MorphoSys Annual Report 2017

Plain-text annual report

annual report G A s y S o h p r o M 7 1 0 2 t r o p e R l a u n n A 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 (March 8, 2018) 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 BAY1093884 / Bayer Hemophilia Elgemtumab (LJM716) / Novartis Cancer MOR106 / Galapagos Inﬂ ammation MOR107 3 (LP2-3) / not partnered Not disclosed NOV-7 (CLG561) / Novartis Eye diseases NOV-8 / Novartis Inﬂ ammation NOV-9 (LKA651) / Novartis Diabetic eye diseases NOV-10 (PCA062) / Novartis Cancer NOV-11 / Novartis Blood disorders NOV-13 (HKT288) / Novartis Cancer NOV-14 / Novartis Asthma PRV-300 (CNTO3157) / ProventionBio Inﬂ ammation Vantictumab (OMP-18R5) / OncoMed Solid tumors P R O G R A M / P A R T N E R I N D I C AT I O N Tremfya®1 (guselkumab) / Janssen/J&J Psoriasis Gantenerumab / Roche Alzheimer’s disease MOR208 / not partnered Hematological malignancies Anetumab ravtansine (BAY94-9343) / Bayer Solid tumors BHQ880 / Novartis Multiple myeloma Bimagrumab ( BYM338) / Novartis Musculoskeletal diseases CNTO6785 / Janssen/J&J Inﬂ ammation MOR103 (GSK3196165) / GlaxoSmithKline Inﬂ ammation MOR202 / I-Mab Biopharma 2 Multiple myeloma NOV-12 (MAA868) / Novartis Prevention of thrombosis Setrusumab (BPS804) / Mereo/Novartis Brittle bone syndrome Tesidolumab (LFG316) / Novartis Eye diseases Utomilumab (PF-05082566) / Pﬁ zer Cancer VAY736 / Novartis Inﬂ ammation Xentuzumab (BI-836845) / BI Solid tumors 1 We still consider Tremfya® a phase 3 compound due to ongoing studies in various indications. 2 For development in the Greater China market (China, Hong Kong, Taiwan, Macao). 3 A phase 1 study in healthy volunteers was completed. MOR107 is currently in preclinical investigation with a focus on oncology indications. 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 114 Programs in Total 12 proprie tary progr ams 28 Clinical Product Candidates* 12 in phase 2 1 out- licensed progr am 13 in phase 1 101 partnered discovery progr ams 3 in phase 3 *In addition, 7 proprietary programs and 54 partnered discovery programs are in discovery stage, 1 proprietary and 24 partnered discovery programs are in preclinic. E C N A L G A T A S Y S O H P R O M O I L O F T R O P – E N I L E P I P T C U D O R P ENG INEERING THE MEDICINES OF TOMORROW Our mission is to make excep- tional, innovative biopharma- ceuticals to improve the lives of patients suﬀ ering from serious diseases. We are driven by a de - sire to make the medicines of tomorrow a reality. MorphoSys at a glance Figures, data, facts (December 31, 2017) pro gr ams in discovery 61 More than 70 active clinical studies with MorphoSys antibodies pro gr ams in preclinic pro gr ams in phase 1 25 pro gr ams in phase 2 13 12 pro gr ams in phase 3 3 116.8 95.7 22.2 ) € n o i l l i m n i ( s e s n e p x e d & r 2007 2016 2017 employees 326 34 nations indi catio ns: 52 % oncology 27 % autoimmune and inﬂ ammatory diseases 13 MOR Programs 11 % musculoskeletal diseases 6 % eye diseases 4 % neurological diseases t n e m p o l e v e d l a c i n i l c n i s e t a d i d n a c g u r d Please find additional information in our online magazine. https://reports.morphosys.com/2017/ ENG INEERING THE MEDICINES OF TOMORROW Our mission is to make excep- tional, innovative biopharma- ceuticals to improve the lives of patients suﬀ ering from serious diseases. We are driven by a de - sire to make the medicines of tomorrow a reality. Contents g r o u p m a n ag e m e n t r e p o r t 23 41 49 53 57 57 57 64 73 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 Sustainable Business Development Risk and Opportunity Report Statement on Corporate Governance and Corporate Governance Report f i n a n c i a l s tat e m e n t s 104 105 106 108 110 112 155 Consolidated Statement of Income (IFRS) Consolidated Statement of Comprehensive Income (IFRS) Consolidated Balance Sheet (IFRS) Consolidated Statement of Changes in Stockholders’ Equity (IFRS) Consolidated Statement of Cash Flows (IFRS) Notes Responsibility Statement a d d i t i o n a l i n f o r m at i o n 156 161 166 168 170 173 174 Independent 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 the company, Dr. Simon Moroney its culture and our future success are very dependent on our employees – on their inspiration, their motivation, their hard work. What was your motivation to found MorphoSys 25 years ago and what do you believe is a key success factor? Dr. Simon Moroney — We were motivated to found Dr. Simon Moroney — Dr. Simon Moroney — We were motivated to found MorphoSys by the shared goal to build some- thing – to build a company. We had speciﬁ c tech- nical ideas about how we could make human anti- bodies, substances for therapeutics. It was a shared desire to move away from what we had done in the past, be at some level independent, be responsible for our own futures. I think that cultural aspect is one of the things that makes MorphoSys an attractive place for people to work. We take care to look after our people, to give people career opportunities. o n li n e rep o rt Watch the full interview with Dr. Simon Moroney https://reports.morphosys.com/2017/ #interview Inter view with Dr. Simon Moroney, CEO and cofounder of MorphoSys i am confident Dr. Simon Moroney that we continue to be a source of innovation in the pharmaceutical industry – that we make a difference for patients. MorphoSys aims to intensify clinical develop- ment of its own therapeutic compounds in order to address the needs of patients suf- fering from serious diseases. Why is this a crucial objective for the company? Dr. Simon Moroney — It’s also a moral aspect. If a company controls technologies that can be used to develop better therapeutic substances, I believe there is almost a duty to apply those technologies to the beneﬁ t of patients. An example from our own portfolio is an antibody that we’re developing for a form of lymphoma, where we have shown in ﬁ rst clinical trials that we can really make a diﬀ erence for patients suﬀ ering from this very serious illness. How will the headlines about MorphoSys read in 25 years? Dr. Simon Moroney — I’m conﬁ dent that MorphoSys will be a signiﬁ cant player in our industry. I’m conﬁ dent that we’ll continue to be a source of inno- vation in the pharmaceutical industry, a source of the next generation of products – that we make a diﬀ er ence for patients. Goals and Strategy On our way to becoming a fully integrated biopharmaceutical company MOR Programs The Proprietary Development segment is becoming increasingly important: in 2017, the ﬁ rst proprietary program progressed into a pivotal clinical trial. Additional four programs are in clinical development. Partnered Programs In the Partnered Discovery segment, we identify optimized therapeutic antibodies on behalf of partners. In 2017, Tremfya® was the ﬁ rst product derived from a partnership to receive market approval. Goals and Strategy On our way to becoming a fully integrated biopharmaceutical company Innovations Innovative technologies and smart development strategies are central to our approach. Success is created by our employees, who collaborate closely across all disciplines. Strategy MorphoSys’s goal is to develop exceptional biopharma- ceuticals to improve the lives of pa tients suﬀ ering from serious diseases. With the successful transformation from a technology provider to a drug development com- pany, we are well on the way to achieving this goal. MOR106 MOR106 is the first Ylanthia antibody in clinical development, being investigated for the treatment of atopic dermatitis. In cooperation with our partner Galapagos we are developing the antibody against inﬂ ammatory skin diseases. Find out more in our online magazine. https://reports.morphosys.com/2017/#mor106 https://reports.morphosys.com/2017/#mor106 MOR208 Exploring new ways and treatment options for blood cancer patients. MOR208 is being developed in a pivotal clinical trial for the treatment of malignant B cell diseases. Find out more in our online magazine. https://reports.morphosys.com/2017/#mor208 Tremf ya ® Tremfya® is the first is the first is the first is the first HuCAL antibody with market approval HuCAL antibody with market approval HuCAL antibody with market approval HuCAL antibody with market approval in the United States, Europe and in the United States, Europe and in the United States, Europe and in the United States, Europe and Canada for the treatment of moderate- Canada for the treatment of moderate- Canada for the treatment of moderate- Canada for the treatment of moderate- to-severe psoriasis. to-severe psoriasis. to-severe psoriasis. to-severe psoriasis. The compound is marketed by our partner Janssen and investigated in additional indications. Find out more in our online magazine. https://reports.morphosys.com/2017/#tremfya 16 T h e C o m p a n y Management Board of MorphoSys AG D R . M A R K U S E N Z E L B E R G E R Chief Scientiﬁ c Oﬃ cer D R . S I M O N M O R O N E Y Chief Executive Oﬃ cer D R . M A LT E P E T E R S Chief Development Oﬃ cer J E N S H O L S T E I N Chief Financial Oﬃ cer Letter to the Shareholders T h e C o m p a n y 17 In 2017, we took a large step towards our goal of becom- ing an integrated biopharmaceutical company. The major highlights were the approval of Tremfya® and clinical data for MOR208. Letter to the Shareholders In 2017, MorphoSys took a large step towards our goal of becoming a fully integrated bio- pharmaceutical company. We made substantial progress in both the Partnered Discovery and Proprietary Development segments of our business. The major highlights were, ﬁ rst, the approval of our partner Janssen’s Tremfya® and second, clinical data that, we hope, hint at a bright future for our proprietary program MOR208. These and other developments point to the successful execution of our strategy, which is focused on de- veloping innovative biopharmaceuticals to help patients suﬀ ering from serious diseases. Our heritage is that of a company that commands a technology for making therapeu- tics belonging to an important class – human antibodies. It has always been our ambition to make active substances that are optimized for their safety, therapeutic activity and ideally, their convenience. We believe that by selecting and optimizing the best possible molecule from our antibody library, we can have a positive impact on a patient’s disease and on his or her quality of life. This is the motivation that drives all of us at MorphoSys, from the lab scientist to the oﬃ ce worker. In July 2017, we witnessed a wonderful illustration of how our technology can deliver great drugs when our partner Janssen brought a new product, Tremfya®, to the mar- ket. This drug, which comprises an antibody made using our proprietary HuCAL tech- nology as the active substance, is for the treatment of moderate-to-severe psoriasis, a terribly debilitating disease. The vision that underlies all of our therapeutic projects looks like being realized in Tremfya®: data from clinical trials showed that it is highly eﬀ ective in treating psoriasis, with a bi-monthly self-administration that is very convenient for patients. Janssen is continuing the development of Tremfya® in pso- riasis as well as in other indications. In the meantime, Tremfya® has been approved by regulatory authorities in the United States, Europe and Canada and we are hopeful that it will become a highly successful drug. In October, a second major milestone was reached when we received breakthrough therapy designation (BTD FDA) for our ) for our ) from the US Food and Drug Administration ( ) from the US Food and Drug Administration ( ) from the US Food and Drug Administration (FDA BTD) from the US Food and Drug Administration ( therapy designation ( therapy designation (BTD FDA FDA BTD proprietary product candidate MOR208. BTD is awarded for an investigational drug to treat a serious condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically signiﬁ cant endpoint. The evidence that led to this award came from our L-MIND signiﬁ cant endpoint. The evidence that led to this award came from our L- signiﬁ cant endpoint. The evidence that led to this award came from our L-MIND which is investigating a combination of lenalidomide and MOR208 in older patients suﬀ ering from a particularly aggressive form of lymphoma, for which there are no trial, 18 T h e C o m p a n y Letter to the Shareholders We also entered our ﬁ rst ever deal with a Chinese company, I-Mab Biopharma, who will develop MOR202 in the Chinese region. approved treatments. Preliminary data showed that over half the patients in the trial experienced a response, with a third of them showing a complete response. The data also revealed that the responses were long lasting and, in the vast majority of responding patients, are still ongoing. Our goal now is to complete clinical testing within the L-MIND study. We will continue the ongoing discussion with the FDA on within the L- within the L-MIND the potential path to market for MOR208, including the possibility of an expedited regulatory submission primarily based on L- regulatory submission primarily based on L-MIND regulatory submission primarily based on L-MIND . We believe that if MOR208 approval is obtained, it oﬀ ers a great opportunity for us to advance MorphoSys to a fully-integrated commercial biopharmaceutical company. It is a product that could be used in a relatively limited number of hemato-oncology centers, which can be targeted with a relatively modestly-sized sales force. We are convinced that by pursuing our own commercialization strategy for MOR208, we can maximize the value within this therapeutic program. Tremfya® and MOR208 were the two most visible highlights of a strong year for our pipeline of therapeutic agents. Two others worthy of mention are MOR202 and MOR106. In November, we entered our ﬁ rst ever deal with a Chinese company, when we signed a deal with I-Mab Biopharma, who will develop MOR202 in the Chinese region. The Chinese market for pharmaceuticals is huge, is developing extremely rap- idly and is becoming much more accessible to medicines from the west. In I-Mab, we believe we have found an ideal partner for MOR202, and we look forward to sup- porting them in their objective of developing MOR202 quickly. We expect I-Mab to start clinical trials in China later this year. Meanwhile, we are exploring opportunities for the further development of MOR202, either alone or with partners, in one or more oncology indications, including non-small-cell lung cancer. In October, we published ﬁ rst results from our phase 1 trial of MOR106. This anti- body, which is being co-developed under a 50 : 50 cost- and rights-sharing agreement with Galapagos, is being tested for the treatment of atopic dermatitis, a very wide- spread and poorly treated skin disease. The phase 1 data showed that MOR106 was generally well tolerated, and showed ﬁ rst signs of activity in reducing the signs and symptoms of the disease. We also observed that the eﬀ ect was durable – although the drug was only administered for four weeks, the positive impact on the disease was observable for up to three months. The next step is phase 2 development, which is planned to commence in 2018. Letter to the Shareholders T h e C o m p a n y 19 We are deliberately evolving away from our earlier business model in which we pro- vided discovery services to pharmaceutical companies. This change gives us a greater opportunity to create long-term value, as has been seen in the development of our share price over the last couple of years. It is, however, not without short-term conse- quences. For example the end of our collaboration with Novartis, which came, as planned, in November 2017 has an immediate negative impact on our revenues. I am convinced that this is the right step in the long run for several reasons – we have more freedom over which projects we work on, more control over their development and most importantly, retain more value for the company. The programs we have worked on with our pharmaceutical partners will, nonetheless, serve us extremely well in the years to come. Tremfya® is just one of 100 Partnered Discovery programs on which we could earn milestones and royalties well into the future. This will form a solid foundation for our plans and activities in the years to come. MorphoSys is extremely fortunate in having a wonderful group of employees. Without their dedication, inspiration and close collaboration, the achievements we made in the last year would not have been possible. On behalf of the MorphoSys Management Board, I would like to thank them for their continuing eﬀ orts and hard work. The year 2018 will see the departure of Dr. Gerald Möller, who will retire as Chairman of the Supervisory Board in May. With his retirement, MorphoSys will lose a very special supporter, who has been instrumental in helping us build the company over the last 19 years. We thank him for everything he has done for us, and wish him the very best for his retirement. MorphoSys is poised at an exciting time in its development, and I look forward to a successful 2018. I trust that we can count on the continued engagement of you, our shareholders, and thank you for your support over the last year. dr. simon morone y C H I E F E X E C U T I V E O F F I C E R We are deliberately evolving away from our earlier, more service-based, busi- ness model. This change gives us a greater opportunity to create long-term value. 20 G r o u p M a n a g e m e n t R e p o r t Contents Contents G r o u p M a n a g e m e n t R e p o r t 21 Group Management Report T R O P E R T N E M E G A N A M P U O R G 23 41 49 53 57 57 57 64 73 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 Sustainable Business Development Risk and Opportunity Report Statement on Corporate Governance and Corporate Governance Report 22 G r o u p M a n a g e m e n t R e p o r t 2017 was a successful year for MorphoSys. True to our mission of developing exceptional biopharmaceuticals to improve the lives of patients suﬀ ering from serious diseases, we advanced product candidates in various stages of development. During the reporting year, MOR208, our antibody for the treatment of hematological malignancies, transitioned to a pivotal phase 3 trial for the treat- ment of aggressive lymphoma. In October, we received break- through therapy designation from the US Food and Drug Ad- ministration (FDA) for MOR208 in an ongoing phase 2 trial in the same indication. MOR202, our antibody against multiple myeloma, also made good progress, culminating in an agreement with a new development partner for MOR202 in China. Successes were also reported by our partners. Tremfya®, developed by our part- ner Janssen, became the ﬁ rst therapeutic antibody based on our proprietary technology to reach the market. Tremfya®, which is approved to treat moderate-to-severe plaque psoriasis, was launched in the United States and received approval for mar- keting in the European Union and Canada. For the ﬁ rst time in the company’s history, we received product-based royalty reve- nues. With royalty payments expected to grow in the future, we plan to reinvest these revenues in the development of our pro- prietary drug programs and continue on our path to becoming a commercial biopharmaceutical company specializing in oncology. Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 23 Operations and Business Environment Strategy and Group Management S T RAT EGY AND OBJEC T IVES MorphoSys’s goal is to make exceptional, innovative biopharma- ceuticals to improve the lives of patients suﬀ ering from serious diseases. With our successful transition from a technology pro- vider to a drug development organization, we are well on our way to reaching this goal. Our main value drivers are our pro- prietary drug candidates, led by our investigational antibody* MOR208, which is being developed for the treatment of blood cancer. Based on our proprietary technology platforms for generating therapeutic antibodies and leadership in the ﬁ eld of therapeutic antibody discovery, generation and engineer- ing, we, together with our partners, have created more than 100 therapeutic product candidates currently in development. In 2017, Tremfya®, the ﬁ rst commercial product based on MorphoSys’s proprietary technology, received market approval in the United States, Europe and Canada. This antibody, like the majority of our development programs, is the result of a partnership with a company in the pharmaceutical industry. MorphoSys uses the revenues generated from these partner- ships to advance its proprietary development portfolio. The Proprietary Development segment is gaining in importance and currently comprises 13 programs, one of which is in pivotal development. The Proprietary Development segment focuses on developing therapeutic agents based on the Company’s proprietary tech- nology platforms, candidates in-licensed from other companies or programs co-developed with a partner. During clinical devel- opment, the Company determines whether and at which point it will pursue a partnership for later development and commer- cialization. The drug candidate can then be either completely out-licensed or developed further in cooperation with a pharma- ceutical or biotechnology company (co-development). In speciﬁ c cases, individual projects may be developed on a proprietary basis until they reach the market, with MorphoSys becoming involved in their commercialization in selected regions. In the Partnered Discovery segment, MorphoSys generates antibody candidates for partners in the pharmaceutical and biotechnology industries. MorphoSys receives contractual pay- ments, which include 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 support the Company’s long-term business model and help fund its proprietary development activities. Both segments are founded on the Company’s innovative tech- nologies. These are, in particular HuCAL*, the Company’s anti- body library* which is the basis for more than 20 product candidates currently in clinical development, and the follow-on platform Ylanthia*, which is the largest known Fab-based anti- body library. The acquisition of the biopharmaceutical com- pany Lanthio Pharma B.V. in May 2015 secured MorphoSys’s access to an innovative platform of stabilized therapeutic pep- tides. We also apply our resources and expertise to expand and deepen our technology in the area of peptides and antibodies. *S E E G L O S S A R Y – page 170 The Company’s goal is to maximize the portfolio’s value by investing in proprietary drug candidates while maintaining ﬁ nancial discipline and strict cost control to ensure increasing enterprise value. GROUP MANAGEMEN T AND PERF ORMANCE INDIC AT ORS MorphoSys pays equal attention to ﬁ nancial and non-ﬁ nancial indicators to steer the Group. These indicators help to monitor the success of strategic decisions and give the Company the opportunity to take quick corrective action when necessary. The Company’s management also follows and evaluates selected early indicators so that it can thoroughly assess a project’s progress and act promptly should a problem occur. 24 G r o u p M a n a g e m e n t R e p o r t Operations and Business Environment FINANCIAL PERFORMANCE INDICATORS Our ﬁ nancial performance indicators are described in detail in the section entitled “Analysis of Net Assets, Financial Posi- tion and Results of Operations.” Earnings before interest and taxes (EBIT), revenues, operating expenses, segment results and liquidity are the key ﬁ nancial indicators we use to measure our operating performance. Segment indicators are reviewed monthly, and the budget for the current ﬁ nancial year is re- vised and updated on a quarterly basis. Each year, the Com- pany prepares a mid-term plan for the subsequent three years. A thorough cost analysis is prepared regularly and used to monitor the Company’s adherence to ﬁ nancial targets and make comparisons to previous periods. MorphoSys’s business performance is inﬂ uenced by factors such as milestone and license payments, research and develop- ment expenses, other operating cash ﬂ ows, existing liquidity resources, expected cash inﬂ ows and working capital. These indicators are also routinely analyzed and evaluated with special attention given to the income statement, existing and future liquidity and available investment opportunities. The net present value of investments is calculated using discounted cash ﬂ ow models*. *S E E G L O S S A R Y – page 170 T A B L E 0 1 Development of Financial Performance Indicators1 in million € 2017 2016 2015 2014 2013 MORPHOSYS G ROUP Revenues from continuing operations2 Operating expenses from continuing operations EBIT (Earnings before interest and taxes) from continuing operations3 Liquidity PROPRIE TARY DE VELOPMENT Segment revenues Segment EBIT PARTNERED DISC OVERY Segment revenues Segment EBIT 66.8 133.8 (67.6) 312.2 17.6 (81.3) 49.2 30.2 49.7 109.8 (59.9) 359.5 0.6 (77.6) 49.1 31.0 106.2 93.7 17.2 298.4 59.9 10.7 46.3 20.4 64.0 70.1 (5.9) 352.8 15.0 (18.4) 49.0 25.9 78.0 67.9 9.9 390.7 26.9 (0.5) 51.0 25.4 1 Diﬀ erences may occur due to rounding. 2 Revenues from discontinued operations 2013: € 0.6 million. 3 Contains unallocated expenses (see also Item 3.3 of the Notes): 2017: € 16.5 million, 2016: € 13.4 million, 2015: € 13.9 million, 2014: € 13.4 million, 2013: € 15.0 million). NON - FINANCIAL PERFORMANCE INDICATORS For reporting purposes, MorphoSys uses the Sustainable De- velopment Key Performance Indicators (SD KPIs) recommended by the SD KPI standard. These indicators are used as bench- marks for the commercialization rate (SD KPI 2) and include the success of proprietary research and development (SD KPI 1) as well as the achievements of partnered programs. In the past ﬁ ve years, there have been no product recalls, ﬁ nes or settle- ments as the result of product safety or product liability dis- putes (SD KPI 3). To secure and expand its position in the therapeutics market, MorphoSys relies on the steady progress of its product pipeline, not only in terms of the number of therapeutic product candi- dates (114 at the end of the reporting year) but also based on the progress of its development pipeline and prospective market potential. Innovative technologies, when applied appropriately, can be used to generate superior product candidates and there- fore a further key performance indicator is the progress of the Company’s technology development. In addition to the quality of our research and development, our professional management Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 25 of partnerships is also a core element of our success, as demon- strated by new contracts and the ongoing progress made within existing alliances. Details on these performance indicators can be found in the section entitled “Research and Development and Business Performance” (page 31). The non-ﬁ nancial performance indicators described in the sec- tion “Sustainable Business Development” (page 57) are also used to manage the MorphoSys Group successfully. T A B L E 0 2 Sustainable Development 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 1 Programs in Phase 21 Programs in Phase 3 TOTAL1 PARTNERED DISC OVERY (NUMBER OF INDIVIDUAL ANTIBODIES) Programs in Discovery Programs in Preclinic Programs in Phase 1 Programs in Phase 2 Programs in Phase 32 Programs Launched2 TOTAL R&D E XPENSES (IN MILLION € ) R&D Expenses on Behalf of Partners Proprietary Development Expenses Expenses for Technology Development TOTAL 2017 2016 2015 2014 2013 7 1 2 2 1 13 54 24 11 10 2 1 8 1 2 3 0 14 54 22 10 12 2 0 101 100 8 2 1 3 0 14 43 25 9 9 3 0 89 5 2 1 2 0 10 40 25 8 8 3 0 84 3 0 1 2 0 6 37 22 6 8 2 0 75 17.7 97.7 1.4 116.8 17.2 77.1 1.4 95.7 22.1 54.1 2.5 78.7 19.6 33.5 2.9 56.0 17.5 27.5 4.2 49.2 1 Thereof one out-licensed program: MOR103/GSK3196165, out-licensed to GSK. 2 We still consider Tremfya® a phase 3 compound due to ongoing studies in various indications. Therefore the number of “Programs in Phase 3” as well as the “Programs Launched” both include Tremfya®. Regarding the total number of programs in the pipeline, however, we only count it as one program. LE ADING INDICATORS MorphoSys follows a variety of leading indicators to monitor the macroeconomic environment, the industry and the Com- pany 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 and external ﬁ nancial reports to acquire information on leading macroeco- nomic indicators such as industry transactions, changes in the legal environment and the availability of research funds and reviews these data carefully. For active collaborations, there are joint steering committees that meet regularly to update and monitor the programs’ prog- ress. These ongoing reviews give the Company a chance to intervene at an early stage if there are any negative develop- ments and provide it with information about expected mile- stones and related payments well in advance. Partners in non-active collaborations regularly provide MorphoSys with written reports so that it can follow the progress of therapeutic programs. 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 The business development area uses market analyses to get an early indication of the market’s demand for new technologies. By continuously monitoring the market, MorphoSys can quickly respond to trends and requirements and initiate its own activi- ties or partnerships. Organizational Structure ORGANIZAT ION OF T HE MORPHOSY S GROUP The MorphoSys Group, consisting of MorphoSys AG and its subsidiaries, develops and commercializes antibodies* and peptides for therapeutic applications. The activities of the Group’s two business segments are based on its proprietary technologies. The Proprietary Development segment combines all of the Company’s proprietary research and development of therapeutic compounds. MorphoSys, alone or with partners, develops its proprietary and in-licensed compounds with the option to bring them into partnerships, out-license them or market them in speciﬁ c regions. The development of propri- etary technologies is also conducted in this segment. The sec- ond business segment, Partnered Discovery, uses MorphoSys’s technologies to make human* antibody-based therapeutics on behalf of partners in the pharmaceutical industry. All business activities within the scope of these collaborations are reﬂ ected in this segment. In the 2017 ﬁ nancial year, the Group was located at MorphoSys AG’s registered oﬃ ce in Planegg near Munich, where MorphoSys’s subsidiary Sloning BioTechnology GmbH is also located, and in Groningen, the Netherlands, which is the location of its subsidiary Lanthio Pharma B.V. and its subsidi- ary LanthioPep B.V. MorphoSys AG’s central corporate func- tions such as accounting, controlling, human resources, legal, patent, purchasing, corporate communications and investor re- lations, as well as the two segments Proprietary Development and Partnered Discovery, are all located in Planegg. The sub- sidiary 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 laboratories, general management and administration, as well as human resources, accounting and business development departments. Additional information about the Group’s structure can be found in the Notes (Item 2.2.1). 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 structure with the Management Board as the governing body with its four members appointed and super- vised by the Supervisory Board. The Supervisory Board is elected by the Annual General Meeting and currently consists of six members. Detailed information concerning the Group’s management and control and its corporate governance princi- ples can be found in the Corporate Governance Report. The Senior Management Group supports the Management Board of the Company. At the end of the reporting year, the Senior Management Group consisted of 25 managers from various departments. Business Activities DRUG DEVEL OPMEN T MorphoSys develops drugs using its own research and develop- ment (R&D) and by cooperating with pharmaceutical and bio- technology partners. Our core business activity is developing new treatments for patients suﬀ ering from serious diseases with a focus on oncology and inﬂ ammatory diseases. The Com- pany possesses a very broad pipeline, which comprised a total of 114 therapeutic programs at the end of 2017, 28 of which are in clinical development. In 2017 the ﬁ rst therapeutic agent based on MorphoSys’s proprietary technology, which was de- veloped by one of the Company’s licensees, received market approval in the United States, Europe and Canada. Figure 1 shows the revenue development of the MorphoSys Group di- vided into the business segments Proprietary Development and Partnered Discovery. T ECHNOL OGIES MorphoSys has developed a number of technologies providing 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 anti- bodies and a system for their optimization. Another funda- mental platform is Ylanthia, which represents the next genera- tion of antibody technology and is currently the largest known antibody library. Ylanthia is based on an innovative concept for generating highly speciﬁ c and fully human antibodies. MorphoSys expects Ylanthia to set a new standard for the phar- maceutical industry’s development of therapeutic antibodies in this decade and beyond. Slonomics* is the Company’s patented, Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 27 fully automated technology for gene synthesis and modiﬁ ca- tion, which is used to generate highly diverse gene libraries in a controlled process to be used e.g. for the improvement of anti- body properties. The lanthipeptide* technology developed by Lanthio Pharma B.V., a fully owned MorphoSys subsidiary, 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 MoprhoSys Group by Segment ( ›› S E E F I G U R E 0 2 – MorphoSys’s Product Pipeline ( Revenues of the MoprhoSys Group by Segment (page 28) page 28 page 28) page 30 MorphoSys’s Product Pipeline (page 30) page 30) PROPRIE TARY DEVEL OPMEN T An important goal of MorphoSys is to increase enterprise value through proprietary drug development. To achieve this goal, the Company is focusing on cancer and selected programs in inﬂ ammatory diseases. ONC OLO GY The ability of monoclonal antibodies* to bind to speciﬁ c anti- gens* on tumors or activate the immune system against can- cer to unleash a therapeutic eﬀ ect in patients has led to their dominant role in targeted cancer therapies. According to a study by the QuintilesIMS Institute, expenditures in oncology reached approximately US$ 75 billion worldwide in early 2017. Expenditures are projected to increase to US$ 120 – 135 billion in the year 2021. MorphoSys is currently investing in the clini- cal development of two cancer programs: MOR208 and MOR202. MOR208 is directed against the target molecule CD19*, which is implicated in many B cell malignancies. CD19 is broadly and homogeneously expressed across tumor cells of diﬀ erent B cell malignancies including DLBCL* (diﬀ use large B cell lymphoma) and CLL* (chronic lymphocytic leukemia). CD19 enhances B cell receptor signaling, which is selectively expressed on B cells and an important factor in B cell survival, making CD19 a potential target in B cell malignancies. The market research ﬁ rm Pharma- ceutical Processing expects the therapeutic market for the B cell malignancy non-Hodgkin’s lymphoma (NHL*) to reach approxi- mately US$ 5.5 billion in 2024. Current biological therapies for mately mately US$ 5.5 billion in 2024. Current biological therapies the treatment of B cell malignancies, including rituximab (trade name Rituxan® and MabThera®) and obinutuzumab (trade name Gazyva®), are directed against the CD20* target mole- cule which is also a surface marker of B cells*. MOR208 has been modiﬁ ed in the Fc part* of the antibody with the goal of enhancing its activity. This is intended to lead to higher anti- body-dependent cell-mediated cytotoxicity (ADCC*), as well as an improvement in antibody-dependent cellular phagocytosis (ADCP*) and, thereby, more eﬀ ective tumor cell killing by the body’s own immune system. The most advanced therapeutic approach against CD19 is currently the bispeciﬁ c* antibody blinatumomab (trade name Blincyto®) approved for acute lym- phoblastic leukemia (ALL*). Other clinical programs directed against the same target molecule use alternative approaches to increase the antibody’s eﬃ cacy, for example by coupling with toxic substances or changing the antibody’s glycosylation-pat- tern (which also leads to increased ADCC and ADCP). 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 and then engineers them outside of the body so that they can recognize 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 ﬁ eld of B cell malignancies. In 2017, two CAR-T approaches were approved in blood cancer indications: axicabtagene ciloleucel (axi-cel) for DLBCL and tisagenlecleucel (CTL019) for ALL. MOR202 is directed against the target molecule CD38* and is currently being developed for the treatment of multiple myeloma* (MM), a form of bone marrow cancer. CD38 is a highly expressed and validated target in multiple myeloma. Preclinical* ﬁ ndings also support an anti-CD38 approach in other therapeutic ﬁ elds beyond multiple myeloma including solid tumors such as non-small-cell lung cancer (NSCLC). After MorphoSys regained its rights to MOR202 from Celgene in March 2015, the Company continued developing MOR202 inde- pendently in an ongoing phase 1/2a study. Although MM is a relatively small area of oncology in terms of frequency of occur- rence, the MM market has shown strong growth in recent years. However, there is still no standard treatment for MM available and a medical need for treatment options with better survival rates and lower side eﬀ ects. Despite signiﬁ cantly higher sur- vival rates, this disease is seldom curable, and a majority of patients experience a relapse. This has increased the attractive- ness of alternative treatments, such as those targeting CD38. The approval of the CD38 antibody daratumumab (trade name Darzalex®) by the FDA* (Food and Drug Administration) in No- vember 2015 validated this treatment approach. MorphoSys is seeking a partner for the further development of MOR202 in MM. The Company entered its ﬁ rst regional partnership in China with I-Mab at the end of 2017. *S E E G L O S S A R Y – page 170 28 G r o u p M a n a g e m e n t R e p o r t Operations and Business Environment 01 Revenues of the MorphoSys Group by Segment (in million €)1 1 Diﬀ erences due to rounding. 2 Group revenues from continuing operations; sale of AbD Serotec to Bio-Rad was announced in 2012, and therefore respective revenues were reclassiﬁ ed as dis- continued operations in accordance with IFRS 5. 78.02 64.0 106.2 49.7 66.8 51.0 49.0 59.9 46.3 49.1 49.4 26.9 15.0 17.6 0.6 2013 2014 2015 2016 2017 partnered disc ov ery pro prie tary de v elo pment MorphoSys and its partner Aptevo Therapeutics (formerly Emergent BioSolutions) have been developing MOR209/ES414 in a phase 1 clinical study in patients suﬀ ering from metastatic castration-resistant prostate cancer (mCRPC*) since 2015. MOR209/ES414 is a bispeciﬁ c anti-PSMA/anti-CD3* antibody based on Aptevo’s ADAPTIR™ platform. In 2017, in the context of prioritizing its development programs, MorphoSys termi- nated its cooperation with Aptevo. INFL AMMATORY AND AUTOIMMUNE DISE ASES* Chronic inﬂ ammatory and autoimmune diseases aﬀ ect millions of patients worldwide and impose an enormous social and eco- nomic burden. The QuintilesIMS Institute estimates the global market for the treatment of autoimmune diseases will be in the range of US$ 75 billion to US$ 90 billion in the year 2021. MOR103/103/103 GSK3196165 is a HuCAL antibody, which MorphoSys fully out-licensed to GlaxoSmithKline (GSK) in 2013. GSK is developing the antibody independently and bears all of the related costs. MorphoSys participates in the compound’s devel- opment and commercialization through milestone payments up to a total of € 423 million and through tiered, double-digit royalties on net sales. In 2013, MorphoSys received an upfront payment of € 22.5 million. MOR103/GSK3196165 is directed against the target molecule GM-CSF* (granulocyte macrophage colony-stimulating factor), a central player in the emergence of inﬂ ammatory diseases such as rheumatoid arthritis* (RA). Bio- technologically produced drugs already comprise the majority of this market’s total revenue. The overall market for RA drugs is growing steadily, and GBI Research expects it will reach US$ 19 billion in the year 2020. MorphoSys estimates that MOR103/GSK3196165 has the potential to be the ﬁ rst marketed anti-GM-CSF antibody. MOR106 is the ﬁ rst antibody candidate derived from a strate- gic alliance with the Belgian company Galapagos NV for the identiﬁ cation and development of new antibody candidates. MOR106 has been in phase 1 clinical development for atopic dermatitis since 2016. It is the ﬁ rst publicly disclosed monoclo- nal antibody* targeting IL-17C in clinical development world- wide. MOR106 selectively targets and inhibits IL-17C, which is associated with inﬂ ammatory skin disorders. Atopic dermatitis, also known as atopic eczema or neurodermatitis, is a chronic pruritic (itching) inﬂ ammatory skin disease. The National Eczema Association estimates that atopic dermatitis aﬀ ects over 30 million Americans or up to 25 % of children and 2 – 3 % of adults. 60 % of AD patients are diagnosed in the ﬁ rst year of life, and 90 % of patients have a disease onset before age ﬁ ve. Symptoms commonly fade during childhood, however, approximately 10 – 30 % of the patients will suﬀ er from atopic dermatitis for life. A smaller percentage ﬁ rst develop symptoms as adults. It is planned to initiate a phase 2 study together with Galapagos in the ﬁ rst half of 2018. 01 Revenues of the MorphoSys Group by Segment (in million €)1 78.02 64.0 106.2 49.7 66.8 51.0 49.0 49.1 49.4 59.9 46.3 26.9 15.0 17.6 0.6 Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 29 The acquisition of the Dutch pharmaceutical company Lanthio Pharma B.V. in 2015 enhanced MorphoSys’s proprietary port- folio with the addition of MOR107 (formerly LP2). MOR107 is a novel lanthipeptide that has demonstrated angiotensin II type 2 (AT2) receptor-dependent activity in preclinical in vivo studies, and may have the potential to treat a variety of dis- eases. MorphoSys is currently evaluating the potential of MOR107 in the ﬁ eld of oncology. INFLUENCING FAC TORS A political goal of many countries is to provide proper medical care for the public as demographic change drives the need for new forms of therapy. 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 tightened their healthcare restrictions and are closely monitoring drug pricing and reimbursement. Generic competition, which is already common in the ﬁ eld of small molecule drugs, now poses an increasing challenge to the biotechnology industry due to drug patent expiries. The technological barriers for generic biopharmaceuticals, or bio- similars*, will remain high. Nevertheless, many drug manufac- turers, particularly those from Europe and Asia, are now enter- ing this market and placing more competitive pressure on established biotechnology companies. In the US, the approval of biosimilars as an alternative form of treatment has been very slow; they are, however, gaining more attention because of increasing pressure in the healthcare sector to reduce costs. Industry experts believe the global market for biosimilars will reach US$ 28 billion in 2020. PAR T NERED DIS COVERY In the Partnered Discovery segment, MorphoSys applies tech- nologies for the research, development and optimization of therapeutic antibodies as drug candidates in partnership with pharmaceutical and biotechnology companies. While the devel- opment costs are borne by the respective partners, MorphoSys proﬁ ts from research ﬁ nancing, milestone payments and poten- tial 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 alliance, which ended at the end of November 2017, was ex- panded in 2012 through a supplementary cooperation agree- ment under which the companies collaborated on creating therapeutic antibodies using MorphoSys’s next-generation antibody platform Ylanthia in addition to HuCAL. The active partnership with Novartis ended at the end of November 2017 in accordance with the contract. Even after the end of the active partnership, MorphoSys will continue to beneﬁ t from Novartis’s products based on antibodies originating from the collabora- tion by means of potential success-based milestone payments and royalties. As Novartis in-licensed the HuCAL technology in 2014, it can be used to start new antibody programs in the future. At the end of 2017, there were 14 antibodies in clinical development resulting from this cooperation. Partnered Discovery programs for drug development include not only programs in MorphoSys’s core areas of oncology and inﬂ ammatory diseases, but also those in indications where the Company has not yet established proprietary expertise. Examples of Partnered Discovery programs include the following: Guselkumab, a HuCAL antibody targeting IL-23, is being de- veloped by MorphoSys’s partner Janssen in plaque psoriasis* and psoriatic arthritis* (PsA). In July 2017, Janssen received FDA approval for guselkumab in the United States for the treat- ment of moderate-to-severe plaque psoriasis. The ﬁ rst HuCAL commercial product is now available to patients in the United States under the brand name Tremfya® (guselkumab). The European Medicines Agency (EMA*) also approved Tremfya® (guselkumab) in Europe shortly after its approval in Canada in mid-November. Psoriasis is a chronic, autoimmune inﬂ amma- tory disorder of the skin characterized by abnormal itching and physically painful skin areas. It is estimated that about 125 mil- lion people worldwide have psoriasis with approximately 25 % suﬀ ering from cases that are considered moderate-to-severe. Independent market experts forecast the market for psoriasis to grow from € 7.5 billion in 2014 to € 12 billion in the year 2024. *S E E G L O S S A R Y – page 170 30 G r o u p M a n a g e m e n t R e p o r t Operations and Business Environment 02 MorphoSys’s Product Pipeline (March 8, 2018) * S E E G L O S S A R Y : page 170 1 Market 2 We still consider Tremfya® a phase 3 compound due to ongoing studies in various indications. 3 For development in the Greater China market (China, Hong Kong, Taiwan, Macao). 4 A phase 1 study in healthy volunteers was completed. MOR107 is currently in preclinical investigation with a focus on oncology indications. P R O G R A M / P A R T N E R I N D I C AT I O N PH AS E 1 2 3 M 1 P R O G R A M / P A R T N E R I N D I C AT I O N PH AS E 1 2 3 M 1 Tremfya® 2 (guselkumab) / Janssen/J&J Plaque psoriasis Plaque psoriasis (VOYAGE 1) Plaque psoriasis (VOYAGE 2) Pustular/erythrodermic psoriasis* Plaque psoriasis Plaque psoriasis (POLARIS) Plaque psoriasis (POLARIS) Palmoplantar pustulosis* Moderate-to-severe plaque psoriasis (SelfDoseTM device) Moderate-to-severe plaque psoriasis (ECLIPSE) Psoriatic arthritis* (PsA) (Discover-1) Psoriatic arthritis* (PsA) Gantenerumab / Roche Mild Alzheimer’s disease (Marguerite RoAD) Prodromal Alzheimer’s disease Genetically predisposed for Alzheimer’s disease (DIAN) Safety, tolerability and pharmacokinetics* (sc) Pain, tolerability, safety and pharmacokinetics (sc) MOR208 / not partnered Diﬀ use large B cell lymphoma (DLBCL*) (B-MIND*) Chronic lymphocytic leukemia (CLL*) or small lymphocytic lymphoma (SLL*) (COSMOS*) Diﬀ use large B cell lymphoma (DLBCL*) (L-MIND*) Anetumab ravtansine (BAY94-9343) / Bayer Mesothelioma* (MPM) Cancer multi-indications BHQ880 / Novartis Multiple myeloma* (MM) (renal insuﬃ ciency) Smoldering multiple myeloma* Bimagrumab (BYM338) / Novartis Muscular atrophy hip fracture surgery Sarcopenia (dose-ranging) Sarcopenia (withdrawal extension study) Type 2 diabetes CNTO6785 / Janssen/J&J Chronic obstructive pulmonary disease (COPD) Rheumatoid arthritis* (RA) MOR103 ( GSK3196165) / GlaxoSmithKline Rheumatoid arthritis* (RA) Rheumatoid arthritis* (RA) (mechanistic study) Hand osteoarthritis MOR202 / I-Mab Biopharma3 Multiple myeloma* Nov-12 (MAA868) / Novartis Prevention of thrombosis Atrial ﬁ brillation Setrusumab (BPS804) / Mereo/Novartis Brittle bone disease (OI) (Type I, III, IV) (ASTEROID) Tesidolumab (LFG316) / Novartis Paroxysmal nocturnal hemoglobinuria Utomilumab (PF-05082566) / Pﬁ zer Breast cancer (AVIATOR) Acute myeloid leukemia (AML) Acute myeloid leukemia (AML) Advanced malignancies (combo with avelumab and PF-04518600) Solid tumors (combo with ISA101b vaccination) Solid tumors, NHL* (combo with rituximab) Solid tumors (combo with mogamulizumab) Solid tumors (combo with PF04518600) Colorectal cancer (combo with cetuximab & irinotecan) Advanced ovarian cancer (T cell immunotherapy) Breast cancer (combo with trastuzumab emtansine or trastuzumab) Diﬀ use large B cell lymphoma (Javelin DLBCL*) (combo with avelumab) VAY736 / Novartis Pemphigus vulgaris Idiopathic pulmonary ﬁ brosis Primary Sjögren‘s syndrome Rheumatoid arthritis* (RA) ADCC* mediated B cell* depletion and BAFF-R blockade (AMBER) Primary Sjögren’s syndrome (eﬃ cacy & safety) Chronic lymphocytic leukemia (combo with ibrutinib) Xentuzumab (BI-836845) / BI Breast cancer Castration-resistant prostate cancer (CRPC) (combo with enzalutamide) Solid tumors (Japan) Solid tumors (combo with abemaciclib) EGFR* mutant non-small-cell lung cancer (NSCLC) BAY109388 4 / Bayer Hemophilia Elgemtumab ( L JM716) / Novartis HER2+ cancer (combo with BYL719 & trastuzumab) MOR106 / Galapagos Atopic dermatitis MOR107 4 ( L P2-3) / not partnered Not disclosed NOV-7 (CLG561) / Novartis Eye diseases NOV-8 / Novartis Inﬂ ammation NOV-9 (LKA651) / Novartis Diabetic eye diseases NOV-10 (PCA062) / Novartis Cancer NOV-11 / Novartis Blood disorders NOV-13 (HKT288) / Novartis Cancer NOV-14 / Novartis Asthma PRV-300 (CNTO3157) / ProventionBio Colitis Vantictumab (OMP-18R5) / OncoMed Breast cancer (combo with paclitaxel) Pancreatic cancer (combo with nap-paclitaxel & gemcitabine) m o r pro gr am out- licensed mor pro gr am partnered disc ov ery pro gr am Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 31 Gantenerumab is a HuCAL antibody targeting amyloid beta, which is being developed by MorphoSys’s partner Roche as a potential treatment for Alzheimer’s disease. This compound is being investigated in several clinical studies to see if there is a positive eﬀ ect from intervening at an early stage in the dis- ease’s progression. In two of these studies, Roche is evaluating the compound in around 1,000 patients with mild Alzheimer’s disease and 800 patients with prodromal Alzheimer’s disease. Roche has converted these trials into open-label studies to test higher doses after the temporary discontinuation of earlier studies at the end of 2014. The data from the open-label exten- sion had been presented at the CTAD (Clinical Trials* on Alz- heimer’s Disease) 2017, showing signiﬁ cantly greater amyloid reduction with higher doses of gantenerumab compared to lower doses. Roche announced to examine higher doses of gan- tenerumab in two phase 3 trials. There are currently no drugs available that fundamentally improve the course of Alzheimer’s disease. *S E E G L O S S A R Y – page 170 Research and Development and Business Performance 2017 BUSINESS PERF ORMANCE MorphoSys’s business is strongly focused on advancing its therapeutic programs in research and development to beneﬁ t patients suﬀ ering from serious diseases and to increase the Company’s value. With the clinical development of proprietary programs as the focal point of the Company, we strive to gain access to novel disease-speciﬁ c target molecules, advanced product candidates and innovative technology platforms, so as to advance our proprietary development portfolio. MorphoSys also participates in the success of its partners’ therapeutic pro- grams. The ﬁ rst antibody based on MorphoSys’s technology has been available in the US market since the middle of 2017. The key measures of value and success of MorphoSys’s re- search and development include: • the initiation of projects and the progression of individual development programs • collaborations and partnerships with other companies to broaden the Company’s technology base and pipeline of com- pounds and commercialize its therapeutic programs • clinical and preclinical research results • regulatory guidance of health authorities to pursue commer- cialization of individual therapeutic programs • robust patent protection to secure MorphoSys’s market position COL L ABORAT IONS AND PAR T NERSHIP S PROPRIE TARY DE VE LOPMENT Since mid-2016, MorphoSys and the University of Texas MD Anderson Cancer Center have been working together in a stra- tegic alliance. The partners plan to jointly identify and validate novel anti-cancer antibodies and to develop them further until they reach the clinical proof-of-concept in the respective on- cology indications. To accomplish this, MorphoSys is applying its Ylanthia technology platform. The alliance continued in the reporting year and is expected to encompass multiple target molecules and programs. Current programs are focused on HLA peptide complexes in the area of hematological diseases. At the end of November 2017, MorphoSys and I-Mab Biopharma announced that they had signed an exclusive regional licensing agreement for MOR202. Under the terms of the agreement, I-Mab has the exclusive rights to develop and commercialize MOR202 in China, Taiwan, Hong Kong and Macao. MorphoSys received an immediate upfront payment of US$ 20 million. The Company is also entitled to receive additional success-based clinical and commercial milestone payments from I-Mab of up to US$ 100 million, as well as tiered double-digit royalties on net sales of MOR202 in the agreed regions. I-Mab intends to start clinical development of MOR202 to treat patients with multiple myeloma in China in 2018. PAR TNERED DISC OVERY In November 2016, MorphoSys and LEO Pharma agreed to form a strategic alliance for the discovery and development of thera- peutic antibodies for the treatment of skin diseases. Under the terms of the agreement, MorphoSys is applying its Ylanthia technology platform to generate antibody candidates against targets selected by LEO, and will conduct all development ac- tivities up to the start of clinical testing. LEO Pharma will be responsible for clinical development and commercialization of resulting drugs in all indications outside of cancer. The col- laboration continued in 2017 and is currently working on two projects. The active collaboration with Novartis ended at the end of November 2017 in accordance with the contract. Novartis did not exercise an option to extend the partnership that was pro- vided in the contract. Although active collaboration has ended, the development of product candidates derived from the use of the Company’s technologies will continue and new programs can be initiated under a license acquired by Novartis. The fur- ther development of these programs by Novartis could lead to additional milestone and royalty payments in the future. 32 G r o u p M a n a g e m e n t R e p o r t Operations and Business Environment 03 Active Clinical Studies with MorphoSys Anti- bodies (December 31) P H A S E 1 2 3 24 16 3 24 27 8 29 19 12 29 25 10 27 31 14 2013 2014 2015 2016 2017 PROJEC T INI T IAT IONS AND PROGRESS, T RIAL EX T ENSIONS At the end of the 2017 ﬁ nancial year, the number of therapeutic programs in the MorphoSys pipeline remained unchanged at 114 (December 31, 2016: 114 programs), comprising Propri- etary Development and Partnered Discovery projects. One product from the Partnered Discovery segment received mar- ket approval in 2017 in the United States, Europe and Canada. At the end of 2017, MorphoSys had 13 projects (December 31, 2016: 14) in its proprietary development portfolio, ﬁ ve of them in its clinical pipeline and eight in preclinical development or in the discovery phase. The number of programs being pursued by our partners in the Partnered Discovery segment totaled 101 (December 31, 2016: 100), 23 of which were in clinical develop- ment, 24 in preclinical development and 54 in the discovery phase. MorphoSys’s partnered and proprietary clinical pipeline currently comprises 28 unique compounds that are being eval- uated in more than 70 clinical trials. ›› S E E F I G U R E 0 3 – Active Clinical Studies with MorphoSys Antibodies ( page 32 Active Clinical Studies with MorphoSys Antibodies (page 32) page 32) PROPRIE TARY DE VELOPMENT The clinical studies to investigate MOR208 in combination with other cancer drugs for B cell malignancies were started in 2016 and continued in 2017. The main focus of the current MOR208 development program is on relapsed or refractory diﬀ use large B cell lymphoma (r/r DLBCL*). Two of the three ongoing MOR208 studies, namely the L-MIND* and B-MIND* trials, are being conducted in this indication. Both trials are focusing on r/r DLBCL patients who are not eligible for high-dose chemotherapy and subsequent autologous stem cell transplantation. The available therapy options for this group of patients are currently very limited, which is why the Company sees a high unmet medical need for new treatment alternatives. A strategic goal of MorphoSys is to ﬁ nd the fastest path to market for MOR208 in this indication. • The L-MIND (Lenalidomide-MOR208 IN DLBCL) study initi- ated in April 2016 is evaluating MOR208 in combination with the immunomodulatory drug lenalidomide in patients suﬀ er- ing from relapsed or refractory diﬀ use large B cell lymphoma (DLBCL). The trial is an open-label, single-arm study with the primary endpoint being the overall response rate (ORR*) and multiple secondary endpoints, including progression-free survival (PFS*), overall survival (OS*) and time to progres- sion (TTP*). • The phase 2/3 clinical trial B-MIND* (Bendamustine-MOR208 IN DLBCL) is designed to evaluate the safety and eﬃ cacy of MOR208 combined with the chemotherapeutic agent benda- mustine in comparison to rituximab plus bendamustine. In June 2017 this study transitioned into its pivotal phase 3 part. The start of the phase 3 trial triggered a milestone payment to Xencor, Inc. that was paid in July 2017. B-MIND will enroll 330 adult patients worldwide with relapsed or refractory DLBCL who are not eligible for autologous stem cell trans- plantation and high-dose chemotherapy. This is the ﬁ rst pivotal study of an antibody from MorphoSys’s proprietary pipeline. Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 33 • In addition to the two trials in r/r DLBCL, MorphoSys is cur- rently evaluating MOR208 in a phase 2 trial in chronic lym- phocytic leukemia (CLL*) and small lymphocytic lymphoma (SLL*). The trial, named COSMOS* (CLL patients assessed for ORR & Safety in MOR208 Study), is designed to evaluate MOR208 in combination with the cancer drugs idelalisib (since 2016) and venetoclax (since 2017). The study enrolls patients for whom prior therapy with a BTK inhibitor* such as ibrutinib was either unsuccessful or no longer successful. Currently these patients have very limited therapy options and therefore, this indication represents a high unmet medi- cal need. The study is currently investigating the clinical safety of the treatment combinations. The HuCAL antibody MOR202 targeting CD38 is currently be- ing evaluated in a phase 1/2a dose-escalation study alone and in combination with the immunomodulatory cancer drugs (IMiDs) lenalidomide and pomalidomide, in each case with dexamethasone, in patients with relapsed/refractory multiple myeloma (MM). Patient enrollment for the study has been com- pleted. The subsequent observation of the patients will continue. MOR106 is the third drug candidate from MorphoSys’s propri- etary portfolio in clinical development. The antibody is being developed by MorphoSys and its partner Galapagos NV, and a phase 1 clinical trial has been completed. In addition to investi- gating MOR106 in healthy volunteers, the trial was expanded in 2017 to include patients suﬀ ering from atopic dermatitis. The study was completed in August 2017, and the ﬁ rst results indi- cating clinical activity were announced in September. MOR106 is the ﬁ rst antibody based on MorphoSys’s proprietary Ylanthia technology to enter clinical development, and the ﬁ rst publicly disclosed antibody targeting IL-17C in clinical development worldwide. Galapagos and MorphoSys jointly discovered MOR106 and are co-developing this compound in further clini- cal development. MOR107 is the ﬁ rst lanthipeptide in MorphoSys’s clinical pipeline. The peptide is based on the proprietary technology platform belonging to MorphoSys’s Dutch subsidiary Lanthio Pharma B.V. This compound is a selective agonist of the angio- tensin II receptor type 2 (AT2-R). Lanthipeptides* are a class of modiﬁ ed peptides that have been engineered for improved sta- bility and selectivity. In February 2017, we initiated a phase 1 study in healthy volunteers. In May 2017, the ﬁ rst part of the clinical study was completed and the study was terminated. MOR107 is currently in preclinical* investigation with a focus on oncology indications. *S E E G L O S S A R Y – page 170 MOR209/ES414 was co-developed with Aptevo Therapeutics, a spin-oﬀ of Emergent BioSolutions, in a phase 1 study in patients suﬀ ering from metastatic, castration-resistant prostate cancer. In September 2017, following a review of its development port- folio, MorphoSys ended the cooperation with Aptevo Therapeu- tics Inc. for the program’s further development. The rights to the drug candidate’s development and commercialization were returned to Aptevo. MOR103/GSK3196165 was out-licensed to GlaxoSmithKline (GSK). GSK is currently evaluating this antibody in phase 2b and phase 2a clinical studies in patients with rheumatoid arthritis (RA) as well as in a phase 2a trial in patients suﬀ ering from inﬂ ammatory hand osteoarthritis. PAR TNERED DISC OVERY In January 2017, MorphoSys announced that its partner Novartis would initiate a phase 2 clinical trial with bimagrumab in an additional indication. The trial is designed to assess the safety, pharmacokinetics and eﬃ cacy of the HuCAL antibody versus placebo in around 60 obese patients with type 2 diabetes. In March 2017, MorphoSys disclosed that its partner Roche planned to initiate a new pivotal phase 3 program with gan- tenerumab in patients with prodromal or mild Alzheimer’s dis- ease. Roche will initiate two phase 3 clinical trials under the names GRADUATE-1 and GRADUATE-2. Gantenerumab is a monoclonal antibody derived from MorphoSys’s HuCAL Tech- nology, which is directed against amyloid beta. In May, MorphoSys’s licensee Janssen announced plans for new phase 3 clinical studies with guselkumab, which include a study to evaluate the comparative eﬃ cacy of guselkumab versus secukinumab for the treatment of moderate-to-severe plaque psoriasis (ECLIPSE study). Janssen initiated the ECLIPSE study in the ﬁ rst half of 2017. In September 2017, Janssen initiated two phase 3 studies in psoriatic arthritis evaluating the eﬃ cacy and safety of guselkumab in this in- ﬂ ammatory disease, which aﬀ ects both the joints and the skin. Janssen made a milestone payment to MorphoSys in connection with the initiation of these new phase 3 studies. Janssen also announced a phase 3 program to evaluate guselkumab in Crohn’s disease. Guselkumab is a fully human anti-IL-23 p19 subunit monoclonal antibody developed by Janssen and was generated by MorphoSys utilizing its proprietary HuCAL anti- body library technology. 