MorphoSys
Annual Report 2018

Plain-text annual report

2018 8 1 0 2 t r o p e R l a u n n A 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 Product Pipeline MorphoSys’s Product Pipeline (December 31, 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 Tremfya®* (guselkumab) / Janssen/J&J Psoriasis Gantenerumab / Roche Alzheimer’s disease MOR208 / not partnered Hematological malignancies Anetumab ravtansine (BAY94-9343) / Bayer Solid tumors BAY1093884 / Bayer Hemophilia BHQ880 / Novartis Multiple myeloma Bimagrumab ( BYM338) / Novartis Metabolic disease CNTO6785 / Janssen/J&J Inflammation Ianalumab (VAY736) / Novartis Inflammation MOR103 (GSK3196165) / GlaxoSmithKline Inflammation MOR106 / Novatis/Galapagos Inflammation MOR202 / I-Mab Biopharma** Multiple myeloma NOV-12 (MAA868) / Novartis Prevention of thrombosis Setrusumab (BPS804) / Mereo/Novartis Brittle bone syndrome Tesidolumab (LFG316) / Novartis Eye diseases l e g e n d : m o r p r o g r a m o u t - l i c e n s e d m o r p r o g r a m pa r t n e r e d d i s c o v e r y p r o g r a m M O S T A D V A N C E D D E V E L O P M E N T S TA G E Y R E V O C S I D C I N I L C E R P 1 2 3 E S A H P E S A H P E S A H P T E K R A M P R O G R A M  / P A R T N E R I N D I C AT I O N Utomilumab (PF-05082566) / Pfizer Cancer Xentuzumab (BI-836845) / BI Solid tumors BAY2287411 / Bayer Cancer Elgemtumab (LJM716) / Novartis Cancer MOR107*** (LP2-3) / not partnered Not disclosed NOV-7 (CLG561) / Novartis Eye diseases NOV-8 / Novartis Inflammation 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 Inflammation Vantictumab (OMP-18R5) / OncoMed Solid tumors * We still consider Tremfya® a phase 3 compound due to ongoing studies in various indications. ** For development in China, Hong Kong, Taiwan, Macao. *** A phase 1 study in healthy volunteers was completed. MOR107 is currently in preclinical investigation with a focus on oncology indications. phase 1 phase 2 phase 3 12 Programs 14 Programs 3 Programs* In addition, 6 proprietary programs and 56 partnered discovery programs are in discovery stage, 1 proprietary and 24 partnered discovery programs are in preclinic. MorphoSys at a Glance Figures, data, facts (December 31, 2018) employees 329 34 nations pro gr ams in discovery 62 pro gr ams in preclinic 25 pro gr ams in phase 1 More than 70 active clinical studies with MorphoSys antibodies * We still consider Tremfya® a phase 3 compound due to ongoing studies in various indications. ** For development in China, Hong Kong, Taiwan, Macao. *** A phase 1 study in healthy volunteers was completed. MOR107 is currently in preclinical investigation with a focus on oncology indications. pro gr ams in phase 2 12 14 pro gr ams in phase 3 3 E C N A L G A T A S Y S O H P R O M – E N I L E P I P T C U D O R P 12 MOR Programs 106.4 ) € n o i l l i m n i ( s e s n e p x e d & r 27.6 2008 2018 ENG INEERING THE MEDICINES OF TOMORROW Our mission is to make exceptional, innovative biopharmaceuticals to improve the lives of patients suffering from serious diseases. Our focus is on cancer. Innovative technologies and smart development strategies are central to our approach. Success is created by our employees, who focus on excellence in all they do and col- laborate closely across disciplines. S T N E T N O C FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTPlease find additional information in our online magazine. https://reports.morphosys.com/2018/ Contents t h e c o m pa n y 06 10 12 14 16 Roadmap Clinical Development at MorphoSys MorphoSys – A Strong Development Partner Research at MorphoSys Letter to the Shareholders g r o u p m a n ag e m e n t r e p o r t 25 49 63 67 71 76 84 Operations and Business Environment Operating and Financial Review and Prospects Outlook and Forecast Shares and the Capital Market Sustainable Business Development Risk and Opportunity Report Statement on Corporate Governance, Group Statement on Corporate Governance and Corporate Governance Report 113 Subsequent Events f i n a n c i a l s tat e m e n t s 116 117 118 120 122 124 176 Consolidated Statement of Profit or Loss (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 177 182 186 188 191 192 Independent Auditor’s Report Report of the Supervisory Board Supervisory Board of MorphoSys AG Glossary List of Figures and Tables Imprint FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTMaga zine 4 Roadmap As a fully inte- grated biopharma- ceutical company, we are driven by a desire to develop the medicines of tomorrow. The jour- ney towards this goal has been and continues to be exciting. Roadmap Maga zine 5 FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTMaga zine 6 1992 the beginning: The company was founded in Martinsried near Munich. Roadmap first ipo: MorphoSys AG goes public on the Frankfurt Stock Exchange in 1999. On September 6, 2004, the Company entered into the TecDAX and in 2018 to the MDAX. Since late 2016 the headquarters is located in Planegg near Munich o n l i n e r e p o r t https://www.morphosys.com/ company/history#roadmap antibody technology: In 2000, MorphoSys presented its HuCAL antibody library. This was followed by the HuCAL Gold antibody library (2001) and the HuCAL PLATINUM an- tibody library (2008). Ylanthia, the next generation of anti- body technologies, was launched in 2011. Slonomics, which has been part of the MorphoSys technology portfolio since 2010, enables the precise optimization of antibodies from the Ylanthia library. a novel agent against alzheimer’s: In 2006 Partner Roche starts clinical development of a HuCAL anti- body against Alzheimer’s disease (gantenerumab). Six years later, gantenerumab became the fi rst MorphoSys antibody to enter late stage clinical development (phase 3). In 2018, new phase 3 trials where initiated to evaluate and approve gantenerumab in an optimized dosage regimen. 22 Total Partnerships (as of Dec. 2018) new partnerships for proprietary development: MorphoSys is increasingly entering into development and marketing partnerships with other biotech and pharmaceutical companies in order to advance its proprietary drug candidates. These in- clude partnerships with GSK (2013 for MOR103), Merck (2014 for immunoncology), I-Mab Biopharma (2017 for MOR202 and 2018 for MOR210), Novartis (2018 for MOR106, together with Galapagos). service and discovery partnerships: Initia- tion of a strategic partnership with Novartis in 2004, which expands into one of the largest antibody research collaborations in biotech and pharmaceuticals in 2007. MorphoSys has been researching and discovering anti- bodies on behalf of pharmaceutical partners since 1997. These include further partnerships with Bayer (1999), Roche (2000), Centocor (today: Janssen, 2000), Schering (2001) and Pfi zer (2003). development of mor208: In 2010, MorphoSys signs a license agreement with Xencor Inc. for MOR208. In the same year, MorphoSys starts clinical development of the antibody. The fi rst positive data on MOR208 where presen- ted in 2012. In 2017, the U.S. Food and Drug Administra- tion awarded MOR208 breakthrough therapy designation in the blood cancer indication of diffuse large B cell lym- phoma (DLBCL). MorphoSys intends to develop MOR208 toward regulatory approval as soon as possible. proprietary drug development: The fi rst proprietary antibody MOR103 enters clinical develop- ment in 2008. In 2012, MorphoSys publishes positive study results with MOR103 in rheumatoid arthritis. The following year, MorphoSys signs a license agreement with GlaxoSmithKline for MOR103. In 2018, GlaxoSmith- Kline presents positive data from a phase 2 trial in rheumatoid arthritis patients. first approval: In 2017, MorphoSys’s licensing partner Janssen receives approval for Tremfya® (guselkumab) for the treatment of moderate to severe plaque psoriasis in the United States, Europe and Canada. Approvals in other countries to follow. a novel agent against alzheimer’s: In 2006 Partner Roche starts clinical development of a HuCAL anti- body against Alzheimer’s disease (gantenerumab). Six years later, gantenerumab became the fi rst MorphoSys antibody to enter late stage clinical development (phase 3). In 2018, new phase 3 trials where initiated to evaluate and approve gantenerumab in an optimized dosage regimen. 22 Total Partnerships (as of Dec. 2018) new partnerships for proprietary development: MorphoSys is increasingly entering into development and marketing partnerships with other biotech and pharmaceutical companies in order to advance its proprietary drug candidates. These in- clude partnerships with GSK (2013 for MOR103), Merck (2014 for immunoncology), I-Mab Biopharma (2017 for MOR202 and 2018 for MOR210), Novartis (2018 for MOR106, together with Galapagos). service and discovery partnerships: Initia- tion of a strategic partnership with Novartis in 2004, which expands into one of the largest antibody research collaborations in biotech and pharmaceuticals in 2007. MorphoSys has been researching and discovering anti- bodies on behalf of pharmaceutical partners since 1997. These include further partnerships with Bayer (1999), Roche (2000), Centocor (today: Janssen, 2000), Schering (2001) and Pfi zer (2003). development of mor208: In 2010, MorphoSys signs a license agreement with Xencor Inc. for MOR208. In the same year, MorphoSys starts clinical development of the antibody. The fi rst positive data on MOR208 where presen- ted in 2012. In 2017, the U.S. Food and Drug Administra- tion awarded MOR208 breakthrough therapy designation in the blood cancer indication of diffuse large B cell lym- phoma (DLBCL). MorphoSys intends to develop MOR208 toward regulatory approval as soon as possible. proprietary drug development: The fi rst proprietary antibody MOR103 enters clinical develop- ment in 2008. In 2012, MorphoSys publishes positive study results with MOR103 in rheumatoid arthritis. The following year, MorphoSys signs a license agreement with GlaxoSmithKline for MOR103. In 2018, GlaxoSmith- Kline presents positive data from a phase 2 trial in rheumatoid arthritis patients. first approval: In 2017, MorphoSys’s licensing partner Janssen receives approval for Tremfya® (guselkumab) for the treatment of moderate to severe plaque psoriasis in the United States, Europe and Canada. Approvals in other countries to follow. Roadmap Maga zine 9 Our Goal: Is to develop MorphoSys into a Fully Integrated Biopharmaceutical Company. Nasdaq 2018 nasdaq ipo and establishment of us presence: With the listing and IPO at Nasdaq in 2018, MorphoSys gains numerous new investors and strengthens its capital base (gross proceeds USD 239 million). In addition, the US subsidiary MorphoSys US Inc. is established to prepare the Company’s planned commercialization for MOR208 subject to FDA approval. Maga zine 10 Clinical Development at Mor phoSys o n l i n e r e p o r t https://reports.morphosys.com/2018/ magazine/hitting-the-home-stretch/ Clinical Development at Mor phoSys Maga zine 11 Clinical Development at MorphoSys: Hitting the home stretch With the development of the antibody MOR208, MorphoSys has reached the most advanced development stage as a bio- techpharmaceutical company. Originally, we started out as explorers and service providers. We have identified thousands of antibodies for our pharma partners, the most promising of which are in development (see following pages). Today, MOR208 is the first antibody from our proprietary pipeline that we intend to develop to market approval on our own account. MOR208 is being investigated for the treatment of blood cancer, such as diffuse large cell B cell lymphoma (DLBCL), an aggressive cancer of the lymphatic system. With this, MOR208 gives hope to patients by addressing a high unmet medical need. For those DLBCL patients who do not respond to standard therapies, current treatment options are very limited. We carry out multiple clinical studies and, by now, can see the home stretch. In October 2017, the U.S. Food and Drug Administration (FDA) granted breakthrough therapy designation for MOR208 in combination with lenalidomide. As we intend to apply for FDA approval by the end of 2019, we have already started setting up a commercial organization in the U.S. Prospectively, the development of proprietary drug candidates up to market approval will be a central pillar of MorphoSys’s business model. FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTMaga zine 12 Mor phoSys – A Strong Development Par tner MD Anderson Cancer Center Together with the renowned MD Anderson Cancer Center at the Universit y of Texas, we work on the research and development of therapeutic antibodies against cancer. Based on our Ylanthia