0 million). Most of this revenue resulted from the termination of co-development activities with Celgene in the first quarter of 2015. 34567832 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 Revenue of the MorphoSys Group by Region (in %) 05 F I G U R E The market for cancer drugs, which is the most important market for MorphoSys’s pipeline development, is one of the most attractive and fastest-growing segments in pharmaceuticals. The US market research institute IMS Health estimates that in 2014, global sales of oncological compounds exceeded US$ 100 billion for the first time and will continue to grow on average by 6 to 8 % annually until 2018. The aging global population has sustained this growth trend. The World Health Organization (WHO) expects the number of new cancer cases to rise 70 % in the next 20 years. N O R T H AMERIC A % Antibodies in the field of cancer immunotherapy continued to dominate headlines in 2015. Clinical data was shown that further corroborated the efficacy of the anti-PD1 and anti-PD-L1 antibodies which act by blocking immune checkpoints. These compounds, which reactivate the body’s immune system for identifying and kill- ing tumor cells, was also a dominant theme at the May/June 2015 ASCO conference, the world’s premier cancer conference. Compa- nies presented promising clinical study results particularly in the areas of skin cancer (melanoma) and lung cancer. EURO P E AND A SIA 95 94 However, there are also factors that could slow down the pharma- ceutical market. Political and public opposition to higher drug prices became abundantly evident in 2015, particularly in connec- tion with the launch of a new hepatitis C drug by Gilead Sciences priced at US$ 1,000 per pill. Price pressure on biotechnology drugs emerged with the successful development of generically manufactured, patent-free imitation products. Experts also expect pharmaceutical prices to come under pressure due to competition within the biotech and pharmaceutical industry as a result of the global expansion of research pipelines. 2012 2011 6 5 Additionally, the following antibodies received approval in 2015: • Secukinumab (trade name Cosentyx®), the first monoclonal anti- body targeting IL 17a for treating patients with moderate to se- 71 vere psoriasis was approved in the USA and EU. 89 • Daratumumab (trade name Darzalex®) targeting the CD 38 anti- gen became the first antibody to receive FDA approval for treat- ing patients with multiple myeloma, a form of bone cancer. 41 29 11 59 • Elotuzumab (trade name Empliciti®), another potent antibody for treating multiple myeloma targeting glycoprotein SLAMF7 2015 (Signaling Lymphocytic Activation Molecule Family Member 7) received FDA approval. 2013 2014 Revenues Proprietary Development and Partnered Discovery (in million €) The number of mergers and acquisitions in the pharmaceutical and biotechnology sectors has grown dramatically. In the first half of 2015, transactions reached a record US$ 210 billion and were triple their level in the same period of the previous year; at the end of the full year, transactions in the medical sector had reached US$ 724 billion, or one-seventh of the aggregate volume of merg- ers and acquisitions worldwide. 06 F I G U R E More information on the development of the stock market can be found in the section “Shares and the Capital Market” on page 45. T O TA L 82.1 DEVEL OPMEN T OF T HE AN T IBOD Y SEC T OR The year 2015 marked a very successful year for the clinical devel- opment of therapeutic antibodies. The FDA set a record with its approval of nine antibodies. According to the scientific publica- tion, mAbs Journal, there are currently 53 antibodies in phase 3 clinical studies and 16 of those are to treat cancer. The “Antibodies to Watch in 2016” list presented by mAbs Journal at the Antibody Engineering Conference in San Diego in December 2015 included guselkumab which is derived from MorphoSys’s technology plat- form and is being developed by Janssen. Results are expected in 2016 from a phase 3 clinical study of this compound in psoriasis. 46.6 42.7 51.9 32.7 CURRENC Y DEVEL OPMEN T S The European debt crisis, a faster-growing US economy and a stronger US dollar on the back of the US key interest rate increase in December resulted in an even weaker euro. Falling energy prices brought down European inflation rates, which raised the monetary regulator’s deflationary concerns, and the European Cen- tral Bank reinforced its expansionary monetary policy, putting additional pressure on the euro. At the end of 2015, the euro was quoted at US$ 1.09, or roughly 10 % lower than its level at the start of the year. According to experts, the euro will continue to move closer to parity with the dollar. 106.2 78.0 Changes in these currencies could have an effect on MorphoSys’s future costs and revenues because most of the Company’s busi- ness is transacted in euros and US dollars. The ongoing weakness in the euro versus the US dollar has a direct influence on the Com- pany’s operating results because a growing share of its clinical study costs are incurred in the USA. 64.0 59.9 43.6 42.3 48.0 26.9 2.4 7.0 1.9 3.0 15.0 5.4 4.0 2011 2012 2013 2014 2015 partnered disc ov ery segment – funded research and licensing fees partnered disc ov ery segment – success-based payments proprie tary de v elopment segment 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 33 Analysis of Net Assets, Financial Position and Results of Operations The MorphoSys Group’s scope of consolidation changed as of December 31, 2015. The consolidated financial statements as of December 31, 2015 include MorphoSys AG, Sloning BioTechnology GmbH, Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. Further information on the Group’s organizational structure can be found on page 25. PAR T NERED DISCOVERY SEGMEN T The revenues generated by the Partnered Discovery segment in- cluded € 42.3 million in funded research and license fees (2014: € 43.6 million) and € 4.0 million in success-based payments (2014: € 5.4 million). ›› S E E F I G U R E 0 6 – Revenues Proprietary Development and Partnered Discovery 2 Based on the average foreign exchange rates in 2014, the revenues of the Proprietary Development and Partnered Discovery segments would have totaled € 106.1 million. Operating Expenses In 2015, operating expenses increased 34 % to € 93.7 million (2014: € 70.1 million). Expenses consisted of research and development expenses of € 78.7 million (2014: € 56.0 million) and general and administrative expenses of € 15.1 million (2014: € 14.1 million). Research and development expenses increased as planned due to ongoing projects. Operating expenses in the Proprietary Development segment rose from € 33.5 million to € 54.1 million and in the Partnered Discov- ery segment increased to € 25.9 million (2014: € 23.0 million). Personnel expenses from share-based payments are included in general and administrative expenses and research and develop- ment expenses. These expenses amounted to € 3.6 million in 2015 (2014: € 4.0 million). Revenues Group revenues increased 66 % year-on-year to € 106.2 million (2014: € 64.0 million). This increase mainly originated from the realization of deferred revenue resulting from the termination of the MOR202 co-development and co-promotion agreement with Celgene. Success-based payments amounted to 4 % (2014: 8 %) of total revenue. On a regional basis, MorphoSys generated 59 %, or € 62.2 million, of its commercial revenues with biotechnology and pharmaceutical companies and non-profit organizations headquartered in North America and 41 %, or € 44.0 million, with customers headquar- tered primarily in Europe and Asia. In the same period of the pre- vious year the distribution was 29 % and 71 %, respectively. ›› S E E F I G U R E 0 5 – Revenue of the MorphoSys Group by Region Roughly 97 % of Group revenues are attributable to activities with our partners Celgene, Novartis and Pfizer (2014: 92 % with Novartis, Celgene and Centocor). PROPRIE TARY DEVEL OPMEN T SEGMEN T The Proprietary Development segment achieved revenues of € 59.9 million in 2015 (2014: € 15.0 million). Most of this revenue resulted from the termination of co-development activities with Celgene in the first quarter of 2015. 34567834 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 RESEARCH AND DEVEL OPMEN T EXPENSES Research and development expenses increased by € 22.7 million in 2015 to a total of € 78.7 million (2014: € 56.0 million) and consist of expenses for external laboratory services (2015: € 29.2 million; 2014: € 14.9 million), personnel expenses (2015: € 25.6 million; 2014: € 21.0 million), expenses for intangible assets (2015: € 7.2 mil- lion; 2014: € 8.1 million), expenses for external services (2015: € 5.2 million; 2014: € 2.7 million), technical infrastructure ex- penses (2015: € 5.2 million; 2014: € 4.1 million), other expenses (2015: € 3.4 million; 2014: € 2.9 million) and expenses for consum- ables (2015: € 3.0 million; 2014: € 2.3 million). In 2015, a € 3.7 mil- lion impairment was recognized on goodwill resulting from the acquisition of Sloning BioTechnology GmbH. In 2014, expenses for intangible assets included impairment on patents, license rights and laboratory facilities of € 4.1 million. ›› S E E F I G U R E 0 7 – Selected R&D Expenses EBIT Earnings before interest and taxes (EBIT) amounted to € 17.2 mil- lion compared to € – 5.9 million in the previous year. The Propri- etary Development segment reported EBIT of € 10.7 million (2014: € – 18.4 million), while the Partnered Discovery segment achieved EBIT of € 20.4 million (2014: € 25.9 million). Finance Income and Expenses Finance income of € 3.8 million (2014: € 1.8 million) was generated in 2015 and included mainly interest income as well as realized and unrealized gains from currency hedging transactions. Fi- nance expenses amounted to € 0.4 million (2014: € 0.2 million) and resulted mainly from realized and unrealized losses from cur- rency hedging transactions. In 2015, the Company incurred proprietary development expenses of € 54.1 million (2014: € 33.5 million) and € 2.5 million (2014: € 2.9 million) for technology development. ›› S E E F I G U R E 0 8 – Distribution of R&D Expenses Taxes The Group reported income tax expenses of € 5.7 million in 2015 (2014: tax benefit of € 1.3 million) consisting of current tax ex- penses of € 4.2 million and deferred tax expenses of € 1.5 million. Consolidated Net Profit/Loss for the Period In 2015, the Company generated a net profit of € 14.9 million (2014: net loss of € – 3.0 million). The basic net result per share for 2015 is € 0.57 (2014: € – 0.12). GENERAL AND ADMINIS T RAT IVE EXPENSES General and administrative expenses were above the previous year’s level and amounted to € 15.1 million (2014: € 14.1 million). They mainly consisted of personnel expenses (2015: € 10.4 mil- lion; 2014: € 9.6 million), expenses for external services (2015: € 2.6 million; 2014: € 2.7 million), technical infrastructure ex- penses (2015: € 1.0 million; 2014: € 0.8 million) and other expenses (2015: € 1.1 million; 2014: € 1.0 million). Other Income and Expenses Other income totaled € 5.5 million (2014: € 0.8 million) and mainly stemmed from earnings effects from the fair-value measurement of the shares already held in Lanthio Pharma B.V. in the amount of € 4.5 million. Other income also included income from grants re- ceived and currency gains. Other expenses totaled € 0.8 million (2014: € 0.6 million) and mainly resulted from currency losses. 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 35 07 F I G U R E Multi-Year Overview – Income Statement Selected R & D Expenses (in million €) T O TA L 04 T A B L E Multiple-Year Overview – Income Statement1 in million € 55.91 Revenues Research and Development Expenses 49.21 56.0 General and Administrative Expenses 37.71 Other Income/Expenses EBIT Finance Income/Expenses Income Tax Income/Expenses 20.7 17.8 Profit/(Loss) for the Year from Continuing Operations 21.2 18.3 Profit/(Loss) for the Year from Discontinued Operations2 11.1 13.0 13.6 7.2 Consolidated Net Profits/(Loss) 1.6 3.3 21.0 17.8 12.8 15.0 2.2 2.3 78.7 2015 2014 20132 20122 20112 106.2 78.7 15.1 4.7 17.2 3.4 29.2 (5.7) 25.6 14.9 0.0 14.9 64.0 56.0 14.1 0.2 (5.9) 1.6 1.3 21.0 (3.0) 0.0 3.0 (3.0) 78.0 49.2 18.8 (0.1) 9.9 0.8 (3.3) 7.4 6.0 13.3 51.9 37.7 12.1 0.3 2.5 0.6 (0.7) 2.4 (0.4) 1.9 82.1 55.9 14.9 (1.5) 9.8 1.4 (3.0) 8.2 0.01 8.2 1 Differences due to rounding 2 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 2011 titled “Results from discontinued operations” from the year 2011 onwards. Other line items contain the results of the continuing operations. 2015 2013 2012 2014 e x ternal l ab or atory fundin g personnel c onsumab les other (includes expenses for intangible assets, technical infrastructure, and external services) 1 Due to the sale of sub -stantially all of the AbD Serotec operating segment with of closing date of 10 January 2013, the fi gures for the years 08 F I G U R E Financial Position Distribution of R & D Expenses (in million €) T O TA L PRINC IPL ES OF F INANC IAL MANAGEMEN T At MorphoSys, the primary goal of financial management is to en- sure sufficient liquidity reserves at all times for the Company’s continued growth. The most important sources of this liquidity are the cash inflows from the operating business and commercial op- erations. Cash flow projections and scenarios are used to deter- mine the level of liquidity needed. 55.91 C ASH FL OWS* The net cash outflow from operating activities in 2015 totaled 37.71 € 23.5 million (2014: cash outflow of € 14.2 million). *S E E G L O S S A R Y – page 142 49.21 33.9 19.1 33.5 In 2015, the Company invested in a variety of financial assets such as available-for-sale securities and bonds and financial assets clas- sified as loans and receivables. These investments brought cash 3.6 inflows of € 86.3 million (2014: cash outflow of € 21.5 million). 16.0 18.1 27.5 17.5 4.2 2.9 INVES T MEN T S In 2015, MorphoSys invested € 1.4 million in property, plant and equipment (2014: € 2.9 million) mainly for laboratory equipment (i.e., machinery) and computer hardware. Depreciation of property, plant and equipment increased slightly to € 1.5 million (2014: € 1.4 million). 78.7 56.0 The Company invested € 7.4 million in intangible assets in 2015 (2014: € 17.6 million). Amortization of intangible assets was slightly below the prior year’s level and amounted to € 1.9 million in 2015 (2014: € 2.7 million). In 2015, impairments of € 0.02 mil- lion (2014: on patents, licenses and laboratory equipment of € 4.1 million) were recognized on patents. 54.1 L IQUIDI T Y On December 31, 2015, the Company held liquid funds, marketable securities and other financial assets of € 298.4 million versus € 352.8 million on December 31, 2014. 22.1 19.6 In 2015, financing activities led to a cash outflow of € 4.1 million (2014: cash outflow of € 3.9 million). 2013 2012 2011 2014 proprie tary de v elopment e xpenses r&d e xpenses on b ehalf of partners technolo gy de v elopment e xpenses 1 Due to the sale of sub -stantially all of the AbD Serotec operating segment with of closing date of 10 January 2013, the fi gures for the years 2.9 2.5 2015 34567834 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 RESEARCH AND DEVEL OPMEN T EXPENSES Research and development expenses increased by € 22.7 million in 2015 to a total of € 78.7 million (2014: € 56.0 million) and consist of expenses for external laboratory services (2015: € 29.2 million; 2014: € 14.9 million), personnel expenses (2015: € 25.6 million; 2014: € 21.0 million), expenses for intangible assets (2015: € 7.2 mil- lion; 2014: € 8.1 million), expenses for external services (2015: € 5.2 million; 2014: € 2.7 million), technical infrastructure ex- penses (2015: € 5.2 million; 2014: € 4.1 million), other expenses (2015: € 3.4 million; 2014: € 2.9 million) and expenses for consum- ables (2015: € 3.0 million; 2014: € 2.3 million). In 2015, a € 3.7 mil- lion impairment was recognized on goodwill resulting from the acquisition of Sloning BioTechnology GmbH. In 2014, expenses for intangible assets included impairment on patents, license rights and laboratory facilities of € 4.1 million. ›› S E E F I G U R E 0 7 – Selected R&D Expenses EBIT Earnings before interest and taxes (EBIT) amounted to € 17.2 mil- lion compared to € – 5.9 million in the previous year. The Propri- etary Development segment reported EBIT of € 10.7 million (2014: € – 18.4 million), while the Partnered Discovery segment achieved EBIT of € 20.4 million (2014: € 25.9 million). Finance Income and Expenses Finance income of € 3.8 million (2014: € 1.8 million) was generated in 2015 and included mainly interest income as well as realized and unrealized gains from currency hedging transactions. Fi- nance expenses amounted to € 0.4 million (2014: € 0.2 million) and resulted mainly from realized and unrealized losses from cur- rency hedging transactions. In 2015, the Company incurred proprietary development expenses of € 54.1 million (2014: € 33.5 million) and € 2.5 million (2014: € 2.9 million) for technology development. ›› S E E F I G U R E 0 8 – Distribution of R&D Expenses Taxes The Group reported income tax expenses of € 5.7 million in 2015 (2014: tax benefit of € 1.3 million) consisting of current tax ex- penses of € 4.2 million and deferred tax expenses of € 1.5 million. Consolidated Net Profit/Loss for the Period In 2015, the Company generated a net profit of € 14.9 million (2014: net loss of € – 3.0 million). The basic net result per share for 2015 is € 0.57 (2014: € – 0.12). GENERAL AND ADMINIS T RAT IVE EXPENSES General and administrative expenses were above the previous year’s level and amounted to € 15.1 million (2014: € 14.1 million). They mainly consisted of personnel expenses (2015: € 10.4 mil- lion; 2014: € 9.6 million), expenses for external services (2015: € 2.6 million; 2014: € 2.7 million), technical infrastructure ex- penses (2015: € 1.0 million; 2014: € 0.8 million) and other expenses (2015: € 1.1 million; 2014: € 1.0 million). Other Income and Expenses Other income totaled € 5.5 million (2014: € 0.8 million) and mainly stemmed from earnings effects from the fair-value measurement of the shares already held in Lanthio Pharma B.V. in the amount of € 4.5 million. Other income also included income from grants re- ceived and currency gains. Other expenses totaled € 0.8 million (2014: € 0.6 million) and mainly resulted from currency losses. Multi-Year Overview – Income Statement 04 T A B L E Multiple-Year Overview – Income Statement1 in million € Revenues Research and Development Expenses General and Administrative Expenses Other Income/Expenses EBIT Finance Income/Expenses Income Tax Income/Expenses Profit/(Loss) for the Year from Continuing Operations Profit/(Loss) for the Year from Discontinued Operations2 Consolidated Net Profits/(Loss) 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 35 2015 2014 20132 20122 20112 106.2 78.7 15.1 4.7 17.2 3.4 (5.7) 14.9 0.0 14.9 64.0 56.0 14.1 0.2 (5.9) 1.6 1.3 (3.0) 0.0 (3.0) 78.0 49.2 18.8 (0.1) 9.9 0.8 (3.3) 7.4 6.0 13.3 51.9 37.7 12.1 0.3 2.5 0.6 (0.7) 2.4 (0.4) 1.9 82.1 55.9 14.9 (1.5) 9.8 1.4 (3.0) 8.2 0.01 8.2 1 Differences due to rounding 2 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. Financial Position PRINC IPL ES OF F INANC IAL MANAGEMEN T At MorphoSys, the primary goal of financial management is to en- sure sufficient liquidity reserves at all times for the Company’s continued growth. The most important sources of this liquidity are the cash inflows from the operating business and commercial op- erations. Cash flow projections and scenarios are used to deter- mine the level of liquidity needed. C ASH FL OWS* The net cash outflow from operating activities in 2015 totaled € 23.5 million (2014: cash outflow of € 14.2 million). *S E E G L O S S A R Y – page 142 In 2015, the Company invested in a variety of financial assets such as available-for-sale securities and bonds and financial assets clas- sified as loans and receivables. These investments brought cash inflows of € 86.3 million (2014: cash outflow of € 21.5 million). In 2015, financing activities led to a cash outflow of € 4.1 million (2014: cash outflow of € 3.9 million). INVES T MEN T S In 2015, MorphoSys invested € 1.4 million in property, plant and equipment (2014: € 2.9 million) mainly for laboratory equipment (i.e., machinery) and computer hardware. Depreciation of property, plant and equipment increased slightly to € 1.5 million (2014: € 1.4 million). The Company invested € 7.4 million in intangible assets in 2015 (2014: € 17.6 million). Amortization of intangible assets was slightly below the prior year’s level and amounted to € 1.9 million in 2015 (2014: € 2.7 million). In 2015, impairments of € 0.02 mil- lion (2014: on patents, licenses and laboratory equipment of € 4.1 million) were recognized on patents. L IQUIDI T Y On December 31, 2015, the Company held liquid funds, marketable securities and other financial assets of € 298.4 million versus € 352.8 million on December 31, 2014. 34567836 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 This amount consisted of cash and cash equivalents of € 90.9 mil- lion (December 31, 2014: € 32.2 million), marketable securities and bonds of € 97.4 million (December 31, 2014: € 113.5 million) and other financial assets in the amount of € 94.6 million (Decem- ber 31, 2014: € 157.0 million) that are categorized as “loans and receivables” under “other receivables” contained in “current assets.” Other investments under the category of “loans and receivables” of € 15.5 million were reported under non-current assets as of De- cember 31, 2015 (December 31, 2014: € 50.0 million). The decrease in marketable securities and other financial assets mainly resulted from the acquisition of the remaining shares in Lanthio Pharma B.V., the share buyback, the milestone payment to Emergent and the use of cash for operating activities in 2015. 05 T A B L E Multiple-Year Overview – Financial Situation1 in million € 2015 2014 2013 2012 2011 Net Cash Provided by/Used in Operating Activities2, 4 Net Cash Provided by/Used in Investing Activities4 Net Cash Provided by/Used in Financing Activities2, 4 Cash and Cash Equivalents (as of 31 December)3 Available-for-sale Financial Assets Bonds, Available-for-sale Financial Assets Categorized as Loans and Receivables, Current Portion Financial Assets Categorized as Loans and Receivables, Net of Current Portion (23.5) 86.3 (4.1) 90.9 64.3 33.1 94.6 15.5 (14.2) (21.5) (3.9) 32.2 106.0 7.5 157.0 50.0 89.1 (193.9) 130.6 71.9 188.4 11.1 119.3 0.0 1.8 (12.1) 1.6 40.7 79.7 0.0 10.0 0.0 27.1 (18.1) 1.3 54.6 79.8 0.0 0.0 0.0 1 Differences due to rounding 2 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. 3 In 2012, € 5.3 million in cash and cash equivalents was recorded under assets of disposal group classified as held for sale. 4 In 2015, interest paid and interest received were reclassified from operating activities into investing activities and financing activities in the statement of cash flows. In order to provide comparative information for the previous year, the figures for 2014 have been adjusted accordingly. Net Assets ASSE T S As of December 31, 2015, total assets amounted to € 400.1 million and were € 26.4 million lower compared to December 31, 2014 (€ 426.5 million). Current assets declined by € 22.3 million. The rise in cash and cash equivalents and available-for-sale bonds was overcompensated by the use of cash for operating activities in 2015, the cash payment of € 20.0 million for the acquisition of the remaining shares in Lanthio Pharma B.V. and the decline in ac- counts receivable. Most of the cash and cash equivalents were invested in various securities. As of December 31, 2015, an amount of € 64.3 million (December 31, 2014: € 106.0 million) was invested in various money market funds and reported under “available-for-sale finan- cial assets.” The item “bonds, available-for-sale” contained bonds totaling € 33.1 million (December 31, 2014: € 7.5 million). Finan- cial instruments totaling € 94.6 million (December 31, 2014: € 157.0 million) were allocated to the category “loans and receiv- ables.” These instruments were mainly term deposits with either fixed or variable interest rates. 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 37 Non-current assets declined by € 4.1 million year-on-year to € 100.0 million due to the reclassification of cash invested in long- term assets to current assets because maturities had fallen below 12 months. The effect of this reclassification was largely compen- sated by the rise in R&D programs under development of € 32.7 mil- lion from the purchase of preclinical programs through the acqui- sition of Lanthio Pharma B.V. and a milestone payment to Emergent. The preclinical program MOR107 (formerly LP2) as well as three further molecules at an earlier stage of development acquired through the acquisition of Lanthio Pharma B.V. have been part of MorphoSys’s proprietary portfolio since May 2015. L IABIL I T IES Current liabilities declined from € 32.7 million on December 31, 2014 to € 27.5 million on December 31, 2015. This effect mainly resulted from a decrease in the item “deferred revenue, net of cur- rent portion” and was partially compensated by higher accounts payable and accrued expenses. Non-current liabilities (December 31, 2015: € 9.9 million; Decem- ber 31, 2014: € 45.0 million) declined by € 35.1 million year-on- year mainly due to the recognition of deferred revenues through profit and loss after the termination of the co-development and co-promotion agreement with Celgene for the MOR202 program. S T OCKHOL DERS’ EQUI T Y As of December 31, 2015, Group equity totaled € 362.7 million compared to € 348.8 million on December 31, 2014. The number of shares issued totaled 26,537,682 as of Decem- ber 31, 2015, of which 26,103,012 shares were outstanding (De- cember 31, 2014: 26,456,834 shares issued and 26,005,944 shares outstanding). The number of authorized ordinary shares increased from 4,957,910 on December 31, 2014 to 13,206,421 as a result of the creation of € 10,584,333 in new Authorized Capital 2015-I and the cancella- tion of € 2,335,822 in Authorized Capital 2013-I at the Annual Gen- eral Meeting on May 8, 2015. The number of ordinary shares of conditional capital declined from 7,166,848 to 7,086,000 after the exercise of 80,848 conversion rights in 2015. The value of treasury stock increased from € 14,251,962 on Decem- ber 31, 2014 to € 15,827,946 on December 31, 2015 mainly as the result of MorphoSys’s repurchase of 88,670 of its own shares on the stock exchange. The repurchase, which totaled € 5,389,984, was carried out at an average share price of € 60.79. Brokerage fees for the repurchase totaled € 2,947. The effect of this repur- chase was offset by the transfer of 104,890 of the Company’s own shares from the 2011 long-term incentive plan (LTI plan) amount- ing to € 3,816,947 to the Management Board and Senior Manage- ment Group. The vesting period for this LTI program expired on June 1, 2015. As of December 31, 2015, the Company held a total of 434,670 of its own shares. Financing As of December 31, 2015, the Company’s equity ratio had risen to 91 % compared to 82 % on December 31, 2014. The Group is cur- rently not financed by debt. 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 There is no agency currently assessing the creditworthiness of MorphoSys. 34567838 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 Multi-Year Overview – Balance Sheet Structure 06 T A B L E Multi-Year Overview – Balance Sheet Structure1 in million € 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 1 Differences due to rounding 12/31/2015 12/31/2014 12/31/2013 12/31/2012 12/31/2011 300.1 100.0 0.0 400.1 27.5 9.9 0.0 362.7 400.1 322.4 104.1 0.0 426.5 32.7 45.0 0.0 348.8 426.5 406.6 41.1 0.0 447.7 35.4 60.1 0.0 352.1 447.7 142.9 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 0.0 197.1 228.4 Comparison of Actual Business Results to Forecasts In the 2015 reporting year, MorphoSys demonstrated solid finan- cial performance. The revenue and earnings targets published at the start of the financial year were revised in March 2015 follow- ing the termination of the cooperation with Celgene to develop MOR202. The full recognition of deferred revenue from the origi- nal agreement and a one-time payment from Celgene prompted an upward revision in the revenue and earnings forecasts. The re- lated projected costs for proprietary research and development were also raised. A detailed comparison of our forecasts with the actual results can be found in Table 7. 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 39 07 T A B L E Comparison of Actual Business Results to Forecasts 2015 Targets 2015 Results Financial targets Proprietary Development Group revenue between € 101 million and € 106 million (initial guidance € 58 million to € 63 million, updated on March 26, 2015 with the announcement of termination of Celgene cooperation) Expenses for proprietary product and technology development of € 56 million to € 63 million (initial guidance € 48 million to € 58 million, updated on March 26, 2015 with the announce- ment of termination of Celgene cooperation) EBIT of € 9 million to € 16 million (initial guidance € – 20 million to € – 30 million, updated on March 26, 2015 with the announcement of termination of Celgene cooperation) MOR208 • Continuation of the phase 2 study in NHL and B-ALL* • Initiation of further combination studies in NHL MOR202 • Continuation of the phase 1/2a study in additional cohorts and combination studies with pomalidomide and lenalidomide Group revenue of € 106.2 million Expenses for proprietary product and technology develop- ment of € 56.6 million EBIT of € 17.2 million MOR208 • Presentation of clinical data from the ongoing phase 2a study in NHL at the ASCO Annual Meeting in May/June, the EHA conference in June and the annual ASH meeting in December • Planned initiation of further combination studies in 2016 based on data presented in the 2015 financial year MOR202 • Presentation of clinical data from the ongoing phase 1/2a study at the ASCO Annual Meeting in May/June, the EHA conference in June and the annual ASH meeting in December • Initiated treatment of additional patient groups in combi- nation with pomalidomide or lenalidomide shortly after financial year end MOR209/ES414 • Initiation of phase 1 trial in mCRPC under the cooperation MOR209/ES414 • Initiation in March 2015 of a phase 1 trial in up to with Emergent 130 patients suffering from mCRPC Partnered Discovery Progress of partnered development programs • Net addition of five partnered programs • Initiation of a phase 2 clinical study with the HuCAL antibody guselkumab (CNTO1959) in psoriasis arthritis by partner Janssen • Initiation of a phase 1 trial of a HuCAL antibody in the field of blood disorders by partner Novartis • Exercise of the option by partner Heptares to initiate its own therapeutic antibody program under an existing research alliance • Initiation of a phase 1 trial of the HuCAL antibody BAY1093884 in the field of bleeding disorders by partner Bayer HealthCare *S E E G L O S S A R Y – page 142 345678 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 The Management Board’s General Assessment of Business Performance The 2015 financial year marked a successful year for the Group overall, even though not all targets were reached. We made solid progress in growing our pipeline and raised our number of devel- opment programs to 103 by the end of 2015 (2014: 94). The Group’s revenue increased to € 106.2 million in the 2015 fi- nancial year, and EBIT grew to € 17.2 million. The rise in revenue and the positive operating result were mainly driven by the recog- nition of deferred revenues arising from the termination of the Celgene cooperation. Net cash outflows from operating activities in 2015 totaled € 23.5 million. These outflows stemmed from in- creased investment in the proprietary R&D, in line with expecta- tions. The equity ratio of 91 % and liquidity of € 298.4 million underscore the Group’s very sound financial position. The number of development programs in the Proprietary Develop- ment segment increased to 14. Promising results from preclinical and clinical studies of MOR202 and MOR208 were presented at major medical conferences. MorphoSys is developing both of these programs independently after the cooperation with Celgene to de- velop MOR202 ended in March. In the first quarter, MOR209/ES414 commenced clinical development, and GSK announced the initia- tion of an additional study of MOR103 in osteoarthritis. The acqui- sition of Lanthio Pharma added four development candidates to MorphoSys’s portfolio. Collaborations with Immatics, Heptares and G7 give the Company broader access to innovative targets to be validated as part of our R&D activities. Solid progress was also made in our Partnered Discovery segment. The number of programs in this segment increased to 89, with three of these programs in clinical phase 3 studies, nine antibody programs in clinical phase 2 and a further nine development can- didates in clinical phase 1. Accounting Judgements In preparing the 2015 consolidated financial statements, no ac- counting policies or accounting options were used that differ from those in prior years and that, if used or exercised differently, would have had a material effect on the Company’s net assets, financial position or balance sheet structure. Information on the effects of the Management Board’s use of estimates, assumptions and judg- ments can be found in the Notes to the Consolidated Financial Statements. G R O U P M A N A G E M E N T R E P O R T Outlook and Forecast 41 Outlook and Forecast MorphoSys is increasingly focusing on the development of its proprietary therapeutic antibodies. These activities are supple- mented by numerous partnered programs. By maximizing the number of development programs, MorphoSys raises its future growth potential and limits the overall risk inherent in developing novel drugs. General Statement on Expected Development MorphoSys’s strategic focus is on the development of a broad and sustainable pipeline of innovative drug candidates, both on a pro- prietary basis and with partners. The development of drug candi- dates is based on MorphoSys’s established and proven technolo- gies and the Company continues to invest in their development. In the therapeutic area, the commercialization of these technologies provides contractually secured cash flows from long-term partner- ships with major pharmaceutical companies. MorphoSys also ben- efits from the successful development of drug candidates through milestone payments and royalties from product sales as soon as the drugs are commercialized. Revenues from R&D funding, license and milestone payments and a strong liquidity position enable the Company to build its com- mercial operations by investing in the development of proprietary drugs and technologies. The Management Board expects the fol- lowing developments in 2016: • Higher investment in proprietary product candidates by initiat- ing further clinical studies. • Continued expansion of proprietary development activities through in-licensing and possibly also through company acqui- sitions as well as co-development or new proprietary develop- ment activities. • New strategic agreements based on proprietary technologies focused on gaining access to innovative target molecules and compounds. • Investments in technology development to maintain the Com- pany’s lead in the field of antibodies and related technologies, such as lanthipeptides. • Expansion of the therapeutic antibody pipeline as part of the partnership with Novartis. Strategic Outlook MorphoSys’s business model is based on its proprietary technolo- gies, including the HuCAL and Ylanthia antibody libraries, the Slonomics platform and the lanthipeptide library. We use these technologies to develop innovative drug candidates so that pa- tients have access to better treatment alternatives. MorphoSys’s management intends to continue expanding the Company’s pro- prietary portfolio of drug candidates and increase its investment in its proprietary development portfolio. MorphoSys will also con- tinue to concentrate on using and expanding its technologies in fast-growing, innovation-driven areas of the life sciences sector. In the Proprietary Development segment, MorphoSys develops proprietary therapeutic antibodies and peptides, primarily in the areas of inflammatory diseases and oncology. Decisions to enter into alliances to develop MorphoSys’s proprietary candidates will be made on an individual basis. In some cases projects can remain in proprietary development for a longer period – even until their commercialization. 3 The Partnered Discovery segment generates contractually secured cash flows based on long-term cooperation agreements. The part- nership with Novartis is responsible for the majority of develop- ment candidates. This partnership is scheduled to end in Decem- ber 2017 with an option for Novartis to extend it for an additional two years. The development of candidates from this partnership and others continues even after the contract expires and can lead to further milestone payments. The Company’s broad pipeline promises an impressive number of market-ready, therapeutic anti- bodies in the coming years and financial participation in the form of royalty payments from product sales. Results from phase 3 tri- als of two product candidates are expected in 2016. If the study results are positive, the antibodies could receive approval as early as 2016/2017. For the foreseeable future, MorphoSys plans to invest a substantial portion of its financial resources in proprietary R&D. Management believes that this is the best way to expand the Company’s port- folio of proprietary development candidates and strengthen its technology platform and thereby, maximize shareholder value. 4567842 G R O U P M A N A G E M E N T R E P O R T Outlook and Forecast Expected Economic Development The International Monetary Fund (IMF) expects the growth of the global economy in 2016 to be higher than in 2015 but, because of increasing global risk, growth is anticipated to be lower than pre- viously expected. In its January forecast, the IMF estimates growth will reach 3.4 % in the current year (2015: 3.1 %), whereas in its fall 2015 forecast the IMF still expected growth of 3.6 %. The reasons given for the higher level of economic uncertainty at the start of the year were the ongoing slowdown in China and several other emerging markets, the sharp drop in oil and commodity prices and the unpredictable impact of the refugee crisis. The global economy and the capital markets were also shaken by the massive declines in stock markets in the first few weeks of the year. Based on reduced growth prospects in the emerging economies, the economic outlook was further reduced by other institutions. In its latest update from February 2016, OECD reduced its estimate for global growth to 3.0 % (previously 3.3 %). The advanced economies should grow by a total of 2.1 % on average in 2016 compared to the previous year (2015: 1.9 %). The IMF ex- pects Germany to grow 1.7 % in 2016 (2015: 1.5 %), which is the average rate expected for the eurozone (2016: 1.7 %, 2015: 1.5 %), but below European countries such as Spain and Great Britain. Europe’s growth is expected to be more consumer-led rather than export-led because the very low level of inflation coupled with sluggish growth in the emerging markets will pressure exports. The US economy is expected to remain more robust and could reach growth of 2.6 % (2015: 2.5 %). In 2016, the emerging markets are expected to achieve overall growth of 4.3 % following 4.0 % in 2015 but will still be pressured by weaker growth in China, which the IMF has estimated at 6.3 % (2015: 6.9 %). There is also some concern about Brazil, which is expected to remain in a deep reces- sion (2016: -3.5 % versus 2015: -3.8 %), and Russia, whose economy is also expected to shrink (2016: -1.0 % versus 2015: -3.7 %). Expected Development of the Life Sciences Sector After four years (2012 – 2015) of outstanding performance for bio- technology shares, during which the Nasdaq Biotechnology Index* more than tripled, the industry news service BioCentury expects the sector’s performance in 2016 to be more in line with the over- all market. The sector’s volatility is expected to increase because of potential discussions during the US presidential campaign on price controls in the pharmaceutical industry. The sector has already come under massive pressure on the stock markets in early 2016 with the Nasdaq Biotechnology Index falling to a 15-month low. The significantly greater volatility of the capital markets means that it has become more difficult to forecast devel- opment of the sector’s financing conditions in 2016. *S E E G L O S S A R Y – page 142 Fundamentally, the sector is still on a strong footing. Scientific advances and a growing understanding of biological relationships, such as those in combination therapies in the area of immuno- oncology, coupled with a continued high unmet medical need par- ticularly in the areas of cancer and rare diseases, lead industry experts to expect more innovation and new drug approvals. After an exceptional year 2015 in which the FDA granted 45 approvals, BioCentury has already listed a potential 35 approvals for the year 2016. Expected Business Development MorphoSys will use the majority of the proceeds from the Novartis contract, which are guaranteed until at least the end of November 2017, and its strong liquidity position to concentrate on expanding and increasing the value of its development pipeline. The Company expects the Partnered Discovery segment to start ten new partnered programs every year on average until the end of 2017. The customary attrition rates in drug development mean that the net growth of the overall pipeline, however, will be some- what lower. The Company aims to enter new partnerships with pharmaceutical and biotechnology companies based on the Ylanthia technology. These collaborations and those with academic insti- tutes are also expected to provide access to new target molecules and technologies. In a best-case scenario, the Company may see the first approval of a therapeutic antibody from one of its partnerships in 2016. Re- sults from a phase 3 study of bimagrumab (BYM338) are expected in the first half of 2016. Novartis is solely responsible for the devel- opment of this antibody and recently announced that it will seek approval in 2016 if the study results are positive. An application for approval might also be submitted for guselkumab (CNTO1959), being developed by Janssen. G R O U P M A N A G E M E N T R E P O R T Outlook and Forecast 43 Expected Personnel Development The number of employees in the Proprietary Development and Partnered Discovery segments is expected to remain stable during the 2016 financial year. Future Research and Development The Company’s R&D budget for proprietary drug development will rise significantly again in the 2016 financial year compared to the prior year. The majority of investment will fund the clinical development of the most advanced drug candidates MOR208, MOR202 and MOR209/ES414. Further investment is planned in the areas of target molecule validation and antibody and tech- nology development. The steps planned for the Company’s proprietary portfolio in 2016 are expected to include: • Initiation of the L-MIND combination study of MOR208 in combi- nation with lenalidomide in DLBCL • Initiation of a safety evaluation of MOR208 in combination with bendamustine (B-MIND); this study is expected to be transi- tioned into a pivotal phase 3 study in 2017 in which MOR208 in combination with bendamustine is tested in comparison to ritux- imab and bendamustine • Initiation of the combination study of MOR208 in combination with idelalisib in CLL • Continuation of the phase 1/2a study of MOR202 with additional patients and a recommended dosage of 16 mg/kg alone and in combination with pomalidomide and lenalidomide • Continuation of an adapted phase 1 trial of MOR209/ES414 in mCRPC as part of the cooperation with Emergent • Continuation and initiation of a phase 1 study of the MOR106 co-development program with Galapagos • Initiation of a phase 1 study of MOR107 • In-licensing of one or more target molecules or compounds to reinforce the proprietary portfolio • Further development of the lanthipeptide technology • Initiation and continuation of new development programs in the field of antibody identification and preclinical development Expected Development of the Financial Position and Liquidity MorphoSys has a solid financial base and predictable revenues that stem mainly from its collaboration with Novartis. Addition- ally, MorphoSys receives performance-based milestone payments for the successful development of product candidates. Based on these factors, the Management Board expects Group revenue for the 2016 financial year in the range of € 47 million to € 52 million. This forecast does not include any additional revenue from new collaborations. The majority of the Group’s revenue is expected to be generated by the Partnered Discovery segment. Based on management’s current projections, R&D expenses for proprietary programs and technology development in 2016 should be in the range of € 76 million to € 83 million. MorphoSys plans to initiate further clinical studies in addition to continuing the cur- rent ongoing studies for MOR208, MOR202 and MOR209/ES414. R&D expenses in the Partnered Discovery segment are expected to be at roughly the same level as the previous year. The Company’s EBIT in 2016 is expected to be in the range of € – 58 million to € – 68 million. This guidance does not include any potential in-licensing or co-development of further development candidates. The Partnered Discovery segment is expected to gen- erate operating results in 2016 at roughly the same level as the previous year. MorphoSys anticipates the Proprietary Development segment to report a significant loss brought on by higher expenses for proprietary R&D. In the years ahead, there will be an increasing impact on net assets and the financial position from one-time events, such as in-licens- ing and out-licensing proprietary product candidates, major mile- stone payments as well as royalties related to HuCAL or Ylanthia antibodies that reach the market. Just as failures in drug develop- ment can have a negative impact on the MorphoSys Group, these types of events can lead to a significant change in our financial targets. Near-term revenue growth depends on the Company’s ability to enter new partnerships and/or out-license proprietary programs. Royalties for commercialized products could start con- tributing to revenue growth as of 2017. 