34 G r o u p M a n a g e m e n t R e p o r t Operations and Business Environment CL INIC AL S T UD Y DATA F ROM CURREN T PROJEC T S PROPRIE TARY DE VELOPMENT In 2017, MorphoSys announced data from clinical studies of its proprietary drug programs MOR202 and MOR208 at several scientiﬁ c conferences. The open-label, single-arm phase 2 study known as L-MIND (Lenalidomide-MOR208 IN DLBCL) is designed to evaluate the safety and eﬃ cacy of MOR208 in combination with lenalido- mide in patients with relapsed or refractory diﬀ use large B cell lymphoma (r/r DLBCL). DLBCL is the most common form of non-Hodgkin’s lymphoma (NHL). In 2017, MorphoSys presented preliminary data from L-MIND at scientiﬁ c conferences in- cluding the Annual Meeting of the American Society of Clinical Oncology (ASCO), the Congress of the European Hematology Association (EHA), the Lymphoma Meeting in Lugano and the Annual Meeting of the American Society of Hematology (ASH). The data presented at the ASH conference in December 2017 also formed the basis for the breakthrough therapy designation granted by the FDA in 2017. These data showed, based on 51 patients enrolled, 44 of whom were eligible for eﬃ cacy evaluation by the investigators at the time of data-cut oﬀ June 13, 2017, an objective response to the treatment in 52 % ( overall response rate, ORR) and a complete remission in 32 % (CR rate) of the patients. The preliminary median progression- free survival (mPFS) was 11.3 months. There was no unexpected toxicity* observed with combination therapy. There were also no infusion-related reactions (IRRs) reported due to the adminis- tration of MOR208. The administered dose of lenalidomide needed to be reduced in 45 % of patients. In early December, the Company announced that patient re- cruitment had been completed as required by the study proto- col, 81 patients having been enrolled in the study. Latest interim data (cut-oﬀ date December 12, 2017) based on 81 patients enrolled, 68 of whom were available for eﬃ cacy as- sessment by the investigators, showed a overall response rate (ORR) of 49 % and a CR rate of 31 %. At the time of data-cut oﬀ , the preliminary PFS rate at 12 months was 50.4 % and the pre- liminary mPFS had not been reached. 29 out of 33 responses (88 %) were ongoing at the time of data-cut oﬀ ; median time to response was 1.8 months, median time to complete response was 3.6 months. No unexpected toxicities were observed for the treatment combination and no infusion-related reactions were reported for MOR208. The most frequent adverse events with a toxicity grading of 3 or higher were neutropenia, thrombocyto- penia, febrile neutropenia and pneumonia, observed in 36 %, 12 %, 7 % and 7 % of patients, respectively. 40 % of patients re- quired a reduction of their lenalidomide dose, from a starting dose of 25 mg daily. MorphoSys’s anti-CD38 antibody MOR202 is currently being evaluated in a phase 1/2a clinical study in pretreated patients suﬀ ering from relapsed/refractory multiple myeloma. In June 2017, the Company presented updated safety and eﬃ cacy data from this ongoing study at the ASCO Annual Meeting. MOR202 was administered as a 2-hour infusion up to the highest dose of 16 mg/kg. Infusion-related reactions (IRRs) occurred in only 6 % of patients in the clinically relevant dose cohorts of MOR202 (4 mg/kg, 8 mg/kg, 16 mg/kg) and were limited to grades 1 and 2. No unexpected safety signals were observed. Patients treated with MOR202 in combination with LEN/ LEN DEX and a me- LEN/ dian of three prior treatment regimens showed a response rate of 71 % based on the “intent-to-treat” (ITT) population with the treatment of nine patients still ongoing at the data cut-oﬀ . The median progression-free survival (mPFS) rate of this cohort was not yet reached. Patients treated with MOR202 in combina- tion with POM/DEX with a median of four prior treatment regi- mens showed an objective response rate of 46 % with treatment of eight patients still ongoing at the data cut-oﬀ . It is important to note that the data from this cohort were still relatively imma- ture and that responses in this patient group are often observed after a longer treatment time. The current median PFS of this combination is 17.5 months after a median follow-up period of 8.5 months. MOR106, an antibody from the Company’s Ylanthia platform directed against IL-17C and co-developed with Galapagos, was evaluated in a phase 1 study initiated in 2016. The placebo-con- trolled study investigated the safety, tolerability and pharma- cokinetic proﬁ le of MOR106 when administered in single as- cending doses in healthy volunteers as well as in multiple ascending doses in patients suﬀ ering from atopic dermatitis. At the end of September 2017, MorphoSys and Galapagos pub- lished initial results from the study. No clinically relevant safety signals were observed. Any adverse drug reactions ob- served in relation to MOR106 were mild to moderate and tran- sient in nature. No serious adverse events or infusion-related reactions were recorded. Even though the study was not statis- tically designed to show diﬀ erences in eﬃ cacy between treat- ment groups, an improvement of at least 50 % measured by the Eczema Area and Severity Index (EASI 50) at week 4 was ob- served in 83 % of patients (5 out of 6) at the highest dose level of MOR106 compared to only 17 % of patients (1 out of 6) who were receiving a placebo. These ﬁ rst signs of MOR106’s clinical ac- tivity, coupled with the fact that it is generally well-tolerated, support its planned progression to a phase 2 clinical study. In February 2018, results from this study were presented in the late breaking abstracts session at the American Academy of Dermatology (AAD) Annual Meeting in San Diego, USA. Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 35 In the ﬁ rst quarter of 2017, MOR107 became the ﬁ rst lanthi- peptide in MorphoSys’s clinical pipeline to enter clinical devel- opment. In May 2017, MorphoSys announced it had completed the ﬁ rst part of a phase 1 clinical study in healthy volunteers and terminated the study. Based on an initial analysis of the blinded data from the volunteers enrolled to date, no clinically relevant safety signals were observed in all tested doses and all adverse events observed thus far were temporary and mild. PAR TNERED DISC OVERY During the reporting year, partners of MorphoSys continued to develop HuCAL antibodies and presented data on the study re- sults at scientiﬁ c conferences and in press releases. In March 2017, MorphoSys announced that its licensee Janssen presented positive results from two phase 3 studies evaluating guselkumab, a fully human anti-IL-23 monoclonal antibody, in patients with moderate-to-severe plaque psoriasis. Janssen pre- sented data from the VOYAGE-2 and NAVIGATE studies at the 2017 annual meeting of the American Academy of Dermatology (AAD) in Orlando, Florida. As previously announced in Novem- ber 2016, the results of both studies were included in Janssen’s application for guselkumab’s market approval in the United States and Europe. In February 2018, Janssen reported data from the phase 3 VOYAGE-2 study of guselkumab, which demon- strated long-term skin clearance in patients with moderate- to-severe plaque psoriasis. According to Janssen, the new data showed that a vast majority of patients (or 86 %) with moderate- to-severe plaque psoriasis receiving guselkumab who achieved at least 90 percent improvement of the signs and symptoms of their psoriasis measured by the Psoriasis Area and Severity Index (PASI 90) at week 28, maintained a PASI 90 response with continuous treatment through week 72. At the end of July 2017, MorphoSys announced that its partner Bayer reported the results of a phase 2 clinical study examin- ing anetumab ravtansine in patients with malignant pleural mesothelioma*. The study did not meet its primary endpoint of progression-free survival in comparison to vinorelbine. Ane- tumab ravtansine is an antibody-drug conjugate (ADC*) di- rected against mesothelin, and is based on an antibody made using MorphoSys’s HuCAL technology. Malignant pleural me- sothelioma is a rare cancer and commonly caused by exposure to asbestos. Bayer stated that it would continue to investigate the compound in clinical studies in other cancer indications. REGUL AT ORY EVEN T S PROPRIE TARY DE VELOPMENT On October 23, 2017, the US Food and Drug Administration (FDA*) granted breakthrough therapy designation to MOR208 in combination with lenalidomide for the treatment of blood cancer patients with relapsed or refractory (r/r) diﬀ use large B cell lymphoma (DLBCL) who are not eligible for high-dose chemotherapy and autologous stem cell transplantation. FDA’s breakthrough therapy designation is based on preliminary data from the ongoing phase 2 L-MIND study, which is evaluat- ing the safety and eﬃ cacy of MOR208 in combination with lenalidomide in this patient group. FDA breakthrough therapy designation is intended to expedite the development and re- view of drug candidates and their combination with other drugs. The FDA grants this designation when preliminary data indicate that the drug candidate demonstrates substantial im- provement over existing therapies in the treatment of a serious or life-threatening disease. PAR TNERED DISC OVERY In July 2017, MorphoSys’s licensee Janssen announced it had received US market approval from the FDA for Tremfya® (gusel- kumab) for the treatment of adult patients suﬀ ering from moderate-to-severe plaque psoriasis. MorphoSys received a milestone payment from Janssen related to the approval. In mid-September 2017, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA*) recommended approval in Europe of Tremfya® (guselkumab) for the treatment of patients with moderate-to-severe plaque psoriasis. The EU Commission granted European approval in November 2017. Also in November, Janssen announced that it had received Health Canada approval in Canada for Tremfya® (guselkumab) for the treatment of adult patients suﬀ ering from moderate-to-severe plaque psoriasis. *S E E G L O S S A R Y – page 170 PAT EN T S During the 2017 ﬁ nancial year, MorphoSys continued to con- solidate and expand the patent protection of its development programs and its growing technology portfolio, which are the Company’s most important value drivers. In February 2017, MorphoSys announced that it added a second patent with US Patent Number 9,200,061 to its lawsuit against Janssen Biotech and Genmab, A/S. Later in the year, MorphoSys added a third US patent, US 9,758,590, to the lawsuit. In April 2016, MorphoSys ﬁ led a lawsuit in the United States at the Dis- trict Court of Delaware against Janssen Biotech and Genmab A/S for patent infringement of US Patent Number 8,263,746. In ﬁ ling the lawsuit, MorphoSys seeks redress for infringement by Janssen’s and Genmab’s daratumumab, a CD38-directed monoclonal antibody indicated for the treatment of certain patients with multiple myeloma. At the end of the ﬁ nancial year, the Company maintained over 50 diﬀ erent proprietary patent families worldwide in addition to the numerous patent families it pursues with its partners. 36 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 Group Development In early January 2017, MorphoSys announced the appointment of Dr. Malte Peters as the Company’s new Chief Development Oﬃ cer. Dr. Peters assumed his new position on March 1, 2017, succeeding Dr. Arndt Schottelius who was Chief Development Oﬃ cer until February 28, 2017. Dr. Schottelius left the Com- pany to pursue new opportunities. Dr. Peters was previously employed as Global Head Clinical Development Biopharmaceu- ticals at Novartis’s subsidiary Sandoz. For a period of one year as of March 1, 2017, Dr. Peters was entitled to request the trans- fer of a maximum of € 500,000 in Company treasury shares. A request was made in March 2017 upon which a total of 9,505 of the Company’s treasury shares was transferred to Dr. Peters. At the Annual General Meeting of MorphoSys AG on May 17, 2017, shareholders approved all resolutions of the Company’s management with the required majority of votes. Krisja Vermeylen was newly elected to the Supervisory Board, replac- ing Karin Eastham whose resignation took eﬀ ect at the end of the Annual General Meeting on May 17, 2017. Ms. Vermeylen holds the position of Senior Vice President Corporate People & Organisation at Novo Nordisk A/S, Bagsvaerd, Denmark. Over the past 20 years, Ms. Vermeylen has held a variety of manage- ment positions at Novo Nordisk, including General Manager for Belgium and Luxembourg (BeLux), France and, most recently, Germany. In addition, Dr. Frank Morich, Klaus Kühn and Wendy Johnson were reelected to the Supervisory Board follow- ing the expiry of their terms of oﬃ ce. At the Company’s Capital Markets Days held in London and New York in early September 2017, MorphoSys presented its growth and development strategy and provided an overview of its current activities. It also provided an outlook on potential upcoming events. One of the key strategic goals is to identify and pursue the fastest possible path to market for MOR208 in r/r DLBCL. MorphoSys also reemphasized its goal of becoming a fully integrated biopharmaceutical company. The Company presented not only proprietary and partnered clinical programs but also several of the proprietary programs that are currently in the early stages of research and development. Dr. Markus Enzelberger was appointed MorphoSys’s Chief Scientiﬁ c Oﬃ cer (CSO) as of November 1, 2017, after having served as Interim CSO since April 15, 2017. He succeeds Dr. Marlies Sproll, who resigned on October 31, 2017 due to ongoing family matters. Prior to her resignation, Dr. Sproll had taken temporary leave from her CSO position starting on April 15, 2017. As of November 1, 2017, Dr. Sproll assumed a new part-time role at MorphoSys as Special Advisor to the CEO. Dr. Enzelberger was previously Senior Vice President Discovery Alliances and Technologies at MorphoSys and was responsible for the Company’s entire drug discovery activities and tech- nology development. Dr. Enzelberger is a chemist by training and joined MorphoSys in 2002. For a period of one year as of November 1, 2017, Dr. Enzelberger was entitled to request the transfer of a maximum of € 400,000 in Company treasury shares. A request was made in November 2017 upon which a total of 4,956 of the Company’s treasury shares was transferred to Dr. Enzelberger. Group Headcount Development On December 31, 2017, the MorphoSys Group had 326 employees (December 31, 2016: 345), 132 of whom hold PhD degrees (De- cember 31, 2016: 137). The MorphoSys Group employed an aver- age of 344 employees in 2017 (2016: 354). ›› S E E F I G U R E 0 4 – Total Headcount of the MorphoSys Group ( page 37 Total Headcount of the MorphoSys Group (page 37) page 37) In order to successfully compete for the best employees, MorphoSys conducts an annual comparison of the Company’s compensation with that paid by other companies in the biotech industry and similar sectors and makes adjustments when nec- essary. The remuneration system at MorphoSys includes ﬁ xed compensation and a variable annual bonus that is linked to the achievement of corporate goals. Individual goals promote both the employees’ personal development and the achievement of key corporate goals. Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 37 T O TA L 299 329 365 345 326 04 Total Headcount of the MorphoSys Group (December 31) 2013 2014 2015 2016 2017 289 263 156 135 161 105 60 54 t n e m g e s y b s e e y o l p m e 56 63 n o i t c n u f y b s e e y o l p m e 2016 2017 2016 2017 pro prie tary de v elo pment partnered disc ov ery unallo cated employ ees in gener al and adminis tr ati v e employees in r&d In addition, a “spot bonus” (given “on the spot”) is promptly awarded to employees for exceptional accomplishments. We again made signiﬁ cant use of this instrument during the re- porting year. A detailed overview of headcount development and MorphoSys’s activities to promote successful long-term human resource de- velopment can be found in the section “Sustainable Business Development.” 38 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 Changes in the Business Environment According to forecasts by the International Monetary Fund (IMF), global economic growth saw a signiﬁ cant acceleration to 3.6 % in 2017 (2016: 3.1 %). The IMF is currently seeing the strongest global upswing in a decade. The Eurozone, Japan, China, the emerging economies of Eastern Europe and Russia all trended higher. The IMF sees risks for further economic development in the United Kingdom in the wake of Brexit and political uncertainties in the United States. The IMF cautioned the Eurozone to remain vigilant in combating the ongoing risks in the banking sector. According to the IMF, the US tax reform has improved the growth perspec- tives for the US, Germany and the world economy. The 2017 growth forecast for the advanced economies was raised to 2.2 % (2016: 1.7 %). The emerging and developing economies are expected to report slightly higher growth of 4.6 % (2016: 4.3 %). In its October 2017 report, the IMF believes the economic recovery in the Eurozone will continue and ex- pects growth of 2.1 % in 2017 (2016: 1.8 %). The 2017 forecast for Germany is 2.0 % (2016: 1.9 %). Growth in the United States is projected at 2.2 % in 2017 (2016: 1.5 %). China is expected to grow 6.8 % (2016: 6.7 %). The economies in Russia and Brazil climbed out of recession in 2017, growing 1.8 % (2016: – 0.2 %) and 0.7 % (2016: – 3.6 %), respectively. 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 ﬁ nancial year. MorphoSys’s operations were also not aﬀ ected by any ﬂ uctuations within individual countries and, therefore, in this respect were not directly impacted by global economic developments. CURRENC Y DEVEL OPMEN T S Contrary to the forecasts of many analysts at the beginning of the year, the euro strongly outperformed the US dollar in 2017. After a weak year for the euro in 2016 and a slump in the ﬁ rst few days of January 2017 to its lowest point since early 2003 of US$ 1.03, many analysts had predicted that parity would be reached in 2017. However, the currencies took an altogether dif- ferent direction in 2017. In April, the euro had already reached US$ 1.09 – the highest level since the dollar rally following the US election in the fall of 2016. Later in the year, the euro con- tinued to decouple from the dollar, trading at over US$ 1.17 in mid-November amid strong economic data and optimistic growth prospects for the Eurozone as a whole. Market observ- ers believe this performance is related to successful structural reforms implemented in numerous European countries follow- ing the euro crisis. Most of MorphoSys’s business is transacted in euros and US dollars, therefore changes in these currencies could have an eﬀ ect on the Company’s future costs and revenues. Any weak- ness in the euro versus the US dollar would have a direct inﬂ u- ence on the Company’s operating results because a growing share of its costs stems from clinical studies conducted in the United States. Moreover, a strong euro reduces the royalty payments from Tremfya® sales incurred in US dollars that are converted into euro. MorphoSys deals with this risk using the appropriate hedge accounting measures. REGUL AT ORY ENVIRONMEN T The healthcare industry’s regulatory environment is domi- nated by stringent product quality, safety and eﬃ cacy require- ments, which place ever-higher demands on the companies in- volved. Novel drugs are required to demonstrate a beneﬁ t over existing therapies in order to be approved, gain the market’s acceptance and be ﬁ nancially reimbursed. The current trend in the United States is toward faster approval by the FDA (Food and Drug Administration). The FDA’s actions are partly due to legislation adopted in 2012 and the mecha- nisms created to reduce review times, such as the breakthrough therapy designation and the extension of accelerated approvals. These mechanisms facilitate a faster review process for drug candidates demonstrating a substantial improvement for pa- tients in urgent need, such as oncology patients. This develop- ment was evident in 2017. In 2017, the FDA had approved 46 new medications and therefore granted more than twice as many registrations as in the previous year (2016: 22). Between 2006 and 2014, the FDA approved an average of 28 new drugs per year. Biopharmaceutical companies such as MorphoSys, who are focused on the development of therapies for indications with high medical need, could potentially beneﬁ t from the mecha- nisms described above. MorphoSys received FDA breakthrough therapy designation in 2017 for its drug candidate MOR208. DEVEL OPMEN T OF T HE PHARMACEU T IC AL AND BIO T ECHNOL OGY SEC T ORS According to market researchers, the development of the global pharmaceutical industry was sluggish in 2017. At the begin- ning of the year, analysts expected the ten largest pharmaceu- tical companies to grow just 2 % on average, based mainly on fears of growing price pressure in the United States. Particu- larly in the third quarter of 2017, a number of pharmaceutical and major biotech companies, including Amgen, Merck & Co. and Gilead, reported weakening organic growth. Operations and Business Environment G r o u p M a n a g e m e n t R e p o r t 39 In contrast to the expectations at the beginning of the year, M&A in the healthcare sector was slightly weaker overall in 2017 than in the prior year. According to analysts at Merger- market, a market intelligence provider, mergers and acquisi- tions in the ﬁ rst nine months reached a level of around US$ 200 billion, or almost 10 % lower than in the prior year. The decline was primarily the result of fewer M&A transactions in the pharmaceutical industry. One of the reasons indicated was the uncertainty surrounding the anticipated corporate tax reform in the United States. The biotech industry, on the other hand, had its strongest M&A year since the analysis began in 2001, driven by multi-billion dollar acquisitions such as Gilead’s ac- quisition of Kite Pharma. Fundamentally, the pharmaceutical industry remains robust. A report from the International Trade Administration of the US Department of Commerce expects worldwide pharmaceutical sales from 2015 to 2020 to grow at an annual rate of 4.9 %, from roughly US$ 1 trillion to US$ 1.3 trillion. The demand for phar- maceutical products is being driven by a variety of demographic and economic trends including a rapidly aging world popula- tion and the accompanying higher incidence of chronic disease, increasing urbanization, greater disposable income, higher public health spending and a growing demand for more eﬀ ec- tive treatments. The market for cancer drugs – the primary market for most of MorphoSys’s proprietary compounds – is one of the most attrac- tive and fastest-growing segments of the pharmaceutical indus- try. According to the market research institute Research and Markets, the volume of the worldwide oncology market in 2016 was US$ 119 billion. Driving the market is a growing shift toward targeted therapies such as monoclonal antibodies and cell-based therapies. The Research and Markets report esti- mates that the global market for oncology products will grow by an average of approximately 10 % per annum to US$ 241 billion in 2023. In 2017, pharmaceutical and biotechnology companies both in the US and in Europe faced rising pricing pressure thus ﬁ nd- ing it more diﬃ cult to charge high prices for their medications. Beside rising political pressure one reason is a shift in the mar- ket structure. The companies that negotiate with the pharma- ceutical companies are getting bigger and fewer, thus gaining negotiation power. Therefore it was observed that even though list prices for medications are still rising, drugmakers were forced to give large rebates to insurers and pharmacy beneﬁ t companies. Further information on the development of the stock market environment can be found in the section “Shares and the Capi- tal Market.” DEVEL OPMEN T OF T HE AN T IBOD Y SEC T OR The year 2017 was a very dynamic and successful year for the clinical development of therapeutic antibodies. By mid-Novem- ber 2017, the FDA had granted regulatory approval to ten new antibodies. This number was already above the previous record of nine antibody approvals by the FDA in 2015. In a follow-up to the article “Antibodies to Watch in 2017,” pub- lished in “mAbs Journal,” the Antibody Society disclosed in an article published in the beginning of 2017 that by the end of 2016 a total of 52 antibodies were in phase 3 clinical trials (year-end 2015: 53), 20 of which are being developed to treat cancer (year-end 2015: 17). In July 2017, the FDA granted approval to our development partner Janssen for guselkumab for the treatment of plaque psoriasis. Guselkumab is a compound derived with the help of MorphoSys’s technology. In 2017, the following antibodies received their ﬁ rst FDA regu- latory approval: • Brodalumab against plaque psoriasis • Avelumab against Merkel cell carcinoma • Dupilumab against atopic dermatitis • Ocrelizumab against multiple sclerosis • Durvalumab against urothelial carcinoma • Sarilumab against rheumatoid arthritis • Guselkumab against plaque psoriasis • Inotuzumab ozogamicin against acute lymphoblastic leukemia • Benralizumab against asthma • Emicizumab against hemophilia MorphoSys regards the successful development of the antibody segment as a generally positive signal and a validation of the Company’s focus on this drug class in its development activi- ties. However, from this observation no conclusions can be drawn regarding the development perspectives of individual drug candidates. 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 05 Revenues by Region (December 31) (in %) 89 11 71 29 41 59 90 10 87 13 2013 2014 2014 2015 2016 2016 2017 euro pe and asia no rth ameri ca no rth ameri ca 06 Revenues Proprietary Development and Partnered Discovery (December 31) (in million €)1 1 Diﬀ erences due to rounding. T O TA L 78.0 64.0 106.2 49.7 66.8 48.0 26.9 3.0 59.9 43.6 42.3 43.6 41.9 15.0 5.4 4.0 5.6 0.6 17.6 7.3 2013 2014 2015 2016 2017 segment partnered disc ov ery funded research and licensing fees segment partnered disc ov ery segment pro prie tary success-based payments de v elo pment 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 41 Analysis of Net Assets, Financial Position and Results of Operations The MorphoSys Group’s scope of consolidation as of Decem- ber 31, 2017 was unchanged compared to December 31, 2016. The consolidated ﬁ nancial statements as of December 31, 2017 include MorphoSys AG, Sloning BioTechnology GmbH, Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. Further infor- mation on the Group’s organizational structure can be found on page 26. Revenues Operating Expenses In 2017, operating expenses increased by 22 % to € 133.8 mil- lion (2016: € 109.8 million). Expenses consisted of research and development expenses of € 116.8 million (2016: € 95.7 million) and general and administrative expenses of € 17.0 million (2016: € 14.1 million). Research and development expenses were increased as a result of the higher number of projects in development. Group revenues in the 2017 ﬁ nancial year increased 34 % ver- sus the previous year, reaching a total of € 66.8 million (2016: € 49.7 million). Operating expenses in the Proprietary Development segment increased from € 78.5 million to € 99.1 million. Expenses in the Partnered Discovery segment increased to € 18.9 million (2016: € 18.1 million). Success-based payments amounted to 11 % or € 7.3 million (2016: 11 % or € 5.6 million) of total revenues. On a regional basis, MorphoSys generated 13 %, or € 8.7 million, of its commer- cial revenues with biotechnology and pharmaceutical companies and non-proﬁ t organizations headquartered in North America and 87 %, or € 58.1 million, with customers headquartered in Europe and Asia. In the same period of the previous year, the distribution was 10 % and 90 %, respectively (see Figure 5: Reve- nues by Region). Roughly 90 % of Group revenues are attribut- able to activities with our partners Novartis, I-Mab Biopharma and Janssen (2016: 95 % with Novartis, Pﬁ zer and Janssen). ›› S E E F I G U R E 0 5 – Revenues by Region ( page 40 Revenues by Region (page 40) page 40) PROPRIE TARY DEVEL OPMEN T SEGMEN T The Proprietary Development segment achieved revenues of € 17.6 million in 2017 (2016: € 0.6 million). PAR T NERED DIS COVERY SEGMEN T The revenues generated by the Partnered Discovery segment amounted to € 49.2 million and consisted of € 41.9 million in funded research and license fees (2016: € 43.6 million) and € 7.3 million in success-based payments (2016: € 5.6 million). ›› S E E F I G U R E 0 6 – Revenues Proprietary Development and Partnered Discovery page 40 ((page 40) page 40) Personnel expenses from share-based payments are included in general and administrative expenses and research and de- velopment expenses. These expenses amounted to € 5.0 mil- lion in 2017 (2016: € 2.4 million). RESEARCH AND DEVEL OPMEN T EXPENSES Research and development expenses increased by € 21.1 mil- lion in 2017 to a total of € 116.8 million (2016: € 95.7 million) and consisted of expenses for external laboratory services (2017: € 52.9 million; 2016: € 39.4 million), personnel expenses (2017: € 29.7 million; 2016: € 26.5 million), expenses for intan- gible assets (2017: € 13.5 million; 2016: € 13.7 million), expenses for external services (2017: € 10.1 million; 2016: € 5.0 million); technical infrastructure expenses (2017: € 4.9 million; 2016: € 5.9 million), other expenses (2017: € 3.1 million; 2016: € 2.9 million) and expenses for consumables (2017: € 2.6 mil- lion; 2016: € 2.3 million). Expenses for intangible assets primarily consisted of impairment of € 9.8 million (2016: € 10.1 million) on the in-process R&D program MOR209/ES414. The reason for the impairment was the termination of the coop- eration with Aptevo Therapeutics in 2017. ›› S E E F I G U R E 0 7 – Selected R&D Expenses ( page 42 Selected R&D Expenses (page 42) page 42) 42 G r o u p M a n a g e m e n t R e p o r t Analysis of Net Assets, Financial Position and Results of Operations 07 Selected R & D Expenses (December 31) (in million €) 1 Due to the sale of sub stantially all of the AbD Serotec operating segment with closing date of January 10, 2013, the ﬁ gures for the year 2013 refer only to continuing operations. T O TA L 49.21 56.0 78.7 95.7 116.8 52.9 39.4 26.5 27.5 29.7 31.6 29.2 25.6 21.0 21.2 13.0 12.8 15.0 21.0 17.8 2.2 2.3 3.0 2.3 2.6 2013 2014 2015 2016 2017 e x ternal l ab o r ato ry fundin g perso nnel c o nsumab les other (includes expenses for intangible assets, technical infra- structure and external services) In 2017, the Company incurred proprietary development ex- penses of € 97.7 million (2016: € 77.1 million) and € 1.4 million (2016: € 1.4 million) for technology development (see Figure 8: Distribution of R&D Expenses). ›› S E E F I G U R E 0 8 – Distribution of R&D Expenses ( page 44 Distribution of R&D Expenses (page 44) page 44) GENERAL AND ADMINIS T RAT IVE EXPENSES General and administrative expenses were above the previous year’s level, amounting to € 17.0 million (2016: € 14.1 million). They mainly consisted of personnel expenses (2017: € 12.3 mil- lion; 2016: € 9.5 million), expenses for external services (2017: € 2.9 million; 2016: € 2.5 million), technical infrastructure expenses (2017: € 0.8 million; 2016: € 0.9 million) and other expenses (2017: € 0.9 million; 2016: € 1.2 million). Other Income and Expenses Other income totaled € 1.1 million (2016: € 0.7 million) and included in both 2017 and 2016 income from grants and currency gains. Other expenses totaled € 1.7 million (2016: € 0.6 million) and mainly resulted from currency losses and the repayment of cost subsidies. Earnings Before Interest and Taxes (EBIT) Following the investment made in proprietary product devel- opment in 2017, earnings before interest and taxes (EBIT) amounted to € – 67.6 million as expected. This compares to an EBIT of € – 59.9 million in the prior year. The Proprietary De- velopment segment reported EBIT of € – 81.3 million (2016: € – 77.6 million), while the Partnered Discovery segment achieved EBIT of € 30.2 million (2016: € 31.0 million). Finance Income and Expenses Finance income amounted to € 0.7 million (2016: € 1.4 million) and included mainly interest income as well as gains from cur- rency hedges. Finance expenses amounted to € 1.9 million (2016: € 1.3 million) and resulted mainly from losses from cur- rency hedges. 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 43 Taxes The Group reported a tax expense of € 1.0 million in 2017 (2016: tax expense of € 0.5 million) derived from a deferred tax expense of € 0.5 million and a current tax expense of € 0.5 million. Consolidated Net Proﬁ t/Loss for the Period In 2017, the net result for the period amounted to € – 69.8 mil- lion (2016: € – 60.4 million). Earnings per share in 2017 was € – 2.41 (2016: € – 2.28). Multi-Year Overview – Income Statement T A B L E 0 3 Multi-Year Overview – Income Statement1 Multi-Year Overview – Income Statement1 Multi-Year Overview – Income Statement in million € Revenues Research and Development Expenses General and Administrative Expenses Other Income/Expenses EBIT Finance Income/Expenses Income Tax Income/Expenses Proﬁ t/(Loss) for the Year from Continuing Operations Proﬁ t/(Loss) for the Year from Discontinued Operations2 Consolidated Net Proﬁ t/(Loss) Basic Net Proﬁ t/(Loss) per Share (in €) 2017 2016 2015 2014 20132 66.8 (116.8) (17.0) (0.6) (67.6) (1.2) (1.0) (69.8) 0.0 (69.8) (2.41) 49.7 (95.7) (14.1) 0.2 (59.9) 0.1 (0.5) (60.4) 0.0 (60.4) (2.28) 106.2 (78.7) (15.1) 4.7 17.2 3.4 (5.7) 14.9 0.0 14.9 0.57 64.0 (56.0) (14.1) 0.2 (5.9) 1.6 1.3 (3.0) 0.0 (3.0) (0.12) 78.0 (49.2) (18.8) (0.1) 9.9 0.8 (3.3) 7.4 6.0 13.3 0.54 1 Diﬀ erences 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” for the year 2013. 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 ﬁ nancial management is to ensure suﬃ cient liquidity reserves at all times for the Com- pany’s continued growth. The most important source of this liquidity is the operations of the individual business units and the resulting cash inﬂ ow. Cash ﬂ ow projections and scenarios are used to determine the level of liquidity needed. C ASH F L OWS* The net cash outﬂ ow from operating activities in 2017 totaled € 38.4 million (2016: cash outﬂ ow of € 46.6 million). *S E E G L O S S A R Y – page 170 In 2017, the Company changed the composition of the ﬁ nancial assets held in its portfolio through the purchase and sale of various investment products. These shifts resulted in net cash inﬂ ows of € 32.9 million (2016: cash outﬂ ow of € 80.8 million). Financing activities resulted in cash inﬂ ows of € 8.2 million in 2017 (2016: cash inﬂ ow of € 110.4 million), mainly due to the exercise of convertible bonds granted to the Management Board and the Senior Management Group. 44 G r o u p M a n a g e m e n t R e p o r t Analysis of Net Assets, Financial Position and Results of Operations 08 Distribution of R & D Expenses (December 31) (in million €) 1 Due to the sale of sub stantially all of the AbD Serotec operating segment with closing date of January 10, 2013, the ﬁ gures for the year 2013 refer only to continuing operations. T O TA L 49.21 56.0 78.7 95.7 116.8 97.7 77.1 27.5 17.5 33.5 19.6 54.1 22.1 17.2 17.7 4.2 2.9 2.5 1.4 1.4 2013 2014 2015 2016 2017 pro prie tary de v elo pment e xpenses r&d e xpenses o n b ehalf o f partners technolo gy de v elo pment e xpenses INVES T MEN T S In 2017, MorphoSys invested € 1.3 million in property, plant and equipment (2016: € 2.5 million), mainly laboratory equip- ment (i.e. machinery), computer hardware and tenant ﬁ xtures. Depreciation of property, plant and equipment in 2017 increased to € 2.0 million (2016: € 1.8 million). The Company invested € 11.8 million in intangible assets in 2017 (2016: € 0.4 million). Amortization of intangible assets was above the prior year’s level and amounted to € 2.1 million in 2017 (2016: € 2.0 million). In 2017, impairment of € 9.8 mil- lion was recognized on the in-process MOR209/ES414 program (2016: € 10.1 million). L IQUIDI T Y On December 31, 2017, the Company held cash and cash equiv- alents, marketable securities and other ﬁ nancial assets of € 312.2 million compared to € 359.5 million on December 31, 2016. This amount consisted of cash and cash equivalents of € 76.6 million (December 31, 2016: € 73.9 million), marketable securities and bonds of € 86.5 million (December 31, 2016: € 69.9 million) and other ﬁ nancial assets in the amount of € 149.1 million (December 31, 2016: € 136.1 million) that are categorized as “loans and receivables” under “current assets.” On December 31, 2016, other investments in the category of “loans and receivables” in the amount of € 79.5 million were reported under non-current assets. The decline in liquidity resulted primarily from the use of cash and cash equivalents for operations in the year 2017. 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 45 T A B L E 0 4 Multi-Year Overview – Financial Situation1 in million € 2017 2016 2015 2014 2013 Net Cash Provided by/Used in Operating Activities2 Net Cash Provided by/Used in Investing Activities2 Net Cash Provided by/Used in Financing Activities2 Cash and Cash Equivalents (as of 31 December) 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 (38.4) 32.9 8.2 76.6 86.5 0.0 149.1 0.0 (46.6) (80.8) 110.4 73.9 63.4 6.5 136.1 79.5 (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 Diﬀ erences due to rounding. 2 In 2015, interest paid and interest received were reclassiﬁ ed from operating activities into investing activities and ﬁ nancing activities in the statement of cash ﬂ ows. In order to provide comparative information for the previous year, the ﬁ gures for 2014 have been adjusted accordingly. Net Assets ASSE T S As of December 31, 2017, total assets amounted to € 415.4 mil- lion and were € 48.2 million below their level on December 31, 2016 (€ 463.6 million). Current assets increased by € 32.6 mil- lion. The rise in cash and cash equivalents, available-for-sale ﬁ nancial assets and ﬁ nancial assets classiﬁ ed as loans and re- ceivables was oﬀ set by the decline in available-for-sale bonds and accounts receivables. As of December 31, 2017, an amount of € 86.5 million (Decem- ber 31, 2016: € 63.4 million) was invested in various money market funds and reported under “available-for-sale ﬁ nancial assets.” The item “available-for-sale bonds” did not contain any bonds on December 31, 2017 (December 31, 2016: € 6.5 mil- lion). The category “loans and receivables” included ﬁ nancial instruments totaling € 149.1 million (December 31, 2016: € 136.1 million). These instruments were mainly term deposits with either ﬁ xed or variable interest rates. Non-current assets declined by € 80.8 million to € 74.7 million compared to their level on December 31, 2016. The main reason for the decline was a reduction in non-current ﬁ nancial assets in the category “loans and receivables.” L IABIL I T IES Current liabilities increased from € 38.3 million on December 31, 2016 to € 47.7 million on December 31, 2017. This eﬀ ect mainly resulted from the rise in accounts payable and accrued expenses. Non-current liabilities (December 31, 2017: € 9.0 million; December 31, 2016: € 9.8 million) decreased mainly due to the decline in non-current deferred revenues compared to the December 31, 2016 reporting date. S T OCKHOL DERS’ EQUI T Y As of December 31, 2017, Group equity totaled € 358.7 million compared to € 415.5 million on December 31, 2016. The number of shares issued totaled 29,420,785 as of December 31, 2017, of which 29,101,107 shares were outstanding (Decem- ber 31, 2016: 29,159,770 shares issued and 28,763,760 shares outstanding). In comparison to December 31, 2016, the number of authorized ordinary shares increased from 10,584,333 to 14,579,885. The change was a result of the cancellation of Conditional Capital 2015-I of € 10,584,333 and the creation of Conditional Capital 2017-I of € 2,915,977 and Conditional Capital 2017-II in the amount of € 11,663,908 by resolution of the Annual General Meeting on May 17, 2017. 46 G r o u p M a n a g e m e n t R e p o r t Analysis of Net Assets, Financial Position and Results of Operations The number of ordinary shares of conditional capital was lower compared to the level on December 31, 2016, declining from 6,752,698 to 6,491,683 due to the exercise of 261,015 conver- sion rights in the year 2017. On December 31, 2017, the Company held 319,678 shares of treasury stock valued at € 11,826,981, representing a decline of € 2,821,231 compared to December 31, 2016 (396,010 shares, € 14,648,212). The cause of the decline was the transfer of 61,871 shares of treasury stock valued at € 2,286,752 to the Management Board and Senior Management Group from the performance-based 2013 long-term incentive program (LTI). The vesting periods for this LTI program expired on April 1, 2017 and October 1, 2017. Beneﬁ ciaries were given the option to receive a total of 61,871 shares within six months. In addition, a total of 9,505 MorphoSys shares valued at € 351,305 were transferred to the Chief Development Oﬃ cer, Dr. Peters, in March 2017. In November 2017, a total of 4,956 shares valued at € 183,174 were transferred to the Chief Scientiﬁ c Oﬃ cer, Dr. Enzelberger. Financing As of December 31, 2017, the Company’s equity ratio amounted to 86 % compared to 90 % on December 31, 2016. The Group currently does not have any ﬁ nancial liabilities owed to ﬁ nan- cial institutions. Off-Balance-Sheet Financing MorphoSys does not use any oﬀ -balance-sheet ﬁ nancing in- struments such as the sale of receivables, asset-backed securi- ties, sale-and-leaseback transactions or contingent liabilities in combination with non-consolidated special-purpose entities. Credit Rating There is no agency currently assessing the creditworthiness of MorphoSys. Multi-Year Overview – Balance Sheet Structure T A B L E 0 5 Multi-Year Overview – Balance Sheet Structure1 in million € Assets Current Assets Non-current Assets Total Equity and Liabilities Current Liabilities Non-current Liabilities Stockholders’ Equity Total 1 Diﬀ erences due to rounding. 12/31/2017 12/31/2016 12/31/2015 12/31/2014 12/31/2013 340.7 74.7 415.4 47.7 9.0 358.7 415.4 308.1 155.5 463.6 38.3 9.8 415.5 463.6 300.1 100.0 400.1 27.5 9.9 362.7 400.1 322.4 104.1 426.5 32.7 45.0 348.8 426.5 406.6 41.1 447.7 35.4 60.1 352.1 447.7 Comparison of Actual Business Results Versus Forecasts MorphoSys demonstrated solid ﬁ nancial performance during the 2017 reporting year. A detailed comparison of the Company’s forecasts versus the actual results can be found in Table 6. 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 47 T A B L E 0 6 Comparison of Actual Business Results Versus Forecasts 2017 Targets 2017 Results Financial targets Proprietary Development Partnered Discovery Group revenues between € 63 million and € 66 million (initial forecast € 46 – 51 million; revised on November 30, 2017 upon announcement of regional licensing agreement with I-Mab for MOR202) Expenses for proprietary product and technology development of € 96 million to € 100 million (initial forecast: € 85 – 95 million; revised on November 30, 2017 upon announcement of regional licensing agreement with I-Mab for MOR202) EBIT of € – 66 million to € – 71 million (initial forecast: € – 75 million to € – 85 million; revised on November 30, 2017 upon announcement of regional licensing agreement with I-Mab for MOR202) Proprietary Development segment: R&D expenses to continue to rise (2016: € 78.5 million) EBIT sharply negative (2016: € – 77.6 million) Partnered Discovery segment: R&D expenses around prior-year level (2016: € 18.1 million) EBIT sharply positive, slightly below segment EBIT in 2016 (2016: € 31.0 million) Group revenues of € 66.8 million Expenses for proprietary product and technology development of € 99.1 million EBIT of € – 67.6 million Proprietary Development segment: R&D expenses of € 99.1 million EBIT of € – 81.3 million Partnered Discovery segment: R&D expenses of € 17.7 million EBIT of € 30.2 million MOR208 • Presentation of ﬁ rst preliminary data of the L-MIND study (phase 2 combination study of lenalidomide in DLBCL) • Completion of the phase 2 safety part of the B-MIND study (combination study of bendamustine in DLBCL) and initiation of the pivotal phase 3 part of the study (in comparison to rituximab and bendamustine) MOR208 • Presentation of preliminary data of the L-MIND study at the 2017 Annual Meeting of the American Society of Clinical Oncology (ASCO) in June • Transition of the B-MIND trial to a pivotal phase 3 part in June • Expansion of the COSMOS trial through the combination arm with venetoclax • Initiation of another study arm of the COSMOS trial (another • Breakthrough therapy designation based on L-MIND study combination drug in addition to existing combination with ide- lalisib in CLL) granted by FDA MOR202 • Completion of the phase 1/2a dose-escalation study in MOR202 • Presentation of updated safety and eﬃ cacy data from the multiple myeloma, including data from the highest dose of 16 mg/kg alone and in combination with pomalidomide and lenalidomide phase 1/2a study at the ASCO Annual Meeting in June; patient enrollment for the study has been completed; subsequent observation will continue MOR209/ES414 • Continuation of the phase 1 trial with adjusted dosing regimen in mCRPC under the cooperation with Aptevo Therapeutics MOR209/ES414 • Termination of cooperation with Aptevo in September with return of all development and commercialization rights to Aptevo for MOR209/ES414 MOR106 • Completion of a phase 1 trial in atopic dermatitis as part of the MOR106 • Completion of phase 1 trial in August and presentation of ﬁ rst co-development program with Galapagos data in September indicating clinical activity MOR107 • Initiation of a phase 1 trial in healthy volunteers MOR107 • Initiation of phase 1 trial in healthy volunteers in February followed by completion of the ﬁ rst part of the trial in May • Initiation and continuation of new development programs in the • Initiation of preclinical development of an anti-C5aR antibody area of antibody discovery and preclinical development in the fourth quarter Progress of partnered development programs • Increasing number of partnered programs (101) as maturity progresses • First HuCAL antibody Tremfya® (guselkumab) for treating plaque psoriasis receives marketing approval in the US, Europe and Canada (partner is Janssen) • Partner Novartis initiates phase 2 trial of HuCAL antibody bimagrumab in obese patients with type 2 diabetes • Partner Roche initiates new pivotal phase 3 trials of gantenerumab in patients with prodromal to mild Alzheimer’s disease • Partner Janssen initiates new phase 3 trials of HuCAL antibody guselkumab in plaque psoriasis (comparative study with secukinumab) and psoriatic arthritis; notiﬁ cation of a further phase 3 study in Crohn’s disease 48 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 We also made very good progress in the Partnered Discovery segment. A deciding factor was the marketing approval of the HuCAL antibody Tremfya® (guselkumab) developed by Janssen. Guselkumab is now the ﬁ rst approved antibody based on MorphoSys technologies – a milestone for the Company. A pi v- otal study of anetumab ravtansine, initiated by our partner Bayer, did not meet its primary endpoint. Novartis announced its intention to conduct a phase 2 clinical trial of the HuCAL antibody bimagrumab in severely obese patients with type 2 diabetes. Roche announced plans for a new pivotal phase 3 trial of gantenerumab in Alzheimer’s disease. The number of Part- nered Discovery programs in the reporting year grew to a total of 101 (end of 2016: 100). Accounting Judgments In preparing the 2017 consolidated ﬁ nancial statements, no ac- counting policies or accounting options were used that diﬀ er from those in prior years or that, if used or exercised diﬀ er- ently, would have had a material eﬀ ect on the Company’s net assets, ﬁ nancial position, results of operations or balance sheet structure. Information on the eﬀ ects of the Management Board’s use of estimates, assumptions and judgments can be found in the Notes to the Consolidated Financial Statements. The Management Board’s General Assessment of Business Performance The 2017 ﬁ nancial year was a very successful year for MorphoSys. There were two events in particular that had a positive impact on our business development. The ﬁ rst was in July, with the ﬁ rst MorphoSys antibody to receive marketing approval. Tremfya® (guselkumab), developed by our partner Janssen for plaque psoriasis, received approval initially in the US, followed by Europe and Canada. The second event came in October, when we were granted breakthrough therapy designa- tion by the US Food and Drug Administration (FDA) for our proprietary antibody MOR208 in the blood cancer indication relapsed or refractory DLBCL. Revenues in the 2017 ﬁ nancial year increased to € 66.8 mil- lion, and EBIT amounted to € – 67.6 million. The increase in revenues and the improved operating result compared to the previous year were largely the result of entering into a regional partnership for our proprietary antibody MOR202. This agree- ment resulted in a one-time payment of € 16.8 million, which also prompted us to raise our ﬁ nancial forecast for the 2017 ﬁ nancial year. The net cash outﬂ ow from operating activities amounted to € 38.4 million, which was the result of the planned increase in expenses for proprietary research and develop- ment. Our equity ratio of 86 % and liquid funds of € 312.2 mil- lion are a conﬁ rmation of the strength of the Company’s ﬁ nan- cial resources. The proprietary portfolio advanced signiﬁ cantly, with 13 ac- tive compounds at year-end (year-end 2016: 14). Data from a phase 2 combination study of MOR208 in the blood cancer indication DLBCL were presented at a large US oncology confer- ence. Based on these data, the US Food and Drug Adminis- tration (FDA) granted breakthrough therapy designation to MOR208, in combination with lenalidomide, for the treatment of adult patients with relapsed or refractory diﬀ use large B cell lymphoma who are not eligible for high-dose chemotherapy and autologous stem-cell transplantation. A further phase 2 combi- nation study of MOR208 in DLBCL transitioned to a phase 3 study. The current dose-escalation study of MOR202 in multiple myeloma is evaluating the drug at the highest doses reached in the trial. Clinical data from the phase 1 study of MOR106 in atopic dermatitis in cooperation with Galapagos were pub- lished. The ﬁ rst part of a phase 1 clinical trial of MOR107, the ﬁ rst lanthipeptide in MorphoSys’s clinical development pipe- line, was completed. The compound MOR209/ES414 was re- turned to the partner Aptevo as part of a portfolio optimization. Outlook and Forecast G r o u p M a n a g e m e n t R e p o r t 49 Outlook and Forecast • New strategic agreements based on proprietary technologies focused on gaining access to innovative target molecules and compounds. • Continued expansion of proprietary development activities through potential in-licensing, company acquisitions, co-de- velopment and new proprietary development activities. • Investment in the development of proprietary technologies to maintain and expand the Company’s position in therapeutic antibodies and related technologies. Strategic Outlook MorphoSys’s business model is based on the development of innovative drug candidates derived from the Company’s propri- etary technologies, such as its HuCAL and Ylanthia antibody libraries. Drug candidates are developed both on a proprietary basis and together with partners to provide patients access to better treatment alternatives. The focus of proprietary develop- ment is oncology and inﬂ ammatory diseases. MorphoSys’s man- agement intends to advance the Company’s portfolio of drug candidates and develop individual candidates towards the mar- ket. MorphoSys will also concentrate on applying 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 oncology and inﬂ ammatory diseases. Decisions to enter into alliances to develop MorphoSys’s proprietary candi- dates are made on a case-by-case basis. In some cases, projects can remain in proprietary development for a longer period or even until their commercialization. Our main focus is cur- rently the continuation of the MOR208 development towards a potential regulatory approval and the set-up of capabilities to commercialize MOR208 in certain geographies. MorphoSys’s business model is based on the development of innovative drug candidates derived from its proprietary technol- ogies, in particular the HuCAL and Ylanthia antibody libraries. Drug candidates are developed both on a proprietary basis and together with partners to give patients access to better treat- ment alternatives. The focus of proprietary development is on- cology and inﬂ ammatory diseases. Management’s goal is to continue developing proprietary drug candidates towards mar- ket approval, while at the same time concentrating on further developing its technologies in fast-growing, innovation-driven areas of the life sciences sector. General Statement on Expected Development MorphoSys’s strategic focus is on the development of innova- tive drugs to improve the lives of patients suﬀ ering from seri- ous diseases. The development of MOR208, our most advanced drug candidate, for the treatment of certain forms of blood can- cer is currently our top priority. Our continued investment in the development of validated and innovative technology plat- forms is an important basis for our business. In the Partnered Discovery segment, the commercialization of our technologies provides contractually secured cash ﬂ ows from our partner- ships with pharmaceutical companies. MorphoSys further par- ticipates in the successful development of its partners’ drug candidates through the receipt of revenues, such as milestone payments and royalties on product sales, as soon as the drugs are commercialized. Our main source of royalties is currently generated from sales of the HuCAL antibody Tremfya® by our partner Janssen, which was launched in 2017. Revenues from R&D funding, royalties, license and milestone payments and a strong liquidity position enable the Company to continue expanding its development of proprietary drugs and technologies. The Management Board expects, among oth- ers, the following developments in 2018: • Continue to advance the development of MOR208 towards a potential regulatory approval. • Evaluate potential set-up of commercialization capabilities in order to market MOR208 in certain geographies. • Continue the development of MOR202 and explore opportuni- ties for its further development, either alone or together with a partner, in one or more oncology indications, including in solid tumors. 50 G r o u p M a n a g e m e n t R e p o r t Outlook and Forecast The Partnered Discovery segment generates contractually se- cured cash ﬂ ows based on various partnerships with major pharmaceutical companies. The majority of development candi- dates in recent years stemmed from our partnership with Novartis. As previously announced, this partnership ended in accordance with the contract at the end of November 2017. Although the partnership has ended, development candidates under this partnership will continue to be developed and may lead to additional milestone payments and royalties. Based on its breadth and stage of development, the partnered pipeline is expected to generate a number of marketable therapeutic anti- bodies in the future. Should these be successful, the Company’s ﬁ nancial participation in the form of royalties on product sales would likely increase. MorphoSys plans to invest a substantial portion of its ﬁ nancial resources in proprietary R&D for the foreseeable future. The Management Board believes this is the best route to increasing the Company’s value for the long term. Our goal is to bring MOR208, our most advanced proprietary drug candidate, to the market. Due to the advanced maturity of the proprietary MOR208 program, MorphoSys will increasingly engage in ac- tivities, either alone or with potential partners, to prepare for possible commercialization in the future. We also plan to ad- vance our portfolio of proprietary development candidates and further strengthen our technology platform. Expected Economic Development In its fall 2017 report, the International Monetary Fund (IMF) is projecting global economic growth of 3.7 % in 2018, which is slightly higher than in 2017 (forecast: 3.4 %). Advanced econo- mies are anticipated to grow 2.0 % in 2018 compared to a fore- cast of 1.8 % for 2017. The IMF also expects the development in Europe to remain positive and is forecasting growth in the Eurozone in 2018 of roughly 1.9 %, which is higher than in the prior year (forecast: 1.5 %). Based on this forecast, Europe is ex- pected to make a sizeable contribution to global economic growth. The IMF expects economic growth in Germany to reach 1.8 % in 2018 (2017E 1.4 %). Record employment ﬁ gures, in- creasing nominal and real wages and low energy costs are fuel- ing private consumption. Nevertheless, challenges such as an aging population and a return to a normal level of interest rates still exist. The IMF is projecting a rise in US economic growth in 2018 to 2.3 % compared to expected growth of 2.2 % in 2017. According to the IMF, growth in the emerging and developing countries in 2018 is expected to reach 4.9 % (2017E: 4.6 %). Growth in China should reach 6.5 % in 2018 (2017E: 6.2 %) while Russia is expected to grow 1.6 % compared to growth of 1.1 % in 2017. The trend in Brazil is also expected to turn around with economic growth projected at 1.5 % for 2018 after positive growth of 0.5 % in the prior year. Expected Development of the Life Sciences Sector Following a temporary sharp decline in biotechnology stocks in 2016, the sector was again able to assert itself on the capital markets in the 2017 reporting year. The leading global industry index, the NASDAQ Biotechnology Index*, closed the year 2017 with an increase of 21 %. According to the auditing ﬁ rm Ernst & Young in its 2018 M&A Report, M&A activity in the life sciences sector, however, saw a decline in total volume of almost 20 % in 2017, ending the year at just over US$ 200 billion. In a survey of leading industry managers, 60 % of respondents said they expect M&A conditions in the sector to improve in 2018. On the basis of this survey, Ernst & Young is projecting total M&A volume to surpass US$ 200 billion again in 2018, mainly driven by a continued increase in competition and price pres- sure in the healthcare sector. The sector continues to be in good shape overall. The number of new FDA product approvals more than doubled in 2017 to 46 compared to 22 in 2016. A policy road map published by the FDA in January 2018 suggests that the number of new registra- tions in 2018 will remain high. Among others, the FDA plans to implement measures to increase competition in the ﬁ eld of bio- similars, which are generic versions of biopharmaceutical prod- ucts. Patient access to promising new drugs is also expected to be made easier. A growing challenge for pharmaceutical and biotechnology companies both in the US and Europe is expected to be the on- going price pressures as drug makers are facing increasingly stronger negotiating partners for drug prices and pressure from policy makers. Future Research and Development and Expected Business Performance PROPRIE TARY DEVEL OPMEN T The Company’s R&D budget for proprietary drug development in the 2018 ﬁ nancial year is expected to be in the corridor of around € 95 million to € 105 million. The majority of invest- ment will fund the clinical development of our proprietary drug candidates MOR208, MOR202 and MOR106. Much of that fund- ing will be dedicated to the clinical development of MOR208. Further investment will be made in the areas of target molecule validation as well as antibody and technology development. We will also continue to seek collaborations with partners such as academic institutions to gain access to new target molecules and technologies. Outlook and Forecast G r o u p M a n a g e m e n t R e p o r t 51 The events and development activities planned in 2018 include the following: • Update on interactions with the FDA during the break- through therapy designation process for MOR208. • Completion of treatment of 81 patients under the current study protocol of the fully recruited L-MIND* trial and the start of data evaluation. • Continuation of the pivotal phase 3 study evaluating MOR208 in combination with bendamustine in comparison to ritux- imab and bendamustine in r/r DLBCL* (B-MIND* study). • Continuation of the phase 2 COSMOS* trial of MOR208 with idelalisib and venetoclax in CLL* and presentation of study data at conferences. According to information provided on the website clinicaltrials. gov, in 2018 primary completion may be reached in a total of up to 31 clinical trials in various study phases from partners evaluating antibodies based on MorphoSys technology. This includes a pivotal phase 2b study by Mereo in osteogenesis imperfecta (brittle bone syndrome) of the HuCAL antibody BSP804, directed against the target molecule sclerostin and generated within the scope of the Novartis partnership. Sev- eral Janssen phase 3 trials in psoriasis are also scheduled for primary completion in 2018. These include a direct compara- tive study between Janssen’s product Tremfya® and competing product Cosentyx®. • Continue to advance the development of MOR208 towards a potential regulatory approval and begin to set up commercial capabilities in order to commercialize MOR208 in certain geographies. Our partner Roche is also expected to initiate two new pivotal phase 3 trials in the 2018 ﬁ nancial year (called GRADUATE-1 and GRADUATE-2) with the antibody gantenerumab in Alzhei- mer’s disease. • Evaluation of new potential partnerships for MOR202 for its optimal development. • Evaluate the start of an exploratory clinical trial of MOR202 in non-small-cell lung cancer (NSCLC). • Presentation of study data after the completion of the still on- going phase 1/2a dose-escalation trial of MOR202 in multiple myeloma. • Initiation of a phase 2 trial of MOR106 in atopic dermatitis under our co-development program with Galapagos. • Preclinical investigations of MOR107 with a focus on oncology indications based on initial anti-tumor data. • Initiation and continuation of development programs in the area of antibody discovery and preclinical development. Based on information provided on the clinicaltrials.gov web- site, we anticipate the publication of data from a phase 2b study of MOR103/GSK3196165 in rheumatoid arthritis and a phase 2a study in hand osteoarthritis conducted by our partner GSK. Our partner I-Mab has announced its intention to commence its ﬁ rst clinical study of MOR202 in China in 2018. *S E E G L O S S A R Y – page 170 PAR T NERED DIS COVERY MorphoSys intends to continue to focus, above all, on the fur- ther development of its proprietary development pipeline. In the Partnered Discovery segment, MorphoSys will carefully review its options to enter into additional antibody collabora- tions based on the Ylanthia technology with pharmaceutical and biotech companies, similar to the partnership it concluded with LEO Pharma in 2016. Whether, when and to what extent news will be published fol- lowing the primary completion of trials in the Partnered Dis- covery segment is at the full discretion of our partners. Expected Personnel Development While the number of employees in the Proprietary Develop- ment segment is expected to increase slightly during the 2018 ﬁ nancial year, the number of employees in the Partnered Dis- covery segment is expected to see a slight decline. Due to the initiation of building up commercial capacities, the number of employees in G&A is expected to increase slightly. Expected Development of the Financial Position and Liquidity MorphoSys had ﬁ nancial resources of € 312.2 million at the end of the 2017 ﬁ nancial year. Revenues in the 2018 ﬁ nancial year are expected to be below those achieved in the prior year. The reasons for this expected decline are primarily two items that will not reoccur in the 2018 ﬁ nancial year, namely € 37 million in revenues from the partnership with Novartis that ended in accordance with the contract in November 2017 and the one- time payment of € 16.8 million for partnering MOR202. Al- though the partnership with Novartis has ended, MorphoSys will continue to be eligible for success-based milestone pay- ments and royalties in the event of the successful development of product candidates by Novartis. The Management Board is projecting Group revenues of € 20 million to € 25 million in the 2018 ﬁ nancial year. Revenues are expected to include royalty income from Tremfya® ranging from € 12 million to € 17 mil- lion on constant US$ currency. This forecast does not take into account revenues from future collaborations and/or licensing agreements. 