plat form, we will identif y antibody candidates for jointly selected target molecules. GlaxoSmithKline With GlaxoSmithKline we have entered into an agreement for the development and com - mercialization of MOR103. This antibody is currently in development for the treatment of patients with rheumatoid ar thritis. Under the license agreement, we will receive poten - tial payments totaling 445 million euros and double - digit royalties on net sales. MorphoSys – A Strong Development Par tner Strong partners, joint success MorphoSys is a well-respected development partner for renowned pharmaceutical and biotechnology companies worldwide. This is not limited to the discovery of compounds, where we have excellent expertise and experience. We are also involved in a variety of partnerships that cover the complete development range – from the identification of target molecules to later stages of development and all the way to market approval. The antibody MOR106 is a good example how to advance the development successfully with partners. We discovered and developed MOR106 together with the Belgian company Galapagos N.V. While Galapagos has identified the target molecule, we have identified the antibody. Preclinical studies have shown that MOR106 plays an important role in certain inflammatory skin diseases. MOR106 is currently in clinical development for the treatment of atopic dermatitis. In July 2018, we, together with Galapagos, signed an exclusive global licensing agreement with the pharmaceutical company Novartis. Should MOR106 be approved for such a broad indication as atopic dermatitis, the partner Novartis will bring in the respec- tive necessary commercial and marketing power. The agreement includes an upfront and potential success-based milestone pay- ments. In addition, Novartis will take over all future cost for re- search and development. In summary, this partnership has created a network resulting in benefits for all stakeholders: First and foremost as we hope for the patients, but also for the companies in terms of joint research and the later commercialization as well as revenue generation. Mor phoSys – A Strong Development Par tner Maga zine 13 Leo Pharma Dermatolog y: Together with Leo Pharma we have an ongoing collaboration working on antibody- based therapies. In 2018 we extended this par tner- ship to also develop peptide - based therapeutics. Using their broad experience in dermatolog y, Leo Pharma selects target molecules and we identif y suitable drug candidates. In addition, we have the option to develop resulting drug candidates in cancer indications ourselves up to market approval. I-Mab I - Mab and MorphoSys signed a strategic collaboration and regional licensing agreement for the preclinical antibody MOR210 in Novem - ber 2018. MOR210 has the potential for de - velopment in the innovative field of immuno - oncolog y. I - Mab will have exclusive rights to develop and commercialize MOR210 in China, Hong Kong, Macao, Taiwan and South Korea, while we retain the rights in the rest of the world. Galapagos & Novartis Together with Galapagos, we have entered into a global licensing agreement with Novar tis for the development of MOR106 for the treat- ment of atopic dermatitis. The agreement in - cludes an upfront payment of 95 million euros, potential milestone payments of up to 850 mil - lion euros as well as royalties. o n l i n e r e p o r t https://reports.morphosys.com/2018/ magazine/partners/ FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTMaga zine 14 Research at Mor phoSys there are currently more than 100 anti­ body programs in the morphosys pipe­ line. i hope that many of these will make it to the market and that many patients will benefit from our work. Stefan Schmidt, Chemical -Technical Assistant at MorphoSys o n l i n e r e p o r t https://reports.morphosys.com/2018/ magazine/searching-and-finding/ Research at Mor phoSys Maga zine 15 Research at MorphoSys Searching and Finding the Right Antibody MorphoSys identifies the right antibodies for interesting therapeutic targets in partnerships with biotech and pharmaceutical companies. This business model brought success to MorphoSys, and antibody discovery remains a pillar of the Company until today. Tremfya® has now been approved for the treatment of patients with psoriasis, as the first antibody based on our technology. Stefan Schmidt was involved in the discovery of the antibody in the laboratory in 2003. Mr. Schmidt, can you still remember how you and your colleagues discovered Tremfya®? Stefan Schmidt — We performed several lab exper- iments to find an antibody for Janssen that is directed against a subunit of the newly discovered IL-23 molecule. IL-23 is an endogenous messenger sub- stance that plays a role in the development of psori- asis. In hindsight, it was pure coincidence that I, of all people, was involved in the experiment that eventually lead to the discovery of Tremfya® - it could have been anyone of our team. Following the discovery, MorphoSys transferred Tremfya® to Janssen for further development. Have you been following this? Stefan Schmidt — As far as possible, I try to follow the development of all antibodies we have discovered for other companies. When the news came out that Tremfya® was approved in the U.S. – and later also in other countries such as the EU and Japan – was just fantastic. Knowing thatpatients now benefit from what we originally discovered in the laboratory is very rewarding. Is there still a need for antibody discovery efforts today? Stefan Schmidt — In my opinion, the need for specific antibodies is greater than ever, as the med- icine of today moves towards so-called personalized treatments tailored for specific disease variants or target molecules. Antibodies are ideal candidates for such targeted therapies due to their specificity and selectivity, thereby avoiding unnecessary treat- ments and side effects. Besides Tremfya®, are there any other antibod- ies from MorphoSys’s laboratories that are close to approval? Stefan Schmidt — There are currently more than 100 antibody programs in the MorphoSys pipeline. I hope that many of them will make it to the market, in the U.S., in Europe, worldwide, and that many patients will benefit from our work. That’s why we go to work every day. FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTT he C ompany 16 Let ter to the Shareholder s The year 2018 was an outstanding one for MorphoSys. Our achievements in R&D, corporate development and in strengthening the company’s finances combine to take us significantly closer to our objective of making MorphoSys a fully integrated biopharmaceutical company. All stakeholders in MorphoSys as well as many qualified observers were deeply impressed by the progress made with our lead investigational pro- gram, MOR208, in 2018. By year-end, this program had emerged as one of the most interesting new cancer drug candidates in the pharmaceutical industry. We also made excel- lent progress elsewhere in our Proprietary Develop- ment segment, with deals on MOR106 and MOR210 and encouraging developmental advances for MOR202 and MOR103. The potential in our Part- nered Discovery segment was highlighted by the commercial success of Janssen’s drug Tremfya®, which reached over half a billion U.S. dollars in sales in its first full year on the market. We expect this segment to become an increasingly lucrative source of income, which we will use to grow our business, with a clear focus on our Proprietary Development programs, particularly MOR208. we are committed to creating new treatments for patients suffering from serious diseases – and thereby building value for all of our stakeholders. D r. Simon Moroney, Chief E xecutive Of ficer Let ter to the Shareholder s T he C ompany 17 With compelling clinical data, break- through therapy desig- nation from the FDA and a clear view of the path to market, we de- cided to commercialize MOR208 in the U.S. and to build an orga- nization there for this purpose. In April, we completed a highly successful listing of the company’s shares on the Nasdaq stock exchange. We made the decision to list on Nasdaq to en- sure we make the most of the enormous opportunity that MOR208 represents for MorphoSys. With maturing clinical data, breakthrough therapy designa- tion from the FDA and a clear view of the path to market, we are planning to commercialize MOR208 in the U.S. and are building an organization there for this purpose. This plan resonated well with investors, leading to an over- subscribed Nasdaq offering with gross proceeds of US$ 239 million. We are establishing our commercial organization in the U.S. and the first senior execu- tives have now been recruited. We are building with a very clear goal in mind: to ensure that the market launch of MOR208, subject of course to regu- latory approval, will be a success. If all goes according to plan, this could happen as early as mid-2020. All of us here at MorphoSys are very excited about the potential opportunity to bring MOR208 to market and to help patients suffering from a particularly aggressive form of cancer, diffuse large B-cell lymphoma (DLBCL). We are very encouraged by the most recent clinical data from our ongoing study of MOR208 in combination with lenalidomide (L-MIND) in relapsed or refrac- tory DLBCL. These data, which we presented in December at the American Society of Hematology (ASH) Annual Meeting, were superior to the results that we had published previously in respect of response rates and especially progression-free survival. One third of all patients who participated in the study have experienced complete regression of their tumors, and several are still in remission after two years. If approved, the combination of MOR208 and lenalidomide could provide a new chemotherapy-free regimen to patients who are in urgent need of more therapeutic options. Ultimately, we believe that MOR208-based therapies have the potential to become a treatment alter- native for patients with a variety of B-cell malignancies, and our goal is to FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTT he C ompany 18 Let ter to the Shareholder s we will work closely with the fda to develop our blood cancer antibody mor208 towards approval as fast as possible. D r. Malte Peters, Chief Development Of ficer make these available to as many patients as possible. To that end, we already announced plans to bring MOR208 into front-line development in DLBCL later this year. Over the course of the year, we also made outstanding progress with the other programs in our Proprietary Development segment. In July, we were delighted to announce that, together with our partner Galapagos, we had entered an exclusive global license agreement with Novartis for MOR106. We are develop- ing this antibody as a potential treatment for atopic dermatitis, a debilitating skin disease that affects over 80 million people across the world’s seven largest markets for pharmaceuticals. Bringing medicines to such a large patient population is extremely challenging, which is why it made sense for us to secure the cooperation of a large partner. The deal with Novartis will enable us to advance MOR106 as quickly and broadly as possible while allowing us to allo- cate more resources elsewhere, in particular, to the development of MOR208. Another important partnership is our exclusive strategic collaboration and regional licensing agreement with I-Mab Biopharma for MOR202. I-Mab is Our partnerships should provide a grow- ing revenue stream in the years ahead, they allow us to enter new territories and they enable us to ex- ploit the full potential of products based on our technology. Let ter to the Shareholder s T he C ompany 19 moving forward with the development of MOR202 as planned and expects to initiate pivotal clinical trials in multiple myeloma during 2019. In Novem- ber 2018, we expanded our agreement with I-Mab to include a pre-clinical program, MOR210. Our relationship with I-Mab takes our product candidates into territories, most importantly China, that it would be difficult for us to target ourselves, while allowing us to retain rights in the rest of the world – a true win-win outcome. We will continue to pursue our own development plans for MOR202 and aim to start a clinical trial in an autoimmune disease later this year. Rounding out the progress in our Proprietary Development segment in 2018 was the confirmation from GSK that they intend to continue developing MOR103 in rheumatoid arthritis. We look forward to the start of a phase 3 clinical trial during 2019. While our intense focus on MOR208 demands the