4567844 G R O U P M A N A G E M E N T R E P O R T Outlook and Forecast At the end of the 2015 financial year, MorphoSys had liquid funds of € 298.4 million (December 31, 2014: € 352.8 million). This de- cline resulted from proprietary R&D expenses as well as the acqui- sition of the remaining shares in Lanthio Pharma B.V. The projected loss in 2016 will cause the liquidity position to decline even fur- ther. MorphoSys considers its solid cash position as an advantage that can be used to accelerate its future growth through strategic activities, such as in-licensing compounds and investments in promising companies. The funds can also be used for increased research and development in the Company’s portfolio of drug candidates. DIVIDEND Based on German accounting principles, MorphoSys’s financial statements report an accumulated profit that could be used for dividends. Based on the expected losses in 2016, the Company no longer expects to report any accumulated income. MorphoSys will continue investing in the development of proprietary drugs and intends to do further in-licensing and acquisitions so that it can continue creating shareholder value and open up new growth op- portunities. For this reason, the Company does not expect to pay a dividend in the foreseeable future. This outlook is based on Management Board assumptions and factors that were known at the time of preparing this Annual Re- port that could influence the Company in 2016 and beyond. Future results may differ materially from the expectations described in the section “Outlook and Forecast.” Key risks are described in the risk report. G R O U P M A N A G E M E N T R E P O R T Shares and the Capital Market 45 Shares and the Capital Market MorphoSys’s share price was highly volatile during the reporting year. The year’s high of € 78 was reached on January 8, 2015 and the year’s low of € 52.52 was set in early November 2015. The main reason for the poor share price performance was the termination of the cooperation with Celgene. The shares closed the financial year at € 57.65, giving the Company a market capitalization* of € 1.53 billion. MorphoSys’s share price performance lagged be- hind the performance of the benchmark indices, which increased 34 % (TecDAX*) and 11 % (Nasdaq Biotechnology Index) in the 2015 financial year. *S E E G L O S S A R Y – page 142 ›› S E E F I G U R E 0 9 – Performance of the MorphoSys Share in 2015 ›› S E E F I G U R E 10 – Comparison of the MorphoSys Share Price Development between 2011 and 2015 Stock Market Development For global stock markets 2015 was a turbulent year. The DAX, Ger- many’s leading index, closed the year with sharp price gains for the fourth consecutive year. As in previous years, performance in Germany was supported by lower interest rates that offset the neg- ative effects of falling oil prices and a slide in the Chinese stock market. After a six-year rally in the US Dow Jones Index that ended in 2014, US stock markets had to accept a decline in the 2015 re- porting year. MorphoSys’s investor relations activities in 2015 continued to target Europe and the USA. There continued to be tremendous in- terest in biotechnology shares from US investors. Liquidity and Index Membership In 2015, stronger interest in MorphoSys shares boosted their year- on-year average daily trading volume across all trading platforms in the regulated market to € 14.9 million (2014: € 12.0 million). The trading volume of the shares traded on the TecDAX, the index for the 30 largest technology stocks on the Frankfurt Stock Exchange, increased by almost 15 % on average. By the end of 2015, MorphoSys improved its standing in the TecDAX and was ranked 8th in terms of trading volume (year-end 2014: 9th). In terms of market capital- ization, MorphoSys was ranked 10th (year-end 2014: 8th). In addition, the average daily trading volume in MorphoSys shares on the alternative trading platforms (“dark pools”) in 2015 amounted to approximately 89,800 shares valued at € 5.8 million (2014: ap- prox. 64,400 shares valued at € 4.6 million). Common Stock The exercise of 80,848 convertible bonds in 2015 prompted a rise in the Company’s common stock to 26,537,682 shares or € 26,537,682.00. MorphoSys issued stock options and non-interest-bearing con- vertible bonds under its employee incentive program until 2010. In 2011, the Company introduced a performance-based long-term in- centive (LTI) plan. The Company repurchases shares annually for this plan. A detailed description of this program can be found in the Corporate Governance Report contained in this Annual Report. In April 2015, 40,425 performance shares were issued to the Man- agement Board and the Senior Management Group under the LTI plan. For more information, please refer to the Notes (see section 8.2.5). Stock options were not issued to the Management Board, members of the Senior Management Group or the workforce in the reporting year. 4 567844 G R O U P M A N A G E M E N T R E P O R T Outlook and Forecast 09 F I G U R E At the end of the 2015 financial year, MorphoSys had liquid funds of € 298.4 million (December 31, 2014: € 352.8 million). This de- cline resulted from proprietary R&D expenses as well as the acqui- sition of the remaining shares in Lanthio Pharma B.V. The projected loss in 2016 will cause the liquidity position to decline even fur- ther. MorphoSys considers its solid cash position as an advantage that can be used to accelerate its future growth through strategic activities, such as in-licensing compounds and investments in promising companies. The funds can also be used for increased research and development in the Company’s portfolio of drug candidates. highest le ve l 01/08/2015 150 140 130 120 110 DIVIDEND Based on German accounting principles, MorphoSys’s financial statements report an accumulated profit that could be used for dividends. Based on the expected losses in 2016, the Company no 100 90 Performance of the MorphoSys Share in 2015 (1 January 2015 = 100 %) longer expects to report any accumulated income. MorphoSys will continue investing in the development of proprietary drugs and intends to do further in-licensing and acquisitions so that it can continue creating shareholder value and open up new growth op- portunities. For this reason, the Company does not expect to pay a dividend in the foreseeable future. lowest le ve l 11/04/2015 31.46 % This outlook is based on Management Board assumptions and factors that were known at the time of preparing this Annual Re- port that could influence the Company in 2016 and beyond. Future results may differ materially from the expectations described in the section “Outlook and Forecast.” Key risks are described in the risk report. + 2.63 % 80 70 60 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC morphosys nas daq b iotechn olo gy inde x tecda x 10 F I G U R E Comparison of the MorphoSys Share Price Development between 2011 and 2015 (1 January 2011 = 100 %) highest le ve l 12/18/2014 € 86.72 lowest le ve l 11/23/2011 € 15.89 550 500 450 400 350 300 250 200 150 100 50 0 2011 2012 2013 2014 2015 morphosys nas daq b iotechn olo gy inde x tecda x G R O U P M A N A G E M E N T R E P O R T Shares and the Capital Market 45 Shares and the Capital Market MorphoSys’s share price was highly volatile during the reporting year. The year’s high of € 78 was reached on January 8, 2015 and the year’s low of € 52.52 was set in early November 2015. The main reason for the poor share price performance was the termination of the cooperation with Celgene. The shares closed the financial year at € 57.65, giving the Company a market capitalization* of € 1.53 billion. MorphoSys’s share price performance lagged be- hind the performance of the benchmark indices, which increased 34 % (TecDAX*) and 11 % (Nasdaq Biotechnology Index) in the 2015 financial year. *S E E G L O S S A R Y – page 142 ›› S E E F I G U R E 0 9 – Performance of the MorphoSys Share in 2015 ›› S E E F I G U R E 10 – Comparison of the MorphoSys Share Price Development between 2011 and 2015 Stock Market Development For global stock markets 2015 was a turbulent year. The DAX, Ger- many’s leading index, closed the year with sharp price gains for the fourth consecutive year. As in previous years, performance in Germany was supported by lower interest rates that offset the neg- ative effects of falling oil prices and a slide in the Chinese stock market. After a six-year rally in the US Dow Jones Index that ended in 2014, US stock markets had to accept a decline in the 2015 re- porting year. MorphoSys’s investor relations activities in 2015 continued to target Europe and the USA. There continued to be tremendous in- terest in biotechnology shares from US investors. Liquidity and Index Membership In 2015, stronger interest in MorphoSys shares boosted their year- on-year average daily trading volume across all trading platforms in the regulated market to € 14.9 million (2014: € 12.0 million). The trading volume of the shares traded on the TecDAX, the index for the 30 largest technology stocks on the Frankfurt Stock Exchange, increased by almost 15 % on average. By the end of 2015, MorphoSys improved its standing in the TecDAX and was ranked 8th in terms of trading volume (year-end 2014: 9th). In terms of market capital- ization, MorphoSys was ranked 10th (year-end 2014: 8th). In addition, the average daily trading volume in MorphoSys shares on the alternative trading platforms (“dark pools”) in 2015 amounted to approximately 89,800 shares valued at € 5.8 million (2014: ap- prox. 64,400 shares valued at € 4.6 million). Common Stock The exercise of 80,848 convertible bonds in 2015 prompted a rise in the Company’s common stock to 26,537,682 shares or € 26,537,682.00. MorphoSys issued stock options and non-interest-bearing con- vertible bonds under its employee incentive program until 2010. In 2011, the Company introduced a performance-based long-term in- centive (LTI) plan. The Company repurchases shares annually for this plan. A detailed description of this program can be found in the Corporate Governance Report contained in this Annual Report. In April 2015, 40,425 performance shares were issued to the Man- agement Board and the Senior Management Group under the LTI plan. For more information, please refer to the Notes (see section 8.2.5). Stock options were not issued to the Management Board, members of the Senior Management Group or the workforce in the reporting year. 4 567846 G R O U P M A N A G E M E N T R E P O R T Shares and the Capital Market 08 T A B L E Key Data for the MorphoSys Share (as of December 31) 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 1 Figures of 2011 only include trading on Xetra and German regional exchanges. 2015 2014 2013 2012 2011 362.7 348.8 352.1 202.0 197.1 26,537,682 26,456,834 26,220,882 23,358,228 23,112,167 1,530 57.65 14.9 0.87 2,027 76.63 11.9 0.65 1,464 55.85 6.9 0.59 685 29.30 1.9 0.38 405 17.53 1.8 0.38 International Investor Base Annual General Meeting Various voting right notifications were issued during the report- ing year in accordance with Sections 21, 25 and 26 of the German Securities Trading Act (WpHG). These notifications were published on the MorphoSys website and can be found under Media and Investors – Stock Information – Shareholder Structure. According to the definition given by the Deutsche Börse, 98.3 % of MorphoSys AG’s shares were in free float at the end of the report- ing year. Novartis Pharma AG (Basel, Switzerland) held roughly 4.1 % and Celgene Netherlands II BV (Amsterdam, the Nether- lands) held about 3 % of the shares. International institutional investors continued to hold approximately 70 % of the shares. Ac- cording to the latest voting right announcements, our largest sin- gle shareholders were Flossbach von Storch Invest S.A. (Luxem- bourg) with 5.8 %, Baillie Gifford & Co. (Edinburgh, UK) with 5.0 %, Templeton Investment Counsel, LLC (Wilmington, DE, USA) with 3.1 %, Templeton Global Advisors Limited (Nassau, Bahamas) with 3.1 %, and Invesco Holding Company Limited (Henley-on-Thames, UK) with 3.0 %. An overview of the current shareholder structure can also be found on the Company’s website (Media and Investors – Stock Information – Shareholder Structure). The Management and Supervisory Boards of MorphoSys AG welcomed shareholders to the Company’s 17th Annual General Meeting in Munich on May 8, 2015. The shareholders and proxies attending represented more than 50 % of the common stock of MorphoSys AG (2014: 47.8 % of the common stock). All 15 agenda items submitted for resolution were adopted by a clear majority. This year’s Annual General Meeting is scheduled for June 2, 2016 and will take place again in Munich. Investor Relations Activities During the 2015 financial year, MorphoSys continued to strengthen its communication with the capital markets. The Company took part in 20 international investor conferences and held several road shows and private meetings in both Europe and the USA. There continued to be strong interest from specialized healthcare inves- tors headquartered in the USA. With the Company’s publication of the annual, half-yearly and quarterly results, the Management Board held conference calls to report past and expected business developments and answer questions from analysts and investors. In private meetings, investors were not only interested in the gen- eral progress of the drug pipeline but were especially interested in the development of the proprietary portfolio, which had a total of 14 active programs at the end of the reporting year. Ten analysts were covering MorphoSys shares at the end of 2015. G R O U P M A N A G E M E N T R E P O R T Shares and the Capital Market 47 09 T A B L E Analyst Recommendations (as of December 31, 2015) Buy/Overweight 5 Hold 4 Sell 0 n/a 1 Buy/Overweight; Hold; Sell; n/a = not available (no rating) For the second consecutive year, MorphoSys was awarded the first prize in the “Investors’ Darling 2015 – Capital Market Strategist of the Year” competition for the TecDAX. The Handelshochschule Leipzig, supported by the Manager Magazine, evaluated the capi- tal market communications of all index-listed stock companies. The evaluation included the quality of standard financial report- ing, the IR website, investor presentations and capital market performance. Detailed information on the MorphoSys share, financial ratios, the Company’s strategic direction and the Group’s recent developments can be found on the Company’s website (Media and Investors). 567848 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development Sustainable Business Development At MorphoSys, sustainability is a value firmly anchored in the Company’s corporate culture to ensure it acts in an environmen- tally and socially responsible manner for the benefit of present and future generations. Complying with the highest ethical, social and environmental standards goes hand in hand with long-term eco- nomic success. This section describes the measures taken in the reporting year to ensure the Company meets these standards. To ensure compliance with these standards, MorphoSys uses selected non-financial performance indicators in addition to the financial performance indicators discussed in the section “Analysis of Net Assets, Financial Position and Results of Operations”. The Corpo- rate Governance Report details MorphoSys’s management struc- ture and corporate governance practices. Sustainable Corporate Management Sustainability is a hallmark of MorphoSys’s corporate manage- ment and plays a major role in the pursuit of corporate goals and contributing value to society. This applies to the short- and long- term objectives of all levels of management and is reflected in the Company’s core task of developing even more effective and safer drugs. To ensure lasting business success, the Company incorpo- rates environmental and social responsibility into its daily busi- ness and bases its business model on sustainable growth that pro- tects the interests of its shareholders, creates long-term value and weighs the Company’s actions in terms of their impact on the en- vironment, society, patients and employees. Internally, this busi- ness model is reflected in a progressive human resources policy that takes employees’ needs seriously. A comprehensive risk management system ensures that factors that could threaten sustainable corporate performance are identi- fied early and corrected if necessary. MorphoSys only assumes risk when there is an opportunity to increase the Company’s en- terprise value. At the same time, a great effort is made to system- atically identify new opportunities and leverage its business suc- cess (more information on risks and opportunities can be found on page 53). Group-wide compliance with the sustainability strategy is moni- tored by the entire Management Board, chaired by the Chief Fi- nancial Officer. The Code of Conduct’s credo, which is available in German and English and applies to employees group-wide, regu- lates the strategy’s implementation in daily operations. Employee training on general and specific sections of the Code of Conduct is conducted regularly to ensure that the guidelines are understood and implemented. The Code of Conduct Committee consists of four members (a Chairperson and three other members) and is avail- able to employees at all times. A Compliance Officer coordinates MorphoSys’s Compliance Management System. Detailed infor- mation on this subject can be found on page 78 of the Corporate Governance Report. Employees can ask for advice on all matters concerning legal compliance and corporate responsibility and re- port any suspected violations. This may be done on an anonymous basis, if preferred. Violations are systematically pursued and ap- propriate remedial action is taken. No such violations have been reported to date, and the Company believes it is unlikely in the future that any serious offenses would occur that could materi- ally affect the Group’s net assets, financial position and results of operations. The Company’s long-term and sustainable business success rests on innovative research and development to meet the major chal- lenge of providing comprehensive healthcare in the future. Be- cause of a growing and aging population, biotechnology-derived drugs represent a growing portion of the overall healthcare sys- tem. In the opinion of management, all aspects of the current busi- ness model of MorphoSys support the sustainable investment in- terests of its shareholders. Detailed information on the KPIs for sustainable development used by MorphoSys is provided in the section “Strategy and Group Man- agement” (page 19). The following report on the implementation of MorphoSys’s corporate strategy and the Company’s sustainable business development is based on the recommendations of the German Sustainability Code originally presented by the Council for Sustainable Development in October 2011 and updated in January 2015. Non-Financial Performance Indicators E T HIC AL S TANDARDS AND COMMUNIC AT ION WI T H S TAKEHOL DERS The highest scientific and ethical principles for conducting human clinical trials and animal testing are anchored in MorphoSys’s Code of Conduct, which is modeled after the “Declaration of Hel- sinki” of the World Medical Association (WMA). Strict adherence to applicable national and international regulations is mandatory for all MorphoSys employees and sub-contractors. Because European legislation prescribes the performance of animal testing to determine the toxicity*, pharmacokinetics* and pharma- codynamics* of drug candidates, the biotechnology industry can- not forgo this type of testing. Animal studies for MorphoSys are given to contract research organizations (CROs*) because the Com- pany does not have laboratories suitable for this type of research. In the course of product development, MorphoSys contracts out animal studies according to the principles of good animal welfare and the respectful treatment of animals as set out in national and European regulations. MorphoSys introduced a quality assurance and control system with written standard operating procedures (SOPs*) that are continually updated to ensure that the Company only contracts with contract research organizations that adhere to local, national and international regulations for animal studies. Studies are carried out only after the approval of the relevant ethics committee and under the constant supervision of a veterinarian. Institutes cooperating with MorphoSys must comply with ethical principles and legal regulations for research involving animals and, within certain circumstances, have the Good Laboratory Prac- tice (GLP*) quality assurance certification. This is how MorphoSys ensures it fulfills its moral obligation for the respectful treatment of animals. The Company also conducts on-site inspections of the research institute’s study centers that include a review of the staff’s skills and training as well as animal welfare. These inspections are carried out during the audits conducted prior to contract awards. G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development 49 The Declaration of Helsinki mentioned above also defines the ethical principles MorphoSys follows when dealing with healthy volunteers and patients in clinical trials. MorphoSys carries out clinical trials in accordance with Good Clinical Practice (GCP*), and testing is conducted in compliance with the relevant provi- sions on privacy and confidentiality. Protecting the rights, safety and welfare of all clinical trial participants has the highest priority at MorphoSys. Clinical trials are initiated only after the approval of the relevant independent ethics committee and/or institutional re- view board. Before participating in a clinical trial, each participant must voluntarily submit an informed consent. *S E E G L O S S A R Y – page 142 The goal of MorphoSys’s business activities is to improve patients’ health through its scientific work. The Company can only achieve this goal if its activities are socially accepted. Achieving this ac- ceptance requires continuous and open dialog with stakeholders so that MorphoSys can understand potential concerns with regard to biotechnological approaches and explain the Company’s activi- ties and their benefits. To this end, MorphoSys is active in a variety of ways that range from participation in public information events to active support of the Communication and Public Relations task force of BIO Deutschland e.V. PROCUREMEN T The Central Purchasing and Logistics Department is responsible for purchasing external goods, consulting and services for MorphoSys in specified areas. New systems and processes were introduced during the reporting year to improve efficiency and re- duce purchasing costs. This department reinforced MorphoSys’s position in key areas by introducing special framework agree- ments and establishing preferred partnerships with suppliers. All suppliers selected by MorphoSys agree to comply with all anti- corruption standards, human rights practices and internationally recognized labor standards and data protection laws. ENVIRONMEN TAL PRO T EC T ION AND OCCUPAT IONAL SAFE T Y Because the biotechnology industry is subject to stringent regula- tory requirements, environmental protection and occupational safety are important tasks of Group management. The Environ- mental Protection and Occupational Safety Department monitors compliance with all relevant requirements. In addition to strict compliance with all legal requirements, MorphoSys makes a tre- mendous effort to maintain sustainable environmental manage- ment and the effective protection of its employees. 5 67850 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development For the seventh consecutive year, the Company took part in a sur- vey conducted by the Carbon Disclosure Project (CDP), an indepen- dent non-profit organization whose aim is to reduce greenhouse gases and ensure the sustainable use of water. As in previous years, the study results showed that there is no need for the Company to take any action. The results are used for the current monitoring of consumption and provide an additional control indicator. MorphoSys was certified for the sixth consecutive year as a “bicy- cle-friendly company” for its participation in the “Bike to Work” ini- tiative sponsored by the German Bicycle Club (ADFC) and a German health insurance company. MorphoSys also offers employees an extensive range of preventative healthcare options, such as auto- genic training, ball sports, weight training and marathons. With one reportable occupational accident in the reporting year, the number of accidents remained below the previous year’s low level of two accidents and placed the ratio of reportable accidents at MorphoSys significantly below the average ratio in Germany (22.3 reportable occupational accidents per 1,000 full-time em- ployees in the latest survey conducted in 2014). MorphoSys tries to minimize the amount of harmful substances used in its laboratories. Only those who are specially trained are allowed to work with toxins. Work involving contagious pathogens can only be carried out in secure laboratories. MorphoSys only uses certified companies to dispose of chemical waste and also refrains from labeling antibodies with radioactive substances. ›› S E E F I G U R E 11 – Occupational Safety at MorphoSys QUAL I T Y ASSURANCE Biopharmaceutical companies bear a special responsibility to com- ply with the highest quality and safety standards. MorphoSys fol- lows detailed procedures and stringent rules in drug development to avoid safety risks that may pose a threat to patients and, in turn, the Company’s financial situation. This is how the Company en- sures the quality of the investigational medicinal products, keeps risks to volunteers and patients in clinical studies as low as possi- ble and assures that the data are measured reliably and processed correctly. To control and regulate these processes in its own development department, MorphoSys created an integrated quality management system that complies with the principles of Good Manufacturing Practice (GMP*), Good Clinical Practice (GCP) and Good Laboratory Practice (GLP). An independent quality assurance department ensures that all development activities comply with national and international laws, rules and guidelines. The Quality Assurance Manager reports to and coordinates activities with the Chief Executive Officer to meet the stringent quality standards, ensure product quality and data integrity as well as the safety of volun- teers and patients in clinical trials. *S E E G L O S S A R Y – page 142 The Quality Assurance Department prepares an annual review plan using a risk-based approach that is used when auditing the contract research institutes, suppliers and contract manufac- turers selected for clinical studies as well as MorphoSys’s own departments. MorphoSys holds a manufacturing license for the approval of tested compounds for its proprietary development activities and was also issued a certificate from the German authorities of Upper Bavaria confirming the Company’s compliance with Good Manu- facturing Practice (GMP) standards and guidelines. ›› S E E F I G U R E 12 – Quality Management System at MorphoSys IN T EL L EC T UAL PROPER T Y Proprietary technology and the drug candidates derived therefrom are MorphoSys’s most valuable assets. Therefore, it is critical to the Company’s success that these assets are protected by patents and other appropriate measures so that they may be utilized exclu- sively and effectively. MorphoSys’s core technologies – HuCAL, Ylanthia, Slonomics and lanthipeptide technology – form the Company’s basis for success. Each single technology is protected by a number of patent families that are complemented by various independent technology pat- ents. Most of these have now been issued in all major markets, in- cluding Asian markets such as China. Our development program portfolio was also strengthened this past financial year through the acquisition of Lanthio Pharma and the related development of the MOR107 drug candidate. This pro- gram, like other proprietary drug programs, is protected by the 12 F I G U R E Quality Management System at MorphoSys 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 1 2 Q U A L I T Y M A N A G E M E N T S Y S T E M S 3 5 4 7 6 5 6 7 1 2 3 Training and Qualifi cation Self Inspection/Internal Audits Documentation System 4 Handling of Deviations, Change Batch Record Review/Batch Control, Complaints, Out of Specifi cation (OOS) and Recalls Release SOP System* External Audits (CMO*, CTO*, CRO*, clinical trial sites) *S E E G L O S S A R Y – page 142 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development 51 11 F I G U R E Occupational Safety at MorphoSys appropriate patents and applications. The development candidates MOR103 (out-licensed to GSK) and MOR202 are each protected by more than half a dozen issued patents and patent applications that cover various aspects of the compounds and provide effective pro- tection. The relevant patents and associated protection certificates are expected to expire in 2031. The MOR208 program is also pro- tected by various patents scheduled to expire in 2029 (US patent) and 2027 (European patent), excluding any consideration given to possible regulatory or patent office extensions. Patent applications covering MOR209/ES414 are scheduled to expire in 2032 at the earliest, also without giving any consideration to possible regula- tory or patent office extensions. 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 MorphoSys requires all executives with management responsibil- ity to take part in management seminars created exclusively for the Company. The training is based on several thematically related components that aim to provide not only theoretical knowledge but also prepare participants for the special demands placed on the Company’s executives. As in previous years, all executives in the reporting year took part in an external workshop that fully ad- dressed the challenges of management under the motto “Mission: Management.” 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 MorphoSys also actively promoted the professional career paths of specialists and experts during the reporting year. The goal of this type of career promotion – also for those without personnel re- sponsibilities – is to maintain flat hierarchies and put traditional management and professional career paths on an equal footing, also in terms of titles and compensation structures. MorphoSys offers in-house vocational training to open up promis- ing career prospects, particularly for young people. In awarding apprenticeships, the Company has been very successful in consid- ering students who are equally suitable but do not have a diploma. On December 31, 2015, MorphoSys had three trainees in the IT department and six biology laboratory trainees (December 31, 2014: two IT trainees; six biology laboratory trainees). Transparent communication among employees is a central aspect of MorphoSys’s corporate culture as stated in the Company’s credo. In meetings held every two weeks, the Management Board pre- sents the Company’s recent developments and answers questions, and employees are given the opportunity to present selected proj- ects. Questions and feedback from the staff can be taken directly in the meeting or submitted in advance in writing – anonymously if desired. The Company’s intranet was technologically and con- ceptually redesigned in the reporting year to streamline internal communication. The new design ensures that the Company is using the latest generation of document management systems and appli- cations. Employees have access to a broader range of information on external communication especially created for the internal tar- get group. The programs developed in cooperation with or for partners are also fully secured by patent protection. MorphoSys’s patent depart- ment works closely with the relevant partners. Patents covering all drug development programs have durations that significantly ex- ceed those of the underlying technologies. MorphoSys’s patent lawyers are currently maintaining over 50 dif- ferent patent families worldwide in addition to the numerous pat- ent families the Company pursues with its partners. The patent portfolio is routinely analyzed and adapted to the Company’s cor- porate strategy. ! HUMAN RES OURCES MorphoSys operates a progressive human resources policy for the long-term retention of professionally and personally suitable employees from a variety of fields. In an industry such as the bio- technology industry, in which success is largely dependent on the creativity and commitment of staff, employee retention and satis- faction are crucial success factors. At the end of the reporting year, MorphoSys had employees representing 29 different nationalities (2014: 22) employed at the Company for an average of 6.0 years (2014: 5.8 years). ›› S E E F I G U R E 13 – Employees by Gender ›› S E E F I G U R E 14 – Seniority Employees have access to a broad range of in-house and external training programs, advanced education, specialized continuing education and development programs as well as industry confer- ences. MorphoSys promotes not only ongoing professional educa- tion but also the personal development of its employees and, in individual cases, even offers support through customized coaching. 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 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 “Gentech- nik Sicherheitsverordung” (German Genetic Engineer- ing Safety Directive) and other safety professionals per- form an internal audit to assess the risk involved • Specifi c safety and evacuation training for the employ- ees working with the substances • Assurance that all safety measures are implemented before actual work commences 678 50 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development 12 F I G U R E For the seventh consecutive year, the Company took part in a sur- vey conducted by the Carbon Disclosure Project (CDP), an indepen- dent non-profit organization whose aim is to reduce greenhouse gases and ensure the sustainable use of water. As in previous years, the study results showed that there is no need for the Company to take any action. The results are used for the current monitoring of consumption and provide an additional control indicator. Quality Management System at MorphoSys MorphoSys was certified for the sixth consecutive year as a “bicy- cle-friendly company” for its participation in the “Bike to Work” ini- tiative sponsored by the German Bicycle Club (ADFC) and a German health insurance company. MorphoSys also offers employees an extensive range of preventative healthcare options, such as auto- genic training, ball sports, weight training and marathons. With one reportable occupational accident in the reporting year, the number of accidents remained below the previous year’s low level of two accidents and placed the ratio of reportable accidents at MorphoSys significantly below the average ratio in Germany C O R P O R AT E R E Q U I R E M E N T S / (22.3 reportable occupational accidents per 1,000 full-time em- D E P A R T M E N TA L R E Q U I R E M E N T S ployees in the latest survey conducted in 2014). MorphoSys tries to minimize the amount of harmful substances used in its laboratories. Only those who are specially trained are allowed to work with toxins. Work involving contagious pathogens can only be carried out in secure laboratories. MorphoSys only 1 uses certified companies to dispose of chemical waste and also refrains from labeling antibodies with radioactive substances. ›› S E E F I G U R E 11 – Occupational Safety at MorphoSys 2 QUAL I T Y ASSURANCE Biopharmaceutical companies bear a special responsibility to com- ply with the highest quality and safety standards. MorphoSys fol- lows detailed procedures and stringent rules in drug development to avoid safety risks that may pose a threat to patients and, in turn, the Company’s financial situation. This is how the Company en- sures the quality of the investigational medicinal products, keeps risks to volunteers and patients in clinical studies as low as possi- ble and assures that the data are measured reliably and processed correctly. Self Inspection/Internal Audits Training and Qualifi cation 1 2 3 Documentation System *S E E G L O S S A R Y – page 142 M A N A G E M E N T B O A R D To control and regulate these processes in its own development department, MorphoSys created an integrated quality management system that complies with the principles of Good Manufacturing Practice (GMP*), Good Clinical Practice (GCP) and Good Laboratory Practice (GLP). An independent quality assurance department ensures that all development activities comply with national and international laws, rules and guidelines. The Quality Assurance Manager reports to and coordinates activities with the Chief Executive Officer to meet the stringent quality standards, ensure product quality and data integrity as well as the safety of volun- teers and patients in clinical trials. *S E E G L O S S A R Y – page 142 The Quality Assurance Department prepares an annual review plan using a risk-based approach that is used when auditing the contract research institutes, suppliers and contract manufac- turers selected for clinical studies as well as MorphoSys’s own departments. R E G U L AT O R Y R E Q U I R E M E N T S MorphoSys holds a manufacturing license for the approval of tested compounds for its proprietary development activities and was also issued a certificate from the German authorities of Upper Bavaria confirming the Company’s compliance with Good Manu- facturing Practice (GMP) standards and guidelines. ›› S E E F I G U R E 12 – Quality Management System at MorphoSys 7 IN T EL L EC T UAL PROPER T Y Proprietary technology and the drug candidates derived therefrom are MorphoSys’s most valuable assets. Therefore, it is critical to the Company’s success that these assets are protected by patents and other appropriate measures so that they may be utilized exclu- sively and effectively. Q U A L I T Y M A N A G E M E N T S Y S T E M S 6 3 5 4 MorphoSys’s core technologies – HuCAL, Ylanthia, Slonomics and lanthipeptide technology – form the Company’s basis for success. Each single technology is protected by a number of patent families that are complemented by various independent technology pat- ents. Most of these have now been issued in all major markets, in- Handling of Deviations, Change Control, Complaints, Out of cluding Asian markets such as China. Specifi cation (OOS) and Recalls Batch Record Review/Batch Release 5 4 6 SOP System* Our development program portfolio was also strengthened this External Audits (CMO*, CTO*, past financial year through the acquisition of Lanthio Pharma and the related development of the MOR107 drug candidate. This pro- gram, like other proprietary drug programs, is protected by the CRO*, clinical trial sites) 7 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development 51 MorphoSys requires all executives with management responsibil- ity to take part in management seminars created exclusively for the Company. The training is based on several thematically related components that aim to provide not only theoretical knowledge but also prepare participants for the special demands placed on the Company’s executives. As in previous years, all executives in the reporting year took part in an external workshop that fully ad- dressed the challenges of management under the motto “Mission: Management.” MorphoSys also actively promoted the professional career paths of specialists and experts during the reporting year. The goal of this type of career promotion – also for those without personnel re- sponsibilities – is to maintain flat hierarchies and put traditional management and professional career paths on an equal footing, also in terms of titles and compensation structures. MorphoSys offers in-house vocational training to open up promis- ing career prospects, particularly for young people. In awarding apprenticeships, the Company has been very successful in consid- ering students who are equally suitable but do not have a diploma. On December 31, 2015, MorphoSys had three trainees in the IT department and six biology laboratory trainees (December 31, 2014: two IT trainees; six biology laboratory trainees). Transparent communication among employees is a central aspect of MorphoSys’s corporate culture as stated in the Company’s credo. In meetings held every two weeks, the Management Board pre- sents the Company’s recent developments and answers questions, and employees are given the opportunity to present selected proj- ects. Questions and feedback from the staff can be taken directly in the meeting or submitted in advance in writing – anonymously if desired. The Company’s intranet was technologically and con- ceptually redesigned in the reporting year to streamline internal communication. The new design ensures that the Company is using the latest generation of document management systems and appli- cations. Employees have access to a broader range of information on external communication especially created for the internal tar- get group. appropriate patents and applications. The development candidates MOR103 (out-licensed to GSK) and MOR202 are each protected by more than half a dozen issued patents and patent applications that cover various aspects of the compounds and provide effective pro- tection. The relevant patents and associated protection certificates are expected to expire in 2031. The MOR208 program is also pro- tected by various patents scheduled to expire in 2029 (US patent) and 2027 (European patent), excluding any consideration given to possible regulatory or patent office extensions. Patent applications covering MOR209/ES414 are scheduled to expire in 2032 at the earliest, also without giving any consideration to possible regula- tory or patent office extensions. The programs developed in cooperation with or for partners are also fully secured by patent protection. MorphoSys’s patent depart- ment works closely with the relevant partners. Patents covering all drug development programs have durations that significantly ex- ceed those of the underlying technologies. MorphoSys’s patent lawyers are currently maintaining over 50 dif- ferent patent families worldwide in addition to the numerous pat- ent families the Company pursues with its partners. The patent portfolio is routinely analyzed and adapted to the Company’s cor- porate strategy. HUMAN RES OURCES MorphoSys operates a progressive human resources policy for the long-term retention of professionally and personally suitable employees from a variety of fields. In an industry such as the bio- technology industry, in which success is largely dependent on the creativity and commitment of staff, employee retention and satis- faction are crucial success factors. At the end of the reporting year, MorphoSys had employees representing 29 different nationalities (2014: 22) employed at the Company for an average of 6.0 years (2014: 5.8 years). ›› S E E F I G U R E 13 – Employees by Gender ›› S E E F I G U R E 14 – Seniority Employees have access to a broad range of in-house and external training programs, advanced education, specialized continuing education and development programs as well as industry confer- ences. MorphoSys promotes not only ongoing professional educa- tion but also the personal development of its employees and, in individual cases, even offers support through customized coaching. 67852 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development To improve employer branding, MorphoSys started a Facebook career page in March 2015. The target group is potential appli- cants who want to gain a better understanding of the Company. Employee profiles and information on a variety of activities that extend beyond a typical workday are presented to give an authen- tic and positive impression of the Company. MorphoSys helps new employees become more familiar with the Group through extensive onboarding activities. Employees can learn about the Company’s processes in two-day orientation semi- nars with presentations from all operating departments and by participating in laboratory tours. Free sport and relaxation options, such as the recently introduced barbell weight training for strengthening the back muscles, soc- cer, volleyball and basketball, as well as autogenic training and massage for a fee promote health and socializing among employ- ees across departments. All of the members of the Senior Manage- ment Group accepted an offer for free health checkups. Feasible concepts for reconciling professional development with personal life are a strategic success factor for progressive compa- nies and the reason MorphoSys has offered employees a diverse range of options, such as flexible work hours and special part-time employment arrangements, for many years. Modern IT equipment also allows employees to work during business trips or from their home office without interruption. MorphoSys makes it easier for employees with families to re-enter the workforce and combine work and family life. MorphoSys is also a co-founder of the “Biokids” kindergarten in Martinsried. Special arrangements for other ser- vices for working family members have also been made with a German service provider. MorphoSys makes every effort to protect employees from work- place hazards and maintain their health through preventative measures. The extremely low number of occupational accidents illustrates the success of the Company’s strict monitoring of all occupational protection and safety measures. During the reporting year, there was one reportable occupational accident. MorphoSys tries to maintain the low number of accidents and the highest level of employee safety and well-being through the help of policies and training from the Department of Health and Occupational Safety and by offering routine medical examinations. The continued de- cline in the fluctuation rate during the reporting year to 4.1 % (2014: 5.6 %) is another indication of employees’ strong identifica- tion with the Company. ›› S E E F I G U R E 15 – Labor Turnover Rate 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 53 13 F I G U R E Risk and Opportunity Report Employees by Gender (2015) 37 % MorphoSys operates in an industry characterized by constant change and innovation. The challenges and opportunities in the healthcare sector are influenced by a wide variety of factors. Global demographic changes, medical advances and the desire to in- crease quality of life provide excellent growth opportunities for the pharmaceutical and biotechnology industries; however, com- panies must also grapple with growing regulatory requirements in the field of drug development as well as cost pressure on the healthcare systems. 63 % 2 014: 6 6 % N U M B E R 26 N U M B E R 2 014: 3 4 % All material risks in the various business segments and the Com- pany as a whole are assessed using a systematic risk process that is carried out twice a year. Risks are assessed by comparing their quantifiable financial impact on the MorphoSys Group with their probability of occurrence with and without initiating a risk mitiga- tion process. This method is applied over a 12-month assessment period as well as a period of three years to include risks related to the Company’s proprietary development that have longer dura- tions. Additionally, there is a strategic risk assessment that spans more than three years. An overview of MorphoSys’s current risk assessment activities can be found in Tables 10 and 11 (page 60). 43 27 43 4 3 MorphoSys makes a great effort to identify new opportunities and 6 to leverage its business success to generate a lasting increase in 4 enterprise value. Entrepreneurial success, however, is not achiev- able without conscious risk-taking. Through its worldwide opera- tions, MorphoSys is confronted with a number of risks that could affect its business. MorphoSys’s risk management system identi- fies these risks, evaluates them and takes suitable action to avert risk and reach its corporate objectives. A periodic strategy review ensures that there is a balance of risk and opportunity. MorphoSys only assumes risk when there is an opportunity to increase the Company’s enterprise value. 2015 T R A I N E E S 2014 Risk Management System The risk management system is an essential element of MorphoSys’s corporate governance and ensures the Company adheres to good corporate governance principles and complies with regulatory requirements. 15 F I G U R E 14 F I G U R E Seniority (average duration in years) Labor Turnover Rate (in %) Y E A R S MorphoSys has a comprehensive system in place to identify, as- sess, communicate and deal with risks throughout the Company. The risk management system identifies risk at a very early stage, making it possible to take action to limit operating losses and mon- itor risks that could jeopardize the Company. All actions to mini- 6.0 mize risk are assigned to risk officers, most of whom belong to MorphoSys’s Senior Management Group. 