52 G r o u p M a n a g e m e n t R e p o r t Outlook and Forecast R&D expenses for proprietary programs and technology de- velopment are expected to reach € 95 million to € 105 million in 2018. Most of these expenses in the Proprietary Develop- ment segment will arise from the ongoing studies of MOR208, MOR202 and MOR106 as well as from our early-stage develop- ment programs. R&D expenses for the Partnered Discovery segment are expected to be lower than in the prior year due to the expiration of the partnership with Novartis. Due to the advanced maturity of the proprietary MOR208 pro- gram, MorphoSys will increasingly engage in activities, either alone or with potential partners, to help prepare for possible commercialization in the future. The Company expects EBIT of approximately € – 110 million to € – 120 million in 2018. This guidance does not include reve- nues from potential future partnerships or licensing agree- ments nor milestones for MOR103 that could occur in the course of 2018. Eﬀ ects from potential in-licensing or co-development deals for new development candidates are not included in the guidance either. The Partnered Discovery segment is expected to generate a positive operating result in 2018. The Proprietary Development segment is expected to report a sharply negative EBIT due to planned R&D expenditures on proprietary programs. In the years ahead, one-time events, such as the in-licensing and out-licensing of development candidates and larger mile- stone payments and royalties from the market maturity of HuCAL and Ylanthia antibodies could have an increasing im- pact on the Company’s net assets and ﬁ nancial position. Such events could cause ﬁ nancial targets to change signiﬁ cantly. Similarly, failures in drug development could have negative consequences for the MorphoSys Group. Revenue growth in the near future will depend on the Company’s ability to out-license its proprietary programs and/or enter into new partnerships. In addition, revenues should increasingly beneﬁ t from royalties based on sales of Tremfya® (guselkumab). At the end of the 2017 ﬁ nancial year, MorphoSys had liquidity of € 312.2 million (December 31, 2016: € 359.5 million). The loss projected for 2018 will cause a decline in liquidity. MorphoSys sees its solid cash position as an advantage that can be used to accelerate its future growth through strategic activities such as the in-licensing of compounds and investments in promising companies. Available liquidity can also be used to fund re- search and development expenses for the Company’s propri- etary portfolio of therapeutic antibodies. DIVIDEND In the separate ﬁ nancial statements of MorphoSys AG, pre- pared in accordance with German Generally Accepted Ac- counting Principles (German Commercial Code), the Company is reporting an accumulated deﬁ cit, which prevents it from distributing a dividend for the 2018 ﬁ nancial year. In view of the anticipated losses in 2018, the Company expects to con- tinue to report an accumulated loss for the 2018 ﬁ nancial year. MorphoSys will invest further in the development of propri- etary drugs and will pursue additional in-licensing and acqui- sition transactions to open up new growth opportunities and increase the Company’s value. Based on these plans, the Com- pany does not expect to pay a dividend in the foreseeable future. This outlook takes into account all known factors at the time of preparing the Annual Report and is based on the Management Board’s assumptions of events that could inﬂ uence the Com- pany in 2018 and beyond. Future results may diﬀ er from the expectations described in the section entitled “Outlook and Forecast.” The most signiﬁ cant risks are described in the risk report. Shares and the Capital Market G r o u p M a n a g e m e n t R e p o r t 53 Shares and the Capital Market MorphoSys AG shares opened the reporting year at a share price of € 48.75. After a volatile start in the ﬁ rst weeks of 2017, the shares marked their low for the year on February 6 at € 47.60. The shares then trended higher in line with the TecDAX before breaking out in September with price perfor- mance far outpacing the benchmark index. Positive news ﬂ ow, such as the breakthrough therapy status for MOR208 from the FDA and the approval of Tremfya® received by Janssen in new regions, drove MorphoSys shares to a high of € 82.95 on No- vember 21. The shares closed the ﬁ nancial year at € 76.58, amounting to a signiﬁ cant share price increase of 57 % and market capitalization* of € 2.3 billion. In a record year for German and international stock indices, the shares of MorphoSys AG still outperformed with a 57 % in- crease in share price. The NASDAQ Biotechnology Index ended the year 22 % higher, and the TecDAX* rose 40 % for the year. ›› S E E F I G U R E 0 9 – Performance of the MorphoSys Share in 2017 ( ›› S E E F I G U R E 10 – Performance of the MorphoSys Share 2013–2017 ( Performance of the MorphoSys Share in 2017 (page 54) page 54 page 54) page 54 Performance of the MorphoSys Share 2013–2017 (page 54) page 54) Liquidity and Index Membership The average daily trading volume in MorphoSys shares on all regulated trading platforms increased by 61 % in 2017, reach- ing a volume of € 15.6 million (2016: € 9.7 million). The aver- age daily trading volume on the TecDAX, which contains the 30 largest technology stocks on the Frankfurt Stock Ex- change, rose 46 % amid the overall positive stock market envi- ronment. By the end of 2017, MorphoSys ranked 10th in the TecDAX in terms of market capitalization (2016: 11th) and 12th in terms of trading volume (2016: 11th). The average daily trading volume in MorphoSys shares on alter- native trading platforms (“dark pools”) in 2017 was approxi- mately € 6.3 million, or 98,700 shares (2016: approx. 103,700 shares valued at € 4.4 million), representing a year-on-year decline of 5 %. *S E E G L O S S A R Y – page 170 Common Stock Stock Market Development The 2017 stock market year was marked by positive develop- ments worldwide. The German DAX index reached a new high in early November, and the US Dow Jones Index gained nearly 25 % for the year. The MSCI Emerging Markets stock index, which tracks the stock markets in the emerging countries, rose 37 %. In this favorable environment, biotech stocks managed to regain investor conﬁ dence. During the reporting year, MorphoSys con- tinued to increase its investor relations activities focusing again primarily on Europe and the United States. The Company’s common stock increased to 29,420,785 shares, or € 29,420,785.00, in the reporting year due to the exercise of convertible bonds granted to the Management Board and the Senior Management Group in 2013. A detailed description of the convertible bond program can be found in the Notes (Item 7.2). A long-term incentive plan (2013 LTI program), which was granted to the Management Board and members of the Senior Management Group in 2013, was allocated in the year under review. As part of this 2013 LTI program, 61,871 treasury shares were transferred from the Company to the Management Board and Senior Management Group during the reporting year. A detailed description of this program can be found in the Corporate Governance Report and in the Notes (Item 7.3.1) of this Annual Report. In addition, the two new Management Board members, Dr. Malte Peters and Dr. Markus Enzelberger, were granted a total of 14,461 MorphoSys shares held by the Company as treasury stock. This reduced the holdings of MorphoSys AG’s treasury stock to 319,678 shares. 54 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 09 Performance of the MorphoSys Share in 2017 (January 1, 2017 = 100 %) 10 Performance of the MorphoSys Share 2013–2017 (January 1, 2013 = 100 %) 170 160 150 140 130 120 110 100 90 350 300 250 200 150 100 50 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC morphosys ag nasdaq b iotec hno lo gy inde x tec da x 2013 2014 2015 2016 2017 morphosys ag nasdaq b iotec hno lo gy inde x tec da x T A B L E 0 7 Key Data for the MorphoSys Share (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 €) Average daily trading volume (in % of common stock) 2017 2016 2015 2014 2013 358.7 415.5 362.7 348.8 352.1 29,420,785 29,159,770 26,537,682 26,456,834 26,220,882 2,253 76.58 15.6 0.83 1,422 48.75 9.7 0.78 1,530 57.65 14.9 0.87 2,027 76.63 11.9 0.65 1,464 55.85 6.9 0.59 Shares and the Capital Market G r o u p M a n a g e m e n t R e p o r t 55 International Investor Base Various voting right notiﬁ cations were issued during the re- porting year in accordance with Section 26 (1) of the German Securities Trading Act (WpHG). These notiﬁ cations were pub- lished on the MorphoSys website and can be found under Media and Investors – Stock Information – Recent Voting Rights Notiﬁ cations. According to the deﬁ nition given by the Deutsche Börse, the free ﬂ oat in MorphoSys AG’s shares was 98.91 % at the end of the reporting year. ›› S E E F I G U R E 11 – Shareholders of MorphoSys AG by Region ( page 56 Shareholders of MorphoSys AG by Region (page 56) page 56) Annual General Meeting MorphoSys also took part in around 20 international investor conferences. As in prior years, the Company held an Investor’s Day in Chicago, USA, in June on the occasion of the ASCO An- nual Meeting, the world’s largest conference for cancer. Several roadshows were held at various locations in both Europe and the USA. The strongest interest continued to be in the United States where a large number of specialized healthcare investors are located. Meanwhile, approximately 45 % of MorphoSys AG shares are held by US institutional investors. The Management Board also held conference calls in conjunc- tion with the publication of the annual, half-yearly and quar- terly results to report past and expected business developments and answer questions from analysts and investors. The Management and Supervisory Boards of MorphoSys AG welcomed shareholders to the Company’s 19th Annual General Meeting in Munich on May 17, 2017. The shareholders and proxies attending represented more than 54.0 % of the com- mon stock of MorphoSys AG (2016: 54.1 % of the common stock represented). The key topics in investor discussions were the general prog- ress of the drug pipeline and the development of the propri- etary portfolio, which had a total of 13 active programs at the end of the reporting year. Investors were particularly interested in the clinical results of our partnered programs, especially the data and plans for the pivotal studies. All six agenda items submitted for resolution were adopted by a clear majority, including the reelection of Supervisory Board members Dr. Frank Morich, Klaus Kühn and Wendy Johnson. Krisja Vermeylen was newly elected to the Supervisory Board of MorphoSys AG. Investor Relations Activities During the 2017 ﬁ nancial year, MorphoSys maintained close communication with the capital markets. On September 5 and 6, the Company held Capital Markets Days in London and New York. The Management Board gave a complete presentation of MorphoSys’s strategy and detailed insight into the latest pipe- line developments. Following the presentation, participants were given an opportunity to address questions to the manage- ment. Both events were also webcast, making them accessible to interested parties worldwide. A total of more than 100 in- vestors, analysts and shareholders watched the Management Board’s presentations. 56 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 11 Shareholders of MorphoSys AG by Region1 (December 31, 2017) 1 Source: Bloomberg 48 % N O R T H A M E R I C A M A N A G E M E N T B O A R D A N D S U P E R - V I S O R Y B O A R D 3% 7% 11% 15% 15% G R E AT B R I TA I N G E R M A N Y R E S T O F E U R O P E R E S T O F W O R L D T A B L E 0 8 Analyst Recommendations (December 31, 2017) Buy/Overweight 8 Hold 3 Sell 0 n/a 0 Buy/Overweight; Hold; Sell; n/a = not available (no rating) There were a total of 11 analysts covering MorphoSys shares at the end of 2017. Detailed information on MorphoSys shares, ﬁ nancial ratios, the Company’s strategic direction and the Group’s recent develop- ments can be found on the Company’s website (Media and Investors). Sustainable Business Development G r o u p M a n a g e m e n t R e p o r t 57 Sustainable Business Development MorphoSys is aware of its responsibility to present and future generations and sees sustainable behavior as a prerequisite for long-term business success. As a biotechnology company con- ducting both research and drug development, observing the highest ecological, social and ethical standards is a top priority and a key component of MorphoSys’s corporate culture. The fol- lowing section describes the Company’s sustainability strategy and the activities carried out during the reporting year that represent non-ﬁ nancial performance indicators. The ﬁ nancial performance indicators are presented in the section “Analysis of Net Assets, Financial Position and Results of Operations.” Information on MorphoSys’s management structure and corpo- rate governance practices can be found in the Corporate Gover- nance Report. 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 in contributing value to society. This applies to the short- and long-term objectives of all levels of management and is reﬂ ected in the Company’s core task of developing even more eﬀ ective and safer drugs. To ensure lasting business success, the Company incorporates environmental and social responsi- bility into its daily business and bases its business model on sustainable growth that protects the interests of its sharehold- ers, creates long-term value and weighs the Company’s actions in terms of their impact on the environment, society, patients and employees. Internally, this business model is reﬂ ected 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 identiﬁ ed early and corrected if necessary. MorphoSys only as- sumes risk when there is an opportunity to increase the Com- pany’s enterprise value. At the same time, a great eﬀ ort is made to systematically identify new opportunities and leverage its business success (more information on risks and opportunities can be found on page 64). Group-wide compliance with the sustainability strategy is monitored by the entire Management Board, with primary re- sponsibility assigned to the Chief Financial Oﬃ cer. The sus- tainability strategy is based on the Company’s Credo, which contains the ethical principles forming the foundation of all activities of MorphoSys and its employees. The Credo is devel- oped further by MorphoSys’s Code of Conduct. Employee train- ing on general and speciﬁ c sections of the Code of Conduct is conducted regularly to ensure that the guidelines are under- stood and implemented. The Compliance Committee consists of ﬁ ve members and is available to employees at all times. The Compliance Oﬃ cer, who is also a member of the committee, coordinates the elements of MorphoSys’s Compliance Manage- ment System. More information on this subject can be found on page 97 of the Corporate Governance Report. Employees can ask for advice on all matters concerning legal compliance and corporate responsibility and report any suspected violations. If preferred, this may be done on an anonymous basis. Violations are systematically pursued, and appropriate 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 oﬀ enses would occur that could materially aﬀ ect the Group’s net assets, ﬁ nancial position and results of operations. The Company’s long-term and sustainable business success rests on innovative research and development to meet the major challenge of providing comprehensive healthcare in the future. Due to a growing and aging population, biotechnology- derived drugs represent a growing portion of the overall health- care system. In the opinion of management, all aspects of the current business model of MorphoSys support the sustainable investment interests of its shareholders. Detailed information on the KPIs for sustainable development used by MorphoSys is provided in the section “Strategy and Group Management” (page 23). 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 Octo- ber 2011 and last updated in 2017. 58 G r o u p M a n a g e m e n t R e p o r t Sustainable Business Development Non-Financial Performance Indicators E T HIC AL S TANDARDS AND COMMUNIC AT ION WI T H S TAKEHOL DERS The highest scientiﬁ c and ethical principles for conducting human clinical trials and animal testing are anchored in MorphoSys’s Code of Conduct, which is modeled after the “Dec- laration of Helsinki” of the World Medical Association (WMA). Strict adherence to applicable national and international regu- lations is mandatory for all MorphoSys employees and sub-con- tractors. Because European legislation prescribes the performance of animal testing to determine the toxicity, pharmacokinetics* and pharmacodynamics* of drug candidates, the biotechnology industry cannot forgo this type of testing. Animal studies for MorphoSys are given to contract research organizations (CROs*) because the Company does not have laboratories suit- able for this type of research. In the course of product develop- ment, MorphoSys contracts out animal studies according to the principles of good animal welfare and the respectful treat- ment of animals as set out in national and European regula- tions. MorphoSys introduced a quality assurance and control system with written standard operating procedures (SOPs*) that are continually updated to ensure that the Company only deals 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 ethi- cal principles and legal regulations for research involving ani- mals and, in certain cases, have the Good Laboratory Practice (GLP*) quality assurance certiﬁ cation. This is how MorphoSys ensures it fulﬁ lls its moral obligation for the respectful treat- ment of animals. The Company also conducts on-site inspec- tions of the research institute’s study centers that include a re- view 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. The Declaration of Helsinki mentioned above also deﬁ nes 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 pro- visions on privacy and conﬁ dentiality. Protecting the rights, safety and welfare of all clinical trial participants has the high- est priority at MorphoSys. Clinical trials are initiated only after the approval of the relevant independent ethics committee and/ or institutional review board. Before participating in a clinical trial, each participant must voluntarily submit an informed consent. The goal of MorphoSys’s business activities is to improve patients’ health through its scientiﬁ c work. The Company can only achieve this goal if its activities are socially accepted. Achieving this acceptance requires a continuous and open dia- log with stakeholders so that MorphoSys can understand poten- tial concerns with regard to biotechnological approaches and explain the Company’s activities and their beneﬁ ts. To accom- plish this, MorphoSys is active in a variety of ways that range from participation in public information events to active sup- port of the Communication and Public Relations task force of BIO Deutschland e.V., Berlin. PROCUREMEN T The Central Purchasing and Logistics Department is responsi- ble for negotiating and purchasing goods and services for MorphoSys in speciﬁ ed areas. During the reporting year, the department increased the eﬃ ciency of its procurement man- agement systems and processes, which involved the introduc- tion of an electronic approval process for orders in certain cost categories. Preparations are currently being made to introduce processes for other relevant cost categories. The department also supported the creation of an improved clinical sourcing strategy for selecting and categorizing clinical materials and services and eﬃ ciently cooperating with suppliers within these strategic partnerships. ENVIRONMEN TAL PRO T EC T ION AND OCCUPAT IONAL SAF E T Y Because the biotechnology industry is subject to stringent regu- latory requirements, environmental protection and occupational safety are important tasks of Group management. The Technical Operations Department and its subsections monitor Group-wide compliance with all relevant requirements. In addition to strict compliance with all legal requirements, MorphoSys makes a tremendous eﬀ ort to maintain sustainable environmental man- agement and the eﬀ ective protection of its employees. 12 Occupational Safety at MorphoSys Sustainable Business Development G r o u p M a n a g e m e n t R e p o r t 59 ! 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 “Gentechnik Sicherheitsverordnung” (Ger- man Genetic Engineering Safety Directive) and other safety professionals perform an internal audit to assess the risk involved Speciﬁ c safety and evacuation training for the employees working with the substances Assurance that all safety measures are imple- mented before actual work commences 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 ONLY SPECIALLY TRAINED EMPLOYEES ARE ALLOWED TO WORK WITH TOXIC SUBSTANCES 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 oﬀ ers employees an extensive range of preventative healthcare options. A sample of these options can be found in the section entitled “Human Resources” (page 61). With one reportable occupational accident in the reporting year, the number of accidents was at the same very low level as in the previous year, placing the ratio of reportable accidents at MorphoSys signiﬁ cantly below the average ratio in Germany (18.4 reportable occupational accidents as deﬁ ned by the em- ployers’ liability insurance association BG RCI per 1,000 full- time employees in the latest survey conducted in 2016). MorphoSys tries to minimize the amount of harmful sub- stances used in its laboratories. Only those who are specially trained are allowed to work with toxins. Work involving con- tagious pathogens can only be carried out in secure laborato- ries. MorphoSys only uses certiﬁ ed companies to dispose of chemical waste and also refrains from radioactive substances. page 59 Occupational Safety at MorphoSys (page 59) page 59) ›› S E E F I G U R E 12 – Occupational Safety at MorphoSys ( QUAL I T Y ASSURANCE Biopharmaceutical companies bear a special responsibility to comply with the highest quality and safety standards. MorphoSys follows 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 ﬁ nancial situation. This is how the Company ensures the quality of the investigational medicinal products, keeps risks to volunteers and patients in clinical studies as low as possible and ensures that data are measured reliably and processed correctly. To control and regulate these processes in its own development department, MorphoSys created an integrated quality manage- ment system that complies with the principles of Good Manu- facturing Practice (GMP*), Good Clinical Practice (GCP*) and Good Laboratory Practice (GLP*). An independent quality as- surance department ensures that all development activities comply with national and international laws, rules and guide- lines. The Quality Assurance Manager reports to and coordi- nates activities with the Chief Executive Oﬃ cer to meet the stringent quality standards, ensure product quality and data integrity as well as the safety of volunteers and patients in clin- ical trials. *S E E G L O S S A R Y – page 170 60 G r o u p M a n a g e m e n t R e p o r t Sustainable Business Development 13 Quality Management System at MorphoSys 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 M A N A G E M E N T B O A R D Q U A L I T Y M A N A G E M E N T S Y S T E M S 1 7 2 R E G U L AT O R Y R E Q U I R E M E N T S 6 3 5 4 1 T R A I N I N G A N D Q U A L I F I C AT I O N 4 H A N D L I N G O F D E V I AT I O N S , 5 B AT C H RECORD REV IE W/ B AT C H RE L E A SE 2 S E L F -I N S P E C T I O N / I N T E R N A L A U D I T S 3 D O C U M E N TAT I O N S Y S T E M C H A N G E C O N T R O L , C O M P L A I N T S , O U T O F S P E C I F I C AT I O N ( O O S ) A N D R E C A L L S 6 S O P S Y S T E M * 7 E X T E R N A L A U D I T S ( C M O *, C T O *, C R O *, C L I N I C A L T R I A L S I T E S ) 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 manu- facturers 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, as well as a certiﬁ cate from the German authorities of Upper Bavaria conﬁ rming the Company’s compliance with Good Manufacturing Practice (GMP*) standards and guidelines. ›› S E E F I G U R E 13 – Quality Management System at MorphoSys ( *S E E G L O S S A R Y – page 170 page 60 Quality Management System at MorphoSys (page 60) page 60) Sustainable Business Development G r o u p M a n a g e m e n t R e p o r t 61 IN T EL L EC T UAL PROPER T Y Proprietary technology and the drug candidates derived there- from are MorphoSys’s most valuable assets. Therefore, it is crit- ical to the Company’s success that these assets are protected by appropriate measures such as patents and patent ﬁ lings. Only through these means can MorphoSys ensure that these assets are exclusively utilized. It is also the reason our Intellectual Property (IP) Department seeks out the best strategy to protect the Company’s products and technologies. The rights of third parties are also actively monitored and respected. MorphoSys’s core technologies, which include the Ylanthia anti- body library and the Slonomics technology amongst others, body body library and the Slonomics technology amongst others, form the Company’s basis for success. Each of these technolo- gies is protected by a number of patent families. Meanwhile, most of these patents have been granted in all of the key regions, including the markets of Europe, the United States and Asia. The same is true for our development programs. In addition to the patents that protect the drug candidates themselves, other patent applications were ﬁ led that cover other aspects of the programs. The relevant patents and associated protection certiﬁ cates for development candidates MOR103/GSK3196165 (out-licensed to GSK) and MOR202 are expected to expire in 2031. The MOR208 program is also protected by various pat- ents scheduled to expire in 2029 (US patent) and 2027 (Euro- pean patent), aside from any possible regulatory or patent oﬃ ce extensions. The programs developed in cooperation with or for partners are also fully secured by patent protection. MorphoSys’s patent de- partment works closely with the relevant partners. The patents covering these drug development programs have durations that signiﬁ cantly exceed those of the underlying technology patents. MorphoSys also monitors the activities of its competitors and initiates any necessary actions. In April 2016, MorphoSys ﬁ led a patent infringement lawsuit against Janssen Biotech and Genmab. This lawsuit is still in progress. MorphoSys’s patent attorneys currently maintain over 50 dif- ferent patent families worldwide in addition to the numerous patent families the Company pursues with its partners. The patent portfolio is routinely analyzed and adapted to the Com- pany’s corporate strategy. HUMAN RES OURCES MorphoSys follows a progressive human resources policy for the long-term retention of professionally and personally suit- able employees from a variety of ﬁ elds. In an industry such as ours, where success largely depends on the creativity and commitment of staﬀ , factors such as employee retention and employee satisfaction are crucial for success. At the end of the reporting year, MorphoSys had employees representing 34 dif- ferent nationalities (2016: 31) employed at the Company for an average of 7.6 years (2016: 6.9 years). Employees by Gender (page 62) ›› S E E F I G U R E 14 – Employees by Gender ( page 62 page 62) page 62 page 62) Seniority (page 62) ›› S E E F I G U R E 15 – Seniority ( Employees have access to a broad range of in-house and exter- nal training programs, advanced education, specialized continu- ing education and development programs and industry confer- ences. MorphoSys promotes not only ongoing professional education but also the personal development of its employees and in some cases even oﬀ ers support through customized coaching. MorphoSys encourages all employees with management respon- sibility to take part in management seminars created exclu- sibility sibility to take part in management seminars created exclu- sively for the Company. The training is oﬀ ered in several mod- ules with themes that build upon one another. The goal is not only to provide theoretical knowledge but also to prepare par- ticipants for the special demands placed on the Company’s ex- ecutives. MorphoSys actively promoted the professional career paths of specialists and experts once again during the reporting year. The intended goal of this type of career promotion, which is also available to employees without personnel responsibilities, is to continue to maintain ﬂ at hierarchies and place traditional management and professional career paths on an equal footing, also in terms of titles and compensation structures. MorphoSys oﬀ ers in-house vocational training to open up promising career prospects, particularly for young people. In awarding apprenticeships, the Company has been very suc- cessful in considering students who are equally suitable but do not have a diploma. On December 31, 2017, MorphoSys had two trainees in the IT department and six biology laboratory trainees (December 31, 2016: one IT trainee; six biology labora- tory trainees). 62 G r o u p M a n a g e m e n t R e p o r t Sustainable Business Development ) r e b m u n ( s e e n i a r t s e e y o l p m e l a t o t e g a r e v a s r a e y 14 Employees by Gender (December 31) 15 Seniority 16 Workforce Turnover Rate1 (in %) 1 The higher workforce turnover rate in 2017 is mainly driven by the end of the active part- nership with Novartis. The col- laboration was terminated in accordance with the contract at the end of November 2017. 4 3 4 4 24 44 23 39 ) r e b m u n ( s e v i t u c e x e 2016 2017 2016 2017 2016 2017 2016 2017 < 5 5 -10 10 -15 15 - 2 0 >2 0 2016 2017 64 % 64 % 2016 2017 36 % 36 % 6.9 Y E ARS 7.6 YEARS 36 % 39 % 15 % 9 % 1 % % % 7.5 10.6 Sustainable Business Development G r o u p M a n a g e m e n t R e p o r t 63 MorphoSys makes every eﬀ ort 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 re- porting 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 oﬀ ering routine medical examinations. ›› S E E F I G U R E 16 – Workforce Turnover Rate ( page 62 Workforce Turnover Rate (page 62) page 62) As articulated in the Company’s credo, transparent communi- cation between employees is a central aspect of MorphoSys’s corporate culture. One example is the employees’ use of the Company’s intranet to obtain target-group-speciﬁ c informa- tion. MorphoSys also has a tri-weekly general meeting in which the Management Board presents the Company’s latest develop- ments to employees, answers questions and provides an oppor- tunity for employees to present selected projects. Employees’ questions and feedback can be taken directly in the meeting or submitted in advance in writing – anonymously if desired. MorphoSys maintains a Facebook career page to promote em- ployer branding. The target group is potential applicants who want to learn more about the Company. The page presents em- ployee proﬁ les and reports on a variety of activities extending beyond the typical workday to give an authentic and modern impression of the Company. New employees are helped to become 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. New executives are oﬀ ered an additional seminar concerning their management duties. Free athletic and relaxation options, such as back training, soc- cer, volleyball and basketball, as well as autogenic training, yoga and massage for a fee, all work to promote health and so- cializing among employees of all departments. Providing feasible concepts for reconciling a professional ca- reer with personal life is a strategic success factor for progres- sive companies. For many years, MorphoSys has been oﬀ ering employees a diverse range of options, such as ﬂ exible working hours and special part-time employment arrangements. Mod- ern IT equipment also allows employees to work during busi- ness trips or from their home oﬃ ce without interruption. MorphoSys makes it easier for employees with families to reen- ter the workforce and combine work and family life. The Com- pany cooperates with an external provider oﬀ ering employees additional services related to care and nursing. 64 G r o u p M a n a g e m e n t R e p o r t Risk and Opportunity Report Risk and Opportunity Report MorphoSys operates in an industry characterized by constant change and innovation. The challenges and opportunities in the healthcare sector are inﬂ uenced by a wide variety of fac- tors. Global demographic changes, medical advances and the desire to increase quality of life provide excellent growth op- portunities for the pharmaceutical and biotechnology indus- tries; however, companies must also grapple with growing reg- ulatory requirements in the ﬁ eld of drug development as well as cost pressure on healthcare systems. MorphoSys undertakes great eﬀ ort to identify new opportuni- ties and to leverage its business success to generate a lasting increase in enterprise value. Entrepreneurial success, however, is not achievable without conscious risk-taking. Through its worldwide operations, MorphoSys is confronted with a number of risks that could aﬀ ect its business. MorphoSys’s risk man- agement system identiﬁ es these risks, evaluates them and takes suitable action to avert risk and reach its corporate objec- tives. A periodic strategy review ensures that there is a balance between risk and opportunity. MorphoSys only assumes risk when there is an opportunity to increase the Company’s enter- prise 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, assess, communicate and deal with risks throughout the Com- pany. The risk management system identiﬁ es risk as early as possible and details possible actions to limit operating losses and avoid risks that could jeopardize the Company. All actions to minimize risk are assigned to risk oﬃ cers, who are also members of MorphoSys’s Senior Management Group. All material risks in the various business segments and the Company as a whole are assessed using a systematic risk as- sessment that is carried out twice a year. Risks are assessed by comparing their quantiﬁ able ﬁ nancial impact on the MorphoSys Group with their probability of occurrence with and without initiating a risk mitigation 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 develop- ment that have longer durations. Additionally, there is long-term strategic risk assessment that spans more than three years (qualitative assessment). An overview of MorphoSys’s current risk assessment activities can be found in Tables 9 and 10. Risk managers enter their risks into an IT platform that makes monitoring, analyzing and documenting risks much easier. The risk management system distinguishes risk owners from risk managers. For risks relating to clinical development, the risk owner is the responsible business team head for the respective clinical program. For non-clinical risks, the risk owner is the responsible department head. Employees from the respective area of the risk owner can be risk managers as long as the risks included in the risk management system fall under their area of responsibility. Risk owners and risk managers are required to update their risks and assessments at half-yearly intervals. The process for this is coordinated and led by the Corporate Finance & Corporate Development Department, which is also responsible for monitoring the evaluation process and summa- rizing the key information. The information is regularly pre- sented to the Management Board which, in turn, presents the results to the Supervisory Board twice a year. The entire evalu- ation process is based on standardized forms for the evalua- tions. Risk management and monitoring activities are carried out by the relevant managers. The changes in the risk proﬁ le resulting from these activities are recorded at regular inter- vals. It is also possible to report important risks on an ad hoc basis when they occur outside of the regular intervals. A regu- lar audit by external consultants ensures the ongoing develop- ment of the risk management system and that any potential changes in the Company’s risk areas are promptly incorpo- rated. The risk and opportunity management system combines a bottom-up approach for recognizing both short- and medi- um-term risks with a top-down approach that systematically identiﬁ es long-term global risks and opportunities. As part of the top-down approach, workshops are held twice per year with selected members of the Senior Management Group. These workshops assess and discuss the long-term risks and opportu- nities in diﬀ erent areas of the Company, including those ex- ceeding a period of three years. The evaluation process is solely qualitative. These risks are listed in Table 10. Principles of Risk and Opportunity Management MorphoSys continually encounters both risks and opportuni- ties. These could have a potential material impact on the Com- pany’s net assets and ﬁ nancial position as well as a direct eﬀ ect on intangible assets, such as the Company’s image in the sector or the Company’s trademark. MorphoSys deﬁ nes risk as an internal or external event that has an immediate impact on the Company and includes an as- sessment of the potential ﬁ nancial impact on the Company’s targets. There is a direct relationship between opportunity and risk. Seizing opportunities has a positive inﬂ uence on Com- pany targets, whereas risk emergence has a negative inﬂ uence. 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 Develop- ment Department coordinates the risk management process and reports regularly to the Management Board. The Super- visory Board has appointed the Audit Committee to monitor the eﬀ ectiveness of the Group’s risk management system. The Audit Committee periodically reports its ﬁ ndings 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 17 – Risk and Opportunity Management System at MorphoSys ( page 66 Risk and Opportunity Management System at MorphoSys (page 66) page 66) Risk and Opportunity Report G r o u p M a n a g e m e n t R e p o r t 65 Accounting-Related Internal Control System MorphoSys employs extensive internal controls, Group-wide reporting guidelines as well as other measures, such as em- ployee training and ongoing professional education with the goal of maintaining accurate bookkeeping and accounting and ensuring reliable ﬁ nancial reporting in the consolidated ﬁ nan- cial statements and group management report. This essential component of Group accounting consists of preventative, moni- toring and detection measures intended to ensure security and control in accounting and operating functions. Detailed infor- mation about the internal control system for ﬁ nancial reporting can be found in the Corporate Governance Report. Risks RISK C AT EGORIES As part of its risk assessment, MorphoSys assigns risks to the six categories described below. The assessment of the relevance of the risks is not distinguished according to categories but according to impact and probability of occurrence. Therefore, Tables 9 and 10, which list MorphoSys’s biggest risks, do not necessarily include risks from all six categories. FINANCIAL RISK MorphoSys’s ﬁ nancial risk management seeks to limit ﬁ nan- cial 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 mate- rialize, are delayed or are out-licensed to a diﬀ erent degree than originally 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 import- ant for minimizing risk. Financial risk related to the Compa- ny’s proprietary programs was reduced in 2013 by successfully partnering MOR103/GSK3196165. The ﬁ nancial risk relating to the fully proprietary program MOR208 remains entirely with MorphoSys. MorphoSys retains some risk with respect to the clinical development of programs introduced into partnerships; for example, MOR106. For the MOR202 program, a regional de- velopment and commercialization agreement was signed for 66 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 17 Risk and Opportunity Management System at MorphoSys C O R P O R AT E G O V E R N A N C E S U P E R V I S O R Y B O A R D M A N A G E M E N T B O A R D C O M P L I A N C E M A N A G E M E N T R I S K A N D O P P O R T U N I T Y M A N A G E M E N T I N T E R N A L C O N T R O L S Y S T E M I N T E R N A L R E V I S I O N D E F I N E O B J E C T I V E S D I S C U S S I O N F O R U M M O N I T O R S Y S T E M A S S E S S R I S K T E C H N O L O G Y S C O U T I N G B U S I N E S S D E V E L O P M E N T I M P L E M E N T M E A S U R E S I N N O V AT I O N C A P I TA L I N T E R N A L A U D I T 17 Risk and Opportunity Management System at MorphoSys C O R P O R AT E G O V E R N A N C E S U P E R V I S O R Y B O A R D M A N A G E M E N T B O A R D C O M P L I A N C E M A N A G E M E N T R I S K A N D O P P O R T U N I T Y M A N A G E M E N T I N T E R N A L C O N T R O L S Y S T E M I N T E R N A L R E V I S I O N D E F I N E O B J E C T I V E S D I S C U S S I O N F O R U M M O N I T O R S Y S T E M A S S E S S R I S K T E C H N O L O G Y S C O U T I N G B U S I N E S S D E V E L O P M E N T I M P L E M E N T M E A S U R E S I N N O V AT I O N C A P I TA L I N T E R N A L A U D I T Risk and Opportunity Report G r o u p M a n a g e m e n t R e p o r t 67 China, Taiwan, Hong Kong and Macao in the reporting year, leading to a partial reduction in MorphoSys’s ﬁ nancial risks. The early termination of development partnerships may force MorphoSys to bear future development costs alone and have a major impact on the Company’s income statement and ﬁ nancial planning. Continuing economic diﬃ culties in Europe indicate that poten- tial bank insolvencies still pose a ﬁ nancial risk. For this rea- son, MorphoSys continues to invest only in funds and bank instruments deemed safe – to the extent this is possible and can be estimated – and that have a high rating and/or are secured by a strong partner. MorphoSys limits its dependence on individual ﬁ nancial institutions by diversifying and/or investing in lower risk money market funds. However, a strat- egy that eliminates all risks of bank insolvency would be too costly and impractical. For example, German government bonds are a very secure form of investment but currently trade with negative interest rates. A further risk is the receipt of ade- quate interest on ﬁ nancial investments, particularly in light of today’s negative interest rates. It is currently very diﬃ cult for MorphoSys to invest within the scope of company policies and still avoid negative interest rates. MorphoSys invests when pos- sible in instruments that yield positive interest rates. However, there is no guarantee that positive, safe, interest-bearing in- vestments will always be available. In the Partnered Discovery segment, there is a ﬁ nancial risk associated with royalties on Tremfya® product sales. Revenues generated by MorphoSys’s partner Janssen from the drug, which was approved in 2017, are diﬃ cult to predict and may lead to deviations from the budgeted revenues. MorphoSys plans to continue to invest a signiﬁ cant portion of its funds in the development of its product candidates. This includes identifying target molecules and drug candidates, conducting preclinical and clinical studies, producing clinical material, supporting partners and co-developing programs. Current ﬁ nancial resources and expected revenues are ex- pected to be suﬃ cient to meet the Company’s current and short-term capital needs. This does not guarantee, however, that suﬃ cient funds will be available over the long term at all times. OPER ATIONAL RISK Operational risk includes risks related to the exploration and development of proprietary drug candidates. 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 expected results, shows unexpected adverse side eﬀ ects or is compiled incorrectly. Clinical trial design and drafts of develop- ment plans are always completed with the utmost care. This gives the trials the best opportunity to show clinically relevant data in clinical testing and persuade regulatory agencies and potential partners. External experts also contribute to the Com- pany’s existing internal know-how. Special steering commit- tees and panels are formed to monitor the progress of clinical programs. Any changes with respect to clinical trials such as the trial’s design or the speed at which patients can be recruited may lead to a delay in development and, as a result, have a negative im- pact on the trial’s economic feasibility and potential. In the course of prioritizing its development programs, for example, MorphoSys decided during the reporting year to end its cooper- ation with Aptevo Therapeutics Inc. for the development of MOR209/ES414 in prostate cancer and to return the develop- ment and commercialization rights to Aptevo. There is also a risk associated with proprietary programs if partnerships fail or are delayed. STR ATEGIC RISK Access to suﬃ cient ﬁ nancing options also poses a strategic risk for the Company. Following MorphoSys’s decision to develop its proprietary portfolio in-house, the ﬁ nancing of research and development is now a key focus. Risks in this respect can arise from a lack of access to capital. MorphoSys established an in- depth budget process to mitigate these risks. The Company also employs various departments and external consultants to en- sure the smooth execution of capital market transactions. A further strategic risk is the danger that a development pro- gram introduced into a partnership may fail. Partnerships can be terminated prematurely, forcing MorphoSys to search for new development partners or bear the substantial cost of fur- ther development alone. This may result in a delay or even the termination of the development of individual candidates and could lead to additional costs and a potential long-term loss of revenues for MorphoSys due to delayed market entry. 68 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 Another strategic risk is that preliminary data from clinical trials may lead to the trial’s termination or a change in the trial’s design. E X TERNAL RISKS MorphoSys faces external risk with respect to intellectual prop- erty, among others. The patent protection of MorphoSys’s pro- prietary 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 corresponding results. The Company also develops strategies to circumvent 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 propri- etary technology platforms and products for many years to come. Risks can also arise through the enforcement of the Com- pany’s intellectual property rights vis-à-vis third parties. Ex- ternal risks may also arise as a result of changes in the legal framework. This risk is minimized through continued training of the relevant staﬀ and discussions with external experts. It is also conceivable that competitors might challenge the Compa- ny’s patents or infringe on MorphoSys patents or patent fami- lies, which in turn could lead MorphoSys to take legal action against its competitors. Such procedures, particularly when they take place in the US, are costly and represent a signiﬁ cant ﬁ nancial risk. As an internationally operating biotechnology company with numerous partnerships and an in-house research and devel- opment department for developing drug candidates, the MorphoSys Group is subject to a number of regulatory and legal risks. These risks include those related to patent, competition, tax and antitrust law, potential liability claims from existing partnerships and environmental protection. The Regulatory Aﬀ airs department is also aﬀ ected by this risk in terms of the feedback it receives from regulators on study design. Future legal proceedings are conceivable and cannot be anticipated. Therefore, we cannot rule out that we may incur expenses for legal or regulatory judgments or settlements that are not or cannot be partially or fully covered by insurance and may have a signiﬁ cant impact on our business and results. ORGANIZ ATIONAL RISK Organizational risks arise, for example, with respect to setting up a marketing structure and the related costs. For MorphoSys, this means that processes and procedures need to be adapted accordingly. In September 2017, the Company established the “Pre-Commercial” department, which works with external con- sultants to set up marketing structures. Risk also arises from missing or delayed information within the organization on patent issues. C OMPLIANCE RISK Compliance risk can arise when quality standards are not met, or business processes are not conducted properly from a legal standpoint. To counter this risk, MorphoSys is committed to having its business operations meet the highest quality stan- dards as set out in the Sustainability Report. Carrying out a compliance risk analysis is a central tool of the compliance management system. Speciﬁ c 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 prob- lems. 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. To minimize risk, the internal quality management system is also regularly audited by exter- nal experts and subjected to recurring audits by an internal, independent quality assurance department. Inadequate or late ﬁ nancial communication can lead to ﬁ nes or even lawsuits. Annual General Meetings conducted incorrectly may lead to legal disputes with shareholders resulting in sig- niﬁ 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 com- promised. To minimize these risks, the preparation and execu- tion of the Annual General Meeting and all related documents and processes are carefully reviewed and monitored by the relevant internal departments, as well as by external lawyers and auditors when it comes to the annual ﬁ nancial statements. None of the Top 10 Risks listed in Tables 9 and 10 belonged to this risk category in the reporting period. None of the Top 10 Risks listed in Tables 9 and 10 belonged to this risk category in the reporting period. Risk and Opportunity Report G r o u p M a n a g e m e n t R e p o r t 69 T HE MANAGEMEN T BOARD’S EVALUAT ION OF T HE OVERAL L RISK SI T UAT ION IN T HE MORPHOSY S GROUP MorphoSys Group’s Management Board considers the overall risk to be manageable and trusts in the eﬀ ectiveness of the risk management 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 jeopardized. This assessment applies to the MorphoSys Group as a whole as well as to each Group company. This con- clusion is based on several factors that are summarized below: • The MorphoSys Group has an exceptionally high equity ratio. • The Management Board ﬁ rmly 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 pharmaceutical companies and has a strong foundation of technologies for expanding the Company’s proprietary portfolio. Despite these factors, it is impossible to rule out, control or inﬂ uence risk in its entirety. Opportunities Leading antibody technologies, excellent know-how and a broad portfolio of validated clinical programs have made MorphoSys one of the world’s leading biotechnology companies in the ﬁ eld 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 com- panies in the ﬁ eld of antibodies that could potentially become customers or partners for MorphoSys’s products and technolo- gies. Based on this fact and the Company’s extensive, long-term technological and product development expertise, MorphoSys has identiﬁ ed 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 ﬁ eld of antibodies – opens up new opportunities for the Group be- cause many classes of compounds have similar molecular structures. OPP OR T UNI T Y MANAGEMEN T SY S T EM The opportunity management system is an important compo- nent of MorphoSys’s corporate management and is used to iden- tify opportunities as early as possible and generate added value for the Company. Opportunity management is based on the following 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 • an in-house suggestion scheme for new scientiﬁ c ideas with appropriate incentive systems. Committees discuss speciﬁ c opportunities and decide what action should be taken to exploit these opportunities. The meet- ings and their outcomes are recorded in detail, and any subse- quent action is reviewed and monitored. The Group’s Business Development Team takes part in numerous conferences and in the process identiﬁ es diﬀ erent opportunities that can enhance the Company’s growth. These opportunities are presented and considered by the committee by means of an evaluation pro- cess. The technology scouting team searches speciﬁ cally for innovative technologies that can generate synergies with MorphoSys’s existing technology platforms and could be used to soruce new therapeutic molecules. These outcomes are also discussed and evaluated in interdepartmental committees. A proven process for evaluating opportunities gives MorphoSys a qualitative and replicable evaluation. MorphoSys’s key opportunities are described in Table 11 (quali- tative evaluation). GENERAL S TAT EMEN T ON OPP OR T UNI T IES Increased life expectancy in industrialized countries and ris- ing incomes and living standards in emerging countries are expected to drive the demand for more innovative treatment options and advanced technologies. Scientiﬁ c and medical prog- ress has led to a better understanding of the biological process of disease and paves the way for new therapeutic approaches. Innovative therapies, such as fully human antibodies, have reached market maturity in recent years and have led to the development of commercially successful medical products. Therapeutic compounds based on proteins* – also referred to as “biologics” – are less subject to generic competition than chemically produced molecules because the production of bio- logical compounds 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 signiﬁ cant licensing agreements made over the past two to three years. *S E E G L O S S A R Y – page 170 This type of technological advance 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 de- velopment programs. New technology modules that enable the production of antibodies against novel classes of target mole- cules can also provide access to new disease areas in which antibody-based treatments 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 example 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 com- pounds and technologies that accelerate its growth. Potential acquisition candidates are also systematically presented, dis- cussed and evaluated during the routine meetings described above between the Management Board and selected members of the Senior Management Group. After these meetings, prom- ising candidates are reviewed in terms of their strategic syner- gies and evaluated by internal specialist committees. Protocols are completed on all candidates and evaluations are systemati- cally archived for follow-up and monitoring. A proprietary data- base helps administer this information and keep it available. F INANC IAL OPP OR T UNI T IES Exchange rate and interest rate developments can positively or negatively aﬀ ect the Group’s ﬁ nancial results. Interest rate and ﬁ nancial market developments are continuously monitored to promptly identify and take advantage of opportunities. 70 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 MARKE T OPP OR T UNI T IES MorphoSys believes its antibody platforms HuCAL, Ylanthia, Slonomics and the in-licensed lanthipeptide technology can all be used to develop products addressing signiﬁ cant unmet med- ical needs. T HERAPEU T IC AN T IBODIES – PROPRIE TARY DEVEL OPMEN T It is reasonable to assume that the pharmaceutical industry will continue or even increase its in-licensing of drugs to reﬁ ll its pipelines and replace key products and blockbusters that have lost patent protection. MorphoSys’s most advanced com- pounds MOR103/GSK3196165, MOR202, MOR208 and MOR106 place the Company in an excellent position to capitalize on the needs of pharmaceutical companies. MorphoSys is continuously enhancing its proprietary portfolio, and will continue to advance it by adding clinical trials with the Company’s key drug candidates in new disease areas and adding additional programs. In this way, the Company may take advantage of existing and future opportunities for co-de- velopment or partnerships. The Company is also looking for more opportunities to in-license promising drug candidates. The drug candidate MOR208 may provide MorphoSys with its ﬁ rst opportunity to independently market a drug. After receiv- ing breakthrough therapy designation in October 2017 for MOR208 in combination with the cancer drug lenalidomide for the treatment of blood cancer patients (indication r/r DLBCL), the development of this antibody may now accelerate. T HERAPEU T IC AN T IBODIES – PAR T NERED DEVEL OPMEN T By developing drugs with a number of partners, MorphoSys has been able to spread the risk that is inevitably linked with drug development. With 101 individual therapeutic antibodies currently in partnered development programs, it is becoming more likely that MorphoSys will have an opportunity to partic- ipate ﬁ nancially in marketed drugs. During the reporting year, for example, our partner Janssen received regulatory approval in the United States, Europe and Canada for Tremfya® to treat patients suﬀ ering from moderate-to-severe plaque psoriasis. T ECHNOL OGY DEVEL OPMEN T MorphoSys continues to invest in its existing and new technol- ogies to defend its technological leadership. MorphoSys estab- lished a new technology platform with Ylanthia that, in con- trast to its previous version HuCAL, is eligible for broader licensing to partners. Commercialization of the Ylanthia anti- body library began in 2012. T A B L E 0 9 Summary of MorphoSys’s Key Short- and Medium-Term Risks Proprietary Development segment Risks related to building a marketing structure Discontinuation of one or more proprietary clinical programs Failure or delay of partnership for one or more proprietary clinical programs Delay in the development of one or more proprietary clinical programs and/or higher development costs Outside of the Proprietary Development segment Failure to reach revenue targets in Partnered Discovery programs Proprietary Development segment Discontinuation of one or more proprietary clinical programs Unexpected increase in development costs Delay in the development of one or more proprietary clinical programs and/or higher development costs Outside of the Proprietary Development segment Lack of information ﬂ ow within the organization about patent-related issues Risk from bank insolvencies Risk and Opportunity Report G r o u p M a n a g e m e n t R e p o r t 71 Risk category 3-year assessment Organizational Operating, strategic Operating ••• •• •• High Moderate Moderate Operating, strategic •• Moderate Financial •• Moderate Risk category 1-year assessment Operating Financial ••• •• High Moderate Financial, operating Organizational Financial • • • Low Low Low LEG END • •• ••• •••• LOW RISK : MODER ATE RISK : HIG H RISK : CATASTROPHIC RISK : 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 72 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 A B L E 1 0 Summary of MorphoSys’s Key Long-Term Risks Segment Risk Order of importance1 Proprietary Development Lack of competitiveness of the MorphoSys pipeline Partnered Discovery Delay or discontinuation of partnered programs Proprietary Development Failure to build a marketing structure Proprietary Development Insuﬃ cient expansion of the MorphoSys pipeline Proprietary Development Inability to ﬁ nance the MorphoSys pipeline 1 Declining importance of risk from 1 to 5, whereby 1 represents the most important risk. 1 2 3 4 5 T A B L E 11 Summary of MorphoSys’s Key Opportunities Segment Opportunity Order of importance2 Partnered Discovery Rapid acceleration of Tremfya® sales with signiﬁ cant volume Proprietary Development Partnering a proprietary program Proprietary Development Rapid market entry of MOR208 due to breakthrough therapy designation (L-MIND study in DLBCL) 1 2 3 2 Declining importance of opportunity from 1 to 3, whereby 1 represents the greatest opportunity. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 73 Statement on Corporate Governance and Corporate Governance Report There is no cap on the overall or individual variable remuner- ation components of Management Board members’ remuner- ation (see Item 4.2.3 (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. 