majority of our investment, it is important to acknowledge the solid foundation that our Partnered Discovery segment provides for our business. Partnerships in this segment provide value on several fronts: they should provide a growing revenue stream in the years we have a very solid financial position that allows us to fully explore the value of our proprietary therapeutic candidates. J ens Holstein, Chief Financial Of ficer FINANCIAL STATEMENTSGROUP MANAGEMENT REPORT T he C ompany 20 Let ter to the Shareholder s ahead, they allow us to enter territories that it would be difficult for us to reach on our own and they enable us to exploit the full potential of products discovered using our technology. A great example is Janssen’s Tremfya®, the first therapeutic agent based on MorphoSys’s pro- prietary technology to gain market approval. Tremfya® was first approved in 2017 in the U.S. for the treatment of plaque psoriasis. Other countries followed shortly thereafter. In 2018, its first full year on the market, total sales were US$ 544 million, meaning that Tremfya® is well on its way to becoming a blockbuster. In its core indication of psoriasis, Janssen reported new clinical data in 2018 demonstrating supe- riority over competitor Cosentyx® in a head-to- head clinical study, based on a very important clinical metric, the PASI 90 score at week 48. Janssen is conducting 12 late-stage clinical trials of Tremfya® in a variety of settings, illustrating the advantage for us of working with a committed partner. We expect sales of Tremfya® to continue to grow strongly in the years to come, from which MorphoSys will benefit through our royalty participation. in order to further strengthen our pipeline, we bring new innovative product candidates into clinical development. D r. Markus Enzelberger, Chief Scientific Of ficer To conclude, I would like to mention two critical factors that have contributed to MorphoSys’s success and our ability to grow. First, our technologies, on which our extraordinarily rich product pipeline is based. Second, our dedicated and highly capable people, without whom none of our achievements would Let ter to the Shareholder s T he C ompany 21 have been possible. On behalf of MorphoSys’s Management Board, I would like to express our deep gratitude to all of them for their ongoing efforts, creativity and commitment to our company’s success. I would also like to thank you, our shareholders, for your continued support and for your belief in the company. Allow me to conclude with a few words on my own behalf. On February 19, 2019, I informed the Supervisory Board of MorphoSys that I will not renew my contract as a member of the company's Management Board. As a result of this decision, I will step down as CEO on expiry of my current contract on June 30, 2020, or when a successor is appointed, whichever comes sooner. I am immensely proud of everything we have achieved over the past 27 years since MorphoSys was founded. MorphoSys today is stronger than it has ever been and I have every confidence in its future. There is only one reason for my decision: after dedicating such a long time to MorphoSys, I am looking forward to having more time for other interests, and to exploring new opportunities. In the meantime, it’s business as usual. We look forward to another exciting year ahead as we advance to the next stage in our growth – becoming an integrated commercial biopharmaceutical company. MorphoSys is stronger than it has ever been. We look forward to another exciting year ahead as we advance to the next stage in our growth – becoming an integrated commercial biopharmaceutical company. 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 FINANCIAL STATEMENTSGROUP MANAGEMENT REPORTG roup Management Repor t 22 C ontents Group Management Report C ontents G roup Management Repor t 23 T R O P E R T N E M E G A N A M P U O R G 25 49 63 67 71 76 84 Operations and Business Environment Operating and Financial Review and Prospects Outlook and Forecast Shares and the Capital Market Sustainable Business Development Risk and Opportunity Report Statement on Corporate Governance, Group Statement on Corporate Governance and Corporate Governance Report 113 Subsequent Events FINANCIAL STATEMENTS G roup Management Repor t 24 O per ations and B usiness Env ironment The year 2018 was a successful one for MorphoSys. Our goal is to discover, develop and commercialize outstanding, innovative therapies for critically ill patients. The focus of our business activities is on cancer. Working toward this goal, we made good progress in advancing product candidates at various stages of development during the year under review. In 2018, we announced positive data from two ongoing clinical studies on MOR208, our antibody for the treatment of blood cancer. We have established a wholly-owned subsidi- ary to build a strong U.S. presence to prepare for the planned commercializa- tion of MOR208 pending FDA approval. Furthermore, we entered into or expanded several important partnerships. We and our partner Galapagos entered into a worldwide, exclusive agreement with Novartis Pharma AG covering the development and commercialization of our joint program MOR106. This collaboration will enable us to accelerate and broaden the development of MOR106 beyond the current focus on atopic dermatitis and to fully exploit the potential of this drug candidate. Building on our existing collaboration with I-Mab Biopharma for MOR202 in Greater China, we entered into an exclusive strategic collaboration and regional licensing agreement for MOR210, a preclinical-stage antibody directed against C5aR, which has potential to be developed as an immuno-oncology agent. We were also pleased to report successes of our partners. Tremfya®, devel- oped by our partner Janssen and the first approved and marketed therapeutic antibody based on MorphoSys’s proprietary technology, was granted market- ing authorization in several countries during 2018, including Japan. Janssen continued to explore the use of Tremfya® in additional indications and re- ported positive long-term data in plaque psoriasis. Royalty payments showed strong year-on-year growth in 2018 which we reinvested in the development of our proprietary drug programs and in building a commercial organization. We aim to become a fully integrated biopharmaceutical company, developing and commercializing our own drugs, and during 2018 we were able to take important steps towards achieving that goal. O per ations and B usiness Env ironment G roup Management Repor t 25 Operations and Business Environment Strategy and Group Management S T RAT EGY AND OBJEC T IVES MorphoSys intends to discover, develop and commercialize innovative therapies for patients suffering from serious dis- eases, with a focus on oncology. Having successfully transi- tioned from a technology provider to a drug development orga- nization over the past years, we now, as the next step of our corporate development path, aim to transform into an inte- grated commercial biopharmaceutical company. Based on our leading expertise in antibody, protein and peptide technolo- gies, we have created, together with our partners, more than 100 therapeutic product candidates, of which 29 are currently in clinical development. Our main value drivers are our propri- etary drug candidates, led by our investigational antibody* MOR208, which is being developed for the treatment of blood cancers. Guselkumab (Tremfya®), marketed by Janssen, is the first commercial product based on MorphoSys’s proprietary technology and is approved in the United States, Canada, Euro- pean Union, Japan and a number of other countries worldwide. This antibody, like the majority of our development programs, is the result of a partnership with a pharmaceutical company. MorphoSys intends to use the revenues generated from these partnerships to advance its proprietary development portfolio which currently comprises 12 programs, one of which is in piv- otal development. The Proprietary Development segment focuses on the develop- ment of therapeutic agents based on our proprietary technology platforms, candidates in-licensed from other companies and programs co-developed with partners. During clinical develop- ment, we determine whether and at which point to pursue a partnership for later development and commercialization. The drug candidate can then be either completely out-licensed or developed further in cooperation with a pharmaceutical or bio- technology company (co-development). Alternatively, individ- ual projects may be developed on a proprietary basis until they reach the market, with MorphoSys commercializing a product in selected regions. In the Partnered Discovery segment, MorphoSys generates an- tibody candidates for partners in the pharmaceutical and bio- technology industries. We receive contractual payments, 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 our long-term business model and help fund our propri- etary development activities. Both segments are almost exclusively based on MorphoSys’s innovative technologies, which include HuCAL*, our antibody library* which is the basis for more than 20 product candidates currently in clinical development, and the next-generation anti- body platform Ylanthia*. In addition, over recent years we have established two types of stabilized peptides: our lanthipeptide platform, which we gained access to with the acquisition of Lanthio Pharma B.V. in May 2015, and our HTH* peptide plat- form, which we developed ourselves. We continue to apply our resources and expertise to expand and deepen our technolo- gies. In addition, we added the compounds MOR208 and MOR107 to our portfolio which have been in-licensed and acquired, respectively. *S E E G L O S S A R Y – page 188 Our goal is to maximize the portfolio’s value by investing in the development and, if appropriate, the commercialization of our proprietary drug candidates while maintaining financial disci- pline and strict cost control. GROUP MANAGEMEN T AND PERF ORMANCE INDIC AT ORS MorphoSys pays equal attention to financial and non-financial 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 prog- ress and act promptly should a problem occur. FINANCIAL STATEMENTSG roup Management Repor t 26 O per ations and B usiness Env ironment FINANCIAL PERFORMANCE INDICATORS Our financial performance indicators are described in detail in the section entitled “Operating and Financial Review and Pros- pects.” Earnings before interest and taxes (EBIT – defined as earnings before finance income, finance expenses, impairment losses on financial assets and income taxes), revenues, operat- ing expenses, segment results and liquidity (liquidity is pre- sented in the following balance sheet items: as of December 31, 2018 “cash and cash equivalents”, “financial assets at fair value, with changes recognized in profit or loss” as well as “financial assets at amortized cost”; as of December 31, 2017 “cash and cash equivalents”, “available-for-sale financial as- sets” as well as “financial assets classified as loans and re- ceivables”) are the key financial indicators we use to measure our operating performance. Segment indicators are reviewed monthly, and the budget for the current financial 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 financial targets and make comparisons to previous periods. MorphoSys’s business performance is influenced by factors such as royalty, milestone and license payments, research and development expenses, other operating cash flows, existing li- quidity resources, expected cash inflows and working capital. These indicators are also routinely analyzed and evaluated with special attention given to the Statement of profit or loss, existing and future liquidity and available investment opportu- nities. The net present value of investments is calculated using discounted cash flow models*. T A B L E 0 1 Development of Financial Performance Indicators1 in million € MORPHOSYS G ROUP Revenues Operating expenses EBIT2 Liquidity3 PROPRIE TARY DE VELOPMENT Segment revenues Segment EBIT PARTNERED DISC OVERY Segment revenues Segment EBIT 2018 2017 2016 2015 2014 76.4 (136.5) (59.1) 454.7 53.6 (53.3) 22.8 13.3 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 1 Differences may occur due to rounding. 2 Contains unallocated expenses (see also Item 3.3 of the Notes): 2018: € 19.2 million, 2017: € 16.5 million, 2016: € 13.4 million, 2015: € 13.9 million, 2014: € 13.4 million). 