5.8 % 5.6 2014 2015 E X E C U T I V E S Risk managers enter their risks into a Group-wide IT platform that makes monitoring, analyzing and documenting risks much easier. Any changes can be tracked in this system. The risk management system distinguishes risk owners from risk managers. Risk own- ers are typically the relevant department heads (usually members of the Senior Management Group). Risk managers can be depart- ment employees when the risks that fall under their area of re- sponsibility are included in the risk management system. Risk owners and risk managers are required to review and update their risks and assessments at half-yearly intervals. The process for this is coordinated and led by the Corporate Finance & Corporate De- velopment Department, which is also responsible for monitoring the evaluation process and summarizing the key information. The information is presented to the Management Board and Supervi- sory Board twice a year. The entire evaluation process is based on standardized forms and diagrams and includes a “heat map” as well as a detailed description of the major risks over one- and three-year time frames. The heat map graphically illustrates the effectiveness of the controls implemented for the five largest risks (one- and three-year time frames) so that the effect of the monitor- ing activities for various risks can be visualized. Risk manage- ment and monitoring activities are carried out by the relevant managers. The changes in the risk profile resulting from these activities are recorded at regular intervals. Risk owners and risk managers are also required to report risks outside of these peri- odic assessments when the risks exceed a certain threshold (ad hoc reporting). An audit by external consultants ensures the on- going development of the risk management system and that any 4.1 6 2014 2015 2014 2015 7852 G R O U P M A N A G E M E N T R E P O R T Sustainable Business Development To improve employer branding, MorphoSys started a Facebook career page in March 2015. The target group is potential appli- cants who want to gain a better understanding of the Company. Employee profiles and information on a variety of activities that extend beyond a typical workday are presented to give an authen- tic and positive impression of the Company. MorphoSys helps new employees become more familiar with the Group through extensive onboarding activities. Employees can learn about the Company’s processes in two-day orientation semi- nars with presentations from all operating departments and by participating in laboratory tours. Free sport and relaxation options, such as the recently introduced barbell weight training for strengthening the back muscles, soc- cer, volleyball and basketball, as well as autogenic training and massage for a fee promote health and socializing among employ- ees across departments. All of the members of the Senior Manage- ment Group accepted an offer for free health checkups. Feasible concepts for reconciling professional development with personal life are a strategic success factor for progressive compa- nies and the reason MorphoSys has offered employees a diverse range of options, such as flexible work hours and special part-time employment arrangements, for many years. Modern IT equipment also allows employees to work during business trips or from their home office without interruption. MorphoSys makes it easier for employees with families to re-enter the workforce and combine work and family life. MorphoSys is also a co-founder of the “Biokids” kindergarten in Martinsried. Special arrangements for other ser- vices for working family members have also been made with a German service provider. MorphoSys makes every effort to protect employees from work- place hazards and maintain their health through preventative measures. The extremely low number of occupational accidents illustrates the success of the Company’s strict monitoring of all occupational protection and safety measures. During the reporting year, there was one reportable occupational accident. MorphoSys tries to maintain the low number of accidents and the highest level of employee safety and well-being through the help of policies and training from the Department of Health and Occupational Safety and by offering routine medical examinations. The continued de- cline in the fluctuation rate during the reporting year to 4.1 % (2014: 5.6 %) is another indication of employees’ strong identifica- tion with the Company. ›› S E E F I G U R E 15 – Labor Turnover Rate 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 53 Risk and Opportunity Report MorphoSys operates in an industry characterized by constant change and innovation. The challenges and opportunities in the healthcare sector are influenced by a wide variety of factors. Global demographic changes, medical advances and the desire to in- crease quality of life provide excellent growth opportunities for the pharmaceutical and biotechnology industries; however, com- panies must also grapple with growing regulatory requirements in the field of drug development as well as cost pressure on the healthcare systems. MorphoSys makes a great effort to identify new opportunities and to leverage its business success to generate a lasting increase in enterprise value. Entrepreneurial success, however, is not achiev- able without conscious risk-taking. Through its worldwide opera- tions, MorphoSys is confronted with a number of risks that could affect its business. MorphoSys’s risk management system identi- fies these risks, evaluates them and takes suitable action to avert risk and reach its corporate objectives. A periodic strategy review ensures that there is a balance of risk and opportunity. MorphoSys only assumes risk when there is an opportunity to increase the Company’s enterprise value. Risk Management System The risk management system is an essential element of MorphoSys’s corporate governance and ensures the Company adheres to good corporate governance principles and complies with regulatory requirements. MorphoSys has a comprehensive system in place to identify, as- sess, communicate and deal with risks throughout the Company. The risk management system identifies risk at a very early stage, making it possible to take action to limit operating losses and mon- itor risks that could jeopardize the Company. All actions to mini- mize risk are assigned to risk officers, most of whom belong to MorphoSys’s Senior Management Group. All material risks in the various business segments and the Com- pany as a whole are assessed using a systematic risk process that is carried out twice a year. Risks are assessed by comparing their quantifiable financial impact on the MorphoSys Group with their probability of occurrence with and without initiating a risk mitiga- tion process. This method is applied over a 12-month assessment period as well as a period of three years to include risks related to the Company’s proprietary development that have longer dura- tions. Additionally, there is a strategic risk assessment that spans more than three years. An overview of MorphoSys’s current risk assessment activities can be found in Tables 10 and 11 (page 60). Risk managers enter their risks into a Group-wide IT platform that makes monitoring, analyzing and documenting risks much easier. Any changes can be tracked in this system. The risk management system distinguishes risk owners from risk managers. Risk own- ers are typically the relevant department heads (usually members of the Senior Management Group). Risk managers can be depart- ment employees when the risks that fall under their area of re- sponsibility are included in the risk management system. Risk owners and risk managers are required to review and update their risks and assessments at half-yearly intervals. The process for this is coordinated and led by the Corporate Finance & Corporate De- velopment Department, which is also responsible for monitoring the evaluation process and summarizing the key information. The information is presented to the Management Board and Supervi- sory Board twice a year. The entire evaluation process is based on standardized forms and diagrams and includes a “heat map” as well as a detailed description of the major risks over one- and three-year time frames. The heat map graphically illustrates the effectiveness of the controls implemented for the five largest risks (one- and three-year time frames) so that the effect of the monitor- ing activities for various risks can be visualized. Risk manage- ment and monitoring activities are carried out by the relevant managers. The changes in the risk profile resulting from these activities are recorded at regular intervals. Risk owners and risk managers are also required to report risks outside of these peri- odic assessments when the risks exceed a certain threshold (ad hoc reporting). An audit by external consultants ensures the on- going development of the risk management system and that any 6 7854 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 potential changes in the Company’s risk areas are promptly incor- porated. The risk and opportunity management system combines a bottom-up approach for recognizing both short- and medium- term risks with a top-down approach in the area of strategic risks and opportunities. The top-down approach systematically identi- fies global strategic risks and opportunities and completes the overview of the overall risks and opportunities. Examples include environmental and industry risks, personnel risks and other risks that may result from the public perception of the Company. As part of the top-down approach, a workshop is held with selected mem- bers of the Senior Management Group in which the strategic risks and opportunities in different areas of the Company are assessed and discussed including those exceeding a period of three years. These workshops are held twice a year as part of the routine risk assessment. The evaluation process is solely qualitative. These risks are listed in Table 11 (page 60). Principles of Risk and Opportunity Management MorphoSys continually encounters both risks and opportunities. These could have a potential material impact on the net assets and financial position as well as a direct effect on intangible assets, such as the Company’s image in the sector or the Company’s trademark. MorphoSys defines risk as an internal or external event that has an immediate impact on the Company and includes an assessment of the potential financial impact on the Company’s goals. There is a direct relationship between opportunity and risk. Seizing oppor- tunities has a positive influence on Company goals, whereas risk emergence has a negative influence. Responsibilities under the Risk and Opportunity Management System The Management Board of MorphoSys AG is responsible for the risk and opportunity management system and ensures that all risks and opportunities are evaluated, monitored and presented in their entirety. The Corporate Finance & Corporate Development Department oversees the risk management process and reports to the Management Board regularly. The Supervisory Board has ap- pointed the Audit Committee to monitor the effectiveness of the Group’s risk management system. The Audit Committee periodi- cally reports its findings to the entire Supervisory Board, which is also directly informed by the Management Board twice a year. ›› S E E F I G U R E 16 – The Risk and Opportunity Management System at MorphoSys Accounting-Related Internal Control System MorphoSys employs extensive internal controls, Group-wide re- porting guidelines as well as other measures, such as employee training and ongoing professional education with the goal of main- taining accurate bookkeeping and accounting and ensuring reli- able financial reporting in the consolidated financial statements and Group Management Report. This essential component of Group accounting consists of preventative, monitoring and detection measures intended to ensure security and control in accounting and operating functions. Detailed information about the internal control system for financial reporting can be found in the Corpo- rate Governance Report. Risks 16 F I G U R E The Risk and Opportunity Management System at MorphoSys RISK C AT EGORIES MorphoSys divides its key risks into the following six categories: • Financial risk (includes risk resulting from insolvencies and payment defaults; license fees; research funding and milestones that are lower than planned or anticipated; and risks associated with any form of financing and financial instruments, such as cash investments, bank failures, currencies, interest rates, taxes, debt collection and lack of funding) CORP ORAT E G O VERNANC E • Operational risk (risk, for example, in the areas of procurement/ production, customers, and personnel, as well as risk related to preclinical or clinical trial results and other risk specific to the biotechnology industry) • Strategic risk (for example, mergers and acquisitions (M&A), shareholdings, R&D, corporate image, superior development proj- ects and technologies of competitors and portfolio development) MANAGEMEN T SUPERVI S OR Y • External risk (risk beyond the Company’s control, such as eco- B OARD B OARD nomic, political and legal risk; as well as risk specific to compa- nies in the biotechnology and pharmaceutical industries, such as the risk to intellectual property protection or in the regulatory environment when seeking the approval of new drugs) • Organizational risk (includes risk concerning IT, facilities man- agement, succession planning, business interruption and pro- cess delays as a result of the high complexity and number of projects) COMPL IANC E MANAGEMEN T RI SK • Compliance risk (for example, non-compliance with US FDA and MANAGEMEN T European EMA* regulations, quality management policies, ac- counting standards, corporate governance or violations of the German Stock Corporation Act) OPP OR T UNI T Y MANAGEMEN T *S E E G L O S S A R Y – page 142 F INANC IAL RISK MorphoSys’s financial risk management seeks to limit financial risk and reconciles this risk with the requirements of its business. DEF INE OB JEC T IVE S IMPL EMEN T MEA SURE S Financial risk can arise in relation to licensing agreements, for example when projects (products or technologies) do not material- ize, are delayed or out-licensed to a different degree than origi- MONI T OR A SSE SS T EC HNOL O G Y S Y S T EM RI SK S COU T ING nally planned. Risk also arises when revenues do not reach their projected level or when costs are higher than planned due to higher resource requirements. Detailed project preparations, such as those made through in-depth exchanges with internal and external partners and consultants, ensure the optimal starting point early in the process and are important for minimizing risk. Financial risk related to the Company’s proprietary programs was reduced by successfully partnering MOR103. The financial risk relating to the fully proprietary programs MOR202 and MOR208 remains entirely with MorphoSys. The Company’s increasing focus on proprietary development programs means the risks related to this area of MorphoSys’s business model will gain in importance. The termination of individual programs or clinical trials may have a significant effect on the Company’s short-, medium-, and long-term IN T ERNAL AUDI T 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 55 financial planning. The termination of in-licensed programs can result in extraordinary amortization and negatively affect the net assets and results of operations. MorphoSys retains some risk with respect to the clinical development of programs introduced into partnerships. The early termination of development partner- ships may force MorphoSys to bear future development costs alone and have a major impact on the Company’s income statement and financial planning. Continuing economic difficulties in Europe indicate that potential bank insolvencies still pose a financial risk. For this reason, MorphoSys continues to invest only in securities and bank instru- ments deemed safe – to the extent this is possible and can be esti- mated – and that have maintained their high rating and/or are secured by a strong partner and are liquid (short-term investment horizon). MorphoSys has simulated various scenarios and set up appropriate contingency plans. Adequate returns on financial as- sets also represent a risk. Short-term interest rates in the eurozone are currently negative, for example the three-month Euribor inter- est rate was at the beginning of February 2016 at – 17 basis points. In addition, the higher the credit quality, the lower the respective interest rate. In this environment, MorphoSys has opted for higher safety at the expense of lower return. IN T ERNAL CON T ROL S Y S T EM In future, MorphoSys will continue to spend substantial resources on the development of product candidates, including the identifi- cation of target molecules and drug candidates, the conducting of preclinical studies and clinical trials, the manufacturing of mate- rial and the support of collaborations and joint development of programs as well as the acquisition of new technologies and the in-licensing of new development candidates. The current financial resources and expected future cash in-flows should be sufficient to meet the Company’s current and near-term capital requirements. However, it is not guaranteed that funding will be sufficient at all times. DI S CUSSION F ORUM OPERAT IONAL RISK Operational risk includes risks related to the exploration and de- velopment of proprietary drug candidates and the risks associated with antibody production. BUSINE SS DEVEL OPMEN T INNO VAT ION C AP I TAL The termination of a clinical trial prior to out-licensing to part- ners – which does not necessarily imply the failure of an entire program – can occur when the trial data does not produce the ex- pected results, show unexpected adverse side effects or were com- piled incorrectly. Clinical trial design and drafts of development plans are always completed with the utmost care. This gives the trials the best opportunity to show clinically relevant data in clini- cal testing and persuade regulatory agencies and potential part- ners. External experts also contribute to the Company’s existing internal know-how. Special steering committees and panels are formed to monitor the progress of clinical programs. 7854 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 potential changes in the Company’s risk areas are promptly incor- porated. The risk and opportunity management system combines a bottom-up approach for recognizing both short- and medium- term risks with a top-down approach in the area of strategic risks and opportunities. The top-down approach systematically identi- fies global strategic risks and opportunities and completes the overview of the overall risks and opportunities. Examples include environmental and industry risks, personnel risks and other risks that may result from the public perception of the Company. As part of the top-down approach, a workshop is held with selected mem- bers of the Senior Management Group in which the strategic risks and opportunities in different areas of the Company are assessed and discussed including those exceeding a period of three years. These workshops are held twice a year as part of the routine risk assessment. The evaluation process is solely qualitative. These risks are listed in Table 11 (page 60). Principles of Risk and Opportunity Management MorphoSys continually encounters both risks and opportunities. These could have a potential material impact on the net assets and financial position as well as a direct effect on intangible assets, such as the Company’s image in the sector or the Company’s trademark. MorphoSys defines risk as an internal or external event that has an immediate impact on the Company and includes an assessment of the potential financial impact on the Company’s goals. There is a direct relationship between opportunity and risk. Seizing oppor- tunities has a positive influence on Company goals, whereas risk emergence has a negative influence. Responsibilities under the Risk and Opportunity Management System The Management Board of MorphoSys AG is responsible for the risk and opportunity management system and ensures that all risks and opportunities are evaluated, monitored and presented in their entirety. The Corporate Finance & Corporate Development Department oversees the risk management process and reports to the Management Board regularly. The Supervisory Board has ap- pointed the Audit Committee to monitor the effectiveness of the Group’s risk management system. The Audit Committee periodi- cally reports its findings to the entire Supervisory Board, which is also directly informed by the Management Board twice a year. ›› S E E F I G U R E 16 – The Risk and Opportunity Management System at MorphoSys Accounting-Related Internal Control System MorphoSys employs extensive internal controls, Group-wide re- porting guidelines as well as other measures, such as employee training and ongoing professional education with the goal of main- taining accurate bookkeeping and accounting and ensuring reli- able financial reporting in the consolidated financial statements and Group Management Report. This essential component of Group accounting consists of preventative, monitoring and detection measures intended to ensure security and control in accounting and operating functions. Detailed information about the internal control system for financial reporting can be found in the Corpo- rate Governance Report. 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 55 Risks RISK C AT EGORIES MorphoSys divides its key risks into the following six categories: • Financial risk (includes risk resulting from insolvencies and payment defaults; license fees; research funding and milestones that are lower than planned or anticipated; and risks associated with any form of financing and financial instruments, such as cash investments, bank failures, currencies, interest rates, taxes, debt collection and lack of funding) • Operational risk (risk, for example, in the areas of procurement/ production, customers, and personnel, as well as risk related to preclinical or clinical trial results and other risk specific to the biotechnology industry) • Strategic risk (for example, mergers and acquisitions (M&A), shareholdings, R&D, corporate image, superior development proj- ects and technologies of competitors and portfolio development) • External risk (risk beyond the Company’s control, such as eco- nomic, political and legal risk; as well as risk specific to compa- nies in the biotechnology and pharmaceutical industries, such as the risk to intellectual property protection or in the regulatory environment when seeking the approval of new drugs) • Organizational risk (includes risk concerning IT, facilities man- agement, succession planning, business interruption and pro- cess delays as a result of the high complexity and number of projects) • Compliance risk (for example, non-compliance with US FDA and European EMA* regulations, quality management policies, ac- counting standards, corporate governance or violations of the German Stock Corporation Act) *S E E G L O S S A R Y – page 142 F INANC IAL RISK MorphoSys’s financial risk management seeks to limit financial risk and reconciles this risk with the requirements of its business. Financial risk can arise in relation to licensing agreements, for example when projects (products or technologies) do not material- ize, are delayed or out-licensed to a different degree than origi- nally planned. Risk also arises when revenues do not reach their projected level or when costs are higher than planned due to higher resource requirements. Detailed project preparations, such as those made through in-depth exchanges with internal and external partners and consultants, ensure the optimal starting point early in the process and are important for minimizing risk. Financial risk related to the Company’s proprietary programs was reduced by successfully partnering MOR103. The financial risk relating to the fully proprietary programs MOR202 and MOR208 remains entirely with MorphoSys. The Company’s increasing focus on proprietary development programs means the risks related to this area of MorphoSys’s business model will gain in importance. The termination of individual programs or clinical trials may have a significant effect on the Company’s short-, medium-, and long-term financial planning. The termination of in-licensed programs can result in extraordinary amortization and negatively affect the net assets and results of operations. MorphoSys retains some risk with respect to the clinical development of programs introduced into partnerships. The early termination of development partner- ships may force MorphoSys to bear future development costs alone and have a major impact on the Company’s income statement and financial planning. Continuing economic difficulties in Europe indicate that potential bank insolvencies still pose a financial risk. For this reason, MorphoSys continues to invest only in securities and bank instru- ments deemed safe – to the extent this is possible and can be esti- mated – and that have maintained their high rating and/or are secured by a strong partner and are liquid (short-term investment horizon). MorphoSys has simulated various scenarios and set up appropriate contingency plans. Adequate returns on financial as- sets also represent a risk. Short-term interest rates in the eurozone are currently negative, for example the three-month Euribor inter- est rate was at the beginning of February 2016 at – 17 basis points. In addition, the higher the credit quality, the lower the respective interest rate. In this environment, MorphoSys has opted for higher safety at the expense of lower return. In future, MorphoSys will continue to spend substantial resources on the development of product candidates, including the identifi- cation of target molecules and drug candidates, the conducting of preclinical studies and clinical trials, the manufacturing of mate- rial and the support of collaborations and joint development of programs as well as the acquisition of new technologies and the in-licensing of new development candidates. The current financial resources and expected future cash in-flows should be sufficient to meet the Company’s current and near-term capital requirements. However, it is not guaranteed that funding will be sufficient at all times. OPERAT IONAL RISK Operational risk includes risks related to the exploration and de- velopment of proprietary drug candidates and the risks associated with antibody production. The termination of a clinical trial prior to out-licensing to part- ners – which does not necessarily imply the failure of an entire program – can occur when the trial data does not produce the ex- pected results, show unexpected adverse side effects or were com- piled incorrectly. Clinical trial design and drafts of development plans are always completed with the utmost care. This gives the trials the best opportunity to show clinically relevant data in clini- cal testing and persuade regulatory agencies and potential part- ners. External experts also contribute to the Company’s existing internal know-how. Special steering committees and panels are formed to monitor the progress of clinical programs. 7856 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 As part of the development of compounds, however, results and findings may come to light which cause a failure or adaptation of the development steps, administration and development timelines. These findings and those from competing companies can lead to changes in the development plan, market potential and timeline. The risk involved in drug development is difficult to control. Antibody production is a significant cost factor in the development of this class of drugs. The Company’s obligation to comply with international drug regulatory agencies’ requirements at every step of production in order to ensure the highest quality compounds and patient safety plays a critical role in its costs. The production process for biopharmaceuticals is usually performed in cell cul- ture systems with several thousand liters of culture volume and requires a number of steps to be carried out under strict super- vision and controlled conditions until the individual investiga- tional medicinal products are ready for use in patients. Therefore, depending on the phase of the project, lead times of one to two years must be scheduled for the supply of antibody material. This planning, coupled with early strategic financial investments, represent major factors in drug development because of the high complexity and risk involved in both the production process and clinical trial planning, which can have a considerable effect on the speed and cost of development. S T RAT EGIC RISK Strategic risk exists in relation to the proprietary portfolios of ther- apeutic candidates. After successfully introducing an existing pro- prietary program into a partnership, the focus continues to be on forming further partnerships and adding to the portfolio. Risk can emerge from a lack of attractive targets, compounds or innovative technologies or from missed or failed M&A transactions that would have provided access to strategically important assets. MorphoSys mitigates these risks by forming multidisciplinary teams respon- sible for adding to the proprietary portfolio and identifying suit- able therapeutic candidates. In the Company’s search for new drug candidates, a New Discovery Team searches for suitable targets for developing novel therapeutic molecules using proprietary or exter- nal technology platforms. MorphoSys also started the Innovation Capital program, which invests in innovative start-up companies to secure long-term options on new technologies and therapeutic molecules. Development programs introduced into partnerships can also fail, and partnerships can be terminated prematurely forcing MorphoSys to search for new development partners or bear the substantial cost of further development alone. This may result in a delay or even the termination of the development of individual can- didates and could lead to additional costs and a potential long-term loss of revenue for MorphoSys due to delayed market entry. Another strategic risk is the emergence of better molecules or more beneficial therapeutic approaches that could destroy the competitiveness of antibodies in the future or delay a drug candi- date’s market entry. This risk could also be classified as industry risk. MorphoSys tries to minimize this risk by conducting its own discovery activities and using detailed time schedules for its pro- prietary programs. The Company’s Innovation Capital program is an effective tool for identifying and investing in new trends early on so that MorphoSys can join in their development. MorphoSys also has its own scouting team that searches worldwide for new and innovative technologies and keeps track of the competition. Another strategic risk is the possible non-renewal of the coopera- tion agreement with Novartis. The current agreement runs until the end of November 2017 and Novartis has the option to extend the agreement an additional two years. If Novartis does not exer- cise this option, MorphoSys will stand to lose annual revenues of approximately € 40 million as of the 2018 financial year. EX T ERNAL RISK MorphoSys faces external risk with respect to intellectual prop- erty, among others. The patent protection of MorphoSys’s propri- etary technologies and compounds is especially important. To minimize risks in this area, MorphoSys keeps a vigilant eye on published patents and patent applications and analyzes the corre- sponding results. The Company also develops strategies to cir- cumvent external patents that may one day be relevant before they are issued or takes other appropriate action. Through the years, MorphoSys has seen increasing success with this strategy and has created ample leeway for its proprietary technology platforms and products for many years to come. Risks can also arise from enforc- ing the Company’s patents against third parties. External risks can also emerge from changes in the regulatory environment. These risks are minimized by providing ongoing training to the relevant personnel and by audits and discussions with external experts. It is also conceivable that competitors challenge patents of MorphoSys Group companies or that MorphoSys concludes that MorphoSys’s patents or patent families are infringed by competitors, which may prompt MorphoSys to take legal action against competitors. This type of legal action, particularly when it occurs in the USA, involves high costs and poses a significant financial risk. Another area where external risk can arise is our collaborations with service providers in preclinical and clinical development and the processing of clinical data. Insufficient or poor performance from service providers can lead to development delays, financial loss or even threaten entire programs. As an internationally operating biotechnology company with nu- merous partnerships and an in-house research and development department for developing drug candidates, the MorphoSys Group is subject to a number of legal risks. These risks include those re- lated to patent, competition, tax and antitrust law, potential liabil- ity claims from existing partnerships, and environmental protec- tion. Future legal proceedings are conceivable and cannot be anticipated. Therefore, we cannot rule out that we may incur ex- penses for legal or regulatory judgments or settlements that are not or cannot be partially or fully covered by insurance and may have a significant impact on our business and results. ORGANIZAT IONAL RISK The Proprietary Development, Partnered Discovery and Technical Operations areas, among others, are subject to organizational risk. Proprietary Development and Partnered Discovery may suffer quality problems or delays within the organization if the number of programs or their complexity increases. To reduce complexity and thereby reduce risk, the Company introduced uniform proce- dures and monitors their compliance by means of routine audits. 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 57 Risk in the Technical Operations area concerns procedures that may cause lasting damage, business interruptions or accidents in- volving harmful or polluting substances. Measures taken to avoid these types of disruptions include the routine inspection and maintenance of equipment and facilities and providing training and tutorials for the employees concerned. These risks are reduced even further using electronic monitoring systems. Financial risk in this area is generally covered by insurance. Additional informa- tion on MorphoSys’s operating environment can be found in the section “Sustainable Business Development.” COMPL IANCE RISK Compliance risk can arise when quality standards are not met or business processes are not conducted properly from a legal stand- point. To counter this risk, MorphoSys is committed to having its business operations meet the highest quality standards as set out in the Sustainability Report. The system is also routinely checked by external specialists and subjected to repeat testing by an inter- nal, independent in-house quality assurance department. Specific risk can arise, for example, when the internal quality management system does not meet the legal requirements or when there is no internal system for detecting quality problems. If the internal controls are not able to detect violations of Good Manufacturing Practice (GMP), Good Clinical Practice (GCP) or Good Laboratory Practice (GLP) then this also would represent a compliance risk. Inadequate or late financial communication can lead to fines or even lawsuits. Annual General Meetings conducted incorrectly may lead to legal disputes with shareholders resulting in signifi- cant costs from attempts to prevent either a challenge to or repeat of the Annual General Meeting. Pending decisions for corporate actions, such as capital increases, could also be compromised. To minimize these risks, the preparation and execution of the Annual General Meeting and all related documents and processes are carefully reviewed and monitored by the relevant internal depart- ments as well as external lawyers and auditors. 7858 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 HE MANAGEMEN T BOARD’S EVALUAT ION OF T HE OVERAL L RISK SI T UAT ION AT T HE MORPHOSY S GROUP MorphoSys Group’s Management Board considers the overall risk to be appropriate and trusts in the effectiveness of the risk man- agement system in relation to changes in the environment and the needs of the ongoing business. It is the Management Board’s view that the MorphoSys Group’s continued existence is not jeopar- dized. This assessment applies to the MorphoSys Group as a whole as well as to each Group company. This conclusion is based on several factors that are summarized in the following: • As in previous years, the major Group objectives have been reached. • The MorphoSys Group has an exceptionally high equity ratio. • The Management Board firmly believes that the MorphoSys Group is well positioned to cope with any adverse events that may occur. • The Group controls a comprehensive portfolio of preclinical and clinical programs in partnerships with a number of large phar- maceutical companies and has a strong base of technologies for expanding the Company’s proprietary portfolio. Despite these factors, it is impossible to rule out, control or influ- ence risk in its entirety. Opportunities Leading antibody technologies, powerful strategic alliances, excel- lent 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. This therapeutic class is now one of the most successful in the industry, and there is an impressive number of pharmaceutical and biotechnology companies in the field of antibodies that could potentially become customers or partners for MorphoSys’s products and technologies. Due to this fact and thanks to the Company’s extensive techno- logical and product development expertise, MorphoSys has identi- fied a number of future growth opportunities. MorphoSys’s technologies for developing and optimizing thera- peutic antibody candidates have distinct advantages that can lead to higher success rates and shorter development times in the drug development process. The transfer and application of MorphoSys’s core capabilities – even those outside of the field of antibodies – opens up new opportunities for the Group because many classes of compounds have similar molecular structures. The Innovation Capital initiative seizes previously unavailable opportunities by making MorphoSys a strategic investor in young, innovative com- panies and allowing it to use synergies effectively. OPP OR T UNI T Y MANAGEMEN T SY S T EM The opportunity management system is an important component of MorphoSys’s corporate management and is used to identify opportunities early and generate added value for the Company. Opportunity management is based on four pillars: • a routine discussion forum involving the Management Board and selected members of the Senior Management Group; • the Company’s business development activities; • a technology scouting team; and • the Innovation Capital initiative. Committees discuss specific opportunities and decide what action should be taken to exploit these opportunities. The meetings and their outcomes are recorded in detail, and any subsequent action is reviewed and monitored. The Group’s Business Development Team takes part in numerous conferences and in the process identifies different opportunities that can enhance the Company’s growth. These opportunities are presented and evaluated within the committee using an evaluation process. The Technology Scout- ing Team searches specifically for innovative technologies that can generate synergies with MorphoSys’s technological infra- structure and identify new therapeutic molecules. These outcomes are also discussed and evaluated in interdepartmental commit- tees. The Innovative Capital initiative already described also al- lows MorphoSys to participate in these early innovations and make it possible for the Company to use them in the future. A proven process for evaluating opportunities gives MorphoSys a qualitative and replicable evaluation. GENERAL S TAT EMEN T ON OPP OR T UNI T IES Increased life expectancy in industrialized countries and rising incomes and living standards in emerging countries are expected to drive the demand for more innovative treatment options and advanced technologies. Scientific and medical progress has led to a better understanding of the biological process of disease and paves the way for new therapeutic approaches. Innovative thera- pies, such as fully human antibodies, have reached market matu- rity in recent years and have led to the development of commer- cially successful medical products. Therapeutic compounds based on proteins are less subject to generic competition than chemically produced molecules because the production of biological com- pounds is far more complex. The sharp rise in both the demand for antibodies and the interest in this class of drug candidates can be seen by the acquisitions and significant licensing agreements made over the past two to three years. 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 59 These types of technological advances can help the Company ex- pand its list of partners and increase not only the speed but also the success rate of its partnered and proprietary drug development programs. New technology modules that enable the production of antibodies against novel classes of target molecules can also pro- vide access to new disease areas in which antibody-based treat- ments are underrepresented. Technology development is carried out by a team of scientists whose focus is the further development of MorphoSys technolo- gies. MorphoSys not only develops technology internally but also uses external resources to enhance its own activities. A good ex- ample of this is the Company’s acquisition of Lanthio Pharma, a Dutch company developing lanthipeptides. ACQUISI T ION OPP OR T UNI T IES In the past, MorphoSys has proven its ability to acquire compounds and technologies that accelerate its growth. Potential acquisition candidates are also systematically presented, discussed and eval- uated during the routine meetings described above between the Management Board and selected members of the Senior Manage- ment Group. After these meetings, promising candidates are reviewed in terms of their strategic synergies and evaluated by internal specialist committees. Protocols are completed on all can- didates and evaluations are systematically archived for follow-up and monitoring. A proprietary database helps administer this in- formation and keep it available. MorphoSys plans to move forward with its acquisition strategy in the year ahead in order to enhance its existing portfolio and tech- nology platform and secure access to patents and licenses for novel proprietary technologies and products. F INANC IAL OPP OR T UNI T IES Exchange rate and interest rate developments can positively or negatively affect the Group’s financial results. Interest rate and financial market developments are continuously monitored – par- ticularly during this period of extremely low interest rates – to promptly identify and take advantage of opportunities. MARKE T OPP OR T UNI T IES MorphoSys believes its antibody platforms HuCAL, Ylanthia, Slonomics and the lanthipeptide technology acquired in the re- porting year can all be used to develop products addressing high unmet medical needs. T HERAPEU T IC AN T IBODIES – PROPRIE TARY DEVEL OPMEN T It is reasonable to assume that the pharmaceutical industry will increase the level of in-licensing new drugs to refill its pipelines and replace key products and blockbusters that have lost patent pro- tection. MorphoSys’s most advanced compounds MOR103, MOR202 and MOR208 place the Company in an excellent position to capital- ize on the needs of pharmaceutical companies. Secured cash flows from the Partnered Discovery segment have allowed MorphoSys to strengthen its proprietary portfolio con- tinously. By investigating new disease areas, MorphoSys will con- tinue to expand its proprietary portfolio by adding clinical trials using the Company’s key drug candidates. MorphoSys intends to enhance its portfolio with additional programs and in doing so could take advantage of existing and future opportunities for co-development or partnerships. The Company is also looking for more opportunities to in-license interesting drug candidates. Drug candidates MOR208 and MOR202 may give MorphoSys its first opportunity to market a drug on its own. T HERAPEU T IC AN T IBODIES – PAR T NERED DISCOVERY By developing drugs with a number of partners, MorphoSys has been able to spread the risk inextricably linked with drug develop- ment over a broader spectrum. With around 90 individual thera- peutic antibodies currently in partnered development programs, it is becoming more likely that MorphoSys will have an opportunity to participate financially in marketed drugs. In 2015, three antibod- ies were in phase 3 clinical development. If the results of the clini- cal studies are positive, it is conceivable that an approval could be granted in the near future. Our partner Novartis, for example, has announced that it may file for the approval of bimagrumab in 2016. T ECHNOL OGY DEVEL OPMEN T MorphoSys continues to invest in its existing and new technolo- gies to defend its technological leadership. MorphoSys established a new technology platform with Ylanthia that, in contrast to its previous version HuCAL, is eligible for broader licensing to differ- ent partners. 7860 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 10 T A B L E Summary of Key Short- and Medium-Term Risks at MorphoSys FINANCIAL RISK Risk of missing revenue targets/incorrect budgeting Risk of bank insolvencies OPER ATIONAL RISK Risk related to development of proprietary antibodies Risk related to antibody production STR ATEG IC RISK Risk of failure to in-license new therapeutic molecules Risk of missed acquisition opportunities E X TERNAL RISK Patent-related risk (related to lawsuits, patent situation of technology platform, new national/international regulations) Risk related to external service providers in the clinical area ORG ANIZ ATIONAL RISK Risk due to growing number and complexity of programs Risk in the technical operations area C OMPLIANCE RISK Quality risk related to legal requirements Legal risk L EGEND • •• ••• •••• LOW RISK : MODER ATE RISK : HIG H RISK : CATASTROPHIC RISK : 11 T A B L E Summary of Key Long-Term Risks at MorphoSys 1-Year Assessment 3-Year Assessment •• •• Moderate Moderate •• • Moderate Low ••• •• High Moderate ••• •• High Moderate •• • •• •• •• • •• • Moderate Low •• • Moderate Low Moderate Moderate •• •• Moderate Moderate Moderate Low •• • Moderate Low Moderate Low •• • Moderate Low low probability of occurrence, low impact moderate probability of occurrence, moderate impact moderate probability of occurrence, moderate to strong impact high probability of occurrence, severe impact Segment Risk Order of Importance1 Proprietary Development Lack of competitiveness of the MorphoSys pipeline Partnered Discovery Termination of partnered programs Proprietary Development Lack of funding for proprietary development activities Proprietary Development Premature establishment of sales structure with delayed development of proprietary drug candidates 1 Declining importance of risk from 1 to 4, whereby 1 represents the most important risk. 1 2 3 4 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 61 Statement on Corporate Governance and Corporate Governance Report The Statement on Corporate Governance and the Corporate Gover- nance Report are available on the Company’s website under Media and Investors – Corporate Governance. Statement on Corporate Governance under Sec. 289a (HGB) for the 2015 Financial Year In the Statement on Corporate Governance under Sec. 289a HGB, the Management Board and the Supervisory Board report on cor- porate governance. In addition to the annual Declaration of Con- formity in accordance with Sec. 161 of the Stock Corporation Act (AktG), the Statement on Corporate Governance also includes rele- vant information on corporate governance practices and other as- pects of corporate governance, including a description of the work- ing practices of the Management Board and Supervisory Board. DECL ARAT ION OF CONF ORMI T Y WI T H T HE GERMAN CORP O - RAT E GOVERNANCE CODE ( T HE “CODE” ) OF T HE MANAGEMEN T BOARD AND SUPERVISORY BOARD OF MORPHOSY S AG The Management Board and Supervisory Board of MorphoSys AG declare the following under Sec. 161 of the German Stock Corpora- tion Act: 1. Since the last Declaration of Conformity on December 5, 2014, MorphoSys AG has complied with the recommendations of the “Government Commission on the German Corporate Governance Code” dated June 24, 2014 and the version from May 5, 2015 with the following exceptions: a. There is no cap on the overall or individual variable remuner- ation components of Management Board members’ remuner- ation (see Item 4.2.3 Para. 2 sentence 6 of the Code). Based on the Supervisory Board’s existing limitations for the Manage- ment Board’s variable remuneration components and their annual allocation, the Supervisory Board does not believe that an additional cap is required. b. Until July 21, 2015, the Supervisory Board refrained from fully applying the recommendations in Item 5.4.1 Paras. 2 and 3 sentence 1 of the Code. According to Item 5.4.1 Para 2, the Supervisory Board shall specify certain objectives re- garding the Board’s composition that provides for an appro- priate level of female participation. Recommendations made by the Supervisory Board to the responsible election bodies shall take these objectives into account in accordance with Item 5.4.1 Para. 3 sentence 1. The Supervisory Board has es- tablished concrete objectives for its composition and has thereby resolved to strive for adequate female representation. An exact quota of women was not specified because qualifica- tion and not gender should be the deciding criteria in appoint- ing members of the Supervisory Board. As of July 22, 2015, the recommendations in Item 5.4.1 Paras. 2 and 3 sentence 1 of the Code have been fully applied because on this date a corresponding quota was established. 2. MorphoSys will continue to comply with the recommendations of the “Government Commission on the German Corporate Gov- ernance Code” in the version dated May 5, 2015 with the excep- tions described under Item 1a. Martinsried/Planegg, December 3, 2015 MorphoSys AG On behalf of the Management Board: On behalf of the Supervisory Board: Dr. Simon Moroney Chief Executive Officer Dr. Gerald Möller Chairman of the Supervisory Board 7 862 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 G OVERNANCE COMP OSI T ION OF T HE MANAGEMEN T BOARD AND PRAC T ICES MorphoSys ensures compliance with laws and rules of conduct through the Group-wide application of the following documents: the Code of Conduct, the Compliance Handbook and supplemen- tary internal guidelines. MorphoSys’s Code of Conduct sets out the fundamental principles and key policies and practices for business behavior. The code is a valuable tool for employees and executives, particularly in busi- ness, legal and ethical situations of conflict. It reinforces the prin- ciples of transparent and sound management and fosters trust in the Company from the financial markets, business partners, em- ployees and the public. Compliance with the Code of Conduct is carefully monitored. The Group-wide application of the Code is overseen by a Code of Conduct Committee, and the Code itself is routinely reviewed and updated when necessary. The Code of Con- duct can be downloaded from the Company’s website under Media and Investors – Corporate Governance. The Compliance Handbook describes MorphoSys’s compliance management system and is intended to ensure compliance with all legal regulations as well as set out high ethical standards that apply to both the management and all employees. The Manage- ment Board has overall responsibility for the compliance manage- ment system and is required to report regularly to the Audit Com- mittee and the Supervisory Board. In carrying out its compliance responsibility, the Management Board has assigned the relevant tasks to various offices at MorphoSys. The Compliance Officer monitors the communication between the individual compliance posts within MorphoSys and makes adjust- ments to the system as needed in consultation with the Manage- ment Board. The Compliance Officer also routinely reports all rele- vant developments in the Company’s compliance system to the Chief Executive Officer. The Compliance Officer is supported by a Compliance Committee that meets at regular intervals to discuss compliance issues. This committee serves as a liaison between the various departments dealing with compliance issues and facilitates the identification and discussion of all the compliance posts’ relevant issues. This is the basis upon which the Compliance Officer periodically verifies adherence to the compliance management system and MorphoSys’s compliance status. More information on MorphoSys’s compliance management sys- tem can be found in the Corporate Governance Report on page 78. SUPERVISORY BOARD MANAGEME NT BOARD The Management Board of the Company consists of a Chief Execu- tive Officer and three other members. A schedule of responsibilities defines the different areas of responsibility as follows: • Dr. Simon Moroney, Chief Executive Officer, responsible for Strategy and Planning; Compliance and Quality Assurance; Internal Audit; Human Resources; Business Development & Port- folio Management; Legal; the coordination of individual areas of the Management Board; and representation of the Management Board to the Supervisory Board. • Jens Holstein, Chief Financial Officer, responsible for Accounting and Taxes; Controlling; Corporate Finance & Corporate Develop- ment; Risk Management; IT; Technical Operations; Procurement & Logistics; Corporate Communications and Investor Relations; and Environmental Social Governance (ESG). • Dr. Arndt Schottelius, Chief Development Officer, responsible for Preclinical Development; Clinical Research; Clinical Operations; Drug Safety & Pharmacovigilance; Regulatory Affairs; and Proj- ect Management. • Dr. Marlies Sproll, Chief Scientific Officer responsible for Develop- ment Partnerships & Technology Development; Target Molecule & Antibody Research; Protein Chemistry; Alliance Management; and Intellectual Property. SUPERVISORY BOARD As of December 31, 2015, the MorphoSys AG Supervisory Board consisted of six members who oversee and advise the Management Board. The current Supervisory Board consists of professionally qualified members who represent MorphoSys AG shareholders. Dr. Gerald Möller, acting Chairman of the Supervisory Board, coor- dinates the Board’s activities, chairs the Supervisory Board meet- ings and represents the interests of the Supervisory Board exter- nally. All Supervisory Board members are independent, as defined in the German Corporate Governance Code, and have many years of experience in the biotechnology and pharmaceutical industries. The members are duly elected by the shareholders during the Annual General Meeting. The Chairperson of the Supervisory Board is not a former member of MorphoSys AG’s Management Board. The terms of office of all six Supervisory Board members ended with the conclusion of the 2015 Annual General Meeting and, therefore, six Supervisory Board members were either elected or reelected to the Supervisory Board during the 2015 Annual General Meeting. The members of the Supervisory Board and its committees are listed in the table below. 