2. MorphoSys will continue to comply with the recommenda- tions of the “Government Commission on the German Corpo- rate Governance Code” in the version dated February 7, 2017 with the exception described under Item 1. Planegg, December 1, 2017 MorphoSys AG On behalf of the Management Board: On behalf of the Supervisory Board: Dr. Simon Moroney Chief Executive Oﬃ cer Dr. Gerald Möller Chairman of the Supervisory Board The Statement on Corporate Governance and the Corporate Governance Report are available on the Company’s website under Media and Investors – Corporate Governance. Statement on Corporate Governance Under Section 289f (HGB) for the 2017 Financial Year In the Statement on Corporate Governance under Section 289f HGB, the Management Board and the Supervisory Board report on corporate governance. In addition to the annual Declaration of Conformity in accordance with Section 161 of the Stock Cor- poration Act (AktG), the Statement on Corporate Governance also includes relevant information on corporate governance practices and other aspects of corporate governance, including a description of the working practices of the Management Board and Supervisory Board. DECL ARAT ION OF CONF ORMI T Y WI T H T HE GERMAN CORP ORAT E GOVERNANCE CODE ( T HE “CODE” ) OF T HE MANAGEMEN T BOARD AND SUPERVIS ORY BOARD OF MORPHOSY S AG The Management Board and Supervisory Board of MorphoSys AG declare the following under Section 161 of the German Stock Corporation Act: 1. Since the last Declaration of Conformity on December 2, 2016, MorphoSys AG has complied with the recommenda- tions of the “Government Commission on the German Corpo- rate Governance Code” in the versions from May 5, 2015 and February 7, 2017 with the following exception: 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 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 Management Handbook and supplementary internal guidelines. MorphoSys’s Code of Conduct sets out the fundamental princi- ples and key policies and practices for business behavior. The Code is a valuable tool for employees and executives, particu- larly in business, legal and ethical situations of conﬂ ict. It rein- forces the principles of transparent and sound management and fosters trust in the Company from the ﬁ nancial markets, business partners, employees and the public. Compliance with the Code of Conduct is carefully monitored. The Group-wide application of the Code is overseen by the Compliance Com- mittee, and the Code itself is routinely reviewed and updated when necessary. The Code of Conduct can be downloaded from the Company’s website under Media and Investors – Corporate Governance. The Compliance Handbook describes MorphoSys’s Compliance Management System (CMS) and is intended to ensure compli- ance with all legal regulations as well as set out high ethical standards that apply to both the management and all employ- ees. The Management Board has overall responsibility for the compliance management system and is required to report regu- larly to the Audit Committee and the Supervisory Board. In larly larly to the Audit Committee and the Supervisory Board. In carrying out its compliance responsibility, the Management Board has assigned the relevant tasks to various functions at MorphoSys. The Compliance Oﬃ cer arranges the exchange of information between the internal compliance-relevant functions. The Com- pliance Oﬃ cer monitors the Company’s existing CMS and im- plements it based on appropriate measures and decisions taken on an individual basis. The Compliance Oﬃ cer is the employee contact person for all compliance-related issues and imple- ments the compliance requirements deﬁ ned by the Compliance Committee. The Compliance Oﬃ cer is supported by a Compliance Commit- tee that meets at regular intervals. The Compliance Committee supports the Compliance Oﬃ cer in the implementation and monitoring of the CMS. The Compliance Committee is particu- larly responsible for the identiﬁ cation and discussion of all com- pliance-relevant issues and thus makes it possible for the Com- pliance Oﬃ cer as well as the other members of the Compliance Committee to periodically verify MorphoSys’s compliance sta- tus and, if necessary, update the CMS. More information on MorphoSys’s Compliance Management System can be found in the Corporate Governance Report. SUPERVIS ORY BOARD MANAGEME NT BOARD The Management Board of the Company consists of a Chief Executive Oﬃ cer and three other members. A schedule of re- sponsibilities currently deﬁ nes the diﬀ erent areas of responsi- bility as follows: • Dr. Simon Moroney, Chief Executive Oﬃ cer: Strategy and Planning, Compliance & Quality Assurance, Internal Audit, Human Resources, Business Development & Portfolio Man- agement, Legal, Commercial Planning, the coordination of individual areas of the Management Board, representation of the Management Board to the Supervisory Board • Jens Holstein, Chief Financial Oﬃ cer: Accounting and Tax, Controlling, Corporate Finance & Corporate Development, Risk Management, IT, Technical Operations, Procurement & Logistics, Corporate Communications & Investor Relations, Environmental Social Governance (ESG) • Dr. Marlies Sproll, Chief Scientiﬁ c Oﬃ cer (until October 31, 2017): Discovery Alliances & Technology Development, Pro- tein Sciences, Alliance Management, Intellectual Property, Lanthio Pharma • Dr. Markus Enzelberger, Interim Chief Scientiﬁ c Oﬃ cer (from April 15, 2017 to October 31, 2017 and Chief Scientiﬁ c Oﬃ cer (since November 1, 2017): Discovery Alliances & Technology Development, Protein Sciences, Alliance Management, Intel- lectual Property, Lanthio Pharma • Dr. Arndt Schottelius, Chief Development Oﬃ cer (until Febru- ary 28, 2017): Preclinical Development, Clinical Research, Clinical Operations, Drug Safety & Pharmacovigilance, Regu- latory Aﬀ airs • Dr. Malte Peters, Chief Development Oﬃ cer (since March 1, 2017): Preclinical Research, Clinical Development, Clinical Operations, Drug Safety & Pharmacovigilance, Regulatory Aﬀ airs In the course of the year, personnel changes in the Manage- ment Board resulted in temporary, minor changes in the re- sponsibilities of the Management Board. SUPERVISORY BOARD As of December 31, 2017, the MorphoSys AG Supervisory Board consisted of six members who oversee and advise the Manage- ment Board. The current Supervisory Board consists of pro- fessionally qualiﬁ ed members who represent MorphoSys AG shareholders. Dr. Gerald Möller, the Chairman of the Super- visory Board, coordinates the Board’s activities, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. All Supervisory Board mem- bers are independent, as deﬁ ned in the German Corporate Governance Code, and have many years of experience in the biotechnology and pharmaceutical industries. The Chairman of the Supervisory Board is not a former member of MorphoSys AG’s Management Board. The members of the Supervisory Board and its committees are listed in the table below. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 75 T A B L E 12 Composition of the Supervisory Board until Termination of the 2017 Annual General Meeting Position Initial Appointment End of Term Audit Committee 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 ﬁ nancial expert Chairperson Member T A B L E 1 3 Composition of the Supervisory Board since Termination of the 2017 Annual General Meeting Position Initial Appointment End of Term Audit Committee Remuneration and Nomination Committee Science and Technology Committee Dr. Gerald Möller Chairman 1999 2018 Dr. Frank Morich Deputy Chairman Krisja Vermeylen Klaus Kühn Dr. Marc Cluzel Wendy Johnson Member Member Member Member 2015 2017 2015 2012 2015 2020 2019 2020 2018 2020 Independent ﬁ nancial expert Chairperson Member 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 WORK ING PRAC T ICES OF T HE MANAGEMEN T BOARD AND SUPERVIS ORY 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 pre- scribed by the German Stock Corporation Act clearly diﬀ eren- tiates between a company’s management and supervision. The responsibility of both boards is clearly stipulated by law and by the boards’ bylaws and Articles of Association. The boards work closely together to make decisions and take actions for the Company’s beneﬁ t. Their stated objective is to sustainably in- crease the Company’s value. Management Board members each have their own area of re- sponsibility as deﬁ ned in the schedule of responsibilities. They regularly report to their Management Board colleagues, their cooperation being governed by the bylaws. The Supervisory Board ratiﬁ es both the schedule of responsibilities and the bylaws. Management Board meetings are typically held weekly and are chaired by the Chief Executive Oﬃ cer. 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. Manage- ment Board resolutions are passed by a simple majority and, in the event of a tied vote, the Chief Executive Oﬃ cer’s vote de- cides. For material events, each Management Board or Super- visory Board member can call an extraordinary meeting of the entire Management Board. Management Board resolutions can also be passed outside of meetings by an agreement made orally, by telephone or in writing (also by email). Minutes are taken of each meeting of the full Management Board, are sub- mitted for approval to the full Management Board and for signa- ture by the Chief Executive Oﬃ cer at the following meeting. In addition to the regularly scheduled meetings, Management Board strategy workshops are also held for developing and prioritizing the Group-wide strategic objectives. The Management Board promptly and comprehensively in- forms the Supervisory Board in writing and at Supervisory Board meetings 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 fundamen- tal Company issues. In addition to routine Supervisory Board meetings, a strategy meeting takes place between the Manage- ment 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. Detailed information on the cooperation of the Management Board and Supervisory Board and important items of discussion during the 2017 ﬁ nan- cial year can be found in the Report of the Supervisory 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 bylaws that apply to its duties. In accordance with these bylaws, the Chairperson of the Super visory Board coordinates the activities of the Supervisory Board, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. The Super visory Board typically passes its resolutions in meetings, but resolutions may also be passed outside of meetings in writing (also by e-mail), by tele- phone or video conference. The Supervisory Board has a quorum when at least two-thirds of its members (including either the Chairperson or Deputy Chairperson of the Supervisory Board) take part in the vote. Resolutions of the Supervisory Board are generally passed with a simple majority unless the law prescribes otherwise. In the event of a tied vote, the vote of the Chairperson of the Super- visory Board is decisive. Minutes are completed for Supervisory Board meetings and resolutions passed outside of meetings. A copy of the Super- visory Board’s minutes is made available to all Supervisory Board members. The Supervisory Board conducts an eﬃ ciency evaluation regularly in accordance with the recommendation in Item 5.6 of the Code. COMPOSIT ION AND WORKING PRAC T ICES OF THE MANAGE- MENT BOARD AND SUPERVISORY BOARD COMMIT TEES The Management Board has not formed any committees. The Supervisory Board has three committees: the Audit Com- mittee, the Remuneration and Nomination Committee and the Science and Technology Committee. The members of the three committees formed by the Supervisory Board are profession- ally qualiﬁ ed. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 77 T A B L E 14 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 Name Dr. Gerald Möller Dr. Marc Cluzel Karin Eastham1 Wendy Johnson Klaus Kühn Dr. Frank Morich Krisja Vermeylen2 01/16 2017 03/07 2017 03/21 2017 05/16 2017 05/17 2017 07/26 2017 07/27 2017 10/10 2017 12/13 2017 – – – – – – – – – 1 Supervisory Board member until termination of the 2017 Annual General Meeting. 2 Supervisory Board member since termination of the 2017 Annual General Meeting. 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 Karin Eastham1 Wendy Johnson Klaus Kühn Krisja Vermeylen2 by phone by phone 03/06/2017 04/26/2017 07/26/2017 10/10/2017 11/03/2017 12/13/2017 – – – – – – 1 Supervisory Board member until termination of the 2017 Annual General Meeting. 2 Supervisory Board member since termination of the 2017 Annual General Meeting. 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 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 Eastham1 Krisja Vermeylen2 Dr. Frank Morich as guest by phone by phone 01/16/2017 03/07/2017 05/16/2017 10/10/2017 12/04/2017 – – – – – – – – – 1 Supervisory Board member until termination of the 2017 Annual General Meeting. 2 Supervisory Board member since termination of the 2017 Annual General Meeting. 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 03/07/2017 05/16/2017 07/26/2017 10/10/2017 12/13/2017 Name Dr. Marc Cluzel Wendy Johnson Dr. 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 AUDIT C OMMIT TEE The main task of the Audit Committee is to support the Super- visory Board in fulﬁ lling its supervisory duties with respect to the accuracy of the annual and consolidated ﬁ nancial state- ments, the activities of the auditor and internal control func- tions, such as risk management, compliance and internal audit- ing. The Audit Committee submits a recommendation to the Supervisory Board for the election at the Annual General Meet- ing of an independent auditor. The members of the Audit Com- mittee are Klaus Kühn (Chairperson), Wendy Johnson, Karin Eastham (until May 17, 2017) and Krisja Vermeylen (since May 17, 2017). Klaus Kühn currently fulﬁ lls the prerequisite of an independent ﬁ nancial expert. REMUNER ATION AND NOMINATION C OMMIT TEE The Remuneration and Nomination Committee is responsible for preparing and reviewing the Management Board’s compen- sation system annually before its ﬁ nal approval. When neces- sary, the Committee searches for suitable candidates to appoint to the Management Board and Supervisory Board and submits appointment proposals to the Supervisory Board. The Commit- tee also prepares the contracts made with Management Board members. The members of the Remuneration and Nomination Committee are Karin Eastham (Chairperson until May 17, 2017), Dr. Gerald Möller (Chairperson since May 17, 2017), Dr. Marc Cluzel and Krisja Vermeylen (since May 17, 2017). Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 79 Regular meetings with analysts and investors in the context of road shows and individual meetings play a central role in inves- tor relations at MorphoSys. Conference calls accompany publi- cation 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 recordings of other important events as well as con- ference call transcripts are also available on the Company’s website to all interested parties. The Company’s website www.morphosys.com serves as a cen- tral platform for current information on the Company and its development. Financial reports, analyst meetings and confer- ence presentations, as well as press releases and ad hoc state- ments, are also available. The important regularly scheduled publications and events (annual reports, interim reports, an- nual general meetings and press and analyst conferences) are published in the Company’s ﬁ nancial calendar well in advance. ES TABL ISHMEN T OF SPEC IF IC TARGE T S F OR T HE COMP OSI T ION OF T HE SUPERVIS ORY BOARD The Supervisory Board shall be composed in such a way that (i) the Supervisory Board in its entirety has the necessary knowl- edge, skills and professional experience to properly perform its duties, (ii) the Company’s international activities and potential conﬂ icts of interest are taken into consideration, (iii) a suﬃ - cient number of independent Supervisory Board members is ensured, (iv) an age limit and a regular limit on the length of service is speciﬁ ed for members of the Supervisory Board, and (v) the aspect of diversity is taken into account. SCIENCE AND TECHNOLO GY C OMMIT TEE The Science and Technology Committee advises the Super- visory Board on matters concerning proprietary drug and technology development and prepares the relevant Super- visory Board resolutions. The members of the Science and Technology Committee are Dr. Marc Cluzel (Chairperson), Dr. Frank Morich and Wendy Johnson. The Supervisory Board members’ biographies can be found on the MorphoSys website under Company – Management – Super- visory visory Board. visory Board. Corporate Governance Report At MorphoSys, responsible, sustainable and value-oriented corporate governance is 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, com- mercial 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 companies that strongly emphasizes shareholder interests. Many of the corporate governance principles contained in the Code have been practiced at MorphoSys for many years. Corpo- rate governance issues at MorphoSys AG are detailed in the Statement on Corporate Governance under Section 289f HGB. The statement also contains the annual Declaration of Confor- mity, relevant information 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 principle of corporate communication is to inform institutional investors, private shareholders, ﬁ nancial analysts, employees and all other stakeholders, simultaneously and fully of the Company’s situation through regular, transpar- ent and timely communication. Shareholders have immediate access to the information provided to ﬁ nancial analysts and similar recipients and can obtain this information in both Ger- man and English. The Company is ﬁ rmly committed to follow- ing a fair information policy. 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 In view of these factors and in consideration of the Company’s speciﬁ c circumstances (Section 5.4.1 of the German Corporate Governance Code), the Supervisory Board ﬁ rst set targets for its composition in July 2015 and reviewed and updated these targets on July 26, 2017 as follows: APPROPRIATE REPRESENTATION OF WOMEN AND DIVE RSIT Y The Supervisory Board of MorphoSys has a total of six mem- bers, two of whom are women. The Supervisory Board strongly believes that, at 33.33 %, the current proportion of women on the Company’s Supervisory Board is appropriate and intends to maintain this proporation in the future. The Supervisory Board currently fulﬁ lls this quota. The Supervisory Board also believes a quota of at least two non-German members or at least two members with extensive international experience represents a fair share of diversity given the Company’s international orientation. The Supervisory Board currently meets this quota. INDEPENDENCE The Supervisory Board considers it appropriate that at least four of its members are independent (Section 5.4.2 of the Ger- man Corporate Governance Code). Members of the Supervisory Board are considered independent when they have no personal or business relationship with MorphoSys, its management, a controlling shareholder or an aﬃ liate that may give rise to a material and more than temporary conﬂ ict of interest. All six current members of the Supervisory Board meet the criteria to be classiﬁ ed as independent. Therefore, the Supervisory Board currently meets the quota of four independent members. Signiﬁ cant and more than temporary conﬂ icts of interest should be avoided, especially when it involves work for major competitors. It should be noted, however, that conﬂ icts of inter- est in certain cases cannot be excluded. Any potential conﬂ icts of interest must be disclosed to the Chairperson of the Super- visory Board and remedied appropriately. There are currently no conﬂ icts of interest. AGE LIMIT At the time of their appointment by the Annual General Meet- ing, Supervisory Board members should not be older than 75 years. However, the Supervisory Board may decide to make an exception in speciﬁ c cases. The age limit of 75 years is cur- rently respected by the Supervisory Board members. TERM OF APP OINTMENT At the Annual General Meeting, the Supervisory Board intends to propose an initial two-year period of oﬃ ce for Supervisory Board members. The Supervisory Board intends to allow reap- pointment twice, each for an additional term of three years, but reserves the right to make exceptions in speciﬁ c cases and permit members to be reappointed for a fourth term of three years. Since the time of setting this target, the maximum term of appointment for all elected Supervisory Board members has been respected. The Supervisory Board intends to adhere to the targets set for its composition when making future election proposals to the Annual General Meeting. SK IL L AND EXPERIENCE PROF IL E F OR T HE SUPERVIS ORY BOARD AS A WHOL E In addition to deﬁ ning speciﬁ c targets, the Supervisory Board should develop a proﬁ le of skills and experience for the entire Supervisory Board (Section 5.4.1 of the German Corporate Governance Code). On July 26, 2017, the Supervisory Board deﬁ ned the following proﬁ le of skills and experience for the entire Supervisory Board: PROFES SIONAL E XPER TISE AND E XPERIE NCE Supervisory Board members should possess the necessary professional expertise and experience to fulﬁ ll their duties as members of the Supervisory Board of MorphoSys as an interna- tional biotechnology company. All current Supervisory Board members have the relevant experience in management posi- tions in the pharmaceutical and biotechnology industries and, therefore, meet this requirement. In order to promote further cooperation between members of the Supervisory Board, care should be taken in the selection of candidates to ensure that the aspect of diversity in terms of professional background, expertise, experience and personality is suﬃ ciently taken into account. GENER AL KNOWLEDGE All members of the Supervisory Board should have general knowledge of the industry in which the Company operates in order to make suﬃ cient and substantial contributions to Super- visory Board meetings. All Supervisory Board members have the necessary expertise in the pharmaceutical and biotechnol- ogy industries based on their background and, therefore, meet this requirement. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 81 In July 2015, the Supervisory Board adopted the following quota for women on the Management Board for an initial period of two years, which was reviewed and updated in July 2017 as follows: “The Management Board of MorphoSys AG has a total of ﬁ ve members, including one female member. The current ratio of women’s representation on the Management Board of the com- pany is therefore below 30 % and amounts to 20 %. With refer- ence to the decision on the quota of women on the Management Board, which was taken in July 2015, the Supervisory Board intends to achieve a ratio of 25 % in the future, namely by June 30, 2022”. The Company does not currently meet this target. The reason this target has not been met is the unplanned departure of Dr. Marlies Sproll as Chief Scientiﬁ c Oﬃ cer as of October 31, 2017 for personal reasons and the appointment of Dr. Markus Enzelberger initially as Interim Chief Scientiﬁ c Oﬃ cer from April 15, 2017 to October 31, 2017, and then as Dr. Marlies Sproll’s successor as Chief Scientiﬁ c Oﬃ cer beginning on November 1, 2017. As a result, the Management Board cur- rently consists of four male members, and there are currently no women on the Management Board. In July 2015, the Management Board adopted the following quota for women in the ﬁ rst level of management below the Management Board for an initial period of two years and re- viewed and updated it in July 2017 as follows: “At the time of the decision, the ﬁ rst management level below the Management Board (the Senior Management Group) con- sisted of 22 members, nine of whom were women, placing the level of female representation at this management level at 40.9 %, which is above the 30 % target. The Management Board conﬁ rms its July 2015 decision on the quota of women in the ﬁ rst level of management below the Management Board and intends to continue to maintain a minimum ratio of 30 % until June 30, 2022.” The Company continues to meet this target. PROFES SIONAL E XPER TISE • At least two members of the Supervisory Board must have extensive experience in drug development • At least one Supervisory Board member must have expertise in the areas of accounting or auditing (Section 100 (5) AktG) • At least one member of the Supervisory Board must have ex- perience in human resource issues, particularly with regard to Management Board matters The Company currently meets the above targets. SUFFICIENT AVAIL ABILIT Y OF TIME All members of the Supervisory Board must ensure that they have suﬃ cient time available to properly perform their Super- visory Board duties. It must therefore be ensured that • the Supervisory Board member is able to personally attend at least four ordinary Supervisory Board meetings per year, as well as the annual strategy meeting, for which a reasonable amount of preparation time is required in each case; • the Supervisory Board member is able to attend extraordi- nary meetings of the Supervisory Board if necessary to deal with speciﬁ c topics; • the Supervisory Board member is able to attend the Annual General Meeting; • the Supervisory Board member has suﬃ cient time available to review the annual and consolidated ﬁ nancial statements; • the Supervisory Board member sets aside additional time to prepare and participate in committee meetings, depending on his/her possible membership in one or more of the current three committees of the Supervisory Board. The Supervisory Board intends to observe the skills and expe- rience proﬁ le for the entire Supervisory Board when making future election proposals to the Annual General Meeting. WOMEN’S QUO TA F OR T HE SUPERVIS ORY BOARD, MANAGEMEN 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 adopted a women’s quota for the Supervisory Board for an initial period of two years. The Supervisory Board reviewed this quota in July 2017 and up- dated as follows: “MorphoSys AG’s Supervisory Board has a total of six members. Two of those members are women, which places the current quota of 33.33 % for female members on the Company’s Supervisory Board above the 30 % target. The Supervisory Board conﬁ rms its decision regarding the quota for women on the Supervisory Board, which was passed in July 2015, and intends to maintain this ratio until June 30, 2022.” The Company continues to meet this target. 82 G r o u p M a n a g e m e n t R e p o r t Statement on Corporate Governance and Corporate Governance Report In July 2015, the Management Board adopted a women’s quota for the second level of management below the Management Board initially for a period of two years and reviewed and up- dated the quota in July 2017 as follows: “The second manage- ment level below the Management Board (i.e. the Company’s managers excluding the Senior Management Group) at the time of the decision consisted of 40 members, 14 of whom were women. This placed the quota of women in the second manage- ment level below the Company’s Management Board at 35 %, which is above the 30 % target at the time of the resolution. The Management Board conﬁ rms its July 2012 decision on the quota of women in the second level of management below the Management Board and intends to maintain a quota of at least 30 % until June 30, 2022.” The Company continues to meet this target. DIVERSI T Y PL AN Diversity is ﬁ rmly anchored in the corporate culture of MorphoSys and its aﬃ liates. All dimensions of diversity are of equal importance at MorphoSys, be it age, gender, educational background, occupation, origin, religion, sexual orientation or identity. The MorphoSys Management Board and Supervisory Board see it as their responsibility to further increase and ef- fectively utilize the various aspects of diversity beyond the mere determination of targets for the proportion of women on the Management Board, Supervisory Board and in executive positions. The Company has not yet developed its own diversity plan with respect to the composition of the Management and Supervisory Boards. Nevertheless, the internal organization and continued development of an open and inclusive corporate culture play an important role in the day-to-day work of the Management and Supervisory Boards. The skills and experience proﬁ le for the Supervisory Board as a whole also takes diversity into consid- eration. The Management and Supervisory Boards intend to develop a diversity plan for their composition in the future that addresses key aspects of diversity, deﬁ nes speciﬁ c goals for this purpose and contains guidelines on how these goals should be achieved. REMUNERAT ION REP OR T The Remuneration Report presents the principles, structure and amount of Management Board and Supervisory Board re- muneration. The report complies with the legal provisions and gives consideration to the recommendations of the German Cor- porate Governance Code. MANAGEME NT BOARD REMUNER ATION The Management Board’s remuneration system is intended to provide an incentive for performance-oriented and sustainable corporate management. Therefore, the aggregate remuneration of the Management Board members consists of diﬀ erent compo- nents: ﬁ xed components, an annual cash bonus based on the achievement of corporate targets (short-term incentive – STI), a variable compensation component with a long-term incentive (long-term incentive – LTI) and other remuneration compo- nents. Variable remuneration components with long-term in- centive consist of performance share plans from the current and prior years, a convertible bond program from the year 2013, as well as a stock option plan from the current year. Man- agement Board members also receive fringe beneﬁ ts in the form of non-cash beneﬁ ts, mainly the use of a company car and the payment of insurance premiums. All remuneration pack- ages are reviewed annually for their scope and appropriateness by the Remuneration and Nomination Committee and are com- pared to the results of an annual Management Board remuner- ation analysis. The amount of compensation paid to Manage- ment Board members highly depends on their individual areas of responsibility, the Company’s economic situation and suc- cess and the Company’s business prospects versus its competi- tion. All decisions concerning adjustments to remuneration packages are made by the entire Supervisory Board. The Man- agement Board’s remuneration and index-linked pension scheme were last adjusted in July 2017. The remuneration of the new Management Board member Dr. Markus Enzelberger was adjusted as of November 1, 2017. OV ERV I E W In the 2017 ﬁ nancial year, total beneﬁ ts of € 6,453,649 (2016: € 4,383,658) were granted to the Management Board in accor- dance with the provisions of the German Corporate Governance Code. Of the total remuneration granted for the year 2017, € 3,387,433 was cash compensation and € 3,066,216, or 48 %, resulted from personnel expenses for share-based compensa- tion (remuneration with long-term incentive: performance share plan, stock option plan and convertible bond plan). In 2017, share-based compensation included a one-time incentive granted to Dr. Malte Peters and Dr. Markus Enzelberger for joining the Management Board of MorphoSys AG, which con- sisted of shares of treasury stock. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 83 The total amount of beneﬁ ts paid to the Management Board in the 2017 ﬁ nancial year amounted to € 10,593,126 (2016: € 5,070,618). In addition to cash compensation payments of € 2,963,485 (2016: € 2,672,333), this amount includes primarily the relevant value under German tax law of the transfer of treasury stock from a performance-based share plan (share- based compensation), which amounted to € 1,986,671 (2016: € 2,398,285). This ﬁ gure includes € 899,962 under German tax law for treasury shares granted to Dr. Malte Peters and Dr. Markus Enzelberger as a one-time incentive for joining the Management Board of MorphoSys AG. Because convertible bonds were exercised in 2017, the total amount for 2017 also included proceeds from the exercise of convertible bonds in the amount of € 4,743,008. As of April 3, 2017, a total of 36,729 treasury shares from the 2013 performance-based share plan for the Management Board vested because the vesting period for this LTI program had ex- pired. The beneﬁ ciaries had the option to receive the shares at a time of their choosing within a six-month period ending on October 2, 2017. All transactions in MorphoSys shares exe- cuted by members of the Management Board were reported as required by law and published in the Corporate Governance Report as well as on the Company’s website. In accordance with the requirements of Section 4.2.5 (3) of the German Corporate Governance Code, the tables that follow pro- vide detailed mandatory information on the remuneration of the individual Management Board members. Please note that the tables that follow are provided in the con- text of the Corporate Governance Report and diﬀ er from the information about Management Board remuneration presented in the Notes of this Annual Report (Item 7.4). These diﬀ erences are due to the diﬀ ering presentation requirements under the German Corporate Governance Code and IFRS*. *S E E G L O S S A R Y – page 170 84 G r o u p M a n a g e m e n t R e p o r t Statement on Corporate Governance and Corporate Governance Report T A B L E 1 5 Compensation of the Management Board in 2017 and 2016 (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 € Fixed Compensation Fringe Beneﬁ ts1 Total Fixed Compensation One -Year Variable Compensation2 Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2016 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Stock Option Plan4 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation in € Fixed Compensation Fringe Beneﬁ ts1 Total Fixed Compensation One -Year Variable Compensation2 Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2016 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Stock Option Plan4 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation Dr. Simon Moroney Chief Executive Ofﬁ cer 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) 463,457 500,876 500,876 500,876 372,652 372,652 372,652 34,270 497,727 210,873 33,964 563,820 0 0 35,912 536,788 368,144 35,912 536,788 0 35,912 536,788 438,266 58,224 58,224 58,224 0 343,009 267,861 0 0 0 0 1,372,036 1,071,444 808,657 1,037,238 58,224 2,939,970 142,096 149,567 149,567 149,567 1,448,480 1,723,593 744,579 3,626,325 Dr. Markus Enzelberger5 Chief Scientiﬁ c Ofﬁ cer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) – – – – – – – – – – – – 204,698 417,158 621,856 121,688 0 0 144,354 112,745 378,787 29,186 204,698 417,158 621,856 0 0 0 0 0 0 204,698 417,158 621,856 144,866 0 0 577,416 450,980 1,173,262 29,186 29,186 1,029,829 651,042 1,824,304 728,649 360,732 1,646,722 204,028 180,538 204,028 6,453,649 3,423,149 12,557,751 2017 (Mini- mum) 2017 (Maxi- mum) 42,905 415,557 42,905 415,557 326,071 0 898,988 701,992 59,641 1,986,692 99,949 99,949 2017 42,905 415,557 273,899 0 224,747 175,498 733,785 99,949 59,641 59,641 59,641 2017 (Mini- mum) 2017 (Maxi- mum) 281,500 568,644 850,144 281,500 568,644 850,144 242,083 0 0 898,988 701,992 1,843,063 60,967 60,967 2017 281,500 568,644 850,144 206,903 0 0 224,747 175,498 607,148 60,967 1,249,291 575,147 2,502,198 1,518,259 911,111 2,754,174 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2017 (Mini- mum) 2017 (Maxi- mum) 2017 2017 (Mini- mum) 2017 (Maxi- mum) 2017 2017 (Mini- mum) 2017 (Maxi- mum) 2017 222,450 222,450 222,450 103,253 103,253 103,253 1,685,429 1,685,429 1,685,429 20,427 20,427 20,427 9,161 9,161 9,161 1,094,207 1,094,207 1,094,207 242,877 242,877 242,877 112,414 112,414 112,414 2,779,636 2,779,636 2,779,636 67,745 85,302 23,490 23,490 1,061,869 0 1,260,078 39,879 39,879 39,879 39,879 39,879 39,879 197,623 197,623 197,623 0 168,543 131,629 407,796 77,976 0 674,172 526,516 0 0 0 0 0 0 0 1,105,400 863,231 0 0 0 0 4,421,600 3,452,924 39,879 1,325,869 77,976 77,976 63,369 28,245 39,879 28,245 63,369 28,245 3,228,123 197,623 9,332,225 445,890 445,890 445,890 1 In 2017, the fringe beneﬁ ts of Dr. Malte Peters und Dr. Markus Enzelberger each included a one-time compensation in the form of MorphoSys shares as an incentive to join the Management Board of MorphoSys AG. 2 The one-year compensation granted for the 2017 ﬁ nancial year represents the bonus accrual for 2017 that will be paid in February 2018. The bonus granted for the 2016 ﬁ nancial year was paid in February 2017. 3 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 ﬁ nancial year. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 85 Jens Holstein Chief Financial Ofﬁ cer Dr. Malte Peters Chief Development Ofﬁ cer Appointment: March 1, 2017 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) 500,876 500,876 500,876 314,405 372,652 372,652 372,652 46,300 360,705 143,054 34,791 369,397 0 0 42,905 415,557 273,899 42,905 415,557 0 42,905 415,557 326,071 59,641 59,641 59,641 0 224,747 175,498 0 0 0 0 898,988 701,992 547,242 733,785 59,641 1,986,692 92,875 99,949 99,949 99,949 1,000,822 1,249,291 575,147 2,502,198 – – – – – – – – – – – – 281,500 568,644 850,144 206,903 0 0 224,747 175,498 607,148 60,967 281,500 568,644 850,144 0 0 0 0 0 0 281,500 568,644 850,144 242,083 0 0 898,988 701,992 1,843,063 60,967 60,967 1,518,259 911,111 2,754,174 Dr. Marlies Sproll6 Chief Scientiﬁ c Ofﬁ cer Temporary Leave: April 15, 2017 – October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius Chief Development Ofﬁ cer Resignation: February 28, 2017 Total 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) 2016 2017 2017 (Mini- mum) 2017 (Maxi- mum) 314,405 222,450 222,450 222,450 309,759 103,253 103,253 103,253 1,402,026 1,685,429 1,685,429 1,685,429 24,141 338,546 143,054 23,263 369,397 0 0 20,427 20,427 20,427 242,877 242,877 242,877 67,745 0 85,302 28,388 338,147 140,940 9,161 9,161 9,161 133,099 1,094,207 1,094,207 1,094,207 112,414 112,414 112,414 1,535,125 2,779,636 2,779,636 2,779,636 23,490 0 23,490 637,921 1,061,869 0 1,260,078 39,879 39,879 39,879 23,263 39,879 39,879 39,879 115,281 197,623 197,623 197,623 0 168,543 131,629 0 0 0 0 369,397 674,172 526,516 0 0 0 0 0 0 0 0 0 0 0 1,672,011 0 0 0 1,105,400 863,231 0 0 0 0 4,421,600 3,452,924 535,714 407,796 39,879 1,325,869 533,600 92,876 77,976 77,976 77,976 95,473 63,369 28,245 39,879 28,245 63,369 2,425,213 3,228,123 197,623 9,332,225 28,245 423,320 445,890 445,890 445,890 967,136 728,649 360,732 1,646,722 967,220 204,028 180,538 204,028 4,383,658 6,453,649 3,423,149 12,557,751 4 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. 5 The ﬁ gures presented for Dr. Markus Enzelberger do not include any compensation granted for his activities as a member of the Senior Management Group as they do not relate to his appointment as a member of the Management Board. 6 Dr. Marlies Sproll left the Management Board of MorphoSys AG on October 31, 2017. Since November 1, 2017, she has taken on a new part-time role at MorphoSys as Special Adviser to the CEO. Therefore, the ﬁ gures presented for Dr. Marlies Sproll do not include any remuneration granted for these activities. 2017 35,912 536,788 368,144 0 343,009 267,861 2017 (Mini- mum) 2017 (Maxi- mum) 35,912 536,788 35,912 536,788 438,266 58,224 58,224 58,224 0 1,372,036 1,071,444 1,037,238 58,224 2,939,970 149,567 149,567 149,567 1,723,593 744,579 3,626,325 2017 (Mini- mum) 2017 (Maxi- mum) 204,698 417,158 621,856 204,698 417,158 621,856 144,866 0 0 577,416 450,980 1,173,262 2017 204,698 417,158 621,856 121,688 0 0 144,354 112,745 378,787 29,186 29,186 29,186 1,029,829 651,042 1,824,304 0 0 0 0 0 0 0 0 0 0 86 G r o u p M a n a g e m e n t R e p o r t Statement on Corporate Governance and Corporate Governance Report 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 Ofﬁ cer Jens Holstein Chief Financial Ofﬁ cer Dr. Malte Peters Chief Development Ofﬁ cer Appointment: March 1, 2017 In € 2016 2017 2016 2017 2016 2017 Fixed Compensation Fringe Beneﬁ ts1 Total Fixed Compensation One -Year Variable Compensation2 Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2012 Long-Term Incentive Program3 (Vesting Period 4 Years) 2013 Long-Term Incentive Program3 (Vesting Period 4 Years) Other4 Total Variable Compensation Service Cost Total Compensation 463,457 34,270 497,727 238,692 0 794,430 0 0 1,033,122 142,096 500,876 35,912 536,788 210,873 0 0 650,378 0 861,251 149,567 314,405 46,300 360,705 161,926 372,652 42,905 415,557 143,054 0 658,350 574,467 0 0 0 736,393 92,875 445,431 0 1,246,835 99,949 1,672,945 1,547,606 1,189,973 1,762,341 – – – – – – – – – – – 281,500 568,644 850,144 0 0 0 0 0 0 60,967 911,111 1 In 2017, the fringe beneﬁ ts of Dr. Malte Peters und Dr. Markus Enzelberger each included a one-time compensation in the form of MorphoSys shares as an incentive to join the Management Board of MorphoSys AG. 2 The one-year variable compensation presented here represents the bonus paid in the respective ﬁ nancial year for the previous ﬁ nancial year. 3 The date and value of the payments is the date and value applicable under German tax law. Therefore, this table shows the non-cash beneﬁ ts arising in the respective ﬁ nancial year from the diﬀ erence 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. 4 No compensation recovery claims against the Management Board existed in 2017 or 2016. FI X ED REM U N ER AT I O N A N D FRI N G E B EN EFI TS The non-performance-related remuneration of the Management Board consists of ﬁ xed remuneration and additional beneﬁ ts, which primarily include the use of company cars, as well as subsidies for health, welfare and disability insurance. The Chief Financial Oﬃ cer, Mr. Jens Holstein, receives an additional expense allowance for maintaining two households. PENS I O N E X PENSES The Company also provides payments to Management Board members equal to a maximum of 10 % of the member’s ﬁ xed annual salary plus any taxes payable. This compensation is intended for the members’ individual retirement plans. Addi- tionally, all Management Board members participate in a pen- sion 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 will be met by Allianz Pensions-Management e.V. These pension obligations are not pension beneﬁ t plans. 2017 204,698 417,158 621,856 0 0 0 0 0 0 29,186 651,042 2017 222,450 20,427 242,877 143,054 0 0 445,431 3,388,866 77,976 3,709,719 2017 103,253 9,161 112,414 140,940 0 0 445,431 1,870,648 28,245 2,011,307 2017 1,685,429 1,094,207 2,779,636 637,921 0 0 1,986,671 7,367,600 445,890 10,593,126 2,800,381 1,284,277 4,743,008 2017 500,876 35,912 536,788 210,873 0 0 0 650,378 861,251 149,567 1,547,606 2017 372,652 42,905 415,557 143,054 658,350 0 0 445,431 1,246,835 99,949 1,762,341 2017 281,500 568,644 850,144 0 0 0 0 0 0 60,967 911,111 Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 87 Dr. Markus Enzelberger5 Chief Scientiﬁ c Ofﬁ cer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 Dr. Marlies Sproll6 Chief Scientiﬁ c Ofﬁ cer Temporary Leave: April 15, 2017 – October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius7 Chief Development Ofﬁ cer Resignation: February 28, 2017 Total 2016 2017 2016 2017 2016 2017 2016 2017 – – – – – – – – – – – 204,698 417,158 621,856 0 0 0 0 0 0 29,186 651,042 314,405 24,141 338,546 156,635 222,450 20,427 242,877 143,054 309,759 28,388 338,147 156,635 103,253 9,161 112,414 140,940 1,402,026 133,099 1,535,125 713,888 1,685,429 1,094,207 2,779,636 637,921 0 2,800,381 0 1,284,277 0 4,743,008 540,155 0 489,233 0 2,398,285 0 0 0 696,790 92,876 445,431 0 3,388,866 77,976 0 0 645,868 95,473 445,431 0 1,870,648 28,245 0 0 3,112,173 423,320 1,986,671 0 7,367,600 445,890 1,128,212 3,709,719 1,079,488 2,011,307 5,070,618 10,593,126 5 The ﬁ gures presented for Dr. Markus Enzelberger do not include any payments for his activities as a member of the Senior Management Group as they do not relate to his appointment as a member of the Management Board. 6 Dr. Marlies Sproll left the Management Board of MorphoSys AG on October 31, 2017. Since November 1, 2017, she has taken on a new part-time role at MorphoSys as Special Adviser to the CEO. Therefore, the payments presented for Dr. Marlies Sproll do not include any remuneration for these activities. 7 The ﬁ gures presented for Dr. Arndt Schottelius do include remuneration from the exercise of convertible bonds and the transfer of treasury stock from a long-term incentive program after his resignation as Chief Development Oﬃ cer. These were granted for his activities as a member of the Management Board in previous years. PERFORMANCE-BASED COMPENSATION (SHORT-TERM INCENTIVE – STI) Members of the Management Board each receive performance- based compensation in the form of an annual bonus payment of up to 70 % of the gross base salary when 100 % of the member’s targets have been achieved. These bonus payments are depen- dent on the achievement of corporate targets speciﬁ ed by the Supervisory Board at the start of each ﬁ nancial year. Targets are typically based on, amongst other objectives, the Compa- ny’s performance and the progress of the partnered pipeline and the Company’s proprietary pipeline. At the start of the year, the Supervisory Board assesses the degree to which corporate goals were achieved in the prior year and uses this information to determine the bonus. The bonus may not exceed 125 % of the target amount (corresponding to 87.5 % of the gross base salary). Performance-based compensation can be reduced to zero if goals are not achieved. The bonus for the 2017 ﬁ nan- cial year will be paid in February 2018. Contrary to the usual bonus scheme for Management Board members, in the period from April 15 to October 31, 2017, Dr. Markus Enzelberger, as an interim Board member, agreed to an entitlement to a bonus payment of up to 52 % of his gross base salary with 100 % target achievement (maximum 65 % with 125 % target achievement). During this period, Dr. Marlies Sproll (on leave) was not enti- tled to a bonus payment. 88 G r o u p M a n a g e m e n t R e p o r t Statement on Corporate Governance and Corporate Governance Report LONG-TERM INCENTIVE COMPENSATION (LONG-TERM INCENTIVE – LTI) In 2011, MorphoSys introduced a long-term incentive compen- sation plan (Performance Share Plan) for the Management Board and members of the Senior Management Group. The Per- formance Share Plan is based on the allocation of shares linked to the achievement of predeﬁ ned 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, 2017, the Management Board members (including Dr. Markus Enzelberger as an interim Management Board member from April 15 to October 31) were granted a total of 15,675 shares. Each Management Board member received an entitlement beneﬁ t for a speciﬁ c number of shares. For more information, please refer to Item 7.3.5 in the Notes to the Consolidated Finan- cial Statements and the explanation on stock repurchases in the Corporate Governance Report. Long-term performance targets are set by the Supervisory Board at the time the shares are allocated for a speciﬁ c year. The deﬁ ned targets for the 2017 Performance Share Plan were the absolute performance of MorphoSys shares, as well as the relative performance of MorphoSys shares relative to a bench- mark index comprising of equal parts of the NASDAQ Biotech- nology Index and the TecDAX Index. The absolute and relative performance of the share price for each of the four assessment periods (one year each) is determined by comparing the aver- age share price of the last 30 trading days prior to the begin- ning of the relevant assessment period (April 1) with the aver- age share price of the last 30 trading days prior to the end of the evaluation period. The participants in the Performance Share Plan receive an annual share entitlement, which will be evalu- ated on the basis of the absolute and relative performance of the share price, that is, a comparison of the performance of MorphoSys shares versus the benchmark index. Depending on the absolute and relative performance of the share price over the course of an evaluation period, certain (absolute and rela- tive) tiered target attainment levels between 10 % and 300 % can be achieved. Exceeding the target attainment level of 300 % does not grant entitlement to additional shares during the rele- vant assessment period (cap). At the end of the four-year term, a total level of target achievement based on the absolute and relative target attainment levels has to be established. The average absolute and relative attainment levels reached are weighted at 50 %. The overall target achievement is capped at 200 %. The ultimate number of performance shares allocated to the Performance Share Plan participants is determined at the com- pletion of the program, which spans four years. This calculation incorporates the number of shares initially granted (“grants”) multiplied with the total level of target achievement, as well as a “company factor” that is determined at the Supervisory Board’s discretion. This company factor is a number between zero and two that is set by the Supervisory Board based on the Company’s situation. The company factor’s predeﬁ ned default value is one (1). In 2017, MorphoSys also introduced a stock option plan (SOP) as another form of long-term incentive compensation based on the resolution of the Annual General Meeting on June 2, 2016 (Agenda Item 9). As of April 1, 2017, a total of 40,319 stock options were granted to the Management Board (including Dr. Markus Enzelberger as interim Management Board mem- ber from April 15 to October 31). Each member of the Manage- ment Board received a speciﬁ c number of stock options that entitle them to purchase up to two MorphoSys shares each. Fur- ther details can be found in Item 7.1 in the Notes to the Consoli- dated Financial Statements and the explanations on stock re- purchases in the Corporate Governance Report. In accordance with the resolution of the Annual General Meet- ing on June 2, 2016 (Agenda Item 9), the SOP’s performance targets include the absolute price performance of MorphoSys shares and the relative price performance of MorphoSys shares compared to a benchmark index. The benchmark index con- sists of equal parts of the NASDAQ Biotechnology Index and the TecDAX Index. Each performance target has a 50 % weighting in the achievement of the overall target. To determine the degree of target achievement for each perfor- mance target, the four-year vesting period (until the ﬁ rst stock options can be exercised) is subdivided into four equal periods of one year each. An arithmetic mean is calculated based on the degree of target achievement in each of the four years. This, in turn, determines the ﬁ nal percentage of target achievement for each performance target. The ﬁ nal percentage of target achieve- ment for each of the two performance targets are then added together and divided by two, the result being the overall level of target achievement. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 89 For the performance target of absolute price performance, a comparison is made between the stock market price of MorphoSys shares at the beginning of each year in the four- year period with the price at the end of each respective period. If MorphoSys shares perform well, the degree of target achieve- ment can reach up to 200 % on a straight-line basis for that par- ticular year. Any further positive share price development of MorphoSys shares will not lead to any further increase in the performance target (cap). For the performance target of relative price performance, the development of MorphoSys’s share price is compared with the development of the benchmark index during each annual pe- riod and set in relation to each other. In forming the benchmark index, the NASDAQ Biotech Index and the TecDAX Index are each weighted at 50 % in such a way that the percentage price movements of each index are added for the respective annual period and divided by two. If MorphoSys shares outperform the benchmark index, the degree of target achievement for the relevant period can reach up to 200 % on a straight-line basis. Any further positive share price development of MorphoSys shares versus the benchmark index will not lead to any further increase in the performance target (cap). Stock options can only be exercised when the four-year (mini- mum) vesting period prescribed by law has expired, and the speciﬁ ed minimum value for the degree of target achievement of a performance target has been exceeded. The ultimate num- ber of exercisable stock options is calculated by multiplying the number of initially granted stock options (“grants”) by the total level of target achievement and rounding up to the nearest whole number. The resulting ultimate number of stock options is limited to 200 % of the initially granted number of stock op- tions. The stock options are settled in the form of Company shares, with each stock option entitling the holder to one share for the ﬁ nal number of stock options. When the stock options are exercised, the exercise price must be paid for each underlying share. The exercise price corre- sponds to the average closing auction price of MorphoSys shares in the 30 trading days prior to the day on which the stock options were issued. The terms of the stock option plan provide further details on the granting and settlement of stock options, the issue of Com- pany shares from the Conditional Capital 2016-III and the ad- ministration of the SOP. For more information, please refer to the corresponding resolution of the Annual General Meeting on June 2, 2016 (Agenda Item 9). M ISC EL L A N EO US None of the Management Board members were granted any loans or similar beneﬁ ts in the reporting year nor have they received any beneﬁ ts from third parties that were promised or granted based on their positions as members of the Manage- ment Board. T ERM I N AT I O N O F M A N AG EM EN T B OA RD EM PLOY M EN T C O N T R ACTS/C H A N G E O F C O N T RO L If a Management Board member’s employment contract termi- nates due to the member’s death, the member’s spouse or life partner is entitled to the ﬁ xed monthly salary for the month of death and the 12 months thereafter. In the event of a change of control, Management Board members are entitled to exercise their extraordinary right to terminate their employment con- tracts and receive any outstanding ﬁ xed salary for the re- mainder of the agreed contract period. Moreover, in such a case, all stock options and performance shares granted will become vested immediately and can be exercised after the ex- piration of the statutory vesting periods. A change of control has occurred when (i) MorphoSys transfers assets or a sub- stantial portion of its assets to unaﬃ liated third parties, (ii) MorphoSys merges with an unaﬃ liated company or (iii) a shareholder or third party holds 30 % or more of MorphoSys’s voting rights. C H A N G E I N T H E C O M P OS I T I O N O F T H E M A N AG EM EN T B OA RD On January 5, 2017, MorphoSys announced that Dr. Malte Peters would succeed Dr. Arndt Schottelius as the Chief Devel- opment Oﬃ cer and member of the Management Board of MorphoSys AG. Dr. Schottelius resigned from his position as Chief Development Oﬃ cer eﬀ ective February 28, 2017 to pur- sue new challenges. For the period leading up to the end of his employment contract on April 30, 2017, Dr. Schottelius and MorphoSys entered into an exemption agreement. According to the agreement, Dr. Schottelius was entitled to the remuneration agreed in his employment contract until April 30, 2017. The remuneration included a contractually agreed payment of a pro rata amount of his annual gross base salary of € 103,252.96 and a bonus of € 23,490.05. Dr. Schottelius also exercised the con- vertible bonds granted to him in 2013. In addition, he received shares that had vested after the four-year vesting period under 90 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 2013 Performance Share Plan. Dr. Schottelius still has a pro rata entitlement based on the 2014, 2015 and 2016 Performance Share Plans, which can be exercised after a total of four years at the earliest. Dr. Schottelius did not participate in the 2017 Performance Share Plan. Eﬀ ective March 1, 2017, Dr. Malte Peters was appointed Chief Development Oﬃ cer of MorphoSys AG. His employment contract runs until June 30, 2019. As an addi- tional incentive to join MorphoSys, Dr. Peters was granted a one-time compensation payment for the lost compensation from his former employment. This compensation was in the form of treasury shares held by MorphoSys valued at € 500,000. On October 30, 2017, MorphoSys announced that Dr. Markus Enzelberger would succeed Dr. Marlies Sproll as Chief Scien- tiﬁ c Oﬃ cer at MorphoSys AG. Dr. Sproll had been on a tempo- rary leave of absence for family reasons since April 15, 2017 and eventually resigned from her post as Chief Scientiﬁ c Oﬃ - cer eﬀ ective October 31, 2017 due to ongoing family matters. She has been working as a Special Advisor to the CEO of MorphoSys, Simon Moroney, on a part-time basis since Novem- ber 1, 2017. She received remuneration until October 31, 2017 in accordance with her Management Board employment con- tract. Dr. Sproll’s long-term compensation granted to her during her time as a member of the Management Board will be settled in accordance with the plans’ terms. Eﬀ ective November 1, 2017, Dr. Enzelberger was appointed Chief Scientiﬁ c Oﬃ cer of MorphoSys AG after having served as the Interim Chief Scien- tiﬁ c Oﬃ cer since April 15, 2017. Dr. Enzelberger has held various management positions in research and development at MorphoSys since 2002. His Management Board employment contract runs until June 30, 2020. Upon joining the Manage- ment Board of MorphoSys AG, Dr. Enzelberger was granted a one-time incentive consisting of MorphoSys treasury shares to the value of € 400,000. SUPERVISORY BOARD REMUNER ATION The remuneration of Supervisory Board members is governed by the Company’s Articles of Association and a corresponding Annual General Meeting resolution on Supervisory Board re- muneration. In the 2017 ﬁ nancial year, Supervisory Board members received ﬁ xed compensation, attendance fees and ex- pense allowances for their participation in Supervisory Board and committee meetings. Each Supervisory Board member has received annual ﬁ xed compensation (€ 85,400 for Chairper- sons, € 51,240 for Deputy Chairpersons and € 34,160 for all other members) for their membership of the Supervisory Board. The Chairperson receives € 4,000 for each Supervisory Board meeting chaired and the other members receive € 2,000 for each Supervisory Board meeting attended. For committee work, the committee Chairperson receives € 12,000 and other com- mittee members each receive € 6,000. Committee members also receive € 1,200 for their participation in a committee meet- ing. Participation in a Supervisory Board or committee meeting by telephone or video conference results in a 50 % reduction in compensation for meeting participation. Supervisory Board members residing outside of Europe who personally take part in a Supervisory Board or committee meeting are entitled to a ﬁ xed 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 2017 ﬁ nancial year, Supervisory Board members re- ceived a total of € 523,015 (2016: € 529,680) excluding the reim- bursement of travel expenses. This amount consists of ﬁ xed compensation and attendance fees for participating in Super- visory Board and committee meetings. No loans were granted to Supervisory Board members by the Company. The table below details the Supervisory Board’s remuneration. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 91 T A B L E 1 6 Compensation of the Supervisory Board in 2017 and 2016 in € Dr. Gerald Möller Dr. Frank Morich Dr. Marc Cluzel Krisja Vermeylen2 Wendy Johnson Klaus Kühn Karin Eastham3 TOTAL Fixed Compensation Attendance Fees1 Total Compensation 2017 2016 2017 2016 2017 2016 95,156 57,240 52,160 28,961 46,160 46,160 19,578 91,400 57,240 52,160 - 46,160 46,160 52,160 36,800 23,200 26,800 16,000 38,000 22,000 14,800 43,400 26,800 34,600 - 33,800 21,400 24,400 131,956 134,800 80,440 78,960 44,961 84,160 68,160 34,378 84,040 86,760 - 79,960 67,560 76,560 345,415 345,280 177,600 184,400 523,015 529,680 1 The attendance fee contains expense allowances for the attendance at the Supervisory Board and the Committee meetings. 2 Krisja Vermeylen joined the Supervisory Board of MorphoSys AG on May 17, 2017. 3 Karin Eastham has left the Supervisory Board of MorphoSys AG on May 17, 2017. 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, stock options and convertible bonds held by each member of the Management Board and the Supervisory Board are listed below. 92 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 T A B L E 17 Directors’ Holdings S H A R E S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Arndt Schottelius3 Dr. Marlies Sproll4 TOTAL SUPERVISORY BOARD Dr. Gerald Möller Dr. Frank Morich Dr. Marc Cluzel Krisja Vermeylen5 Wendy Johnson Klaus Kühn Karin Eastham6 TOTAL S T O C K O P T I O N S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Marlies Sproll4 TOTAL 01/01/2017 Additions Sales 12/31/2017 514,214 7,000 - - 10,397 57,512 589,123 11,000 1,000 500 - 500 0 2,000 15,000 12,024 38,235 9,505 4,956 68,772 68,772 42,529 34,235 0 2,600 0 0 483,709 11,000 9,505 7,262 - - 202,264 79,364 511,476 0 0 0 350 0 0 0 350 0 0 0 0 0 0 0 0 11,000 1,000 500 350 500 0 - 13,350 01/01/2017 Additions Forfeitures Exercises 12/31/2017 0 0 - - 0 0 12,511 8,197 8,197 5,266 6,148 40,319 0 0 0 0 0 0 0 0 0 0 0 0 12,511 8,197 8,197 5,266 – 34,171 Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 93 C O N V E R T I B L E B O N D S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Arndt Schottelius3 Dr. Marlies Sproll4 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. Malte Peters1 Dr. Markus Enzelberger2 Dr. Arndt Schottelius3 Dr. Marlies Sproll4 TOTAL 01/01/2017 Additions Forfeitures Exercises 12/31/2017 88,386 90,537 - - 60,537 60,537 299,997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 30,000 0 0 60,537 60,537 151,074 88,386 60,537 0 0 - - 148,923 01/01/2017 Additions Forfeitures Allocations 12/31/2017 37,220 25,134 - - 25,134 25,134 112,622 4,864 3,187 3,187 2,047 0 2,390 15,675 0 0 0 0 0 0 0 12,024 8,235 0 0 8,235 8,235 36,729 30,060 20,086 3,187 5,987 - - 59,320 1 Dr. Malte Peters joined the Management Board of MorphoSys AG on March 1, 2017. 2 Dr. Markus Enzelberger joined the Management Board of MorphoSys AG on November 1, 2017. Prior to his appointment as member of the Management Board 4,906 shares have been held by Dr. Markus Enzelberger. Under the Long-Term Incentive Programs 2014 to 2016, Dr. Markus Enzelberger was granted 3,940 performance shares as a member of the Senior Management prior to his appointment as member of the Management Board. 