3 Liquidity presented in the following balance sheet items: as of December 31, 2018 “cash and cash equivalents”, “financial assets at fair value, with changes recognized in profit or loss” as well as “other financial assets at amortized cost”; as of December 31, 2017, 2016, 2015, 2014 “cash and cash equivalents”, “available-for-sale financial assets and bonds” as well as “financial assets classified as loans and receivables”. NON - FINANCIAL PERFORMANCE INDICATORS 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 (115 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 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). O per ations and B usiness Env ironment G roup Management Repor t 27 The non-financial performance indicators described in the sec- tion “Sustainable Business Development” (page 71) are also used to manage the MorphoSys Group successfully.  For reporting purposes, MorphoSys uses the Sustainable Devel- opment Key Performance Indicators (SD KPIs*) recommended by the SD KPI standard. These indicators are used as benchmarks for the commercialization rate (SD KPI 2) and include the suc- cess of proprietary research and development (SD KPI 1) and partnered programs. In the past five years, there have been no product recalls, fines or settlements as the result of product safety or product liability disputes (SD KPI 3). *S E E G L O S S A R Y – page 188 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 11 Programs in Phase 22 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 33 Programs Launched3 TOTAL 2018 2017 2016 2015 2014 6 1 1 3 1 12 55 24 11 11 2 1 7 1 2 2 1 13 54 24 11 10 2 1 8 1 2 3 0 14 54 22 10 12 2 0 103 101 100 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 1 Including MOR107, for which a phase 1 study in healthy volunteers was completed; the compound is currently in preclinical investigation. 2 Thereof two fully out-licensed programs: MOR103/GSK3196165, out-licensed to GSK; MOR106, out-licensed to Novartis; MOR202 is out-licensed to I-Mab Biopharma for the development in China, Hong Kong, Macao and Taiwan. 3 We still consider Tremfya® as 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 financial 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 in- tervene at an early stage if there are any negative develop- ments and provide it with information about expected interim goals and related milestone 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. FINANCIAL STATEMENTS G roup Management Repor t 28 O per ations and B usiness Env ironment 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 sub- sidiaries, develops and commercializes antibodies* and pep- tides for therapeutic applications. The activities of the Group’s two business segments are based on its proprietary technolo- gies. The Proprietary Development segment combines all of the Company’s proprietary research and development of thera- peutic compounds. MorphoSys, alone or with partners, devel- ops its proprietary and in-licensed compounds with the option to bring them into partnerships, out-license them or market them in selected regions and therapeutic settings. The develop- ment of proprietary technologies is also conducted in this seg- ment. The second 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 col- laborations are reflected in this segment. MorphoSys AG is located at its registered office in Planegg near Munich. MorphoSys AG’s subsidiary Lanthio Pharma B.V. and its subsidiary LanthioPep B.V. are located in Groningen, the Netherlands. In order to provide the organizational framework for a potential future commercialization of our lead compound MOR208 in the United States, MorphoSys US Inc. was founded in July 2018. The wholly owned subsidiary of MorphoSys AG was established in Princeton, New Jersey, USA. In the future, it is planned to locate the subsidiary in Boston, Massachusetts, USA. MorphoSys AG’s central corporate functions such as ac- counting, controlling, human resources, legal, patent, purchas- ing, corporate communications and investor relations, as well as the two segments Proprietary Development and Partnered Discovery, are all located in Planegg. The subsidiaries MorphoSys US Inc., Lanthio Pharma B.V. and its subsidiary LanthioPep B.V., are largely autonomous and independently managed. These sub- sidiaries generally have their own management and adminis- tration, as well as human resources, accounting and business development departments. The subsidiaries Lanthio Pharma B.V. and LanthioPep B.V. have their own research and develop- ment laboratories as well. In June 2018, the subsidiary Sloning BioTechnology GmbH, located in Planegg, Germany, was merged into MorphoSys AG. 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 as well as on the Nasdaq Global Market, is the parent company of the MorphoSys Group. In accordance with the German Stock Cor- poration Act, the Company has a dual management structure with the Management Board as the governing body with its four members appointed and overseen by the Supervisory Board. The Supervisory Board is elected by the Annual General Meeting and currently consists of six members. Detailed infor- mation concerning the Group’s management and control and its corporate governance principles can be found in the Corpo- rate Governance Report. The Senior Management Group sup- ports the Management Board of the Company. At the end of the reporting year, the Senior Management Group consisted of 24 managers from various departments. Business Activities DRUG DEVEL OPMEN T MorphoSys develops drugs using its own research and develop- ment (R&D) and by collaborating with partners from the phar- maceutical and biotechnology industry or with academic insti- tutions. Our core business activity is developing new treatments for patients suffering from serious diseases. We have a very broad pipeline, which comprised a total of 115 therapeutic pro- grams at the end of 2018, 29 of which are in clinical develop- ment. The first therapeutic agent based on MorphoSys’s propri- etary technology, which was developed by one of our licensees, is approved in the United States, Canada, European Union, Japan and a number of other countries worldwide. Figure 1 shows the revenue development of the MorphoSys Group divided into our two business segments Proprietary Development and Part- nered Discovery, which are described in more detail in the Strategy and Group Management and Organizational Structure sections above. Our Proprietary Development programs are critical to our goal of becoming a fully integrated biopharmaceutical company that develops and commercializes its own drugs. We are focusing our development activities on cancer treatments, but also have selected programs in inflammatory diseases. The ability of monoclonal antibodies* to bind to specific anti- gens* on tumors or activate the immune system against cancer to unleash a therapeutic effect in patients has led to their dom- inant role in targeted cancer therapies. According to a report from the IQVIA Institute, global spending on cancer medicines rose to approximately US$  133  billion in 2017. Overall, the global market for oncology medicines is predicted to reach as much as US$ 200 billion by 2022. Chronic inflammatory and O per ations and B usiness Env ironment G roup Management Repor t 29 01 Revenues of the MorphoSys Group by Segment (in million €)1 1 Diff erences due to rounding. 64.0 106.2 49.7 66.8 76.4 49.0 46.3 49.1 49.2 53.6 59.9 15.0 0.6 17.6 22.8 2014 2015 2016 2017 2018 partnered disc ov ery pro prie tary de v elo pment autoimmune diseases* affect millions of patients worldwide and impose an enormous social and economic burden. The Quin- tilesIMS 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. MorphoSys’s most advanced Proprietary Development programs are highlighted below in the Research and Development and Business Performance section on page 31. Our clinical stage Partnered Discovery programs are developed entirely under the control of our partners. They comprise not only programs in our core area of oncology, but also in indica- tions where we have not established proprietary expertise. The most advanced Partnered Discovery programs are highlighted below in the Research and Development and Business Perfor- mance section on page 31. technology. Ylanthia is based on an innovative concept for gen- erating highly specific and fully human antibodies. We expect Ylanthia to set a new standard for the pharmaceutical indus- try’s development of therapeutic antibodies in this decade and beyond. Slonomics* is the Company’s patented, fully automated technology for gene synthesis and modification, which is used to generate highly diverse gene libraries in a controlled pro- cess to be used, for example, for the improvement of antibody properties. The lanthipeptide technology developed by Lanthio Pharma B.V., a wholly owned MorphoSys subsidiary, is a valu- able addition to our existing library of antibodies and opens up new possibilities for discovering potential drugs based on sta- bilized peptides. The newest addition to the technology port- folio is our proprietary Helix-Turn-Helix (HTH) peptide technol- ogy. In contrast to the lanthipeptides* that are stabilized by a specific amino acid modification, the HTH peptides are endowed with an inherent stability by their structure. T ECHNOL OGIES MorphoSys has developed a number of technologies that pro- vide direct access to human antibodies for treating diseases, which we utilize for both our Proprietary Development and Partnered Discovery programs. One of the most widely known MorphoSys technologies is HuCAL, which is a collection of bil- lions of fully human antibodies and a system for their optimiza- tion. Another fundamental platform is Ylanthia, a large anti- body library representing the next generation of antibody COMMERC IAL In July 2018, we established a wholly owned subsidiary, MorphoSys US Inc. The subsidiary focuses on building a strong U.S. presence to prepare for the planned commercialization of MOR208 subject to FDA* approval. *S E E G L O S S A R Y – page 188 ›› S E E F I G U R E 01 – Revenues of the MoprhoSys Group by Segment (page 29) ›› S E E F I G U R E 0 2 – MorphoSys’s Product Pipeline (page 30) ›› S E E F I G U R E 0 3 – Active Clinical Studies with MorphoSys Antibodies (page 30) FINANCIAL STATEMENTSO per ations and B usiness Env ironment 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® (guselkumab) / Janssen/J&J Psoriasis Gantenerumab / Roche Alzheimer’s disease MOR208 / not partnered Hematological malignancies Utomilumab (PF-05082566) / Pfi zer  Cancer Xentuzumab (BI-836845) / BI   Solid tumors BAY2287411 / Bayer  Cancer Anetumab ravtansine (BAY94-9343) / Bayer  Solid tumors Elgemtumab ( L JM716) / Novartis  Cancer BAY109388 4 / Bayer  Hemophilia BHQ880 / Novartis Multiple myeloma Bimagrumab (BYM338) / Novartis Metabolic diseases CNTO6785 / Janssen/J&J  Infl ammation Ianalumab (VAY736) / Novartis  Infl ammation MOR107 3 ( L P2-3) / nicht in Partnerschaft  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 MOR103 ( GSK3196165) / GlaxoSmithKline  Infl ammation NOV-11 / Novartis  Blood disorders MOR106 / Novartis/Galapagos  Infl ammation MOR202 / I-Mab Biopharma2   Multiple myeloma Nov-12 (MAA868) / Novartis  Prevention of thrombosis NOV-13 (HKT288) / Novartis  Cancer NOV-14 / Novartis   Asthma PRV-300 (CNTO3157) / ProventionBio  Infl ammation Setrusumab (BPS804) / Mereo/Novartis Brittle bone syndrome Vantictumab (OMP-18R5) / OncoMed   Solid tumors Tesidolumab (LFG316) / Novartis  Eye diseases 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 P H A S E 1 2 3 24 27 8 29 19 12 29 25 10 27 31 14 26 32 15 G roup Management Repor t 30 02 MorphoSys’s Product Pipeline (December 31, 2018) 1 Market 2 For development in China, Hongkong, Taiwan, Macao 3 A phase 1 study in healthy volunteers was completed. MOR107 is currently in preclinical investigation with a focus on oncology indications. 