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 63 12 T A B L E Composition of the Supvervisory Board until Termination of the 2015 Annual General Meeting Position Appointment End of Period Committee Initial Audit Remuneration and Nomination Committee Science and Technology Committee Dr. Gerald Möller Chairman 1999 2015 Dr. Geoffrey Vernon Deputy Chairman Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham Member Member Member Member 1999 2007 2002 2012 2012 2015 2015 2015 2015 2015 Independent Financial Expert Chairperson Member 13 T A B L E Composition of the Supvervisory Board since Termination of the 2015 Annual General Meeting Position Appointment End of Period Committee Initial Audit Remuneration and Nomination Committee Science and Technology Committee Dr. Gerald Möller Chairman 1999 2018 Dr. Frank Morich Deputy Chairman Karin Eastham Klaus Kühn Dr. Marc Cluzel Wendy Johnson Member Member Member Member 2015 2012 2015 2012 2015 2017 2018 2017 2018 2017 Independent Financial Expert Chairperson Member 8 64 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 WORK ING PRAC T ICES OF T HE MANAGEMEN T BOARD AND SUPERVISORY BOARD To ensure good corporate governance, a guiding principle of the cooperation between the Management Board and Supervisory Board at MorphoSys AG is the open, comprehensive and regular communication of information. The dual board system prescribed by the German Stock Corporation Act clearly differentiates be- tween a company’s management and supervision. The responsi- bility of both Boards is clearly stipulated by the legislator and the Boards’ bylaws and Articles of Association. The stated objec- tive of MorphoSys AG’s Management Board and Supervisory Board is to sustainably increase Company value. The Boards work closely together to make decisions and take actions for the Company’s benefit. Management Board members have their own area of responsibility defined in the schedule of responsibilities and regularly report to their Management Board colleagues. Cooperation among Manage- ment Board members is governed by the bylaws. The Supervisory Board ratifies both the schedule of responsibilities and the bylaws. Management Board meetings are typically held weekly and chaired by the Chief Executive Officer. During these meetings, resolutions are passed concerning dealings and transactions that, under the bylaws, require the approval of the entire Management Board. At least half of the Management Board’s members must be present to pass a resolution. Management Board resolutions are passed by a simple majority and, in the event of a tied vote, the Chief Executive Officer’s vote decides. For material events, each Management Board or Supervisory Board member can call an extraordinary meeting of the entire Management Board. Management Board res- olutions can also be passed outside of meetings by an agreement made orally, by telephone or in writing (also by e-mail). A written protocol is completed for each meeting of the full Management Board and is submitted for approval to the full Management Board and for signature to the chief executive officer at the following meeting. Management Board strategy workshops are also held in which the Group-wide strategic objectives are developed and prioritized. The Management Board promptly and comprehensively informs the Supervisory Board in writing and at Supervisory Board meet- ings about planning, business development, the Group’s position, risk management and other compliance issues. Extraordinary meetings of the Supervisory Board are also called for material events. The Management Board involves the Supervisory Board in the strategy, planning and all fundamental Company issues. In addition to routine Supervisory Board meetings, a strategy meeting takes place between the Management Board and Supervisory Board once annually to discuss MorphoSys’s strategic direction. The Management Board’s bylaws specify that material business transactions require the approval of the Supervisory Board. De- tailed information on the cooperation of the Management Board and Supervisory Board and important items of discussion during the 2015 financial year can be found in the Report of the Supervi- sory Board. The Supervisory Board holds a minimum of two meetings per calendar half-year and at least six meetings per full calendar year. The Supervisory Board has supplemented the Articles of Association with rules of procedure that apply to its duties: The Chairperson of the Supervisory Board coordinates the activities of the Supervisory Board, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. The Supervisory Board typically passes its resolutions in meet- ings, but resolutions may also be passed outside of meetings in writing (also by e-mail), by telephone or video conference. The Supervisory Board has a quorum when at least two-thirds of its members (including either the Chairperson or Deputy Chair- person of the Supervisory Board) take part in the vote. Resolutions of the Supervisory Board are passed with a simple majority unless the law prescribes otherwise. In the event of a tied vote, the Chair- person of the Supervisory Board’s vote decides. Protocols are completed for Supervisory Board meetings, and res- olutions passed outside of meetings. A copy of the Supervisory Board’s protocol is made available to all Supervisory Board mem- bers. The Supervisory Board conducts an efficiency evaluation regularly in accordance with the recommendation in Item 5.6 of the Code. COMPOSITION AND WORKING PRACTICES OF THE MANAGEMENT BOARD AND SUPERVISORY BOARD COMMIT TEES The Management Board has not formed any committees. The Supervisory Board has three committees: the Audit Commit- tee, the Remuneration and Nomination Committee and the Science and Technology Committee. The members of the three committees formed by the Supervisory Board are professionally qualified. 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 65 14 T A B L E Participation of Supervisory Board Members S U P E R V I S O R Y B O A R D M E E T I N G S by phone by phone Strategy Meeting Name 01/16/2015 02/25/2015 03/18/2015 05/07/2015 05/08/2015 07/22/2015 07/23/2015 10/01/2015 12/03/2015 Dr. Gerald Möller Dr. Geoffrey Vernon Dr. Walter Blättler Dr. Daniel Camus Dr. Marc Cluzel Karin Eastham Dr. Frank Morich Klaus Kühn Wendy Johnson M E E T I N G S O F T H E A U D I T C O M M I T T E E Name 02/25/2015 03/18/2015 04/29/2015 07/22/2015 10/01/2015 11/03/2015 12/03/2015 by phone by phone by phone Dr. Daniel Camus Dr. Geoffrey Vernon Karin Eastham Klaus Kühn Wendy Johnson M E E T I N G S O F T H E R E M U N E R A T I O N A N D N O M I N A T I O N C O M M I T T E E Name Dr. Gerald Möller Dr. Marc Cluzel Karin Eastham by phone by phone 02/20/2015 02/25/2015 03/03/2015 05/07/2015 12/02/2015 8 66 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 M E E T I N G S O F T H E S C I E N C E A N D T E C H N O L O G Y C O M M I T T E E by phone by phone by phone Name 02/25/2015 04/30/2015 05/07/2015 07/22/2015 09/15/2015 10/01/2015 11/09/2015 12/03/2015 Dr. Walter Blättler Dr. Marc Cluzel Wendy Johnson Frank Morich 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 – – SCIENCE AND TECHNOLOGY C OMMIT TEE The Science and Technology Committee advises the Supervisory Board on matters concerning proprietary drug and technology de- velopment and prepares the relevant Supervisory Board resolutions. The members of the Science and Technology Committee until May 8, 2015 were Dr. Walter Blättler (Chairman) and Dr. Marc Cluzel. As of May 8, 2015, the members of the Science and Technology Committee are Dr. Marc Cluzel (Chairman), Dr. Frank Morich and Ms. Wendy Johnson. The Supervisory Board members’ biographies can be found on the MorphoSys website under Company – Management – Supervisory Board. AUDIT C OMMIT TEE The main task of the Audit Committee is to support the Supervi- sory Board in fulfilling its supervisory duties with respect to the accuracy of the annual and consolidated financial statements, the activities of the auditor and internal control functions, such as risk management, compliance and internal auditing. The Audit Com- mittee submits a recommendation to the Supervisory Board for the election at the Annual General Meeting of an independent audi- tor. The members of the Audit Committee until May 8, 2015, were Dr. Daniel Camus (Chairman), Dr. Geoffrey Vernon and Karin Eastham, who all fulfill the prerequisite of being independent financial experts. The members of the Audit Committee as of May 8, 2015, were Klaus Kühn (Chairman), Karin Eastham and Wendy Johnson. Klaus Kühn and Karin Eastham fulfill the prerequisite of being independent financial experts. REMUNER ATION AND NOMINATION C OMMIT TEE The Remuneration and Nomination Committee is responsible for preparing and reviewing the Management Board’s compensation system annually before its final approval. When necessary, the Committee searches for suitable candidates to appoint to the Man- agement Board and Supervisory Board and submits appointment proposals to the Supervisory Board. The Committee also prepares the contracts made with Management Board members. The mem- bers of the Remuneration and Nomination Committee are Dr. Gerald Möller (Chairman until May 8, 2015), Dr. Marc Cluzel and Ms. Karin Eastham (Chairperson as of May 8, 2015). 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 67 Corporate Governance Report At MorphoSys, responsible, sustainable and value-oriented corpo- rate governance assumes a high priority. Good corporate gover- nance is an essential aspect of MorphoSys’s corporate manage- ment and forms the framework for the Group’s management and supervision, which includes the Group’s organization, commercial principles and tools for its guidance and control. The German Corporate Governance Code (“the Code”) provides a standard for the transparent monitoring and management of com- panies that strongly emphasizes shareholder interests. Many of the corporate governance principles contained in the Code have been practiced at MorphoSys for many years. Corporate gover- nance issues at MorphoSys AG are detailed in the Statement on Corporate Governance under Sec. 289a HGB. The statement also contains the annual Declaration of Conformity, relevant informa- tion on corporate governance practices and a description of the Management Board and Supervisory Board’s working practices. Additional information can be found in this Corporate Governance Report. COMMUNIC AT ION WI T H T HE C API TAL MARKE T S At MorphoSys, a key corporate communication principle is to simul- taneously and fully inform institutional investors, private share- holders, financial analysts, employees and all other stakeholders of the Company’s situation through regular, transparent and timely communication. Shareholders have immediate access to the infor- mation provided to financial analysts and similar recipients and can obtain this information in both German and English. The Com- pany is firmly committed to following a fair information policy. Regular meetings with analysts and investors in the context of road shows and individual meetings play a central role in investor relations at MorphoSys. Conference calls accompany publications of quarterly results and give analysts and investors an immediate opportunity to ask questions about the Company’s development. Company presentations for on-site events, visual and audio record- ings of other important events as well as conference call tran- scripts are also available on the Company’s website to all inter- ested parties. The Company’s website www.morphosys.com serves as a central platform for current information on the Company and its develop- ment. Financial reports, analyst meeting and conference presenta- tions as well as press releases and ad hoc statements are also available. The important regularly scheduled publications and events (annual reports, interim reports, annual general meetings and press and analyst conferences) are published in the Company’s financial calendar well in advance. ESTABLISHMENT OF SPECIFIC TARGETS FOR THE COMPOSITION OF THE SUPERVISORY BOARD MorphoSys AG’s Supervisory Board has a total of six members. The Supervisory Board believes a ratio of at least two non-German members, or at least two members having extensive international experience, provides a fair share of diversity given the Company’s international orientation. The Supervisory Board currently meets this ratio. The Supervisory Board also strives to have at least four indepen- dent members. The Supervisory Board currently meets this ratio. Material and lasting conflicts of interest should be avoided, partic- ularly those arising from activities for major competitors. No such conflict of interest currently exists. The Supervisory Board has two female members and the Company intends to maintain this ratio in the future. The age limit of 75 years contained in the Supervisory Board’s bylaws is respected but the Supervisory Board may make an ex- ception to this provision in specific cases. At the Annual General Meeting, the Supervisory Board intends to propose an initial period of office of two years for Supervisory Board members. The Supervisory Board still intends to allow reap- pointment only once for an additional term of three years but re- serves the right to make exceptions in specific cases and permit members to be reappointed for a third or potentially fourth term of three years each. The Supervisory Board intends to respect the targets described in future election proposals. 868 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 WOMEN’S QUO TA F OR T HE SUPERVISORY BOARD, MANAGE- MEN T BOARD AND T HE T WO MANAGEMEN T L EVEL S BEL OW T HE MANAGEMEN T BOARD In July 2015, the Supervisory Board established a women’s quota for the Supervisory Board and Management Board: MorphoSys AG’s Supervisory Board has a total of six members. Two of those members are women, which places the current ratio of female members on the Company’s Supervisory Board above 30 %, at 33.33 %. The Supervisory Board intends to maintain this ratio in the future. MorphoSys AG’s Management Board has a total of four members. One of those members is a woman, which places the current ratio of female members on the Company’s Management Board below 30 %, at 25 %. The Supervisory Board intends to maintain this ratio in the future. In July 2015, the Management Board established a women’s quota for the two management levels below the Management Board: consists of a performance share plan and convertible bond pro- grams from prior years. Management Board members also receive fringe benefits in the form of non-cash benefits, mainly the use of a company car and the payment of insurance premiums. All remu- neration packages are reviewed annually for their scope and ap- propriateness by the Remuneration and Nomination Committee and compared to the results of an annual management board re- muneration analysis. The amount of compensation paid to Man- agement Board members highly depends on their individual areas of responsibility, their personal achievement of goals, the Compa- ny’s economic situation and success and the Company’s business prospects versus its competition. All decisions concerning adjust- ments to the remuneration package are made by the entire Super- visory Board. The Management Board’s remuneration and in- dex-linked pension scheme were last adjusted in July 2015. OV ERV IE W In the 2015 financial year, total benefits of € 4,464,154 (2014: € 5,065,240) were granted to the Management Board in accor- dance with the provisions of the Corporate Governance Code. At the time of the decision, the first management level below the Management Board (the Senior Management Group) consisted of 20 members, seven of who were women, placing the level of female representation above 30 %, at 35 %. The Management Board intends to maintain a minimum ratio of 30 %. Of the remuneration for the year 2015, € 2,613,470 was cash com- pensation and € 1,850,684, or 41%, resulted from personnel ex- penses for share-based compensation (performance share plan and convertible bond plan) (remuneration with long-term incen- tive – LTI). At the time of the decision, the second management level below the Management Board (executives outside of the Senior Management Group) consisted of 48 members, 19 of who were women, placing the level of female representation above 30 %, at 39.59 %. The Man- agement Board intends to maintain a minimum ratio of 30 %. REMUNERAT ION REP OR T The Remuneration Report presents the principles, structure and amount of Management Board and Supervisory Board remunera- tion. The report complies with the legal provisions and gives con- sideration to the Code’s recommendations. MANAGEMENT BOARD REMUNER ATION The Management Board’s remuneration system is intended to pro- vide an incentive for performance-oriented and sustainable corpo- rate management. Therefore, the aggregate remuneration of the Management Board members consists of different components: fixed components, an annual cash bonus based on the achievement of individual and corporate targets (short-term incentive – STI), a variable compensation component with a long-term incentive (long-term incentive – LTI) and other remuneration components. The variable remuneration component with long-term incentive The total amount of benefits paid to the Management Board in the 2015 financial year was € 9,508,884 (2014: € 6,984,419). In addition to cash compensation payments of € 2,869,901 (2014: € 2,893,199), this amount includes the value of exercised convertible bonds and the transfer of treasury shares from a performance-based share plan (share-based compensation) amounting to € 6,638,983 (2014: € 4,091,220) relevant under German tax law. Management Board members exercised 51,800 convertible bonds in the course of 2015. On June 1, 2015 a total of 71,949 treasury shares were transferred to the Management Board from the 2011 performance-based share plan because the vesting period for this LTI program had expired. All transactions in MorphoSys shares executed by members of the Management Board were reported as required by law and published in the Corporate Governance Re- port and on the Company’s website. 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 69 LONG -TERM INCENTIVE COMPENSATION (LONG -TERM INCENTIVE – LTI) In 2011, MorphoSys introduced a new, long-term incentive com- pensation plan (Performance Share Plan) for the Management Board and members of the Senior Management Group. The LTI-pro- gram is based on the allocation of shares linked to the achieve- ment of predefined performance targets over a four-year period. Each year, the Supervisory Board determines the number of shares to be allocated to the Management Board. On April 1, 2015, the Management Board was granted 21,948 shares. Each Management Board member received an entitlement benefit for a specific num- ber of shares. For more information, please refer to Item 8.2.5 in the Notes to the Consolidated Financial Statements and the expla- nation on share buybacks in the Corporate Governance Report. The Supervisory Board sets the long-term performance targets along with the allocation of shares for a given year. The target for the 2015 LTI-program was the performance of the MorphoSys share compared to a benchmark index consisting equally of the Nasdaq Biotechnology Index and the TecDAX Index. LTI-program participants are awarded shares annually based on the daily rela- tive performance of the MorphoSys share versus the benchmark index. There is a hurdle of 50 % and a cap of 200 % for the price performance in any given year. For example, if the relative perfor- mance of the MorphoSys shares versus the benchmark index is less than 50 %, participants will not receive any entitlement benefits for the relevant year. Participants also do not receive entitlement benefits for additional shares when the share price performance exceeds 200 %. The ultimate number of performance shares allocated to the LTI-program participants is determined at the completion of the program, namely after four years. This calculation incorporates the number of shares initially allocated after adjusting for the share price development of the MorphoSys share versus the bench- mark index and a “company factor” that is determined at the Su- pervisory Board’s discretion. This company factor is a number be- tween zero and two that is set by the Supervisory Board based on the Company’s situation. The company factor’s predefined default value is one. MISCELL ANEO US Management Board members were not granted any loans or simi- lar benefits in the reporting year nor have they received any bene- fits from third parties that were promised or granted based on their position as a member of the Management Board. In accordance with the requirements of Item 4.2.5, Para. 3 of the Code, the following table provides detailed mandatory informa- tion on the remuneration of the individual Management Board members. Please note that the following tables are provided in the context of the Corporate Governance Report and differ from the information on Management Board remuneration presented in the Notes of this Annual Report (Item 7.4). These differences are due to the varying presentation requirements under the Corporate Governance Code and IFRS*. *S E E G L O S S A R Y – page 142 FIXED REM UNER ATI ON AND FRIN G E B ENEFITS The non-performance-related remuneration of the Management Board consists of fixed remuneration and additional benefits, which primarily include the use of company cars, as well as subsidies for health, welfare and disability insurance. The Chief Financial Officer, Mr. Jens Holstein, receives an additional expense allowance for maintaining two households. PENSI ON E X PENSES The Company also provides payments to Management Board mem- bers equal to a maximum of 10 % of the member’s fixed annual salary plus any payable taxes. This compensation is intended for the members’ individual retirement plans. Additionally, all Man- agement Board members participate in a pension plan in the form of a provident fund, which was introduced in cooperation with Allianz Pensions-Management e.V. The pension obligations of the provident fund are met by Allianz Pensions-Management e.V. PERFORMANCE- BASED COMPENSATION (SHORT-TERM INCENTIVE – STI) Each member of the Management Board receives performance- based compensation in the form of an annual bonus of up to 70 % of the gross base salary when 100 % of his or her goals have been achieved. These bonus payments are dependent on the achieve- ment of both corporate and personal goals specified by the Super- visory Board at the start of each financial year. Corporate goals comprise 80 % of performance-based compensation. These are based on the Company’s performance measured by revenue, oper- ating result, the progress of the partnered pipeline, the Company’s proprietary portfolio and the achievement of technology targets. Individual goals comprise 20 % of annual performance-based com- pensation and include operating objectives that the respective Management Board members are expected to fulfill. At the start of the year, the Supervisory Board assesses the degree to which cor- porate and personal goals were achieved in the prior year and uses this information to determine the bonus. The bonus may not ex- ceed 125 % of the target amount (corresponding to 87.5 % of gross base salary). Performance-based compensation can be omitted if the goals are not achieved. The bonus for the 2015 financial year will be paid in February 2016. 870 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 TERMINATION OF MANAG EMENT B OARD EMPLOY MENT C ONTR AC TS/ CHAN G E OF C ON TROL If a Management Board member’s employment contract termi- nates due to member’s death, the member’s spouse or life partner is entitled to the fixed monthly salary for the month of death and the 12 months thereafter. In the event of a change in control, Man- agement Board members are entitled to exercise their extraordi- nary right to terminate their employment contracts and receive any outstanding fixed salary for the remainder of the agreed contract period. Moreover, in such a case, all convertible bonds and perfor- mance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting period. A change of control has occurred when (i) MorphoSys transfers as- sets or a substantial portion of its assets to unaffiliated third par- ties, (ii) MorphoSys merges with an unaffiliated company or (iii) a shareholder or third party holds 30 % or more of MorphoSys’s vot- ing rights. 15 T A B L E Compensation of the Management Board in 2015 and 2014 (Disclosure in Accordance with the German Corporate Governance Code) B E N E F I T S G R A N T E D T O T H E M A N A G E M E N T B O A R D in € 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) 2014 2015 2014 2015 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) 2015 (Mini- mum) 2015 (Maxi- mum) Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer Fixed Compensation Fringe Benefits Total Fixed Compensation One -Year Variable Compensation1 Multi-Year Variable Compensation: 2010 Convertible Bonds Program2 (Vesting Period 4 Years) 2013 Convertible Bonds Program2 (Vesting Period 4 Years) 2014 Long-Term Incentive Program3 (Vesting Period 4 Years) 2015 Long-Term Incentive Program3 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation 426,502 445,736 445,736 445,736 289,335 302,384 302,384 302,384 289,335 302,384 302,384 302,384 289,335 302,384 302,384 302,384 1,294,507 1,352,888 1,352,888 1,352,888 29,444 455,946 324,696 36,887 482,623 238,692 6,010 0 36,887 482,623 0 0 36,887 482,623 390,019 33,722 323,057 220,271 39,735 342,119 161,926 0 0 0 39,735 342,119 0 0 39,735 342,119 264,585 0 310,530 164,969 164,969 164,969 318,087 168,984 168,984 168,984 212,687 112,990 112,990 112,990 212,687 112,990 112,990 112,990 1,053,991 559,933 559,933 559,933 402,413 0 0 1,043,649 125,730 422,533 826,194 138,280 0 0 1,690,132 0 164,969 2,245,120 813,983 138,280 138,280 86,866 289,406 620,316 90,800 0 275,625 0 0 0 0 1,157,624 168,984 1,591,193 90,800 90,800 0 275,625 0 1,229,288 1,157,624 0 1,157,624 0 1,290,751 5,163,004 112,990 1,535,199 701,829 112,990 1,535,199 3,266,354 2,564,572 559,933 6,906,711 94,064 94,064 86,628 94,085 94,085 385,877 417,229 417,229 417,229 1,625,325 1,447,097 785,872 2,866,023 1,223,906 1,053,235 601,903 2,024,112 1,115,389 985,368 539,327 1,961,536 1,100,620 978,454 532,413 1,954,622 5,065,240 4,464,154 2,459,515 8,806,293 32,508 321,843 215,208 29,889 332,273 156,635 29,889 332,273 29,889 332,273 264,585 22,828 312,163 210,144 22,954 325,338 156,635 22,954 22,954 118,502 129,465 129,465 129,465 325,338 325,338 1,413,009 1,482,353 1,482,353 1,482,353 264,585 970,319 713,888 0 1,183,774 3,373 0 3,373 0 12,756 0 0 0 0 0 0 275,625 0 706,893 86,653 289,406 559,031 94,064 0 0 0 0 0 0 289,406 559,031 94,085 Total 2015 (Mini- mum) 2015 (Maxi- mum) 0 0 0 0 0 0 0 1 The one-year compensation granted for the 2015 financial year represents the bonus accrual for 2015 that will be paid in February 2016. The bonus granted for the 2014 financial year was paid in February 2015. 2 Stock-based compensation plans not issued on an annual basis. The fair value was determined pursuant to the regulations of IFRS 2 “Share-based Payment.” For plans that are not issued annually, the pro rata share of personnel expenses resulting from share-based payments is presented for each financial year. 3 Stock-based compensation plans issued annually. The fair value was determined pursuant to the regulations of IFRS 2 “Share-based Payment.” For plans issued annually, the personnel expenses resulting from share-based payments are presented for the entire term at the time of issue. 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 71 in € 2014 2015 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) 2015 (Mini- mum) 2015 (Maxi- mum) 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) 2014 2015 2015 (Mini- mum) 2015 (Maxi- mum) Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer Total 426,502 445,736 445,736 445,736 289,335 302,384 302,384 302,384 289,335 302,384 302,384 302,384 289,335 302,384 302,384 302,384 1,294,507 1,352,888 1,352,888 1,352,888 310,530 164,969 164,969 164,969 318,087 168,984 168,984 168,984 212,687 112,990 112,990 112,990 212,687 112,990 112,990 112,990 1,053,991 559,933 559,933 559,933 32,508 321,843 215,208 29,889 332,273 156,635 3,373 0 29,889 332,273 0 0 29,889 332,273 264,585 22,828 312,163 210,144 22,954 325,338 156,635 0 3,373 0 22,954 22,954 118,502 129,465 129,465 129,465 325,338 325,338 1,413,009 1,482,353 1,482,353 1,482,353 0 0 264,585 970,319 713,888 0 1,183,774 0 12,756 0 0 0 15 T A B L E Compensation of the Management Board in 2015 and 2014 (Disclosure in Accordance with the German Corporate Governance Code) B E N E F I T S G R A N T E D T O T H E M A N A G E M E N T B O A R D Fixed Compensation Fringe Benefits Total Fixed Compensation One -Year Variable Compensation1 Multi-Year Variable Compensation: 2010 Convertible Bonds Program2 (Vesting Period 4 Years) 2013 Convertible Bonds Program2 (Vesting Period 4 Years) 2014 Long-Term Incentive Program3 (Vesting Period 4 Years) 2015 Long-Term Incentive Program3 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation was paid in February 2015. 6,010 0 29,444 455,946 324,696 36,887 482,623 238,692 36,887 482,623 36,887 482,623 390,019 33,722 323,057 220,271 39,735 342,119 161,926 39,735 342,119 39,735 342,119 264,585 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 The one-year compensation granted for the 2015 financial year represents the bonus accrual for 2015 that will be paid in February 2016. The bonus granted for the 2014 financial year 2 Stock-based compensation plans not issued on an annual basis. The fair value was determined pursuant to the regulations of IFRS 2 “Share-based Payment.” For plans that are not issued annually, the pro rata share of personnel expenses resulting from share-based payments is presented for each financial year. 3 Stock-based compensation plans issued annually. The fair value was determined pursuant to the regulations of IFRS 2 “Share-based Payment.” For plans issued annually, the personnel expenses resulting from share-based payments are presented for the entire term at the time of issue. 402,413 0 275,625 0 1,043,649 125,730 422,533 826,194 138,280 1,690,132 164,969 2,245,120 813,983 138,280 138,280 86,866 289,406 620,316 90,800 1,157,624 168,984 1,591,193 90,800 90,800 275,625 0 0 706,893 86,653 289,406 559,031 94,064 0 0 0 1,229,288 0 1,157,624 0 1,290,751 0 0 0 5,163,004 112,990 1,535,199 3,266,354 2,564,572 559,933 6,906,711 94,085 94,085 385,877 417,229 417,229 417,229 1,625,325 1,447,097 785,872 2,866,023 1,223,906 1,053,235 601,903 2,024,112 1,115,389 985,368 539,327 1,961,536 1,100,620 978,454 532,413 1,954,622 5,065,240 4,464,154 2,459,515 8,806,293 112,990 1,535,199 701,829 94,064 94,064 86,628 289,406 559,031 94,085 0 275,625 0 1,157,624 0 0 0 8 72 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 A Y M E N T S D U R I N G T H E F I N A N C I A L Y E A R Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer Total 2014 289,335 32,508 321,843 244,590 1,705,110 0 0 1,949,700 86,653 2,358,196 2015 302,384 29,889 332,273 215,208 0 0 1,036,320 1,251,528 94,064 1,677,865 2014 289,335 22,828 312,163 244,590 0 0 0 244,590 86,628 643,381 2015 302,384 22,954 325,338 210,144 1,036,320 0 2,526,294 94,085 2,945,717 2014 2015 1,294,507 118,502 1,413,009 1,094,313 0 0 5,185,533 385,877 6,984,419 1,352,888 129,465 1,482,353 970,319 4,622,005 0 7,609,302 417,229 9,508,884 1,279,830 4,091,220 2,016,978 in € Fixed Compensation Fringe Benefits Total Fixed Compensation One -Year Variable Compensation1 Multi-Year Variable Compensation: 2010 Convertible Bonds Program2 (Vesting Period 4 Years) 2011 Long-Term Incentive Program2 (Vesting Period 4 Years) Other3 Total Variable Compensation Service Cost Total Compensation 2014 426,502 29,444 455,946 360,543 2015 445,736 36,887 482,623 324,696 2,386,110 737,148 0 0 2,746,653 125,730 3,328,329 1,513,045 0 2,574,889 138,280 3,195,792 2014 289,335 33,722 323,057 244,590 0 0 0 244,590 86,866 654,513 2015 302,384 39,735 342,119 220,271 0 1,036,320 0 1,256,591 90,800 1,689,510 1 The one-year variable compensation presented here represents the bonus paid in the respective financial year for the previous financial year. 2 The date and value of the payments is the date and value applicable under German tax law. Therefore, this table shows the non-cash benefits arising in the respective financial year from the difference between the exercise or conversion price and the stock market price at the time of exercising the convertible bonds or at the time of transfer of own shares from a performance share plan. 3 No compensation recovery claims against the Management Board existed in 2015 or 2014. SUPERVISORY BOARD REMUNE R ATION The remuneration of Supervisory Board members is governed by the Company’s Articles of Association and a corresponding An- nual General Meeting resolution on Supervisory Board remuner- ation. In the 2015 financial year, Supervisory Board members received fixed compensation, attendance fees and expense allow- ances for their participation in Supervisory Board and committee meetings. Since 2014, each Supervisory Board member has re- ceived annual fixed compensation (€ 85,400 for Chairpersons, € 51,240 for Deputy Chairpersons and € 34,160 for all other mem- bers) for their membership of the Supervisory Board. The Chair- person receives € 4,000 for each Supervisory Board meeting chaired and the other members receive € 2,000 for each Supervi- sory Board meeting attended. For committee work, the committee Chairperson receives € 12,000 and other committee members each receive € 6,000. Committee members also receive € 1,200 for their participation in a committee meeting. Compensation is paid quarterly on a pro-rated basis. A resolution of the Annual General Meeting on May 8, 2015 made two changes to the rules governing Supervisory Board remuneration: Participation in a Supervisory Board meeting by telephone or video conference results in a 50 % reduction in compensation for meeting participation and, in cer- tain cases, a fixed expense allowance is granted for travel time when a meeting is personally attended. Therefore, Supervisory Board members residing outside of Europe who personally take part in a Supervisory Board or committee meeting are entitled to a fixed expense allowance of € 2,000 (plus any sales tax due) for additional travel time in addition to attendance fees and reim- bursed expenses. Supervisory Board members are also reimbursed for travel ex- penses and value-added taxes (VAT) on their compensation. In the 2015 financial year, Supervisory Board members received a total of € 529,270 (2014: € 514,480) excluding the reimbursement of travel expenses. This amount consists of fixed compensation and attendance fees for participating in Supervisory Board and committee meetings. No loans were granted to Supervisory Board members by the Company. The table below details the Supervisory Board’s remuneration. 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 73 P A Y M E N T S D U R I N G T H E F I N A N C I A L Y E A R in € Fixed Compensation Fringe Benefits Total Fixed Compensation One -Year Variable Compensation1 Multi-Year Variable Compensation: 2010 Convertible Bonds Program2 (Vesting Period 4 Years) 2011 Long-Term Incentive Program2 (Vesting Period 4 Years) Other3 Total Variable Compensation Service Cost Total Compensation 2014 426,502 29,444 455,946 360,543 0 0 2,746,653 125,730 3,328,329 2015 445,736 36,887 482,623 324,696 1,513,045 0 2,574,889 138,280 3,195,792 2014 289,335 33,722 323,057 244,590 0 0 0 244,590 86,866 654,513 2015 302,384 39,735 342,119 220,271 0 0 1,036,320 1,256,591 90,800 1,689,510 1 The one-year variable compensation presented here represents the bonus paid in the respective financial year for the previous financial year. 2 The date and value of the payments is the date and value applicable under German tax law. Therefore, this table shows the non-cash benefits arising in the respective financial year from the difference between the exercise or conversion price and the stock market price at the time of exercising the convertible bonds or at the time of transfer of own shares from a performance share plan. 3 No compensation recovery claims against the Management Board existed in 2015 or 2014. Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer Total 2014 289,335 32,508 321,843 244,590 2015 302,384 29,889 332,273 215,208 2,386,110 737,148 1,705,110 0 0 0 1,949,700 86,653 2,358,196 1,036,320 0 1,251,528 94,064 1,677,865 2014 289,335 22,828 312,163 244,590 0 0 0 244,590 86,628 643,381 2015 302,384 22,954 325,338 210,144 2014 2015 1,294,507 118,502 1,413,009 1,094,313 1,352,888 129,465 1,482,353 970,319 1,279,830 4,091,220 2,016,978 1,036,320 0 2,526,294 94,085 2,945,717 0 0 5,185,533 385,877 6,984,419 4,622,005 0 7,609,302 417,229 9,508,884 16 T A B L E Compensation of the Supervisory Board in 2015 and 2014 in € Dr. Gerald Möller Dr. Walter Blättler1 Dr. Daniel Camus1 Dr. Marc Cluzel Karin Eastham Dr. Geoffrey Vernon1 Dr. Frank Morich2 Wendy Johnson2 Klaus Kühn2 Total Fixed Compensation Attendance Fees3 Total Compensation 2015 2014 2015 2014 2015 2014 93,521 16,188 16,188 50,089 50,089 20,073 37,324 30,099 30,099 97,400 46,160 46,160 46,160 46,160 57,240 – – – 36,200 13,000 8,400 28,000 36,800 8,400 14,200 26,400 14,200 38,000 25,200 23,200 32,400 32,400 24,000 – – – 129,721 135,400 29,188 24,588 78,089 86,889 28,473 51,524 56,499 44,299 71,360 69,360 78,560 78,560 81,240 – – – 343,670 339,280 185,600 175,200 529,270 514,480 1 Dr. Walter Blättler, Dr. Daniel Camus and Dr. Geoffrey Vernon left the Supervisory Board of MorphoSys AG on May 8, 2015. 2 Dr. Frank Morich, Wendy Johnson and Klaus Kühn joined the Supervisory Board of MorphoSys AG on May 8, 2015. 3 The attendance fee contains expense allowances for the attendance on Supervisory Board and committee meeting. 8 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 HOL DINGS OF MANAGEMEN T BOARD AND SUPERVIS ORY BOARD MEMBERS The members of the Management Board and the Supervisory Board hold more than 1 % of the shares issued by the Company. All shares, performance shares and convertible bonds held by each member of the Management Board and the Supervisory Board are listed below. 17 T A B L E Directors’ Holdings S H A R E S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll TOTAL SUPERVISORY BOARD Dr. Gerald Möller Dr. Walter Blättler1 Dr. Daniel Camus1 Dr. Marc Cluzel Karin Eastham Dr. Geoffrey Vernon1 Dr. Frank Morich2 Wendy Johnson 2, 3 Klaus Kühn 2 TOTAL 01/01/2015 Additions Forfeitures Sales 12/31/2015 452,885 2,000 2,000 28,620 485,505 9,000 2,019 0 500 1,000 0 – – – 42,353 16,132 16,132 49,132 123,749 2,000 0 0 0 1,000 0 1,000 0 0 12,519 4,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14,132 16,132 27,000 57,264 0 0 0 0 0 0 0 0 0 0 495,238 4,000 2,000 50,752 551,990 11,000 – – 500 2,000 – 1,000 500 0 15,000 1 Dr. Walter Blättler, Dr. Daniel Camus and Dr. Geoffrey Vernon left the Supervisory Board of MorphoSys AG on 08. May 2015. 2 Dr. Frank Morich, Wendy Johnson and Klaus Kühn joined the Supervisory Board of MorphoSys AG on 08. May 2015. 3 500 shares have been acquired by Wendy Johnson before joining the Supervisory Board of MorphoSys AG. 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 75 C O N V E R T I B L E B O N D S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll TOTAL P E R F O R M A N C E S H A R E S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Arndt Schottelius Dr. Marlies Sproll TOTAL 01/01/2015 Additions Forfeitures Exercises 12/31/2015 107,186 90,537 60,537 93,537 351,797 0 0 0 0 0 0 0 0 0 0 18,800 0 0 33,000 51,800 88,386 90,537 60,537 60,537 299,997 01/01/2015 Additions Forfeitures Allocations 12/31/2015 54,655 37,434 37,434 37,434 166,957 13,062 8,946 8,946 8,946 39,900 0 0 0 0 0 23,553 16,132 16,132 16,132 71,949 44,164 30,248 30,248 30,248 134,908 DIREC T ORS’ DEAL INGS Members of MorphoSys AG’s Management Board and Supervisory Board and persons related to such members are required to dis- close any trading in MorphoSys shares under Sec. 15a of the Ger- man Securities Trading Act (WpHG). During the reporting year, MorphoSys received the following noti- fications under Sec. 15a WpHG listed in the table below. 8 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 18 T A B L E Directors’ Dealings (2015) Party Subject to the Notification Requirement Date of Transaction Function in 2015 Type of Transaction Number of Stocks/ Derivatives Average Share Price Transaction Volume Dr. Simon Moroney Dr. Marlies Sproll Dr. Marlies Sproll Dr. Marlies Sproll Dr. Arndt Schottelius Dr. Arndt Schottelius Dr. Arndt Schottelius Dr. Marlies Sproll Dr. Marlies Sproll Dr. Marlies Sproll CEO CSO CSO CSO Purchase; convertible bonds were converted into MorphoSys AG shares; Dr. Moroney is holding the shares received 12/16/2015 12/16/2015 Sale; convertible bonds were converted into MorphoSys AG shares and subsequently sold Purchase; convertible bonds were converted into MorphoSys AG shares; Dr. Sproll is holding the shares received 12/15/2015 12/15/2015 Sale; convertible bonds were converted into MorphoSys AG shares and subsequently sold CDO 06/03/2015 CDO 06/03/2015 CDO 06/02/2015 CSO 06/04/2015 CSO 06/03/2015 CSO 06/02/2015 Jens Holstein CFO 06/04/2015 Jens Holstein CFO 06/03/2015 Jens Holstein CFO 06/02/2015 Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. Sale of MorphoSys AG shares; the shares were granted on 06/01/2015 within MorphoSys’s long term incentive (LTI) program 2011 after a four-year waiting period. The shares were subsequently sold. 18,800 € 16.79 € 315,652.00 9,500 € 56.1934 € 533,837.30 14,000 € 16.79 € 235,060.00 9,500 € 56.0253 € 532,240.35 5,392 € 66.1085 € 356,457.03 5,370 € 65.6735 € 352,666.70 5,370 € 66.0633 € 354,759.92 2,667 € 65.6343 € 175,046.68 2,667 € 65.8605 € 175,649.95 2,666 € 65.6746 € 175,088.48 3,381 € 65.6343 € 221,909.57 5,381 € 65.8605 € 354,395.35 5,370 € 65.6746 € 352,672.60 Dr. Frank Morich Dr. Gerald Möller Karin Eastham Deputy Chairman of the Supervisory Board Chairman of the Supervisory Board Member of the Supervisory Board 05/12/2015 Purchase of MorphoSys AG shares 1,000 € 63.51 € 63,510.00 03/27/2015 Purchase of MorphoSys AG shares 2,000 € 56.70 € 113,400.00 03/27/2015 Purchase of MorphoSys AG shares 1,000 US$ 61.8129 US$ 61,812.90 AVOIDING CONFL IC T S OF IN T ERES T Management Board and Supervisory Board members are required to refrain from any actions that could lead to a conflict of interest with their duties at MorphoSys AG. Such transactions or the sec- ondary employment of Management Board members must be dis- closed immediately to the Supervisory Board and are subject to the Board’s approval. The Supervisory Board, in turn, must inform the Annual General Meeting of any conflicts of interest and their han- dling. There were no conflicts of interest in the 2015 financial year. S T OCK REPURCHASES By resolution of the Annual General Meeting on May 19, 2011 and superseded by the Annual General Meeting resolution on May 23, 2014, MorphoSys is authorized in accordance with Sec. 71 Para. 1 no. 8 AktG to repurchase its own shares in an amount of up to 10 % of the existing common stock. This authorization can be exer- cised in whole or in part, once or several times by the Company or a third party on the Company’s behalf for the purposes specified in the authorizing resolution. It is at the Management Board’s discretion to decide whether to carry out a repurchase on a stock exchange, via a public offer or through a public invitation to sub- mit a bid. In April 2015, MorphoSys repurchased a total of 88,670 of its own shares based on the authorization from the year 2014. The Com- pany plans to use these shares for a long-term incentive program for the Management Board and Senior Management Group. The authorization also permits the shares to be used for other lawful purposes. INF ORMAT ION T ECHNOL OGY During the 2015 financial year, the Information Technology de- partment focused on IT security and optimizing the IT infrastruc- ture. The entire IT infrastructure was tested for vulnerabilities and threat vectors allowing cyber-attacks using a detailed, multi- stage safety check by external IT experts. The results confirmed that MorphoSys has a state-of-the-art IT security system. The potential for optimization that was identified prompted further improvements. A decisive factor for maintaining comprehensive IT security is not only technical security testing but also the behavior of employees. As part of an IT security campaign called the “IT Security Aware- ness Campaign,” employees were made more aware of IT security through a variety of activities. 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 77 In the R&D area, the software and databases that support com- pany-specific processes and technologies in antibody selection, characterization and production were developed further during the reporting year. The software used in this area is based on the GeneData Biologics software which is used throughout the indus- try and allows MorphoSys to quickly and reliably identify the most promising and differentiated drug candidates from the high num- ber of antibody molecules technically available. INF ORMAT ION ON T HE IN T ERNAL CON T ROL AND RISK MAN - AGEMEN T SY S T EM CONCERNING T HE ACCOUN T ING PROCESS UNDER SEC . 289 PARA. 5 AND SEC . 315 PARA. 2 NO. 5 HGB In the 2015 financial year, MorphoSys completed a routine update of the documentation for its existing internal control and risk man- agement system. This update serves to maintain adequate internal control over financial reporting and to ensure the availability of all controls so that financial figures can be reported as precisely and accurately as possible. The COSO (Committee of Sponsoring Organizations of the Treadway Commission) defines the corre- sponding COSO framework (“Internal Control – Integrated Frame- work”). This is the framework used by MorphoSys and is the most commonly used for the internal control of financial reporting. System constraints make it impossible to give absolute assurance that internal controls will always prevent or completely detect all misrepresentations made in the context of financial reporting. In- ternal controls can only provide reasonable assurance that finan- cial reporting is reliable and verify that the financial statements were prepared in accordance with the IFRS standards for external purposes adopted by the European Union. The consolidated financial statements are subjected to a number of preparation, review and control processes so that the statements can be reported promptly to the market and shareholders. To ac- complish this, the Company’s executives have a coordinated plan for which all internal and external resources are made available. MorphoSys also uses a strict four-eye principle to ensure the accu- racy of the key financial ratios reported and the underlying execu- tion of all accounting processes. Numerous rules and guidelines are also followed to ensure the strict separation of the planning, posting and execution of financial transactions. This functional separation of processes is ensured by all of the Company’s operat- ing IT systems through the appropriate assignment of rights. Ex- ternal service providers routinely review the implementation of and compliance with these guidelines as well as the efficiency of the accounting processes. The reporting year’s most recent review showed insignificant cause for action. The appropriate corrective actions are being planned, and their implementation will be re- viewed again in the following year. 878 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 Predicting future events is not the purpose of MorphoSys’s inter- nal control and risk management system. The Company’s risk management system does, however, ensure that business risks are detected and assessed as soon as possible. The risks identified are eliminated or at least brought to an acceptable level using appro- priate corrective measures. Special attention is given to risks that could jeopardize the Company. COMPL IANCE MANAGEMEN T SY S T EM The basic mechanisms of the compliance management system at MorphoSys are presented in the section entitled “Relevant Infor- mation on Corporate Governance Practices” on page 62. In addi- tion to this information, the responsibilities within the compliance organization are shown in Figure 17. ›› S E E F I G U R E 17 – Compliance Management System (CMS) The Management Board ensures that risks are always dealt with responsibly and keeps the Supervisory Board informed of any risks and their development. Detailed information on the risks and opportunities encountered by MorphoSys can be found in the “Risk and Opportunity Report” (page 53). 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 to the Su- pervisory Board. At the 2015 Annual General Meeting, Pricewater- houseCoopers AG Wirtschaftsprüfungsgesellschaft was appointed auditor for the 2015 financial year. As proof of its independence, the auditor submitted a Declaration of Independence to the Super- visory Board. Lead auditors of these consolidated financial state- ments were Mr. Dietmar Eglauer and Mr. Bodo Kleinschrod. Infor- mation on other consulting, audit and valuation services provided by PricewaterhouseCoopers AG to MorphoSys AG during the 2015 financial year can be found in the Notes (Item 7.1). INTERNAL AUDIT DEPAR TMENT The Internal Audit Department is a key component of the Company’s compliance management system whose main duty is to provide the MorphoSys Group with a systematic and uniform approach for evaluating and improving the effectiveness of risk management and supporting the management and monitoring activities when meeting set targets. The audit and consulting firm KPMG was re- appointed in 2015 to act as a co-sourcing partner in the internal auditing process. Internal auditing is based on a risk-oriented internal audit plan that is largely based on the results of the most recent risk surveys. The Management Board and Supervisory Board Audit Committee’s audit requirements and recommendations are included in the au- dit plan. The Internal Audit Department reports regularly to the Manage- ment Board. The Head of Internal Audit and the Chief Executive Officer both report to the Supervisory Board’s Audit Committee twice annually or on an ad hoc basis when necessary. Four audits were conducted successfully in the course of 2015. A few areas requiring action were identified, and corrections were initiated or performed. Appropriate corrective action was initiated during the reporting year for any complaints. The Internal Audit Department is planning to carry out four audits in 2016. 