3 Dr. Arndt Schottelius left the Management Board of MorphoSys AG on February 28, 2017. The exercises and allocations presented in the tables “Convertible Bonds” and “Performance Shares” were made after resignation from the Management Board. The respective convertible bonds and performance shares were granted in previous years. The table “Shares” shows no further changes in the number of shares after resignation from the Management Board of MorphoSys AG. 4 Dr. Marlies Sproll left the Management Board of MorphoSys AG on October 31, 2017. The exercises presented in the table “Convertible Bonds” were made after resignation from the Management Board. The respective convertible bonds were granted in a previous year. The table “Shares” shows no further changes in the number of shares after resignation from the Management Board of MorphoSys. 5 Krisja Vermeylen joined the Supervisory Board of MorphoSys AG on May 17, 2017. 6 Karin Eastham left the Supervisory Board of MorphoSys AG on May 17, 2017. Changes in the number of shares after resignation from the Supervisory Board of MorphoSys AG are not presented in the tables. The members of the MorphoSys Supervisory Board do not hold stock options, convertible bonds or performance shares. and persons related to such members are required to disclose any trading in MorphoSys shares. MANAGERS T RANSAC T IONS In accordance with the relevant legal provisions of Article 19 (1a) of the Market Abuse Regulation (MAR), the members of MorphoSys AG’s Management Board and Supervisory Board During the reporting year, MorphoSys received the following notiﬁ cations under Article 19 (1a) MAR listed in the table below. 94 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 T A B L E 1 8 Managers’ Transactions in 2017 Party Sub- ject to the Notiﬁ cation Requirement Function Date of Transaction in 2017 Type of Transaction Aggregated Share Price Aggregated Volume Place of Transaction Dr. Markus Enzelberger Chief Scientiﬁ c Oﬃ cer 11/21/2017 Disposal € 81.62 € 212,201.49 Xetra 11/20/2017 Purchase of 4,956 shares as part of his remuneration as member of the Managing Board (issuer’s own shares) not numberable not numberable 09/29/2017 Disposal € 71.75 € 1,361,556.78 09/28/2017 Disposal € 71.86 € 1,692,519.75 outside a trading venue outside a trading venue outside a trading venue Dr. Markus Enzelberger Dr. Simon Moroney Dr. Simon Moroney Krisja Vermeylen Chief Scientiﬁ c Oﬃ cer Chief Executive Oﬃ cer Chief Executive Oﬃ cer Member of the Super visory Board 06/26/2017 Jens Holstein Chief Financial Oﬃ cer 05/17/2017 Dr. Markus Enzelberger Chief Scientiﬁ c Oﬃ cer (Interim) 05/17/2017 Dr. Malte Peters Chief Develop- ment Oﬃ cer 05/17/2017 Dr. Marlies Sproll Chief Scientiﬁ c Oﬃ cer 05/17/2017 Dr. Simon Moroney Chief Executive Oﬃ cer 05/17/2017 Jens Holstein Jens Holstein Jens Holstein Chief Financial Oﬃ cer Chief Financial Oﬃ cer Chief Financial Oﬃ cer 04/05/2017 Purchase; the stock portfolio is held jointly with a person closely associated with Ms Vermeylen Acceptance of 8,197 stock options to sub- scribe for up to 2 shares each within the compensation as a Management Board Member (Stock-Option-Program 2017) Acceptance of 5,266 stock options to sub- scribe for up to 2 shares each within the compensation as a Management Board Member (Stock-Option-Program 2017) Acceptance of 8,197 stock options to sub- scribe for up to 2 shares each within the compensation as a Management Board Member (Stock-Option-Program 2017) Acceptance of 6,148 stock options to sub- scribe for up to 2 shares each within the compensation as a Management Board Member (Stock-Option-Program 2017) Acceptance of 12,511 stock options to subscribe for up to 2 shares each within the compensation as a Management Board Member (Stock-Option-Program 2017) Purchase of shares based on conversion of convertible bonds as part of his remu- neration as member of the Managing Board (Convertible Bonds Program 2013) € 64.57 € 22,599.75 Xetra not numberable not numberable not numberable not numberable not numberable not numberable not numberable not numberable not numberable not numberable € 31.88 € 956,250.00 outside a trading venue outside a trading venue outside a trading venue outside a trading venue outside a trading venue outside a trading venue 04/05/2017 Disposal € 54.42 € 714,711.86 Xetra 04/05/2017 Disposal € 54.30 € 1,145,753.65 Jens Holstein Chief Financial Oﬃ cer 04/03/2017 Dr. Simon Moroney Chief Executive Oﬃ cer 04/03/2017 Dr. Marlies Sproll Chief Scientiﬁ c Oﬃ cer 04/03/2017 Dr. Malte Peters Chief Develop- ment Oﬃ cer 03/27/2017 Allocation of 8,235 shares as part his remuneration as member of the Managing Board (Long-Term Incentive Program 2013) (issuer’s own shares) Allocation of 12,024 shares as part of his remuneration as member of the Managing Board (Long-Term Incentive Program 2013) (issuer’s own shares) Allocation of 8,235 shares as part of her remuneration as member of the Managing Board (Long-Term Incentive Program 2013) (issuer’s own shares) Purchase of 9,505 shares as part of his reumuneration as member of the Managing Board (issuer’s own shares) not numberable not numberable not numberable not numberable not numberable not numberable not numberable not numberable outside a trading venue outside a trading venue outside a trading venue outside a trading venue outside a trading venue Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 95 AVOIDING CONF L IC T S OF IN T ERES T Management Board and Supervisory Board members are re- quired to refrain from any actions that could lead to a conﬂ ict of interest with their duties at MorphoSys AG. Such transac- tions or the secondary employment of Management Board members must be disclosed 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 conﬂ icts of interest and their handling. In the 2017 ﬁ nancial year, no conﬂ icts of interest arose in the Supervisory Board. S T OCK REPURCHASES By resolution of the Annual General Meeting on May 23, 2014, MorphoSys is authorized in accordance with Section 71 (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 speciﬁ ed 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 oﬀ er or through a public invi- tation to submit a bid. In 2017, MorphoSys did not repurchase any shares based on the authorization from the year 2014. INF ORMAT ION T ECHNOL OGY In the reporting year 2017, IT security and compliance contin- ued to be key topics in the area of information technology. External security experts checked the network and the entire IT infrastructure in the new oﬃ ce building. This happened, inter alia, using simulated hacking attacks to detect potential vulnerabilities. Any safety-relevant system notiﬁ cations or user notiﬁ cations that occurred were analyzed by the internal CERT (Computer Emergency Response Team). In some cases, external IT secu- rity experts were consulted for further analysis. As in the pre- vious year, no serious security incidents had occurred. Due to the move to the new oﬃ ce building, the business conti- nuity plan and the IT contingency plans have been revised. Additional emergency measures were introduced in the form of a Cyber Security Incident Response Plan to counteract the ever-increasing risk of cyber attacks. The IT Security Aware- ness Campaign (ISAC) simulated an extensive phishing attack to sensitize employees for their co-responsibility and essential contribution to IT security in the enterprise. To optimize the cyber defense measures, an artiﬁ cial intelligence-based Next- Generation Endpoint Protection has been integrated. In addition, an initiative on artiﬁ cial intelligence and machine learning was launched to evaluate the potential applications of these technologies in research and development. INF ORMAT ION ON T HE IN T ERNAL CON T ROL AND RISK MANAGEMEN T SYS T EM WI T H REGARD T O T HE ACCOUN T ING PROCESS UNDER SEC TION 289 (4) AND SEC TION 315 (4) HGB In the 2017 ﬁ nancial year, MorphoSys completed a routine up- date of the documentation for its existing internal control and risk management system. This update serves to maintain ade- quate internal control over ﬁ nancial reporting and to ensure the availability of key controls so that ﬁ nancial ﬁ gures can be reported as precisely and accurately as possible. COSO (Com- mittee of Sponsoring Organizations of the Treadway Commis- sion) deﬁ nes the corresponding COSO framework (“Internal Control – Integrated Framework”). This is the framework used by MorphoSys and is the most commonly used for the internal control of ﬁ nancial reporting. System constraints make it impossible to give absolute assur- ance that internal controls will always prevent or completely detect all misrepresentations made in the context of ﬁ nancial reporting. Internal controls can only provide reasonable assur- ance that ﬁ nancial reporting is reliable and verify that the ﬁ nancial statements were prepared in accordance with the IFRS standards adopted by the European Union for external purposes. The consolidated ﬁ nancial statements are subjected to numer- ous preparation, review and control processes so that they can be reported promptly to the market and to shareholders. To accomplish 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-eyes principle to ensure the accuracy of the key ﬁ nancial ratios reported and the underlying execution of all accounting processes. Numerous rules and guidelines are also followed to ensure the strict separation of the planning, posting and execution of ﬁ nancial transactions. This functional separation of processes is en- sured by all of the Company’s operating IT systems through an appropriate assignment of rights. External service providers routinely review the implementation of and compliance with these guidelines as well as the eﬃ ciency of the accounting pro- cesses. The reporting year’s most recent review showed no cause for action. 96 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 Compliance Management System (CMS) Credo Code of Conduct reports, if required, to C O M P L I A N C E O F F I C E R reports to C H A I R P E R S O N O F T H E A U D I T C O M M I T T E E C H I E F E X E C U T I V E O F F I C E R manages the interfaces between the different compliance streams C O M P L I A N C E R I S K M A N A G E M E N T S U P E R V I S I O N + I M P R O V E M E N T S C O M P L I A N C E C O M M I T T E E CMS T R A I N I N G S C O M P L I A N C E D O C U M E N T S W H I S T L E B L O W E R S Y S T E M Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 97 Predicting future events is not the job of MorphoSys’s internal control and risk management system. The Company’s risk man- agement system does, however, ensure that business risks are detected and assessed early. The risks identiﬁ ed are eliminated or at least brought to an acceptable level using appropriate cor- rective measures. Special attention is given to risks that could jeopardize the Company. 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”. ACCOUN T ING AND EX T ERNAL AUDI T MorphoSys AG prepares its ﬁ nancial statements in accordance with the provisions of the German Commercial Code (HGB) and the Stock Corporation Act (AktG). The consolidated ﬁ nancial statements are prepared in accordance with the International Financial Reporting Standards (IFRS), as applicable in the Euro- pean Union. For the election of the Company auditor, the Audit Committee of the Supervisory Board submits a nomination proposal to the Supervisory Board. At the 2017 Annual General Meeting, Price- waterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft was appointed auditor for the 2017 ﬁ nancial year. As proof of its independence, the auditor submitted an Independence Declaration to the Supervisory Board. The lead auditor of these consolidated ﬁ nancial statements was Mr. Dietmar Eglauer, who has audited the consolidated ﬁ nancial statements since 2014. PricewaterhouseCoopers GmbH has been the auditor for MorphoSys AG since the 2011 ﬁ nancial year. Information on other consulting, audit and valuation services provided by PricewaterhouseCoopers GmbH to MorphoSys AG during the 2017 ﬁ nancial year can be found in the Notes under Item 6.1. COMPL IANCE MANAGEMEN T SY S T EM The basic mechanisms of the compliance management system (CMS) at MorphoSys are presented in the section ”Relevant Information on Corporate Governance Practices”. In addition to this information, the responsibilities within the compliance or- ganization are shown in Figure 18. The identiﬁ cation and assessment of compliance risks are an important part of the CMS. The main compliance-relevant risk areas for the Company are evaluated using a systematic ap- proach and take into account the Company’s strategic orienta- tion. In the 2017 ﬁ nancial year, a compliance risk analysis was carried out that was focused on corruption prevention. Risk-minimizing measures were initiated for the areas identi- ﬁ ed that required action. ›› S E E F I G U R E 18 – Compliance-Management-System (CMS) ( page 96 Compliance-Management-System (CMS) (page 96) page 96) INTERNAL AUDIT DEPAR TMENT As an element of corporate governance, the Internal Audit De- partment plays a key role in the Company’s compliance man- agement system. The department’s main duty is to provide the MorphoSys Group with a systematic and uniform approach for evaluating and improving the eﬀ ectiveness of risk manage- ment and supporting the management and monitoring activi- ties when meeting set targets. The accounting and consulting ﬁ rm KPMG was reappointed in 2017 as a co-sourcing partner for the internal auditing process. Internal auditing is based on a risk-oriented internal audit plan that is based on the results of the most recent risk surveys and the results of prior audits. The Management Board’s and Super- visory Board Audit Committee’s audit requirements and recom- mendations are included in the audit plan. The Internal Audit Department reports regularly to the Man- agement Board. The head of Internal Audit and the Chief Exec- utive Oﬃ cer both report to the Supervisory Board’s Audit Com- mittee twice annually or on an ad hoc basis when necessary. Five audits were conducted successfully in the course of 2017. Some areas requiring action were identiﬁ ed and corrections were initiated or performed. Appropriate corrective action was initiated during the reporting year for any complaints. The Internal Audit Department is planning six audits in 2018. 98 G r o u p M a n a g e m e n t R e p o r t Statement on Corporate Governance and Corporate Governance Report Disclosures Under Section 289a (1), Section 315a (1) HGB and Explanatory Report of the Management Board Under Section 176 (1) Sentence 1 AktG COMP OSI T ION OF COMMON S T OCK As of December 31, 2017, the Company’s statutory common stock amounted to € 29,159,770.00 and was divided into 29,159,770 no-par-value bearer shares. Excluding the 319,678 treasury shares held by the Company, the statutory common stock concerns bearer shares with voting rights granting each share one vote at the Annual General Meeting. At its meeting on December 13, 2017, the Supervisory Board of MorphoSys AG resolved to amend the amount of common stock after the issuance of new shares resulting from the exercise of convertible bonds in 2017. The amendment of the Company’s common stock took eﬀ ect upon its entry in the commercial register on January 4, 2018 and amounts to € 29,420,785.00, divided into 29,420,785 no-par-value bearer shares. RES T RIC T IONS AF F EC T ING VO T ING RIGH T S OR T HE T RANSF ER OF SHARES The Management Board is not aware of any restrictions that may aﬀ ect 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 Section 136 AktG, or the provisions for treasury stock under Section 71b AktG. SHAREHOL DINGS IN COMMON S T OCK EXCEEDING 10 % OF VO T ING RIGH T S We are not aware of nor have we been notiﬁ ed of any direct or indirect interests in the Company’s common stock that exceed 10 % of the voting rights. 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 ASS OC IAT ION The number of Management Board members, their appointment and dismissal and the nomination of the Chief Executive Oﬃ cer are determined by the Supervisory Board in accordance with Section 6 of the Articles of Association and Section 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 ﬁ ve years. Reappointments or extensions in the term of oﬃ ce are allowed for a maximum term of ﬁ ve years in each case. The Supervisory Board may revoke the appointment of a Manage- ment Board member or the nomination of a Chief Executive Oﬃ cer for good cause within the meaning of Section 84 (3) AktG. If a required member of the Management Board is ab- sent, one will be appointed by the court in cases of urgency under Section 85 AktG. As a rule, the Articles of Association can only be amended by a resolution of the Annual General Meeting in accordance with Section 179 (1) sentence 1 AktG. Under Section 179 (2) sentence 2 AktG in conjunction with Section 20 of the Articles of Associ- ation, the MorphoSys AG 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 man- datory majority of votes or capital, this shall be applied. Amend- ments to the Articles of Association that only aﬀ ect their word- ing can be resolved by the Supervisory Board in accordance with Section 179 (1) sentence 2 AktG in conjunction with Sec- tion 12 (3) of the Articles of Association. SHARES WI T H SPEC IAL RIGH T S CONF ERRING P OWERS OF CON T ROL Shares with special rights conferring powers of control do not exist. P OWER OF T HE MANAGEMEN T BOARD T O ISSUE SHARES The Management Board’s power to issue shares is granted under Section 5 (5) through (6e) of the Company’s Articles of Association and the statutory provisions: 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 vot- ing rights directly in accordance with the statutory provisions and the Articles of Association as do other shareholders. 1. Authorized Capital a. According to Section 5 (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 € 11,663,908.00 for cash contributions and/or contributions in kind by issuing up to 11,663,908 new, no-par-value bearer shares until and including the date of April 30, 2022 (Authorized Capital 2017-II). Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 99 Shareholders are principally entitled to subscription rights in the case of a capital increase. One or more credit institutions may also subscribe to the shares with the ob- ligation to oﬀ er the shares to shareholders for subscrip- tion. With the Supervisory Board’s consent, the Manage- ment Board is, however, authorized to exclude shareholder 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 domestic and/or foreign stock exchange in the context of a public oﬀ er- ing. The total shares to be issued via a capital increase against contribution in cash and/or in kind, excluding preemptive rights and based on the authorizations mentioned above, shall not exceed 20 % of the common stock. The calculation used is based on either the eﬀ ective date of the authoriza- tions or the exercise of the authorizations, whichever amount is lower. The 20 % limit mentioned above shall take into account (i) treasury shares sold excluding preemptive rights after the eﬀ ective 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 eﬀ ective date of these authorizations and excluding preemptive rights during the eﬀ ective period of these authorizations or re- solved by the same Annual General Meeting that resolved these authorizations, and (iii) shares to be issued during the eﬀ ective period of these authorizations to service con- vertible bonds and/or bonds with warrants whose basis for authorization exists on the eﬀ ective date of these au- thorizations provided that the convertible bonds and/or bonds with warrants have been issued with the exclusion of the preemptive rights of shareholders (unless they ser- vice 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) Pursuant to Section 5 (6) of the Articles of Association, with the Supervisory Board’s consent, the Management Board is authorized to increase the common stock of the Company against contribution in cash once or several times by a total of up to € 2,915,977.00 until and including April 30, 2022 by issuing up to 2,915,977 new no-par- value bearer shares (Authorized Capital 2017-I). Shareholders are principally entitled to subscription rights in the case of a capital increase. One or more credit institutions may also subscribe to the shares with the ob- ligation to oﬀ er the shares to shareholders for subscrip- tion. With the Supervisory Board’s consent, the Manage- ment Board is, however, authorized to exclude shareholder subscription rights: aa) to the extent necessary to avoid fractional shares; or bb) if the issue price of the new shares is not signiﬁ cantly below the market price of shares of the same class already listed 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 eﬀ ect or at the time it is exercised, in accordance with or in the respective application of Section 186 (3) sentence 4 AktG. The total number of shares to be issued via capital in- creases against contribution in cash, excluding subscrip- tion rights and based on the authorizations mentioned above, shall not exceed 20 % of the common stock when calculated based on the authorizations’ eﬀ ective date or exercise, whichever amount is lower. This 20 % limit shall take into account (i) treasury shares sold with the exclu- sion of subscription rights after the eﬀ ective date of these authorizations (unless they service the entitlements of members of the Management Board and/or employees under employee participation programs); (ii) shares to be issued with the exclusion of subscription rights during the eﬀ ective period of these authorizations from other authorized capital existing on the eﬀ ective date of these authorizations or to be resolved by the same Annual General Meeting resolving these authorizations; and (iii) shares to be issued during the eﬀ ective period of these 100 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 authorizations to service bonds with conversion or warrant rights, whose authorization basis exists on the eﬀ ective date of these authorizations, to the extent the bonds with conversion or warrant rights were issued with the exclu- sion of shareholders’ subscription rights (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. 2. Conditional Capital a. According to Section 5 (6b) of the Articles of Association, the Company’s common stock is conditionally increased by up to € 5,307,536.00, divided into a maximum of 5,307,536 no-par-value bearer shares (Conditional Capital 2016-I). The conditional capital increase serves solely as a means to grant new shares to the holders of conversion or warrant rights, which will be issued by the company or companies in which the Company has a direct or indirect majority interest according to the authorizing resolution of the Annual General Meeting on June 2, 2016, under Agenda Item 7 letter a). The shares will be issued at the respective conversion or exercise price to be determined in accordance with the resolution above. The conditional capital increase will only be carried out to the extent that the holders of conversion or warrant rights exercise these rights or fulﬁ ll conversion obligations under such bonds. The shares will be entitled to dividends as of the begin- ning of the previous ﬁ nancial year, provided they were issued before the start of the Company’s Annual General Meeting, or as of the beginning of the ﬁ nancial year in which they were issued. b. According to Section 5 (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 (Condi- tional Capital 2008-III). The conditional capital increase will only be executed to the extent that holders of the con- vertible bonds exercise their conversion rights for conver- sion into ordinary shares of the Company. The new shares participate in the Company’s proﬁ ts from the beginning of the ﬁ nancial year, for which there has been no resolution on the appropriation of accumulated income at the time of issuance. With the Supervisory Board’s consent, the Man- agement Board is authorized to determine the further de- tails of the capital increase and its implementation. At its meeting on December 13, 2017, the Supervisory Board of MorphoSys AG resolved to amend the amount of Conditional Capital 2008-III after the issuance of new shares resulting from the exercise of convertible bonds in 2017. The amendment of the Company’s Conditional Capital 2008-III took eﬀ ect upon its entry in the commer- cial register on January 4, 2018 and amounts to € 188,985, divided into 188,985 no-par-value bearer shares. c. According to Section 5 (6g) of the Articles of Association, the Company’s common stock is conditionally increased by up to € 995,162.00 through the issue of up to 995,162 new no-par- value bearer shares of the Company (Condi- tional Capital 2016-III). The conditional capital serves to meet the obligations of subscription rights that have been issued and exercised based on the authorization resolved by the Annual General Meeting of June 2, 2016 under Agenda Item 9 letter a). The conditional capital increase will only be executed to the extent that holders of sub- scription rights exercise their right to subscribe to shares of the Company. The shares will be issued at the exercise price set in each case as the issue amount in accordance with Agenda Item 9 letter a) subparagraph (8) of the Annual General Meeting’s resolution dated June 2, 2016; Section 9 (1) AktG remains unaﬀ ected. The new shares are entitled to dividends for the ﬁ rst time for the ﬁ nancial year for which there has been no resolution by the Annual General Meeting on the appropriation of accumulated in- come. The Management Board, and the Company’s Super- visory Board where members of the Management Board are concerned, is authorized to determine the additional details of the conditional capital increase and its execution. 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 Section 71 AktG and by the authoriza- tion of the Annual General Meeting of May 23, 2014: Until and including the date of April 30, 2019, the Company is authorized to repurchase its own shares in an amount of up to 10 % of the common stock existing at the time of the resolution (or possibly a lower amount of common stock at the time of exercising this authorization) for any purpose permitted under the statutory limits. The repurchase takes place at the Manage- ment Board’s discretion on either the stock exchange, through a public oﬀ er or public invitation to submit a bid. The authoriza- tion may not be used for the purpose of trading in the Compa- ny’s own shares. The intended use of treasury stock 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: 1. The shares may be redeemed without the redemption or its execution requiring a further resolution of the Annual Gen- eral Meeting. 2. The shares may be sold other than on the stock exchange or shareholder oﬀ er if the shares are sold for cash at a price that is not signiﬁ cantly below the market price of the Company’s shares of the same class at the time of the sale. Statement on Corporate Governance and Corporate Governance Report G r o u p M a n a g e m e n t R e p o r t 101 Following a change of control, some Senior Management Group members may also terminate their employment contract and demand a severance payment equal to one annual gross ﬁ xed salary. Moreover, in such a case, all stock options, convertible bonds and performance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting or blackout periods. The following cases constitute a change of control: (i) MorphoSys transfers all or a material portion of the Company’s assets to an unaﬃ liated entity, (ii) MorphoSys merges with an unaﬃ liated entity or (iii) a shareholder or third party directly or indirectly holds 30 % or more of MorphoSys’s voting rights. 3. The shares may be sold for contribution in kind, particularly in conjunction with company mergers, acquisitions of com- panies, parts of companies or interests in companies. 4. The shares may be used to fulﬁ ll subscription or conversion rights resulting from the exercise of options and/or conver- sion rights or conversion obligations for Company shares. 5. The shares may be oﬀ ered or transferred to employees of the Company and those of aﬃ liated companies, members of the Company’s management and those of aﬃ liated companies and/or used to meet commitments or obligations to purchase Company shares that were or will be granted to employees of the Company or those of aﬃ liated companies, members of the Company’s management or managers of aﬃ liated compa- nies. The shares may also be used to fulﬁ ll obligations or rights to purchase Company shares that will be agreed with the Company’s employees, members of the senior manage- ment and aﬃ liates in the context of employee participation programs. If shares are used for the purposes mentioned above, share- holder 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, which ended at the end of November 2017. During the term of this agreement, in speciﬁ c cases of a change of control, Novartis Pharma AG was entitled but not obliged to take various measures that include the par- tial or complete termination of the collaboration agreement. Under Section 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. COMPENSAT ION AGREEMEN T S CONCLUDED 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 ﬁ xed salary still outstanding until the end of the contract period. Moreover, in such a case, all stock options, convertible bonds and performance shares granted will become vested im- mediately and can be exercised after the expiration of the stat- utory vesting or blackout periods. 102 F i n a n c i a l S t a t e m e n t s Contents Contents F i n a n c i a l S t a t e m e n t s 103 Financial Statements S T N E M E T A T S L A I C N A N I F 104 105 106 108 110 N o t e s 112 112 127 127 127 129 133 139 141 Consolidated Statement of Income (IFRS) Consolidated Statement of Comprehensive Income (IFRS) Consolidated Balance Sheet (IFRS) Consolidated Statement of Changes in Stockholders’ Equity (IFRS) Consolidated Statement of Cash Flows (IFRS) General Information Summary of Signiﬁ cant Accounting Policies Segment Reporting Segment Reporting 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 Remuneration System for the Management Board and Employees of the Group 152 Additional Notes 104 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 Consolidated Net Loss Earnings per Share, basic and diluted Shares Used in Computing Earnings per Share, basic and diluted The notes are an integral part of these consolidated ﬁ nancial statements. Note 2017 2016 2.7.1, 4.1 66,790,840 49,743,515 2.7.2, 4.2.1 (116,808,575) (95,723,069) 2.7.2, 4.2.2 (17,038,720) (14,116,085) (133,847,295) (109,839,154) 2.7.3, 4.3 2.7.4, 4.3 1,119,598 (1,670,792) 708,571 (553,925) 3 (67,607,649) (59,940,993) 2.7.5, 4.3 2.7.6, 4.3 2.7.7, 4.4 2.7.8, 4.5 2.7.8, 4.5 712,397 (1,894,852) (1,036,365) 1,385,164 (1,308,322) (518,625) (69,826,469) (60,382,776) (2.41) (2.28) 28,947,566 26,443,415 Consolidated Statement of Comprehensive Income (IFRS) F i n a n c i a l S t a t e m e n t s 105 Consolidated Statement of Comprehensive Income (IFRS)* in € Consolidated Net Loss Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds (Thereof € 86,685 and € 251,455 for 2017 and 2016, respectively, Reclassiﬁ cations of realized Gains and Losses to Proﬁ t and Loss) Change of Tax Eﬀ ects presented in Other Comprehensive Income on Available-for-sale Financial Assets and Bonds Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds, Net of Tax Eﬀ ects Change in Unrealized Gains and Losses on Cash Flow Hedges (Thereof € 256,085 and € 0 for 2017 and 2016, respectively, Reclassiﬁ cations of realized Losses to Proﬁ t and Loss) Change of Tax Eﬀ ects presented in Other Comprehensive Income on Cash Flow Hedges Change in Unrealized Gains and Losses on Cash Flow Hedges, Net of Tax Eﬀ ects Other Comprehensive Income Total Comprehensive Income 2017 2016 (69,826,469) (60,382,776) 54,170 63,659 117,829 (490,164) 130,751 (359,413) (241,584) 115,396 (136,550) (21,154) 490,164 (130,751) 359,413 338,259 (70,068,053) (60,044,517) * In ﬁ nancial years 2017 and 2016, the statement of comprehensive income only comprised components which will be reclassiﬁ ed in terms of IAS 1.82A(b) to proﬁ t and loss in subsequent periods when speciﬁ c conditions are met. The notes are an integral part of these consolidated ﬁ nancial statements. 106 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 classiﬁ ed as Loans and Receivables Accounts Receivable Income 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 classiﬁ ed as Loans and Receivables, Net of Current Portion Prepaid Expenses and Other Assets, Net of Current Portion Total Non-current Assets TOTAL AS SE TS The notes are an integral part of these consolidated ﬁ nancial statements. Note 12/31/2017 12/31/2016 2.8.1, 5.1 2.8.1, 5.2 2.8.1, 5.2 2.8.1, 5.2 2.8.2, 5.3 2.8.2, 5.5 2.8.2, 5.4 2.8.3, 5.5 2.8.4, 5.5 2.8.5, 5.6 2.8.6, 5.7.1 2.8.6, 5.7.2 2.8.6, 5.7.3 2.8.6, 5.7.4 2.8.6, 5.7.5 2.8.1, 5.2 2.8.7, 5.8 76,589,129 86,538,195 0 149,059,254 11,234,308 654,511 84,727 300,753 73,928,661 63,361,727 6,532,060 136,108,749 12,596,655 519,915 656,887 310,366 16,219,761 14,041,469 340,680,638 308,056,489 3,526,351 4,669,128 2,999,074 52,158,527 655,399 7,364,802 0 3,344,292 74,717,573 4,189,108 5,323,341 3,146,937 50,818,700 1,285,474 7,364,802 79,521,181 3,894,085 155,543,628 415,398,211 463,600,117 Consolidated Balance Sheet (IFRS) F i n a n c i a l S t a t e m e n t s 107 in € Note 12/31/2017 12/31/2016 LIABILITIES AND STO CK HOLDERS ’ 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 Other Liabilities, Net of Current Portion Total Non-current Liabilities Total Liabilities Stockholders’ Equity Common Stock Ordinary Shares Issued (29,420,785 and 29,159,770 for 2017 and 2016, respectively) Ordinary Shares Outstanding (29,101,107 and 28,763,760 for 2017 and 2016, respectively) Treasury Stock (319,678 and 396,010 shares for 2017 and 2016, respectively), at Cost Additional Paid-in Capital Revaluation Reserve Accumulated Deﬁ cit Total Stockholders’ Equity TOTAL LIABILITIES AND STO CK HOLDERS ’ EQUIT Y The notes are an integral part of these consolidated ﬁ nancial statements. 2.9.1, 6.1 2.9.2, 6.2 2.9.1, 6.2 2.9.3, 6.3 2.9.1, 6.2 2.9.4, 6.3 2.9.5 2.9.6, 4.4 2.9.7, 6.4 44,811,718 32,222,616 314,944 1,185,741 1,388,638 1,652,006 3,195,252 1,232,072 47,701,041 38,301,946 23,166 306,385 87,785 7,811,258 797,537 9,026,131 56,727,172 23,166 1,672,872 218,293 7,421,835 501,840 9,838,006 48,139,952 2.9.8, 6.5.1 29,420,785 29,159,770 2.9.8, 6.5.4 2.9.8, 6.5.5 2.9.8, 6.5.6 2.9.8, 6.5.7 (11,826,981) 438,557,856 (105,483) (97,375,138) 358,671,039 (14,648,212) 428,361,175 136,101 (27,548,669) 415,460,165 415,398,211 463,600,117 108 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, 2016 Capital Increase, Net of Issuance Cost of € 2,778,652 Compensation Related to the Grant of Convertible Bonds and Performance Shares Repurchase of Treasury Stock, Net of Bank Fees Transfer of Treasury Stock for Long-Term Incentive Program Reserves: Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds, Net of Tax Eﬀ ects Change in Unrealized Gains on Cash Flow Hedges, Net of Tax Eﬀ ects Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2016 BAL ANCE AS OF JANUARY 1, 2017 Compensation Related to the Grant of Stock Options, Convertible Bonds and Performance Shares Exercise of Convertible Bonds Issued to Related Parties Transfer of Treasury Stock for Long-Term Incentive Program Transfer of Treasury Stock to Members of the Management Board Reserves: Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds, Net of Tax Eﬀ ects Change in Unrealized Gains and Losses on Cash Flow Hedges, Net of Tax Eﬀ ects Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2017 The notes are an integral part of these consolidated ﬁ nancial statements. Common Stock Note Shares € 26,537,682 2,622,088 26,537,682 2,622,088 6.5.4 7.1, 7.2, 7.3 7.2, 7.4 7.3.1, 7.4 6.5.1, 7.4 6.5.6 6.5.6 6.5.7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 29,159,770 29,159,770 29,159,770 29,159,770 0 261,015 0 261,015 0 0 0 0 0 0 0 0 0 0 0 0 29,420,785 29,420,785 Total Stock- holders’ Equity 362,736,007 112,593,220 2,357,418 (2,181,963) (21,154) 359,413 (60,382,776) (60,044,517) 415,460,165 415,460,165 4,974,599 8,304,328 € 0 0 0 117,829 (359,413) (69,826,469) (70,068,053) 358,671,039 Consolidated Statement of Changes in Stockholders’ Equity (IFRS) F i n a n c i a l S t a t e m e n t s 109 Treasury Stock Additional Paid-in Capital Revaluation Reserve Accumulated Income/(Deﬁ cit) Total Stock- holders’ Equity Shares € € € € € 434,670 (15,827,946) 319,394,322 (202,158) 32,834,107 362,736,007 0 0 52,295 (90,955) 0 0 (2,181,963) 3,361,697 109,971,132 2,357,418 0 (3,361,697) 0 0 0 0 0 0 0 0 0 0 0 0 396,010 396,010 (14,648,212) (14,648,212) 428,361,175 428,361,175 0 0 (61,871) (14,461) 0 0 2,286,752 534,479 4,974,599 8,043,313 (2,286,752) (534,479) 0 0 0 0 0 0 0 0 0 0 0 0 319,678 (11,826,981) 438,557,856 0 0 0 0 (21,154) 359,413 0 338,259 136,101 136,101 0 0 0 0 117,829 (359,413) 0 (241,584) (105,483) 0 0 0 0 0 0 (60,382,776) (60,382,776) (27,548,669) (27,548,669) 0 0 0 0 0 0 (69,826,469) (69,826,469) 112,593,220 2,357,418 (2,181,963) 0 (21,154) 359,413 (60,382,776) (60,044,517) 415,460,165 415,460,165 4,974,599 8,304,328 0 0 117,829 (359,413) (69,826,469) (70,068,053) (97,375,138) 358,671,039 110 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 Loss Adjustments to Reconcile Net Loss to Net Cash Provided by/(Used in) Operating Activities: Impairment of Assets Depreciation and Amortization of Tangible and Intangible Assets Net (Gain)/Loss on Sales of Available-for-sale Financial Assets Proceeds from Derivative Financial Instruments Net (Gain)/Loss on Derivative Financial Instruments Net (Gain)/Loss on Sale of Property, Plant and Equipment Recognition of Deferred Revenue Stock-based Compensation Income Tax Expenses Changes in Operating Assets and Liabilities: Accounts Receivable Prepaid Expenses and Other Assets, Tax Receivables and Other Receivables Accounts Payable and Accrued Expenses, Tax Provisions and Provisions Other Liabilities Deferred Revenue Income Taxes Paid Note 2017 2016 (69,826,469) (60,382,776) 9,863,582 4,028,948 84,841 (589,134) 919,042 11,314 10,141,187 3,763,813 915,201 725,157 (29,879) (4,037) (19,595,746) (19,042,772) 4,974,599 1,036,365 1,362,347 1,807,670 7,819,386 3,133,558 18,385,824 (1,861,982) 2,357,418 518,625 (1,154,597) (13,912,263) 13,010,160 (421,492) 17,440,930 (540,383) 5.6, 5.7 5.6, 5.7 5.2 5.4 5.4 6.3 4.2.3, 7 4.4 5.3 5.4, 5.5 6.1, 6.2 6.1 6.3 Net Cash Provided by/(Used in) Operating Activities (38,445,855) (46,615,708) The notes are an integral part of these consolidated ﬁ nancial statements. Consolidated Statement of Cash Flows (IFRS) F i n a n c i a l S t a t e m e n t s 111 in € Note 2017 2016 INVESTING AC TIVITIES: Purchase of Available-for-sale Financial Assets Proceeds from Sales of Available-for-sale Financial Assets Proceeds from Sales of Bonds, Available-for-sale Purchase of Financial Assets Classiﬁ ed as Loans and Receivables Proceeds from Sales of Financial Assets Classiﬁ ed as Loans and Receivables Purchase of Property, Plant and Equipment Proceeds from Disposals of Property, Plant and Equipment Purchase of Intangible Assets Interest Received Net Cash Provided by/(Used in) Investing Activities FINANCING AC TIVITIES: Repurchase of Treasury Stock, Net of Bank Fees Proceeds of Share Issuance Cost of Share Issuance Proceeds in Connection with Convertible Bonds Granted to Related Parties Outﬂ ows in Connection with Convertible Bonds Granted to Related Parties Interest Paid Net Cash Provided by/(Used in) Financing Activities 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 The notes are an integral part of these consolidated ﬁ nancial statements. 5.2 5.2 5.2 5.2 5.2 5.6 5.7 6.5.4 6.5 (56,406,580) (166,923,795) 33,231,500 6,500,000 167,873,152 25,770,000 (108,000,000) (256,499,997) 170,498,593 (1,317,058) 84 (11,831,789) 257,752 149,894,769 (2,502,286) 5,000 (411,204) 2,008,325 32,932,502 (80,786,036) 0 0 (15,525) 8,189,345 0 0 8,173,820 2,660,467 73,928,661 76,589,129 (2,181,963) 115,371,872 (2,778,652) 0 (6,707) (1,819) 110,402,731 (16,999,013) 90,927,673 73,928,661 112 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”) develops and applies technologies for generating therapeutic antibodies. The Company has a broad proprietary portfolio of compounds and a broad pipeline of compounds developed with partners from the pharmaceutical and biotechnology 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 Company completed its initial public oﬀ ering on Germany’s “Neuer Markt”: the previous seg- ment of the Deutsche Börse designated for high-growth companies. On January 15, 2003, MorphoSys AG was admitted to the Prime Standard segment of the Frankfurt Stock Exchange. 2 Summary of Signiﬁ cant Accounting Policies 2.1 BASI S OF AND CHANGE S IN ACCOUN T ING S TANDARD S 2 .1.1 BASIS OF APPLICATION These consolidated ﬁ nancial statements were prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB), (“IFRS”). The state- ments take into account the recommendations of the International Finan cial 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 accordance with Sec. 315a Para. 1 of the German Commercial Code (HGB). These consolidated ﬁ nancial statements as of and for the ﬁ nancial years ended December 31, 2017 and 2016, comprise MorphoSys AG and its subsidiaries (collectively referred to as the “MorphoSys Group” or the “Group”). In preparing the consolidated ﬁ nancial statements in accordance with IFRS, the Management Board is required to make certain estimates and assumptions, which have an eﬀ ect on the amounts recognized in the consolidated ﬁ nancial statements and the accompanying notes. The actual results may diﬀ er 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 ﬁ nancial statements were prepared in Euro – the functional currency of all entities in the MorphoSys Group. Statements are prepared on the basis of historical cost, except for derivative ﬁ nan- cial instruments and available-for-sale ﬁ nancial assets, which are rec- ognized at their respective fair value. All ﬁ gures in this report are rounded to the nearest euro, thousand euros or million euros. Unless stated otherwise, the accounting policies set out below have been applied consistently to all periods presented in these consolidated ﬁ nancial statements. 2 .1.2 CHANGES 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 ﬁ rst time in the ﬁ nancial year. Notes F i n a n c i a l S t a t e m e n t s 113 Standard/Interpretation Mandatory application for ﬁ nancial years starting on Adopted by the European Union Impact on MorphoSys IAS 7 (A) IAS 12 (A) Disclosure Initiative Recognition of Deferred Tax Assets for Unrealised Losses 01/01/2017 01/01/2017 Annual Improvements to IFRS Standards 2014 – 2016 Cycle 01/01/2017 yes yes yes none yes none (A) Amendments The impact on the consolidated ﬁ nancial statements of the Amend- ments to IAS 12 is not deemed to be material. The following new and revised standards and interpretations, which were not yet mandatory for the ﬁ nancial 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 ﬁ nancial state- ments, and their impact is currently being assessed by the Group. Only material impacts will be described in more detail. The impact on the consolidated ﬁ nancial statements of the Amendments to IFRS 2 and IFRIC 22 is not expected to be material and is therefore not individu- ally described. Standards with the remark “none” are not likely to have a material impact on the consolidated ﬁ nancial statements. Standard/Interpretation IFRS 9 IFRS 15 and IFRS 15 (A) IFRS 16 IFRS 17 Financial Instruments Revenue from Contracts with Customers Leases Insurance Contracts Classiﬁ cation and Measurement of Share-based Payment Transactions Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts Prepayment Features with Negative Compensation Revenue from Contracts with Customers Plan Amendment, Curtailment or Settlement Long-term Interests in Associates and Joint Ventures Transfers of Investment Property Foreign Currency Transactions and Advance Consideration Uncertainty over Income Tax Treatments Annual Improvements to IFRS Standards 2014 – 2016 Cycle Annual Improvements to IFRS Standards 2015 – 2017 Cycle IFRS 2 (A) IFRS 4 (A) IFRS 9 (A) IFRS 15 (C) IAS 19 (A) IAS 28 (A) IAS 40 (A) IFRIC (I) 22 IFRIC (I) 23 (A) Amendments (C) Clariﬁ cations (I) Interpretation Mandatory application for ﬁ nancial years starting on Adopted by the European Union Possible Impact on MorphoSys 01/01/2018 01/01/2018 01/01/2019 01/01/2021 01/01/2018 01/01/2018 01/01/2019 01/01/2018 01/01/2019 01/01/2019 01/01/2018 01/01/2018 01/01/2019 01/01/2018 01/01/2019 yes yes yes no no yes no yes no no no no no yes no yes yes yes none yes none none yes none none none yes none none none 114 F i n a n c i a l S t a t e m e n t s Notes IFRS 9, the new standard governing ﬁ nancial instruments, may lead to changes in the classiﬁ cation and measurement of ﬁ nancial assets and ﬁ nancial liabilities. Upon ﬁ rst-time recognition, ﬁ nancial assets are classiﬁ ed as assets to be measured “at fair value” or “at amortized cost”, depending on the business model and the contractually agreed cash ﬂ ows of the respective ﬁ nancial instruments. Depending on the classiﬁ cation, the subsequent measurement of ﬁ nancial assets is carried out either at amortized cost or at fair value. Changes in the fair value are to be recognized in proﬁ t or loss or in other comprehensive income. The requirements for the de-recognition of ﬁ nancial assets and liabili- ties and the general accounting of ﬁ nancial liabilities have been adopted to a large extent from IAS 39. Changes to the classiﬁ cation result in changes to MorphoSys’s ﬁ nancial assets that are classiﬁ ed as “avail- able-for-sale” or “loans and receivables” in accordance with IAS 39. There are no material conversion eﬀ ects with regard to the measure- ment of ﬁ nancial assets and ﬁ nancial liabilities. Hitherto, “available- for-sale” ﬁ nancial instruments are measured already at fair value in accordance with IAS 39 and thus no conversion eﬀ ects will arise. The provisions in the new standard for the recognition of impairments are based on the expected credit loss model and replace the model of incurred losses applied under IAS 39. Unlike under IAS 39, ﬁ nancial assets are to be divided into diﬀ erent risk classes according to historical and future expected loss probabilities, and a risk provision must be recognized before the occurrence of loss events. Past experience and the Group’s expectations regarding the performance of existing assets do only suggest minor future losses. Therefore no additional impair- ment should be recognized at the time of initial application other than the twelve-month expected credit loss in accordance with IFRS 9. For “Accounts receivable” the simpliﬁ ed impairment model will be applied with recognition of a loss allowance based on lifetime expected credit losses. IFRS 9 is not expected to have an impact on the recognition of hedging relationships. As of December 31, 2017, there is neither a forward rate agreement that is subject to hedge accounting in accordance with IAS 39 nor any other hedging instrument that will be subject to hedge accounting. Qualitative and quantitative adjustments to the disclosures in accor- dance with IFRS 7 are expected due to the implementation of IFRS 9, however, only for the ﬁ scal year 2018. 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. IFRS 15 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash ﬂ ows arising from contracts with customers and replaces IAS 18 “Revenue”. This review revealed that, compared to the regulations currently applied to the existing contrac- tual arrangements, quantitative eﬀ ects on the consolidated ﬁ nancial statements are to be expected since for some contracts, revenue under IFRS 15 has to be recognized at a point in time rather than over time as under IAS 18. The Group will implement the new standard on Janu- ary 1, 2018 and will apply the modiﬁ ed retrospective method which requires the recognition of the cumulative eﬀ ect of applying IFRS 15 as at January 1, 2018 to accumulated deﬁ cit, and not restate prior years. Therefore, the Group estimates that deferred revenue will be reduced by € 1.1 million and accumulated deﬁ cit will be reduced by € 1.1 million on January 1, 2018, accordingly. Qualitative adjustments of the required disclosures in the Notes under IFRS 15 are expected, however, not before the standard’s ﬁ rst-time application as of Janu- ary 1, 2018. The Group also reviewed the new IFRS 16 standard governing leases for its potential impact on existing lease contracts. Currently, all leases are accounted for as operating leases pursuant to IAS 17. As of Janu- ary 1, 2019, right-of-use assets under existing lease contracts will be capitalized and lease liabilities will be recognized. Rental costs cur- rently recognized in the statement of income will be replaced by depre- ciation on the respective assets and interest expenses, i.e. the related costs will be presented in diﬀ erent line items in the statement of income and may diﬀ er in their overall amount compared to the application of IAS 17. From today’s perspective, the implementation of IFRS 16 will have material quantitative eﬀ ects on the consolidated balance sheet due to the rented premises at Semmelweisstraße 7, Planegg. The exact amount of assets and lease liabilities and the transitional provisions to be applied when switching from IAS 17 to IFRS 16 have not yet been determined. 2.2 CONS OL IDAT ION PRINC IPL E S Intercompany balances and transactions and any unrealized gains arising from intercompany transactions are eliminated when preparing consolidated ﬁ nancial statements pursuant to IFRS 10.B86. Unrealized losses are eliminated in the same manner as unrealized gains. Account ing 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 Planegg near Munich. MorphoSys AG has two wholly owned subsidiar- ies (collectively referred to as the “MorphoSys Group” or the “Group”): Sloning BioTechnology GmbH (Planegg) and Lanthio Pharma B.V. (Groningen, The Netherlands). Additionally, MorphoSys AG’s invest- ment in Lanthio Pharma B.V. indirectly gives it 100 % ownership in LanthioPep B.V. (Groningen, The Netherlands). The consolidated ﬁ nancial statements for the year ended December 31, 2017 were prepared and approved by the Management Board in its meeting on March 8, 2018 by means of a resolution. The Management Board members are Dr. Simon Moroney (Chief Executive Oﬃ cer), Jens Holstein (Chief Financial Oﬃ cer), Dr. Markus Enzelberger (Chief Scienti ﬁ c Oﬃ cer), and Dr. Malte Peters (Chief Development Oﬃ cer). Dr. Arndt Schottelius was Chief Development Oﬃ cer until Febru- ary 28, 2017. Dr. Malte Peters assumed the position on March 1, 2017. Dr. Markus Enzelberger, who served as Interim CSO from April 15, 2017, was appointed Chief Scientiﬁ c Oﬃ cer (CSO) eﬀ ective Novem- ber 1, 2017. He succeeded Dr. Marlies Sproll, who resigned from her CSO position eﬀ ective end of October 31, 2017. Notes F i n a n c i a l S t a t e m e n t s 115 2.3 F INANC IAL INS T RUMEN T S AND F INANC IAL RI SK MANAGEMEN T 2 .3.1 CRE DIT RISK AND LIQUIDIT Y RISK Financial instruments that could subject the Group to a concentration of credit and liquidity risk include primarily cash and cash equivalents, marketable securities (consisting of available-for-sale ﬁ nancial assets and bonds), ﬁ nancial assets of the loans and receivables category, derivat ive ﬁ nancial instruments and receivables. The Group’s cash and cash equivalents are principally denominated in euros. Marketable securities and ﬁ nancial assets of the loans and receivables category represent investments in high-quality securities. Cash, cash equiva- lents, marketable securities and ﬁ nancial assets of the loans and receiv ables category are held at several renowned ﬁ nancial institu- tions in Germany. The Group continuously monitors its positions with ﬁ nancial institutions that are counterparts to its ﬁ nancial 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 exter nal ratings. Nevertheless, the Group’s revenues and accounts receiv able are still subject to credit risk from customer concentration. The Group’s most signiﬁ cant single customer accounted for € 5.1 mil- lion of accounts receivables as of December 31, 2017 (December 31, 2016: € 8.4 million) or 45 % of the Group’s accounts receivable at the end of 2017. The top three individual customers of the Group accounted for of 55 %, 25 % and 10 %, respectively, of the total revenues in 2017. On December 31, 2016, one customer had accounted for 66 % of the Group’s accounts receivable, and the top three customers had individually accoun t ed for 85 %, 5 % and 5 % of the Group’s revenues in 2016. Based on the Management Board’s assessment, no allowances were required in the ﬁ nancial years 2017 and 2016. The carrying amounts of ﬁ nan- cial assets represent the maximum credit risk. The table below shows the accounts receivables by region as of the reporting date. in € 12/31/2017 12/31/2016 Europe and Asia USA and Canada Other TOTAL 8,838,884 2,395,424 0 11,234,308 9,852,273 2,744,382 0 12,596,655 The Supervisory Board is authorized to amend the ﬁ nancial statements after their approval by the Management Board. MorphoSys Group’s registered head oﬃ ce is located in Planegg (district of Munich), and the registered business address is Semmelweisstraße 7, 82152 Planegg, Germany. The company is registered in the Commercial Register, Sec- tion B, of the District Court of Munich under the number HRB 121023. 2 .2 .2 C ONSOLIDATION ME THODS The following Group subsidiaries are included in the scope of consoli- dation as shown in the following table. Company Sloning BioTechnology GmbH Lanthio Pharma B.V. LanthioPep B.V. Purchase of Shares October 2010 May 2015 May 2015 Included in Basis of Consolidation since 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 subsid- iaries because it possesses full power over the investees. Additionally, MorphoSys is subject to risk exposure or has rights to variable returns from its involvement with the investees. MorphoSys also has unlimited capacity to exert power over the investees to inﬂ uence their returns. The Group does not have any entities consolidated as joint ventures by using the equity method as deﬁ ned by IFRS 11 “Joint Arrangements” nor does it exercise a controlling inﬂ uence as deﬁ ned by IAS 28 “Invest ments in Associates and Joint Ventures”. Interests in such enti- ties would be measured at fair value or historic cost in accordance with IAS 39. Assets and liabilities of fully consolidated domestic and international entities are recognized using Group-wide uniform accounting and valuat ion methods. The consolidation methods applied have not changed from the previous year. Receivables, liabilities, expenses and income among consolidated enti- ties are eliminated in the consolidated ﬁ nancial statements. 2 .2 .3 BASIS OF FORE IGN CURRE NCY TR ANSL ATION IAS 21 “The Eﬀ ects of Changes in Foreign Exchange Rates” governs the accounting for transactions and balances denominated in foreign currencies. Transactions denominated in foreign currencies are trans- lated at the exchange rates prevailing on the date of the transaction. Any resulting translation diﬀ erences are recognized in proﬁ t and loss. On the reporting date, assets and liabilities are translated at the closing rate for the ﬁ nancial year. Any foreign exchange rate diﬀ erences derived from these translations are recognized in the consolidated statement of income. 116 F i n a n c i a l S t a t e m e n t s Notes The following table shows the aging of trade receivables as of the reporting date. in €; Accounts Receivable are due since Accounts Receivable Write-oﬀ Accounts Receivable, Net of Allowance for Impairment in €; Accounts Receivable are due since Accounts Receivable Write-oﬀ Accounts Receivable, Net of Allowance for Impairment On December 31, 2017 and December 31, 2016, the Group was not ex- posed to a credit risk from derivative ﬁ nancial instruments. The maxi- mum credit risk of ﬁ nancial guarantees (rent deposits) on the reporting date amounted to € 1.1 million (December 31, 2016: € 1.3 million). The contractually agreed maturities and the corresponding cash out- ﬂ ows of accounts payable are within one year. Convertible bonds issued to related parties mature on March 31, 2020 (maximum cash outﬂ ow: € 0.1 million). 2 .3.2 MARKE T RISK Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will aﬀ ect the Group’s results of operations or the value of the ﬁ nancial instruments held. The Group is exposed to currency and interest rate risks. C U R R EN CY R I S K The consolidated ﬁ nancial 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 exchange rates to minimize currency risk and addresses this risk by using derivative ﬁ nancial instruments. Under the Group’s hedging policy, highly probable cash ﬂ ows and deﬁ - nite foreign currency receivables collectable within a twelve-month period are tested to determine if they should be hedged. MorphoSys began using foreign 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 provisions as of December 31, 2017, since the fair value is negative. 12/31/2017 0 – 30 days 12/31/2017 30 – 60 days 12/31/2017 60+ days 12/31/2017 Total 11,234,308 0 11,234,308 0 0 0 0 0 0 11,234,308 0 11,234,308 12/31/2016 0 – 30 days 12/31/2016 30 – 60 days 12/31/2016 60+ days 12/31/2016 Total 12,596,655 0 12,596,655 0 0 0 0 0 0 12,596,655 0 12,596,655 As of December 31, 2017, there were twelve unsettled forward rate agreements with terms of one month to twelve months (December 31, 2016: ten unsettled forward rate agreements). The unrealized gross loss from these agreements amounted to € 0.3 million as of December 31, 2017 and was reported in the ﬁ nance result (December 31, 2016: less than € 0.1 million unrealized gross gain). One forward rate agreement dating back to January 2016 with an original maturity in early April 2017 was subject to hedge accounting as a cash ﬂ ow hedge and at the original term’s expiry was extended until the beginning of July 2017. In July 2017, a net loss of € 0.3 million was recognized in the income statement for this hedging instrument, which was previously recognized as gross gains and losses in other comprehensive income. Notes F i n a n c i a l S t a t e m e n t s 117 The table below shows the Group’s exposure to foreign currency risk based on the items’ carrying amounts. as of December 31, 2017; in € EUR US$ Other Total Cash and Cash Equivalents Available-for-sale Financial Assets Financial Assets classiﬁ ed as Loans and Receivables Accounts Receivable Restricted Cash (included in Other Current Assets) Accounts Payable and Accrued Expenses TOTAL 74,289,250 86,538,195 149,059,254 11,199,652 1,132,782 (44,655,328) 277,563,805 2,299,879 0 0 34,656 0 (156,390) 2,178,145 0 0 0 0 0 0 0 76,589,129 86,538,195 149,059,254 11,234,308 1,132,782 (44,811,718) 279,741,950 as of December 31, 2016; in € EUR US$ Other Total Cash and Cash Equivalents Available-for-sale Financial Assets Bonds, Available-for-sale Financial Assets classiﬁ ed as Loans and Receivables Financial Assets classiﬁ ed as Loans and Receivables, Net of Current Portion Accounts Receivable Restricted Cash (included in Other Current Assets) Accounts Payable and Accrued Expenses TOTAL 73,456,907 63,361,727 6,532,060 136,108,749 79,521,181 12,215,814 1,252,405 (31,794,114) 340,654,729 471,754 0 0 0 0 380,841 0 (428,502) 424,093 0 0 0 0 0 0 0 0 0 73,928,661 63,361,727 6,532,060 136,108,749 79,521,181 12,596,655 1,252,405 (32,222,616) 341,078,822 2 .3.3 FAIR VALUE HIE R ARCHY AND ME ASURE ME NT PRO CE DURES The IFRS 13 “Fair Value Measurement” guidelines must always be appl ied 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 betw een independent market participants or the price to be paid for the transfer of a liability (disposal or exit price). Accordingly, the fair value of a liability reﬂ ects the default risk (i.e., own credit risk). Measure- ment at fair value requires that the sale of the asset or the transfer of the liability takes place on the principal market or, if no such principal market is available, on the most advantageous market. The principal market is the market a company has access to that has the highest volume and level of activity. Various foreign exchange rates and their impact on assets and liabili- ties were simulated in an in-depth sensitivity analysis to determine the eﬀ ects on income. A 10 % increase in the euro versus the US dollar as of December 31, 2017 would have reduced the Group’s income by € 0.2 million. A 10 % decline in the euro versus the US dollar would have increased the Group’s income by € 0.2 million. A 10 % increase in the euro versus the US dollar as of December 31, 2016 would have reduced the Group’s income by less than € 0.1 million. A 10 % decline in the euro versus the US dollar would have increased the Group’s income by less than € 0.1 million. I N T ER EST R AT E R I S K The Group’s risk exposure to changes in interest rates mainly relates to ﬁ xed term deposits and bonds, available-for-sale. Changes in the general level of interest rates may lead to an increase or decrease in the fair value of these securi ties. The Group’s investment focus places the safety of an investment ahead of its return. Interest rate risk is limited because all securities can be liquidated within a maximum of two years. The Group is not subject to signiﬁ cant interest rate risks from the liabili ties currently reported in the balance sheet. 