03 Active Clinical Studies* with MorphoSys Anti- bodies (December 31) * S E E G L O S S A R Y : page 188 2014 2015 2016 2017 2018 O per ations and B usiness Env ironment G roup Management Repor t 31 INF LUENC ING FAC T ORS A political goal of many countries is to provide cost-effective medical care for its citizens as demographic change drives the need for new forms of therapy. Cost-cutting could slow the in- dustry’s development. As part of their austerity measures, gov- ernments in Europe, the United States and Asia have tightened their healthcare restrictions and are closely monitoring drug pricing and reimbursement. The regulatory approval processes in the U.S., Europe and else- where are lengthy, time-consuming and unpredictable. It typi- cally takes many years from the start of human clinical testing to obtain marketing approval of a drug, which depends upon numerous factors, including the substantial discretion of the regulatory authorities. Approval laws, regulations, policies or the type and amount of information necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Generic competition, which is already common in the field 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*, are expected to remain high. Nevertheless, many drug manufacturers, particularly those from Europe and Asia, are now entering this market and placing more competitive pressure on established biotechnology companies. In the U.S., 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. According to the Allied Market Research information service, the global market for biosimilars will reach US$ 27 bil- lion in 2020. Research and Development and Business Performance 2018 BUSINESS PERF ORMANCE MorphoSys’s business is strongly focused on advancing our therapeutic programs in research and development to benefit patients suffering from serious diseases and to increase MorphoSys’s value. The clinical development of proprietary programs with the goal of advancing them toward regulatory approval and commercialization is our focal point. We strive to gain access to novel disease-specific target* molecules, product candidates and innovative technology platforms to advance our Proprietary Development portfolio. MorphoSys also continues to participate in the advancements of our partners’ therapeutic programs through success-based milestone payments and roy- alties. The first antibody based on MorphoSys’s technology has been on the market in the U.S. since mid-2017. The key measures of success of MorphoSys’s research and de- velopment include: • the initiation of projects and the progress of individual devel- opment programs, • collaborations and partnerships with other companies to broaden our technology base and pipeline of compounds and to commercialize our therapeutic programs, • clinical and preclinical* research results, • regulatory guidance of health authorities to pursue approval of individual therapeutic programs, • robust patent protection to secure MorphoSys’s market position. PROPRIE TARY DEVEL OPMEN T On December 31, 2018, the number of Proprietary Development programs totaled 12, three of which were out-licensed, either fully or for certain regions only. Five of these programs are in clinical development, one is in preclinical development, and six are in the discovery stage. Our Proprietary Development activ- ities are currently focused on the five clinical candidates: • MOR208 – an antibody for the treatment of hematological (blood) cancers for which MorphoSys holds exclusive world- wide commercial rights • MOR202 – an antibody for the treatment of multiple myeloma* and other cancers as well as certain autoimmune diseases for which we have signed a regional licensing agreement with I-Mab Biopharma for development and commercialization in China, Hong Kong, Taiwan and Macao • MOR106 – an antibody for the treatment of inflammatory dis- eases for which MorphoSys and Galapagos entered into an exclusive license agreement with Novartis in July 2018 • MOR103/GSK3196165 – an antibody that we have fully out- licensed to GlaxoSmithKline (GSK) and which is currently in clinical development at GSK for the treatment of rheumatoid arthritis* • MOR107 – a lanthipeptide developed by our subsidiary Lanthio Pharma which is currently in preclinical testing in oncology settings. *S E E G L O S S A R Y – page 188 In addition to the programs listed above, we are pursuing sev- eral proprietary programs in earlier-stage research and devel- opment, including MOR210, a preclinical antibody that was licensed to I-Mab in November 2018 for China and certain other territories in Asia. MOR208 OV ERV I E W MOR208 is an investigational monoclonal antibody* directed against the target molecule CD19*. CD19 is broadly expressed on the surface of B cells*, a type of white blood cell. CD19 en- hances B cell receptor signaling, an important factor in B cell survival, making CD19 a potential target for the treatment of B  cell malignancies, including DLBCL* (diffuse large B cell FINANCIAL STATEMENTSG roup Management Repor t 32 O per ations and B usiness Env ironment lymphoma) and CLL* (chronic lymphocytic leukemia), indications for which MOR208 is being developed. The market research firm Global Data expects the therapeutic market for non- Hodgkin’s lymphoma (NHL*), a type of B cell malignancy that includes DLBCL and CLL, to reach approximately US$ 5.5 bil- lion in 2024. L-MIND is a phase  2 open-label, single-arm trial evaluating MOR208 plus lenalidomide (LEN) in patients with r/r DLBCL who are ineligible for HDCT and ASCT. The study enrolled pa- tients after up to three prior lines of therapy, with at least one prior therapy including an anti-CD20* targeting therapy, such as rituximab (Rituxan®). Collectively, lymphomas represent approximately 4 % of all can- cers diagnosed in the United States. NHL is the most prevalent of all lymphoproliferative diseases, with the National Cancer Institute estimating that 74,680 new cases occurred in the United States in 2018. Worldwide, 385,741 new cases per year were estimated in 2012. DLBCL is the most frequent type of malignant lymphoma worldwide and accounts for approxi- mately one-third of all NHLs globally. First-line treatment of B  cell malignancies, including DLBCL, most commonly con- sists of a combination chemotherapy regimen plus the antibody rituximab (Rituxan®), also referred to commonly as R-CHOP* (R, rituximab; CHOP, cyclophosphamide, doxorubicin, vincris- tine and the corticosteroid prednisone). Yet, despite the thera- peutic success of first-line R-CHOP in DLBCL, up to 40 % of pa- tients become refractory to or relapse after initial treatment with fast progression of disease. We are developing MOR208 pursuant to a collaboration and license agreement that we entered into in June 2010 with Xencor, Inc. (Xencor), under which Xencor granted us an exclu- sive worldwide license to MOR208 for all indications. Pursuant to this agreement, except for the phase 1 clinical trial of MOR208 in CLL, which was completed in January 2013, we are responsi- ble for all development and commercialization activities in con- nection with MOR208. O N G O I N G C L I N I CA L T RI A LS A N D C L I N I CA L DATA PRESEN T ED There are currently three clinical trials* ongoing with MOR208 – L-MIND* (phase 2 trial in relapsed/refractory DLBCL (r/r* DLBCL)), B-MIND* (phase 2/3 trial in r/r DLBCL) and COSMOS* (phase 2 trial in r/r CLL and small lymphocytic lymphoma (SLL*). The main focus of the current MOR208 development program is on r/r DLBCL. Two of the three ongoing MOR208 clinical 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 (HDCT*) and autologous stem cell transplantation (ASCT*). The available therapy options for this group of patients are currently very limited, thus we see a high unmet medical need for new treat- ment alternatives. Important new data from two of our three current studies with MOR208 were presented during 2018. Updated interim data from the study were presented in Decem- ber 2018 at the American Society of Hematology (ASH) Annual Meeting . These interim data (cut-off date June 5, 2018) had a median observation time of 12  months, and efficacy results were based on assessment by the investigators for all 81 pa- tients enrolled in the study. Patients enrolled had a median age of 72  years and had received a median of two prior lines of treatment. The data showed a response in 47 out of 81 patients (overall response rate, or ORR*, 58 %) with complete responses (CR*) in 27 (33 %) and partial responses (PR*) in 20 (25 %) patients. The median progression-free survival (mPFS) was 16.2 months (95 % confidence interval (CI*) 6.3 months – not reached). Re- sponses were durable with a median duration of response (DoR*) not reached (95 % CI: NR – NR), and 70 % of responding patients were without progression at 12 months (12-month DoR rate: 70 %, Kaplan-Meier estimate). A significant proportion of patients (37/81; 46 %) were still on study treatment at data cut- off, with 19 treated for over 12 months. Median overall survival (OS*) was not reached (95 % CI: 18.6 months – NR); the 12-month OS rate was 73 % (95 % CI: 63 % – 85 %). Response rates and median PFS* similar to those seen overall were observed in most patient subgroups of interest, including by Ann Arbor stage, or those patients who were primary refrac- tory, refractory to last prior therapy, or refractory to rituximab (Rituxan®). No unexpected toxicities were observed for the treatment com- bination and no infusion-related reactions (IRRs*) were reported for MOR208. The most frequent treatment-emergent adverse events (TEAEs) with a toxicity* grading of 3 or higher were neutropenia in 35 (43 %), thrombocytopenia in 14 (17 %), and anemia in 7 (9 %) patients. Treatment-related serious adverse events (SAEs*) occurred in 16 (20 %) patients, the majority of which were infections or neutropenic fever. Forty-one (51 %) pa- tients required dose reduction of LEN; 58 patients (72 %) could stay on a daily LEN dose of 20 mg or higher. We are continuing our discussions with the U.S. Food and Drug Administration (FDA) to evaluate possible paths to market, in- cluding the possibility of an expedited regulatory submission and potential approval based primarily on the L-MIND study. In October 2017, MOR208, in combination with LEN, was granted O per ations and B usiness Env ironment G roup Management Repor t 33 U.S. FDA breakthrough therapy designation (BTD*) for the treat- ment of r/r DLBCL patients ineligible for HDCT or ASCT based on preliminary data from the L-MIND study. BTD is intended to expedite development and review of drug candidates, alone or in combination with other drugs. It is granted if preliminary clinical evidence indicates that the drug candidate may provide substantial improvement over existing therapies in the treat- ment of a serious or life-threatening disease. A key goal of the Company is to work towards the submission of a regulatory filing for MOR208 in r/r DLBCL to the FDA for the U.S. and possibly to EMA* for submission of a regulatory filing in Europe, primarily based on data from the L-MIND study. In parallel, the process is underway to conduct and complete data collection for the CMC* (chemistry, manufacturing and con- trols) package required for the regulatory filing and potential market supply thereafter. The purpose of the CMC package is to prove a safe and stable commercial-scale production and man- ufacturing process of the drug. B-MIND is a phase 2/3 randomized, multi-center trial evalu- ating MOR208 plus bendamustine compared to rituximab (Rituxan®) plus bendamustine in patients with r/r DLBCL who are ineligible for HDCT and ASCT. This ongoing trial is sched- uled to enroll patients in centers across Europe, the Asia/Pacific region and the United States. The study is currently in its phase 3 part. In 2018, recruitment and treatment of patients continued as planned. COSMOS is a phase 2, two-cohort open-label, multi-center study evaluating the preliminary safety and efficacy of MOR208 combined with idelalisib (cohort A) or venetoclax (cohort B) in patients with r/r CLL or SLL previously treated with Bruton’s tyrosine kinase inhibitor (BTKi) ibrutinib. Preliminary safety and efficacy data on all 11 patients enrolled in cohort A (cut-off date: January 29, 2018) were presented at the European Hematological Association (EHA) Annual Con- gress in June 2018. Patients enrolled had received a median of five prior treatment lines (range: 2 – 9). Nine out of the 11 pa- tients enrolled (82 %) had discontinued prior ibrutinib treatment due to progressive disease and two patients (18 %) due to toxicity. The most common TEAEs of grade 3 or higher were hemato- logic, with neutropenia observed for four patients (36 %) and anemia for three patients (27 %) being the most common re- ported events. Eleven treatment-emergent SAEs were reported in five patients (45 %), none of them being fatal. All five patients recovered. Six treatment-related SAEs were reported in three patients (27 %). All except one were suspected to be related to idelalisib; the other was assessed as being attributable to both study drugs. According to the preliminary efficacy analysis conducted by the investigators, the ORR was 82 %, including one CR (9 %) con- firmed by bone marrow biopsy and eight PRs (73 %). In addition, two patients (18 %) showed stable disease (SD). The median ob- servation time at cut-off was 4.2 months. At the time of data