17 F I G U R E Compliance Management System (CMS) Disclosures under Sec. 289 Para. 4, Sec. 315 Para. 4 HGB and Explanatory Report of the Management Board un- der Sec. 176 Para. 1 Sentence 1 AktG 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 79 extensions in the term of office are allowed for a maximum term of five years in each case. The Supervisory Board may revoke the appointment of a Management Board member or the nomination of a Chief Executive Officer for good cause within the meaning of Sec. 84 Para. 3 AktG. If a required member of the Management Board is absent, one will be appointed by the court in cases of ur- gency under Sec. 85 AktG. COMP OSI T ION OF COMMON S T OCK As of December 31, 2015, the Company’s statutory common stock amounted to € 26,456,834.00 and was divided into 26,456,834 no-par-value bearer shares. Except for the 434,670 treasury shares held by the Company, the shares concerned are bearer shares with voting rights with each share carrying one vote at the Annual Gen- eral Meeting. C O M P L I A N C E O F F I C E R reports to RESTRIC T IONS AFFEC T ING VO T ING RIGHT S OR THE TRANSFER manages the interfaces between the diff erent compliance streams OF SHARES The Management Board is not aware of any restrictions that may affect voting rights, the transfer of shares or those that may emerge from agreements between shareholders. Voting right restrictions may also arise from the provisions of the German Stock Corporation Act (AktG), such as those under Sec. 136 AktG, or the provisions for treasury shares under Sec. 71b AktG. I N T E R N A L A U D I T SHAREHOL DINGS IN COMMON S T OCK EXCEEDING 10 % C O D E O F C O N D U C T C O M M I T T E E OF VO T ING RIGH T S We have not been notified of or are aware of any direct or indirect interests in the Company’s common stock that 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. CMS C H I E F E X E C U T I V E O F F I C E R As a rule, the Articles of Association can only be amended by a resolution of the Annual General Meeting in accordance with Sec. 179 Para. 1 sentence 1 AktG. Under Sec. 179 Para. 2 sentence 2 AktG in conjunction with Sec. 20 of the Articles of Association, MorphoSys’s Annual General Meeting resolves amendments to the Articles of Association generally through a simple majority of the votes cast and a simple majority of the common stock represented. If the law stipulates a higher mandatory majority of votes or capi- tal, this shall be applied. Amendments to the Articles of Associa- tion that only affect their wording can be resolved by the Supervi- sory Board in accordance with Sec. 179 Para. 1 sentence 2 AktG in conjunction with Sec. 12 Para. 3 of the Articles of Association. P OWER OF T HE MANAGEMEN T BOARD T O ISSUE SHARES The Management Board’s power to issue shares is granted under Sec. 5 Para. 5 through Para. 6e of the Company’s Articles of Asso- ciation as of December 31, 2015 and the following statutory provisions: Q U A L I T Y A S S U R A N C E Quality Management System (GCP, GMP, GLP) 1. Authorized Capital a. According to Sec. 5 Para. 5 of the Articles of Association, with the Supervisory Board’s consent, the Management Board is authorized to increase the Company’s common stock on one or more occasions by up to € 10,584,333.00 for cash contri- butions or contributions in kind by issuing up to 10,584,333 new, no-par-value bearer shares until and including April 30, 2020 (Authorized Capital 2015-I). I N T E R N A L C O N T R O L S Y S T E M CON T ROL OVER VO T ING RIGH T S WI T H REGARD T O EMPL O YEE OWNERSHIP OF C API TAL Employees who hold shares in the Company exercise their voting rights directly in accordance with the statutory provisions and the Articles of Association as do other shareholders. L E G A L APP OIN T MEN T AND DISMISSAL OF MANAGEMEN T BOARD MEMBERS AND AMENDMEN T S T O T HE AR T ICL ES OF ASSOC IAT ION The number of Management Board members, their appointment and dismissal and the nomination of the Chief Executive Officer are determined by the Supervisory Board in accordance with Sec. 6 of the Articles of Association and Sec. 84 AktG. The Company’s Management Board currently consists of the Chief Executive Offi- cer and three other members. Management Board members may be appointed for a maximum term of five years. Reappointments or R I S K M A N A G E M E N T S Y S T E M Shareholders are principally entitled to subscription rights. One or more credit institutions may also subscribe to the shares with the obligation to offer the shares to shareholders for subscription. With the Supervisory Board’s consent, the Management Board is, however, authorized to exclude share- holder subscription rights: aa) in the case of a capital increase for cash contribution, to the extent necessary to avoid fractional shares; or bb) in the case of a capital increase for contribution in kind; or cc) in the case of a capital increase for cash contribution when the new shares are placed on a foreign stock ex- change in the context of a public offering. 8 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 Predicting future events is not the purpose of MorphoSys’s inter- nal control and risk management system. The Company’s risk management system does, however, ensure that business risks are detected and assessed as soon as possible. The risks identified are eliminated or at least brought to an acceptable level using appro- priate corrective measures. Special attention is given to risks that could jeopardize the Company. COMPL IANCE MANAGEMEN T SY S T EM The basic mechanisms of the compliance management system at MorphoSys are presented in the section entitled “Relevant Infor- mation on Corporate Governance Practices” on page 62. In addi- tion to this information, the responsibilities within the compliance organization are shown in Figure 17. ›› S E E F I G U R E 17 – Compliance Management System (CMS) The Management Board ensures that risks are always dealt with responsibly and keeps the Supervisory Board informed of any risks and their development. Detailed information on the risks and opportunities encountered by MorphoSys can be found in the “Risk and Opportunity Report” (page 53). 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 to the Su- pervisory Board. At the 2015 Annual General Meeting, Pricewater- houseCoopers AG Wirtschaftsprüfungsgesellschaft was appointed auditor for the 2015 financial year. As proof of its independence, the auditor submitted a Declaration of Independence to the Super- visory Board. Lead auditors of these consolidated financial state- ments were Mr. Dietmar Eglauer and Mr. Bodo Kleinschrod. Infor- mation on other consulting, audit and valuation services provided by PricewaterhouseCoopers AG to MorphoSys AG during the 2015 financial year can be found in the Notes (Item 7.1). INTERNAL AUDIT DEPAR TMENT The Internal Audit Department is a key component of the Company’s compliance management system whose main duty is to provide the MorphoSys Group with a systematic and uniform approach for evaluating and improving the effectiveness of risk management and supporting the management and monitoring activities when meeting set targets. The audit and consulting firm KPMG was re- appointed in 2015 to act as a co-sourcing partner in the internal auditing process. Internal auditing is based on a risk-oriented internal audit plan that is largely based on the results of the most recent risk surveys. The Management Board and Supervisory Board Audit Committee’s audit requirements and recommendations are included in the au- dit plan. The Internal Audit Department reports regularly to the Manage- ment Board. The Head of Internal Audit and the Chief Executive Officer both report to the Supervisory Board’s Audit Committee twice annually or on an ad hoc basis when necessary. Four audits were conducted successfully in the course of 2015. A few areas requiring action were identified, and corrections were initiated or performed. Appropriate corrective action was initiated during the reporting year for any complaints. The Internal Audit Department is planning to carry out four audits in 2016. 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 79 extensions in the term of office are allowed for a maximum term of five years in each case. The Supervisory Board may revoke the appointment of a Management Board member or the nomination of a Chief Executive Officer for good cause within the meaning of Sec. 84 Para. 3 AktG. If a required member of the Management Board is absent, one will be appointed by the court in cases of ur- gency under Sec. 85 AktG. As a rule, the Articles of Association can only be amended by a resolution of the Annual General Meeting in accordance with Sec. 179 Para. 1 sentence 1 AktG. Under Sec. 179 Para. 2 sentence 2 AktG in conjunction with Sec. 20 of the Articles of Association, MorphoSys’s Annual General Meeting resolves amendments to the Articles of Association generally through a simple majority of the votes cast and a simple majority of the common stock represented. If the law stipulates a higher mandatory majority of votes or capi- tal, this shall be applied. Amendments to the Articles of Associa- tion that only affect their wording can be resolved by the Supervi- sory Board in accordance with Sec. 179 Para. 1 sentence 2 AktG in conjunction with Sec. 12 Para. 3 of the Articles of Association. P OWER OF T HE MANAGEMEN T BOARD T O ISSUE SHARES The Management Board’s power to issue shares is granted under Sec. 5 Para. 5 through Para. 6e of the Company’s Articles of Asso- ciation as of December 31, 2015 and the following statutory provisions: 1. Authorized Capital a. According to Sec. 5 Para. 5 of the Articles of Association, with the Supervisory Board’s consent, the Management Board is authorized to increase the Company’s common stock on one or more occasions by up to € 10,584,333.00 for cash contri- butions or contributions in kind by issuing up to 10,584,333 new, no-par-value bearer shares until and including April 30, 2020 (Authorized Capital 2015-I). Shareholders are principally entitled to subscription rights. One or more credit institutions may also subscribe to the shares with the obligation to offer the shares to shareholders for subscription. With the Supervisory Board’s consent, the Management Board is, however, authorized to exclude share- holder subscription rights: aa) in the case of a capital increase for cash contribution, to the extent necessary to avoid fractional shares; or bb) in the case of a capital increase for contribution in kind; or cc) in the case of a capital increase for cash contribution when the new shares are placed on a foreign stock ex- change in the context of a public offering. Disclosures under Sec. 289 Para. 4, Sec. 315 Para. 4 HGB and Explanatory Report of the Management Board un- der Sec. 176 Para. 1 Sentence 1 AktG COMP OSI T ION OF COMMON S T OCK As of December 31, 2015, the Company’s statutory common stock amounted to € 26,456,834.00 and was divided into 26,456,834 no-par-value bearer shares. Except for the 434,670 treasury shares held by the Company, the shares concerned are bearer shares with voting rights with each share carrying one vote at the Annual Gen- eral Meeting. RESTRIC T IONS AFFEC T ING VO T ING RIGHT S OR THE TRANSFER OF SHARES The Management Board is not aware of any restrictions that may affect voting rights, the transfer of shares or those that may emerge from agreements between shareholders. Voting right restrictions may also arise from the provisions of the German Stock Corporation Act (AktG), such as those under Sec. 136 AktG, or the provisions for treasury shares under Sec. 71b AktG. SHAREHOL DINGS IN COMMON S T OCK EXCEEDING 10 % OF VO T ING RIGH T S We have not been notified of or are aware of any direct or indirect interests in the Company’s common stock that 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 REGARD T O EMPL O YEE OWNERSHIP OF C API TAL Employees who hold shares in the Company exercise their voting rights directly in accordance with the statutory provisions and the Articles of Association as do other shareholders. APP OIN T MEN T AND DISMISSAL OF MANAGEMEN T BOARD MEMBERS AND AMENDMEN T S T O T HE AR T ICL ES OF ASSOC IAT ION The number of Management Board members, their appointment and dismissal and the nomination of the Chief Executive Officer are determined by the Supervisory Board in accordance with Sec. 6 of the Articles of Association and Sec. 84 AktG. The Company’s Management Board currently consists of the Chief Executive Offi- cer and three other members. Management Board members may be appointed for a maximum term of five years. Reappointments or 8 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 The total shares to be issued via a capital increase against contribution in cash and/or in kind, excluding pre-emptive rights and based on the authorizations mentioned above, shall not exceed 20 % of the common stock. The calculation used is based on either the effective date of the authorizations or the exercise of the authorizations, whichever amount is lower. The 20 % limit mentioned above shall take into account (i) treasury shares sold excluding pre-emptive rights after the effective date of these authorizations (unless they service the entitlements of members of the Management Board and/ or employees under employee participation programs), (ii) shares that are issued from other authorized capital existing on the effective date of these authorizations and excluding pre-emptive rights during the effective period of these autho- rizations, and (iii) shares to be issued during the effective period of these authorizations to service convertible bonds and/or bonds with warrants whose basis for authorization ex- ists on the effective date of these authorizations provided that the convertible bonds and/or bonds with warrants have been issued with the exclusion of the pre-emptive rights of share- holders (unless they service the entitlements of members of the Management Board and/or employees under employee participation programs). With the Supervisory Board’s consent, the Management Board is authorized to determine the further details of the capital increase and its implementation. b. According to Sec. 5 Para. 6 of the Articles of Association, with the Supervisory Board’s consent, the Management Board is authorized to increase the Company’s common stock on one or more occasions by up to € 2,622,088.00 for cash contribu- tions by issuing up to 2,622,088 new, no-par-value bearer shares until and including April 30, 2019 (Authorized Capital 2014-I). Shareholders are principally entitled to subscription rights. One or more credit institutions may also subscribe to the shares with the obligation to offer the shares to shareholders for subscription. With the Supervisory Board’s consent, the Management Board is, however, authorized to exclude share- holder subscription rights: aa) to the extent necessary to avoid fractional shares; or bb) if the issue price of the new shares is not significantly below the market price of shares of the same class al- ready listed at the time of the final determination of the issue price and the total number of shares issued against contribution in cash, excluding subscription rights during the term of this authorization, does not exceed 10 % of the common stock on the date this authorization takes effect or at the time it is exercised, in accordance with or in the respective application of Sec. 186 Para. 3 sentence 4 AktG. With the Supervisory Board’s consent, the Management Board is authorized to determine the further details of the capital increase and its implementation. 2. Conditional Capital a. The previous Conditional Capital 1999-I under Sec. 5 Para. 6a of the Articles of Association was canceled by a resolution of the Annual General Meeting on May 23, 2014. b. According to Sec. 5 Para. 6b of the Articles of Association, the Company’s common stock is conditionally increased by up to € 6,600,000.00, divided into a maximum of 6,600,000 no-par- value bearer shares (Conditional Capital 2011-I). The condi- tional capital increase will only be executed to the extent that the holders of warrants or conversion rights resulting from convertible bonds or bonds with warrants, which were con- ferred by the Company until April 30, 2016 under the autho- rization of the Annual General Meeting of May 19, 2011, make use of their subscription rights or that the holders of con- vertible bonds, issued by the Company or one of its direct or indirect domestic or foreign wholly owned subsidiaries until April 30, 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 were created through the exercise of con- version rights or the fulfillment of conversion obligations. c. According to Sec. 5 Para. 6c of the Articles of Association, the Company’s common stock is conditionally increased by up to € 116,848.00 through the issue of up to 116,848 new no-par- value bearer shares of the Company (Conditional Capital 2003-II). The conditional capital increase will only be exe- cuted to the extent that holders of convertible bonds exercise their conversion rights for conversion into ordinary shares of the Company. The new shares are first entitled to dividends for the financial year for which there was no resolution of the Annual General Meeting at the time of issuance as to the appropriation of accumulated income. With the Supervisory Board’s consent, the Management Board is authorized to de- termine the further details of the capital increase and its im- plementation. 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 81 d. The previous Conditional Capital 2008-II under Sec. 5 Para. 6d of the Articles of Association was canceled by a resolution of the Annual General Meeting on May 23, 2014. d. The shares may be used to fulfill subscription or conversion rights resulting from the exercise of options and/or conversion rights or conversion obligations for Company shares. e. The shares may be offered or transferred to employees of the Company and those of affiliated companies, members of the Company’s management and those of affiliated companies and/ or used to meet commitments or obligations to purchase Com- pany shares that were or will be granted to employees of the Company or those of affiliated companies, members of the Com- pany’s management or managers of affiliated companies. The shares may also be used to fulfill obligations or rights to pur- chase Company shares that are agreed with the employees, members of the senior management of the Company and its af- filiates in the context of employee participation programs. If shares are used for the purposes mentioned above, shareholder subscription rights are excluded, with the exception of share redemptions. 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 AF T ER A TAKEOVER BID In 2012, MorphoSys and Novartis Pharma AG extended their original cooperation agreement. Under this agreement, in specific cases of a change of control, Novartis Pharma AG is entitled but not obliged to take various measures that include the partial or complete termination of the collaboration agreement. Under Sections 29 and 30 of the German Securities Acquisition and Takeover Act (WpÜG), a change of control applies when 30 % or more of the Company’s voting rights are acquired. e. According to Sec. 5 Para. 6e of the Articles of Association, the Company’s common stock is conditionally increased by up to € 450,000.00 through the issue of up to 450,000 new no-par- value bearer shares of the Company (Conditional Cap- ital 2008-III). The conditional capital increase will only be executed to the extent that holders of the convertible bonds exercise their conversion rights for conversion into ordinary shares of the Company. The new shares participate in the Company’s profits from the start of the financial year, for which there was no resolution at the time of issuance on the appropriation of accumulated income. With the Supervisory Board’s consent, the Management Board is authorized to de- termine the further details of the capital increase and its implementation. P OWER OF MANAGEMEN T BOARD T O REPURCHASE SHARES The Management Board’s power to repurchase the Company’s own shares is granted in Sec. 71 AktG and by the authorization of the Annual General Meeting of May 23, 2014: Until and including the date of April 30, 2019, the Company is au- thorized to repurchase its own shares in an amount of up to 10 % of the common stock existing at the time of the resolution (or possi- bly a lower amount of common stock at the time of exercising this authorization) for any purpose permitted under the statutory lim- its. The repurchase takes place at the Management Board’s discre- tion on either the stock exchange, through a public offer or public invitation to submit a bid. The authorization may not be used for the purpose of trading in the Company’s own shares. The intended use of treasury shares acquired under this authorization may be found under agenda item 9 of the Annual General Meeting of May 23, 2014. These shares may be used as follows: a. The shares may be redeemed without the redemption or its exe- cution requiring a further resolution of the Annual General Meeting. b. The shares may be sold other than on the stock exchange or shareholder offer if the shares are sold for cash at a price that is not significantly below the market price of the Company’s 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 company mergers, acquisitions of companies, parts of companies or interests in companies. 882 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 COMPENSAT ION AGREEMEN T S CONCL UDED BY T HE COMPANY WI T H MANAGEMEN T BOARD MEMBERS AND EMPL O YEES IN T HE EVEN T OF A TAKEOVER BID Following a change of control, Management Board members may terminate their employment contract and demand the fixed salary still outstanding until the end of the contract period. Moreover, in such a case, all stock options, convertible bonds and perfor- mance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting or blackout periods. Following a change of control, Senior Management Group mem- bers may also terminate their employment contract and demand a severance payment equal to one annual gross fixed salary. More- over, in such a case, all stock options, convertible bonds and per- formance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting or black- out periods. The following cases constitute a change of control: (i) MorphoSys transfers all or a material portion of the Company’s assets to an unaffiliated entity, (ii) MorphoSys merges with an unaffiliated en- tity or (iii) a shareholder or third party directly or indirectly holds 30 % or more of MorphoSys’s voting rights. G R O U P M A N A G E M E N T R E P O R T Subsequent Events 83 Subsequent Events There have been no significant changes in the industry environ- ment since the end of the 2015 financial year. Other events having a material impact on the net assets, financial position and results of operations have also not occurred after the end of the financial year. 8 84 F I N A N C I A L S T A T E M E N T S Contents Financial Statements F I N A N C I A L S T A T E M E N T S Contents 85 86 Consolidated Statement of Income (IFRS) 87 Consolidated Statement of Comprehensive Income (IFRS) Consolidated Balance Sheet (IFRS) 88 Consolidated Statement of Changes in Stockholders’ Equity (IFRS) 90 92 Consolidated Statement of Cash Flows (IFRS) n o t e s General Information Summary of Significant Accounting Policies Segment Reporting Business Combinations Notes to the Income Statement Notes to the Assets of the Balance Sheet Notes to Equity and Liabilities of the Balance Sheet Remuneration System for the Management Board and Employees of the Group Additional Notes 94 94 106 108 109 112 118 120 129 86 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 € Revenues Operating Expenses Research and Development General and Administrative Total Operating Expenses Other Income Other Expenses Earnings before Interest and Taxes (EBIT) Finance Income Finance Expenses Income Tax (Expenses)/Income Consolidated Net Profit/(Loss) Basic Net Profit/(Loss) per Share Diluted Net Profit/(Loss) per Share Shares Used in Computing Basic Net Result per Share Shares Used in Computing Diluted Net Result per Share Note 2015 2014 2.7.1, 5.1 106,222,897 63,977,978 2.7.2, 5.2.1 2.7.2, 5.2.2 2.7.3, 5.3 2.7.4, 5.3 2.7.5, 5.3 2.7.6, 5.3 2.7.7, 5.4 2.7.8, 5.5 2.7.8, 5.5 2.7.8, 5.5 2.7.8, 5.5 78,655,788 15,072,046 93,727,834 5,498,041 758,772 55,962,693 14,146,042 70,108,735 782,273 550,084 17,234,332 (5,898,568) 3,827,177 435,941 (5,724,800) 14,900,768 0.57 0.57 26,019,855 26,244,292 1,809,751 219,879 1,296,067 (3,012,629) (0.12) (0.12) 25,903,995 26,190,314 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) 87 Consolidated Statement of Comprehensive Income (IFRS)1 in € Consolidated Net Profit/(Loss) 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 Effects presented in Other Comprehensive Income 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 Tax Effects Foreign Currency (Losses)/Gains from Consolidation Comprehensive Income Total Comprehensive Income 2015 2014 14,900,768 (3,012,629) (268,749) 14,500 53,497 17,736 (197,516) (293,846) (491,362) (347,517) 318,957 244,151 (141,657) (245,023) 101,290 (143,733) 14,409,406 (3,156,362) 1 In financial years 2015 and 2014, the statement of comprehensive income only comprised components, which will be reclassified in terms of IAS 1.82A(b) to profit and loss in subsequent periods when specific conditions are met. 88 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 Financial Assets classified as Loans and Receivables 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-process R&D Programs Software, Net Goodwill Financial Assets classified as Loans and Receivables, Net of Current Portion Shares Available-for-sale, Net of Current Portion Deferred Tax Asset Prepaid Expenses and Other Assets, Net of Current Portion Total Non-current Assets TOTAL AS SE TS Note 12/31/2015 12/31/2014 2.8.1, 6.1 2.8.1, 6.2 2.8.1, 6.2 2.8.1, 6.2 2.8.2, 6.3 2.8.2, 6.5 2.8.2, 6.4 2.8.3, 6.5 2.8.4, 6.5 2.8.5, 6.6 2.8.6, 6.7.1 2.8.6, 6.7.2 2.8.6, 6.7.3 2.8.6, 6.7.4 2.8.6, 6.7.5 2.8.1, 6.2 2.8.7, 6.8 2.9.6, 5.4 2.8.8, 6.9 90,927,673 64,292,830 33,120,117 94,587,528 11,442,059 826,102 1,324,236 368,782 3,227,008 32,238,161 106,039,373 7,488,259 156,993,068 14,990,532 1,120,563 100,194 556,171 2,869,067 300,116,335 322,395,388 3,474,018 6,141,061 3,244,800 60,959,887 1,936,268 7,364,802 15,510,989 0 381,949 949,381 3,557,729 6,987,910 1,343,188 28,254,201 2,042,206 7,352,467 50,030,000 1,726,633 1,737,387 1,050,864 99,963,155 104,082,585 400,079,490 426,477,973 F I N A N C I A L S T A T E M E N T S Consolidated Balance Sheet (IFRS) 89 in € Note 12/31/2015 12/31/2014 LIAB ILITIES AND STO CKHOLDERS’ EQUIT Y Current Liabilities Accounts Payable and Accrued Expenses Tax Provisions 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 Liability Total Non-current Liabilities Total Liabilities Stockholders’ Equity Common Stock Ordinary Shares Issued (26,537,682 and 26,456,834 for 2015 and 2014, respectively) Ordinary Shares Outstanding (26,103,012 and 26,005,944 for 2015 and 2014, respectively) Treasury Stock (434,670 and 450,890 shares for 2015 and 2014, respectively), at Cost Additional Paid-in Capital Revaluation Reserve Translation Reserve Accumulated Income Total Stockholders’ Equity TOTAL LIAB ILITIES AND STO CKHOLDERS’ EQUIT Y 2.9.1, 7.1 2.9.2, 7.2 2.9.1, 7.2 2.9.3, 7.3 2.9.1, 7.2 2.9.4, 7.3 2.9.5 2.9.6, 5.4 22,341,663 17,830,792 1,698,276 1,436,384 1,994,120 27,470,443 43,344 2,512,666 225,000 7,092,030 9,873,040 37,343,483 777,281 19,541 14,075,166 32,702,780 43,344 44,677,035 251,679 0 44,972,058 77,674,838 2.9.7, 7.4.1 26,537,682 26,456,834 2.9.7, 7.4.4 2.9.7, 7.4.5 2.9.7, 7.4.6 2.9.7, 7.4.7 2.9.7, 7.4.8 (15,827,946) 319,394,322 (202,158) 0 32,834,107 362,736,007 (14,251,962) 318,375,720 (4,642) 293,846 17,933,339 348,803,135 400,079,490 426,477,973 90 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 JANUARY 1, 2014 Compensation Related to the Grant of Convertible Bonds and Performance Shares Exercise of Convertible Bonds Issued to Related Parties Repurchase of Treasury Stock in Consideration of Bank Fees Reserves: Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Tax Effects Foreign Currency Gains from Consolidation Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2014 BAL ANCE AS OF JANUARY 1, 2015 Compensation Related to the Grant of Convertible Bonds and Performance Shares Exercise of Convertible Bonds Issued to Related Parties Repurchase of Treasury Stock in Consideration of Bank Fees Transfer of Treasury Stock for Long-Term Incentive Program Reserves: Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Tax Effects Foreign Currency Losses from Consolidation Consolidated Net Profit Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2015 Common Stock Shares € 26,220,882 26,220,882 0 235,952 0 235,952 0 0 0 0 0 0 0 0 0 0 26,456,834 26,456,834 0 80,848 26,456,834 26,456,834 0 80,848 0 0 0 0 0 0 0 0 0 0 0 0 26,537,682 26,537,682 434,670 (15,827,946) 319,394,322 32,834,107 362,736,007 Treasury Stock Shares Additional Revaluation Translation Accumulated Total Stock- Paid-in Capital Reserve Reserve Income holders’ Equity 339,890 (6,418,018) 310,963,651 240,381 192,556 20,945,968 352,145,420 111,000 (7,833,944) 3,686,387 3,725,682 € 0 0 0 0 0 0 0 0 0 0 € 0 0 0 0 0 0 0 0 0 0 0 (245,023) (245,023) (4,642) (4,642) (197,516) (197,516) (202,158) € 0 0 0 0 0 0 0 0 0 0 0 € 3,686,387 3,961,634 (7,833,944) (245,023) 101,290 (3,012,629) (3,156,362) 348,803,135 348,803,135 3,558,960 1,357,437 (5,392,931) 0 (197,516) (293,846) 14,900,768 14,409,406 101,290 101,290 293,846 293,846 (3,012,629) (3,012,629) 17,933,339 17,933,339 (293,846) (293,846) 14,900,768 14,900,768 € 0 0 0 0 0 0 0 0 0 0 0 0 450,890 450,890 (14,251,962) (14,251,962) 88,670 (104,890) (5,392,931) 3,816,947 318,375,720 318,375,720 3,558,960 1,276,589 (3,816,947) € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 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) 91 Consolidated Statement of Changes in Stockholders’ Equity (IFRS) BAL ANCE AS OF JANUARY 1, 2014 Compensation Related to the Grant of Convertible Bonds and Performance Shares Exercise of Convertible Bonds Issued to Related Parties Repurchase of Treasury Stock in Consideration of Bank Fees Reserves: Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Tax Effects Foreign Currency Gains from Consolidation Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2014 BAL ANCE AS OF JANUARY 1, 2015 Compensation Related to the Grant of Convertible Bonds and Performance Shares Exercise of Convertible Bonds Issued to Related Parties Repurchase of Treasury Stock in Consideration of Bank Fees Transfer of Treasury Stock for Long-Term Incentive Program Reserves: Change in Unrealized Gain on Available-for-sale Financial Assets and Bonds, Net of Tax Effects Foreign Currency Losses from Consolidation Consolidated Net Profit Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2015 Common Stock Shares 235,952 235,952 26,456,834 26,456,834 26,456,834 26,456,834 80,848 80,848 € 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 26,220,882 26,220,882 339,890 (6,418,018) 310,963,651 240,381 192,556 20,945,968 352,145,420 Treasury Stock Additional Paid-in Capital Revaluation Reserve Translation Reserve Accumulated Income Total Stock- holders’ Equity Shares € € € € € € 0 0 0 0 3,686,387 3,725,682 111,000 (7,833,944) 0 0 0 0 0 0 0 0 0 0 0 0 0 450,890 450,890 (14,251,962) (14,251,962) 318,375,720 318,375,720 0 0 0 0 88,670 (104,890) (5,392,931) 3,816,947 3,558,960 1,276,589 0 (3,816,947) 0 0 0 0 0 0 0 0 0 0 0 0 26,537,682 26,537,682 434,670 (15,827,946) 319,394,322 0 0 0 (245,023) 0 0 (245,023) (4,642) (4,642) 0 0 0 0 (197,516) 0 0 (197,516) (202,158) 0 0 0 0 101,290 0 101,290 293,846 293,846 0 0 0 0 0 (293,846) 0 (293,846) 0 0 0 0 0 (3,012,629) (3,012,629) 17,933,339 17,933,339 0 0 0 0 0 0 14,900,768 14,900,768 3,686,387 3,961,634 (7,833,944) (245,023) 101,290 (3,012,629) (3,156,362) 348,803,135 348,803,135 3,558,960 1,357,437 (5,392,931) 0 (197,516) (293,846) 14,900,768 14,409,406 0 32,834,107 362,736,007 92 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 ATING AC TIVITIES: Consolidated Net Profit/(Loss) Adjustments to Reconcile Net Profit/(Loss) to Net Cash Provided by/(Used in) Operating Activities: Impairment of Assets Depreciation and Amortization of Tangible and Intangible Assets Net Gain on Sales of Available-for-sale Financial Assets Purchase of Derivative Financial Instruments Proceeds from Derivative Financial Instruments Net (Gain)/Loss on Derivative Financial Instruments (Gain)/Loss on Sale of Property, Plant and Equipment (Gain)/Loss from Liquidation of Subsidiaries Recognition of Deferred Revenue Stock-based Compensation Income Tax Expenses/(Income) Gain from Revaluation of Participations 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 Income Taxes Paid Note 2015 2014 14,900,768 (3,012,629) 3,723,736 3,454,842 1,016 0 858,768 (1,539,207) 27,710 (295,124) 4,117,590 4,134,479 (727,979) (15,820) 9,503 (38,189) (7,269) 76,489 (72,378,320) (33,546,601) 3,558,960 5,724,801 (4,495,020) 3,635,172 (3,892,870) 7,454,023 584,104 18,132,906 (2,970,114) 3,959,340 (1,296,067) 0 (4,720,210) 1,670,253 101,378 156,411 17,863,327 (2,942,362) 6.6, 6.7 6.6, 6.7 6.2 6.4 6.4 7.3 5.2.3, 8 5.4 4 6.3 6.4, 6.5 7.1, 7.2 7.1 7.3 Net Cash Provided by/(Used in) Operating Activities (23,513,849) (14,218,356) 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) 93 in € Note 2015 2014 INVESTING AC TIVITIES: Purchase of Available-for-sale Financial Assets Proceeds from Sales of Available-for-sale Financial Assets Purchase of Bonds, Available-for-sale Proceeds from Sales of Bonds, Available-for-sale Purchase of Financial Assets Classified as Loans and Receivables Proceeds from Sales of Financial Assets Classified as Loans and Receivables Acquisitions, Net of Cash Acquired Purchase of Property, Plant and Equipment Proceeds from Disposals of Property, Plant and Equipment Purchase of Intangible Assets Proceeds from Closing of an Escrow Account Interest Received Net Cash Provided by/(Used in) Investing Activities FINANC ING AC TIVITIES: Repurchase of Treasury Stock in Consideration of Bank Fees 7.4.4 Proceeds from the Exercise of Convertible Bonds Granted to Related Parties Interest Paid Net Cash Provided by/(Used in) Financing Activities Effect of Exchange Rate Differences on Cash Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Period Cash and Cash Equivalents at the End of the Period 6.2 6.2 6.2 6.2 6.2 6.2 4 6.6 6.7 (25,600,000) (149,061,725) 67,505,472 (27,681,550) 1,621,000 (31,592,379) 127,482,204 (18,169,658) (1,386,639) 3,050 231,934,641 (7,571,909) 11,156,203 (241,635,544) 148,703,792 0 (2,899,662) 5,000 (7,378,758) (17,579,001) 0 1,466,156 86,268,898 (5,392,931) 1,330,758 (3,433) (4,065,606) 69 58,689,512 32,238,161 90,927,673 4,686,883 762,680 (21,498,642) (7,833,944) 4,032,078 (117,371) (3,919,237) 700 (39,635,535) 71,873,696 32,238,161 94 F I N A N C I A L S T A T E M E N T S Notes Notes 1 General Information BUSINE SS AC T IVI T IE S AND T HE COMP ANY MorphoSys AG (“the Company” or “MorphoSys”) is a leader in the develop- ment of highly efficient technologies for generating therapeutic antibod- ies. The Company’s proprietary portfolio of compounds and the pipeline of compounds co-developed with partners from the pharmaceutical and bio- technology industry is one of the broadest in the industry. The Group was founded as a German limited liability company in July 1992. In June 1998, MorphoSys became a German stock corporation. In March 1999, the Com- pany completed its initial public offering on Germany’s “Neuer Markt”: the segment of the Deutsche Börse designated for high-growth companies. On January 15, 2003, MorphoSys AG was admitted to the Prime Standard seg- ment of the Frankfurt Stock Exchange. 2 Summary of Significant Accounting Policies 2.1 B ASI S OF AND CHANGE S IN ACCOUN T ING S TANDARD S 2 .1.1 B ASIS OF APPLICATION These consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB), London. The statements take into account the recommendations of the International Financial Reporting Standards Interpretations Committee (IFRS IC), as applicable in the European Union (EU) and also give consideration to the supplementary German commercial law provisions, applicable in accor- dance with Sec. 315a Para. 1 of the German Commercial Code (HGB). 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 were prepared in euro – the MorphoSys Group’s functional currency. Statements are prepared on the basis of historical cost, except for derivative financial instruments and available-for-sale financial assets, which are recognized at their respec- tive fair value. All figures in this report are rounded to the nearest euro, thousand euros or million euros. Financial assets classified as loans and receivables were presented sepa- rately in 2015 for better transparency of the consolidated balance sheet. In the 2014 consolidated financial statements, these financial assets were included in other receivables. The prior year’s consolidated balance sheet was adjusted accordingly to ensure comparability. In the consolidated statement of cash flows, interest paid and interest re- ceived were reclassified from operating activities into investing activities and financing activities. The prior year’s amounts were adjusted accord- ingly to ensure comparability. For better transparency, the presentation of reserves in the balance sheet is divided into “Revaluation Reserve” and “Translation Reserve”. These consolidated financial statements as of December 31, 2015 com- prise MorphoSys AG and its subsidiaries (collectively referred to as the “MorphoSys Group” or the “Group”). Unless stated otherwise, the accounting policies set out below have been applied consistently to all periods presented in these consolidated finan- cial statements. F I N A N C I A L S T A T E M E N T S Notes 95 2 .1.2 C HANGES IN AC C OUNTING P OLICIES AND DISCLOSURES The accounting principles applied generally correspond to the policies used in the prior year. The following new and revised standards and interpretations were applied for the first time in the financial year. Standard/Interpretation IFRIC 21 Levies Mandatory application for financial years starting on 06/17/2014 Improvements to International Financial Reporting Standards, 2011 – 2013 cycle 01/01/2015 Adopted by the European Union Impact on MorphoSys yes yes none none The following new and revised standards and interpretations, which were not yet mandatory for the financial year or were not yet adopted by the European Union, were not applied. Standards with the remark “yes” are likely to have an impact on the consolidated financial statements, and their impact is currently being assessed by the Group. Standards with the remark “none” are not likely to have a material impact on the consolidated financial statements. Standard/Interpretation IFRS 9 IFRS 14 IFRS 15 IFRS 16 IFRS 10/12 and IAS 28 (A) IFRS 11 (A) IAS 1 (A) IAS 16 and IAS 38 (A) IAS 16 and IAS 41 (A) IAS 19 (A) IAS 27 (A) Financial Instruments Regulatory Deferral Accounts Revenue from Contracts with Customers Leases Investment Entities – Applying the Consolidation Exception Accounting for Acquisitions of Interests in Joint Operations Disclosure Initiative Clarification of Acceptable Methods of Depreciation and Amortization Bearer Plants Defined Benefit Plans: Employee Contributions Equity Method in Separate Financial Statements Improvements to International Financial Reporting Standards, 2010 – 2012 cycle Improvements to International Financial Reporting Standards, 2012 – 2014 cycle (A) Amended Mandatory application for financial years starting on Adopted by the European Union Possible impact on MorphoSys 01/01/2018 01/01/2016 01/01/2018 01/01/2019 01/01/2016 01/01/2016 01/01/2016 01/01/2016 01/01/2016 02/01/2015 01/01/2016 02/01/2015 01/01/2016 no no no no no yes yes yes yes yes yes yes yes yes none yes yes none none yes none none none none none none 96 F I N A N C I A L S T A T E M E N T S Notes The new IFRS 15 standard on revenue recognition was reviewed for its potential impact on the revenue recognition of existing contracts and future contracts with partners and/or licensees. The review for the exist- ing contractual arrangements revealed that no material quantitative ef- fects on the consolidated financial statements compared to the provision currently applied are to be expected. Qualitative adjustments of the re- quired disclosures in the Notes under IFRS 15 will be expected, however they will not be made until the standard’s first-time application as of January 1, 2018. 2.2 CO NS 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 financial statements pursuant to IFRS 10.B86. Unrealized losses are eliminated in the same manner as unrealized gains but are considered an indication of the transferred asset’s possible impairment. Accounting policies have been applied consistently for all subsidiaries. For all contracts and business transactions between group entities the arm’s length principle was applied. 2 .2 .1 C ONSOLIDATE D C OMPANIES AND SC OPE OF C ONSOLIDATION MorphoSys AG as ultimate parent company of the Group is located in Martinsried near Munich. MorphoSys AG has two wholly owned subsid- iaries (collectively referred to as the “MorphoSys Group” or the “Group”): Sloning BioTechnology GmbH (Martinsried) and, as of May 7, 2015, Lanthio Pharma B.V. (Groningen, The Netherlands; see also Item 4* of these Notes). Additionally, MorphoSys AG’s investment in Lanthio Pharma B.V. indirectly gives it 100 % ownership in LanthioPep B.V. (Groningen, The Netherlands). *C R O S S - R E F E R E N C E to page 108 2 .2 .2 C ONSOLIDATION ME THODS The following Group 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 Consolidation since Sloning BioTechnology GmbH Lanthio Pharma B.V. LanthioPep B.V. October 2010 May 2015 May 2015 10/07/2010 05/07/2015 05/07/2015 These subsidiaries are fully consolidated because they are either directly or indirectly wholly owned. MorphoSys controls these subsidiaries be- cause it possesses full power over the investees. Additionally, MorphoSys is subject to risk exposure or has rights to variable returns from its in- volvement with the investees. MorphoSys also has unlimited capacity to exert power over the investees to influence their returns. The Group does not have any entities consolidated as joint ventures by using the equity method as defined by IFRS 11 “Joint Arrangements” nor does it exercise a controlling influence as defined by IAS 28 “Investments in Associates and Joint Ventures”. Interests in such entities would be mea- sured at fair value or historic cost in accordance with IAS 39. Assets and liabilities of fully consolidated domestic and international enti- ties are recognized using Group-wide uniform accounting and valuation methods. The consolidation methods applied have not changed from the previous year. Poole Real Estate Ltd., Oxford, UK, was liquidated during the financial year 2015. The remaining assets were distributed to MorphoSys AG as the sole shareholder. Receivables, liabilities, expenses and income among consolidated entities are eliminated in the consolidated financial statements. S COPE OF CONS OL IDAT ION A S OF DEC EMBER 31, 2015 Company name and registered office COMPANY CONSOLIDATED (APART FROM PARENT COMPANY) Sloning BioTechnology GmbH, Martinsried, Germany Lanthio Pharma B.V., Groningen, The Netherlands LanthioPep B.V., Groningen, The Netherlands1 1 Indirect subsidiary via Lanthio Pharma B.V. Share of Capital % 100 100 100 2 .2 .3 B ASIS OF FORE IGN CURRE NCY TR ANSL ATION IAS 21 “The Effects of Changes in Foreign Exchange Rates” governs the accounting for transactions and balances denominated in foreign curren- cies. Transactions denominated in foreign currencies are translated at the exchange rates prevailing on the date of the transaction. Any resulting translation differences 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 foreign exchange rate differences derived from these transla- tions are recognized in the consolidated statement of income. Any other foreign exchange rate differences at the Group level are recognized in the “Translation Reserve” (stockholders’ equity). The consolidated financial statements for the year ended December 31, 2015 were prepared and approved by the Management Board in its meeting on February 16, 2016 by a resolution of the Management Board. The Manage- ment Board members are 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 Super- visory Board is authorized to amend the financial statements after their approval by the Management Board. MorphoSys Group’s headquarters are located at Lena-Christ-Straße 48, 82152 Martinsried, Germany. F I N A N C I A L S T A T E M E N T S Notes 97 2.3 FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT 2 .3.1 C RE DIT RISK AND LIQUIDIT Y RISK Financial instruments that could subject the Group to a concentration of credit and liquidity risk consist primarily of cash, cash equivalents, mar- ketable securities, derivative financial instruments and receivables. The Group’s cash and cash equivalents are principally denominated in euros. Marketable securities represent investments in high-quality securities. Cash, cash equivalents, and marketable securities are held at several re- nowned financial institutions in Germany. The Group continuously moni- tors its positions with financial institutions that are counterparts to its financial instruments and these institutions’ credit ratings and does not expect any risk of non-performance. One of the Group’s policies requires all customers who wish to transact business on credit terms to undergo a credit assessment based on external ratings. Nevertheless, the Group’s revenues and accounts receivable are still subject to credit risk from customer concentration. The Group’s most significant single customer accounted for € 8.3 million of trade receivables as of December 31, 2015 (December 31, 2014: € 9.3 million). This customer accounted for 73 % of the Group’s accounts receivable at the end of 2015. Three individual customers of the Group accounted for 56 %, 39 %, and 2 % of the total revenues in 2015. On December 31, 2014, one customer had accounted for 62 % of the Group’s accounts receivable and three customers had individually accounted for 68 %, 21 %, and 3 % of the Group’s revenues in 2014. Based on the Management Board’s assessment, no allowances were required in the financial years 2015 and 2014. The carrying amounts of financial assets represent the maximum credit risk. The table below shows the credit risk of trade receivables by region as of the reporting date. in € 12/31/2015 12/31/2014 Europe and Asia USA and Canada Other TOTAL 10,809,051 633,008 0 11,442,059 10,264,935 4,725,597 0 14,990,532 The following table shows the term structure of trade receivables as of the reporting date. in €; A/R are due since Accounts Receivable Write-off Accounts Receivable, Net of Allowance for Impairment in €; A/R are due since Accounts Receivable Write-off Accounts Receivable, Net of Allowance for Impairment 12/31/2015 0 – 30 days 12/31/2015 30 – 60 days 12/31/2015 60+ days 12/31/2015 Total 11,442,059 0 11,442,059 0 0 0 0 0 0 11,442,059 0 11,442,059 12/31/2014 0 – 30 days 12/31/2014 30 – 60 days 12/31/2014 60+ days 14,666,085 0 14,666,085 324,447 0 324,447 0 0 0 12/31/2014 Total 14,990,532 0 14,990,532 98 F I N A N C I A L S T A T E M E N T S Notes As of December 31, 2015 and December 31, 2014, the Group was not ex- posed to a credit risk from derivative financial instruments. The maxi- mum credit risk of financial guarantees (rent deposits) on the reporting date amounted to € 0.6 million (December 31, 2014: € 0.6 million). The contractually agreed maturities and the corresponding cash out- flows of accounts payable are within one year. Convertible bonds issued to related parties mature on March 31, 2020 (maximum cash outflow: € 0.2 million). 2 .3.2 MA RKE T RISK Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s results of operations or the value of the financial instruments held. The Group is exposed to currency and interest rate risks. C U RREN CY RISK The consolidated financial statements are prepared in euros. Whereas MorphoSys’s expenses are predominantly incurred in euros, a portion of the revenue is dependent on the prevailing exchange rate of the US dollar. Throughout the year, the Group monitors the need to hedge foreign ex- change rates to minimize currency risk and addresses this risk by using derivative financial instruments. The table below shows the Group’s exposure to foreign currency risk based on the items’ carrying amounts. as of December 31, 2015; in € EUR USD Cash and Cash Equivalents Available-for-sale Financial Assets Bonds, Available-for-sale Financial Assets classified as Loans and Receivables Financial Assets classified as Loans and Receivables, Net of Current Portion Accounts Receivable Accounts Payable and Accrued Expenses TOTAL 90,206,933 64,292,830 33,120,117 94,587,528 15,510,989 11,365,659 (22,308,082) 286,775,974 720,740 0 0 0 0 76,400 (28,548) 768,592 Other 0 0 0 0 0 0 (5,033) (5,033) Total 90,927,673 64,292,830 33,120,117 94,587,528 15,510,989 11,442,059 (22,341,663) 287,539,533 as of December 31, 2014; in € EUR USD Other Total Cash and Cash Equivalents Available-for-sale Financial Assets Bonds, Available-for-sale Financial Assets classified as Loans and Receivables Financial Assets classified as Loans and Receivables, Net of Current Portion Accounts Receivable Accounts Payable and Accrued Expenses TOTAL 32,130,970 106,039,373 7,488,259 156,993,068 50,030,000 14,887,707 (17,763,146) 349,806,231 107,191 0 0 0 0 102,825 (67,646) 142,370 0 0 0 0 0 0 0 0 32,238,161 106,039,373 7,488,259 156,993,068 50,030,000 14,990,532 (17,830,792) 349,948,601 F I N A N C I A L S T A T E M E N T S Notes 99 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 as- sets or liabilities to which the Company has access. 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). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). Level 2: Level 3: 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 because of their short-term maturities. HIER A RC H Y LE V EL 1 The fair value of financial instruments traded in active markets is based on the quoted market prices on the reporting date. A market is considered active if quoted prices are available from an exchange, dealer, broker, industry group, pricing service or regulatory body that is easily and regu- larly accessible and prices reflect current and regularly occurring market transactions at arm’s length conditions. For assets held by the Group, the appropriate quoted market price is the buyer’s bid price. These instruments fall under Level 1 of the hierarchy (see also Item 6.2* of these Notes). *C R O S S - R E F E R E N C E to page 113 HIER A RC H Y LE V EL 2 The fair value of financial instruments not traded in active markets can be determined using valuation methods. In this case, fair value is estimated using 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 mar- ket data, the instrument is allocated to Level 3. Hierarchy level 2 contains the forward exchange contracts used for hedg- ing. Future cash flows for these forward exchange contracts are based on forward curves. The fair value of these instruments is determined using discounted cash flows. There were no financial assets or liabilities allocated to hierarchy level 3. There were no transfers from one fair value hierarchy level to another in 2015 or 2014. Various foreign exchange rates and their impact on assets and liabilities were simulated in an in-depth sensitivity analysis to determine the effects on income. A 10 % increase in the euro versus the US dollar as of Decem- ber 31, 2015 would have reduced the Group’s income (assuming stable in- terest rates) by € 0.1 million. A 10 % decline in the euro versus the US dol- lar would have increased the Group’s income by € 0.1 million. A 10 % increase in the euro versus the US dollar as of December 31, 2014 would have reduced the Group’s income by less than € 0.1 million (assum- ing stable interest rates). A 10 % decline in the euro versus the US dollar would have increased the Group’s income by less than € 0.1 million. If the foreign exchange rates for the US dollar versus the euro had re- mained at the prior year’s average rate, the Group’s revenues would have been € 0.1 million lower. In 2014, Group revenues would have been € 0.1 million higher. IN T EREST R AT E RISK The Group’s risk exposure to changes in interest rates mainly relates 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 safety of an investment ahead of its return. Interest rate risk is limited because all securities/investments can be liquidated within a maximum of two years. The Group is not subject to significant interest rate risks from the liabili- ties currently reported in the balance sheet. 2 .3.3 F AIR VALUE HIE R ARCHY AND ME ASURE ME NT PRO CE DURES The IFRS 13 “Fair Value Measurement” guidelines must always be applied when measurement at fair value is required or permitted or disclosures regarding measurement at fair value are required based on another IAS/ IFRS guideline. The fair value is the price that would be achieved for the sale of an asset in an arm’s length transaction between independent mar- ket participants or the price to be paid for the transfer of a liability (dis- posal or exit price). Accordingly, the fair value of a liability reflects the default risk (i.e., own credit risk). Measurement at fair value requires that the sale of the asset or the transfer of the liability takes place on the prin- cipal market or, if no such principal market is available, on the most advan- tageous market. The principal market is the market a company has access to that has the highest volume and level of activity. 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. The fair value of non-financial assets is based on the best use of the asset by a market participant. For financial instru- ments, the use of bid prices for assets and ask prices for liabilities is per- mitted but not required if those prices best reflect the fair value in the respective circumstances. For simplification, mean rates are also permit- ted. Thus, IFRS 13 not only applies to financial assets but all assets and liabilities. 100 F I N A N C I A L S T A T E M E N T S Notes The table below shows the fair values of financial assets and liabilities and the carrying amounts presented in the consolidated balance sheet. December 31, 2015 (in 000’s €) Cash and Cash Equivalents Financial Assets classified as Loans and Receivables Accounts Receivable Forward Exchange Contracts Used for Hedging Other Receivables Financial Assets classified as Loans and Receivables, Net of Current Portion Available-for-sale Financial Assets Bonds, Available-for-sale TOTAL Convertible Bonds - Liability Component Accounts Payable and Accrued Expenses Forward Exchange Contracts Used for Hedging TOTAL * Declaration waived in line with IFRS 7.29 (a) December 31, 2014 (in 000’s €) Cash and Cash Equivalents Financial Assets classified as Loans and Receivables Accounts Receivable Other Receivables Financial Assets classified as Loans and Receivables, Net of Current Portion Shares Available-for-sale, Net of Current Portion Available-for-sale Financial Assets Bonds, Available-for-sale TOTAL Convertible Bonds - Liability Component Accounts Payable and Accrued Expenses TOTAL * Declaration waived in line with IFRS 7.29 (a) Loans and Note Receivables Available- for-sale Other Financial Liabilities Total Carrying Amount Fair value 6.1 6.2 6.3 6.4 6.4 6.2 6.2 6.2 8.1 7.1 6.4 90,928 94,588 11,442 750 574 15,511 0 0 213,793 0 0 0 0 0 0 0 0 0 0 64,293 33,120 97,413 0 0 0 0 0 0 0 0 0 0 0 0 0 (225) (22,342) (25) (22,592) 90,928 94,588 11,442 750 574 15,511 64,293 33,120 311,206 (225) (22,342) (25) (22,592) 90,928 94,588 * 0 574 15,511 64,293 33,120 299,014 (225) * (25) (250) Loans and Note Receivables Available- for-sale Other Financial Liabilities Total Carrying Amount Fair value 6.1 6.2 6.3 6.4 6.2 6.8 6.2 6.2 8.1 7.1 32,238 156,993 14,991 100 50,030 0 0 0 254,352 0 0 0 0 0 0 0 0 1,727 106,039 7,488 115,254 0 0 0 0 0 0 0 0 0 0 0 0 (252) (17,831) (18,083) 32,238 32,238 156,993 14,991 100 156,993 * 100 50,030 50,030 1,727 106,039 7,488 369,606 (252) (17,831) (18,083) * 106,039 7,488 352,888 (252) * (252) 2.4 IMP AIRMEN T S 2 .4.1 N ON - DE RIVATIVE FINANCIAL INSTRUME NTS A financial instrument not carried at fair value through profit or loss is assessed at each reporting date to determine if there is objective evidence for impairment. A financial instrument is impaired if objective evidence indicates that an event has occurred after the initial recognition of the asset that could result in a loss and whether that event could have a negative effect on the asset’s estimated future cash flows, which can be assessed reliably. Objective evidence that financial instruments (including equity securi- ties) are impaired can include the default or delinquency of a debtor, indi- cations that a debtor or issuer will enter insolvency, adverse changes in the payment status of borrowers or issuers in the Group as well as eco- nomic conditions that correlate with defaults or the disappearance of an active market for a security. A significant or prolonged decline in an equity security’s fair value below its acquisition cost is objective evidence of impairment. F I N A N C I A L S T A T E M E N T S Notes 101 2 .4.2 RECE IVABLES The Group considers evidence of the impairment of receivables both on an individual and a collective level. All individually significant receivables are tested specifically for impairment. All individually significant receiv- ables found not to be expressly impaired are then collectively tested for any impairment that occurred but was not yet identified. Individually non-significant receivables are collectively tested for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of default probabilities of the timing of impairment reversals and the amount of loss incurred. These are then adjusted to management’s assessment of whether current economic and credit conditions are such that the actual losses are likely to be greater or less than those 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 initial 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 A VAIL ABLE - FOR - SALE FINANCIAL AS SE TS Impairment of available-for-sale financial assets is recognized by reclassi- fying the accumulated losses from the revaluation reserve in equity to profit and loss. The amount of the accumulated loss to be reclassified from equity to profit and loss is the difference between the acquisition cost less amortization and any principal repayment and the current fair value less any impairment previously recognized in profit or loss. If in a subsequent period the fair value of an impaired available-for-sale financial asset in- creases and this increase can be objectively linked to an event occurring after the impairment was recognized in profit or loss, then the impairment loss is reversed, and the amount of the reversal is recognized in profit or loss. Any subsequent increase in the fair value of an available-for-sale fi- nancial instrument is recognized under equity in other comprehensive income. 2 .4.4 N ON - 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 are not yet available for use, the recoverable amount is estimated at the same time each year. Impairment is recognized if the carrying 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 or its fair value less costs of disposal. In assessing value-in-use, the estimated future pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of 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 generates cash flows from ongoing use that are largely independent of the cash flows of other assets or CGUs. A ceiling test for the operating segment must be carried out for goodwill impairment testing. CGUs that have been allocated good- will aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal report- ing purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the combination’s synergies. 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 that was allocated the corporate asset. Impairment losses are recognized in profit and loss. Goodwill impairment cannot be reversed. For all other assets, impairment recognized in prior periods is assessed on each reporting date for any indications that the losses decreased or no longer exist. Impairment is reversed when there has been a change in the estimates used to determine the recoverable amount. Impairment losses can only be reversed to the extent that the as- set’s carrying amount does not exceed the carrying amount net of depre- ciation or amortization that would have been determined if an impairment had not been recognized. 2.5 AD DI T IONAL INF ORMAT ION 2 .5.1 K E Y ESTIMATES AND AS SUMP TIONS Estimates and judgments are continually evaluated and based on histori- cal experience and other factors that include expectations of future events that are believed to be realistic under the prevailing 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 that carry a significant 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 The Group performs a yearly test to determine whether goodwill is subject to impairment in accordance with the accounting policies discussed in Item 2.4.4*. The recoverable amounts from cash-generating units have been determined using value-in-use calculations and are subjected to a sensitivity analysis. These calculations require the use of estimates (see also Item 6.7.5* of the Notes). *C R O S S - R E F E R E N C E to page 101 and page 117 IN C O ME TA X ES The Group is subject to income taxes in a number of tax jurisdictions. Due to the increasing complexity of the income tax law and the corresponding uncertainty regarding the legal interpretation by the fiscal authority tax calculations are generally subject to an increasing amount of uncertainty. Where necessary, possible tax risks are taken into account in the form of a provision. As of December 31, 2015, deferred tax assets on tax loss carryforwards in the amount of € 1.2 million (December 31, 2014: € 1.8 million) were recog- nized as a result of profits expected from Sloning BioTechnology GmbH in financial years 2016 to 2020. As of December 31, 2015, no deferred tax assets on tax loss carryforwards in the amount of € 8.6 million were recognized as a result of losses ex- pected from the Lanthio Group in financial years 2016 to 2020. 102 F I N A N C I A L S T A T E M E N T S Notes 2 .5.2 C APITAL MANAGE ME NT The Management Board’s policy for capital management is to preserve a strong and sustainable capital base in order to maintain the confidence of investors, business partners, and the market and to support future busi- ness development. As of December 31, 2015, the equity ratio was 90.7 % (December 31, 2014: 81.8 %; see also the following overview). The Group does not currently have any financial debt. Under 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 consisting of convertible bonds. MorphoSys also established long- term incentive programs (LTI plan) in 2011, 2012, 2013, 2014 and 2015. These programs are based on the performance-related issue of shares, or “performance shares”, which are granted when certain predefined success criteria have been achieved (for more information, please refer to Item 8.2* of the Notes). There were no changes in the Group’s approach to capital management during the year. *C R O S S - R E F E R E N C E to page 122 in 000’ € 12/31/2015 12/31/2014 Stockholders’ Equity In % of Total Capital Debt In % of Total Capital TOTAL CAPITAL 362,736 90.7 % 37,343 9.3 % 400,079 348,803 81.8 % 77,675 18.2 % 426,478 2.6 U SE OF IN T ERE S T RAT E S F OR VAL UAT ION The Group uses interest rates to measure fair value. When calculating stock- based compensation, MorphoSys uses interest rates on German government bonds with maturities of five or seven years on the date they were granted to determine the fair value of convertible bonds. 2.7 ACCOUN T ING P OL IC IE S APPL IED T O L INE I T EMS OF T HE INCOME S TAT EMEN T 2 .7.1 R E VE NUES AND RE VE NUE REC O GNITION The Group’s revenue includes license fees, milestone payments, service fees and revenues from the sale of goods. Under IAS 18.9, revenues are measured at the fair value of the consideration received or receivable. In accordance with IAS 18.20b, revenues are recognized only to the extent that it is sufficiently probable that the Company will receive the economic benefits associated with the transaction. LI C ENSE FEES A ND MILESTO NE PAY MEN 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 project term, the ex- pected 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 contractual criteria. SERV I C E FEES Service fees from research and development collaborations are recognized in the period the services are provided. Discounts that are likely to be granted and whose amount can be reliably determined are recognized as a reduction in revenue at the time of reve- nue recognition. The timing of the transfer of risks and rewards varies depending on the terms of the sales contract. In accordance with IAS 18.21 and 18.25, revenue from multiple-component contracts is recognized by allocating the total consideration to the separately identifiable compo- nents based on their respective fair values and by applying IAS 18.20. The applicable revenue recognition criteria are assessed separately for each component. Deferred revenue consist of customer payments that were not yet recog- nized as revenue because the related services specified in the contract were not yet rendered. 2 .7.2 O PE R ATING E XPE NSES PERSO NN EL 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”, which require the Group to recognize as a compensation expense share-based payments at their fair value on the value date for the period in which the beneficiaries provide the services related to granting the share-based payments. RESE A RC H A ND DE V ELO PMEN T Research costs are expensed in the period they occur. Development costs are generally expensed as incurred in accordance with IAS 38.5 and IAS 38.11 to 38.23. Development costs are recognized as an intangible asset when the criteria of IAS 38.21 (probability of expected future eco- nomic benefits, reliability of cost measurement) are met and if the Group can provide proof under IAS 38.57. G ENER A L A N D A DM INIST R AT I V E This line item contains 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 from incentives is recognized as a reduction in lease expenses on a straight-line basis over the term of the lease. All of the Group’s lease agreements are classified exclusively as operating 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 at 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 their economic life. F I N A N C I A L S T A T E M E N T S Notes 103 2 .7.3 O THE R INC OME G OV ERNMEN T G R A N TS Grants received from government agencies to fund specific research and development projects are recognized in the income statement in the sepa- rate line item “other income” to the extent that the related expenses have already occurred. Under the terms of the grants, government agencies generally have the right to audit the use of the funds granted to the Group. Basically, government grants are cost subsidies, and their recognition through profit and loss is limited to the corresponding costs. No payments were granted in the 2015 financial year that are required to be classified as investment subsidies. 2 .7.8 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 parent company shareholders by the weighted average number of ordi- nary shares outstanding during the reporting period. Diluted earnings per share is calculated in the same manner with the exception that the net profit or loss attributable to parent company shareholders and the weighted average number of ordinary shares outstanding are adjusted for any dilu- tive effects resulting from convertible bonds granted to the Management Board and employees. 2.8 A CCOUN T ING P OL IC IE S APPL IED T O T HE ASSE T S OF T HE 2 .7.4 O THE R E XPE NSES The line item “other expenses” consists mainly of currency losses from the operating business. 2 .7.5 F INANCE INC OME Interest income is recognized in the income statement as it occurs and takes into account the asset’s effective interest rate. 2 .7.6 F INANCE E XPE NSES Borrowing costs are expensed in the period they occur and included in finance expenses in the income statement. 2 .7.7 I NC OME TA X E XPE NSES/INC OME Income taxes consist of current and deferred taxes and are recognized in the income statement unless they relate to items recognized directly in equity or other comprehensive income. Current taxes are the taxes expected to be payable on the year’s taxable income based on prevailing tax rates on the reporting date and any adjust- ments to taxes payable in 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 purposes. The method of calculating deferred taxes depends on how the asset’s carrying amount is expected to be realized and how the liabilities will be repaid. The calculation is based on the prevailing tax rates or those adopted on the reporting date. Deferred tax assets and liabilities are offset when there is a legally en- forceable right to offset current tax liabilities and assets and when they relate to income taxes imposed on the same taxable entity by the same tax authority or on different tax entities that intend to settle the balance of current tax assets and liabilities on a net basis or when the tax assets and liabilities are to be realized simultaneously. Deferred tax assets are recognized only to the extent that it is likely that there will be future taxable income to offset. Deferred tax assets are re- duced by the amount that the related tax benefit is no longer expected to be realized. BAL ANCE SHEE T 2 .8.1 LIQUIDIT Y LI Q U ID AS S E TS The Group defines liquid assets as all cash at banks and on hand and all short-term deposits with an original maturity of three months or less. The Group invests most of its liquid assets at several major financial institu- tions: Commerzbank, UniCredit, Bayern LB, LBBW, BNP Paribas, Deutsche Bank and Rabobank. The Group recognizes liquid assets at their nominal value. Securities are recognized and measured at fair value. Any fluctuations in the fair value of securities consisting mainly of money market funds are directly recog- nized in equity. Permanent impairment is recognized in profit and loss. N O N - DERI VAT I V E FIN A N C I A L INST RU M EN T Depending on how they are classified, existing financial instruments are either measured at amortized cost (category “loans and receivables”) or fair value (category “available-for-sale financial assets”). The amortized cost of current receivables and current liabilities generally corresponds to either the nominal amount or repayment amount. 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. 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 financial instrument’s classification and reviews this classi- fication at each reporting date. The classification depends on the purpose of acquiring the financial instrument. As of December 31, 2015 and De- cember 31, 2014, some financial instruments held by the Group were clas- sified as “available-for-sale”. These financial instruments are recognized or derecognized as of the date on which the Group commits to the financial instrument’s purchase or sale. Following their initial recognition, avail- able-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, otherwise disposed of or considered impaired, at which time the accumulated loss is reported in profit and loss. Guarantees granted for rent deposits that have been collateralized with available-for-sale securities and obligations from convertible bonds issued to employees are recorded under other assets as restricted cash since they are not available for use in the Group’s operations. 104 F I N A N C I A L S T A T E M E N T S Notes DER I 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. After 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 deriva- tives is recognized in profit and loss because the Group currently does not apply hedge accounting. According to the Group’s foreign currency hedging policy, the Group only hedges highly probable future cash flows and clearly identifiable receivables that can be collected within a 24-month period. The use of derivative financial instruments is subject to a Group policy that is a written guideline approved by the Management Board for dealing with derivative financial instruments. Any changes in the fair value of derivative financial instruments are documented. 2 .8.2 A C C OUNTS 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 2.4.2* and 6.3* of the Notes). *C R O S S - R E F E R E N C E to page 101 and page 114 Income tax receivables mainly include receivables due from tax authori- ties in the context of capital gain taxes withheld. Other non-derivative financial instruments are measured at amortized cost using the effective interest method less any impairment. 2 .8.3 INVE NTORIES Inventories are measured at the lower value of production or acquisition cost and net realizable value under the FIFO method. Acquisition costs comprise all costs of purchase and those incurred in bringing the invento- ries into operating condition while taking into account purchase price re- ductions, such as bonuses and discounts. Net realizable value is the esti- mated selling price less the estimated expenses necessary for completion and sale. Inventories are divided into the categories of raw materials and supplies. 2 .8.4 P RE PAID E XPE NSES AND OTHE R CURRE NT AS SE TS Prepaid expenses include expenses resulting from an outflow of liquid assets prior to the reporting date that are only recognized as expenses in the subsequent financial year. Such expenses usually involve mainte- nance contracts, sublicenses and prepayments for external laboratory ser- vices not yet performed. Other current assets primarily consist of receiv- ables from tax authorities resulting from value-added taxes. This item is recognized at nominal value. 2 .8.5 PR OPE R T Y, PL ANT AND EQUIPME NT Property, plant and equipment is recorded at historical cost less accumu- lated depreciation (see also Item 6.6* of the Notes) and any impairment (see Item 2.4.4* of the Notes). Historical cost includes expenditures di- rectly related to the purchase at the time of the acquisition. Replacements purchases, building alterations and improvements are capitalized while repair and maintenance expenses are charged as expenses as they are incurred. Property, plant and equipment is depreciated on a straight-line basis over its useful life (see table below). Leasehold improvements are depreciated on a straight-line basis over the asset’s estimated useful life. *C R O S S - R E F E R E N C E to page 115 and page 101 Asset Class Computer Hardware Low-value Laboratory and Office Equipment below € 410 Permanent Improvements to Property/Buildings Office Equipment Laboratory Equipment Useful Life 3 years Immediately 10 years 8 years 4 years Depreciation Rates 33 % 100 % 10 % 13 % 25 % Asset’s residual values and useful lives 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 acqui- sition or production costs because the Group finances the entire operating business with equity. 2 .8.6 I NTANGIBLE AS SE TS Purchased intangible assets are capitalized at acquisition cost and exclu- sively amortized on a straight-line basis over their useful lives. Internally generated intangible assets are recognized to the degree the recognition criteria set out in IAS 38 are met. Development costs are capitalized as intangible assets when the capital- ization criteria described in IAS 38 have been met, namely, clear specifi- cation of the product or procedure, technical feasibility, intention of com- pletion, use, commercialization, coverage of development costs through future free cash flows, reliable determination of these free cash flows and 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 as defined by IAS 38. Subsequent expenditures for capitalized intangible assets are capitalized only when they substantially increase the future economic benefits of the specific asset to which they relate. All other expenditures are expensed as incurred. 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) or the remaining patent term. Amortization starts when the patent is issued. Technology identified in the purchase price allocation for the acquisition of Sloning BioTechnology GmbH is recorded at the fair value at the time of acquisi- tion, less accumulated amortization (useful life of ten years). *C R O S S - R E F E R E N C E to page 101 F I N A N C I A L S T A T E M E N T S Notes 105 LI C ENSE 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 method are reviewed at the end of each financial year under IAS 38.104. Annual fees to maintain a 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 contracts without a set duration. IN - PRO C ES S R&D PRO G R A MS This line item contains capitalized upfront payments from the in-licensing of two compounds for the Proprietary Development segment as well as a milestone payment for one of these compounds which was paid at a later time. Additionally, two compounds are included resulting from an acquisi- tion. The assets are recorded at acquisition cost and are not yet available for use and therefore not subject to amortization. The assets were 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 to page 101 GO ODWILL Goodwill is recognized for expected synergies from business combina- tions and the skills of the acquired workforce. Goodwill is tested annually for impairment as required by IAS 36 (see also Item 6.7.5* of the Notes). *C R O S S - R E F E R E N C E to page 117 Intangible Asset Class Useful Life Patents License Rights In-process R&D Programs Software Goodwill 10 years 8 –10 years Not yet amortized 3 – 5 years Impairment Only Amortisation Rates 10 % 13 % – 10 % – 33 % – 20 % – 2 .8.7 S HARES AVAIL ABLE - FOR - SALE The 19.98 % interest in Dutch Lanthio Pharma B.V. was recognized at amortized cost and recorded as a financial instrument under the category “available-for-sale” in the prior year. Following the acquisition of all out- standing shares of Lanthio Pharma B.V. on May 7, 2015, the entity was fully included in MorphoSys’ consolidated financial statements. 2 .8.8 PREPAID E XPENSES AND OTHER ASSETS, NET OF CURRENT PORTION The non-current portion of expenses that occurred 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 sublicenses. This line item also includes other non-current assets, which are recog- nized at fair value. Other non-current assets consist mainly of restricted cash, such as rent deposits. 2.9 A CCOUN T ING P OL IC IE S APPL IED T O EQUI T Y AND L IABIL I T Y I T EMS OF T HE BAL ANCE SHEE T 2 .9.1 A CCOUNTS PAYABLE , OTHER LIABILITIES AND OTHER PROVISIONS Trade payables and other liabilities are recognized at amortized cost. Lia- bilities with a term of more than one year are discounted to their net pres- ent value. Liabilities with uncertain timing or amount are recorded as provisions. IAS 37 requires the recognition of provisions for obligations to third par- ties arising from past events. Furthermore, provisions are only recognized for legal or factual obligations to third parties if the event’s occurrence 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 meet the obligation also includes expected price and cost increases. The interest portion of the added provisions is recorded in the finance result. The measurement of provisions is based on past experience and considers the circumstances in existence on the reporting date. 2 .9.2 T A X PROVISIONS Tax liabilities are recognized and measured at their nominal value. Tax liabilities contain obligations from current taxes, excluding deferred taxes. Provisions for trade taxes, corporate taxes and similar taxes on income are determined based on the taxable income of the consolidated companies less any prepayments made. 2 .9.3 C URRE 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 or nominal value. The corresponding rendering of services and revenue recognition occurs within the 12-month period following the reporting date. 2 .9.4 D E FE RRE D RE VE NUE This line item includes the non-current portion of deferred upfront pay- ments from customers in accordance with IAS 18.13, which are measured at the lower of fair or nominal value. Due to its low materiality, this line item is not discounted to its present value in the financial year despite its long-term maturity. 2 .9.5 C ONVE R TIBLE BONDS DUE TO RE L ATE D PAR TIES The Group issued convertible bonds to the Group’s Management Board and employees. In accordance with IAS 32.28, the equity component of a con- vertible bond must be recorded separately under additional paid-in capital. The equity component is determined by deducting the separately deter- mined amount of the liability component from the fair value of the convert- ible bond. The effect of the equity component is recognized in profit and loss in personnel expenses from share-based payments, whereas the ef- fect on profit and loss from the liability component is recognized as inter- est expense. The Group applies the provisions of IFRS 2 “Share-based Payments” for all convertible bonds granted to the Management Board and the Group’s employees. 106 F I N A N C I A L S T A T E M E N T S Notes 2 .9.6 D E FE RRE D TA XES 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, taxes expected to be paid or recovered in subsequent financial 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 value 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 ST O 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 issue of ordinary shares and stock options are recognized as a deduction from stockholders’ equity, net of any tax effects. When common stock that was recorded as stockholders’ equity is repur- chased, 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 subse- quently 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 Repurchases of the Company’s own shares at prices quoted on an ex- change or at market value are recorded in this line item. A D DIT I O N A L PA ID - IN CA PITA L Additional paid-in capital mainly consists of personnel expenses resulting from the grant of convertible bonds and performance shares and the pro- ceeds 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 that 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 that are not recognized in profit and loss. AC C U M U L AT ED IN C O ME The “accumulated income” line item consists of the Group’s accumulated consolidated net profits/losses. A separate measurement of this item is not made. 3 Segment Reporting MorphoSys Group applies IFRS 8 “Segment Reporting”. An operating segment is defined as a division of an entity that engages in business ac- tivities from which it can earn revenues and incur expenses and whose operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete financial information is available. Segment information is provided for the Group’s operating segments based on the Group’s management and internal reporting structures. The segment results and segment assets include items that can be either di- rectly attributed to the individual segment or allocated to the segments on a reasonable basis. The Management Board evaluates a segment’s economic success using selected key figures so that all income and expenses are included. Operat- ing earnings before interest and taxes, or EBIT, is the key benchmark for measuring and evaluating the operating results. The EBIT margin reflects the ratio of EBIT to revenues. The Group consists of the following operating segments. 3.1 PR OPRIE TARY DEVEL OPMEN T This segment comprises all activities related to the proprietary develop- ment of therapeutic antibodies and peptides. The activities of this segment currently comprise 14 antibodies and peptides in total, including the clin- ical development of the proprietary programs MOR208, MOR209/ES414 and MOR202. The MOR202 cooperation with Celgene was terminated as of March 26, 2015. MOR202 is continued by MorphoSys. The proprietary pro- gram MOR103, which is also included in this segment, was out-licensed to GSK with all activities now conducted by GSK. MorphoSys is also pursuing other programs that are either at an early stage of proprietary develop- ment or fall under co-development agreements. This includes since May 2015 the MOR107 preclinical program (formerly LP2) resulting from the acquisition of Lanthio Pharma B.V. The program MOR106, a cooperation with the partner Galapagos, is also in pre-clinical development. A further eight programs are in the pre-clinical search. 3.2 P AR T NERED DI S COVERY MorphoSys possesses one of the leading technologies for generating ther- apeutics based on human antibodies. The Group markets this technology commercially through its partnerships with numerous pharmaceutical and biotechnology companies. The Partnered Discovery segment encom- passes all operating activities relating to these commercial agreements and most of the Company’s technological development. F I N A N C I A L S T A T E M E N T S Notes 107 3.3 C RO SS -SEGMEN T DI S CL O SURE The information on segment assets is based on the assets’ respective locations. For the 12-month Period Ended 31 December (in 000’s €) External Revenues Other Operating Expenses Other Income Other Expenses SEG MENT EB IT Finance Income Finance Expenses PROFIT BEFORE TA XES Income Tax (Expenses)/Income NE T PROFIT/(LOS S) Current Assets Non-current Assets TOTAL SEG MENT AS SE TS Current Liabilities Non-current Liabilities Stockholders’ Equity TOTAL SEG MENT LIAB ILITIES AND EQUIT Y Capital Expenditure Depreciation and Amortization Proprietary Development Partnered Discovery Unallocated Group 2015 2014 2015 2014 2015 2014 2015 2014 59,939 54,057 4,849 8 10,723 0 0 10,723 0 10,723 6,789 69,353 76,142 16,975 7,037 0 24,012 7,487 858 15,041 33,535 105 0 (18,389) 0 0 (18,389) 0 (18,389) 6,200 30,079 36,279 25,343 40,414 0 65,757 17,335 1,149 46,284 25,918 5 2 20,369 0 0 20,369 0 20,369 17,840 11,269 29,109 3,382 2,568 0 5,950 995 2,243 48,937 23,041 22 0 25,918 0 0 25,918 0 25,918 25,887 17,347 43,234 2,558 4,263 0 6,821 2,512 2,621 0 13,753 644 749 (13,858) 3,827 436 (10,467) (5,725) (16,191) 275,487 19,341 294,828 7,113 268 362,736 370,117 284 354 0 13,533 655 550 (13,428) 1,810 220 (11,838) 1,296 (10,542) 290,308 56,657 346,965 4,802 295 348,803 353,900 631 364 106,223 93,728 5,498 759 17,234 3,827 436 20,625 (5,725) 14,901 300,116 99,963 400,079 27,470 9,873 362,736 400,079 8,766 3,455 63,978 70,109 782 550 (5,899) 1,810 220 (4,309) 1,296 (3,013) 322,395 104,083 426,478 32,703 44,972 348,803 426,478 20,478 4,134 The segment result is defined as a segment’s revenue less the segment’s operating expenses. In the 2015 financial year, impairments totaling € 3.7 million were recognized in the Partnered Discovery segment (2014: impairments of € 2.1 million were attributable to the Proprietary Develop- ment segment and € 2.0 million to the Partnered Discovery segment). The Group’s key customers are allocated to the Partnered Discovery seg- ment and Proprietary Development segment. As of December 31, 2015, the single most important customer represented accounts receivables of a car- rying amount of € 8.3 million (December 31, 2014: € 9.3 million). Three of the Group’s individual customers contributed € 59.3 million, € 41.5 mil- lion and € 1.9 million to total revenues in 2015, respectively. The largest customer was allocated to the Proprietary Development segment and the other two customers to the Partnered Discovery segment. In 2014, three customers mainly assigned to the Partnered Discovery segment accounted for € 43.2 million, € 13.5 million and € 2.0 million of the Group’s total revenues. The following overview shows the Group’s regional distribution of revenue. in 000’ € Germany Europe and Asia USA and Canada TOTAL 2015 2,183 41,800 62,240 106,223 2014 733 44,628 18,617 63,978 A total of € 67.5 million (December 31, 2014: € 102.3 million) and € 32.1 mil- lion (December 31, 2014: € 0) of the Group’s non-current assets, excluding deferred tax assets, are located in Germany and the Netherlands, respec- tively. The Group’s total investments of € 8.7 million (December 31, 2014: € 20.5 million) were made in Germany, except for € 0.1 million (Decem- ber 31, 2014: € 0), which were made in the Netherlands. In accordance with internal definitions, investments only include additions to property, plant and equipment as well as intangible assets which are not related to business combinations. 108 F I N A N C I A L S T A T E M E N T S Notes 4 Business Combinations On May 7, 2015, MorphoSys acquired all outstanding shares of the Dutch biopharmaceutical company Lanthio Pharma B.V. for a one-time payment of € 20.0 million. Since this date, Lanthio Pharma B.V.’s activities have been fully included in MorphoSys’s consolidated financial statements. Prior to the acquisition, MorphoSys held 19.98 % of Lanthio Pharma B.V. The transaction added Lanthio Pharma’s leading LP2 program – a novel lanthi- peptide currently in development for diabetic nephropathy and possibly other fibrotic diseases – to MorphoSys’s growing proprietary portfolio. In accordance with IFRS 3, this business combination is accounted for ac- cording to the acquisition method under which the acquired identifiable assets and liabilities are recognized at their fair value as of the acquisition date. The positive difference between the business combination’s acquisi- tion costs and the share in the net fair value of the assets, liabilities and contingent liabilities identified during the acquisition is separately recog- nized as goodwill and allocated to the respective cash-generating unit. The fair value of the acquired receivables was € 0.5 million. This amount corresponded to the gross amount of the receivables. In the period from May 7, 2015 to December 31, 2015, the acquired com- pany contributed a net loss of € 2.2 million to the Group’s net profit. Group revenues were not affected by the acquisition. Had the acquisition occurred on January 1, 2015, management estimates that the Group’s net profit as of December 31, 2015, would have amounted to € 14.1 million. The cash consideration paid for all outstanding shares was € 20,000,000. Furthermore, the conversion right included in the loan (€ 0.7 million) was exercised in exchange for shares in the company. As a result, the share in the company temporarily increased to 25.63 %. The earnings effect resulting from the measurement of the initial interest in Lanthio Pharma B.V. at fair value amounted to € 4.5 million and was recognized in “other operating income”. As of May 7, 2015, the acquired and identifiable assets and liabilities re- sulting from the acquisition included the following items: in 000’ € Fair value Cash and Cash Equivalents Trade and Other Receivables Prepaid Expenses and Other Current Assets Property, Plant and Equipment In-process R&D Programs Software Deferred Tax Asset Other Non-current Assets Accounts Payable and Accrued Expenses and Provisions Deferred Tax Liabilities Fair Value of Net Assets and Liabilities Goodwill on Acquisition Fair Value of Investment (25.63 %) Consideration Paid Cash (acquired) Net Cash Outflow 1,830 537 144 127 28,211 1 124 29 (752) (7,047) 23,204 3,689 6,893 20,000 (1,830) 18,170 The following amount of goodwill was recognized as a result of the acquisition: Consideration Paid Fair Value of Investment (25.63 %) Fair Value of Identifiable Net Assets and Liabilities Goodwill 20,000 6,893 (23,204) 3,689 Goodwill is primarily attributable to synergy effects expected from the entities’ integration into the Group’s Proprietary Development segment and partially attributable to the know-how of the employees acquired. The Company incurred transaction-related costs of € 0.2 million that mainly related to fees for external legal advice, valuations in the context of the purchase price allocation and notary costs. All transaction-related costs are included in the consolidated income statement under “general and administrative expenses”. F I N A N C I A L S T A T E M E N T S Notes 109 5 Notes to the Income Statement 5.1 REVENUE S In 2015, revenues consisted of license fees and milestone payments total- ing € 85.4 million (2014: € 43.5 million). The Proprietary Development segment contributed revenue of € 59.2 million (2014: € 14.4 million), and the Partnered Discovery segment contributed revenue of € 26.2 million (2013: € 29.1 million). Of the service fees totaling € 20.8 million (2014: € 20.5 million), € 0.7 mil- lion (2014: € 0.6 million) were attributable to the Proprietary Development segment and € 20.1 million (2014: € 19.9 million) to the Partnered Discovery segment. 5.2 O PERAT ING EXPENSE S 5.2 .1 R ESE ARCH AND DE VE LOPME NT E XPE NSES Research and development expenses consist of the items below. 2015 25,557 2,971 3,352 7,177 34,411 5,188 78,656 in 000’ € Personnel Expenses Consumable Supplies Other Operating Expenses Amortization and Other Costs of Intangible Assets External Services Depreciation and Other Costs for Infrastructure TOTAL in million € R&D Expenses on behalf of Partners Proprietary Development Expenses Technology Development Expenses R&D TOTAL 2014 21,048 2,327 2,863 8,050 17,549 4,126 55,963 2015 22.1 54.1 2.5 78.7 2014 19.5 33.6 2.9 56.0 2013 17.5 27.5 4.2 49.2 5.2 .2 G E NE R AL AND ADMINISTR ATIVE E XPE NSES General and administrative expenses include the items below. 5.2 .3 PE RSONNE L E XPE NSE S Personnel expenses include the items below. in 000’ € Personnel Expenses Consumable Supplies Other Operating Expenses Amortization of Intangible Assets External Services Depreciation and Other Costs for Infrastructure TOTAL 2015 10,354 77 913 109 2,643 976 15,072 2014 in 000’ € 9,612 77 835 129 2,685 808 14,146 Wages and Salaries Social Security Contributions Stock-based Compensation Expense Temporary Staff (External) Other TOTAL 2012 16.0 18.1 3.6 37.7 2015 26,559 4,271 3,559 610 912 35,911 2011 19.1 33.9 2.9 55.9 2014 22,353 3,689 3,959 200 459 30,660 In 2015 and 2014, other personnel expenses consisted mainly of recruit- ment costs. 110 F I N A N C I A L S T A T E M E N T S Notes The average number of employees in the 2015 financial year was 356 (2014: 315). Of the 365 employees on December 31, 2015 (December 31, 2014: 329), 305 were active in research and development (December 31, 2014: 274) and 60 were engaged in general and administrative functions (December 31, 2014: 55 employees). As of December 31, 2015, there were 132 employees in the Proprietary Development segment and 176 employ- ees in the Partnered Discovery segment; 57 employees were not allocated to any specific segment (December 31, 2014: 105 in the Proprietary Devel- opment segment, 169 employees in the Partnered Discovery segment and 55 employees were unallocated). Costs for defined-contribution plans amounted to € 0.5 million in 2015 (2014: € 0.4 million). 5.3 O T HER INCOME AND EXPENSE S, F INANC E INCOME AND F INANC E EXPENSE S The line items “other income and expenses” and “finance income and finance expenses” include the following items: in 000’ € 2015 2014 Gain from Revaluation of Participations Grant Income Gain on Exchange Appreciation of Accounts Receivable Previously Deemed Impaired Miscellaneous Income Other Income Loss on Exchange Impairment of Other Receivables Miscellaneous Expenses Other Expenses Gain on Marketable Securities Interest Income Gain on Derivatives Finance Income Interest Expenses Loss on Derivatives Bank Fees Loss on Marketable Securities Finance Expenses TOTAL 4,495 359 306 0 338 5,498 (460) (214) (85) (759) 94 1,907 1,826 3,827 (20) (287) (34) (95) (436) 8,130 0 127 422 202 31 782 (449) 0 (101) (550) 761 1,004 45 1,810 (118) (6) (63) (33) (220) 1,822 I NCOME TAX EXPENSE S / INCOME 5.4 MorphoSys AG and its German subsidiary Sloning BioTechnology GmbH are subject to corporate taxes, the solidarity surcharge and trade taxes. The Company’s corporate tax rate of 15.0 %, the solidarity surcharge of 5.5 % and the effective trade tax rate of 10.5 % have all remained unchanged. In the 2016 financial year, the effective trade tax rate will increase to 10.85 %. The Dutch entities Lanthio Pharma B.V. and LanthioPep B.V. are subject to an income tax rate of 25 % on annual income exceeding € 200,000; annual income below € 200,000 is subject to a tax rate of 20 %. Subject to certain conditions, a tax rate of 5 % may be applicable under what is known as the “Innovation Box”. Income taxes for the past financial year consist of the items listed below. in 000’ € 2015 2014 Current Tax Expense (Thereof Regarding Prior Years: k€ 3; 2014: 2014: k€ 6) Deferred Tax Income/(Expenses) Total Income Tax Income/(Expense) Total Amount of Current Taxes Resulting from Entries Directly Recognized in Equity Total Amount of Current Taxes Resulting from Entries Directly Recognized in Other Comprehensive Income Total Amount of Deferred Taxes Resulting from Entries Directly Recognized in Other Comprehensive Income Total Amount of Tax-Effects Resulting from Entries Directly Recognized in Equity or Other Comprehensive Income (4,182) (1,543) (5,725) (1) 38 35 72 (283) 1,579 1,296 0 (15) 17 2 The following table reconciles the expected income tax expense with the actual income tax expense as presented in the consolidated financial state- ments. The combined income tax rate of 26.33 % in the 2015 financial year (2014: 26.33 %) was applied to profit before taxes to calculate the statutory income tax expense. This rate consisted of a corporate income tax of 15.0 %, a solidarity surcharge of 5.5 % on the corporate tax and an average trade tax of 10.5 % applicable to the Group. in 000’ € Profit Before Income Taxes Expected Tax Rate Expected Income Tax Tax Effects Resulting from: Deferred Tax Asset on Tax Loss Carryforwards Stock-based Compensation Non-Tax-Deductible Items Differences in Profit and Loss Neutral Adjustments Non-Recognition of Deferred Tax Assets on Current Year Tax Losses Tax Rate Differences to Local Tax Rates Effect of Tax Rate Changes Prior Year Taxes Other Effects Actual Income Tax 2015 20,626 26.33 % (5,431) 0 (221) (1,039) 1,689 (684) (28) (4) (3) (4) (5,725) 2014 (4,309) 26.33 % 1,134 629 (424) (179) 107 0 0 0 (6) 35 1,296 F I N A N C I A L S T A T E M E N T S Notes 111 As of December 31, 2015, deferred tax assets on tax loss carryforwards of € 1.2 million were recognized as a result of the profit expected from Slon- ing BioTechnology GmbH for financial years 2016 to 2020 (December 31, 2014: € 1.8 million). The tax loss carryforwards may be carried forward indefinitely and in unlimited amounts. Since 2004, German tax law re- stricts the offsetting of taxable income against existing tax loss carryfor- wards up to an amount of € 1.0 million plus 60 % of taxable income exceed- ing € 1.0 million. As of December 31, 2015, no deferred tax assets on tax loss carryforwards in the amount of € 8.6 million were recognized as a result of losses ex- pected from the Lanthio Group in financial years 2016 to 2020. As of December 31, 2014, deferred tax assets on tax loss carryforwards of € 1.2 million were recognized as a result of the profits expected from MorphoSys AG for financial years 2015 to 2019. The tax loss carryforwards were fully utilized in 2015. Deferred tax assets and liabilities are composed as follows. in 000’s €, as of December 31 Intangible Assets Receivables and Other Assets Prepaid Expenses and Deferred Charges Short-term Securities Investments Provisions Tax Losses TOTAL in 000’s €, as of December 31 Intangible Assets Receivables and Other Assets Prepaid Expenses and Deferred Charges Short-term Securities Investments Provisions Tax Losses TOTAL Deferred Tax Asset 2015 Deferred Tax Asset 2014 Deferred Tax Liabillty 2015 Deferred Tax Liability 2014 0 0 0 90 921 1,222 2,233 0 0 0 54 533 3,023 3,610 8,685 200 4 54 0 0 8,943 1,829 0 7 37 0 0 1,873 Changes in Deferred Taxes in 2015 Recognized in Profit and Loss Income/(Expense) Recognized in Other Comprehensive Income First-time Recognition of Deferred Taxes from Business Combination 197 (206) 3 0 263 (1,801) (1,544) 0 0 0 19 0 0 19 (7,053) 6 0 0 125 0 (6,922) As of December 31, 2015, temporary differences existed in connection with investments in subsidiaries (known as outside basis differences) of € 0.3 million for which no deferred tax liabilities were recognized. 5.5 E ARNINGS ( L O SS ) /CONS OL IDAT ED NE T PROF I T PER SHARE Basic earnings (loss) per share is computed by dividing the 2015 consoli- dated net profit of € 14,900,768 (2014: consolidated net loss of € 3,012,629) by the weighted average number of ordinary shares outstanding during the respective year (2015: 26,019,855; 2014: 25,903,995). 112 F I N A N C I A L S T A T E M E N T S Notes The table below shows the calculation of the weighted average number of ordinary shares. The following table shows the reconciliation of basic earnings per share with diluted earnings per share (in €, except for disclosures per share). 