118 F i n a n c i a l S t a t e m e n t s Notes Fair value is measured by using the same assumptions and taking into account the same characteristics of the asset or liability as would an independent market participant. Fair value is a market-based, not an entity-speciﬁ c measurement. The fair value of non-ﬁ nancial assets is based on the best use of the asset by a market participant. For ﬁ nancial instruments, the use of bid prices for assets and ask prices for liabili- ties is permitted but not required if those prices best reﬂ ect the fair value in the respective circumstances. For simpliﬁ cation, mean rates are also permitted. Thus, IFRS 13 not only applies to ﬁ nancial assets, but all assets and liabilities. MorphoSys uses the following hierarchy for determining and disclosing the fair value of ﬁ nancial instruments: Level 1: Quoted (unadjusted) prices in active markets for identical assets 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 observ- able market data (that is, unobservable inputs). Level 2: Level 3: The carrying amounts of ﬁ nancial assets and liabilities, such as ﬁ nan- cial assets of the loans and receivables cate gory and accounts receiv- able and accounts payable approximate their fair value because of their short-term maturities. H I ER A RC H Y L E V EL 1 The fair value of ﬁ nancial 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 regularly accessible and prices reﬂ ect current and regu- larly 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 5.2* of these Notes). *C R O S S - R E F E R E N C E to page 134 H I ER A RC H Y L E V EL 2 A N D 3 The fair value of ﬁ nancial 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 maxi- mum use of market data and relies as little as possible on entity- speciﬁ c inputs. If all signiﬁ cant inputs required for measuring fair value by using valuation methods are observable, the instrument is allocated to level 2. If signiﬁ cant inputs are not based on observable market data, the instrument is allocated to level 3. Hierarchy level 2 contains the forward exchange contracts used for currency hedging. Future cash ﬂ ows for these forward exchange con- tracts are determined based on forward exchange rate curves. The fair value of these instruments corresponds to their discounted cash ﬂ ows. There were no ﬁ nancial assets or liabilities allocated to hierarchy level 3. There were no transfers from one fair value hierarchy level to another in 2017 or 2016. Notes F i n a n c i a l S t a t e m e n t s 119 The table below shows the fair values of ﬁ nancial assets and liabilities and the carrying amounts presented in the consolidated balance sheet. December 31, 2017 (in 000’ €) Cash and Cash Equivalents Financial Assets classiﬁ ed as Loans and Receivables Accounts Receivable Restricted Cash (included in Other Current Assets) Other Receivables Available-for-sale Financial Assets TOTAL Convertible Bonds – Liability Component Accounts Payable and Accrued Expenses Forward Exchange Contracts Used for Hedging (included in Provisions) TOTAL Note Hierarchy Level Loans and Receivables Available- for-sale Other Financial Liabilities Total Carrying Amount Fair value 5.1 5.2 5.3 5.4 5.4 5.2 7.2 6.1 6.2 1 1 1 1 1 1 2 1 2 76,589 149,059 11,234 1,133 85 0 238,100 0 0 0 0 0 0 0 0 0 86,538 86,538 0 0 0 0 0 0 0 0 0 (88) (44,812) 0 0 (300) (45,200) 76,589 149,059 11,234 1,133 85 86,538 324,638 (88) (44,812) (300) (45,200) 1 1 1 1 1 86,538 (88) 1 (300) 1 Declaration waived in line with IFRS 7.29 (a). For these instruments carrying value is a reasonable approximation of fair value. December 31, 2016 (in 000’ €) Cash and Cash Equivalents Financial Assets classiﬁ ed as Loans and Receivables Accounts Receivable Forward Exchange Contracts Used for Hedging (included in Other Receivables) Restricted Cash (included in Other Current Assets) Other Receivables Financial Assets classiﬁ ed 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 TOTAL Note Hierarchy Level Loans and Receivables Available- for-sale Other Financial Liabilities Total Carrying Amount Fair value 5.1 5.2 5.3 5.4 5.4 5.4 5.2 5.2 5.2 7.2 6.1 1 1 1 2 1 1 1 1 1 2 1 73,929 136,109 12,597 520 1,252 137 79,521 0 0 304,065 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 63,362 6,532 69,894 0 0 0 0 0 0 0 (218) (32,223) (32,441) 73,929 136,109 12,597 520 1,252 137 79,521 63,362 6,532 373,959 (218) (32,223) (32,441) 1 1 1 520 1 1 79,521 63,362 6,532 (218) 1 1 Declaration waived in line with IFRS 7.29 (a). For these instruments carrying value is a reasonable approximation of fair value. 120 F i n a n c i a l S t a t e m e n t s Notes 2.4 IMP AIRMEN T S 2 .4.1 NON - DE RIVATIVE FINANCIAL INSTRUME NTS A ﬁ nancial instrument not carried at fair value through proﬁ t or loss is assessed at each reporting date to determine if there is objective evi- dence for impairment. A ﬁ nancial instrument is impaired if objective evidence indicates that an event has occurred after the initial recogni- tion of the asset that could result in a loss and whether that event could have a negative eﬀ ect on the asset’s estimated future cash ﬂ ows, which can be assessed reliably. Objective evidence that ﬁ nancial instruments are impaired can in- clude the default or delinquency of a debtor, indications that a debtor or issuer will enter insolvency, adverse changes in the payment status of borrowers or issuers in the Group as well as economic conditions that correlate with defaults or the disappearance of an active market for a marketable security. A signiﬁ cant or prolonged decline in a ﬁ nancial instrument’s fair value below its acquisition cost is objective evidence of impairment. 2 .4.2 RECE IVABLES The Group considers evidence of the impairment of receivables on an individual level. All individually signiﬁ cant receivables are tested speciﬁ cally for impairment. For a ﬁ nancial instrument measured at amortized cost less impair- ment, impairment is calculated as the diﬀ erence between its carrying amount and the present value of the estimated future cash ﬂ ows. Cash ﬂ ows are discounted at the asset’s initial eﬀ ective interest rate. Losses are recognized in proﬁ t or loss and reﬂ ected in an allowance account against receivables. When a subsequent event (e.g., repayment by a debtor) causes the amount of impairment to decrease, the impairment is reversed through proﬁ t and loss. 2 .4.3 AVAIL ABLE - FOR - SALE FINANCIAL AS SE TS In case of objective indications, impairment of available-for-sale ﬁ nan- cial assets is recognized by reclassifying the accumulated losses from the revaluation reserve in equity to proﬁ t and loss. The amount of the accumulated loss to be reclassiﬁ ed from equity to proﬁ t and loss is the diﬀ erence between the acquisition cost less amortization and any princi pal repayment and the current fair value less any impairment previously recognized in proﬁ t or loss. Impairment losses recognized in proﬁ t and loss for an investment in a ﬁ nancial instrument classiﬁ ed as available-for-sale are not reversed through proﬁ t and loss. If in a subsequent period the fair value of an impaired available-for-sale debt instrument increases and this increase can be objectively linked to an event occurring after the impairment was recognized in proﬁ t or loss, then the impairment loss is reversed, and the amount of the reversal is recognized in proﬁ t or loss. 2 .4.4 NON - FINANCIAL AS SE TS The carrying amounts of the Group’s non-ﬁ nancial assets and invento- ries are reviewed at each reporting date for any indication of impair- ment. The non-ﬁ nancial asset’s recoverable amount and inventories’ net realizable value is estimated if such indication exists. For goodwill and intangible assets that have indeﬁ nite useful lives or are not yet available for use, the recoverable amount is estimated at the same time each year, or on an interim basis, if required. Impairment is recog- nized if the carrying amount of an asset or the cash-generating unit (CGU) exceeds its estimated 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 ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assess- ments of the time value of money and the risks speciﬁ c 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 ﬂ ows from ongoing use that are largely independent of the cash ﬂ ows 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 goodwill are aggregated so that the level at which impairment testing is performed reﬂ ects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination may be allocated to groups of CGUs that are expected to beneﬁ t from the combination’s synergies. The Group’s corporate assets do not generate separate cash ﬂ ows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and are tested for impair- ment as part of the impairment testing of the CGU that was allocated the corporate asset. Impairment losses are recognized in proﬁ t and loss. Goodwill impair- ment 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 asset’s carrying amount does not exceed the carrying amount net of depreciation or amortization that would have been deter- mined if an impairment had not been recognized. Notes F i n a n c i a l S t a t e m e n t s 121 2.5 ADDI T IONAL INF ORMAT ION 2 .5.1 KE Y ESTIMATES AND AS SUMP TIONS Estimates and judgments are continually evaluated and based on his- torical experience and other factors that include expectations of future events that are believed to be realistic under the prevailing circum- stances. The Group makes estimates and assumptions concerning the future. The resulting accounting-related estimates will, by deﬁ nition, seldom correspond to the actual results. The estimates and assumptions that carry a signiﬁ cant risk of causing material adjustments to the carrying amounts of assets and liabilities in the next ﬁ nancial year are addressed below. 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 remu- neration consisting of convertible bonds issued in 2013 and a stock option plan (SOP) set up in 2017. MorphoSys also established long-term incentive programs (LTI plan) in 2013, 2014, 2015, 2016 and 2017. These programs are based on the performance-related issue of shares, or “performance shares”, which are granted when certain predeﬁ ned success criteria have been achieved and the vesting period has expired (for more information, please refer to Item 7.3* in 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 143 I N - P RO C ES S R&D P RO G R A M S A N D G O O DW I L L The Group performs a yearly test to determine whether in-process R&D programs or goodwill is subject to impairment in accordance with the accounting policies discussed in Item 2.4.4*. The recoverable amounts from in-process R&D programs and cash-generating units have been determined using value-in-use calculations and are subjected to a sen- sitivity analysis. These calculations require the use of estimates (see also Items 5.7.3* and 5.7.5* in the Notes). *C R O S S - R E F E R E N C E to page 120 and page 138 I N C O M E TA X ES The Group is subject to income taxes in a number of tax jurisdictions. Due to the increasing complexity of tax laws and the corresponding uncertainty regarding the legal interpretation by the ﬁ scal authority, tax calculations are generally subject to an elevated amount of uncertainty. To the extent necessary, possible tax risks were taken into account in the form of provisions. Deferred tax assets on tax loss carryforwards are recognized based on the expected business performance of the relevant Group entity. For details on tax loss carryforwards and any recognized deferred tax assets, please refer to Item 4.4* in the Notes. *C R O S S - R E F E R E N C E to page 130 2 .5.2 CAPITAL 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 conﬁ dence of investors, business partners, and the capital market and to support future business development. As of December 31, 2017, the equity ratio was 86.3 % (December 31, 2016: 89.6 %; see also the following over- view). The Group does not currently have any ﬁ nancial debt. in 000’ € 12/31/2017 12/31/2016 Stockholders’ Equity In % of Total Capital Total Liabilities In % of Total Capital TOTAL CAPITAL 358,671 86.3 % 56,727 13.7 % 415,398 415,460 89.6 % 48,140 10.4 % 463,600 2.6 USE 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 of German government bonds with maturities of ﬁ ve 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 RE VE NUES AND RE VE NUE REC O GNITION The Group’s revenue includes license fees, milestone payments and service fees. 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 suﬃ - ciently probable that the Company will receive the economic beneﬁ ts associated with the transaction. L I C EN S E FEES A N D M I L ESTO N E PAY M EN TS Revenues related to non-refundable fees for providing access to tech- nologies, fees for the use of technologies and license fees are recog- nized on a straight-line basis over the period of the agreement unless a more appropriate method of revenue recognition is available. The period of the agreement usually corresponds to the contractually agreed term of the research project or, in the case of contracts without an agreed project term, the expected term of the collaboration. If all IAS 18.14 criteria are met, revenue is recognized immediately and in full. Revenues from milestone payments are recognized upon achieve- ment of certain contractual criteria. 122 F i n a n c i a l S t a t e m e n t s Notes S ERV I C E FEES Service fees from research and development collaborations are recog- nized in the period the services are provided. Discounts that are likely to be granted and whose amount can be reli- ably determined are recognized as a reduction in revenue at the time of revenue 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 identi ﬁ able components based on their respective fair values and by applying IAS 18.20. The applicable revenue recognition criteria are asses sed separately for each component. Deferred revenue consists of customer payments that were not yet recogni zed as revenue because the related services speciﬁ ed in the contract were not yet rendered. 2 .7.2 OPE R ATING E XPE NSES P ERSO N N EL E X P EN S ES R ES U LT I N G FRO M STO C K O P T I O N S The Group applies the provisions under IFRS 2 “Share-based Payment”, which require the Group to spread compensation expenses from the estimated fair values of share-based payments on the reporting date over the period in which the beneﬁ ciaries provide the services which triggered the granting of the share-based payments. IFRS 2 “Share-based Payment” requires the consideration of the eﬀ ects of share-based payments if the Group acquires goods or services in exchange for shares or stock options (“settlement in equity instru- ments”) or other assets that represent the value of a speciﬁ c 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 relation to share-based incentives for employees and the Manage ment Board. Additional information can be found under Items 7.1, 7.2, 7.3* and 7.4* in the Notes. *C R O S S - R E F E R E N C E to page 141–147 R ES E A RC H A N D D E V ELO P M EN 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 intangi- ble asset when the criteria of IAS 38.21 (probability of expected future economic beneﬁ ts, reliability of cost measurement) are met and if the Group can provide proof under IAS 38.57. This line item contains personnel expenses, consumables supplies, other operating expenses, impairment, amortization and other costs of intangible assets (additional information can be found under Item 5.7* in the Notes), external services and depreciation and other costs for infrastructure. *C R O S S - R E F E R E N C E to page 137 G EN ER A L A N D A D M I N I ST R AT I V E This line item contains personnel expenses, consumable supplies, other operating expenses, amortization of intangible assets (software; additional information can be found under Item 5.7* in the Notes), expen ses for external services, and depreciation and other costs for infrastructure. *C R O S S - R E F E R E N C E to page 137 O P ER AT I N G L E AS E PAY M EN 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 recognized 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 classiﬁ ed exclusively as operating leases. The Group did not engage in any ﬁ nance lease arrangements. 2 .7.3 OTHE R INC OME G OV ER N M EN T G R A N TS Grants received from government agencies to fund speciﬁ c research and development projects are recognized in the income statement in the separate line item “other income” to the extent that the related expen ses have already occurred. Under the terms of the grants, govern ment 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 proﬁ t and loss is limited to the corresponding costs. When the repayment of cost subsidies depends on the success of the development project, these cost subsidies are recognized as other lia- bilities until success has been achieved. If the condition for repayment is not met, then the grant is recognized under “other income”. No payments were granted in the 2017 ﬁ nancial year that are required to be classiﬁ ed as investment subsidies. 2 .7.4 OTHE R E XPE NSES The line item “other expenses” consists mainly of currency losses from the operating business and the repayment of cost subsidies. 2 .7.5 FINANCE INC OME Interest income is recognized in the income statement as it occurs and takes into account the asset’s eﬀ ective interest rate. 2 .7.6 FINANCE E XPE NSES Finance expenses are expensed in the income statement in the period they occur. Notes F i n a n c i a l S t a t e m e n t s 123 2 .7.7 INC 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. Current taxes are the taxes expected to be payable on the year’s tax- able income based on prevailing tax rates on the reporting date and any adjustments to taxes payable in previous years. The calculation of deferred taxes is based on the balance sheet liability method that refers to the temporary diﬀ erences 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 liabili ties will be repaid. The calculation is based on the prevailing tax rates or those adopted on the reporting date. Deferred tax assets are oﬀ set against deferred tax liabilities if the taxes are levied by the same taxation authority and the entity has a legally enforceable right to set oﬀ current tax assets against current tax liabilities. 2.8 ACCOUN T ING P OL IC IE S APPL IED T O T HE ASSE T S OF T HE BAL ANCE SHEE T 2 .8.1 LIQUIDIT Y CAS H A N D CAS H EQ U I VA L EN TS A N D M A R K E TA B L E S EC U R I T I ES The Group regards all cash at banks and on hand and all short-term deposits with a maturity of three months or less as cash and cash equivalents. The Group invests most of its cash and cash equivalents at several major ﬁ nancial institutions: Commerzbank, UniCredit, BayernLB, LBBW, BNP Paribas, Deutsche Bank, Sparkasse and Rabobank. Cash and cash equivalents are recognized at nominal value. Marketable securities are recognized and measured at fair value. Any ﬂ uctuations in the fair value of marketable securities are directly recognized in equity. Permanent impairment is recognized in proﬁ t and loss N O N - D ER I VAT I V E FI N A N C I A L I N ST RU M EN TS Depending on how they are classiﬁ ed, existing ﬁ nancial instruments are either measured at amortized cost (category “loans and receivables”) or fair value (category “available-for-sale ﬁ nancial assets”). The amor- tized cost of current receivables and current liabilities generally corre- sponds to either the nominal amount or repayment amount. Deferred tax assets are recognized only to the extent that it is likely that there will be future taxable income to oﬀ set. Deferred tax assets are reduced by the amount that the related tax beneﬁ t is no longer expec ted to be realized. All non-derivative ﬁ nancial instruments are initially recognized at fair value, which is deﬁ ned as the fair value of the consideration provided net of transaction costs. 2 .7.8 E ARNING S PE R SHARE The Group reports basic and diluted earnings per share under consid- eration of IAS 33.41. Basic earnings per share is computed by dividing the net proﬁ t or loss attributable to parent company shareholders by the weighted-average number of ordinary shares outstanding during the reporting period. Diluted earnings per share is calculated in the same manner with the exception that the net proﬁ t or loss attributable to parent company shareholders and the weighted-average number of ordinary shares outstanding are adjusted for any dilutive eﬀ ects result ing from stock options and convertible bonds granted to the Manage ment Board and employees. In 2017 and 2016, diluted earnings per share equal basic earnings per share. The eﬀ ect of 87,904 potentially dilutive shares in 2017 (2016: 99,764 dilutive shares) resulting from stock options and con- vertible bonds granted to the Management Board, the Senior Manage- ment Group and employees of the Company who are not members of the Senior Management Group, has been excluded from the diluted earnings per share because it would result in a decrease in the loss per share and is therefore not to be treated as dilutive. The 62,071 stock options not yet vested as of December 31, 2017, were not included in the calculation of potentially dilutive shares, as they are antidilutive for the 2017 ﬁ nancial year. These shares could poten- tially have a dilutive eﬀ ect in the future. The Group applies IAS 39 for ﬁ nancial instruments in the form of debt and equity instruments. At the time of purchase, the Management Board determines the ﬁ nancial instrument’s classiﬁ cation and reviews this classiﬁ cation at each reporting date. The classiﬁ cation depends on the purpose of acquiring the ﬁ nancial instrument. As of December 31, 2017 and December 31, 2016, some ﬁ nancial instruments held by the Group were classiﬁ ed as “available-for-sale”. These ﬁ nancial instru- ments are recognized or derecognized as of the date on which the Group commits to the ﬁ nancial instrument’s purchase or sale. Following their initial recognition, available-for-sale ﬁ nancial assets are measured at fair value, and any resulting gain or loss is reported directly in the revaluation reserve within equity until the ﬁ nancial instruments are sold, redeemed, otherwise disposed of or considered impaired, at which time the accumulated loss is reported in proﬁ t and loss. Guarantees granted for rent deposits 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. 124 F i n a n c i a l S t a t e m e n t s Notes D ER I VAT I V E FI N A N C I A L I N ST RU M EN TS The Group uses derivative ﬁ nancial instruments to hedge its foreign exchange rate risk and cash ﬂ ows. In accordance with IAS 39.9, stand- alone derivative ﬁ nancial instruments are predominantly held for trading and are initially recognized at fair value. After their initial recognition, derivative ﬁ nancial instruments are measured at fair value, which is deﬁ ned as their quoted market price on the reporting date. Any resulting gain or loss from derivatives is recognized in proﬁ t and loss unless the derivatives are eﬀ ective and designated as hedging instruments under a hedging relationship (hedge accounting). According to the Group’s foreign currency hedging policy, the Group only hedges highly probable future cash ﬂ ows and clearly identiﬁ able receivables that can be collected within a twelve-month period. The use of derivative ﬁ nancial instruments is subject to a Group policy that is a written guideline approved by the Management Board for dealing with derivative ﬁ nancial instruments. Any changes in the fair value of derivative ﬁ nancial instruments are documented. The hedging relationship is no longer accounted for if the Group dissolves the hedging relationship, the hedging instrument expires, is sold, terminated or exercised or no longer is suitable for hedging purposes. The full gain/loss recognized in other comprehensive income and accrued within equity remains in equity when the hedge account- ing ends and is only recognized in proﬁ t and loss once the expected transaction is also recognized in proﬁ t and loss. If the transaction is no longer expected to materialize, the full gain/loss recognized in equity is immediately reclassiﬁ ed into the consolidated statement of income. 2 .8.2 AC C OUNTS RECE IVABLE , INC OME TA X RECE IVABLES AND OTHE R RECE IVABLES Accounts receivable are measured at amortized cost less any impair- ment; for example, allowances for doubtful accounts (see Items 2.4.2* and 5.3* in the Notes). *C R O S S - R E F E R E N C E to page 120 and page 135 Income tax receivables mainly include receivables due from tax author ities in the context of capital gain taxes withheld. H ED G E AC C O U N T I N G The Group has designated hedging instruments to hedge cash ﬂ ows (cash ﬂ ow hedges) during the ﬁ scal years 2017 and 2016. Other non-derivative ﬁ nancial instruments are measured at amortized cost using the eﬀ ective interest method less any impairment. At the beginning of the hedge accounting, the hedging relationship between the underlying and the hedge transaction are documented, including the risk management objectives and corporate strategy under lying the hedging relationship. Additionally, when concluding the hedge and also during the term of the hedge, the Group regularly provides documentation if the hedging instrument designated for the hedging relationship is highly eﬀ ective in terms of the hedged risk to compensate for any changes of the underlying transaction’s cash ﬂ ows. For information on the fair value of derivatives used for hedging, please refer to Item 2.3.2* in the Notes. *C R O S S - R E F E R E N C E to page 116 CAS H FLO W H ED G ES The eﬀ ective portion of the change in fair value of derivatives that are suitable for cash ﬂ ow hedges and designated as such is recognized within other comprehensive income. The gain/loss attributable to the ineﬀ ective portion is immediately recognized in proﬁ t and loss with “other operating income/expenses”. Amounts recognized within other comprehensive income are reclassi- ﬁ ed to the consolidated statement of income in the period in which the underlying transaction is recognized in proﬁ t and loss. The gain/loss is recorded in the same line item of the consolidated statement of income as the underlying transaction. 2 .8.3 INVE NTORIES Inventories are measured at the lower value of production or acquisi- tion cost and net realizable value under the ﬁ rst-in ﬁ rst-out method. Acquisition costs comprise all costs of purchase and those incurred in bringing the inventories into operating condition while taking into account purchase price reductions, such as bonuses and discounts. Net realizable value is the estimated 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 PRE PAID E XPE NSES AND OTHE R CURRE NT AS SE TS Prepaid expenses include expenses resulting from an outﬂ ow of liquid assets prior to the reporting date that are only recognized as expenses in the subsequent ﬁ nancial year. Such expenses usually involve main- tenance contracts, sublicenses and prepayments for external labora- tory services not yet performed. Other current assets primarily consist of receivables from tax authorities resulting from value-added taxes and restricted cash, such as rent deposits. This item is recognized at nominal value. Notes F i n a n c i a l S t a t e m e n t s 125 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* in 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 identiﬁ ed in the purchase price allocation for the acquisition of Sloning BioTechnology GmbH is recorded at the fair value at the time of acquisition, less accumulated amortization (useful life of ten years). *C R O S S - R E F E R E N C E to page 120 L I C EN S E R I G H TS The Group has acquired license rights from third parties by making upfront license payments, paying annual fees to maintain the license and paying fees for sublicenses. The Group amortizes upfront license payments on a straight-line basis over the estimated useful life of the acquired license (eight to ten years). The amortization period and method are reviewed at the end of each ﬁ nancial year under IAS 38.104. Annual fees to maintain a license are amortized over the term of each annual agreement. Sublicense 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. I N - P RO C ES S R&D P RO G R A M S This line item contains capitalized upfront payments from the in-licens- ing of compounds for the Proprietary Development segment, as well as milestone payments for these compounds subsequently paid as mile- stones are achieved. Additionally, the line item also includes compounds resulting from acquisitions. The assets are recorded at acquisition cost and are not yet available for use and therefore not subject to sched- uled amortization. The assets are tested for impairment annually or in case of triggering events, as required by IAS 36. SO F T WA R E Software is recorded at acquisition cost less accumulated amortization (see below) and any impairment (see Item 2.4.4* in the Notes). Amorti- zation is recognized in proﬁ t and loss on a straight-line basis over the estimated useful life of three to ﬁ ve 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 120 2 .8.5 PROPE R T Y, PL ANT AND EQUIPME NT Property, plant and equipment is recorded at historical cost less accu- mulated depreciation (see also Item 5.6* in the Notes) and any impair- ment (see Item 2.4.4* in the Notes). Historical cost includes expendi- tures directly related to the purchase at the time of the acquisition. Replacement purchases, building alterations and improvements are capitalized while repair and maintenance expenses are charged as expen ses as they are incurred. Property, plant and equipment is depre- ciated on a straight-line basis over its useful life (see table below). Leasehold improvements are depreciated on a straight-line basis over the lesser of the asset’s estimated useful life or the remaining term of the lease. *C R O S S - R E F E R E N C E to page 136 and page 120 Asset Class Computer Hardware Low-value Laboratory and Oﬃ ce Equipment below € 410 Permanent Improvements to Property/Buildings Oﬃ ce 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 acquisition or production costs because the Group ﬁ nances the entire operating business with equity. 2 .8.6 INTANGIBLE 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 capi- talization criteria described in IAS 38 have been met, namely, clear speciﬁ cation of the product or procedure, technical feasibility, intention of completion, use, commercialization, coverage of development costs through future free cash ﬂ ows, reliable determination of these free cash ﬂ ows and availability of suﬃ cient resources for completion of develop ment and sale. Amortization is recorded in research and devel- opment expenses. Expenses to be classiﬁ ed as research expenses are allocated to research and development expenses as deﬁ ned by IAS 38. Subsequent expenditures for capitalized intangible assets are capital- ized only when they substantially increase the future economic beneﬁ ts of the speciﬁ c asset to which they relate. All other expenditures are expensed as incurred. 126 F i n a n c i a l S t a t e m e n t s Notes G O O DW I L L Goodwill is recognized for expected synergies from business combina- tions and the skills of the acquired workforce. Goodwill is tested annu- ally for impairment as required by IAS 36 (see also Item 5.7.5* in the Notes). *C R O S S - R E F E R E N C E to page 138 Intangible Asset Class Useful Life Patents License Rights In-process R&D Programs Software Goodwill 10 years 8 – 10 years Not yet amortized, Impairment Only 3 – 5 years Impairment Only Amortization Rates 10 % 13 % – 10 % – 33 % – 20 % – 2 .8.7 PRE PAID E XPE NSES AND OTHE R AS SE TS , NE T OF CURRE NT P OR TION The non-current portion of expenses that occurred prior to the reporting date but to be recognized in subsequent ﬁ nancial 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 ACCOUN 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 AC C OUNTS PAYABLE , OTHE R LIABILITIES AND PROVISIONS Trade payables and other liabilities are recognized at amortized cost. Liabilities with a term of more than one year are discounted to their net present value. Liabilities with uncertain timing or amount are recorded as provisions. IAS 37 requires the recognition of provisions for obligations to third parties arising from past events. Furthermore, provisions are only recogn ized 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 eﬀ ect 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 ﬁ nance result. The measurement of provisions is based on past experience and considers the circumstances in existence on the report ing date. The Group has entered into various research and development con- tracts with research institutions and other companies. These agree- ments are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Group records accruals for estimated ongoing research costs that have been incurred. When evaluating the adequacy of the accrued expenses, the Group analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Signiﬁ cant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could diﬀ er from the Group’s estimates. The Group’s historical accrual estimates have not been materially diﬀ erent from the actual costs. 2 .9.2 TA 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 consoli- dated entities less any prepayments made. 2 .9.3 CURRE NT P OR TION OF DE FE RRE D RE VE NUE Upfront payments from customers for services to be rendered by the Group are recognized as deferred revenue in accordance with IAS 18.13 and measured at the lower of fair value or nominal amount of cash recei ved or receivable. The corresponding rendering of services and revenue recognition is expected to occur within a twelve-month period after the reporting date. 2 .9.4 DE FE RRE D RE VE NUE , NE T OF CURRE NT P OR TION This line item includes the non-current portion of deferred upfront payments from customers in accordance with IAS 18.13, which are measured at the lower of fair value or nominal amount of cash received or receivable. 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 convertible bond must be recorded separately under additional paid-in capital. The equity component is determined by deducting the separately determined amount of the liability component from the fair value of the convertible bond. The eﬀ ect of the equity component is recognized in proﬁ t and loss in personnel expenses from share-based payments, whereas the eﬀ ect on proﬁ t and loss from the liability com- ponent is recognized as interest expense. The Group applies the provi- sions of IFRS 2 “Share-based Payments” for all convertible bonds granted to the Management Board and the Group’s employees. 2 .9.6 DE FE RRE D TA XES The recognition and measurement of deferred taxes are based on the provisions 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 subse- quent ﬁ nancial 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 and take into account the future tax eﬀ ect resulting from temporary diﬀ erences between values in the balance sheet for assets, liabilities as well as for tax loss carryforwards. Deferred tax assets are oﬀ set against deferred tax liabilities if the taxes are levied by the same taxation authority and the entity has a legally enforceable right to set oﬀ current tax assets against current tax liabilities. Pursuant to IAS 12, deferred tax assets and liabilities may not be discounted. Notes F i n a n c i a l S t a t e m e n t s 127 2 .9.7 OTHE R LIABILITIES Other liabilities are made up of rent-free periods. The corresponding release over the minimum rent period are calculated based on the eﬀ ec tive interest method. Other liabilities are discounted due to their long-term maturities. 2 .9.8 STO CKHOLDE RS ’ EQUIT Y C O M M O N STO C K Ordinary shares are classiﬁ ed as stockholders’ equity. Incremental costs directly attributable to the issue of ordinary shares and stock options are recognized as a deduction from stockholders’ equity. T R E AS U 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 as a deduction from common stock. When common stock that was recorded as stockholders’ equity is repur chased, the amount of consideration paid, including directly attri butable costs, is recognized as a deduction from stockholders’ equity net of taxes and is classiﬁ ed as treasury shares. When treasury shares are subsequently sold or reissued, the proceeds are recognized as an increase in stockholders’ equity, and any diﬀ erence between the proceeds from the transaction and the initial acquisition costs is recog nized in additional paid-in capital. The allocation of treasury shares to beneﬁ ciaries (in this case: perfor- mance shares) under long-term incentive programs is reﬂ ected in this line item based on the set number of shares to be allocated after the expiration of the four-year vesting period (quantity structure) multi- plied by the weighted-average purchase price of the treasury shares (value structure). The adjustment is carried out directly in equity by reducing the treasury stock line item, which is a deduction from com- mon stock, while simultaneously reducing the amount of additional paid-in capital. Further information can be found in Item 7.3.1* in the Notes. *C R O S S - R E F E R E N C E to page 143 A D D I T I O N A L PA I D - I N CA P I TA L Additional paid-in capital mainly consists of personnel expenses result ing from the grant of convertible bonds and performance shares and the proceeds from newly created shares in excess of their nominal value. R E VA LUAT I O N R ES ERV E The revaluation reserve mainly consists of unrealized gains and losses on available-for-sale ﬁ nancial assets and bonds that are measured direc tly in equity until they are sold as well as cash ﬂ ow hedges. AC C U M U L AT ED I N C O M E/D EFI C I T The “accumulated income/deﬁ cit” line item consists of the Group’s accumu lated consolidated net proﬁ ts/losses. A separate measurement of this item is not made. 3 Segment Reporting MorphoSys Group applies IFRS 8 “Operating Segments”. An operating segment is deﬁ ned as a unit of an entity that engages in business activi ties from which it can earn revenues and incur expenses and whose operating results are regularly reviewed by the entity’s chief operating decision maker, the Management Board, and for which dis- crete ﬁ nancial 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 directly attributed to the individual segment or allocated to the seg- ments on a reasonable basis. The Management Board evaluates a segment’s economic success using selected key ﬁ gures so that all relevant income and expenses are included. EBIT, which the Company deﬁ nes as earnings before ﬁ nance income, ﬁ nance expenses and income taxes, is the key benchmark for measuring and evaluating the operating results. Refer to the table in Note 3.3 for a reconciliation of EBIT to Net income as well as to the table in Note 4.3 for a breakdown of ﬁ nance income and expenses. Other key internal reporting ﬁ gures include revenues, operating expenses, seg- ment results and the liquidity position. The Group consists of the following operating segments. 3.1 PROPRIE TARY DEVEL OPMEN T The segment comprises all activities related to the proprietary develop- ment of therapeutic antibodies and peptides. These activities currently comprise a total of 13 antibodies and peptides, including the pro- prietary clinical programs MOR208, MOR202, and MOR106, which is co-developed with Galapagos. The proprietary program MOR103, also included in this segment, was out-licensed to GlaxoSmithKline (GSK) in 2013 and all activities since that time are conducted by GSK. This program has been allocated to this segment since the beginning of its development and will, therefore, continue to be reported under this segment. MorphoSys is also pursuing other programs that are either at an early stage of proprietary development or fall under co-development agreements. One of these programs is the clinical program MOR107 (formerly LP2) resulting from the acquisition of Lanthio Pharma B.V. A further eight programs are in the discovery phase. The development of proprietary technologies is allocated to the Proprietary Development segment. 3.2 P AR T NERED DI S COVERY MorphoSys possesses one of the leading technologies for generating therapeutics based on human antibodies. The Group markets this techno logy commercially through its partnerships with numerous pharmaceutical and biotechnology companies. The Partnered Discovery segment encompasses all operating activities relating to these com- mercial agreements. 128 F i n a n c i a l S t a t e m e n t s Notes 3.3 CRO SS -SEGMEN T DI S CL O SURE The information on segment assets is based on the assets’ respective locations. For the Twelve-month Period Ended 31 December (in 000’ €) External Revenues Other Operating Expenses SEG MENT RESULT Other Income Other Expenses SEG MENT EB IT Finance Income Finance Expenses PROFIT BEFORE TA XES Income Tax Expenses NE T 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 2017 2016 2017 2016 2017 2016 2017 2016 17,635 (99,106) (81,471) 157 0 (81,314) 621 (78,515) (77,894) 327 0 (77,567) 49,156 (18,906) 30,250 0 0 30,250 49,123 (18,113) 31,010 0 0 31,010 0 (15,835) (15,835) 963 (1,671) (16,543) 0 (13,212) (13,212) 382 (554) (13,384) 8,802 60,658 69,460 33,008 7,072 0 40,080 12,344 1,555 13,157 59,292 72,449 20,948 6,930 0 27,878 1,358 1,272 18,054 8,490 26,544 4,083 1,045 0 5,128 602 2,075 18,415 10,165 28,580 2,512 2,165 0 4,677 1,181 2,117 313,825 5,569 319,394 10,610 909 358,671 370,190 204 400 276,484 86,087 362,571 14,842 743 415,460 431,045 374 375 66,791 (133,847) (67,056) 1,120 (1,671) (67,607) 712 (1,895) (68,790) (1,036) (69,826) 340,681 74,717 415,398 47,701 9,026 358,671 415,398 13,150 4,030 49,744 (109,840) (60,096) 709 (554) (59,941) 1,385 (1,308) (59,864) (519) (60,383) 308,056 155,544 463,600 38,302 9,838 415,460 463,600 2,913 3,764 The segment result is deﬁ ned as a segment’s revenue less the seg- ment’s operating expenses. The unallocated other operating expenses of € 15.8 million (2016: € 13.2 million) included primarily expenses for central administrative functions that are not allocated to one of the two segments. Finance income, ﬁ nance expense and income tax are also not allocated to the segments as they are managed on a group basis. In the 2017 ﬁ nancial year, impairments totaling € 9.9 million were recog- nized in the Proprietary Development segment (2016: impairments of € 10.1 million in the Proprietary Discovery segment). The Group’s key customers are allocated to the Partnered Discovery and Proprietary Development segments. As of December 31, 2017, the single most important customer represented accounts receivable with a carrying amount of € 5.1 million (December 31, 2016: € 8.4 million). The largest customer accounted for revenues in 2017 of € 36.9 million, the second largest for € 16.8 million and the third largest for € 6.7 mil- lion. The largest and third largest customers were allocated to the Part- nered Discovery segment and the second largest customer to the Pro- prietary Development segment. The top three of the Group’s customers that were all allocated to the Partnered Discovery segment accounted for € 42.1 million, € 2.5 million and € 2.5 million, respectively, of the total revenues in 2016. The following overview shows the Group’s regional distribution of revenue. in 000’ € Germany Europe and Asia USA and Canada TOTAL 2017 2016 851 57,229 8,711 66,791 1,621 43,046 5,077 49,744 A total of € 42.2 million (December 31, 2016: € 123.7 million) and € 32.6 million (December 31, 2016: € 32.6 million) of the Group’s non-current assets, excluding deferred tax assets, are located in Ger- many and the Netherlands, respectively. The Group’s total investments of € 13.1 million (December 31, 2016: € 2.8 million) were made in Ger- many, except for € 0.1 million (December 31, 2016: € 0.1 million), which were made in the Netherlands. In accordance with internal deﬁ nitions, investments only included additions to property, plant and equipment as well as intangible assets which are not related to business combi- nations. MorphoSys deﬁ nes investments as additions to non-current assets that are not related to acquisitions. Notes F i n a n c i a l S t a t e m e n t s 129 in 000’ € 2017 2016 4 Notes to the Income Statement 4 .1 REVENUE S In 2017, revenues consisted of license fees and milestone payments totaling € 44.8 million (2016: € 28.4 million). Of this total, € 16.8 mil- lion was generated by the Proprietary Development segment and € 28.0 million was generated by the Partnered Discovery segment. In 2016, all such revenues of € 28.4 million were generated by the Part- nered Discovery segment. Of the service fee revenues totaling € 22.0 million (2016: € 21.4 mil- lion), € 0.8 million (2016: € 0.6 million) were attributable to the Propri- etary Development segment and € 21.2 million (2016: € 20.8 million) to the Partnered Discovery segment. Personnel Expenses Consumable Supplies Other Operating Expenses Impairment, Amortization and Other Costs of Intangible Assets External Services Depreciation and Other Costs for Infrastructure TOTAL 4 .2 OPERAT ING EXPENSE S in million € 4.2 .1 RESE ARCH AND DE VE LOPME NT E XPE NSES Research and development increased compared to the prior year due to a high level of investment in our proprietary product pipeline (namely, external services) and increased personnel expenses. Research and development expenses consisted of the items below. R&D Expenses on behalf of Partners Proprietary Development Expenses Technology Development Expenses R&D TOTAL 29,735 2,588 3,065 13,503 63,053 4,865 116,809 2017 17.7 97.7 1.4 116.8 26,493 2,321 2,922 13,689 44,409 5,889 95,723 2016 17.2 77.1 1.4 95.7 130 F i n a n c i a l S t a t e m e n t s Notes 4.2 .2 GE NE R AL AND ADMINISTR ATIVE E XPE NSES General and administrative expenses included the items below. 4 .3 O T HER INCOME AND EXPENSE S, F INANCE INCOME AND F INANCE EXPENSE S The line items “other income and expenses” and “ﬁ nance income and ﬁ nance expenses” include the following items. in 000’ € Personnel Expenses Consumable Supplies Other Operating Expenses Amortization of Intangible Assets External Services Depreciation and Other Costs for Infrastructure TOTAL 2017 12,315 33 794 112 2,947 838 17,039 2016 9,521 97 978 111 2,484 925 14,116 4.2 .3 PE RSONNE L E XPE NSES Personnel expenses included the items below. in 000’ € 2017 2016 Wages and Salaries Social Security Contributions Stock-based Compensation Expense Temporary Staﬀ (External) Other TOTAL 28,196 4,542 4,975 881 3,456 42,050 27,146 4,570 2,357 1,061 880 36,014 in 000’ € Grant Income Gain on Foreign Exchange Reversal of Impairment for Accounts Receivable Previously Deemed Impaired Miscellaneous Income Other Income Loss on Foreign Exchange Impairment of Other Receivables Miscellaneous Expenses Other Expenses Gain on Available-for-sale Financial Assets and Bonds Interest Income Gain on Derivatives Finance Income Interest Expenses Loss on Derivatives Bank Fees 2017 157 485 76 402 1,120 (844) 0 (827) (1,671) 35 236 441 712 (374) (1,360) (41) (120) (1,895) 2016 327 192 15 175 709 (400) (7) (147) (554) 294 1,017 74 1,385 (20) (44) (35) (1,209) (1,308) In 2017, other personnel expenses consisted primarily of severance payments, recruitment and development costs. In 2016, other personnel expenses consisted mainly of recruitment costs. Loss on Available-for-sale Financial Assets and Bonds Finance Expenses The average number of employees in the 2017 ﬁ nancial year was 344 (2016: 354). Of the 326 employees on December 31, 2017 (December 31, 2016: 345), 263 were active in research and development (December 31, 2016: 289) and 63 were engaged in general and administrative functions (December 31, 2016: 56 employees). As of December 31, 2017, there were 161 employees in the Proprietary Development segment and 105 employees in the Partnered Discovery segment; 60 employees were not allocated to a segment (December 31, 2016: 135 in the Pro- prietary Development segment, 156 employees in the Partnered Discovery segment and 54 employees were unallocated). Costs for deﬁ ned-contribution plans amounted to € 0.6 million in 2017 (2016: € 0.5 million). INCOME TAX EXPENSE S/ INCOME 4 .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 is 15.0 % and the solidar- ity surcharge 5.5 %. The eﬀ ective trade tax rate is 10.85 % and remained unchanged. 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.” Notes F i n a n c i a l S t a t e m e n t s 131 Income taxes consist of the items listed below. in 000’ € 2017 2016 in 000’ € 2017 2016 Current Tax Income/(Expense) (Thereof Regarding Prior Years: k€ 171; 2016: k€ (60)) Deferred Tax Expenses Total Income Tax Expense 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-Eﬀ ects Resulting from Entries Directly Recognized in Equity or Other Comprehensive Income (534) (502) (1,036) 0 0 0 Proﬁ t Before Income Taxes Expected Tax Rate Expected Income Tax Tax Eﬀ ects Resulting from: Stock-based Compensation Non-Tax-Deductible Items Diﬀ erences in Proﬁ t and Loss Neutral Adjustments Non-Recognition of Deferred Tax Assets on Temporary Diﬀ erences Non-Recognition of Deferred Tax Assets on Current Year Tax Losses Tax Rate Diﬀ erences to Local Tax Rates Prior Year Taxes Other Eﬀ ects Actual Income Tax 45 (564) (519) (82) (112) (194) (68,790) 26.675 % 18,350 (290) (134) 37 (59,864) 26.675 % 15,969 5 (135) 812 3,256 (3,766) (22.007) (13,354) (71) (171) (6) (1,036) (46) 0 (4) (519) The following table reconciles the expected income tax expense with the actual income tax expense as presented in the consolidated ﬁ nancial statements. The combined income tax rate of 26.675 % in the 2017 ﬁ nan cial year (2016: 26.675 %) was applied to proﬁ t before taxes to calcu late 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 10.85 % applicable to the Group. As of December 31, 2017, neither deferred tax assets in the amount of € 33.6 million on tax loss carryforwards (December 31, 2016: € 12.8 million) nor deferred tax assets on temporary diﬀ erences in the amount of € 0.5 million (December 31, 2016: € 3.8 million) were recog- nized by MorphoSys AG due to continued substantial investments in proprietary product development and related business development. As of December 31, 2017, tax loss carryforwards of Sloning BioTech- nology GmbH were fully exhausted. As of December 31, 2016, deferred tax assets in the amount of € 0.5 million were recognized on tax loss carryforwards. As of December 31, 2017, deferred tax assets in the amount of € 3.8 mil- lion on tax loss carryforwards (December 31, 2016: € 2.5 million) were not recognized for the Lanthio Group due to continued substantial invest ments in proprietary product development and related business development. 132 F i n a n c i a l S t a t e m e n t s Notes Deferred tax assets and deferred tax 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 Other Liabilities Tax Losses TOTAL in 000’s €, as of December 31 Intangible Assets Receivables and Other Assets Short-term Securities Investments and cash ﬂ ow hedge Provisions Other Liabilities Tax Losses TOTAL As of December 31, 2017, temporary diﬀ erences existed in connection with investments in subsidiaries (known as outside basis diﬀ erences) of € 0.2 million (December 31, 2016: € 0.3 million) for which no de- ferred tax liabilities were recognized. Deferred Tax Asset 2017 Deferred Tax Asset 2016 Deferred Tax Liability 2017 Deferred Tax Liability 2016 0 0 0 0 253 236 0 489 0 0 0 19 130 123 516 788 8,297 0 3 0 0 0 0 8,300 8,068 8 3 131 0 0 0 8,210 Changes in Deferred Taxes in 2017 Recognized in Proﬁ t and Loss Income/(Expense) Recognized in Other Comprehensive Income (229) 8 0 123 113 ( 516) (501) 0 0 112 0 0 0 112 Notes F i n a n c i a l S t a t e m e n t s 133 4 .5 EARNINGS PER SHARE Earnings per share is computed by dividing the 2017 consolidated net loss of € 69,826,469 (2016: consolidated net loss of € 60,382,776) by the weighted-average number of ordinary shares outstanding during the respective year (2017: 28,947,566; 2016: 26,443,415). 5 Notes to the Assets of the Balance Sheet 5.1 C ASH AND C ASH EQUIVAL EN T S The table below shows the calculation of the weighted-average number of ordinary shares. in 000’ € 12/31/2017 12/31/2016 SHARES IS SUED ON JANUARY 1 29,159,770 26,537,682 2017 2016 Bank Balances and Cash in Hand Term Deposits Restricted Cash Cash and Cash Equivalents 76,589 1,133 (1,133) 76,589 73,929 1,252 (1,252) 73,929 Restricted cash of € 1.1 million mainly consisted of rent deposits (2016: € 1.3 million). Eﬀ ect of Treasury Shares Held on January 1 Eﬀ ect of Repurchase of Treasury Stock Eﬀ ect of Share Issuance Eﬀ ect of Transfer of Treasury Stock to Members of the Management Board Eﬀ ect of Transfer of Treasury Stock / Shares Issued in January Eﬀ ect of Transfer of Treasury Stock / Shares Issued in February Eﬀ ect of Transfer of Treasury Stock / Shares Issued in March Eﬀ ect of Transfer of Treasury Stock / Shares Issued in April Eﬀ ect of Transfer of Treasury Stock / Shares Issued in May Eﬀ ect of Transfer of Treasury Stock / Shares Issued in June Eﬀ ect of Transfer of Treasury Stock / Shares Issued in July Eﬀ ect of Transfer of Treasury Stock / Shares Issued in August Eﬀ ect of Transfer of Treasury Stock / Shares Issued in September Eﬀ ect of Transfer of Treasury Stock / Shares Issued in October Eﬀ ect of Transfer of Treasury Stock / Shares Issued in November Eﬀ ect of Transfer of Treasury Stock / Shares Issued in December (396,010) 0 0 7,759 0 0 0 (434,670) (34,812) 327,761 0 0 0 0 154,250 12,638 3,778 10,039 1,094 17,749 2,038 2,669 3,976 2,566 5,549 127 0 6,463 490 76 0 0 WEIG HTED - AVER AG E NUMBER OF SHARES OF C OMMON STO CK 28,947,566 26,443,415 In 2017 and 2016, diluted earnings per share equal basic earnings per share. The eﬀ ect of 87,904 potentially dilutive shares in 2017 (2016: 99,764 dilutive shares) resulting from stock options and con- vertible bonds granted to the Management Board, the Senior Manage- ment Group and employees of the Company who are not members of the Senior Management Group, has been excluded from the diluted earnings per share because it would result in a decrease in the loss per share and is therefore not to be treated as dilutive. 134 F i n a n c i a l S t a t e m e n t s Notes 5.2 F INANC IAL ASSE T S AND B OND S, AVAIL ABL E-F OR-SAL E AND F INANC IAL ASSE T S CL ASSIF IED AS L OANS AND RECEIVABL E S As of December 31, 2017 and December 31, 2016, available-for-sale ﬁ nancial assets consisted of the items below. in 000’ € DECEMBER 31, 2017 Money Market Funds TOTAL DECEMBER 31, 2016 Money Market Funds TOTAL Maturity Cost Gains Losses Market Value Gross Unrealized daily 86,644 daily 63,433 0 2 106 73 86,538 86,538 63,362 63,362 In 2017, the Group recorded a net gain of less than € 0.1 million in the income statement from the disposal of ﬁ nancial assets. This gain was previously recognized in stockholders’ equity (2016: net gain of € 0.3 million). As of December 31, 2017 and December 31, 2016, bonds, available-for- sale consisted of the items below. in 000’ € DECEMBER 31, 2017 Bonds TOTAL DECEMBER 31, 2016 Bonds TOTAL Maturity Cost Gains Losses Market Value Gross Unrealized daily 0 daily 6,620 0 2 0 90 0 0 6,532 6,532 Interest income from ﬁ nancial assets under “loans and receivables” amounted to € 0.2 million (2016: € 0.9 million) and was recorded in the ﬁ nance result. The risk associated with these ﬁ nancial instruments primarily resulted from bank credit risks. There was no indication of impairment in the ﬁ nancial year 2017. Further information on the accounting for ﬁ nancial assets is provided in Item 2.8.1* in the Notes. *C R O S S - R E F E R E N C E to page 123 In 2017, the Group recorded a net loss of € 0.1 million from the disposal of ﬁ nancial assets contained in the income statement that were previ- ously recognized in stockholders’ equity (2016: net loss of € 1.2 mil- lion). The bonds were purchased at a price above their nominal value. The loss that resulted from the product-speciﬁ c price development is more than oﬀ set by the bond’s interest income. As of December 31, 2017, the Company held current ﬁ nancial assets of € 149.1 million (December 31, 2016: € 136.1 million) and no non- current ﬁ nancial assets (December 31, 2016: € 79.5 million), which were allocated to the “loans and receivables” category in accordance with IAS 39 “Financial Instruments”. These ﬁ nancial assets consisted mainly of term deposits with ﬁ xed or variable interest rates. The decline in ﬁ nancial assets resulted from the expiry of their agreed holding periods and the use of the related cash released for operating activities. The carrying amounts included interest receivables of € 0.1 million (December 31, 2016: € 0.1 million). Notes F i n a n c i a l S t a t e m e n t s 135 5.3 ACCOUN T S RECEIVABL E All accounts receivable are non-interest bearing, and generally have payment terms of between 30 and 45 days. As of December 31, 2017 and December 31, 2016, accounts receivable included unbilled receivables amounting to € 5.3 million and € 3.3 million, respectively. Based on the Management Board’s estimate, no net loss for allowances for doubtful receivables was recognized in proﬁ t and loss in 2017 and 2016. 5.4 O T HER RECEIVABL E S As of December 31, 2017, there were no impairments recognized for other receivables. An immaterial amount of impairments had been recogni zed as of December 31, 2016. 5.5 INCOME 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, 2017 income tax receivables amounted to € 0.7 mil- lion (December 31, 2016: € 0.5 million) and consisted of receivables from capital gain taxes withheld and income taxes for prior years. Inventories amounting to € 0.3 million as of December 31, 2017 (De- cember 31, 2016: € 0.3 million) were stored at the Planegg location and consisted of raw materials and supplies. As in the previous year, no inventories were carried at fair value less selling costs as of the report- ing date. As of December 31, 2017, prepaid expenses and other current assets mainly consisted of combination compounds of € 11.2 million (Decem- ber 31, 2016: € 7.3 million), receivables due from tax authorities for the remaining surplus from prepayments for value-added taxes of € 2.4 million (December 31, 2016: € 2.8 million), prepaid fees for exter- nal laboratory services of € 0.6 million (December 31, 2016: € 2.4 mil- lion), prepaid fees for sublicenses of € 0.4 million (December 31, 2016: € 0.3 million), restricted cash for rent deposits of € 0.4 million (Decem- ber 31, 2016: € 0.4 million) and other prepayments amounting to € 1.1 million (December 31, 2016: € 0.8 million). 136 F i n a n c i a l S t a t e m e n t s Notes 5.6 PROPER T Y, PL AN T AND EQUIPMEN T in 000’ € Cost JANUARY 1, 2017 Additions Disposals DECEMBER 31, 2017 Accumulated Depreciation and Impairment JANUARY 1, 2017 Depreciation Charge for the Year Impairment Disposals DECEMBER 31, 2017 Carrying Amount JANUARY 1, 2017 DECEMBER 31, 2017 Cost JANUARY 1, 2016 Additions Disposals DECEMBER 31, 2016 Accumulated Depreciation and Impairment JANUARY 1, 2016 Depreciation Charge for the Year Impairment Disposals DECEMBER 31, 2016 Carrying Amount JANUARY 1, 2016 DECEMBER 31, 2016 Ofﬁ ce and Laboratory Equipment Furniture and Fixtures 16,658 1,205 (528) 17,335 13,120 1,887 0 (517) 14,490 3,538 2,845 15,040 1,890 (272) 16,658 11,691 1,700 0 (271) 13,120 3,349 3,538 2,389 112 0 2,501 1,738 82 0 0 1,820 651 681 1,780 612 (3) 2,389 1,655 86 0 (3) 1,738 125 651 Total 19,047 1,317 (528) 19,836 14,858 1,969 0 (517) 16,310 4,189 3,526 16,820 2,502 (275) 19,047 13,346 1,786 0 (274) 14,858 3,474 4,189 No impairment of property, plant and equipment was recognized in the 2017 and 2016 ﬁ nancial years. Depreciation is included in the following line items of the income statement. 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 mate- rial contractual commitments for the purchase of property, plant and equipment as of the reporting date. in 000’ € Research and Development General and Administrative TOTAL 2017 1,672 297 1,969 2016 1,518 268 1,786 Notes F i n a n c i a l S t a t e m e n t s 137 5.7 IN TANGIBL E ASSE T S in 000’ € Patents License Rights In-process R&D Programs Software Goodwill Total Cost JANUARY 1, 2017 Additions Disposals DECEMBER 31, 2017 Accumulated Amortization and Impairment JANUARY 1, 2017 Amortization Charge for the Year Impairment Disposals DECEMBER 31, 2017 Carrying Amount JANUARY 1, 2017 DECEMBER 31, 2017 Cost JANUARY 1, 2016 Additions DECEMBER 31, 2016 Accumulated Amortization and Impairment JANUARY 1, 2016 Amortization Charge for the Year Impairment DECEMBER 31, 2016 Carrying Amount JANUARY 1, 2016 DECEMBER 31, 2016 16,419 640 (64) 16,995 11,096 1,230 64 (64) 12,326 5,323 4,669 16,064 355 16,419 9,923 1,173 0 11,096 6,141 5,323 23,896 0 0 23,896 20,749 148 0 0 20,897 3,147 2,999 23,896 0 23,896 20,651 98 0 20,749 3,245 3,147 60,960 11,140 (19,941) 52,159 10,141 0 9,800 (19,941) 0 50,819 52,159 60,960 0 60,960 0 0 10,141 10,141 60,960 50,819 5,800 53 0 5,853 4,515 683 0 0 5,198 1,285 655 5,744 56 5,800 3,808 707 0 4,515 1,936 1,285 11,041 0 0 11,041 3,676 0 0 0 3,676 7,365 7,365 11,041 0 11,041 3,676 0 0 3,676 7,365 7,365 118,116 11,833 (20,005) 109,944 50,177 2,061 9,864 (20,005) 42,097 67,939 67,847 117,705 411 118,116 38,058 1,978 10,141 50,177 79,647 67,939 In the 2017 ﬁ nancial year, impairment losses of € 0.1 million were recogni zed on patents and licenses. No impairment of patents and licen ses was recognized in the 2016 ﬁ nancial year. Amortization is included in the following line items of the income statement. As of December 31, 2017, in-process research and development pro- grams were subject to an impairment test as required by IAS 36. This test indicated no need for impairment. Further details on the impair- ment of in-process research and development programs can be found in Item 5.7.3* in the Notes. *C R O S S - R E F E R E N C E to page 138 The carrying amount of intangible assets pledged as security amounts to € 26.5 million and relates to a government grant in the amount of € 1.5 million. in 000’ € Research and Development Research and Development (Write-oﬀ ) General and Administrative TOTAL 2017 1,958 9,864 103 11,925 2016 1,872 10,141 106 12,119 5.7.1 PATE NTS In the 2017 ﬁ nancial year, the carrying amount of patents declined by € 0.6 million from € 5.3 million to € 4.7 million. This was the result of additions amounting to € 0.6 million for patent applications, particu- larly for proprietary programs and technologies, which were oﬀ set by straight-line amortization of € 1.2 million. 138 F i n a n c i a l S t a t e m e n t s Notes 5.7.2 LICE NSES In the 2017 ﬁ nancial year, the carrying amount of licenses declined by € 0.1 million from € 3.1 million to € 3.0 million. 5.7.5 G O ODWILL The annual goodwill impairment test was performed on September 30, 2017. 5.7.3 IN - PRO CES S R&D PRO GR AMS In the 2017 ﬁ nancial year, the carrying amount of in-process R&D programs increased by € 1.3 million to € 52.2 million. The reason for this increase was the capitalization of a milestone payment made in the amount of € 11.1 million, which was oﬀ set by an impairment on MOR209/ES414 of € 9.8 million. The reason for the impairment was the termination of the cooperation with Aptevo Therapeutics in 2017 due to the expectation of a delay in the development plan, a delayed market entry and a delay in the occurrence of future cash ﬂ ows compared to pre vious assumptions. As of December 31, 2017, this balance sheet item contained capitalized upfront payments from the in-licensing of one compound for the Proprie tary Development segment as well as subsequent milestone payments for this compound which were paid at a later point in time. Additionally, the line item also included two compounds resulting from an acquisition. The annual impairment test was performed on September 30, 2017. At that time, the compound MOR208, an intangible asset with indeﬁ nite useful life and a carrying amount of € 23.9 million, was subject to an impairment test as required by IAS 36. The recoverable amount of the cash-generating unit MOR208, which is part of the Proprie tary Develop- ment segment, was determined on the basis of value-in-use calcula- tions. The calculation showed that the recoverable amount was higher than the carrying amount of the cash-generating unit. The cash ﬂ ow forecasts took into account expected cash inﬂ ows from the potential commercialization of the compound and cash outﬂ ows from the ex- pected research and development as well as commercialization costs. The cash ﬂ ow forecasts are based on the term with patent protection for MOR208. For this reason, a planning horizon of about 20 years is considered appropriate for the value-in-use calculation. The values of the underlying assumptions were determined using both internal (past experience) and external sources of information (market infor- mation). Based on the updated cash ﬂ ow forecast, the value-in-use was determined as follows: A beta factor of 1.2 (2016: 1.2) and WACC before taxes of 9.4 % (2016: 8.6 %). A detailed sensitivity analysis was per- formed for the discount rate. A sensitivity analysis for changes in the cash ﬂ ows has not been performed since the cash ﬂ ows from research and development as well as commercialization of the compound have already been probability-adjusted in the value-in-use calculations so as to reﬂ ect the probabilities of success of phases in clinical trials. The 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. No indicators for impair- ments were identiﬁ ed at December 31, 2017. 