cut-off, six patients were still on treatment. One patient with a very good partial response (VGPR*) according to response crite- ria was taken off the study to receive stem cell transplantation. Two previously responding patients had to discontinue the study due to progressive disease. Two patients (one PR, one SD) discontinued due to adverse events. At the ASH Annual Meeting in December 2018, preliminary safety and efficacy data on all 13 patients enrolled into cohort B (cut-off date: October 15, 2018) were presented. Patients enrolled had received a median of three prior treatment lines (range: 1 – 4). Nine out of the 13 patients enrolled (69 %) had discontin- ued prior ibrutinib treatment due to progressive disease, three patients (23 %) due to toxicity and for one patient the reason was unknown (8 %). The most common hematological TEAE was neutropenia, ob- served for six patients (46 %). Twelve treatment-emergent SAEs were reported in nine patients (69 %), none of them fatal, and all were resolved. According to the preliminary efficacy analysis conducted by the investigators, ten out of 13 patients enrolled showed an ob- jective response (ORR 77 %), including three CRs (23 %) con- firmed by bone marrow biopsy and seven PRs (54 %). Three pa- tients discontinued study participation in the first cycle without undergoing a response assessment, two patients thereof due to IRRs and one patient due to withdrawal of informed consent. No patients had progressive disease. Five patients showed mini- mal residual disease (MRD*) negativity, which means that no tumor cells were detectable in the peripheral blood. The median observation time was 8.3 months. At the time of data cut-off, all ten patients who had initially shown a response continued treatment, and one CR confirmation was pending from bone marrow for one patient. MOR202 OV ERV I E W MOR202 is a recombinant human IgG1 HuCAL monoclonal an- tibody directed against the target molecule CD38*. CD38 is a highly expressed and clinically validated target in multiple myeloma (MM). Scientific research suggests that an anti-CD38 antibody also may have therapeutic activity in solid tumors or autoimmune and other diseases driven by autoantibodies, such as light chain amyloidosis or systemic lupus erythematosus. *S E E G L O S S A R Y – page 188 FINANCIAL STATEMENTSG roup Management Repor t 34 O per ations and B usiness Env ironment MM is a hematological (blood) cancer that develops in the ma- ture plasma cells in the bone marrow. MM is the second most common blood cancer worldwide. Development of MOR202 in MM is currently focused on China, where the patient number has gradually increased in recent years due to an aging popu- lation. Yet there are no effective biologics approved in China for this indication, and current therapies have been associated with serious side effects and limited treatment efficacy. We are currently conducting a phase 1/2a trial in MM. During 2018, we announced our decision not to continue development of MOR202 in MM beyond completion of the currently ongoing trial. This is in line with previous announcements that we would not continue to develop MOR202 in MM without having a suitable partner. However, we continue to support our partner I-Mab in the development of MOR202 with the aim to gain ap- proval in MM for the greater Chinese market as planned. Also during 2018, we made the decision not to start clinical development of MOR202 in NSCLC as we had originally planned. This was due to Genmab and Janssen discontinuing a clinical study of the anti-CD38 antibody daratumumab in com- bination with a checkpoint inhibitor for the treatment of NSCLC based on an analysis of interim clinical data and serious safety findings. We are continuing to evaluate the development of MOR202 in other indications outside of cancer, including certain auto- immune diseases. REG I O N A L AG REEM EN T W I T H I - M A B B I O PH A RM A We have an exclusive regional licensing agreement for MOR202 with I-Mab Biopharma. Under the terms of the agreement signed in November 2017, I-Mab has the exclusive rights to de- velop and commercialize MOR202 in China, Taiwan, Hong Kong and Macao. At the signing, MorphoSys received an immediate upfront payment of US$ 20 million. We are also entitled to re- ceive additional success-based clinical and commercial mile- stone 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. In August 2018, we announced that I-Mab had submitted an investigational new drug (IND*) application to the Chinese authorities for MOR202 (called TJ202 by I-Mab) for the treatment of MM. C L I N I CA L DATA PRESEN T ED Data from our phase 1/2a study in MM were presented in De- cember 2018 at the ASH Annual Meeting. The data were based on the most recent data cut-off after the primary analysis of the study in r/r MM. The dose escalation trial comprises three arms: MOR202, MOR202 in combination with the immunomod- ulatory drug (IMiD) lenalidomide (LEN), and MOR202 in combi- nation with the IMiD pomalidomide (POM), in each case with low-dose dexamethasone (DEX). In total, 56 patients were evaluable for safety and efficacy anal- ysis in the clinically relevant dose cohorts of MOR202 (4 mg/ kg, 8 mg/kg, 16 mg/kg) by the time of the data cut-off on Octo- ber 16, 2018. At data cut-off, 10 patients remained in the study. Of the 56 evaluable patients, 18 received MOR202 plus DEX, 21  received the combination of MOR202 and POM/DEX, and 17 received MOR202 plus LEN/DEX. MOR202 was given as a two-hour infusion up to the highest dose of 16 mg/kg. IRRs occurred in 7 % of patients in the clini- cally relevant dose cohorts of MOR202 and were limited to grades 1 or 2. Further, the infusion time could be shortened to 30 minutes in the majority of patients still on study treatment at the data cut-off date. The most frequent adverse events of grade 3 or higher were neutropenia, lymphopenia and leukopenia in 52 %, 52 % and 39 % of patients, respectively. No unexpected safety signals were observed. Patients treated with MOR202 in combination with LEN/DEX had a median of two prior treatment lines, 59 % being refractory to at least one prior therapy. Median PFS was not yet reached. With five of the 17 patients in this cohort still on study at data cut-off, the median time on study was 11.8 months. An objec- tive response was observed in 11 out of 17 patients (65 %), with two CRs, two VGPRs and seven PRs. Patients receiving MOR202 with POM/DEX, had a median of three prior treatment lines, and all were refractory to prior LEN therapy. Median PFS was 15.9 months. With five out of 21 pa- tients in this cohort still on study at data cut-off, the median time on study was 13.4 months. An objective response was ob- served in ten out of 21 patients (48 %), with two patients achiev- ing a CR, six patients with a VGPR and two PRs. Patients treated with MOR202 plus DEX had a median of three prior treatment regimens, with 67 % being refractory to any prior therapy. Median PFS in this cohort was 8.4 months. All patients had discontinued the study before data cut-off; fol- low-up for this cohort is therefore completed. An objective re- sponse was observed in five out of 18 patients (28 %); median time on study was 3.8 months. O per ations and B usiness Env ironment G roup Management Repor t 35 MOR106 MOR106 is an investigational fully human IgG1 monoclonal an- tibody derived from our Ylanthia library and designed to selec- tively target IL-17C. MOR106 came from the strategic discovery and co-development alliance between Galapagos and MorphoSys, in which both companies contributed their core technologies and expertise. It is the first publicly disclosed monoclonal anti- body targeting IL-17C in clinical development worldwide. In preclinical studies, MOR106 has been shown to inhibit the binding of IL-17C to its receptor, thus abolishing its biological activity. Results from rodent inflammatory skin models of atopic dermatitis (AD*) and psoriasis* support clinical develop- ment of MOR106 for the treatment of inflammatory diseases. In July 2018, we announced with Galapagos that we had entered into a worldwide exclusive development and commercialization agreement with Novartis Pharma AG (Novartis) for MOR106. AD, the most severe and common type of eczema, is a chronic relapsing inflammatory skin disease that causes severe itch, dry skin and rashes, predominantly on the face, inner side of the elbows and knees, and on hands and feet. Scratching of the affected skin leads to a vicious cycle causing redness, swelling, cracking, scaling of the skin and an increased risk of bacterial infections. Lichenification, thickening of the skin, is character- istic in older children and adults. The National Eczema Associ- ation estimates that AD affects over 30 million Americans, and up to 25 % of children and 2-3 % of adults. As many as 50 % of AD patients are diagnosed in the first year of life, and 85 % of pa- tients have a disease onset before age five. Symptoms commonly fade during childhood; however, up to 30 % of the patients will suffer from AD for life. A smaller percentage first develops symptoms as adults. WO RL DW I D E E XC LUS I V E D E V ELO PM EN T A N D C O M M ERC I A L IZ AT I O N AG REEM EN T W I T H N OVA RT IS Our agreement with Novartis was announced in July 2018, and received U.S. anti-trust clearance in September 2018. Under the terms of the agreement, the parties (Galapagos, MorphoSys, Novartis) will cooperate to execute and broaden the existing development plan for MOR106 in AD. Novartis holds exclusive rights for commercialization of any products resulting from the agreement. All current and future research, development, man- ufacturing and commercialization costs for MOR106 will be covered by Novartis. This includes the ongoing phase 2 IGUANA trial in AD patients, as well as the phase 1 bridging study to evaluate the safety and efficacy of a subcutaneous formulation of MOR106 in healthy volunteers and AD patients. MorphoSys and Galapagos will conduct additional trials to support develop- ment of MOR106 in AD. Under the terms of the agreement, Novartis will also explore the potential of MOR106 in indica- tions beyond AD. In addition to the funding of the current and future MOR106 program by Novartis, MorphoSys and Galapagos jointly received an upfront payment of € 95  million. Pending achievement of certain developmental, regulatory, commercial and sales-based milestones, MorphoSys and Galapagos are jointly eligible to re- ceive significant milestone payments, potentially amounting to up to approximately € 850 million, in addition to tiered royal- ties on net commercial sales in the low-teens to low-twenties percent. Under the terms of their agreement from 2008, Galapa- gos and MorphoSys share all payments equally (50/50). C L I N I CA L DATA PRESEN T ED In February 2018, more detailed clinical results from a phase 1 trial with MOR106 in patients with moderate to severe AD were presented at the American Academy of Dermatology (AAD) con- ference after initial study data were reported in September 2017. MOR106 showed first signs of activity as well as durable responses and was generally well tolerated in patients with AD. This randomized, double-blind, placebo-controlled phase 1 trial evaluated single ascending doses (SAD) of MOR106 in healthy volunteers and multiple ascending doses (MAD) in patients with moderate-to-severe AD. In the MAD part, 25 patients re- ceived four infusions once-weekly of either MOR106 (at the doses of 1, 3 and 10 mg/kg body weight) or placebo in a 3:1 ra- tio. Patients were followed for 10 weeks after the end of the treatment period. In the MAD part of the study, all adverse drug reactions observed were mild to moderate and transient in nature. No SAEs and no IRRs were recorded. MOR106 exhibited a favorable pharmacokinetic (PK) profile with dose-dependent exposure. At the highest dose level of MOR106 (10 mg/kg body weight), in 83 % of patients (5/6) an improvement of at least 50 % in signs and extent of AD, as measured by the Eczema Area and Sever- ity Index (EASI*)-50, was recorded at week 4. The onset of activ- ity occurred within two to four weeks, depending on the dose administered. Pooled data across all dose cohorts showed that patients treated with MOR106 achieved an EASI improvement compared to baseline of 58 %, 62 %, 72 % and 64 % at week 4, 8, 12 and 14, respectively. For patients receiving placebo, the EASI improvement was 32 %, 40 %, 38 % and 50 %, respectively. *S E E G L O S S A R Y – page 188 C L I N I CA L T R I A LS I N I T I AT ED IGUANA phase  2 study in AD: In May 2018, we announced with Galapagos