2015 2014 2015 2014 SHARES IS SUED ON JANUARY 1 Effect of Treasury Shares Held 26,456,834 (450,890) 26,220,882 (339,890) Effect of Repurchase of Treasury Stock Effect of Transfer of Treasury Stock to Management Board and Senior Management Group 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 (63,054) (88,492) 60,894 975 2,650 1,578 0 0 3,875 3,208 1,021 0 0 629 2,135 0 0 0 0 58,746 2,198 37,063 0 2,122 4,030 1,781 4,936 619 26,019,855 25,903,995 Diluted earnings (loss) per share is calculated by taking into account the potential increase in the Group’s ordinary shares as the result of granted convertible bonds. Numerator Consolidated Net Profit/(Loss) Denominator Weighted-average Shares Used for Basic EPS Dilutive Shares Arising from Convertible Bonds TOTAL DENOMINATOR Earnings per Share (in €) Basic Diluted 14,900,768 (3,012,629) 26,019,855 25,903,995 224,437 26,244,292 286,319 26,190,314 0.57 0.57 (0.12) (0.12) 6 Notes to the Assets of the Balance Sheet 6.1 C ASH AND C ASH EQUIVAL EN T S in 000’ € 12/31/2015 12/31/2014 Bank Balances and Cash in Hand Term Deposits Restricted Cash Cash and Cash Equivalents 90,928 631 (631) 90,928 32,238 573 (573) 32,238 The increase in cash and cash equivalents resulted mainly from the matu- rity of term deposits close to the balance sheet date that will be reinvested in 2016. Restricted cash of € 0.6 million mainly consisted of rent deposits (2014: € 0.6 million). F I N A N C I A L S T A T E M E N T S Notes 113 F INANC IAL ASSE T S/SECURI T IE S 6.2 As of December 31, 2015 and December 31, 2014, available-for-sale finan- cial assets consisted of the items below. in 000’ € DECEMBER 31, 2015 Money Market Funds Restricted Cash TOTAL DECEMBER 31, 2014 Money Market Funds Restricted Cash TOTAL Maturity Cost Gains Losses Market Value Gross Unrealized daily 64,089 daily 105,961 204 142 0 64 64,293 0 64,293 106,039 0 106,039 The Group’s gross unrealized gain from available-for-sale money market funds in the amount of € 203,738 as of December 31, 2015, the gross unre- alized gain of € 141,640 and the unrealized loss of € 64,291 as of Decem- ber 31, 2014 were recorded as a separate item within equity (revaluation reserve). In 2015, the Group recorded a net gain of € 32,539 from the dis- posal of financial assets contained in the income statement. This gain was previously recognized in stockholders’ equity (2014: € 710,518). As of December 31, 2015 and December 31, 2014, bonds available-for-sale consisted of the items below. in 000’ € DECEMBER 31, 2015 Bonds TOTAL DECEMBER 31, 2014 Bonds TOTAL Maturity daily daily Cost 33,599 7,572 Gross Unrealized Gains Losses Market Value 1 0 480 84 33,120 33,120 7,488 7,488 The Group’s gross unrealized gain from available-for-sale bonds in the amount of € 1,050, the gross unrealized loss of € 479,837 as of Decem- ber 31, 2015 and the gross unrealized loss of € 83,650 as of December 31, 2014 were recognized as a separate item within equity (revaluation re- serve). In 2015, the Group recorded a net loss of € 33,555 from the disposal of financial assets contained in the income statement that were previously recognized in stockholders’ equity (2014: net gain of € 17,460). The bonds were purchased at a price above their nominal value. The loss that resulted from the product-specific price development is offset by the bond’s interest income and results in a positive overall result. with IAS 39 “Financial Instruments”. These financial assets consisted mainly of term deposits with fixed or variable interest rates. The carrying amounts included interest receivables of € 1.2 million (December 31, 2014: € 0.4 million). Interest income from financial assets under “loans and receivables” amounted to € 1,858,793 (2014: € 914,140) and was recorded in the finance result. The risk associated with these financial instruments primarily re- sult from bank credit risks. There was no indication of impairment in the financial year 2015. As of December 31, 2015, the Company held current financial assets of € 94.6 million (December 31, 2014: € 157.0 million) and non-current financial assets of € 15.5 million (December 31, 2014: € 50.0 million), which were allocated to the “loans and receivables” category in accordance Further information on accounting for 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 to page 103 114 F I N A N C I A L S T A T E M E N T S Notes 6.3 A CCOUN 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 December 31, 2015 and December 31, 2014, accounts receivable included unbilled receivables amounting to € 3,878,771 and € 3,649,124, respectively. Based on the Management Board’s estimate, no net loss for allowances for doubtful receivables was recognized in profit and loss in 2015 and 2014. 6.5 I NCOME TAX RECEIVABL E S, INVEN T ORIE S, PREP AID EXPENSE S AND O T HER CURREN T ASSE T S As of December 31, 2015, tax receivables amounted to € 2.7 million (De- cember 31, 2014: € 2.8 million) and consisted of receivables due from tax authorities for value-added taxes payable in the amount of € 1.8 million (December 31, 2014: € 1.7 million) and receivables from capital gain taxes withheld and taxes for prior years in the amount of € 0.8 million (Decem- ber 31, 2014: € 1.1 million). 6.4 O T HER REC EIVABL E S Under the Group’s hedging policy, highly probable cash flows and definite foreign-currency receivables collectable within a 24-month period are tested to determine if they should be hedged. MorphoSys began using for- eign currency options and forwards to hedge its foreign exchange risk against US dollar receivables in 2003. These derivatives are recorded at their fair values under “other receivables”. As of December 31, 2015, there were 15 unsettled forward rate agreements with terms ranging from one to 12 months (December 31, 2014: 24 unset- tled forward rate agreements). The resulting unrealized gain of € 749,929 (December 31, 2014: € 44,506) and unrealized loss of € 24,984 (Decem- ber 31, 2014: €0) as of December 31, 2015 were recorded in the finance result. Impairments of € 0.2 million were taken into account for other receivables, as there is a doubt on the enforcement of the claims. Inventories amounting to € 0.4 million as of December 31, 2015 were stored at the Martinsried location and consisted of raw materials and sup- plies. As in the previous year, no inventories were carried at fair value less selling costs as of December 31, 2015. As of December 31, 2014, inventories amounting to € 0.6 million were stored at the Martinsried location and consisted of raw materials and supplies. As of December 31, 2015, prepaid expenses and other current assets mainly consisted of prepaid fees for external laboratory services of € 0.6 million (December 31, 2014: € 0.5 million), prepaid fees for subli- censes of € 0.3 million (December 31, 2014: € 0.2 million) and other pre- payments amounting to € 0.5 million (December 31, 2014: € 0.5 million). F I N A N C I A L S T A T E M E N T S Notes 115 Office and Laboratory Equipment Furniture and Fixtures 13,963 1,372 126 (421) 15,040 10,560 1,497 25 (391) 11,691 3,403 3,349 12,161 2,864 (1,062) 13,963 10,173 1,386 57 (1,056) 10,560 1,988 3,403 1,765 15 0 0 1,780 1,610 45 0 0 1,655 155 125 1,867 35 (137) 1,765 1,687 60 0 (137) 1,610 180 155 Total 15,728 1,387 126 (421) 16,820 12,170 1,542 25 (391) 13,346 3,558 3,474 14,028 2,899 (1,199) 15,728 11,860 1,446 57 (1,193) 12,170 2,168 3,558 Depreciation is included in the following line items of the income statement. 6.6 PR OPER T Y, PL AN T AND EQUIPMEN T in 000’ € Cost JANUARY 1, 2015 Additions Additions from business combination Disposals DECEMBER 31, 2015 Accumulated Depreciation JANUARY 1, 2015 Depreciation Charge for the Year Write-offs for the Year Disposals DECEMBER 31, 2015 Carrying Amount JANUARY 1, 2015 DECEMBER 31, 2015 Cost JANUARY 1, 2014 Additions Disposals DECEMBER 31, 2014 Accumulated Depreciation JANUARY 1, 2014 Depreciation Charge for the Year Write-offs for the Year Disposals DECEMBER 31, 2014 Carrying Amount JANUARY 1, 2014 DECEMBER 31, 2014 Impairment of property, plant and equipment was immaterial in the 2015 financial year. In 2014, impairment of property, plant and equipment amounted to € 0.1 million and mainly related to laboratory equipment in the Partnered Discovery segment. The impairment occurred because an economic benefit is no longer expected from these assets. 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. There were no material con- tractual commitments for the purchase of property, plant and equipment as of the reporting date. Research and Development Research and Development (Write-off) General and Administrative TOTAL in 000’ € 2015 1,295 25 247 1,567 2014 1,208 57 238 1,503 116 F I N A N C I A L S T A T E M E N T S Notes 6.7 I N TANGIBL E ASSE T S in 000’ € Patents License Rights R&D Programs Software Goodwill Total In-process Cost JANUARY 1, 2015 Additions Additions from business combination DECEMBER 31, 2015 Accumulated Depreciation JANUARY 1, 2015 Depreciation Charge for the Year Write-offs for the Year DECEMBER 31, 2015 Carrying Amount JANUARY 1, 2015 DECEMBER 31, 2015 Cost JANUARY 1, 2014 Additions Disposals DECEMBER 31, 2014 Accumulated Depreciation JANUARY 1, 2014 Depreciation Charge for the Year Write-offs for the Year Disposals DECEMBER 31, 2014 Carrying Amount JANUARY 1, 2014 DECEMBER 31, 2014 15,743 321 0 16,064 8,755 1,145 23 9,923 6,988 6,141 15,470 273 0 15,743 7,635 1,120 0 0 8,755 7,835 6,988 21,896 2,000 0 23,896 20,553 98 0 20,651 1,343 3,245 25,001 815 (3,920) 21,896 19,604 824 4,045 (3,920) 20,553 5,397 1,343 28,254 4,495 28,211 60,960 0 0 0 0 28,254 60,960 12,808 15,446 0 28,254 0 0 0 0 0 12,808 28,254 5,180 563 1 5,744 3,138 670 0 3,808 2,042 1,936 4,376 1,045 (241) 5,180 2,619 744 16 (241) 3,138 1,757 2,042 7,352 0 3,689 11,041 0 0 3,676 3,676 7,352 7,365 7,352 0 0 7,352 0 0 0 0 0 7,352 7,352 78,425 7,379 31,901 117,705 32,446 1,913 3,699 38,058 45,979 79,647 65,007 17,579 (4,161) 78,425 29,858 2,688 4,061 (4,161) 32,446 35,149 45,979 Impairment of patents and licenses was immaterial in the 2015 financial year. In 2014, impairment totaled € 4.1 million. Of this amount, € 2.1 million was recognized in the Proprietary Development segment and € 2.0 million in the Partnered Discovery segment. These impairments were incurred because these assets were no longer expected to generate economic bene- fits. Further detail information concerning the goodwill impairment can be taken from number 6.7.5* of these notes. *C R O S S - R E F E R E N C E to page 117 As of December 31, 2015 in-process research and development programs were subject to an impairment test as required by IAS 36. This test did not reveal any impairment. Amortization is included in the following line items of the income statement. in 000’ € Research and Development Research and Development (Write-off) General and Administrative General and Administrative (Write-Off) TOTAL 2015 1,806 3,699 107 0 5,612 2014 2,562 4,058 126 3 6,749 F I N A N C I A L S T A T E M E N T S Notes 117 As of September 30, 2015, goodwill of € 3.7 million from the Lanthio Group acquisition on May 7, 2015 was tested for impairment. The recoverable amount of the cash-generating unit Lanthio Group, which is part of the Proprietary Development segment, was determined on the basis of value- in-use calculations. The value-in-use was higher than the carrying amount of the cash-generating unit. The cash-flow forecasts included planned cash inflows from the potential sale of compounds based on lan- thipeptides expected to achieve market approval. These cash inflows are offset by expected operating expenses for compound development and clinical trials as well as sales and administrative expenses. The duration and likelihood of individual stages of the study were taken into consider- ation. Cash-flow forecasts are based on a period of 30 years because the Management Board believes that after the successful approval of com- pounds, the drugs that follow can generate free cash flows within that period of time. The values of the underlying assumptions were determined using both internal (past experience) and external sources of information (market information). On the basis of the updated cash-flow forecast, the value-in-use was determined as follows: A beta factor of 1.2 and WACC of 13.6 %. A detailed sensitivity analysis was also performed on the compo- nents of cash flow and discount rate. This analysis did not reveal any need for impairment. The values ascribed to the assumptions correspond to the Management Board’s forecasts for future development and are based on internal planning scenarios as well as external sources of information. 6.8 S HARE S, AVAIL ABL E-F OR-SAL E Shares available-for-sale as of December 31, 2014 consisted of the 19.98 % interest in Dutch Lanthio Pharma B.V. On May 7, 2015, MorphoSys ac- quired all of the company’s outstanding shares. The business combination is accounted for according to IFRS 3 (see Item 4* of the Notes). *C R O S S - R E F E R E N C E to page 108 6.9 P REP AID EXPENSE S AND O T HER ASSE T S, NE T OF CURREN T P OR T ION This line item included the non-current portion of prepaid expenses and other assets. The Group has classified certain line items under other assets as “restricted cash” that are not available for use in the Group’s operations (see Items 2.8.1*, 6.1*, and 6.2* of the Notes). As of December 31, 2015 and December 31, 2014, the Group disposed of restricted cash in the amount of € 0.6 million for issued rent guarantees in each case and in the amount of € 0.2 million and € 0.3 million for convertible bonds granted to employees, respectively. *C R O S S - R E F E R E N C E to page 103 and page 112–113 The table below shows the breakdown of this line item. in 000’ € 12/31/2015 12/31/2014 Prepaid Expenses, Net of Current Portion Other Current Assets TOTAL 67 882 949 183 868 1,051 6.7.1 PATE NTS In the 2015 financial year, the carrying amount of patents declined by € 0.9 million from € 7.0 million to € 6.1 million. This was the result of additions amounting to € 0.3 million for patent applications, particularly for proprietary programs and technologies, which were mainly offset by straight-line amortization of € 1.1 million. 6.7.2 LICE NSES The carrying amount of licenses increased by € 1.9 million rising from € 1.3 million to € 3.2 million in 2015. Additions during the financial year included one-time payments totaling € 2.0 million for access to target molecules and technologies. Amortization was € 0.1 million. 6.7.3 I N - PRO CES S R&D PRO GR AMS The carrying amount of in-process R&D programs increased from € 28.3 million to € 61.0 million in 2015. This increase was primarily the result of the preclinical programs purchased as part of the Lanthio Pharma B.V. acquisition and a milestone payment to Emergent. The MOR107 pre- clinical program (formerly known as LP2) obtained in the acquisition of Lanthio Pharma B.V. has been included in the proprietary portfolio of MorphoSys since May 2015. 6.7.4 SOF T WARE In the 2015 financial year, additions to this line item totaled € 0.6 million. The carrying amount decreased by € 0.1 million from € 2.0 million in 2014 to € 1.9 million in 2015. Additions were offset by amortization of € 0.7 million. 6.7.5 GO ODWILL As of September 30, 2015, goodwill of € 7.4 million from the 2010 acquisi- tion of Sloning BioTechnology GmbH was subject to an impairment test as required by IAS 36. The recoverable amount of the cash-generating unit Slonomics technology, which is part of the Partnered Discovery segment, was determined on the basis of value-in-use calculations. The calculation showed that the recoverable amount was lower than the carrying amount of the cash-generating unit and resulted in a goodwill impairment of € 3.7 million. The cash-flow forecasts took into account the payments ex- pected under existing contracts as well as the future free cash flows from the contribution of the Slonomics technology to partnered programs and was offset by expected personnel and administrative expenses. Cash-flow forecasts are based on a period of ten years because the Management Board believes that commercialization through licensing agreements, up- front payments, milestone payments, funded development services and royalties is only feasible by means of medium- to long-term contracts. For this reason, a planning horizon of ten years is considered appropriate for the value-in-use calculation. The comparably lower cash-flow forecasts are largely the result of weaker business expectations. The values of the un- derlying assumptions were determined using both internal (past experi- ence) and external sources of information (market information). Based on the updated ten-year cash-flow forecast, the value-in-use was determined as follows: A beta factor of 1.2 (2014: 1.2), WACC of 12.7 % (2014: 11.5 %) and a perpetual growth rate of 1 % (2014: 1 %). A detailed sensitivity analysis was performed for the cash-flow components, the growth rate and the dis- count rate for calculating value-in-use. This analysis did not reveal any additional need for impairment. The values ascribed to the assumptions correspond to the Management Board’s forecasts for future development and are based on internal planning scenarios as well as external sources of information. In the 2015 financial year, PwC AG received compensation from MorphoSys in the amount of € 264,001, which included audit fees of € 188,495, fees for other audit-related and valuation services of € 36,506 (review of the half- year-report) as well as fees for other services of € 39,000. PwC AG did not provide any tax advisory services in 2015. T AX PROVI SIONS AND O T HER PROVI SIONS 7.2 As of December 31, 2015, the Group recorded tax provisions and other provisions of € 3.1 million (2014: € 0.8 million for the entire Group). Tax provisions mainly consisted of income tax expenses and other provi- sions included provisions for onerous contracts and lease obligations for office premises, which will not be used anymore in the future. As of December 31, 2015, tax provisions and other provisions were uncer- tain in their amount and are expected to be utilized in 2016. 118 F I N A N C I A L S T A T E M E N T S Notes 7 Notes to Equity and Liabilities of the Balance Sheet 7.1 ACCOUN T S P AYABL E AND ACC RUED 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 table below. in 000’ € 12/31/2015 12/31/2014 Trade Accounts Payable Licenses Payable Accrued Expenses Other Liabilities TOTAL 237 158 20,275 1,672 22,342 569 89 16,101 1,072 17,831 Accrued expenses include accrued personnel expenses for payments to employees and management amounting to € 3.1 million (December 31, 2014: € 3.1 million), provisions for outstanding invoices in the amount of € 2.7 million (December 31, 2014: € 2.0 million), external laboratory ser- vices in the amount of € 13.9 million (December 31, 2014: € 10.5 million), license payments in the amount of € 0.1 million (December 31, 2014: € 0.4 million), audit fees and other audit-related costs in the amount of € 0.1 million (December 31, 2014: € 0.1 million) and expenses for legal advice in the amount of € 0.4 million (December 31, 2014: insignificant). At the Company’s Annual General Meeting in May 2015, the Supervisory Board was authorized to appoint PricewaterhouseCoopers AG Wirtschafts- prüfungsgesellschaft (PwC AG), Munich, as the auditor. F I N A N C I A L S T A T E M E N T S Notes 119 The table below shows the development of tax provisions and other provi- sions in the 2015 financial year. in 000' € Tax Provisions Provisions TOTAL 01/01/2015 Additions Utilized Released 12/31/2015 777 63 840 1,603 1,445 3,048 679 20 699 3 8 11 1,698 1,480 3,178 7.3 D EF ERRED REVENUE S Deferred revenues are payments received from customers for which the services have not been rendered. The table below shows the development of this line item. in 000’ € OPENING BAL ANCE Prepayments Received in the Fiscal Year Revenue Recognised through Release of Prepayments in line with Services Performed in the Fiscal Year CLOSING BAL ANCE thereof short-term thereof long-term 2015 58,752 18,133 (72,378) 4,507 1,994 2,513 2014 74,435 17,863 (33,546) 58,752 14,075 44,677 7.4 S T O C KHOL DERS’ EQUI T Y 7.4.1 C OMMON STO CK As of December 31, 2015, the Company’s common stock, including trea- sury stock, had increased by € 80,848 to € 26,537,682 from its level of € 26,456,834 as of December 31, 2014. Each no-par value bearer share is entitled to one vote. Common stock increased by € 80,848 or 80,848 shares as a result of the exercise of 80,848 convertible bonds granted to the Man- agement Board and the Senior Management Group. The weighted-average exercise price for each convertible bond exercised amounted to € 16.79. As of December 31, 2015, the Company held 434,670 shares of treasury stock amounting to € 15,827,946 which represents an increase of € 1,575,984 compared to December 31, 2014 (450,890 shares, € 14,251,962). This increase was mainly the result of MorphoSys’s repurchase of 88,670 of its own shares on the stock exchange. The repurchase totaling € 5,389,984 was carried out at a weighted-average share price of € 60.79. Brokerage fees for the repurchase totaled € 2,947. Shares of treasury stock can be used for the purposes named in the authorizations of the Annual General Meetings on May 19, 2011 and May 23, 2014, and particularly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also be redeemed. The rise in treasury stock mentioned above was offset by the transfer of 104,890 own shares to the Management Board and Senior Management Group from the 2011 long- term incentive plan (LTI plan), totaling € 3,816,947. The four-year vesting period for this LTI program expired on June 1, 2015. As a result, the num- ber of treasury shares as of December 31, 2015 amounted to 434,670. 7.4.2 A UTHORIZE D CAPITAL Compared to December 31, 2014, the number of authorized ordinary shares increased from 4,957,910 to 13,206,421. This resulted from the cancelation of Authorized Capital 2013-I totaling € 2,335,822 and the creation of new Authorized Capital 2015-I of € 10,584,333 at the Annual General Meeting on May 8, 2015. With the Supervisory Board’s consent, the Management Board is authorized under Authorized Capital 2015-I to increase the Company’s common stock on one or more occasions by up to € 10,584,333 by issuing up to 10,584,333 new, no-par value bearer shares until and including the date of April 30, 2020. 7.4.3 C ONDITIONAL CAPITAL Compared to December 31, 2014, the number of ordinary shares of condi- tional capital decreased from 7,166,848 to 7,086,000 as a result of the ex- ercise of 80,848 conversion rights in 2015. Entry in the commercial regis- ter of the reduction in Conditional Capital through the exercise of 80,848 conversion rights was applied for in January 2016. 7.4.4 T RE ASURY STO CK In the years 2014 and 2015, the Group repurchased own shares. The com- position and development of this line item is listed 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 Purchase in 2014 As of 12/31/2014 Purchase in 2015 Transfer in 2015 As of 12/31/2015 Number of Shares 79,896 84,019 163,915 91,500 255,415 84,475 339,890 111,000 450,890 88,670 (104,890) 434,670 Value 9,774 1,747,067 1,756,841 1,837,552 3,594,393 2,823,625 6,418,018 7,833,944 14,251,962 5,392,931 (3,816,947) 15,827,946 The weighted average share price was € 60.79 per share (2014: € 70.53 per share) at the time of the repurchases in 2015. Treasury shares are recog- nized at acquisition cost. 120 F I N A N C I A L S T A T E M E N T S Notes 7.4.5 A DDITIONAL PAID - IN CAPITAL As of December 31, 2015, additional paid-in capital amounted to € 319,394,322 (December 31, 2014: € 318,375,720). The total increase of € 1,018,602 resulted from the exercise of convertible bonds granted, total- ing € 1,276,590. Personnel expenses resulting from share-based pay- ments increased additional paid-in capital by € 3,558,959. The reclassifi- cation of treasury shares of € 3,816,947 in the context of the allocation of shares under the 2011 performance-based share plan had a compensat- ing effect. In 2014, additional paid-in capital increased by € 7,412,069 and stemmed from the exercise of convertible bonds granted (€ 3,725,682) as well as from personnel expenses resulting from share-based payments (€ 3,686,387). 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 shares or stock options (“settlement in equity instruments”) or other assets that represent the value of a specific number of shares or stock options (“cash settlement”). The key impact of IFRS 2 on the Group is the expense resulting from the use of an option pricing model in rela- tion to share-based incentives for employees and the Management Board. Additional information can be found under Items 7.1*, 7.2* and 7.3* of the Notes. *C R O S S - R E F E R E N C E to page 118 and page 118–119 7.4.6 RE VALUATION RESE RVE As of December 31, 2015, the revaluation reserve amounted to € -202,158 (December 31, 2014: € -4,642). The reduction amounting to a total of € 197,516 arose from a change in the unrealized gain on available-for-sale securities and bonds of € 268,749, which was partly offset by the equity-re- lated recognition of deferred taxes of € 71,233. 7.4.7 T R ANSL ATION RE SE RVE The translation reserve decreased by € 293,846 from € 293,846 on Decem- ber 31, 2014 to € 0 on December 31, 2015. This item included exchange rate differences from the revaluation of financial statements of Group entities prepared in foreign currencies as well as differences between the ex- change rates used in the balance sheet and the income statement. As of December 31, 2015, the Group consisted exclusively of entities preparing their financial statements in euro. 7.4.8 A C CUMUL ATE D INC OME The consolidated net profit of € 14,900,768 is reported in accumulated in- come, causing a rise in accumulated income from € 17,933,339 in 2014 to € 32,834,107 in 2015. 8 Remuneration System for the Management Board and Employees of the Group 8.1 C ONVER T IBL E B OND S 8.1.1 2010 PRO GR AM On April 1, 2010, a total of 352,800 convertible bonds were granted to members of the Management Board and Senior Management Group. The exercise price of the convertible bonds was € 16.79 and equaled the Com- pany’s share price in the XETRA closing auction of the Frankfurt Stock Exchange on the trading day preceding the convertible bonds’ issue. Each convertible bond had a value of € 0.33 and was converted into one no-par value bearer share of the Group against payment of the exercise price. The beneficiaries were only permitted to exercise their conversion rights after a vesting period of four years beginning after the grant date. Exercise of the conversion rights was 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. In the 2015 financial year, a total of 80,848 convertible bonds were exer- cised at a weighted-average share price of € 59.86 (2014: 235,952 convert- ible bonds at a weighted-average share price of € 69.69). 8.1.2 2 013 PRO GR AM On April 1, 2013, MorphoSys AG granted the Management Board and members of the Senior Management Group convertible bonds with a total nominal value of € 225,000 and divided into 449,999 bearer bonds with equal rights from “Conditional Capital 2008-III”. The beneficiaries have the right to convert the bonds into Company shares. Each convertible bond can be exchanged for one of the Company’s bearer shares equal to the proportional amount of common stock, which currently stands at € 1. Ex- ercise of the convertible bonds is subject to several conditions, such as the achievement of performance targets, the expiration of vesting periods, the exercisability of the conversion rights, the existence of an employment or service contract that 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 issue of the convertible bonds. The exercise of the conversion rights is admissible if, on at least one trad- ing day during the lifetime of the convertible bonds, the share price of the Company has risen to more than 120 % of the price in the XETRA closing auction of the Frankfurt Stock Exchange on the trading day preceding the issue 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 is shortened to two years from the grant date. For every year without a notice of termination of the employ- ment relationship with the Company or an affiliated company, 25 % of the conversion rights become vested. In the event of a change of control, all unvested conversion rights become vested. F I N A N C I A L S T A T E M E N T S Notes 121 If an employment or service contract of a beneficiary is terminated without notice, no further conversion rights can be vested under the above men- tioned vesting scheme. Thus, upon rendition of the notice, all conversion 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 becomes effective as of the date of ter- mination of the employment or service contract. The following table shows the development of the convertible bond plans for Group employees in the 2015 and 2014 financial years. Convertible Bonds Weighted- average Price (€) OU TSTANDING ON JANUARY 1, 2014 Granted Exercised Forfeited Expired OU TSTANDING ON DECEMBER 31, 2014 OU TSTANDING ON JANUARY 1, 2015 Granted Exercised Forfeited Expired OU TSTANDING ON DECEMBER 31, 2015 766,799 0 (235,952) 0 0 530,847 530,847 0 (80,848) 0 0 449,999 25.65 0.00 16.79 0.00 0.00 29.58 29.58 0.00 16.79 0.00 0.00 31.88 As of December 31, 2015, the number of vested convertible bonds totaled 225,000 shares (December 31, 2014: 193,348 shares). 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 December 31, 2015. Range of Exercise Prices € 25.00 – € 40.00 Number Outstanding Remaining Contractual Life (in Years) Weighted- average Exercise Price (€) Number Exercisable Weighted- average Exercise Price (€) 449,999 449,999 4.25 4.25 31.88 31.88 225,000 225,000 31.88 31.88 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 presented separately under additional paid-in cap- ital. The corresponding amount is recognized as personnel expenses from convertible bonds. In 2015 and 2014, compensation expenses related to convertible bonds amounted to € 839,906 and € 1,609,086, respectively. 122 F I N A N C I A L S T A T E M E N T S Notes 8.2 L ONG -T ERM INCEN T IVE PRO GRAMS 8.2 .1 2 011 LONG -TE RM INCE NTIVE PRO GR AM On June 1, 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 is paid out in ordinary shares of MorphoSys AG if predefined key performance criteria are achieved. These criteria are assessed and approved annually by the Supervisory Board and include revenue, EBIT and the number of projects in the R&D portfolio. The fulfillment of these criteria is set at 100 % for three years and 110 % for one year. The Supervisory Board set the “com- pany factor” at 1.3, meaning the number of shares to be allocated is scaled by a factor of 1.3. This factor also resulted in additional personnel ex- penses of € 0.5 million in the 2015 financial year. Previously, personnel expenses resulting from the 2011 LTI program were recognized based on the assumption of a company factor of 1.0. Based on these terms and the company factor, a total of 104,890 ordinary shares of MorphoSys AG was allocated to beneficiaries on June 1, 2015 after the expiration of the four- year vesting period. The Management Board received 71,949 shares (for further information, please see the tables titled “Shares” and “Perfor- mance Shares” in Item 8.3* “Related Parties”), and the Senior Manage- ment Group received 32,941 shares. *C R O S S - R E F E R E N C E to page 125 In 2015, personnel expenses from stock options under the Group’s 2011 LTI plan amounted to € 558,740 (2014: € 172,311). 8.2 .2 2 012 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 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 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 are achieved. These criteria are approved annually by the Supervisory Board. The grant date was April 1, 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 will be reduced to the extent that the performance criteria of the relevant year have been fulfilled between only 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 between 0 and 2, for example, if the level of payment seems unreasonable with re- gard to the general development of the Company. The right to receive a certain allocation of shares under the LTI plan, however, occurs only 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 prematurely ceases to hold an office at the MorphoSys Group before expiration of the four-year performance period, this member (or the member’s heirs) is entitled to performance shares determined on a precise daily pro rata basis. If a Management Board member prematurely ceases to hold an office at the MorphoSys Group for good reason as defined by Sec. 626 Para. 2 of the German Civil Code (BGB) before expiration of the four-year performance period, the ben- eficiary will not be entitled to an allocation of performance shares. If a change of control occurs during the four-year vesting period, all perfor- mance shares will be considered fully vested. In each case above, the right to receive a certain allocation 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. The repurchased shares may be used for all purposes named in the authorization of the Annual General Meetings on May 19, 2011 and May 23, 2014, particularly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also be redeemed. These 91,500 shares were allocated to the beneficiaries retroactively on April 1, 2012 and included 57,967 shares for the Management Board (for further information, please see the table titled “Performance Shares” in Item 8.3* “Related Parties”) and 33,533 shares for the Senior Management Group. The number of shares allocated is based on the full achievement of performance criteria and a company factor of 1. The fair value of the per- formance shares was € 19.24 per share on the grant date (April 1, 2012). No dividends were considered in determining the fair value of the repur- chased shares because the Group does not intend to distribute any divi- dends in the foreseeable future. From the grant date until December 31, 2015, two beneficiaries left MorphoSys and, therefore, 4,051 performance shares were forfeited. *C R O S S - R E F E R E N C E to page 125 On October 1, 2012, MorphoSys established another long-term incentive plan (LTI plan) for Senior Management Group members. The terms of this plan were identical to the April 1, 2012 plan. A total of 2,292 shares was allocated. The fair value was € 24.00 per share on the grant date. In 2015, personnel expenses from stock options under the Group’s 2012 LTI plan amounted to € 108,619 (2014: € 293,904). F I N A N C I A L S T A T E M E N T S Notes 123 8.2 .3 2 013 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2013, MorphoSys established another 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 are achieved. These criteria are evaluated annually by the Supervisory Board. The grant date was April 1, 2013 and the vesting/ performance period is four years. If the predefined key performance crite- ria for the respective period are fully met, 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 been achieved between only 50 % and 99.9 % (<100 %) or the achievement of the performance crite- ria has exceeded 100 % (maximum 200 %). If in one year the 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 between 0 and 2, for example, if the level of payment is considered unreasonable in view of the Company’s general development. The right to receive a certain allocation of shares under the LTI plan oc- curs only 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 prematurely ceases to hold an office at the MorphoSys Group before expiration of the four-year performance period, the member (or the member’s heirs) is entitled to performance shares determined on a precise daily pro rata basis. If a Management Board member prematurely ceases to hold an office at the MorphoSys Group for good reason as defined by Sec. 626 Para. 2 of the German Civil Code (BGB) before expiration of the four-year performance period, the beneficiary will not be entitled to an allocation of performance shares. If a change of control occurs during the four-year vesting period, all perfor- mance shares will be considered fully vested. In each case above, the right to receive a certain allocation of shares under the LTI plan only occurs at the end of the four-year vesting period. In April and May of 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 can be used for all purposes named in the authorizations of the Annual General Meetings on May 19, 2011 and on May 23, 2014 and particularly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also be redeemed. Of these shares, 61,600 were allocated to beneficiaries retroactively effec- tive April 1, 2013. This included 36,729 shares for the Management Board (for further information, please see the table titled “Performance Shares” in Item 8.3* “Related Parties”) and 24,871 shares for the Senior Manage- ment Group. The number of shares allocated is based on the full achieve- ment of performance criteria and a company factor of 1. On the grant date (April 1, 2013), the fair value of the performance shares was € 31.88 per share. No dividends were included in the determination of the fair value of the repurchased shares since the Group does not intend to distribute any dividends in the foreseeable future. From the grant date until Decem- ber 31, 2015, one beneficiary left MorphoSys and, therefore, 772 perfor- mance shares were forfeited. For the calculation of the personnel expenses resulting from share-based payments under the 2013 LTI plan, it was as- sumed 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 to page 125 On October 1, 2013, MorphoSys established another long-term incentive plan (LTI plan) for Senior Management Group members. The terms of the plan were identical to the April 1, 2013 plan. A total of 549 shares was allocated, and the fair value on the grant date was € 57.39 per share. In 2015, personnel expenses from stock options under the Group’s 2013 LTI plan amounted to € 299,024 (2014: € 594,309). 8.2 .4 2 014 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2014, MorphoSys established a fourth 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 are achieved. These criteria are evaluated annually by the Supervisory Board. The grant date was April 1, 2014 and the vesting/ performance period is four years. If the predefined key performance crite- ria for the respective period are fully met, 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 been achieved between only 50 % and 99.9 % (<100 %) or the achievement of the performance crite- ria has exceeded 100 % (maximum 200 %). If in one year the performance criteria are met 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 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, occurs only 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 at the MorphoSys Group because of termination (or if the Management Board member terminates the employment contract), resignation, death, injury, disability, by reaching retirement age (receipt of a normal retirement pension, early-retirement pension or disability pension, as long as the re- quirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Manage- ment Board member (or the member’s heirs) is entitled to performance shares determined on a precise daily pro rata basis. 124 F I N A N C I A L S T A T E M E N T S Notes If a member of the Management Board ceases to hold an office at the MorphoSys Group for good reason as defined by Sec. 626 Para. 2 of the German Civil Code (BGB) and/or as defined by Sec. 84 Para. 3 of the Ger- man Stock Corporation Act (AktG), the beneficiary will not be entitled to performance shares. However, in justified cases, the Supervisory 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 only oc- curs at the end of the four-year vesting period. If a change of control occurs during the four-year vesting period, all per- formance shares will become fully vested. In this case, the right to receive a certain allocation of shares under the LTI plan occurs only at the end of the four-year vesting period. In March 2014, MorphoSys repurchased 111,000 of its own shares on the stock exchange at an average price of € 70.53 per share. The repurchased shares may be used for all purposes named in the authorizations of the Annual General Meetings on May 19, 2011 and May 23, 2014 and particu- larly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also be redeemed. A total of 32,513 of these shares were allocated to beneficiaries on April 1, 2014 with 18,264 allocated to the Management Board (further details may be found in the table titled “Performance Shares” in Item 8.3* “Related parties”) and 14,249 shares to the Senior Management Group. The number of shares allocated is based on the full achievement of performance crite- ria and a company factor of 1. The fair value of the performance shares on the grant date (April 1, 2014) was € 67.30 per share. This price was equiv- alent to the share price on the Frankfurt Stock Exchange (Xetra) on the trading day preceding the grant date. No dividends were included in the determination of the fair value of the repurchased shares because the Group does not intend to distribute any dividends in the foreseeable fu- ture. From the grant date until December 31, 2015, one beneficiary left MorphoSys and, therefore, 608 performance shares were forfeited. For the calculation of the personnel expenses from share-based payments under the 2014 LTI plan, it was assumed that one beneficiary will leave the Com- pany during the four-year period. *C R O S S - R E F E R E N C E to page 125 In 2015, personnel expenses resulting from stock options under the Group’s 2014 LTI plan amounted to € 647,941 (2014: € 1,016,776). 8.2 .5 2 015 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2015, MorphoSys established a fifth 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 are achieved. These criteria are evaluated annually by the Supervisory Board. The grant date was April 1, 2015 and the vesting/ performance period is four years. If the predefined key performance crite- ria for the respective period are fully met, 25 % of the performance shares become vested in each year of the four-year vesting period. The number of shares vested each year is reduced or increased to the extent that the performance criteria of the respective year have been achieved between only 50 % and 99.9 % (<100 %) or the achievement of the performance crite- ria exceeded 100 % (maximum 200 %). If in one year the performance crite- ria are met 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 lim- ited by a factor determined by the Group, which generally amounts to 1. 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 at the MorphoSys Group because of termination (or if the Management Board member terminates the employment contract), resignation, death, injury, disability, by reaching the retirement age (receipt of a normal retirement pension, early-retirement pension or disability pension, as long as the re- quirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Manage- ment Board member (or the member’s heirs) is entitled to performance shares determined on a precise daily pro rata basis. If a member of the Management Board ceases to hold an office at the MorphoSys Group for good reason as defined by Sec. 626 Para. 2 of the German Civil Code (BGB) and/or as defined by Sec. 84 Para. 3 of the Ger- man Stock Corporation Act (AktG), the beneficiary will not be entitled to performance shares. If a change of control occurs during the four-year vesting period, all per- formance shares will become fully vested. In this case, the right to receive a certain allocation of shares under the LTI plan occurs only at the end of the four-year vesting period. In April 2015, MorphoSys repurchased 88,670 of its own shares on the stock exchange at an average price of € 60.79 per share for a total amount of € 5,389,984. The repurchased shares may be used for all purposes named in the authorization of the Annual General Meeting on May 23, 2014 and particularly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also be redeemed. A total of 40,425 of these shares were allocated to beneficiaries on April 1, 2015: 21,948 were allocated to the Management Board (further details may be found in the table titled “Performance Shares” in Item 8.3* “Related parties”) and 18,477 shares to the Senior Management Group. The number of shares allocated is based on the 100 % achievement of the performance criteria and a company factor of 1. The fair value of the performance shares as of the grant date (April 1, 2015) was € 58.81 per share. No dividends were considered in the determination of the fair value of the repurchased shares since the Group does not intend to distribute any dividends in the foreseeable future. From the grant date until December 31, 2015, no bene- ficiary left MorphoSys, and no performance shares have been forfeited. For the calculation of the personnel expenses from share-based payments un- der the 2015 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 to page 125 In 2015, personnel expenses from stock options under the Group’s 2015 LTI plan amounted to € 1,104,730. F I N A N C I A L S T A T E M E N T S Notes 125 8.3 R EL AT ED P AR T IE S Related parties that can be influenced by the Group or can have a signifi- cant influence on the Group can be divided into subsidiaries, members of management in key positions and other related entities. The Group engages in business relationships with members of the Man- agement Board and Supervisory Board as related parties responsible for the planning, management and monitoring of the Group. In addition to cash compensation, the Group has granted the Management Board con- vertible bonds and performance shares. The tables below show the shares, 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 the 2015 financial year. 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. Walter Blättler 1 Dr. Daniel Camus1 Dr. Marc Cluzel Karin Eastham Dr. Geoffrey Vernon1 Dr. Frank Morich 2 Wendy Johnson 2, 3 Klaus Kühn 2 TOTAL 01/01/2015 Additions Forfeitures Sales 12/31/2015 452,885 2,000 2,000 28,620 485,505 9,000 2,019 0 500 1,000 0 – – – 12,519 42,353 16,132 16,132 49,132 123,749 2,000 0 0 0 1,000 0 1,000 0 0 4,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14,132 16,132 27,000 57,264 0 0 0 0 0 0 0 0 0 0 495,238 4,000 2,000 50,752 551,990 11,000 – – 500 2,000 – 1,000 500 0 15,000 1 Dr. Walter Blättler, Dr. Daniel Camus and Dr. Geoffrey Vernon left the Supervisory Board of MorphoSys AG on 08. May 2015. 2 Dr. Frank Morich, Wendy Johnson and Klaus Kühn joined the Supervisory Board of MorphoSys AG on 08. May 2015. 3 500 shares have been acquired by Wendy Johnson before joining the Supervisory Board of MorphoSys AG. 126 F I N A N C I A L S T A T E M E N T S Notes 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 01/01/2015 Additions Forfeitures Exercises 12/31/2015 107,186 90,537 60,537 93,537 351,797 0 0 0 0 0 0 0 0 0 0 18,800 0 0 33,000 51,800 88,386 90,537 60,537 60,537 299,997 01/01/2015 Additions Forfeitures Allocations 12/31/2015 54,655 37,434 37,434 37,434 166,957 13,062 8,946 8,946 8,946 39,900 0 0 0 0 0 23,553 16,132 16,132 16,132 71,949 44,164 30,248 30,248 30,248 134,908 MANAGEMEN T B OARD REMUNERAT ION F OR T HE Y EARS 2015 AND 2014 ( IA S 24) : Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer Total 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 Fixed Compensation Fringe Benefits One-Year Variable Compensation Total Short-Term Employee Benefits (IAS 24.17 (a)) Service Cost Total Benefit Expenses – Post-Employment Benefits (IAS 24.17 (b)) Multi-Year Variable Compensation1: 426,502 29,444 324,696 780,642 125,730 125,730 445,736 36,887 238,692 721,315 138,280 138,280 289,335 33,722 220,271 543,328 86,866 86,866 302,384 39,735 161,926 504,045 90,800 90,800 2010 Convertible Bonds Program (Vesting Period 4 Years) 2013 Convertible Bonds Program (Vesting Period 4 Years) 2011 Long-Term Incentive Program (Vesting Period 4 Years) 2012 Long-Term Incentive Program (Vesting Period 4 Years) 2013 Long-Term Incentive Program (Vesting Period 4 Years) 2014 Long-Term Incentive Program (Vesting Period 4 Years) 2015 Long-Term Incentive Program (Vesting Period 4 Years) Total Stock-Based Compensation (IAS 24.17 (e)) Total Compensation 6,010 0 0 0 3,373 0 3,373 0 12,756 0 310,530 164,969 318,087 168,984 212,687 112,990 212,687 112,990 1,053,991 559,933 40,060 62,218 113,270 129,900 22,755 57,029 27,439 42,615 77,583 186,964 119,143 128,057 88,974 15,585 39,061 81,605 0 719,052 1,625,424 196,345 690,141 1,549,736 0 593,781 1,223,975 134,483 528,692 1,123,537 289,335 32,508 215,208 537,051 86,653 86,653 27,439 42,615 77,583 128,057 0 491,754 1,115,458 302,384 29,889 156,635 488,908 94,064 94,064 88,974 15,585 39,061 81,605 134,483 472,698 1,055,670 289,335 22,828 210,144 522,307 86,628 86,628 27,439 42,615 77,583 128,057 0 491,754 1,100,689 302,384 22,954 156,635 481,973 94,085 94,085 88,974 15,585 39,061 81,605 1,294,507 118,502 970,319 2,383,328 385,877 385,877 1,352,888 129,465 713,888 2,196,241 417,229 417,229 122,377 396,822 190,063 69,510 346,019 174,212 571,135 363,958 134,483 472,698 1,048,756 0 2,296,341 5,065,546 599,794 2,164,229 4,777,699 1 The fair value was determined pursuant to the regulations of IFRS 2 “Share-based Payments”. This table shows the pro-rata share of personnel expenses resulting from stock-based compensation for the respective financial year. Further details can be found in Sections 8.1* and 8.2*. *C R O S S - R E F E R E N C E to page 120 and page 121 F I N A N C I A L S T A T E M E N T S Notes 127 The Supervisory Board of MorphoSys AG does not hold any convertible bonds or performance shares. The total remuneration of the Management Board consists of several com- ponents, including fixed compensation, an annual cash bonus that is de- pendent upon the achievement of corporate and personal targets (short- term incentives – STI), variable compensation components with long-term incentives (LTI) and other remuneration components. Following the expi- ration of the relevant contract term, the service contracts of the Manage- ment Board members stipulate a non-competition clause for a period of six months. During this period, the Management Board member is entitled to compensation payments amounting to 100 % of the pro rata fixed com- pensation. In 2015, the total remuneration of the Supervisory Board, excluding reim- bursement for travel costs, amounted to € 529,270 (2013: € 514,480). While the remuneration of the Management Board and the Supervisory Board as members in key management positions is presented in accordance with the provisions of the Corporate Governance Code in the management report, the following tables show the expense-based view in accordance with IAS 24. MANAGEMEN T B OARD REMUNERAT ION F OR T HE Y EARS 2015 AND 2014 ( IA S 24) : Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer Total 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 289,335 32,508 215,208 537,051 86,653 86,653 302,384 29,889 156,635 488,908 94,064 94,064 289,335 22,828 210,144 522,307 86,628 86,628 302,384 22,954 156,635 481,973 94,085 94,085 1,294,507 118,502 970,319 2,383,328 385,877 385,877 1,352,888 129,465 713,888 2,196,241 417,229 417,229 6,010 0 0 0 3,373 0 3,373 0 12,756 0 310,530 164,969 318,087 168,984 212,687 112,990 212,687 112,990 1,053,991 559,933 27,439 42,615 77,583 128,057 0 491,754 1,115,458 88,974 15,585 39,061 81,605 134,483 472,698 1,055,670 27,439 42,615 77,583 128,057 0 491,754 1,100,689 88,974 15,585 39,061 81,605 122,377 396,822 190,063 69,510 346,019 174,212 571,135 363,958 134,483 472,698 1,048,756 0 2,296,341 5,065,546 599,794 2,164,229 4,777,699 Fixed Compensation Fringe Benefits One-Year Variable Compensation Total Short-Term Employee Benefits (IAS 24.17 (a)) Service Cost Total Benefit Expenses – Post-Employment Benefits (IAS 24.17 (b)) Multi-Year Variable Compensation1: 2010 Convertible Bonds Program (Vesting Period 4 Years) 2013 Convertible Bonds Program (Vesting Period 4 Years) 2011 Long-Term Incentive Program (Vesting Period 4 Years) 2012 Long-Term Incentive Program (Vesting Period 4 Years) 2013 Long-Term Incentive Program (Vesting Period 4 Years) 2014 Long-Term Incentive Program (Vesting Period 4 Years) 2015 Long-Term Incentive Program (Vesting Period 4 Years) Total Stock-Based Compensation (IAS 24.17 (e)) Total Compensation 426,502 29,444 324,696 780,642 125,730 125,730 40,060 62,218 113,270 445,736 36,887 238,692 721,315 138,280 138,280 129,900 22,755 57,029 289,335 33,722 220,271 543,328 86,866 86,866 27,439 42,615 77,583 302,384 39,735 161,926 504,045 90,800 90,800 88,974 15,585 39,061 81,605 186,964 119,143 128,057 0 719,052 1,625,424 196,345 690,141 1,549,736 0 593,781 1,223,975 134,483 528,692 1,123,537 1 The fair value was determined pursuant to the regulations of IFRS 2 “Share-based Payments”. This table shows the pro-rata share of personnel expenses resulting from stock-based compensation for the respective financial year. Further details can be found in Sections 8.1* and 8.2*. *C R O S S - R E F E R E N C E to page 120 and page 121 128 F I N A N C I A L S T A T E M E N T S Notes SUPERVI S OR Y B OARD REMUNERAT ION F OR T HE Y EARS 2015 AND 2014 : Fixed Compensation Attendance Fees3 Total Compensation in € 2015 2014 2015 2014 2015 2014 Dr. Gerald Möller Dr. Walter Blättler 1 Dr. Daniel Camus1 Dr. Marc Cluzel Karin Eastham Dr. Geoffrey Vernon1 Dr. Frank Morich 2 Wendy Johnson 2 Klaus Kühn 2 TOTAL 93,521 16,188 16,188 50,089 50,089 20,073 37,324 30,099 30,099 343,670 97,400 46,160 46,160 46,160 46,160 57,240 – – – 339,280 36,200 13,000 8,400 28,000 36,800 8,400 14,200 26,400 14,200 185,600 38,000 25,200 23,200 32,400 32,400 24,000 – – – 175,200 129,721 29,188 24,588 78,089 86,889 28,473 51,524 56,499 44,299 529,270 135,400 71,360 69,360 78,560 78,560 81,240 – – – 514,480 1 Dr. Walter Blättler, Dr. Daniel Camus and Dr. Geoffrey Vernon left the Supervisory Board of MorphoSys AG on 08. May 2015. 