5.7.4 SOF T WARE In the 2017 ﬁ nancial year, additions to this line item totaled € 0.1 million. The carrying amount decreased by € 0.6 million from € 1.3 million in 2016 to € 0.7 million in 2017. Additions were oﬀ set by amortization of € 0.7 million. As of September 30, 2017, goodwill of € 3.7 million from the 2010 acquisi tion of Sloning BioTechnology GmbH was subject to an impair- ment 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 calcu- lations. The calculation showed that the recoverable amount was higher than the carrying amount of the cash-generating unit. The cash ﬂ ow forecasts took into account the payments expected under existing contracts as well as the future free cash ﬂ ows from the contribution of the Slonomics technology to partnered programs and was oﬀ set by expec ted personnel and administrative expenses. Cash ﬂ ow forecasts are based on a period of ten years because the Management Board belie ves 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 con- tracts. For this reason, a planning horizon of ten years is considered appropriate for the value-in-use calculation. The cash ﬂ ow forecasts are largely based on the assumption that the Slonomics technology is very beneﬁ cial for existing customers. The values of the underlying assumptions were determined using both internal (past experience) and external sources of information (market information). Based on the updated ten-year cash ﬂ ow forecast, the value-in-use was determined as follows: A beta factor of 1.2 (2016: 1.2), WACC before taxes of 10.6 % (2016: 12.2 %) and a perpetual growth rate of 1 % (2016: 1 %). A detailed sensitivity analysis was performed for the growth rate and the discount rate for calculating value-in-use. The sensitivity analysis took into account the change in one assumption, with the remaining assumptions remaining unchanged from the original calculation. A sensitivity analysis for changes in the cash ﬂ ows has not been per- formed since the cash ﬂ ows have already been probability-adjusted in the value-in-use calculations so as to reﬂ ect the probabilities of success of phases in clinical trials. This analysis did not reveal any additional need for impairment. The values ascribed to the assumptions corre- spond to the Management Board’s forecasts for future development and are based on internal planning scenarios as well as external sources of information. As of September 30, 2017, goodwill of € 3.7 million and related intangi- ble assets with indeﬁ nite useful life of € 28.2 million from the Lanthio Group acquisition was tested for impairment. The recoverable amount of the cash-generating unit Lanthio Group, which is part of the Pro- prietary 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 ﬂ ow forecasts included planned cash inﬂ ows from the potential sale of compounds based on lanthipeptides expected to achieve market approval. These cash inﬂ ows were oﬀ set by expected operating expenses for compound develop- ment and clinical trials as well as sales and administrative expenses. The duration and likelihood of individual stages of the study were taken into consideration. Cash ﬂ ow forecasts are based on a period of 30 years because the Management Board believes that after the suc- cessful approval of compounds, the drugs that follow can generate free cash ﬂ ows within that period of time. The values of the underlying as- sumptions were determined using both internal (past experience) and external sources of information (market information). On the basis of Notes F i n a n c i a l S t a t e m e n t s 139 the updated cash ﬂ ow forecast, the value-in-use was determined as follows: A beta factor of 1.2 (2016: 1.2) and WACC before taxes of 12.1 % (2016: 11.9 %). A detailed sensitivity analysis was performed with regard to the discount rate. A sensitivity analysis for changes in the cash ﬂ ows has not been performed since the cash ﬂ ows from research and development as well as commercialization of the compounds have al- ready been probability-adjusted in the value-in-use calculations so as to reﬂ ect the probabilities of success of phases in clinical trials. 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. No indicators for impairments were identiﬁ ed at December 31, 2017. 5.8 PREP 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 and mainly resulted from prepaid rent for the premises in Semmelweisstraße 7 in Planegg. The Group classiﬁ ed 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* and 5.1* in the Notes). As of December 31, 2017 and December 31, 2016, the Group held long- term restricted cash in the amount of € 0.7 million and € 0.9 million, respectively, for issued rent guarantees and of € 0.1 million for convert- ible bonds granted to employees (December 31, 2016: € 0.2 million). *C R O S S - R E F E R E N C E to page 123 and page 133 The table below shows the breakdown of this line item. in 000’ € 12/31/2017 12/31/2016 Accrued expenses mainly included accrued personnel expenses for payments to employees and management amounting to € 5.0 million (December 31, 2016: € 2.8 million), provisions for outstanding invoices in the amount of € 2.6 million (December 31, 2016: € 2.6 million), exter- nal laboratory services in the amount of € 26.3 million (December 31, 2016: € 16.2 million), license payments in the amount of € 0.2 million (December 31, 2016: € 0.1 million), audit fees and other audit-related costs in the amount of € 0.2 million (December 31, 2016: € 0.1 million) and expenses for legal advice in the amount of € 2.1 million (December 31, 2016: € 1.0 million). At the Company’s Annual General Meeting in May 2017, the Super- visory Board was authorized to appoint PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (PwC GmbH), Munich, as the auditor. In the 2017 ﬁ nancial year, PwC GmbH received compensation from MorphoSys in the amount of € 351,044, including audit fees in the amount of € 252,725 as well as fees for other services in the amount of € 98,319. PwC GmbH did neither provide other audit-related and valua- tion services nor tax consultation services in 2017. TAX PROVI SIONS AND PROVI SIONS 6.2 As of December 31, 2017, the Group recorded tax provisions and provi- sions of € 1.5 million (2016: € 4.9 million). Tax provisions mainly consisted of income tax expenses and provi- sions included provisions for onerous contracts and lease obligations for oﬃ ce premises, which will not be used anymore in the future, as well as for potential losses resulting from unsettled forward rate agreements. Furthermore provisions comprised obligations resulting from an agreement with a contract manufacturing organization. Prepaid Expenses, Net of Current Portion Other Current Assets TOTAL 2,546 798 3,344 2,783 1,111 3,894 6 Notes to Equity and Liabilities of the Balance Sheet 6.1 ACCOUN T S P AYABL E AND ACCRUED EXPENSE S Accounts payable were non-interest-bearing and under normal circum- stances had payment terms of no more than 30 days. Accounts payable are listed in the table below. in 000’ € 12/31/2017 12/31/2016 Trade Accounts Payable Licenses Payable Accrued Expenses Other Liabilities TOTAL 4,622 196 36,408 3,586 44,812 8,457 179 22,838 749 32,223 140 F i n a n c i a l S t a t e m e n t s Notes As of December 31, 2017, tax provisions and provisions are uncertain in their amount and are expected to be utilized in 2018. The table below shows the development of tax provisions and current and non-current provisions in the 2017 ﬁ nancial year. in 000’ € Tax Provisions Provisions TOTAL 01/01/2017 Additions Utilized Released 12/31/2017 1,652 3,218 4,870 147 1,116 1,263 1,484 1,841 3,325 0 1,284 1,284 315 1,209 1,524 6.3 DEF ERRED REVENUE S Deferred revenues are payments received from customers for which the services have not been rendered. The table below shows the devel- opment of this line item. in 000’ € OPENING BAL ANCE Prepayments Received in the Fiscal Year Revenue Recognized through Release of Prepayments in line with Services Performed in the Fiscal Year CLOSING BAL ANCE thereof short-term thereof long-term 2017 2,905 2016 4,507 18,386 17,441 (19,596) 1,695 1,389 306 (19,043) 2,905 1,232 1,673 6.4 O T HER L IABIL I T IE S Other liabilities exclusively consisted of the deferred amount of the rent-free period for the building located at Semmelweisstraße 7, Planegg, as agreed in the lease contract. This item is released over the contractually agreed minimum rent period. The current portion amounting to € 0.1 million of this liability was inclu ded in the item accounts payable and accrued expenses. 6.5 S T O CKHOL DERS’ EQUI T Y 6.5.1 C OMMON STO CK On December 31, 2017, the Company’s common stock, including trea- sury stock, increased by € 261,015 to € 29,420,785 from its level of € 29,159,770 on December 31, 2016. Each no-par value share is entitled to one vote. Common stock increased by € 261,015 as a result of the exercise of 261,015 convertible bonds granted to the Management Board and the Senior Management Group. The weighted-average exer- cise price of the exercised convertible bonds was € 31.88. On December 31, 2017, the Company held 319,678 shares of treasury stock amounting to € 11,826,981 which represents a decrease of € 2,821,231 compared to December 31, 2016 (396,010 shares, € 14,648,212). This decrease was the result of the transfer of 61,871 shares of treasury stock to the Management Board and Senior Manage- ment under the performance-based 2013 long-term incentive plan (LTI plan) totaling € 2,286,752. The vesting period for this LTI program expi red on April 1, 2017 and October 1, 2017 and provides or provided beneﬁ ciaries a six-month option to receive a total of 61,871 shares. In addition, in March 2017, Chief Development Oﬃ cer Dr. Peters received 9,505 treasury shares worth € 351,305. In November 2017, Chief Scientiﬁ c Oﬃ cer Dr. Enzelberger received 4,956 treasury shares worth € 183,174. As a result, the number of MorphoSys shares held by the Company as of December 31, 2017 amounted to 319,678 (December 31 2016: 396,010). 6.5.2 AUTHORIZE D CAPITAL The number of authorized ordinary shares increased from 10,584,333 on December 31, 2016, to 14,579,885. This increase resulted from the cancellation of Authorized Capital 2015-I amounting to € 10,584,333 and the creation of Authorized Capital 2017-I in the amount of € 2,915,977 and Authorized Capital 2017-II in the amount of € 11,663,908 at the Annual General Meeting on May 17, 2017. Within the scope of Authorized Capital 2017-I and 2017-II, with the Super- visory Board’s approval, the Management Board received authoriza- tion to increase the Company’s common stock on one or more occa- sions until and including April 30, 2022 by up to € 2,915,977 and € 11,663,908, respectively, by issuing up to 2,915,977 and 11,663,908 new, no-par-value bearer shares. Pursuant to the Company’s articles of association, the shareholders may authorize the Management Board to increase the share capital with the consent of the Supervisory Board within a period of ﬁ ve years by issuing shares for a certain total amount, which are referred to as authorized capital (genehmigtes Kapital) and is a concept under German law that enables the Company to issue shares without going through the process of obtaining another shareholders’ resolution. The aggregate nominal amount of the authorized capital created by the shareholders may not exceed one-half of the share capital existing at the time of registration of the authorized capital with the commercial register. 6.5.3 C ONDITIONAL CAPITAL The number of ordinary shares of conditional capital compared to De- cember 31, 2016 decreased from 6,752,698 to 6,491,683 shares due to the exercise of 261,015 conversion rights in 2017. The reduction in or- dinary shares of conditional capital through the exercise of 261,015 conversion rights was entered in the commercial register in December 2017. The shareholders may resolve to amend or create conditional capital (bedingtes Kapital). However, they may do so only to issue conversion or subscription rights to holders of convertible bonds, in preparation for a merger with another company or to issue subscription rights to employees and members of the Management Board of the Company or of an aﬃ liated company by way of a consent or authorization resolu- tion. According to German law, the aggregate nominal amount of the conditional capital created at the shareholders’ meeting may not exceed Notes F i n a n c i a l S t a t e m e n t s 141 one-half of the share capital existing at the time of the shareholders’ meeting adopting such resolution. The aggregate nominal amount of the conditional capital created for the purpose of granting subscription rights to employees and members of the management of our company or of an aﬃ liated company may not exceed 10 % of the share capital existing at the time of the shareholders’ meeting adopting such resolution. 6.5.4 TRE ASURY STO CK In contrast to the year 2016, the Group did not repurchase any of its own shares in 2017. The composition 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 Purchase in 2016 Transfer in 2016 As of 12/31/2016 Transfer in 2017 As of 12/31/2017 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 52,295 (90,955) 396,010 (76,332) 319,678 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 2,181,963 (3,361,697) 14,648,212 (2,821,231) 11,826,981 6.5.5 ADDITIONAL PAID - IN CAPITAL On December 31, 2017, additional paid-in capital amounted to € 438,557,857 (December 31, 2016: € 428,361,175). The total increase of € 10,196,682 resulted mainly from the exercise of convertible bonds in the amount of € 8,043,313 and the allocation of personnel expenses resulting from share-based payments in the amount of € 4,974,599. There was an oﬀ setting eﬀ ect from the decline in the reclassiﬁ cation of treasury shares in the context of the allocation of shares under the 2013 performance-based share plan in the amount of € 2,286,752 and the allocation of treasury shares to Dr. Peters and Dr. Enzelberger in the amount of € 534,479. 6.5.6 RE VALUATION RESE RVE As of December 31, 2017, the revaluation reserve amounted to € – 105,483 (December 31, 2016: € 136,101). The decline of € 241,584 resulted from the change in the unrealized gains and losses from available-for-sale securities and bonds in the amount of € 117,829 and the change in unrealized losses of € – 359,413 from cash ﬂ ow hedges. 6.5.7 AC CUMUL ATE D DE FICIT The consolidated net loss of € – 69,826,469 is reported in accumulated deﬁ cit. The accumulated deﬁ cit increased from € – 27,548,669 in the year 2016 to € – 97,375,138 in 2017. 7 Remuneration System for the Management Board and Employees of the Group 2017 S T O CK OP T ION PL AN 7.1 On April 1, 2017, MorphoSys established a stock option plan (SOP) for the Management Board, the Senior Management Group and employees of the Company who are not members of the Senior Management Group. In accordance with IFRS 2, the program is considered an equity-settled share-based payment and is accounted for accordingly. The grant date was April 1, 2017 and the vesting period/performance period is four years. The stock options vest each year by 25 % within the four-year vesting period, provided that the performance criteria speciﬁ ed for the respective period have been 100 % fulﬁ lled. The number of stock options vested per year is calculated based on the key performance criteria of the absolute MorphoSys share price perfor- mance and the relative MorphoSys share price performance compared to the NASDAQ Biotechnology Index and the TecDAX Index. The perfor- mance criteria can be met annually up to a maximum of 200 %. If the speciﬁ ed performance criteria are met by less than 0 % in one year, no shares will be earned for that year (entitlement). The right to exercise a stock option, however, arises only at the end of the four-year vesting period/performance period. The exercise price, derived from the average market price of the Company’s shares in the XETRA closing auction on the Frankfurt Stock Exchange from the 30 trading days prior to the issue of the stock options, is € 55.52. MorphoSys reserves the right to settle the exercise of stock options through newly created shares from Conditional Capital 2016-III, through the issuance of treasury shares or in cash. The exercise period is three years after the end of the four-year vesting period/perfor- mance period, which is March 31, 2024. If a member of the Management Board ceases to hold an oﬃ ce at the MorphoSys Group through termination (or the Management Board member terminates the employment contract), resignation, death, injury, member terminates the employment contract), resignation, death, injury member terminates the employment contract), resignation, death, injury, disability or the attainment of retirement age (receipt of a standard retirement pension, early-retirement pension or disability pension, as long as the requirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Management Board member (or the member’s heirs) is entitled to a precise daily pro rata number of stock options. If a member of the Management Board ceases to hold an oﬃ ce at the MorphoSys Group for good reason as deﬁ ned by Sec. 626 Para. 2 of the German Civil Code (BGB), all unexercized stock options will be for- feited without any entitlement to compensation. If a change of control occurs during the four-year vesting period, the stock options will become fully vested. In this case, however, the right to exercise the stock options arises only at the end of the four-year vesting period. 142 F i n a n c i a l S t a t e m e n t s Notes As of April 1, 2017, a total of 81,157 stock options had been granted to the beneﬁ ciaries, of which 40,319 had been granted to the Manage- ment Board (further details can be found in the “Stock Options” table in Note 7.4* “Related Parties”), 37,660 to the Senior Management Group and 3,178 to the Company employees who do not belong to the Senior Management Group. The stated number of stock options granted is based on 100 % target achievement. The fair value of the stock options on the grant date (April 1, 2017) was € 21.41 per stock option. In the period from the grant date to December 31, 2017, one beneﬁ ciary had left MorphoSys, resulting in the forfeiture of 1,402 stock options. For the calculation of personnel expenses resulting from share-based payments under the 2017 Stock Option Plan, the assump- tion is that two beneﬁ ciaries would leave the company during the four- year period. *C R O S S - R E F E R E N C E to page 147 In 2017, personnel expenses from stock options under the Group’s 2017 SOP amounted to € 801,330. The fair value of the stock options from the 2017 Stock Option Plan has been determined with a Monte Carlo simulation. The expected volatility is based on the development of the share volatility of the last four years. Furthermore, the calculation of fair value equally considered the performance criteria of the absolute and relative performance of MorphoSys shares compared to the development of the NASDAQ Bio- tech Index and the TecDAX Index. The parameters of each program are listed in the table below. Share Price on Grant Date in € Strike Price in € Expected Volatility of the MorphoSys share in % Expected Volatility of the NASDAQ Biotech Index in % Expected Volatility of the TecDAX Index in % Performance Term of Program in Years Dividend Yield in % Risk-free Interest Rate in % April 2017 Stock Option Plan 55.07 55.52 37.49 25.07 16.94 4.0 n/a between 0.03 and 0.23 CONVER T IBL E B OND S – 2013 PRO GRAM 7.2 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 beneﬁ ciaries have the right to convert the bonds into Company shares. Each convert- ible 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. Exercise of the convertible bonds is subject to several conditions, such as the achievement of performance targets, the expi- ration 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 Company’s share price in the XETRA closing auction of the Frankfurt Stock Exchange on the trading day preceding the issue of the convert- ible bonds. The exercise of the conversion rights is admissible since, on at least one trading 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 since the expi- ration of the four-year vesting period from the grant date. For every year without a notice of termination of the employment relationship with the Company or an aﬃ liated company, 25 % of the conversion rights become vested. The following table shows the development of the convertible bond plans for Group employees in the 2017 and 2016 ﬁ nancial years. OU TSTANDIN G ON JANUARY 1, 2016 Granted Exercised Forfeited Expired OU TSTANDIN G ON DECEMBER 31, 2016 OU TSTANDIN G ON JANUARY 1, 2017 Granted Exercised Forfeited Expired OU TSTANDIN G ON DECEMBER 31, 2017 Convertible Bonds Weighted- average Price (€) 449,999 0 0 (13,414) 0 436,585 436,585 0 (261,015) 0 0 175,570 31.88 0.00 0.00 31.88 0.00 31.88 31.88 0.00 31.88 0.00 0.00 31.88 From the grant date until December 31, 2017, one beneﬁ ciary left MorphoSys and, therefore, 13,414 convertible bonds were forfeited. As December 31, 2017, the number of vested convertible bonds totaled 175,570 shares (December 31, 2016: 327,439 shares). The following overview includes the weighted-average exercise price as well as information on the contract duration of signiﬁ cant groups of convertible bonds as of December 31, 2017. Notes F i n a n c i a l S t a t e m e n t s 143 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 (€) 175,570 175,570 2.25 2.25 31.88 31.88 175,570 175,570 31.88 31.88 The Group recognizes personnel expenses resulting from convertible bonds on a straight-line basis in accordance with IFRS 2 and IAS 32.28. The equity component of the convertible bonds is presented separately under additional paid-in capital. The corresponding amount is recog- nized as personnel expenses from convertible bonds. In 2017 and 2016, compensation expenses related to convertible bonds amounted to € 287,601 and € 40,375, respectively. 7.3 L ONG -T ERM INCEN T IVE PRO GRAMS 7.3.1 2013 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2013, MorphoSys established a long-term incentive plan (LTI plan) for the Management Board and the Senior Management Group. The vesting period of this plan expired on April 1, 2017. Accord- ing 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 is paid out in ordinary shares (performance shares) of MorphoSys AG if predeﬁ ned key performance criteria are achieved. The key performance criteria are based on the absolute MorphoSys share price performance and the relative MorphoSys share price performance compared to the NASDAQ Biotechnology Index and the TecDAX Index. These criteria are approved annually by the Supervisory Board. The fulﬁ llment of these criteria was set at 200 % for one year, 54 % for one year and 0 % for two years. The Supervisory Board set the “company factor” at 1.57, meaning the number of performance shares to be allocated was scaled by a factor of 1.57. This factor resulted in an adjustment of previously recognized personnel expenses of € 1.0 million in the 2017 ﬁ nancial year. Previously, personnel expenses resulting from the 2013 LTI pro- gram were recognized based on the assumption of a company factor of 1.0. Based on these terms and the company factor, a total of 61,323 performance shares of MorphoSys AG was transferred to beneﬁ ciaries on October 2, 2017 after the expiration of the four-year vesting period. The Management Board received 36,729 performance shares (for further information, please see the tables titled “Shares” and “Perfor- mance Shares” in Item 7.4* “Related Parties”), the Senior Management Group received 21,248 performance shares and former members of the Senior Management Group who have since left the Company received 3,346 performance shares. *C R O S S - R E F E R E N C E to page 147 On October 1, 2013, MorphoSys established another long-term incen- tive plan (LTI plan) for Senior Management Group members. The vest- ing period of this plan expired on October 1, 2017. The terms of this plan were identical to the April 1, 2013 plan. The fulﬁ llment of the performance criteria was set at 200 % for one year, 54.8 % for one year and 0 % for two years. The Supervisory Board set the “company factor” at 1.57, meaning the number of performance shares to be allocated was scaled by a factor of 1.57. This factor resulted in an adjustment of pre- viously recognized personnel expenses of € 0.02 million in the 2017 ﬁ nancial year. Previously, personnel expenses resulting from the 2013 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 548 performance shares of MorphoSys AG was allocated to beneﬁ cia- ries after the expiration of the four-year vesting period in December 2017. The Senior Management Group received all of the 548 perfor- mance shares. In 2017, personnel expenses from stock options under the Group’s 2013 LTI plan amounted to € 1,038,639 (2016: € – 23,571). 7.3.2 2014 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2014, MorphoSys established a 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 accoun ted for accordingly. The LTI plan is a performance-related share plan and will be paid out in ordinary shares (performance shares) of MorphoSys AG if predeﬁ ned key performance 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 predeﬁ ned key performance criteria for the respec- tive period are fully met, 25 % of the performance shares become vested in each year of the four-year vesting period. The number of performance shares vested per year is calculated based on the key per- formance criteria of the absolute MorphoSys share price performance and the relative MorphoSys share price performance compared to the NASDAQ Biotechnology Index and the TecDAX Index. The number of performance 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 achieve- ment of the performance criteria has exceeded 100 % (maximum 200 %). If in one year the performance criteria are met by less than 50 %, no performance 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. How- ever, in justiﬁ ed 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 performance shares under the LTI plan, however, occurs only at the end of the four-year vesting period. 144 F i n a n c i a l S t a t e m e n t s Notes At the end of the four-year vesting period, there is a six-month exercise period during which the Company can transfer the shares to the bene- ﬁ ciaries. Beneﬁ ciaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not suﬃ cient 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 oﬃ ce 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 re- tirement pension, early-retirement pension or disability pension, as long as the requirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Management 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 oﬃ ce at the MorphoSys Group for good reason as deﬁ ned by Sec. 626 Para. 2 of the German Civil Code (BGB) and/or as deﬁ ned by Sec. 84 Para. 3 of the German Stock Corporation Act (AktG), the beneﬁ ciary will not be entitled to performance shares. If a change of control occurs during the four-year vesting period, all performance shares will become fully vested. In this case, the right to receive a certain allocation of performance 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 repur- chased shares may be used for all purposes named in the authoriza- tions 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 ﬁ nance acquisitions. The shares may also be redeemed. A total of 32,513 of these shares were allocated to beneﬁ ciaries on April 1, 2014 with 18,264 performance shares allocated to the Management Board (further details may be found in the table titled “Performance Shares” in Item 7.4* “Related parties”) and 14,249 performance shares to the Senior Management Group. The number of performance shares allocated is based on the full achievement of performance criteria and a company factor of 1. The fair value of the performance shares on the grant date (April 1, 2014) was € 62.17 per share. No dividends were included in the determination of the fair value of the performance shares because the Group does not intend to distribute any dividends in the foreseeable future. From the grant date until December 31, 2017, three beneﬁ ciaries left MorphoSys and, therefore, 1,829 performance shares were forfeited. For the calculation of the personnel expenses from share-based payments under the 2014 LTI plan, it was initially assumed that one beneﬁ ciary would leave the Company during the four-year period. This assumption was updated in 2017. *C R O S S - R E F E R E N C E to page 147 In 2017, personnel expenses resulting from performance shares under the Group’s 2014 LTI plan amounted to € 55,759 (2016: € 178,518). 7.3.3 2015 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2015, MorphoSys established a 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 (performance shares) of MorphoSys AG if predeﬁ ned key performance 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 predeﬁ ned key performance criteria for the respec- tive period are fully met, 25 % of the performance shares become vested in each year of the four-year vesting period. The number of performance shares vested per year is calculated based on the key per- formance criteria of the absolute MorphoSys share price performance and the relative MorphoSys share price performance compared to the NASDAQ Biotechnology Index and the TecDAX Index. The number of performance 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 achieve- ment of the performance criteria has exceeded 100 % (maximum 200 %). If in one year the performance criteria are met by less than 50 %, no performance 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. How- ever, in justiﬁ ed 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 performance shares under the LTI plan, however, occurs only at the end of the four-year vesting period. At the end of the four-year waiting period, there is a six-month exercise period during which the Company can transfer the shares to the bene- ﬁ ciaries. Beneﬁ ciaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not suﬃ cient 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 oﬃ ce 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 re- tirement pension, early-retirement pension or disability pension, as long as the requirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Management Board member (or the member’s heirs) is entitled to performance shares determined on a precise daily pro rata basis. Notes F i n a n c i a l S t a t e m e n t s 145 performance 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 achieve- ment of the performance criteria has exceeded 100 % (maximum 200 %). If in one year the performance criteria are met by less than 50 %, no performance 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. How- ever, in justiﬁ ed 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 performance shares under the LTI plan, however, occurs only at the end of the four-year vesting/per- formance period. At the end of the four-year waiting period, there is a six-month exercise period during which the Company can transfer the shares to the bene- ﬁ ciaries. Beneﬁ ciaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not suﬃ cient 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 oﬃ ce 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 re- tirement pension, early-retirement pension or disability pension, as long as the requirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Management 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 oﬃ ce at the MorphoSys Group for good reason as deﬁ ned by Sec. 626 Para. 2 of the German Civil Code (BGB) and/or as deﬁ ned by Sec. 84 Para. 3 of the German Stock Corporation Act (AktG), the beneﬁ ciary will not be enti- tled to performance shares. If a change of control occurs during the four-year vesting period, all performance shares will become fully vested. In this case, the right to receive a certain allocation of performance shares under the LTI plan occurs only at the end of the four-year vesting period. If a member of the Management Board ceases to hold an oﬃ ce at the MorphoSys Group for good reason as deﬁ ned by Sec. 626 Para. 2 of the German Civil Code (BGB) and/or as deﬁ ned by Sec. 84 Para. 3 of the German Stock Corporation Act (AktG), the beneﬁ ciary will not be enti- tled to performance shares. If a change of control occurs during the four-year vesting period, all performance shares will become fully vested. In this case, the right to receive a certain allocation of performance 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. The repur- chased 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 ﬁ nance acquisitions. The shares may also be redeemed. A total of 40,425 of these shares were allocated to beneﬁ ciaries on April 1, 2015 with 21,948 performance shares allocated to the Management Board (further details may be found in the table titled “Performance Shares” in Item 7.4* “Related parties”) and 18,477 per- formance shares to the Senior Management Group. The number of performance shares allocated is based on the full achievement of the performance criteria and a company factor of 1. The fair value of the performance shares on the grant date (April 1, 2015) was € 61.40 per share. No divide nds were included in the determination of the fair value of the performance shares because the Group does not intend to distribute any dividends in the foreseeable future. From the grant date until December 31, 2017, two beneﬁ ciaries left MorphoSys, and therefore 3,055 performance shares were forfeited. For the calculation of the personnel expenses from share-based payments under the 2015 LTI plan, it was initially assumed that one beneﬁ ciary would leave the Company during the four-year period. This assumption was updated in 2017. *C R O S S - R E F E R E N C E to page 147 In 2017, personnel expenses resulting from performance shares under the Group’s 2015 LTI plan amounted to € 201,608 (2016: € 837,153). 7.3.4 2016 LONG -TE RM INCE NTIVE PRO GR AM On April 1, 2016, MorphoSys established a 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 (performance shares) of MorphoSys AG if predeﬁ ned key performance criteria are achieved. These criteria are evaluated annually by the Supervisory Board. The grant date was April 1, 2016 and the vesting/performance period is four years. If the predeﬁ ned key performance criteria for the respec- tive period are fully met, 25 % of the performance shares become vested in each year of the four-year vesting period. The number of performance shares vested per year is calculated based on the key per- formance criteria of the absolute MorphoSys share price performance and the relative MorphoSys share price performance compared to the NASDAQ Biotechnology Index and the TecDAX Index. The number of 146 F i n a n c i a l S t a t e m e n t s Notes In March 2016, MorphoSys repurchased 52,295 of its own shares on the stock exchange at an average price of € 41.69 per share. The repur- chased 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 ﬁ nance acquisitions. The shares may also be redeemed. A total of 68,143 of these shares were allocated to beneﬁ ciaries on April 1, 2016 with 35,681 performance shares allocated to the Management Board (further details may be found in the table titled “Performance Shares” in Item 7.4* “Related parties”) and 32,462 per- formance shares to the Senior Management Group. The number of performance shares allocated is based on the full achievement of the performance criteria and a company factor of 1. The fair value of the performance shares on the grant date (April 1, 2016) was € 46.86 per share. No divide nds were included in the determination of the fair value of the performance shares because the Group does not intend to distribute any dividends in the foreseeable future. From the grant date until December 31, 2017, four beneﬁ ciaries left MorphoSys, and therefore 9,350 performance shares were forfeited. For the calculation of the personnel expenses from share-based payments under the 2016 LTI plan, it was initially assumed that one beneﬁ ciary would leave the Company during the four-year period. This assumption was updated in 2017. *C R O S S - R E F E R E N C E to page 147 In 2017, personnel expenses resulting from performance shares under the Group’s 2016 LTI plan amounted to € 663,624 (2016: € 1,483,694). 7.3.5 2017 LONG -TE RM INCE NTIVE PL AN On April 1, 2017, MorphoSys established another long-term incentive plan (LTI plan) for the Management Board, the Senior Management Group and employees of the Company who are not members of the Senior Management Group. According to IFRS 2, this program is con- sidered a share-based payment program with settlement in equity in- struments and is accounted for accordingly. The LTI plan is a perfor- mance-related share plan and will be paid out in ordinary shares (performance shares) of MorphoSys AG if predeﬁ ned key performance criteria are achieved. The grant date was April 1, 2017 and the vesting/ performance period is four years. If the predeﬁ ned 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 performance shares vested per year is calculated based on the key performance criteria of the absolute MorphoSys share price performance and the relative MorphoSys share price performance compared to the NASDAQ Biotechnology Index and the TecDAX Index. The performance criteria can be met annually up to a maximum of 300 % and up to 200 % for the entire four-year period. If the speciﬁ ed performance criteria are met by less than 0 % in one year, no shares will be earned for that year (entitlement). In any case, the maximum pay-out at the end of the four-year period is limited by a factor deter- mined by the Group, which generally amounts to 1. However, in justi- ﬁ ed 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 re- ceive a certain allocation of performance shares under the LTI plan, however, occurs only at the end of the four-year vesting/performance period. At the end of the four-year waiting period, there is a six-month exercise period during which the Company can transfer the shares to the bene- ﬁ ciaries. Beneﬁ ciaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not suﬃ cient 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 oﬃ ce 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 re- tirement pension, early-retirement pension or disability pension, as long as the requirements for the disability pension entitlement are met) or under other circumstances subject to the Supervisory Board’s discretion, the Management 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 oﬃ ce at the MorphoSys Group for good reason as deﬁ ned by Sec. 626 Para. 2 of the German Civil Code (BGB) and/or as deﬁ ned by Sec. 84 Para. 3 of the German Stock Corporation Act (AktG), the beneﬁ ciary will not be enti- tled to performance shares. If a change of control occurs during the four-year vesting period, all performance shares will become fully vested. In this case, the right to receive a certain allocation of performance shares under the LTI plan occurs only at the end of the four-year vesting period. A total of 31,549 of these shares were allocated to beneﬁ ciaries on April 1, 2017 with 15,675 performance shares allocated to the Manage- ment Board (further details may be found in the table titled “Perfor- mance Shares” in Item 7.4* “Related parties”), 14,640 performance shares allocated to the Senior Management Group and 1,234 perfor- mance shares allocated to employees of the Company who are not members of the Senior Management Group. The number of perfor- mance shares allocated is based on 100 % achievement of the perfor- mance criteria and a company factor of 1. The fair value of the perfor- mance shares on the grant date (April 1, 2017) was € 70.52 per share. From the grant date until December 31, 2017, one beneﬁ ciary left MorphoSys, and therefore 545 performance shares were forfeited. For the calculation of the personnel expenses from share-based payments under the 2017 LTI plan, the assumption is that two beneﬁ ciaries would leave the company during the four-year period. *C R O S S - R E F E R E N C E to page 147 Notes F i n a n c i a l S t a t e m e n t s 147 April 2014 Long-Term Incentive Program April 2015 Long-Term Incentive Program April 2016 Long-Term Incentive Program April 2017 Long-Term Incentive Program 68.08 n/a 30.87 20.28 20.18 4.0 n/a 0.44 57.18 n/a 33.09 20.70 20.10 4.0 n/a 0.07 43.28 n/a 34.64 23.39 17.01 4.0 n/a 0.05 55.07 n/a 37.49 25.07 16.94 4.0 n/a between 0.03 and 0.23 In 2017, personnel expenses resulting from performance shares under the Group’s 2017 LTI plan amounted to € 1,026,037. The fair value of the performance shares from the long-term incentive plans 2014 until 2017 has been determined with a Monte Carlo simula- tion. The expected volatility is based on the development of the share volatility of the last four years. Furthermore, the calculation of fair value equally considered the performance criteria of the absolute and relative performance of MorphoSys shares compared to the devel- opment of the NASDAQ Biotech Index and the TecDAX Index. The para- meters of each program are listed in the table below. Share Price on Grant Date in € Strike Price in € Expected Volatility of the MorphoSys share in % Expected Volatility of the NASDAQ Biotech Index in % Expected Volatility of the TecDAX Index in % Performance Term of Program in Years Dividend Yield in % Risk-free Interest Rate in % 7.4 REL AT ED P AR T IE S Related parties that can be inﬂ uenced by the Group or can have a sig- niﬁ cant inﬂ uence on the Group can be divided into subsidiaries, mem- bers of management in key positions and other related entities. The Group engages in business relationships with members of the Management Board and Supervisory Board as related parties responsi- ble for the planning, management and monitoring of the Group. In ad- dition to cash compensation, the Group has granted the Management Board convertible bonds and performance shares. The tables below show the shares, stock options, convertible bonds and performance shares held by the members of the Management Board and Super- visory Board, as well as the changes in their ownership during the 2017 ﬁ nancial year. 148 F i n a n c i a l S t a t e m e n t s Notes SHARE S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Arndt Schottelius3 Dr. Marlies Sproll4 TOTAL SUPERVISORY B OARD Dr. Gerald Möller Dr. Frank Morich Dr. Marc Cluzel Krisja Vermeylen5 Wendy Johnson Klaus Kühn Karin Eastham6 TOTAL S T O C K OP T IONS MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Marlies Sproll4 TOTAL CONVER T IBL E B OND S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Arndt Schottelius3 Dr. Marlies Sproll4 TOTAL 01/01/2017 Additions Sales 12/31/2017 514,214 7,000 - - 10,397 57,512 589,123 11,000 1,000 500 - 500 0 2,000 15,000 12,024 38,235 9,505 4,956 68,772 68,772 202,264 0 0 0 350 0 0 0 350 42,529 34,235 0 2,600 0 0 79,364 0 0 0 0 0 0 0 0 483,709 11,000 9,505 7,262 - - 511,476 11,000 1,000 500 350 500 0 - 13,350 01/01/2017 Additions Forfeitures Exercises 12/31/2017 0 0 - - 0 0 12,511 8,197 8,197 5,266 6,148 40,319 0 0 0 0 0 0 0 0 0 0 0 0 12,511 8,197 8,197 5,266 - 34,171 01/01/2017 Additions Forfeitures Exercises 12/31/2017 88,386 90,537 - - 60,537 60,537 299,997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 30,000 0 0 60,537 60,537 151,074 88,386 60,537 0 0 - - 148,923 Notes F i n a n c i a l S t a t e m e n t s 149 PERF ORMANC E SHARE S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters1 Dr. Markus Enzelberger2 Dr. Arndt Schottelius3 Dr. Marlies Sproll4 TOTAL 01/01/2017 Additions Forfeitures Allocations 12/31/2017 37,220 25,134 - - 25,134 25,134 112,622 4,864 3,187 3,187 2,047 0 2,390 15,675 0 0 0 0 0 0 0 12,024 8,235 0 0 8,235 8,235 36,729 30,060 20,086 3,187 5,987 - - 59,320 1 Dr. Malte Peters joined the Management Board of MorphoSys AG on March 1, 2017. 2 Dr. Markus Enzelberger joined the Management Board of MorphoSys AG on November 1, 2017. Prior to his appointment as member of the Management Board 4,906 shares have been held by Dr. Markus Enzelberger. Under the Long-Term Incentive Programs 2014 to 2016, Dr. Markus Enzelberger was granted 3,940 performance shares as a member of the Senior Management prior to his appointment as member of the Management Board. 3 Dr. Arndt Schottelius left the Management Board of MorphoSys AG on February 28, 2017. The exercises and allocations presented in the tables “Convertible Bonds” and “Performance Shares” were made after resignation from the Management Board. The respective convertible bonds and performance shares were granted in previous years. The table “Shares” shows no further changes in the number of shares after resignation from the Management Board of MorphoSys AG. 4 Dr. Marlies Sproll left the Management Board of MorphoSys AG on October 31, 2017. The exercises presented in the table “Convertible Bonds” were made after resignation from the Management Board. The respective convertible bonds were granted in a previous year. The table “Shares” shows no further changes in the number of shares after resignation from the Management Board of MorphoSys. 5 Krisja Vermeylen joined the Supervisory Board of MorphoSys AG on May 17, 2017. 6 Karin Eastham left the Supervisory Board of MorphoSys AG on May 17, 2017. Changes in the number of shares after resignation from the Supervisory Board of MorphoSys AG are not presented in the tables. If a Management Board member’s employment contract terminates due to death, the member’s spouse or life partner is entitled to the ﬁ xed monthly salary for the month of death and the 12 months thereafter. In the event of a change of control, Management Board members are enti- tled to exercise their extraordinary right to terminate their employ- ment contracts and receive any outstanding ﬁ xed salary for the re- mainder of the agreed contract period. Moreover, in such a case, all stock options and performance shares granted will become vested im- mediately and can be exercised after the expiration of the statutory vesting periods. A change of control has occurred when (i) MorphoSys transfers assets or a substantial portion of its assets to unaﬃ liated third parties, (ii) MorphoSys merges with an unaﬃ liated company or (iii) a shareholder or third party holds 30 % or more of MorphoSys’s voting rights. While in the management report the remuneration of the Management Board and Supervisory Boards as members in key management posi- tions is presented in accordance with the provisions of the German Corporate Governance Code, the following tables show the expense- based view in accordance with IAS 24. The Supervisory Board of MorphoSys AG does not hold any stock options, convertible bonds or performance shares. The remuneration system for the Management Board is intended to encourage sustainable, results-oriented corporate governance. The Management Board’s total remuneration consists of several compo- nents, including ﬁ xed compensation, an annual cash bonus that is depen dent upon the achievement of corporate targets (short-term incen tives – STI), variable compensation components with long-term incentives (LTI) and other remuneration components. Variable remu- neration components with long-term incentive consist of performance share plans from previous years and the current year, a convertible bond program from 2013 and a stock option plan from the current year. The members of the Management Board additionally receive fringe beneﬁ ts in the form of beneﬁ ts in kind, essentially consisting of a com- pany car and insurance premiums. All total remuneration packages are reviewed annually by the Remuneration and Nomination Com- mittee and compared to an annual Management Board remuneration analysis to check the scope and appropriateness of the remuneration packages. The amount of remuneration paid to members of the Manage- ment Board is based largely on the duties of the respective Manage- ment Board member, the ﬁ nancial situation and the performance and business outlook for the Company versus its competition. All resolu- tions on adjustments to the overall remuneration packages are passed by the plenum of the Supervisory Board. The remuneration of the Manage ment Board and the index-linked pension scheme were last adjus ted in July 2017. The remuneration of the new Management Board member, Dr. Markus Enzelberger, was amended as of November 1, 2017. 150 F i n a n c i a l S t a t e m e n t s Notes MANAGEMEN T B OARD REMUNERAT ION F OR T HE Y EARS 2017 AND 2016 ( IA S 24) : Dr. Simon Moroney Chief Executive Ofﬁ cer Jens Holstein Chief Financial Ofﬁ cer Dr. Malte Peters Chief Development Ofﬁ cer Appointment: March 1, 2017 2016 2017 2016 2017 2016 2017 Fixed Compensation Fringe Beneﬁ ts1 One-Year Variable Compensation Total Short-Term Employee Beneﬁ ts (IAS 24.17 (a)) Service Cost Total Beneﬁ t Expenses – Post-Employment Beneﬁ ts (IAS 24.17 (b)) Multi-Year Variable Compensation2: 2013 Convertible Bonds 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) 2016 Long-Term Incentive Program (Vesting Period 4 Years) 2017 Long-Term Incentive Program (Vesting Period 4 Years) 2017 Stock Option Plan (Vesting Period 4 Years) Total Stock-Based Compensation (IAS 24.17 (e)) Total Compensation 463,457 34,270 210,873 708,600 142,096 500,876 35,912 368,144 904,932 149,567 314,405 46,300 143,054 503,759 92,875 372,652 42,905 273,899 689,456 99,949 142,096 149,567 92,875 99,949 33,964 58,224 34,791 59,641 (42,350) 0 (29,007) 0 (10,303) 202,349 (7,075) 138,585 32,972 22,460 22,572 148,799 67,635 101,906 15,383 46,324 269,420 171,688 176,511 112,481 0 0 163,906 127,997 0 0 107,395 83,861 432,502 1,283,198 814,259 1,868,758 299,698 896,332 563,670 1,353,075 – – – – – – – – – – – – – – – – 281,500 568,644 206,903 1,057,047 60,967 60,967 0 0 0 0 0 0 107,395 83,861 191,256 1,309,270 1 In 2017, the fringe beneﬁ ts of Dr. Malte Peters and Dr. Markus Enzelberger each included a one-time compensation in the form of MorphoSys shares as an incentive to join the Management Board of MorphoSys AG. 2 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 ﬁ nancial year. Further details can be found in Sections 7.1*, 7.2* and 7.3*. 3 The ﬁ gures presented for Dr. Markus Enzelberger do not include any compensation granted for his activities as a member of the Senior Management Group as they do not relate to his appointment as a member of the Management Board. 4 Dr. Marlies Sproll left the Management Board of MorphoSys AG on October 31, 2017. Since November 1, 2017, Dr. Marlies Sproll has taken on a new part-time role at MorphoSys as Special Adviser to the CEO. Therefore, the ﬁ gures presented for Dr. Marlies Sproll do not include any remuneration granted for these activities. *C R O S S - R E F E R E N C E to page 141–143 On January 5, 2017, MorphoSys announced that Dr. Malte Peters would succeed Dr. Arndt Schottelius as the Chief Development Oﬃ cer and member of the Management Board of MorphoSys AG. Dr. Schottelius resigned from his position as Chief Development Oﬃ cer eﬀ ective Feb- ruary 28, 2017 to pursue new challenges. For the period leading up to the end of his employment contract on April 30, 2017, Dr. Schottelius and MorphoSys entered into an exemption agreement. According to the agreement, Dr. Schottelius was entitled to the remuneration agreed in his employment contract until the date of April 30, 2017. The remu- neration included a contractually agreed payment of a pro rata amount of his annual gross base salary of € 103,252.96 and a bonus of € 23,490.05. Dr. Schottelius also exercised the convertible bonds granted to him in 2013. In addition, he received shares that had vested after the four-year vesting period under the 2013 Performance Share Plan. Dr. Schottelius still has a pro rata entitlement based on the 2014, 2015 and 2016 Performance Share Plans, which can be exercised after a total of four years at the earliest. Dr. Schottelius did not participate in the 2017 Performance Share Plan. Eﬀ ective March 1, 2017, Dr. Malte Peters was appointed Chief Development Oﬃ cer of MorphoSys AG. His employment contract runs until June 30, 2019. As an additional incen- tive to join MorphoSys, Dr. Peters was granted a one-time compensa- tion payment for the lost compensation from his former employment. This compensation was in the form of treasury shares held by MorphoSys valued at € 500,000. In the 2017 ﬁ nancial year, the grant- ing of these shares was recognized as personnel expenses from perfor- mance shares as deﬁ ned by IFRS 2. On October 30, 2017, MorphoSys announced that Dr. Markus Enzel- berger would succeed Dr. Marlies Sproll as Chief Scientiﬁ c Oﬃ cer at MorphoSys AG. Dr. Sproll had been on a temporary leave of absence 2017 204,698 417,158 121,688 743,544 29,186 29,186 0 0 0 0 0 0 68,979 53,875 122,854 895,584 2017 222,450 20,427 67,745 310,622 77,976 77,976 39,879 0 138,585 15,383 46,324 112,481 80,538 62,898 496,088 884,686 2017 103,253 9,161 23,490 135,904 28,245 28,245 39,879 138,585 (42,038) (79,105) (76,828) 0 – – (19,507) 144,642 2017 1,685,429 1,094,207 1,061,869 3,841,505 445,890 445,890 197,623 0 618,104 11,188 81,178 319,822 528,213 412,492 2,168,620 6,456,015 2017 500,876 35,912 368,144 904,932 149,567 149,567 58,224 0 202,349 22,460 67,635 171,688 163,906 127,997 2017 372,652 42,905 273,899 689,456 99,949 99,949 59,641 0 138,585 15,383 46,324 112,481 107,395 83,861 2017 281,500 568,644 206,903 1,057,047 60,967 60,967 0 0 0 0 0 0 107,395 83,861 191,256 1,309,270 814,259 1,868,758 563,670 1,353,075 7.1* 7.2* 7.3* *C R O S S - R E F E R E N C E Notes F i n a n c i a l S t a t e m e n t s 151 Dr. Markus Enzelberger3 Chief Scientiﬁ c Ofﬁ cer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 Dr. Marlies Sproll4 Chief Scientiﬁ c Ofﬁ cer Temporary Leave: April 15, 2017 – October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius Chief Development Ofﬁ cer Resignation: February 28, 2017 Total 2016 2017 2016 2017 2016 2017 2016 2017 – – – – – – – – – – – – – – – – 204,698 417,158 121,688 743,544 29,186 314,405 24,141 143,054 481,600 92,876 222,450 20,427 67,745 310,622 77,976 309,759 28,388 140,940 479,087 95,473 103,253 9,161 23,490 135,904 28,245 1,402,026 133,099 637,921 2,173,046 423,320 1,685,429 1,094,207 1,061,869 3,841,505 445,890 29,186 92,876 77,976 95,473 28,245 423,320 445,890 0 0 0 0 0 0 23,263 39,879 23,263 39,879 115,281 197,623 (29,007) 0 (29,007) 0 (129,371) 0 (7,075) 138,585 (7,075) 138,585 (31,528) 618,104 22,572 15,383 22,572 (42,038) 100,688 101,906 46,324 101,906 (79,105) 454,517 11,188 81,178 176,511 112,481 176,511 (76,828) 798,953 319,822 68,979 53,875 122,854 895,584 0 0 288,170 862,646 80,538 62,898 496,088 884,686 0 0 – – 0 0 528,213 412,492 288,170 862,730 (19,507) 144,642 1,308,540 3,904,906 2,168,620 6,456,015 since April 15, 2017 and eventually resigned from her post as Chief Scientiﬁ c Oﬃ cer eﬀ ective October 31, 2017. She was working as a Special Advisor to the CEO of MorphoSys, Simon Moroney, on a part- time basis since November 1, 2017. She received remuneration until October 31, 2017 in accordance with her employment contract. Dr. Sproll’s long-term compensation granted to her during her time as a member of the Management Board will be settled in accordance with the plans’ terms. Eﬀ ective November 1, 2017, Dr. Enzelberger was ap- pointed Chief Scientiﬁ c Oﬃ cer of MorphoSys AG after having served as the Interim Chief Scientiﬁ c Oﬃ cer since April 15, 2017. Dr. Enzelberger has held various management positions in research and development at MorphoSys since 2002. His Management Board employment con- tract runs until June 30, 2020. Upon joining the Management Board of MorphoSys AG, Dr. Enzelberger was granted a one-time incentive con- sisting of treasury shares held by MorphoSys valued at € 400,000. In the 2017 ﬁ nancial year, the granting of these shares was recognized as personnel expenses from performance shares as deﬁ ned by IFRS 2. In the years 2017 and 2016, there were no other long-term beneﬁ ts in accordance with IAS 24.17 (c) or beneﬁ ts upon termination of employ- ment in accordance with IAS 24.17 (d) accruing to the Management Board or Supervisory Board. In 2017, the total remuneration for the Supervisory Board, excluding reimbursed travel costs, amounted to € 523,015 (2016: € 529,680). 152 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 2017 AND 2016: in € Dr. Gerald Möller Dr. Frank Morich Dr. Marc Cluzel Krisja Vermeylen2 Wendy Johnson Klaus Kühn Karin Eastham3 TOTAL Fixed Compensation Attendance Fees1 Total Compensation 2017 2016 2017 2016 2017 2016 95,156 57,240 52,160 28,961 46,160 46,160 19,578 345,415 91,400 57,240 52,160 - 46,160 46,160 52,160 345,280 36,800 23,200 26,800 16,000 38,000 22,000 14,800 177,600 43,400 26,800 34,600 - 33,800 21,400 24,400 184,400 131,956 80,440 78,960 44,961 84,160 68,160 34,378 523,015 134,800 84,040 86,760 - 79,960 67,560 76,560 529,680 1 The attendance fee contains expense allowances for the attendance at the Supervisory Board and the Committee meetings. 2 Krisja Vermeylen joined the Supervisory Board of MorphoSys AG on May 17, 2017. 3 Karin Eastham has left the Supervisory Board of MorphoSys AG on May 17, 2017. No other agreements presently exist with current or former members of the Supervisory Board. The future minimum payments under non-terminable operating leases, insurance contracts and other services as of December 31, 2017 are shown in the following table. On December 31, 2017, the Senior Management Group held 35,978 stock options (December 31, 2016: 0), 13,233 convertible bonds (De- cember 31, 2016: 136,588) and 67,149 performance shares (December 31, 2016: 82,143) granted by the Company. In 2017, a new stock option program and a new performance share program were granted to the Senior Management Group (see Items 7.1* and 7.3.5*). On April 1, 2017, the Senior Management Group was allocated 21,248 shares from the 2013 LTI program and 548 shares on October 1, 2017. In each case there was the option to receive these shares within a six-month period. As of December 2017, the Senior Management Group had exercised options to receive 21,796 shares. *C R O S S - R E F E R E N C E to page 141 and page 146 8 Additional Notes in 000’ € Up to One Year Between One and Five Years More than Five Years TOTAL Rent and Leasing 2,918 11,209 11,190 25,317 Other 733 0 0 733 Total 3,651 11,209 11,190 26,050 Additionally, the future payments shown in the table below may become due for outsourced studies after December 31, 2017. These amounts could be shifted or substantially lower due to changes in the study timeline or premature study termination. 8.1 OBL IGAT IONS ARI SING F ROM OPERAT ING L EASE S, REN TAL AND O T HER CON T RAC T S in million € The Group leases facilities and equipment under long-term operating leases. In ﬁ nancial years 2017 and 2016, leasing expenses amounted to € 2.6 million and € 3.1 million. The 2016 amount includes the recogni- tion of a provision for onerous contracts from rent obligations for oﬃ ce premises. Leasing expenses for 2017 and 2016 include expenses for company cars and machinery totaling € 0.2 million and € 0.2 million, respectively. The majority of these contracts can be renewed on a yearly or quarterly basis. Some of these agreements may be termi- nated prematurely. In 2016 a rental agreement was signed for the premises at Semmel- weisstraße 7, Planegg. The contract includes a minimum rental period of ten years. Up to One Year Between One and Five Years More than Five Years TOTAL Total 2017 56.1 66.1 0.0 122.2 8.2 CON T INGEN T ASSE 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 conﬁ rmed. Current obligations can represent a contingent liability if it is not probable enough that an outﬂ ow of resources justiﬁ es the recognition of a provision. Moreover, it is not possible to make a suﬃ ciently reliable estimate of the amount of the obligations. The Management Board is unaware of any proceedings that may result in a signiﬁ cant obligation for the Group and may lead to a material adverse eﬀ ect on the Group’s net assets, ﬁ nancial position or results of operations. Notes F i n a n c i a l S t a t e m e n t s 153 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 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 proprietary Ylanthia antibody library to iden- tify and develop antibody compounds directed against these receptors. MorphoSys has the right to sublicense to partners access to these tar- get 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 inﬂ ammatory diseases and de- veloping antibody therapies against these diseases. The agreement covers all activities ranging from the probing of target molecules to the completion of clinical trials for novel therapeutic antibodies. After demonstrating clinical eﬃ cacy in humans, the programs may be out- licensed to partners for further development, approval, and commer- cialization. 