that the first patient had been enrolled in IGUANA, a phase 2 study of MOR106 in patients with AD. The placebo-controlled, double-blind study will evaluate the effi- cacy, safety and PK of MOR106. FINANCIAL STATEMENTSG roup Management Repor t 36 O per ations and B usiness Env ironment At least 180 patients with moderate-to-severe AD are planned to be treated over a 12-week period with one of three different doses of intravenously (iv) administered MOR106 (1, 3 or 10 mg/ kg) or placebo using two different dosing regimens in multiple centers across Europe. Dosing at two- or four-week intervals will be evaluated over the 12-week treatment period, followed by a 16-week observation period. The primary objective will be assessed by the percentage change from baseline in EASI score at week 12. Phase  1 bridging study. In September 2018, we announced with Galapagos the initiation of a phase 1 bridging study test- ing a subcutaneous (sc*) formulation of MOR106. This bridging study is a parallel-design phase 1 clinical trial being conducted in two parts. Part 1 is a single center, randomized, open-label study in healthy volunteers who will be treated with different single-dose levels of MOR106 administered subcutaneously or intravenously. Part 2 is a multiple-center, randomized, placebo- controlled, multiple-dose study in patients with moderate to severe AD who will be treated subcutaneously for 12 weeks. Safety and tolerability, PK and occurrence of anti-drug-anti- bodies after administration of MOR106 will be assessed as endpoints. In addition, the efficacy of MOR106 will be explored in subjects with moderate-to-severe AD. MOR103/GSK3196165 OV ERV I E W MOR103/GSK3196165 is a fully human HuCAL antibody directed against the granulocyte-macrophage colony-stimulating factor (GM-CSF*). Due to its diverse functions in the immune system, GM-CSF can be considered a target for a broad spectrum of anti-inflammatory therapies, such as rheumatoid arthritis* (RA), a chronic inflammatory disorder that affects the lining of joints, causing a painful swelling that can eventually result in bone erosion and joint deformity. 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 poten- tial to be the first marketed anti-GM-CSF antibody in RA. We discovered and advanced MOR103/GSK3196165 into clini- cal development, before out-licensing it to GlaxoSmithKline (GSK) in 2013. GSK is now developing the antibody inde- pendently for RA and bears all of the related costs. MorphoSys participates in the program’s development and commercializa- tion 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. C L I N I CA L DATA PRESEN T ED GSK conducted a phase  2b study in patients with RA and a phase 2a study in patients with inflammatory hand osteoarthri- tis (OA). The corresponding study data were presented at the 2018 American College of Rheumatology (ACR) Annual Meet- ing in October 2018. GSK has announced that it does not intend to pursue further development in hand osteoarthritis. Furthermore, results from the phase 2 dose-ranging study of MOR103/GSK3196165 in patients with moderate-to-severe RA who have an inadequate response to methotrexate (MTX) were presented at the ACR Annual Meeting in October 2018. The primary objective of this double-blind, placebo-controlled, dose-ranging study was to assess the efficacy of MOR103/ GSK3196165 in adult patients with active, moderate-to-severe RA. A total of 222 patients were randomized equally to receive placebo or MOR103/GSK3196165 (37 patients per arm) at doses of 22.5 mg, 45 mg, 90 mg, 135 mg or 180 mg, starting with an induction regimen of five weekly subcutaneous injections fol- lowed by every other week (EOW) injections until week 50. Study results from the 180 mg dose arm of MOR103/GSK3196165 were as follows: Efficacy was shown in the majority of patients, as measured by a Disease Activity Score taking into account the C-reactive pro- tein*, (DAS28(CRP*)) of less than 2.6 at week 24 (the primary endpoint of the study), although this did not reach statistical significance (week 24: 16 % for MOR103/GSK3196165 180 mg vs 3 % for placebo, p = 0.134). For DAS28(CRP) change from baseline, there was a rapid on- set of efficacy, as early as week 1, for all doses of MOR103/ GSK3196165 above 22.5  mg. This improvement continued throughout the weekly dosing phase and was statistically sig- nificant at week 12 (–1.27 difference for MOR103/GSK3196165 180 mg from placebo, 95 % CI: –1.91, –0.63; p<0.001). An improvement in efficacy was maintained through the EOW dosing phase and was statistically significant at week 24 (DAS28(CRP): –1.82 difference for MOR103/GSK3196165 180 mg from placebo, 95 % CI: –2.05, –0.23; p < 0.001). Major secondary endpoints including a number of traditional measures to assess the efficacy of MOR103/GSK3196165 were also improved in line with the DAS28(CRP) reduction. The mag- nitude of improvement in patient-based measures (swollen and tender joint counts, pain and clinical disease activity index (CDAI)) was particularly marked. O per ations and B usiness Env ironment G roup Management Repor t 37 The safety profile of MOR103/GSK3196165 was similar to that reported in previous studies. All doses of MOR103/GSK3196165 were well tolerated, and adverse events (AEs), including SAEs, were reported similarly across treatment groups. The percent- age of patients experiencing any AE or SAE respectively, was 49 % and 0 % for placebo, 51 % and 5 % for 22.5  mg MOR103/ GSK3196165, 65 % and 3 % for 45  mg MOR103/GSK3196165, 59 % and 5 % for 90 mg MOR103/GSK3196165, 51 % and 3 % for 135  mg MOR103/GSK3196165, and 65 % and 0 % for 180  mg MOR103/GSK3196165. There were no treatment-limiting safety findings including serious infections, injection site reactions, or laboratory abnormalities, all of which were closely monitored throughout the study. No pulmonary toxicity, including pulmo- nary alveolar proteinosis, was observed. In another phase 2a mechanistic 12-week study with 180 mg MOR103/GSK3196165 presented at the same meeting, a similar clinical efficacy profile with, in addition, synovitis reduction, was observed in patients with RA. MOR107 Lanthipeptides are a class of modified peptides that have been engineered for improved stability and selectivity. MOR107 is based on the proprietary technology platform of our Dutch sub- sidiary Lanthio Pharma B.V. This compound has demonstrated angiotensin II type 2 (AT2) receptor-dependent activity in pre- clinical in vivo studies and may have the potential to treat a variety of diseases. After we had successfully completed a first- in-human phase 1 study in healthy volunteers in 2017, we con- tinued our preclinical investigations with MOR107 during 2018, focusing on oncology indications. In the fourth quarter of 2018, updated study data led to the need for further studies, and the existing development plan was adjusted accordingly. This re- sulted in the expectation of a delayed market entry and a delay in the occurrence of future cash flows compared to previous assumptions, which led to an impairment. Further details can be found in the Notes (Item 5.7.5). MOR210 OV ERV I E W MOR210 is a human antibody directed against C5aR* derived from our HuCAL technology. C5aR, the receptor of the comple- ment factor C5a*, is being investigated as a potential new drug target in the field of immuno-oncology* and autoimmune dis- eases. Tumors have been shown to produce high amounts of C5a which, by recruiting and activating myeloid-derived sup- pressor cells (MDSCs), is assumed to contribute to an immune- suppressive pro-tumorigenic microenvironment. MOR210 is intended to block the interaction between C5a and its receptor, thereby being expected to neutralize the immune-suppressive function of the MDSCs and to enable immune cells to attack the tumor. MOR210 is currently in preclinical development. REG I O N A L AG REEM EN T W I T H I - M A B B I O PH A RM A In November 2018 , we announced that we had entered into an exclusive strategic collaboration and regional licensing agree- ment for MOR210 with I-Mab Biopharma. Under the agreement, I-Mab has exclusive rights to develop and commercialize MOR210 in China, Hong Kong, Macao, Taiwan and South Korea, while we retain rights in the rest of the world. The agreement deepens our existing partnership with I-Mab, building upon the ongoing collaboration for MOR202. Under the terms of the agreement, I-Mab will exercise its exclu- sive license rights for development and commercialization of MOR210 in its territories. With our support, I-Mab will perform and fund all global development activities for MOR210, includ- ing clinical trials in China and the U.S., towards clinical proof- of-concept (PoC*) in oncology. We received an upfront payment of US$ 3.5 million from I-Mab and are eligible to receive development and commercial mile- stone payments of up to US$ 101.5 million, as well as tiered, mid-single-digit royalties on net sales of MOR210 in I-Mab’s territories. In return for the execution of a successful clinical PoC study, I-Mab is eligible to receive low-single-digit royalties on net sales generated with MOR210 outside its territories and a tiered percentage of sub-licensing revenue. PAR T NERED DIS COVERY At the end of 2018, we had one Partnered Discovery program on the market, 24 in clinical development, 24 partnered product candidates in preclinical development and 55 in discovery. Be- low, we highlight our most advanced programs and a recently expanded strategic alliance. Guselkumab (Tremfya®) – a HuCAL antibody targeting IL-23* that is being developed and commercialized by our partner Janssen in plaque psoriasis and other indications. Guselkumab (Tremfya®) is approved in the United States, Canada, European Union, Japan and a number of other countries worldwide. Gantenerumab – a HuCAL antibody targeting amyloid beta* that is in phase 3 clinical testing by our partner Roche for the treatment of Alzheimer’s disease. *S E E G L O S S A R Y – page 188 Other programs – in addition to the two programs above, we have a large number of programs in various stages of research and development from our partnerships with major pharmaceu- tical companies. LEO Pharma – we have a strategic alliance with LEO Pharma for the discovery and development of therapeutic antibodies for the treatment of skin diseases. This agreement was expanded in 2018 to include peptides. FINANCIAL STATEMENTSG roup Management Repor t 38 O per ations and B usiness Env ironment GUSELKUMAB ( TREMF YA®) OV ERV I E W Guselkumab (Tremfya®) is a human HuCAL antibody targeting IL-23 that is being developed and commercialized by Janssen. It is the first commercial product based on our proprietary tech- nology. It is approved in the United States, Canada, the Euro- pean Union and several other countries for the treatment of moderate-to-severe plaque psoriasis and in Japan for the treat- ment of various forms of psoriasis, psoriatic arthritis* and pal- moplantar pustulosis*. IL-23 is a pro-inflammatory protein which has been identified as a cytokine in autoimmune dis- eases and is found in the skin of patients with psoriasis and other inflammatory diseases. It is therefore considered to be a potential treatment target for inflammatory diseases. The anti- body binds to the so-called p19 subunit unique to IL-23. Anti- bodies that bind to IL-23’s p40 subunit will also neutralize IL-12* and are therefore less specific. Guselkumab (Tremfya®) is the first approved antibody binding the p19 subunit of IL-23. Psoriasis is a chronic, autoimmune inflammatory disorder of the skin characterized by abnormal itching and physically painful skin areas. It is estimated that about 125 million people worldwide have psoriasis, with approximately 25 % suffering from cases that are considered moderate to severe. The inde- pendent market experts Transparency Market Research fore- cast the market for psoriasis to grow from € 7.5 billion in 2014 to € 12 billion in the year 2024. In addition to plaque psoriasis, Janssen is developing gusel- kumab (Tremfya®) for the treatment of Crohn’s disease*, pediat- ric psoriasis, psoriatic arthritis, palmar/plantar pustulosis and a few other indications. MorphoSys receives royalties on net sales of guselkumab (Tremfya®) and is eligible to receive milestone payments for selected future development activities. A D D I T I O N A L M A RK E T I N G A PPROVA LS REC EI V ED Building on the first approvals for guselkumab (Tremfya®), which occurred in 2017 in the U.S., Europe and Canada, during 2018 Janssen received marketing approvals in several addi- tional countries as follows: Australia: In April 