2 Dr. Frank Morich, Wendy Johnson and Klaus Kühn joined the Supervisory Board of MorphoSys AG on 08. May 2015. 3 The attendance fee contains expense allowances for the attendance at Supervisory Board and Committee meetings. In the years 2015 and 2014, there were no other long-term benefits in ac- cordance with IAS 24.17 (c) or benefits upon termination of employment in accordance with IAS 24.17 (d) accruing to the Management Board or Supervisory Board. There are presently no other agreements with current or former members of the Supervisory Board. As of December 31, 2015, the Senior Management Group held 150,002 con- vertible bonds (December 31, 2014: 169,050 units) and 85,542 perfor- mance shares (December 31, 2014: 91,807), which were granted by the Company. In 2015, an additional long-term incentive program was allo- cated to the Management Board and Senior Management Group. As part of this program, the Senior Management Group was allocated 18,477 perfor- mance shares. On June 1, 2015, a total of 29,360 shares under the 2011 LTI plan were granted to the Senior Management Group, reducing the number of performance shares. A total of 19,048 convertible bonds were exercised in 2015 (2014: 130,952) while no stock appreciation rights were exercised during the same period (2014: 15,000). In 2015, a total of 1,380 perfor- mance shares forfeited because one beneficiary had left MorphoSys. F I N A N C I A L S T A T E M E N T S Notes 129 9 Additional Notes 9.1 O BL IGAT IONS ARI SING F ROM OPERAT ING L EA SE S, REN TAL AND O T HER CON T RAC T S The Group leases facilities and equipment under long-term operating leases. In financial years 2015 and 2014, leasing expenses amounted to € 2,978,254 and € 1,939,537. The 2015 amount includes the recognition of a provision for onerous contracts from rent obligations for office premises. Leasing expenses for 2015 and 2014 include expenses for company cars and machinery totaling € 229,153 and € 192,597, respectively. The major- ity of these contracts can be renewed on a yearly or quarterly basis. Some of these agreements may be terminated prematurely. The components of future minimum payments under non-terminable oper- ating leases, insurance contracts are shown in the following table. in 000’ € Leasing 2015 Leasing 2014 Other 2015 Other 2014 Total 2015 Total 2014 Rent and Rent and Up to One Year Between One and Five Years More than Five Years TOTAL 2,349 13,438 13,875 29,662 2,415 3,142 0 5,557 840 5 0 845 1,057 5 0 1,062 3,189 13,443 13,875 30,507 3,472 3,147 0 6,619 Compared to the previous year, the increase in the category “Rent and Leasing” mainly resulted from a new rental contract for a building signed in December 2015 and the related perennial obligations. 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 or results of operations. Additionally, the future payments shown in the table below may become due from currently active, terminable contracts for outsourced studies. These amounts can be substantially lower because of the respective con- tractual clauses if the study is terminated prematurely. If certain milestones are achieved in the Proprietary Development seg- ment, for example, filing an application for an investigational new drug (IND) for 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’ € Up to One Year Between One and Five Years More than Five Years TOTAL Total 2015 46,735 114,227 0 160,962 If a partner achieves certain milestones in the Partnered Discovery seg- ment, for example, filing an application for an investigational new drug (IND) for specific target molecules or the transfer of technology, this may trigger milestone payments to MorphoSys. However, no further details can be published since the timing, and the achievement of such milestones are uncertain. 9.2 CO N T INGEN T A SSE T S /CON T INGEN T L IABIL I T IE S Contingent liabilities are potential obligations from past events that exist only when the occurrence of one or more uncertain future events – beyond the Company’s control – is confirmed. Current obligations can represent a contingent liability if it is not probable enough that an outflow of resources justifies the recognition of a provision. Moreover, it is not possible to make a sufficiently reliable estimate of the amount of the obligations. Obligations may arise from enforcing the Company’s patents against third parties. It is also conceivable that competitors challenge patents of MorphoSys Group companies or that MorphoSys concludes that MorphoSys’s patents or patent families are infringed by competitors, which may prompt MorphoSys to take legal action against competitors. At present, there are no specific indications for the occurrence of liabilities as described above. 130 F I N A N C I A L S T A T E M E N T S Notes 9.3 CO RP ORAT E G OVERNANC E The Group has submitted the Declaration of Conformity with the recom- mendations of the Government Commission on the German Corporate Governance Code for the 2015 financial year under Sec. 161 of the German Stock Corporation Act (AktG). This declaration was published on the Group’s website (www.morphosys.com) on December 3, 2015 and made permanently available to the public. 9.4 R E SEARCH AND DEVEL OPMEN T AGREEMEN T S The Group has entered numerous research and development agreements as part of its proprietary research and development activities and its part- nered research strategy. 9.4.1 P ROPRIE TARY DE VE LOPME NT SEGME NT In the Proprietary Development segment, partnerships are entered into as part of the Group’s strategy to develop its own drugs in its core areas of oncology and inflammatory diseases. Our partners include (in alphabetical order): Emergent BioSolutions, G7 Therapeutics, Galapagos, GlaxoSmithKline, Immatics Biotechnologies, Merck Serono, Temple Uni- versity and Xencor. In August 2014, MorphoSys and Emergent BioSolutions announced a co-development and co-promotion agreement for MOR209/ES414. This compound is a bispecific anti-PSMA/anti-CD3 antibody targeting pros- tate cancer that was developed by Emergent based on its proprietary ADAPTIR™ platform (modular protein technology). In early March 2015, MorphoSys and its development partner Emergent BioSolutions an- nounced the commencement of a phase 1 clinical study with MOR209/ ES414 in up to 130 patients suffering from metastatic castration-resistant prostate cancer (mCRPC). The study’s launch triggered a milestone pay- ment to Emergent of € 4.7 million. The existing cooperation agreement was updated in the past financial year. After a joint examination of the clinical results, the companies decided to adjust the dosing regimen and administration of MOR209/ES414. Clinical development will continue in 2016 with an adapted clinical development plan. A change in the contrac- tual agreement brought down MorphoSys’s share in the costs for the years 2016 through 2018 and lowers MorphoSys’s potential milestone payment to Emergent to a maximum of US$ 74 million. There were no changes made to the remaining financial agreements or the division of commer- cial rights. In August 2015, MorphoSys and Swiss-based G7 Therapeutics AG an- nounced a new collaboration to develop novel antibody therapeutics targeting G protein-coupled receptors (GPCRs) and other potentially dis- ease-related transmembrane proteins, such as ion channels. Under this agreement, G7 Therapeutics will give MorphoSys a choice of various re- ceptors that can be linked to the emergence of a variety of diseases. MorphoSys will use its proprietary Ylanthia antibody library to identify and develop antibody compounds directed against these receptors. MorphoSys has the right to sublicense to partners access to these target molecules in conjunction with therapeutic antibody programs. In November 2008, MorphoSys and Galapagos announced a long-term drug discovery and co-development cooperation aimed at exploring novel mechanisms for the treatment of inflammatory diseases and developing antibody therapies against these diseases. The agreement covers all activ- ities ranging from the probing of target molecules to the completion of clinical trials for novel therapeutic antibodies. After demonstrating clini- cal efficacy in humans, the programs may be out-licensed to partners for further development, approval, and commercialization. Both companies contributed their core technologies and expertise to 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 target molecules already identified that are associated with bone and joint diseases. MorphoSys provided access to its antibody technolo- gies used for generating fully human antibodies directed against these target molecules. Under the terms of the agreement, Galapagos and MorphoSys will share the research and development costs. In July 2014, the collaboration advanced into the preclinical development of MOR106, an antibody from MorphoSys’ next-generation library Ylanthia directed against a novel Galapagos target molecule. The antibody will be co-devel- oped in the area of inflammatory diseases. In June 2013, MorphoSys announced it had entered into a global agree- ment with GlaxoSmithKline (GSK) for the development and commercial- ization of MOR103. MOR103/GSK3196165 is MorphoSys’s proprietary HuCAL antibody against the GM-CSF target molecule. Under the agree- ment, GSK assumes responsibility for the compound’s entire develop- ment and commercialization. MorphoSys received an immediate upfront payment of € 22.5 million as part of this agreement. Depending on the achievement of certain developmental stages and regulatory, commercial and revenue-related milestones, MorphoSys is eligible to receive addi- tional payments from GSK in the amount of up to € 423 million, as well as tiered double-digit royalties on net sales. In the third quarter of 2015, GlaxoSmithKline announced the initiation of a phase 2 study with MOR103/ GSK3196165 for rheumatoid arthritis. GSK also plans to initiate a second phase 2 study in osteoarthritis of the hand during the 2016 financial year. In August 2015, MorphoSys announced a strategic alliance in the field of immuno-oncology with the German company Immatics Biotechnologies GmbH. The alliance was formed to develop novel antibody-based therapies against a variety of cancer antigens that are recognized by T cells. The alliance agreement gives MorphoSys access to several of Immatics’s pro- prietary tumor-associated peptides (TUMAPs). In return, Immatics re- ceives the right to develop MorphoSys’s Ylanthia antibodies against sev- eral TUMAPs. The companies will pay each other milestone payments and royalties on commercialized products based on the companies’ develop- ment progress. In June 2014, MorphoSys and Merck KGaA announced an agreement to identify and develop therapeutic antibodies against target molecules of the class of immune checkpoints. Under this agreement, both MorphoSys and Merck Serono, the biopharmaceutical division of Merck, will co-de- velop therapies intended to trigger the immune system to attack tumors. MorphoSys will use its proprietary Ylanthia antibody library and other technology platforms to generate antibodies directed against the selected target molecules. Merck Serono is contributing its broad portfolio and expertise in the field of immuno-oncology and clinical development and will assume full project responsibility starting with phase 1 of clinical development. In April 2014, MorphoSys agreed to a strategic partnership with the Moulder Center for Drug Discovery Research, a division of the School of Pharmacy at Temple University, USA, to discover new therapeutic anti- bodies. Under this cooperation, the Moulder Center receives access to MorphoSys’s Ylanthia technology for validating new disease-related tar- get molecules and generating therapeutic antibodies directed against these molecules. MorphoSys receives an exclusive option to further de- velop each antibody resulting from the cooperation. The department for new bio-therapeutic compound discovery at the Moulder Center deals with the compound’s design and optimization of lead candidates in various dis- ease areas, including cancer, Alzheimer’s disease, cardiovascular, meta- bolic and viral diseases. In June 2010, MorphoSys AG and the US-based biopharmaceutical com- pany Xencor signed an exclusive global licensing and cooperation agree- ment under which MorphoSys receives exclusive global licensing rights to the XmAb5574/MOR208 antibody for the treatment of cancer and other indications. The companies jointly conducted a phase 1/2a trial in the US in patients with chronic lymphocytic leukemia. MorphoSys is solely re- sponsible for further clinical development after the successful comple- tion of the phase 1 clinical trial. Xencor received an upfront payment of US$ 13 million (approx. € 10.5 million) from MorphoSys, which was capi- talized under in-process R&D programs. Xencor is entitled to development, regulatory, and commercially-related milestone payments as well as tiered royalties on product sales. In May 2015, MorphoSys acquired the Dutch company Lanthio Pharma B.V., which specializes in research and development of lanthipeptides. MorphoSys had initially acquired almost a 20% interest in the biopharma- ceutical company in 2012 as part of its Innovation Capital initiative before acquiring the remaining shares in the past financial year. Lanthipeptides are a novel class of therapeutics demonstrating high target molecule selec- tivity and improved compound properties. This transaction adds MOR107 (formerly LP2) to MorphoSys’s proprietary portfolio. MOR107 is a novel lanthipeptide in development for diabetic nephropathy and fibrotic diseases. F I N A N C I A L S T A T E M E N T S Notes 131 9.4.2 P AR TNE RE D DISC OVE RY SEGME NT Commercial partnerships in the Partnered Discovery segment provide MorphoSys with various types of payments that are spread over the dura- tion 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 programs. Prior to the 2015 financial year, active collaborations with a number of partners had already ended because the agreements had expired. How- ever, drug development programs initiated in the active phase are de- signed so that they can be continued by the partner and, therefore, still result in performance-based payments for the achievement of the defined milestones. For more detailed information on individual drug candidates within the various alliances – limited to information available to the pub- lic – please refer to the section “Research and Development” contained in this annual report and the overview of the Group’s drug pipeline. Detailed information on the Group’s individual research alliances is available on the Group’s website. Partnerships in the Partnered Discovery segment that ended before the beginning of 2015 but where drug development programs were still being pursued, include (in alphabetical order): Astellas, Bayer Healthcare Phar- maceuticals, Boehringer Ingelheim, ContraFect, Daiichi-Sankyo, F. Hoff- mann-La Roche, GPC Biotech, Immunogen, Janssen Biotech, Merck & Co., OncoMed Pharmaceuticals, Pfizer, Fibron Ltd. (transfer of the contract from Prochon Biotech Ltd.) and Schering-Plough (a subsidiary of Merck & Co.). Partnerships that were still active in 2015 include (in alphabetical order): GeneFrontier Corporation/Kaneka, Heptares and Novartis. The Group’s most comprehensive alliance is with Novartis AG. Both com- panies 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 contract 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 € 650 million by the expiration of the contract underlying the collaboration. In addition to these payments, MorphoSys is also entitled to royalties on any future product sales. In November 2012, MorphoSys and Novartis entered into a cooperation agreement for the use of the new Ylanthia technology platform. This was an extension of the existing strategic cooperation. 132 F I N A N C I A L S T A T E M E N T S Notes 9.5 S UBSEQUEN T EVEN T S There have been no significant changes in the industry environment since the end of the 2015 financial year. Other events having a material impact on the net assets, financial position and results of operations have also not occurred after the end of the financial year. 9.6 R E SP ONSIBIL I T Y S TAT EMEN T We confirm to the best of our knowledge and in accordance with applicable reporting principles that the consolidated financial statements give a true and fair view of the Group’s assets, liabilities, financial position and re- sults of operations and that the Group Management Report provides a fair review of the Group’s business development, results and position as well as a description of the principal opportunities and risks associated with its expected development. Martinsried, February 16, 2016 Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Arndt Schottelius Chief Development Officer Dr. Marlies Sproll Chief Scientific Officer A D D I T I O N A L I N F O R M A T I O N Auditor’s Report 133 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, February 17, 2016 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dietmar Eglauer Wirtschaftsprüfer (German Public Auditor) ppa. Bodo Kleinschrod Wirtschaftsprüfer (German Public Auditor) 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, 2015 to December 31, 2015. 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 134 A D D I T I O N A L I N F O R M A T I O N Report of the Supervisory Board Report of the Supervisory Board COOPERAT ION OF T HE MANAGEMEN T BOARD AND SUPERVISORY BOARD During the 2015 financial year, the Supervisory Board comprehen- sively performed the duties assigned to it by law, the Articles of Association, its own Rules of Procedure and – with a few excep- tions – the recommendations of the German Corporate Governance Code (the “Code”). We regularly advised and continually oversaw 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 furnish us with periodic written and verbal reports contain- ing timely and detailed information on all business transactions and events of significant relevance to the Company. The Manage- ment Board prepared these reports in collaboration with the re- spective departments. In our committee meetings and plenary sessions, we had the opportunity to fully discuss the Management Board’s reports and the proposed resolutions. The Management Board answered our questions on strategic topics affecting the Company with a great level of detail and submitted the relevant documents in a timely manner. Any deviations from the business plan were thoroughly explained to us, and we were directly in- volved at an early stage in all decisions relevant to the Company. A corresponding resolution was passed if the Supervisory Board’s approval for individual actions was required by law, the Articles of Association or by the Rules of Procedure. The Supervisory Board members regularly prepared resolutions for Management Board actions requiring Supervisory Board approval based on the docu- mentation provided in advance by the Management Board. If nec- essary, the Supervisory Board received the support of the relevant committees and, together with the Management Board, discussed any projects pending decision. All matters requiring approval were submitted for review to the Supervisory Board on a timely basis. Outside of the meetings of the Supervisory Board plenum and the committees, the chairperson of the Supervisory Board regularly exchanged information and ideas with the Management Board and especially the Chief Executive Officer, Dr. Simon Moroney. The Supervisory Board chairperson was also kept informed of the cur- rent business situation and any significant business transactions. Discussions also took place between the chairperson of the Super- visory Board and members of the Senior Management Group in consultation with the Management Board. The other Supervisory Board members also had regular contact with the individual Man- agement Board members. KEY I T EMS OF DISCUSSION AT T HE SUPERVISORY BOARD MEE T INGS IN T HE 2015 F INANC IAL YEAR A total of eight Supervisory Board meetings were held in the 2015 financial year, two of which were conducted by telephone. All Supervisory Board members were present at all meetings. In ur- gent cases occurring outside of the meetings, the Supervisory Board passed resolutions by written procedure. In addition to the above, a one-day strategy meeting took place in July 2015 between the Management Board and the Supervisory Board that primarily addressed the following topics: • the Company’s strategic focus; and • the further development of the Company’s product portfolio and the related impact on the net assets and results of operations. During the 2015 financial year, the Supervisory Board paid partic- ular attention to the following topics and passed resolutions on these topics after thorough examination and discussion: • the Company’s achievement of the 2014 financial year targets, the corporate objectives for the 2015 financial year and setting the corporate objectives for the 2016 financial year; • the agenda and proposed resolutions for the 2015 Annual Gen- eral Meeting; specifically the nominations to the 2015 Annual General Meeting of Wendy Johnson, Klaus Kühn and Dr. Frank Morich as new candidates for the Supervisory Board; • termination of the collaboration with Celgene Corporation to develop MOR202; • purchase of all remaining shares in the biopharmaceutical com- pany Lanthio Pharma B.V.; • the conclusion of the cooperation with G7 Therapeutics AG for developing innovative antibody compounds; • the formation of a strategic alliance in the field of immuno- oncology with Immatics Biotechnologies GmbH; • the new resolution on the composition of the Supervisory Board and the level of female representation on the Management Board and Supervisory Board; • review and revision of schedule of responsibilities for the Man- agement Board; and • the budget for the 2016 financial year. A D D I T I O N A L I N F O R M A T I O N Report of the Supervisory Board 135 We also passed a resolution in the Supervisory Board plenum on the remuneration of Management Board members for the period from July 1, 2015 to June 30, 2016 taking external benchmarking into consideration. We also evaluated the achievement of individ- ual bonus targets for 2014 agreed with the members of the Man- agement Board and dealt with the bonus targets with these mem- bers for both 2015 and 2016. We had the appropriateness of the Management Board’s compensation and its comparison to the re- muneration of various levels of employees confirmed by an inde- pendent remuneration consultant and discussed and adopted the key performance indicators for the long-term incentive plans for both the Management Board and the Senior Management Group. Furthermore, we approved the financial statements for the 2014 financial year and the Management Board’s proposal for the appro- priation of profits. We also dealt with the Corporate Governance Report as well as the Statement on Corporate Governance. The focus of our regular discussions in the Supervisory Board’s plenary meetings were MorphoSys’s revenue and earnings devel- opment, the 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 proprietary drugs, the future development strategy and the de- velopment of new technologies. In addition, we discussed the re- sults of the efficiency review of the Supervisory Board’s work carried out in 2015 by an external consultant and evaluated possi- bilities for improvement. Finally, we have kept ourselves regularly informed with respect to risk management, the internal control system and of the results of the internal audit. CONFL IC T S OF IN T ERES T IN T HE SUPERVISORY BOARD In the 2015 financial year, no conflicts of interest occurred within the Supervisory Board. AC T IVI T IES AND MEE T INGS OF SUPERVISORY BOARD COMMI T T EES In order to perform its duties efficiently, the Supervisory Board has established three committees that prepare the issues falling within their respective areas of competence for the Supervisory Board plenum: the Audit Committee, the Remuneration and Nomi- nation Committee and the Science and Technology Committee. In each Supervisory Board meeting, the committee chairs report to the Supervisory Board on the work of the committees and the min- utes of the committee meetings are made available to all Supervi- sory Board members. The composition of these committees can be found in the “Statement on Corporate Governance,” which is avail- able on the Company’s website under the heading “Media & Inves- tors > Corporate Governance > Statement on Corporate Gover- nance,” and in the Annual Report on pages 61 to 66. All members attended all committee meetings, except for one meeting. The Audit Committee met on seven occasions in the 2015 finan- cial year (of those meeting, three were by telephone). The Commit- tee dealt mainly with accounting issues, the quarterly reports and the financial statements and consolidated financial statements. The Committee discussed these topics with the Management Board and recommended the approval of these statements to the Supervisory Board. The auditor took part in three Audit Commit- tee meetings and informed its members of the audit results. The Audit Committee also made a recommendation to the Supervisory Board for its proposal at the Annual General Meeting for the elec- tion of the independent auditor. The Committee deliberated on the risk management system and the results of the internal audit car- ried out in the 2015 financial year. The Committee regularly ad- vised on the Company’s cash investment policy and the invest- ment recommendations of the Management Board. Additionally, the Committee was informed of improvements in IT security. For efficiency reasons, there is a common Remuneration and Nomination Committee, which meets in its respective role. This Committee met on five occasions in the 2015 financial year (includ- ing twice by telephone) and, in its function as Remuneration Com- mittee, 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 expert with the task of preparing a Management Board remuneration report to verify the appropriateness of the Management Board’s remuneration. Based on this report, the Com- mittee prepared a recommendation as to the future structure of the Management Board’s compensation and submitted this to the Supervisory Board for approval. The Committee also dealt with the ratio of compensation between the Management Board and the Senior Management Group and the staff overall and had this ratio reviewed by the commissioned remuneration expert. This expert confirmed the appropriateness of the “vertical” compensation ra- tios. The Committee also dealt with the individual bonus targets of the Management Board members and the Company’s targets and offered recommendations to the Supervisory Board for approval. The Committee discussed the key performance indicators for the Management Board’s and Senior Management Group’s long-term incentive plans. In its function as Nomination Committee, the Committee dealt with the preparations for the required election of all Supervisory Board members in the context of the 2015 Annual General Meeting. In coordination with the Supervisory Board, the Committee prepared the required profiles for the Supervisory Board candidates up for election, conducted the corresponding interviews with the Supervisory Board candidates and submitted its recommendation to the Supervisory Board for its proposals to the Annual General Meeting for the election of Supervisory Board members. In this context, the Committee commissioned a person- nel consulting firm for professional support in the Committee’s search for suitable new Supervisory Board candidates. 136 A D D I T I O N A L I N F O R M A T I O N Report of the Supervisory Board The Science and Technology Committee met on eight occasions during the 2015 financial year (three of these meetings were by telephone). This Committee dealt mainly with the progress and expansion of the Company’s portfolio, the development of new technologies and the Company’s drug development plans includ- ing the required budget resources. The discussions focused on the start of new development programs, the results of ongoing clinical studies for the development of proprietary drug candidates, devel- opment plans for current and planned clinical studies as well as the development strategy. The Committee addressed the produc- tion 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 recommendations on strengthening the portfolio. CORP ORAT E GOVERNANCE The Supervisory Board dealt with the further development of MorphoSys’s corporate governance keeping in mind the amend- ments made in the Code in May 2015 by the Government Commis- sion German Corporate Governance Code. The detailed Corporate Government Report, including the Corporate Governance Statement according to Sec. 289a HGB (German Commercial Code), may be found on the Company’s website under the heading “Media & In- vestors > Corporate Governance > Corporate Governance Report” and can also be found in the Annual Report on pages 61 – 82. We also discussed with the Management Board the Company’s compliance with the Code’s recommendations and, in justified cases, approved a few exceptions to the Code’s recommendations. Based on this consultation, the Management Board and the Super- visory Board submitted the annual Declaration of Conformity on December 3, 2015. The current version of the annual Declaration of Conformity can be found in this Annual Report and is perma- nently available to MorphoSys’s shareholders on the Company’s website under the heading “Media & Investors > Corporate Gover- nance > 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 in the reporting period. The changes made to the Supervisory Board’s composition during the reporting period are listed below. The terms of office of all Supervisory Board members ended with the conclusion of the 2015 Annual General Meeting. Supervisory Board members Dr. Geoffrey Vernon, Dr. Daniel Camus and Dr. Walter Blättler departed from the Supervisory Board at the conclusion of the 2015 Annual General Meeting. Newly appointed in their place were Dr. Frank Morich, Klaus Kühn and Wendy Johnson. The Su- pervisory Board members Dr. Gerald Möller, Dr. Marc Cluzel and Karin Eastham were up for reappointment and were reappointed to the Supervisory Board at the Annual General Meeting. In its constituent meeting following the 2015 Annual General Meeting, Dr. Gerald Möller was reappointed as chairman of the Supervisory Board and Dr. Frank Morich was appointed as deputy chairman of the Supervisory Board. AUDI T OF T HE F INANC IAL S TAT EMEN T S For the 2015 financial year, the Company commissioned Price- waterhouseCoopers AG Wirtschaftsprüfungsgesellschaft, Munich (“PwC”) as its auditor. The audit contract was awarded by the Su- pervisory Board in accordance with the resolution of the Annual General Meeting on May 8, 2015. 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 the 2015 financial year were properly audited by PwC and issued with an unqualified Auditor’s Report. The key topics of the audit for the consolidated and separate finan- cial statements for the 2015 financial year were the presentation and valuation of cash investments, the valuation of the carrying amounts of goodwill and intangible assets with indefinite useful lives, the presentation and valuation of the stock option programs, the calculation of current and deferred taxes, the revenue recogni- tion and the completeness and accuracy of the Notes. In addition, the auditor confirmed that the Management Board has established an appropriate reporting and monitoring system that is suitable in terms of its design and administration for the early detection of developments that could threaten the Company’s existence. 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 audit report, the consolidated financial statements and the Man- agement Report of the MorphoSys Group were discussed in detail at the Audit Committee meeting on February 24, 2016 and the subsequent meeting of the Supervisory Board on the same day. The audit report, the financial statements and the Management Report of MorphoSys AG were discussed in detail at the Audit Committee meeting on March 16, 2016 and the subsequent meet- ing 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 fo- cus of the audit and was available to both the Audit Committee and the Supervisory Board to answer questions and provide further information. A D D I T I O N A L I N F O R M A T I O N Report of the Supervisory Board 137 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 Super- visory Board also determined that it sees no cause for objection. The financial statements and consolidated financial statements 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. The Supervisory Board also reviewed the Management Board’s proposal for the appropriation of profits and agreed to 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, their dedicated service and the inspirational work environment witnessed during this past finan- cial year. Through their efforts, MorphoSys’s portfolio has contin- ued to mature and expand, and important milestones have been achieved. The Supervisory Board would also like to thank our longstanding Supervisory Board members Dr. Geoffrey Vernon, Dr. Daniel Camus and Dr. Walter Blättler, whose term of office ended in 2015, for their dedication and constructive cooperation. Martinsried/Planegg, March 16, 2016 Dr. Gerald Möller Chairman of the Supervisory Board 138 A D D I T I O N A L I N F O R M A T I O N Supervisory Board of MorphoSys AG Supervisory Board of MorphoSys AG DR. GERALD MÖLLER Chairman Heidelberg, Germany DR. FRANK MORICH Deputy Chairman Berlin, Germany DR. MARC CLUZEL Board Member Montpellier, France no other supervisory board memberships member of the supervisory board of: • Moleac Pte. Ltd.*, Singapore (Member of the Board of Directors) member of the supervisory board of: • 4sigma, Inc.*, Bermuda (Chairman of the Board of Directors) • Adrenomed AG, Germany (Member of the Supervisory Board) • Ayoxxa Biosystems GmbH*, Germany (Chairman of the Advisory Board) • Genticel SA*, France (Deputy Chairman of the Supervisory Board) • Invendo Medical GmbH*, Germany (Chairman of the Advisory Board) * Membership in comparable domestic and foreign supervisory boards of commercial enterprises A D D I T I O N A L I N F O R M A T I O N Supervisory Board of MorphoSys AG 139 KARIN EASTHAM Board Member Rancho Santa Fe, CA, USA WENDY JOHNSON Board Member San Diego, CA, USA KLAUS KÜHN Board Member Grevenbroich, Germany member of the supervisory board of: • Geron Corp.*, USA (Member of the Board of Directors) member of the supervisory board of: • AmpliPhi Biosciences Corp.*, USA (Member of the Board of Directors) • Illumina, Inc.*, USA (Member of the Board of Directors) • Veracyte, Inc.*, USA (Member of the Board of Directors) member of the supervisory board of: • Flossbach von Storch AG, Germany (Chairman of the Supervisory Board) • Hella KGaA Hueck & Co.*, Germany (Member of the Supervisory Board, Member of the Shareholders’ Committee) 140 A D D I T I O N A L I N F O R M A T I O N Senior Management Group of MorphoSys AG Senior Management Group of MorphoSys AG SASCHA ALILOVIC Head of Corporate Finance & Corporate Development MARTIN CLARK Head of Central Purchasing & Logistics KLAUS DE WALL Head of Accounting & Tax SILVIA DERMIETZEL Head of Human Resources DR. GABRIELE ELBL Head of Regulatory Affairs DR. MARKUS ENZELBERGER Head of Discovery Alliances & Technologies DR. CLAUDIA GUTJAHR-LÖSER Head of Corporate Communications & Investor Relations DR. STEFFEN HEEGER Head of Clinical Development DR. BERND HUT TER Head of Intellectual Property DR. BARBARA KREBS-POHL Head of Business Development DR. MARKUS LANG Head of Project Management CHARLOT TE LOHMANN General Counsel A D D I T I O N A L I N F O R M A T I O N Senior Management Group of MorphoSys AG 141 DR. RALF OSTENDORP Head of Protein Sciences & CMC STEFFEN POHLENZ Head of IT LARA SMITH WEBER Head of Controlling DR. STEFAN STEIDL Head of Preclinical Development DR. HARALD WATZKA Head of Alliance Management DR. ARMIN WEIDMANN Head of Compliance & Quality Assurance DR. DOMINIKA WEINELT Head of Drug Safety & Pharmacovigilance DR. GÜNTER WELLNHOFER Head of Technical Operations 142 A D D I T I O N A L I N F O R M A T I O N Glossary Glossary A C D ADC – Antibody drug conjugate; a tumor growth-inhibit- ing substance (cytostatic) that is coupled to an antibody to attack tumors in an even more targeted manner 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 approach in which immune cells are reprogrammed Diabetic nephropathy – Kidney disease due to dia- betes mellitus Cash flow – Key performance indicator in the cash flow statement used to assess the financial and earning capacity Discounted cash flow model – Method of valuing assets, especially for due diligence CD3 – Surface antigen on T cells DLBCL – Diffuse large B cell lymphoma, a subform of ›› NHL ADCP – Antibody-dependent cellular phagocytosis 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 characterized by excess lympho- blasts CD20 – Therapeutic target for the treatment of B cell lymphomas and leukemias E Antibody – Proteins of the immune system that recognize antigens, thereby triggering an immune response CD38 – Therapeutic target for the treatment of multiple myeloma and certain leukemias Antibody library – A collection of genes that encode corresponding human antibodies Antigen – Foreign substance stimulating antibody pro- duction; binding partner of antibody 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, investigators enroll healthy volunteers and/or patients into small pilot studies initially, followed by larger-scale studies in patients Autoimmune disease – Disease caused by an im- mune response by the body against one of its own tissues, cells or molecules CLL – Chronic lymphocytic leukemia; most common type of cancer of the blood and bone marrow, affecting the B cells EGFR – Epidermal growth factor receptor; cell-surface receptor for members of the epidermal growth factor family (EGF-family) of extracellular protein ligands; the epidermal growth factor receptor is a receptor tyrosine kinase EMA – European Medicines Agency ESCC – ›› SQUAMOUS-CELL CARCINOMA; malignant skin or mucous tumor B B-ALL – Acute lymphoblastic B cell leukemia, blood cancer affecting white blood cells, subform of ›› ALL Biosimilars – Term used to describe officially approved new versions of innovator biopharmaceutical products, following patent expiration Bispecific – Antibody consisting of parts from two different antibodies COPD – Chronic obstructive pulmonary disease CRO – Contract research organization F Fab format – The antigen binding fragment of the antibody 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 FL – Follicular lymphoma, a subform of ›› NHL A D D I T I O N A L I N F O R M A T I O N Glossary 143 G I N GCP – Good clinical practice; an inter national ethical and scientific quality standard for designing, conduct- ing, recording and reporting trials that involve the par- ticipation of human subjects 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 manufacturing practice; term for the control and management of manufacturing and quality control testing of pharmaceutical products and medical devices IFRS – International Financial Reporting Standards; future EU-wide standards produced by the IASB Nasdaq Biotech Index – Stock market index made up of biotechnological or pharmaceutical companies list ed at the US stock exchange NASDAQ Immuno-oncology – New class of compounds that stimulate the immune system to attack tumors Inclusion body myositis – Inflammatory muscle disease (›› sIBM) Innovation Capital – Investments in start-ups with technologies and product candidates being close to MorphoSys’s areas of interest NHL – Non-Hodgkin’s lymphomas; diverse group of blood cancers that include any kind of lymphoma except Hodgkin’s lymphomas NK cells – Natural killer cells of the body’s immune sys- tem; cells capable of recognizing and killing abnormal cells, e.g. tumor cells GPCR – G protein-coupled receptor; receptors in the cell membrane that transfers signals to the cell interior L P H Lanthipeptides – Novel class of therapeutics with high target selectivity and improved drug-like properties HER3 – Human epidermal growth factor receptor 3; member of the epidermal growth factor receptor (EGFR/ ERBB) family of receptor tyrosine kinases M Pediatric study – A study conducted in the area of children and adolescent medicine Pharmacodynamics – Study of the effects of drugs on the body Pharmacokinetics – Determination of the fate of sub- stances administered externally to a living organism Preclinic – Preclinical stage of drug development; tests in animal models as well as in laboratory essays HuCAL – Human Combinatorial Antibody Library; pro- prietary antibody library enabling rapid generation of specific human antibodies for all applications Human – Of human origin Market capitalization – Value of a com pany’s out- standing shares, as measured by shares times current price Protein – Polymer consisting of amino acids, e. g. anti- bodies and enzymes MCL – Mantle cell lymphoma, a subform of ›› NHL Psoriasis – A chronic, non-contagious autoimmune disease which affects the skin and joints mCRPC – Metastatic castration-resistant prostate cancer Monoclonal antibody – Homogeneous antibody origin ating from a single clone, produced by a hybrid- oma cell Multiple myeloma – Type of cancer that develops in a subset of white blood cells called plasma cells formed in the bone marrow 144 A D D I T I O N A L I N F O R M A T I O N Glossary R T Y Rheumatoid arthritis – Inflammatory disease of the joints; abbreviation: RA Target – Target molecule for therapeutic intervention, e.g. on the surface of diseased cells Ylanthia – The novel next-generation antibody plat- form of MorphoSys Richter’s transformation – the (often rapid) transi- tion of chronic lymphatic leukemia (›› CLL) in a higher malignant, diffuse form Target molecule selectivity – Criteria to describe to what degree an antibody binds to other structures be- sides its target molecule Royalties – Percentage share of ownership of the rev- enue generated by drug products Target product profile (TPP) – Summary of specifi- cations on a planned therapeutic product S T cells – An abbreviation for T-lymphocytes; a sub type of white blood cells that together with B-lympho cytes are responsible for the body’s immune defense TecDAX – Index of the 30 largest technology companies listed on the Frankfurt Stock Exchange Scaffolds – Proteins with antibody - like capabilities Toxicity – Poisonousness sIBM – Sporadic ›› inclusion body myositis, inflammatory muscle disease Slonomics – DNA engineering and protein library gene ration platform acquired by MorphoSys in 2010 Small molecules – Low molecular compounds SOP system – SOP = standard operating procedure Squamous-cell carcinoma – malignant skin or mucous tumor A D D I T I O N A L I N F O R M A T I O N List of Figures and Tables 145 List of Figures and Tables Figures 01 Revenues of the MorphoSys Group by Segment 02 MorphoSys’s Product Pipeline 03 Active Clinical Studies with MorphoSys Antibodies 04 Headcount of the MorphoSys Group 05 Revenue of the MorphoSys Group by Region 06 Revenues Proprietary Development and Partnered Discovery 07 Selected R&D Expenses 08 Distribution of R&D Expenses 09 Performance of the MorphoSys Share in 2015 Tables 01 Development of Financial Performance Indicators 02 Sustainable Development of Key Performance Indicators (SD KPIs) at MorphoSys 03 Market Data from Selected Phase 3 Partnered Programs 04 Multiple-Year Overview – Income Statement 05 Multiple-Year Overview – Financial Situation 06 Multiple-Year Overview – Balance Sheet Structure 07 Comparison of Actual Business Results to Forecasts 08 Key Data for the MorphoSys Share 09 Analyst Recommendations 10 Summary of Key Short- and Medium-Term Risks at MorphoSys 22 22 27 30 33 33 34 34 45 20 21 25 35 36 38 39 46 47 60 10 Comparison of the MorphoSys Share Price Development between 2011 and 2015 11 Occupational Safety at MorphoSys 12 Quality Management System at MorphoSys 13 Employees by Gender 14 15 16 The Risk and Opportunity Management System at Seniority Labor Turnover Rate MorphoSys 17 Compliance Management System (CMS) 11 Summary of Key Long-Term Risks at MorphoSys 12 Composition of the Supervisory Board until Termination of the 2015 Annual General Meeting 13 Composition of the Supervisory Board since Termination of the 2015 Annual General Meeting 14 Participation of Supervisory Board Members 15 Compensation of the Management Board in 2015 and 2014 16 Compensation of the Supervisory Board in 2015 and 2014 17 Directors’ Holdings 18 Directors’ Dealings 45 50 50 51 51 52 54 78 60 63 63 65 70 73 74 76 146 A D D I T I O N A L I N F O R M A T I O N Imprint Imprint 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®, 100 billion high potentials®, Slonomics®, Lanthio Pharma® and LanthioPep® are registered trademarks of the MorphoSys Group. Concept and Design 3st kommunikation GmbH, Mainz Photography/Picture Credits Andreas Pohlmann, München Matthias Haslauer, Hamburg Getty Images: Martin Barraud, Alfred Pasieka, Hero Images Translation Klusmann Communications, Niedernhausen Editorial Office Apostroph, Hamburg Typesetting and Lithography Knecht GmbH, Ockenheim Printer Woeste Druck + Verlag GmbH & Co. KG, Essen-Kettwig Copy Deadline March 16, 2016 (except financial statements) Key Figures (IFRS) MorphoSys Group (in million €, if not stated otherwise) 12/31/15 12/31/14 12/31/13 12/31/12 12/31/11 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 RESULTS1 Revenues Cost of Goods Sold R&D Expenses SG&A Expenses Personnel Expenses (Excluding Stock-Based Compensation) Capital Expenditure Depreciation of Tangible Assets Amortization of Intangible Assets EBIT Net Proﬁ t/(Loss) Net Proﬁ t/(Loss) from Discontinued Operations BAL ANCE SHEE T Total Assets Cash, Marketable Securities and Other Financial Assets Intangible Assets Total Liabilities Stockholders’ Equity Equity Ratio (in %) MORPHOSYS SHARE 106.2 0.0 78.7 15.1 32.4 8.8 1.5 1.9 17.2 14.9 64.0 0.0 56.0 14.1 26.7 20.5 1.4 2.7 (5.9) (3.0) 78.0 0.0 49.2 18.8 51.9 0.0 37.7 12.1 82.1 0.0 55.9 14.9 27.4 24.1 27.7 5.6 1.5 3.3 9.9 13.3 1.8 1.7 3.5 2.5 1.9 2.9 1.7 3.8 9.8 8.2 0.0 87.0 7.3 46.9 23.2 29.6 13.8 2.1 4.0 13.1 9.2 81.0 6.7 39.0 23.9 26.1 3.8 1.6 3.8 12.8 9.0 71.6 7.1 27.6 20.5 21.5 3.8 1.5 4.8 16.5 13.2 62.0 7.9 22.2 24.8 18.8 12.0 1.5 3.7 8.3 11.5 – – – – 53.0 8.0 17.5 21.4 18.1 4.0 1.5 3.4 5.4 6.0 – – – 6.0 (0.4) 400.1 426.5 447.7 224.3 228.4 209.8 206.1 203.3 184.7 127.8 298.4 79.6 37.3 362.7 91 % 352.8 46.0 77.7 348.8 82 % 390.7 35.1 95.5 352.1 79 % 135.7 35.0 22.3 202.0 90 % 134.4 66.0 31.3 197.1 86 % 108.4 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 % Number of Shares Issued 26,537,682 26,456,834 26,220,882 23,358,228 23,112,167 22,890,252 22,660,557 22,478,787 22,160,259 20,145,966 Group Earnings/(Loss) per Share, Diluted (in €) Dividend (in €) Share Price (in €) PERSONNEL DATA 0.57 – (0.12) – 57.65 76.63 0.54 – 55.85 0.08 – 29.3 0.36 – 17.53 0.4 – 0.4 – 18.53 17.04 0.59 – 18.75 0.53 – 16.1 0.31 – 18.12 Total Group Employees (Number2) 365 329 299 421 446 464 404 334 295 279 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 connection with the transaction are shown in the line item “Net Proﬁ t/(Loss) from Discontinued Operations.” All other line items consist of amounts from continuing operations. 2 2005 to 2012 including employees from the discontinued operations of AbD Serotec. Financial Calendar 2016 2 March p u b l i c at i o n o f 2 0 1 5 y e a r - e n d r e s u lt s 3 May p u b l i c at i o n o f 2 0 1 6 t h r e e m o n t h s ’ r e p o r t 2 June 2 0 1 6 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 1 August p u b l i c at i o n o f 2 0 1 6 s i x m o n t h s ’ r e p o r t 7 November p u b l i c at i o n o f 2 0 1 6 n i n e m o n t h s ’ r e p o r t G A s y S o h p r o M 5 1 0 2 t r o p e R l a u n n A MorphoSys AG Lena-Christ-Str. 48 82152 Martinsried / Planegg Germany Phone: +49-89-89927- 0 Fax: www.morphosys.com +49-89-89927-222

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