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 develop- ment of antibodies, Galapagos provided access to target molecules already identiﬁ ed that are associated with bone and joint diseases. MorphoSys provided access to its antibody technologies used for generat ing fully human antibodies directed against these target mole- cules. Under the terms of the agreement, Galapagos and MorphoSys will share the research and development costs. In July 2014, the collab- oration advanced into the preclinical development of MOR106, an anti- body from MorphoSys’s next-generation library Ylanthia directed against a novel Galapagos target molecule. The antibody will be co- developed in the area of inﬂ ammatory diseases. In June 2013, MorphoSys announced it had entered into a global agree- ment with GlaxoSmithKline (GSK) for the development and commer- cialization of MOR103. MOR103/GSK3196165 is MorphoSys’s propri- etary HuCAL antibody against the GM-CSF target molecule. Under the agreement, GSK assumes responsibility for the compound’s entire develop ment and commercialization. MorphoSys received an immedi- ate upfront payment of € 22.5 million as part of this agreement. De- pending on the achievement of certain developmental stages and regu- latory, commercial and revenue-related milestones, MorphoSys is eligible to receive additional payments from GSK in the amount of up to € 423 million, as well as tiered double-digit royalties on net sales. The drug is currently undergoing development in a phase 2b study in patients with rheumatoid arthritis and a 2a study in patients with os- teoarthritis of the hand. GSK also initiated a mechanistic phase 2a study of MOR103/GSK3196165 in rheumatoid arthritis to further inves- tigate the GM-CSF signaling pathway aﬀ ected by the HuCAL antibody. If certain milestones are achieved in the Proprietary Development segment, for example, ﬁ ling an application for an investigational new drug (IND) for speciﬁ c target molecules, this may trigger regulatory and sales milestone payments to licensors of up to an aggregate of $ 287 million. The next milestone payment in the amount of $ 12.5 million could occur in approximately 18 to 24 months. If a partner achieves certain milestones in the Partnered Discovery segment, for example, ﬁ ling an application for an investigational new drug (IND) for speciﬁ c 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. Obligations may arise from enforcing the Company’s patents against third parties. It is also conceivable that competitors may challenge the patents of the MorphoSys Group companies. MorphoSys may also come to the conclusion that MorphoSys’s patents or patent families have been infringed upon by competitors, which may prompt MorphoSys to take legal action against competitors. At present, there are no speciﬁ c indications that liabilities have occurred as described above. 8.3 CORP ORAT E G OVERNANCE The Group has submitted the Declaration of Conformity with the rec- ommendations of the Government Commission on the German Corpo- rate Governance Code for the 2017 ﬁ nancial 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 1, 2017 and made permanently available to the public. 8.4 RE SEARCH AND DEVEL OPMEN T AGREEMEN T S The Group has entered numerous research and development agree- ments as part of its proprietary research and development activities and its partnered research strategy. The following information de- scribes the agreements that have a material eﬀ ect on the Group and the developments under the research and development agreements in the 2017 ﬁ nancial year. 8.4.1 PROPRIE 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 inﬂ ammatory diseases. Our partners include (in alphabetical order): G7 Therapeutics, Galapagos, GlaxoSmithKline, I-Mab Biopharma, Immatics Biotechnologies, Merck Serono, MD An- derson Cancer Center and Xencor. In August 2014, MorphoSys and Aptevo Therapeutics Inc., a spin-oﬀ of Emergent BioSolutions, announced a co-development and co-promo- tion agreement for MOR209/ES414. MOR209/ES414 is a bi-speciﬁ c anti-PSMA/anti-CD3 antibody based on Aptevo’s (formerly Emergent) proprietary ADAPTIR™ platform (modular protein technology). In the process of prioritizing its development programs, MorphoSys ended the cooperation with Aptevo Therapeutics Inc. at the end of 2017. The rights to the drug’s development and commercialization were returned to Aptevo. As a result of ending the cooperation, impairment for the in-process research and development MOR209/ES414 program in the amount of € 9.8 million was recognized in 2017. 154 F i n a n c i a l S t a t e m e n t s Notes In the reporting year, MorphoSys announced it had signed an exclu- sive regional licensing agreement with I-Mab Biopharma to develop and commercialize MOR202 in China, Taiwan, Hong Kong and Macao. MOR202 is MorphoSys’s proprietary antibody targeting CD38. MOR202 is being evaluated in a phase 1/2a clinical trial in Europe in patients with multiple myeloma. Under the terms of the agreement, I-Mab Bio- pharma has the exclusive rights for the subsequent development and commercialization of MOR202 in the agreed regions. MorphoSys re- ceived an immediate upfront payment of US$ 20.0 million. MorphoSys is also entitled to receive additional success-based clinical and com- mercial milestone payments from I-Mab of up to approximately US$ 100 million, as well as tiered double-digit, staggered royalties on net sales of MOR202 in the agreed regions. In August 2015, MorphoSys announced a strategic alliance in the ﬁ eld of immuno-oncology* with the German company Immatics Biotechnol- ogies 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 proprietary tumor-associated peptides (TUMAPs). In re- turn, Immatics receives the right to develop MorphoSys’s Ylanthia anti bodies against several TUMAPs. The companies will pay each other milestone payments and royalties on commercialized products based on the companies’ development progress. *S E E G L O S S A R Y – page 170 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-develop therapies intended to trigger the immune sys- tem to attack tumors. MorphoSys will use its proprietary Ylanthia an- tibody library and other technology platforms to generate antibodies directed against the selected target molecules. Merck Serono is con- tributing its expertise in the ﬁ eld of immuno-oncology and clinical development and will assume full project responsibility starting with phase 1 of clinical development. In May 2016, MorphoSys and the University of Texas MD Anderson Cancer Center announced a long-term strategic alliance. With MorphoSys applying its Ylanthia technology platform, the partners will work together to identify, validate and develop novel anti-cancer antibodies through to clinical proof of concept by researching targets in a variety of oncology indications. MorphoSys and MD Anderson will conduct early clinical studies of therapeutic antibody candidates after which MorphoSys has the option to continue developing selected anti- bodies in later stages of clinical development for its own proprietary pipeline. In June 2010, MorphoSys AG and the US-based biopharmaceutical com- pany Xencor signed an exclusive global licensing and cooperation agreement 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 responsible for further clinical development after the successful completion of the phase 1 clinical trial. Xencor received an upfront payment of US$ 13.0 million (approx. € 10.5 million) from MorphoSys, which was capitalized 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. 8.4.2 PAR 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 duration of the agreements or recognized in full as revenue when reaching a predeﬁ ned target or milestone. These payments include up- front 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 speciﬁ c antibody programs. Prior to the 2017 ﬁ nancial 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 deﬁ ned milestones. Partnerships in the Partnered Discovery segment that ended before the beginning of 2017 but where drug development programs were still being pursued, include (in alphabetical order): Astellas, Bayer AG, Boehringer Ingelheim, Daiichi-Sankyo, Fibron Ltd. (continuation of contract with Prochon Biotech Ltd.), Janssen Biotech, Merck & Co., OncoMed Pharmaceuticals, Pﬁ zer, Roche and Schering-Plough (a sub- sidiary of Merck & Co.). Partnerships that were still active in 2017 include (in alphabetical order): GeneFrontier Corporation/Kaneka, Heptares, LEO Pharma and Novartis. The Group’s alliance with Novartis AG ended in November 2017. The companies started working together in 2004, which has led to the creation of several ongoing therapeutic antibody programs against a number of diseases. In December 2007, MorphoSys and Novartis sig- niﬁ cantly expanded their existing relationship and forged a strategic alliance in the discovery and development of biopharmaceuticals. The payments for technology access, internalization charges, and R&D ser- vices amounted to € 450.5 million over the ten-year contract. Addition- ally, MorphoSys receives performance-based milestones, contingent upon the successful clinical development and regulatory approval of several products. In addition to these payments, MorphoSys is also entitled to royalties on any future product sales. The partnership with Novartis ended at the end of November 2017 according to the contract. Novartis did not exercise its option to extend the contract. Notes F i n a n c i a l S t a t e m e n t s 155 8.5 SUBSEQUEN T EVEN T S No other events occurred after the balance sheet date of December 31, 2017 that require reporting. 8.6 RE SP ONSIBIL I T Y S TAT EMEN T To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated ﬁ nancial statements give a true and fair view of the Group’s net assets, ﬁ nancial position and results of operations, and the group management report provides a fair review of the development and performance of the business and the position of the Group together with a description of the principal opportunities and risks associated with the Group’s expected development. MorphoSys AG, Planegg, March 8, 2018 Dr. Simon Moroney Dr. Simon Moroney Dr. Simon Moroney Chief Executive Oﬃ cer Jens Holstein Jens Holstein Jens Holstein Chief Financial Oﬃ cer Dr. Malte Peters Chief Development Oﬃ cer Dr. Markus Enzelberger Chief Scientiﬁ c Oﬃ cer 156 F i n a n c i a l S t a t e m e n t s Independent Auditor’s Report Independent Auditor’s Report To MorphoSys AG, Planegg Report on the Audit of the Consoli- dated Financial Statements and of the Group Management Report AUDI T OPINIONS We have audited the consolidated ﬁ nancial statements of MorphoSys AG, Planegg, and its subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2017, and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash ﬂ ow statement for the ﬁ nancial year from January 1, to December 31, 2017, and notes to the consolidated ﬁ nancial statements including a summary of signiﬁ cant accounting policies. In addition, we have audited the group management report of MorphoSys AG for the ﬁ nan- cial year from January 1, to December 31, 2017. We have not audited the content of those parts of the group management report listed in the “Other Information” section of our auditor’s report in accordance with the German legal requirements. In our opinion, on the basis of the knowledge obtained in the audit, • the accompanying consolidated ﬁ nancial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to § [Article] 315e Abs. [paragraph] 1 HGB [Handels- gesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and ﬁ nancial position of the Group as at December 31, 2017, and of its ﬁ nancial performance for the ﬁ nancial year from January 1, to December 31, 2017, and • the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consis- tent with the consolidated ﬁ nancial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our audit opinion on the group management report does not cover the content of those parts of the group management report listed in the “Other Information” section of our auditor’s report. Pursuant to § 322 Abs. 3 Satz [sentence] 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated ﬁ nancial statements and of the group management report. BASIS F OR T HE AUDI T OPINIONS We conducted our audit of the consolidated ﬁ nancial statements and of the group management report in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschafts- prüfer [Institute of Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulﬁ lled our other German pro- fessional responsibilities in accordance with these require- ments. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have ob- tained is suﬃ cient and appropriate to provide a basis for our audit opinions on the consolidated ﬁ nancial statements and on the group management report. KEY AUDI T MAT T ERS IN T HE AUDI T OF T HE CONSOL IDAT ED F INANC IAL S TAT EMEN T S Key audit matters are those matters that, in our professional judgment, were of most signiﬁ cance in our audit of the consoli- dated ﬁ nancial statements for the ﬁ nancial year from January 1, to December 31, 2017. These matters were addressed in the context of our audit of the consolidated ﬁ nancial statements as a whole, and in forming our audit opinion thereon; we do not provide a separate audit opinion on these matters. In our view, the matters of most signiﬁ cance in our audit were as follows: 1. Recoverability of goodwill and intangible assets with indeﬁ - nite useful lives 2. Revenue recognition in connection with the out-licensing of the antibody “MOR202” Our presentation of these key audit matters has been struc- tured in each case as follows: 1) Matter and issue 2) Audit approach and ﬁ ndings 3) Reference to further information Hereinafter we present the key audit matters: Independent Auditor’s Report F i n a n c i a l S t a t e m e n t s 157 1. Recoverability of goodwill and intangible assets with indeﬁ nite useful lives 1) In the Company’s consolidated ﬁ nancial statements an amount of EUR 7.4 million is reported under the “Good- will” balance sheet item. Furthermore, intangible assets with indeﬁ nite useful lives totaling EUR 52.2 million are reported under the “In-process R&D programs” balance sheet item. This balance sheet item includes capitalized upfront payments from the in-licensing of compounds as well as compounds from acquisitions. The assets are not yet available for use and therefore not subject to amorti- zation. Goodwill and intangible assets with indeﬁ nite useful lives are tested for impairment by the Company once a year or when there are indications of impairment to determine any possible need for write-downs. The impair- ment test is performed at the level of the cash-generating units. In an impairment test, the carrying amounts of the respective goodwill and the intangible assets with indeﬁ - nite useful lives are compared with the corresponding recoverable amounts. This is the higher of the value in use and fair value less costs of disposal. The present value of the future cash inﬂ ows and outﬂ ows from the respec- tive group of cash-generating units normally serves as the basis of valuation of goodwill. The present values of the future cash inﬂ ows and outﬂ ows of the cash-generat- ing unit serve as the valuation basis for the in-process R&D programs. The present values are calculated using discounted cash ﬂ ow models. For this purpose, the Company’s cash ﬂ ow forecast forms the starting point for future projections based on assumptions about long- term rates of growth. Expectations relating to future market developments and assumptions about the develop- ment of macroeconomic factors are also taken into ac- count. The discount rate used is the weighted average cost of capital. The impairment test determined that no impairment losses had to be recognized with respect to goodwill. Due to the write-downs with respect to the anti- body “MOR209/ES414” and the decrease in expected future cash inﬂ ows, impairment losses amounting to EUR 9.8 million were recognized with respect to the intan- gible assets of the in-process R&D programs. The result of this measurement depends to a large extent on the execu- tive directors’ estimation of future cash inﬂ ows as well as the discount rate used, and is therefore subject to material uncertainty. Against this background and due to the underlying complexity of the measurement models used, this matter was of particular signiﬁ cance for our audit. 2) As part of our audit, we revaluated, among other things, the methodology used to perform impairment tests and assessed the calculation of the weighted cost of capital. We evaluated the appropriateness of the future cash inﬂ ows used in the measurement by, inter alia, comparing this data with the current budget in the Group’s cash ﬂ ow fore- cast prepared by the executive directors and acknowl- edged by the supervisory board, and by reconciling them against general and sector-speciﬁ c market expectations. With the knowledge that even relatively small changes in the discount rate applied can have a material impact on the recoverable amounts calculated in this way, we also focused our testing in particular on the parameters used to determine the discount rate applied, and evaluated the measurement model. Furthermore, due to the materiality of goodwill and the capitalized R&D programs, we also performed our own sensitivity analyses for the cash- generating units (comparison of carrying and recover- able amounts) and determined that the respective carry- ing amounts were suﬃ ciently covered by the discounted future cash ﬂ ows. To assess the write-down on the in-process R&D program with respect to the antibody “MOR209/ES414”, we examined the contractual docu- ments and evaluated the resulting event that trigged the write-down. Furthermore, on the basis of the ﬁ ndings from the contractual documents, we assessed the calcula- tion of the expenses and write-downs as well as their recognition in the correct period. Overall, the measure- ment parameters and assumptions used by the executive directors are in line with our expectations. 3) The Company’s disclosures pertaining to goodwill and intangible assets with indeﬁ nite useful lives are con- tained in sections 2.5.1, 2.8.6, 5.7.3 and 5.7.5 of the notes to the consolidated ﬁ nancial statements. 2. Revenue recognition in connection with the out-licensing of antibody “MOR202” 1) In MorphoSys AG’s consolidated ﬁ nancial statements revenue amounting to EUR 16.8 million is reported in the consolidated statement of income , which results from the out-licensing of the antibody “MOR202” within the ﬁ nancial year 2017 in the form of a technology transfer to further develop this antibody under an agreement dated November 30, 2017. Revenue is reported and recognized in accordance with IAS 18 and is subject to certain highly discretionary criteria. Accordingly, it is necessary that the payment is contractually ﬁ xed and is not contingent on future events with regard to the amount and that no reim- bursement of the payments made is provided for. The con- tractual agreement regarding the out-licensing must be non-terminable. Furthermore, the licensee must be able to exercise the rights associated with the license freely and at its own discretion. The licensor may not retain any material outstanding obligations for the licensee after the transfer of the license. In light of the extensive and com- plex contractual agreement, recognizing revenue in con- nection with the out-licensing of the antibody “MOR202” is subject to a signiﬁ cant risk and to a certain extent is based on estimates made by the executive directors. Against this background, this matter was of particular signiﬁ cance for our audit. 158 F i n a n c i a l S t a t e m e n t s Independent Auditor’s Report 2) Our audit included the evaluation of the appropriateness and eﬀ ectiveness of the established internal control sys- tem of the Group with regard to the complete and correct recognition of revenue in connection with the out-licens- ing, including the IT systems used. Furthermore, we ob- tained an understanding of the underlying contractual agreement and assessed it with regard to the timing of revenue recognition in accordance with the requirements of IAS 18. In a further step, we evaluated the basis for recognizing revenue in connection with the technology transfer and the amounts thereof. We used and evaluated the corresponding contractual documents to assess the recognition of revenue. We also inspected and evaluated payment records. As part of our evaluation of the tech- nology transfer we also examined the data transfer to the contractual partner. Overall, we were able to satisfy our- selves that the established systems and processes as well as controls in place are appropriate and that the esti- mates and assumptions made by the executive directors are suﬃ ciently documented and substantiated to ensure that revenue in connection with this out-licensing is appropriately recognized. 3) The Company’s disclosures on revenue are contained in sections 2.7.1 and 4.1 of the notes to the consolidated ﬁ nan- cial statements. O T HER INF ORMAT ION The executive directors are responsible for the other informa- tion. The other information comprises the following non-au- dited parts of the group management report, which we obtained prior of the date of our auditor’s report: • the group statement on corporate governance pursuant to § 315d HGB included in the group management report • the corporate governance report pursuant to No. 3.10 of the German Corporate Governance Code (except for the remu- neration report) The annual report is expected to be made available to us after the date of the auditor’s report. Our audit opinions on the consolidated ﬁ nancial statements and on the group management report do not cover the other infor- mation, and consequently we do not express an audit opinion or any other form of assurance conclusion thereon. In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information • is materially inconsistent with the consolidated ﬁ nancial statements, with the group management report or our knowl- edge obtained in the audit, or • otherwise appears to be materially misstated. RESPONSIBILITIES OF THE EXECUTIVE DIREC TORS AND THE SUPERVISORY BOARD FOR THE CONSOLIDATED FINANCIAL STATEMENT S AND THE GROUP MANAGEMENT REPORT The executive directors are responsible for the preparation of the consolidated ﬁ nancial statements that comply, in all mate- rial respects, with IFRSs as adopted by the EU and the addi- tional requirements of German commercial law pursuant to § 315e Abs. 1 HGB and that the consolidated ﬁ nancial state- ments, in compliance with these requirements, give a true and fair view of the assets, liabilities, ﬁ nancial position, and ﬁ nancial performance of the Group. In addition the executive directors are responsible for such internal control as they have determined necessary to enable the preparation of consolidated ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated ﬁ nancial statements, the execu- tive directors are responsible for assessing the Group’s ability to continue as a going concern. They also have the responsi- bility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for ﬁ nancial report- ing based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease opera- tions, or there is no realistic alternative but to do so. Furthermore, the executive directors are responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated ﬁ nan- cial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the executive directors are respon- sible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accordance with the applicable German legal requirements, and to be able to provide suﬃ cient appropriate evidence for the assertions in the group manage- ment report. The supervisory board is responsible for overseeing the Group’s ﬁ nancial reporting process for the preparation of the consoli- dated ﬁ nancial statements and of the group management report. Independent Auditor’s Report F i n a n c i a l S t a t e m e n t s 159 AUDI T OR’S RESP ONSIBIL I T IES F OR T HE AUDI T OF T HE CONS OL IDAT ED F INANC IAL S TAT EMEN T S AND OF T HE GROUP MANAGEMEN T REP OR T Our objectives are to obtain reasonable assurance about whether the consolidated ﬁ nancial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated ﬁ nancial state- ments and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our audit opinions on the consolidated ﬁ nancial statements and on the group manage- ment report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, indi- vidually or in the aggregate, they could reasonably be expected to inﬂ uence the economic decisions of users taken on the basis of these consolidated ﬁ nancial statements and this group man- agement report. We exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated ﬁ nancial statements and of the group manage- ment report, whether due to fraud or error, design and per- form audit procedures responsive to those risks, and obtain audit evidence that is suﬃ cient and appropriate to provide a basis for our audit opinions. The risk of not detecting a mate- rial misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit of the consolidated ﬁ nancial statements and of arrange- ments and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the pur- pose of expressing an audit opinion on the eﬀ ectiveness of these systems. • Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures. • Conclude on the appropriateness of the executive directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signiﬁ cant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are re- quired to draw attention in the auditor’s report to the related disclosures in the consolidated ﬁ nancial statements and in the group management report or, if such disclosures are in- adequate, to modify our respective audit opinions. Our con- clusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or condi- tions may cause the Group to cease to be able to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated ﬁ nancial statements, including the disclo- sures, and whether the consolidated ﬁ nancial statements present the underlying transactions and events in a manner that the consolidated ﬁ nancial statements give a true and fair view of the assets, liabilities, ﬁ nancial position and ﬁ nancial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB. • Obtain suﬃ cient appropriate audit evidence regarding the ﬁ nancial information of the entities or business activities within the Group to express audit opinions on the consoli- dated ﬁ nancial statements and on the group management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinions. • Evaluate the consistency of the group management report with the consolidated ﬁ nancial statements, its conformity with German law, and the view of the Group’s position it provides. • Perform audit procedures on the prospective information presented by the executive directors in the group manage- ment report. On the basis of suﬃ cient appropriate audit evi- dence we evaluate, in particular, the signiﬁ cant assumptions used by the executive directors as a basis for the prospective information, and evaluate the proper derivation of the pro- spective information from these assumptions. We do not ex- press a separate audit opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will diﬀ er materially from the prospective information. We communicate with those charged with governance regard- ing, among other matters, the planned scope and timing of the audit and signiﬁ cant audit ﬁ ndings, including any signiﬁ cant deﬁ ciencies in internal control that we identify during our audit. We also provide those charged with governance with a state- ment that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards. From the matters communicated with those charged with gover- nance, we determine those matters that were of most signiﬁ - cance in the audit of the consolidated ﬁ nancial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. 160 F i n a n c i a l S t a t e m e n t s Independent Auditor’s Report Other Legal and Regulatory Requirements F UR T HER INF ORMAT ION PURSUAN T T O AR T ICL E 10 OF T HE EU AUDI T REGUL AT ION We were elected as group auditor by the annual general meet- ing on May 17, 2017. We were engaged by the supervisory board on October 10, 2017. We have been the group auditor of the MorphoSys AG, Planegg, without interruption since the ﬁ nancial year 2011. We declare that the audit opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report). German Public Auditor Responsible for the Engagement The German Public Auditor responsible for the engagement is Dietmar Eglauer. Report of the Supervisory Board F i n a n c i a l S t a t e m e n t s 161 Report of the Supervisory Board COOPERAT ION OF T HE MANAGEMEN T BOARD AND KEY I T EMS OF DIS CUSSION AT T HE SUPERVIS ORY BOARD SUPERVIS ORY BOARD During the 2017 ﬁ nancial year, the Supervisory Board compre- hensively performed the duties assigned to it by law, the Articles of Association, Rules of Procedure and – with one exception – the recommendations of the German Corporate Governance Code (hereinafter referred to as the “Code”). We regularly ad- vised 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 Manage ment Board fulﬁ lled its duty to inform and furnish us with periodic written and verbal reports containing timely and detailed information on all business transactions and events of signiﬁ cant relevance to the Company. The Management Board prepared these reports in collaboration with the respective de- partments. 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 aﬀ ecting the Company with a great level of detail and submitted the relevant documents in a timely manner. Any deviations from the busi- ness plan were thoroughly explained to us, and we were di- rectly involved at an early stage in all decisions relevant to the Company. A corresponding resolution was passed when the Supervisory Board’s approval for individual actions was required by law, the Articles of Association or the Rules of Procedure. The Super- visory Board members routinely prepared resolutions for Manage ment Board actions requiring Supervisory Board ap- proval based on the documentation provided in advance by the Management Board. When necessary, 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 re- view 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 reg- ularly exchanged information and ideas with the Management Board and especially the Chief Executive Oﬃ cer, Dr. Simon Moroney. The Supervisory Board chairperson was always kept promptly informed of the current business situation and any signiﬁ cant business transactions. The other Supervisory Board members also had regular contact with the individual Manage- ment Board members. MEE T INGS IN T HE 2017 F INANC IAL YEAR A total of eight Supervisory Board meetings were held in the 2017 ﬁ nancial year, whereby two meetings were conducted by telephone. All Supervisory Board members were present at all Supervisory Board meetings. In urgent cases occurring outside of meetings, the Supervisory Board passed resolutions by writ- ten procedure. In addition to the above, a one-day strategy meeting took place between the Management Board and the Supervisory Board in July 2017 that primarily addressed • the Company’s strategic focus; and • the further development of the Company’s product portfolio and its impact on the net assets, ﬁ nancial position and results of operations. During the 2017 ﬁ nancial year, the Supervisory Board paid particular attention to the following topics and passed resolu- tions on these topics after a thorough review and discussion: • the evaluation of the Company’s achievement of the 2016 ﬁ - nancial year corporate targets, an interim review and minor adjustment to the corporate targets deﬁ ned by the Super- visory Board at the end of 2016 for the 2017 ﬁ nancial year and deﬁ ning the corporate targets for the 2018 ﬁ nancial year; • modiﬁ cation of the rules of procedure and schedule of respon- sibilities for the Management Board; • the agenda and proposed resolutions for the 2017 Annual General Meeting, particularly the nominations of Dr. Frank Morich, Klaus Kühn, Wendy Johnson and Krisja Vermeylen as Supervisory Board candidates for election and re-election at the 2017 Annual General Meeting; • re-election of the chair and deputy chair of the Supervisory Board and establishment and staﬃ ng of the Committees in the Board’s constituent meeting following the 2017 Annual General Meeting; • deﬁ nition of the targets relating to the proportion of women on the Supervisory and Management Boards for the coming ﬁ ve years; • updating the objectives for the composition of the Super- visory Board and establishing a skills proﬁ le for the entire Supervisory Board; • termination of the licensing and co-development agreement with Aptevo Research & Development LLC for MOR209, an immunotherapeutic for the treatment of metastatic, castra- tion-resistant prostate cancer, as part of the prioritization of programs within the portfolio; 162 F i n a n c i a l S t a t e m e n t s Report of the Supervisory Board • establishment of a list of permitted and pre-approved non- audit services of the auditor, including the maximum amounts and the corresponding amendment of the rules of procedure for the Supervisory Board and the statutes of the Audit Com- mittee; • award of the audit contract to the auditor for the 2017 ﬁ nan- cial year; • evaluation of partnership opportunities for MOR202 and con- clusion of the regional license agreement with I-Mab for ex- clusive development and commercialization rights to MOR202 in China, Taiwan, Hong Kong and Macao; • the budget for the 2018 ﬁ nancial year. We also passed a resolution in the Supervisory Board plenum on the remuneration of Management Board members for the period July 1, 2017 to June 30, 2018 taking external bench- marking into consideration. We evaluated the achievement of the 2016 corporate targets that were agreed with the Manage- ment Board and discussed the corporate targets for 2017. We commissioned an independent remuneration consultant to con- ﬁ rm the appropriateness of the Management Board’s compen- sation and its comparison to the remuneration of various levels of employees. We discussed and adopted the key performance indicators for the long-term incentive plans for both the Manage ment Board and the Senior Management Group. We also addressed the temporary leave as of April 15, 2017 for family reasons and later resignation as of October 31, 2017 of Dr. Marlies Sproll as Chief Scientiﬁ c Oﬃ cer for ongoing family reasons. To ﬁ ll this gap, we appointed Dr. Markus Enzelberger as Interim Chief Scientiﬁ c Oﬃ cer as of April 15, 2017 followed by Chief Scientiﬁ c Oﬃ cer as of November 1, 2017 as Dr. Sproll’s successor. The management board agreement of Dr. Sproll was adjusted for her period of absence and then rescinded with ef- fect from the date of her departure. We drew up and approved a new management board agreement for Dr. Markus Enzelberger as Interim Chief Scientiﬁ c Oﬃ cer and later as Chief Scientiﬁ c Oﬃ cer. Dr. Enzelberger’s initial term will end on June 30, 2020. Furthermore, we approved the ﬁ nancial statements for the 2016 ﬁ nancial year and dealt with the Corporate Governance Report and the Statement on Corporate Governance. The focus of our regular discussions in the Supervisory Board’s plenary meetings were MorphoSys’s revenue and earnings develop ment, the ﬁ nancial reports, the progress of the two busi- ness segments Partnered Discovery and Proprietary Develop- ment, the results and progress of the clinical programs for the development of proprietary drugs, the future development strategy and the development of new technologies. Further- more, we discussed the ﬁ nancial outlook for the 2019/2020 ﬁ nan cial years and MorphoSys’s associated future potential ﬁ nan cing needs as well as the eﬀ ects of the expiry of the con- tract with Novartis. In addition, we carried out an eﬃ ciency review of the Supervisory Board’s work. And lastly, we kept ourselves regularly informed with respect to the Company’s cash investment policy, risk management, internal audit results, internal control system and compliance management system. CONF L IC T S OF IN T ERES T WI T HIN T HE SUPERVIS ORY BOARD No conﬂ icts of interest arose within the Supervisory Board in the 2017 ﬁ nancial year. AC T IVI T IES AND MEE T INGS OF SUPERVIS ORY BOARD COMMI T T EES To ensure that its duties are performed eﬃ ciently, the Super- visory Board has established three committees – the Audit Committee, the Remuneration and Nomination Committee and the Science and Technology Committee – to prepare the issues that fall within the Supervisory Board’s respective areas of re- sponsibility for the Supervisory Board plenum. In each Super- visory Board meeting, the chairs of the Committees report to the Supervisory Board on the Committees’ work. The minutes of the Committee meetings are made available to all Supervisory Board members. The composition of these committees can be found in the “Statement on Corporate Governance,” which is available on the Company’s website under the heading “Media & Investors > Corporate Governance > Statement on Corporate Governance,” and in the Annual Report on pages 73 to 79. The Audit Committee met on six occasions in the 2017 ﬁ nan- cial year, two of those meetings were held by telephone. All Committee members were present at all Audit Committee meet- ings. The Committee dealt mainly with accounting issues, quarterly reports, ﬁ nancial statements and consolidated ﬁ nan- cial statements. The Committee discussed these topics with the Management Board and recommended the approval of the statements to the Supervisory Board. The auditor took part in four Audit Committee meetings and informed its members of the audit results. The Audit Committee also made a recommen- dation to the Supervisory Board with respect to the Super- visory Board’s proposal at the Annual General Meeting for the election of the independent auditor. The Audit Committee also discussed the appointment of the auditor for the 2017 ﬁ nancial year and the new requirements for the external and internal rotation of the auditor and the related requirement to carry out a public tender for the audit in accordance with the Auditors Reform Act. In this context, the Audit Committee decided to carry out the public invitation to tender for the 2018 annual audit on a voluntary basis, accompanied the relevant process and, as a result, made a recommendation to the Supervisory Board. In addition, the Audit Committee dealt with the prepara- tion of a list of permitted and pre-approved non-audit services of the auditor, including maximum amounts, and made a pro- posal to the Supervisory Board to amend the rules of procedure for the Supervisory Board and the statutes of the Audit Commit- tee. The Committee also discussed the risk management sys- tem, the compliance management system and the results of the Report of the Supervisory Board F i n a n c i a l S t a t e m e n t s 163 internal audit conducted in the 2017 ﬁ nancial year, as well as speciﬁ c accounting issues under International Accounting Standards (IFRS) relevant to the Company. In addition, the Committee regularly discussed the Company’s cash invest- ment policy and the investment recommendations made by the Management Board. The Committee also discussed in depth the 2018 budget and the ﬁ nancial outlook for the 2019/2020 ﬁ nan cial years, as well as any future ﬁ nancing measures that may be derived from this in the coming years, along with a potential commercialization strategy for the Company’s pro- prietary drug candidates. Finally, the Committee dealt with the preparation, accomplishment and results of the unobjected sampling of the consolidated ﬁ nancial statements, group manage ment report, annual ﬁ nancial statements and the manage ment report for the 2016 ﬁ nancial year by the German Financial Reporting Enforcement Panel (Deutsche Prüfstelle für Rechnungslegung e.V. – DPR). To increase eﬃ ciency, there is a common Remuneration and Nomination Committee, in which the Committees fulﬁ ll their respective roles. The Committee met on ﬁ ve occasions in the 2017 ﬁ nancial year, with two of those meetings held by tele- phone. All Committee members were present at all Committee meetings. In its function as a remuneration committee, the Remunera tion and Nomination Committee mainly dealt with the Management Board’s remuneration system and level of compensation. In this context, the Committee also commis- sioned 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 Committee prepared a recommenda- tion as to the future structure of the Management Board’s com- pensation and submitted this to the Supervisory Board for appro val. In doing so, 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 revie wed by the commissioned remuneration expert. This expert conﬁ rmed the appropriateness of the “vertical” compensation ratios. In addition, the Committee gave careful consideration to the corporate targets as a basis for the Management Board’s short-term variable remuneration and oﬀ ered appropriate rec- ommendations to the Supervisory Board for resolution. The Committee discussed the key performance indicators of the long-term incentive plans for the Management Board, Senior Management Group and other employees in key positions. In its function as the Nomination Committee, the Committee dealt with the appointment of Dr. Markus Enzelberger as Interim Chief Scientiﬁ c Oﬃ cer for the duration of Dr. Marlies Sproll’s absence, the preparation of a corresponding management board agreement for Dr. Enzelberger, a modiﬁ cation of the manage ment board agreement with Dr. Sproll for the duration of her absence and the appointment of Dr. Markus Enzelberger as Dr. Sproll’s successor as Chief Scientiﬁ c Oﬃ cer due to Dr. Sproll’s resignation. The Committee also prepared the corre- sponding management board agreement for Dr. Enzelberger and the termination agreement for Dr. Sproll, which were then submitted to the Supervisory Board for resolution. In addition, the Nomination Committee handled the preparations for the election of two new members of the Supervisory Board at the 2018 Annual General Meeting. This was necessary due to the approaching end of the term of oﬃ ce of Dr. Gerald Möller, who served 19 years as chairman of the Supervisory Board, as of the end of the 2018 Annual General Meeting and the early resigna- tion of Klaus Kühn for personal reasons also as of the end of the Annual General Meeting 2018. In light of Dr. Möller’s and Mr. Kühn’s upcoming departure from the Supervisory Board, the Nomination Committee commissioned a recruitment agency to oﬀ er professional support in the search for suitable new Super- visory Board candidates. The Nomination Committee in consul- visory visory Board candidates. The Nomination Committee in consul- tation with the Supervisory Board developed a list of require- ments that candidates should possess in order to be nominated to the Supervisory Board. The Nomination Committee also con- ducted interviews with Supervisory Board candidates and sub- mitted two recommendations for Supervisory Board nomina- tions to be proposed at the Annual General Meeting, which were in turn approved by the Supervisory Board. Supervisory Board member Dr. Marc Cluzel, whose term will also end at the end of the 2018 Annual General Meeting, will stand for reap- pointment for another term. The Science and Technology Committee met on ﬁ ve occa- sions during the 2017 ﬁ nancial year. All Committee members were present at all Committee meetings. This Committee dealt mainly with the progress and expansion of the Company’s port- folio, the development of new technologies and the Company’s drug development plans including the required budget re- sources. The discussions focused on the initiation of new devel- opment programs, development plans for current and planned clinical studies, the development of proprietary drug candi- dates, the results of the related clinical trials, as well as the future development strategy and positioning versus competi- tive products. The Committee addressed the production of clin- ical trial materials for the Company’s proprietary drug candi- dates, the competitive and patent situations of the Company’s proprietary product candidates and the identiﬁ cation of suit- able drug candidates for in-licensing based on the Company’s activities. CORP ORAT E GOVERNANCE The Supervisory Board devoted its attention to the further de- velopment of MorphoSys’s corporate governance taking into consideration the Code’s amendments made by the Government Commission German Corporate Governance Code in February 2017. The detailed Corporate Government Report, including the Corporate Governance Statement according to Section 289f HGB (German Commercial Code), can be found on the Compa- ny’s website under the heading “Media & Investors > Corporate Governance > Corporate Governance Report” and in the An- nual Report on pages 73 to 101. 164 F i n a n c i a l S t a t e m e n t s Report of the Supervisory Board We also discussed with the Management Board the Company’s compliance with the Code’s recommendations and in one justi- ﬁ ed case approved an exception to the Code’s recommenda- tions. Based on this consultation, the Management Board and the Supervisory Board submitted the annual Declaration of Conformity on December 1, 2017. The current version of the Declaration of Conformity can be found in this Annual Report and is permanently available to MorphoSys’s shareholders on the Company’s website under the heading “Media & Investors > Corporate Governance > Declaration of Conformity.” CHANGES IN T HE COMP OSI T ION OF T HE MANAGEMEN T BOARD AND SUPERVIS ORY BOARD The following changes in the composition of the Management Board took place during the reporting period. With eﬀ ect from March 1, 2017, Dr. Malte Peters was newly appointed as a mem- ber of the Management Board and Chief Development Oﬃ cer. The former Chief Development Oﬃ cer, Dr. Arndt Schottelius, resigned from his position on the Company’s Management Board eﬀ ective February 28, 2017. Eﬀ ective April 15, 2017, Dr. Markus Enzelberger was appointed Interim Chief Scientiﬁ c Oﬃ cer for the duration of the absence of Dr. Marlies Sproll. Dr. Sproll resigned from her position on the Management Board eﬀ ective October 31, 2017, and Dr. Markus Enzelberger was appointed as Chief Scientiﬁ c Oﬃ cer eﬀ ective November 1, 2017 as the successor of Dr. Sproll. The following changes in the composition of the Supervisory Board took place during the reporting period. Karin Eastham resigned from her oﬃ ce as a member of the Supervisory Board for personal reasons as of the conclusion of the 2017 Annual General Meeting, and Krisja Vermeylen was newly elected to the Supervisory Board by the 2017 Annual General Meeting. Dr. Frank Morich, Klaus Kühn and Wendy Johnson were all re- elected to the Supervisory Board by the 2017 Annual General Meeting, whereby Klaus Kühn has resigned from his oﬃ ce as member of the Supervisory Board for personal reasons as of the end of the 2018 Annual General Meeting. AUDI T OF T HE ANNUAL F INANC IAL S TAT EMEN T S AND CONS OL IDAT ED F INANC IAL S TAT EMEN T S For the 2017 ﬁ nancial year, the Company commissioned Price- waterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft, Munich (“PwC”) as its auditor. The audit contract was awarded by the Supervisory Board in accordance with the resolution of the Annual General Meeting on May 17, 2017. In accordance with Item 7.2.1 of the Code, the Supervisory Board obtained a declaration of independence from the auditor in advance. The annual ﬁ nancial statements and the consolidated ﬁ nancial statements of MorphoSys AG, as well as the Management Re- port and Group Management Report for the 2017 ﬁ nancial year, were properly audited by PwC and issued with an unqualiﬁ ed Auditor’s Report. The key topics of the audit for the consolidated and annual ﬁ nancial statements for the 2017 ﬁ nancial year were the presentation and measurement of cash investments, the accounting for in-process research and development pro- grams, preparation of the Group Management Report in light of the new Auditor’s Opinion, the eﬀ ects of the expiry of the con- tract with Novartis, the measurement of the carrying amounts of goodwill and intangible assets with indeﬁ nite useful lives, the recognition and measurement of the 2017 long-term incen- tive program, the eﬀ ectiveness of internal controls, as well as the recognition of revenue from the out-licensing of MOR202 to I-Mab. In addition, the auditor conﬁ rmed that the Management Board had established an appropriate reporting and monitoring system that is suitable in 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 annual ﬁ nan- cial statements and consolidated ﬁ nancial statements were pro- vided on a timely basis to all Supervisory Board members for review. The audit report, the consolidated ﬁ nancial statements, the Group Management Report of the MorphoSys Group and the audit report, the annual ﬁ nancial statements and the Manage- ment Report of MorphoSys AG were discussed in detail at the Audit Committee meeting on March 8, 2018, and the meeting of the Supervisory Board on March 9, 2018. The auditor attended all meetings concerning the ﬁ nancial statements and quarterly statements and reported on the key results of his audit. The auditor also explained the scope and focus of the audit and was available to the Audit Committee and the Supervisory Board to answer questions and provide further information. The Audit Committee discussed the audit results in detail and recommended to the Supervisory Board that it approve the ﬁ nan cial statements prepared by the Management Board. The Supervisory Board also took note of the audit results and, in turn, reviewed the ﬁ nancial statements and management re- ports in accordance with the statutory provisions. Following its own examination, the Supervisory Board also determined that it sees no cause for objection. The annual ﬁ nancial statements and consolidated ﬁ nancial statements prepared by the Manage- ment Board and reviewed by the auditor, as well as the Manage- ment Report and Group Management Report, were subsequently approved by the Supervisory Board. Thus, the annual ﬁ nancial statements were adopted. Report of the Supervisory Board F i n a n c i a l S t a t e m e n t s 165 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 ﬁ nancial year. Through their eﬀ orts, MorphoSys’s portfolio has continued to mature and expand, and important milestones have been achieved. At this point, the Supervisory Board would also like to thank our departed Management Board member Dr. Marlies Sproll for her excellent work and great dedication. The Supervisory Board also thanks Supervisory Board member Klaus Kühn, who will terminate his oﬃ ce at the conclusion of the 2018 Annual General Meeting, for his commitment and constructive cooperation. Planegg, March 9, 2018 Dr. Gerald Möller Chairman of the Supervisory Board 166 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. GERAL D MÖL L ER Chairman, Heidelberg, Germany member of the supervisory board of: 4sigma, Inc.*, Bermuda (Chairman of the Board of Directors) 4sigma, Inc.*, Bermuda (Chairman of the Board of Directors) Ayoxxa Biosystems GmbH*, Germany (Chairman of the Advisory Board) Ayoxxa Biosystems GmbH*, Germany (Chairman of the Advisory Board) DR. F RANK MORICH Deputy Chairman, Berlin, Germany no other supervisory board memberships no other supervisory board memberships DR. MARC CL UZEL Board Member, Montpellier, France member of the supervisory board of: Moleac Pte. Ltd.*, Singapore (Member of the Board of Directors) Moleac Pte. Ltd.*, Singapore (Member of the Board of Directors) * Membership in comparable domestic and foreign supervisory boards of commercial enterprises. Supervisory Board of MorphoSys AG A d d i t i o n a l I n f o r m a t i o n 167 KRI SJA VERME YL EN Board Member, Hellerup, Denmark no other supervisory board memberships WEND Y JOHNS ON Board Member, San Diego, CA, USA member of the supervisory board of: AmpliPhi Biosciences Corp.*, USA (Member of the Board of Directors) KL AUS KÜHN Board Member Grevenbroich, Germany Board Member, Board Member, 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’ Committe) 168 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 YEN CHING CHUA Head of Clinical Operations 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 Aﬀ airs DR. GÜNTER FINGERLE-ROWSON Business Team Head DR. BERND HUT TER Head of Intellectual Property DR. TIANTOM JARUTAT Business Team Head DR. BARBARA KREBS-POHL Head of Business Development & Portfolio Management Senior Management Group of MorphoSys AG A d d i t i o n a l I n f o r m a t i o n 169 ANKE LINNARTZ Head of Corporate Communications & Investor Relations CHARLOT TE LOHMANN General Counsel DR. BODO MARR Director Corporate Finance & Corporate Development DR. RALF OSTENDORP Head of Protein Sciences & CMC STEFFEN POHLENZ Head of IT LARA SMITH WEBER Head of Controlling, Interim Head of Corporate Finance DR. MARLIES SPROLL Special Advisor to the CEO DR. STEFAN STEIDL Head of Preclinical Development DR. KATHRIN TISSOT Business Team Head DR. MARGIT URBAN Head of Discovery Alliances & Technologies DR. ANNET TE VELTMAR Head of Commercial 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 DR. GUIDO WÜRTH Head of Clinical Development & Medical Aﬀ airs, Business Team Head 170 A d d i t i o n a l I n f o r m a t i o n Glossary Glossary A 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 cyto- toxicity; a mechanism of cell-mediated immunity whereby an eﬀ ector cell of the immune system actively destroys a target cell that has been bound by speciﬁ c antibodies ADCP – Antibody-dependent cellular phagocytosis D Bispeciﬁ c – Antibody consisting of parts from two diﬀ erent antibodies, thereby being able to bind two diﬀ erent antigens Discounted cash ﬂ ow model – Method of valu- ing assets, especially for due diligence BTK inhibitor – Bruton’s tyrosine kinase, a key kinase of the B cell receptor signaling pathway that plays a signiﬁ cant role in the proliferation, diﬀ eren- tiation and survival of B cells DLBCL – Diﬀ use large B cell lymphoma, a subform of ›› NHL DoR – duration of response E EGFR – Epidermal growth factor receptor; cell- surface receptor for members of the epidermal growth factor family (EGF -family) of extracellular growth factor family ( growth factor family (EGF protein ligands; the epidermal growth factor recep- tor is a receptor tyrosine kinase EMA – European Medicines Agency 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 C ALL – Acute lymphoblastic leukemia; a form of cancer of the white blood cells characterized by excess lymphoblasts CAR-T technology – New therapeutic approach in which immune cells are reprogrammed Antibody – Proteins of the immune system that recognize antigens, thereby triggering an immune response Antibody library – A collection of genes that encode corresponding human antibodies Antigen – Foreign substance stimulating antibody production; binding partner of antibody Autoimmune disease – Disease caused by an im mune response by the body against one of its own tissues, cells or molecules B B cells – White blood cells, part of the immune system, capable of generation antibodies B-MIND – Study to evaluate Bendamustine-MOR208 IN DLBCL Cash ﬂ ow – Key performance indicator in the cash ﬂ ow statement used to assess the ﬁ nancial and earning earning capacity earning capacity CD19 – Therapeutic target for the treatment of B cell lymphomas and leukemias CD20 – Therapeutic target for the treatment of B cell lymphomas and leukemias CD38 – Therapeutic target for the treatment of mul- tiple myeloma, certain leukemias and solid tumors Clinical trial – Clinical trials allow safety and eﬃ - cacy 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, fol- lowed by larger-scale studies in patients CLL – Chronic lymphocytic leukemia; most common type of cancer of the blood and bone marrow, aﬀ ect- ing the B cells CMO – Contract manufacturing organization Biosimilars – Term used to describe oﬃ cially approved new versions of innovator biopharmaceu- tical products, following patent expiration COSMOS – CLLCLLC patients assessed for ORR / Safety in MOR208 Study CR – Complete response CRO – Contract research organization CTO – Contract testing organization Glossary A d d i t i o n a l I n f o r m a t i o n 171 G L O GCP – Good clinical practice; an inter national ethi- cal and scientiﬁ c quality standard for designing, conduct ing, recording and reporting trials that in- volve 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-stimu- lating 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 H HuCAL – Human Combinatorial Antibody Library; pro prietary antibody library enabling rapid genera- tion of speciﬁ c human antibodies for all applications Human – Of human origin I IFRS – International Financial Reporting Stan- dards; accounting standards issued by the IASB and adopted by the EU Immuno-oncology – New class of compounds that stimulate the immune system to attack tumors Lanthipeptides – Novel class of therapeutics with high target selectivity and improved drug-like properties ORR – Overall response rate OS – Overall survival L-MIND – Study to evaluate Lanalidomide-MOR208 IN DLBCL P M Market capitalization – Value of a com pany’s outstanding shares, as measured by shares times current price mCRPC – Metastatic castration-resistant prostate cancer Mesothelioma – Diﬀ usely growing tissue tumor aﬀ ecting for example the pleura Monoclonal antibody – Homogeneous antibody origin ating from a single clone, produced by a hybrid oma cell Palmoplantar pustulosis – Psoriasis on hands and feet PFS – Progression-free survival Pharmacodynamics – Study of the eﬀ ects of drugs on the body Pharmacokinetics – Determination of the fate of substances administered externally to a living organism PR – Partial response Preclinic – Preclinical stage of drug development; tests in animal models as well as in laboratory essays Multiple myeloma – Type of cancer that develops in a subset of white blood cells called plasma cells formed in the bone marrow; abbreviation: MM Protein – Polymer consisting of amino acids, e. g. antibodies and enzymes N Nasdaq Biotech Index – Stock market index made up of biotechnological or pharmaceutical companies list ed at the US stock exchange NASDAQ NHL – Non-Hodgkin’s lymphoma; diverse group of blood cancers that include any kind of lymphoma except Hodgkin’s lymphoma Psoriasis – A chronic, non-contagious autoimmune disease which aﬀ ects the skin and joints Psoriatic arthritis (PsA) – Chronic joint inﬂ am- mation that occures in connection with psoriasis R Rheumatoid arthritis – Inﬂ ammatory disease of the joints; abbreviation: RA Royalties – Percentage share of ownership of the rev enue generated by drug products 172 A d d i t i o n a l I n f o r m a t i o n Glossary Glossary S T Y SLL – Small lymphocytic lymphoma Target – Target molecule for therapeutic interven- tion, e.g. on the surface of diseased cells Ylanthia – The novel next-generation antibody platform of MorphoSys 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 SOP = standard operating procedure SOP 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 im- mune defense TecDAX – Index of the 30 largest technology compa- nies listed on the Frankfurt Stock Exchange TTP – Time to progression Toxicity – Poisonousness List of Figures and Tables A d d i t i o n a l I n f o r m a t i o n 173 List of Figures and Tables Figures 01 Revenues of the MorphoSys Group by Segment 28 02 MorphoSys’s Product Pipeline 30 03 Active Clinical Studies with MorphoSys Antibodies 32 04 Total Headcount of the MorphoSys Group 37 05 Revenues by Region 40 06 Revenues Proprietary Development and Partnered Discovery 40 07 Selected R&D Expenses 42 08 Distribution of R&D Expenses 44 09 Performance of the MorphoSys Share in 2017 54 10 Performance of the MorphoSys Share 2013 – 2017 11 Shareholders of MorphoSys AG by Region 12 Occupational Safety at MorphoSys 13 Quality Management System at MorphoSys 14 Employees by Gender 15 Seniority 16 Workforce Turnover Rate 17 Risk and Opportunity Management System at MorphoSys 18 Compliance Management System (CMS) 54 56 59 60 62 62 62 66 96 Tables 01 Development of Financial Performance Indicators 02 Sustainable Development Key Performance Indicators (SD KPIs) at MorphoSys 03 Multi-Year Overview – Income Statement 04 Multi-Year Overview – Financial Situation 05 Multi-Year Overview – Balance Sheet Structure 06 Comparison of Actual Business Results Versus Forecasts 07 Key Data for the MorphoSys Share 08 Analyst Recommendations 09 Summary of MorphoSys’s Key Short- and Medium-Term Risks 24 25 43 45 46 47 54 56 71 10 Summary of MorphoSys’s Key Long-Term Risks 11 Summary of MorphoSys’s Key Opportunities 12 Composition of the Supervisory Board until Termination of the 2017 Annual General Meeting 72 72 75 13 Composition of the Supervisory Board since Termination of the 2017 Annual General Meeting 75 14 Participation of Supervisory Board Members 77 15 Compensation of the Management Board in 2017 and 2016 84 16 Compensation of the Supervisory Board in 2017 and 2016 91 17 Directors’ Holdings 92 18 Managers’ Transactions in 2017 94 174 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 Semmelweisstrasse 7 82152 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 ﬁ nancial report is also published in German and is available for download on our website. 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. Tremfya® is a registered trademark of Janssen Biotech, Inc. Rituxan® is a registered trademark of Biogen MA Inc. MabThera® is a registered trademark of F. Hoﬀ mann-La Roche AG. Gazyva® is a registered trademark of F. Hoﬀ mann-La Roche AG and Genentech, Inc. Blincyto® is a registered trademark of Amgen Inc. Darzalex® is a registered trademark of Johnson & Johnson. Cosentyx® is a registered trademark of Novartis AG. Concept and Design 3st kommunikation GmbH, Mainz Photography/Picture Credits Andreas Pohlmann, Munich Matthias Haslauer, Hamburg Getty Images Translation Klusmann Communications, Niedernhausen Editorial Ofﬁ ce Götz Translations and Proofreading GmbH, Hamburg Typesetting and Lithography Knecht GmbH, Ockenheim Printer Woeste Druck + Verlag GmbH & Co. KG, Essen-Kettwig Copy Deadline March 8, 2018 (except ﬁ nancial statements) Key Figures (IFRS) MorphoSys Group (in million €, if not stated otherwise) 12/31/17 12/31/16 12/31/15 12/31/14 12/31/13 12/31/12 12/31/11 12/31/10 12/31/09 12/31/08 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 66.8 0.0 116.8 17.0 37.1 13.1 2.0 2.1 (67.6) (69.8) 49.7 0.0 95.7 14.1 33.7 2.9 1.8 2.0 (59.9) (60.4) 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 – – – – – – – 6.0 (0.4) 415.4 463.6 400.1 426.5 447.7 224.3 228.4 209.8 206.1 203.3 312.2 67.8 56.7 359.0 86 % 359.5 67.9 48.1 415.5 90 % 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 % Number of Shares Issued 29,420,785 29,159,770 26,537,682 26,456,834 26,220,882 23,358,228 23,112,167 22,890,252 22,660,557 22,478,787 Group Earnings/(Loss) per Share, Basic and Diluted (in €) Dividend (in €) Share Price (in €) PERSONNEL DATA (2.41) (2.28) – – 0.57 – (0.12) – 76.58 48.75 57.65 76.63 0.54 – 55.85 0.08 – 29.30 0.36 – 17.53 0.40 – 18.53 0.40 – 17.04 0.59 – 18.75 Total Group Employees (Number2) 326 345 365 329 299 421 446 464 404 334 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 2007 to 2012 including employees from the discontinued operations of AbD Serotec. Financial Calendar 2018 March 13 p u b l i c at i o n o f 2 0 1 7 y e a r - e n d r e s u lt s May 17 2 0 1 8 a n n ua l g e n e r a l m e e t i n g i n m u n i c h November 6 publication of third quarter interim statement 2 0 1 8 May 3 publication of first quarter interim statement 2 0 1 8 August 2 p u b l i c at i o n o f 2 0 1 8 h a l f - y e a r r e p o r t G A s y S o h p r o M 7 1 0 2 t r o p e R l a u n n A MorphoSys AG Semmelweisstrasse 7 82152 Planegg Germany Phone: +49-89-89927-0 Fax: +49-89-89927-222 www.morphosys.com

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