2018, Janssen’s country subsidiary reported that guselkumab (Tremfya®) had been approved for the treat- ment of adults living with moderate-to-severe plaque psoriasis in Australia. Brazil: In April 2018, Janssen’s country subsidiary reported that guselkumab (Tremfya®) had been approved for the treat- ment of adults living with moderate-to-severe plaque psoriasis in Brazil. Japan: In April 2018, we announced that Janssen had reported that guselkumab (Tremfya®) had received marketing approval in Japan for the treatment of three forms of psoriasis (plaque, pustular and erythrodermic psoriasis) and psoriatic arthritis in patients with moderate-to-severe disease for whom other exist- ing treatments have failed. Additionally, in November 2018, Janssen reported that gusel- kumab (Tremfya®) had been approved in Japan for the treat- ment of patients with palmoplantar pustulosis who are not responding to, or are refractory to, existing treatments. Palmo- plantar pustulosis is a debilitating, chronic skin disease that causes pustules and inflammation to appear mainly on the palms of the hands and soles of the feet, greatly affecting pa- tients’ quality of life. According to a press release issued by Janssen on November  21, 2018, guselkumab (Tremfya®) was the first and only biologic treatment available for the estimated 130,000 patients living with palmoplantar pustulosis in Japan. South Korea: In April 2018, we announced that an affiliate of Janssen reported that guselkumab (Tremfya®) had been ap- proved for the treatment of moderate-to-severe adult plaque psoriasis requiring phototherapy or systemic therapies in South Korea. N E W C L I N I CA L T RI A LS I N I T I AT ED Crohn’s disease pivotal clinical program: In July 2018, we announced that Janssen had initiated a pivotal phase 2/3 clini- cal program to evaluate the efficacy and safety of guselkumab (Tremfya®) in the treatment of patients with moderate to se- verely active Crohn’s disease, a type of inflammatory bowel disease affecting any part of the gastrointestinal tract. Ex- pected to enroll approximately 2,000 patients, the program, which is named GALAXI, consists of three separate studies: a phase 2 study (GALAXI 1), followed by two phase 3 studies (GALAXI 2 and GALAXI 3). In connection with the start of the GALAXI program, we received two milestone payments from Janssen; the financial details were not disclosed. Phase 3 trial in pediatric plaque psoriasis patients: In Sep- tember 2018, we announced that Janssen had initiated a phase  3 clinical trial of guselkumab (Tremfya®) in pediatric patients suffering from chronic plaque psoriasis, the most com- mon form of psoriasis. According to clinicaltrials.gov, the trial, PROTOSTAR, is expected to enroll approximately 125 children between 6 and 18 years of age with plaque psoriasis, and will evaluate the safety, efficacy, and pharmacokinetics* of gusel- kumab (Tremfya®) against etanercept and placebo. O per ations and B usiness Env ironment G roup Management Repor t 39 Phase 2 trial in hidradenitis suppurativa (HS*): In October 2018, we announced that Janssen had initiated a phase 2 clini- cal study of guselkumab (Tremfya®) in patients with moder- ate-to-severe HS, a chronic skin disease also known as acne inversa. According to clinicaltrials.gov, the randomized, dou- ble-blind study, NOVA, is expected to enroll approximately 180 adult patients with moderate-to-severe HS and will evalu- ate the efficacy, safety and tolerability of guselkumab (Tremfya®) against placebo. In September 2018, Janssen announced new data that showed clinically relevant improvements in long-term patient-reported outcomes (PRO) in patients with plaque psoriasis switched to guselkumab (Tremfya®) after an initial inadequate response to adalimumab (Humira®). These long-term findings from Jans- sen’s phase 3 clinical trial programs – VOYAGE 1 and 2 – in patients with moderate-to-severe plaque psoriasis were part of six abstracts presented at the European Academy of Dermatol- ogy and Venereology (EADV) 2018 Congress. Phase 2a trial in ulcerative colitis (UC*): In January 2019, we announced that Janssen had initiated a proof-of-concept phase 2a clinical trial in patients with moderately to severely active UC, a chronic inflammatory bowel disease. According to clinicaltrials.gov, this randomized, double-blind study will eval- uate the efficacy and safety of guselkumab (Tremfya®) in com- bination with golimumab compared to guselkumab (Tremfya®) or golimumab monotherapy in approximately 210 patients with moderately to severely active UC. N E W LO N G -T ERM DATA PRESEN T ED I N PL AQ U E P SO RI AS IS During 2018, our partner Janssen announced the presentation of new long-term data in patients with plaque psoriasis. In October 2018 , Janssen announced new long-term data from the open-label period of the phase  3 VOYAGE 1 clinical trial that demonstrated stably maintained rates of skin clearance with guselkumab (Tremfya®) treatment at week 52 and week 156 among adult patients with moderate-to-severe plaque psoriasis. According to a press release issued by Janssen, the findings, presented at the 37th Fall Clinical Dermatology Conference in Las Vegas, Nevada/USA, showed that nearly 83 % of patients receiving guselkumab (Tremfya®) in the VOYAGE 1 study maintained at least a 90 % improvement in the Psoriasis Area Severity Index (PASI* 90) response, or near-complete skin clear- ance, and an Investigator’s Global Assessment (IGA) score of cleared (0) or minimal disease (1) at week 156. According to Janssen, 96.4 % of patients treated with guselkumab (Tremfya®) achieved a PASI 75 score at week 156. Furthermore, 53.1 % of patients achieved an IGA score of 0 and 50.8 % of patients achieved a PASI 100 response. This measure represents skin completely cleared of psoriasis plaques (except for residual dis- coloration). *S E E G L O S S A R Y – page 188 According to Janssen, of the 494 patients in the treatment groups receiving guselkumab (Tremfya®) in the study, the per- centage of patients reporting AEs, SAEs, infections and serious infections through week 156 were 86.2 %, 13.4 %, 67.8 % and 2.2 %, respectively, consistent with data from earlier read-outs from the study. No cases of active tuberculosis, opportunistic infections or serious hypersensitivity reactions were reported among guselkumab (Tremfya®)-treated subjects. According to Janssen’s press release, study findings showed that a switch to guselkumab (Tremfya®) at week 28, after an inadequate response to adalimumab (Humira®), led to a sus- tained improvement in PROs in both PSSD and DLQI (Dermatol- ogy Life Quality Index) scores at week 100. The proportions of patients with PSSD symptom and signs scores of 0 (i.e. no pa- tient-reported symptoms or signs of psoriasis) increased from 4.2 % and 1.1 %, respectively, at week 28, to 32.6 % and 18.0 % at week 100. The proportion of patients with a DLQI score of 0 or 1 (i.e. no impact on patient quality of life) increased from 14.4 % at week 28 to 65.3 % at week 100, showing consistent improve- ment and impact on patient well-being after switching to gusel- kumab (Tremfya®). In February 2018 , Janssen announced the presentation of data from the phase 3 VOYAGE 2 trial at the 2018 American Acad- emy of Dermatology (AAD) Annual Meeting. The data showed that a vast majority of patients with moderate to severe plaque psoriasis receiving guselkumab (Tremfya®) who achieved at least 90 percent improvement in the Psoriasis Area and Sever- ity Index (PASI 90) at week 28, maintained a PASI 90 response with continuous treatment through week 72. Findings from the study also demonstrated that a vast majority of patients origi- nally randomized to guselkumab (Tremfya®), but withdrawn from treatment at week 28, regained a PASI 90 response within six months of initiating guselkumab (Tremfya®) re-treatment. Results from the trial demonstrated that among patients who achieved PASI 90 response at week 28 with guselkumab (Tremfya®), 86 % who continued receiving guselkumab (Tremfya®) maintained a PASI 90 response through week 72, while only 11.5 % of patients who were withdrawn from treatment maintained PASI 90 response. Of 173 patients who lost PASI 90 response after withdrawal from guselkumab (Tremfya®), 87.6 % recaptured PASI 90 response six months fol- lowing re-treatment. No new safety signals were observed with continuous treatment or re-treatment therapy with guselkumab (Tremfya®) through week 100. FINANCIAL STATEMENTSG roup Management Repor t 40 O per ations and B usiness Env ironment Guselkumab (Tremfya®) data from eight additional abstracts were also presented at the AAD Annual Meeting, including an oral presentation of a pooled analysis from the phase 3 VOYAGE 1 and 2 trials evaluating consistency of response by weight across subgroups of patients through week 24. The phase 3 VOYAGE 2 trial was a randomized, double-blind, placebo- and active-comparator-controlled study designed to evaluate the safety and efficacy of guselkumab (Tremfya®) com- pared with placebo and adalimumab (Humira®) and of gusel- kumab (Tremfya®) maintenance therapy compared with with- drawal of therapy in adult patients with moderate to severe plaque psoriasis. Patients (n = 992) were randomized to receive subcutaneous (SC) injections of guselkumab (Tremfya®) 100 mg at weeks 0, 4, 12 and 20; placebo at weeks 0, 4 and 12 with crossover to guselkumab (Tremfya®) at weeks 16 and 20 or adalimumab (Humira®) 80 mg at week 0, followed by 40 mg at week 1 and every two weeks through week 23. Patients initially randomized to receive guselkumab (Tremfya®) who achieved a PASI 90 response (n = 375) at week 28 were re-randomized to either continued treatment with guselkumab (Tremfya®) (n = 193) or withdrawal to placebo (n = 182) with re-treatment upon a 50 % or greater loss of PASI improvement at week 28 or week 72 if re-treatment criteria were not met. In December 2018, Janssen announced results from the ECLIPSE study demonstrating that guselkumab (Tremfya®) was superior to secukinumab (Cosentyx®) in treating adults with moderate to severe plaque psoriasis for the primary endpoint assessed at week 48. The data were presented at the 3rd Inflammatory Skin Disease Summit. The phase  3, multicenter, randomized, dou- ble-blind, active comparator trial was designed to evaluate the efficacy and safety of guselkumab (Tremfya®) compared with secukinumab (Cosentyx®) in adult patients with moderate to severe plaque psoriasis. Patients (n = 1,048) were randomized to receive 100 mg of guselkumab (Tremfya®) administered by subcutaneous injection at weeks 0, 4 and 12, followed by eight- week dosing; or 300 mg of secukinumab (Cosentyx®) adminis- tered by two subcutaneous injections of 150 mg at weeks 0, 1, 2, 3 and 4, followed by 4-week dosing. The primary endpoint of the study was the proportion of patients achieving a PASI 90 response at week 48. Secondary endpoints were assessed at weeks 12 and 48, with safety monitoring through week 56. Data from the study demonstrated that 84.5 % of patients treated with guselkumab (Tremfya®) achieved at least 90 % im- provement in their baseline PASI score at week 48, compared with 70.0 % of patients treated with secukinumab (Cosentyx®) (p<0.001). These data, according to Janssen, marked the first- ever results from a head-to-head study comparing an interleu- kin (IL)-23-targeted biologic therapy (guselkumab (Tremfya®)) with an IL-17 inhibitor (secukinumab (Cosentyx®)). ECLIPSE incorporated six major secondary endpoints that used a fixed statistical sequence procedure to control for multiple comparisons and included both shorter and longer-term analy- ses. Guselkumab (Tremfya®) demonstrated non-inferiority to secukinumab (Cosentyx®) in the first major secondary end- point, with 84.6 % of patients on guselkumab (Tremfya®) achiev- ing a PASI 75 response at both weeks 12 and 48 vs. 80.2 % of those on secukinumab (Cosentyx®) (p<0.001). However, it did not demonstrate superiority (p = 0.062). Because superiority was not demonstrated for the first major secondary endpoint, p-values for all the subsequent major secondary endpoints were considered nominal. Three of the remaining major secondary endpoints evaluated efficacy at week 48, including achievement of a PASI 100 re- sponse and Investigator’s Global Assessment (IGA) scores of 0 (cleared), or 0 or 1 (cleared or minimal disease). At week 48, 58.2 % of patients receiving guselkumab (Tremfya®) achieved a PASI 100 response, compared with 48.4 % of patients receiv- ing secukinumab (Cosentyx®); 62.2 % of patients receiving guselkumab (Tremfya®) achieved an IGA score of 0 compared to 50.4 % of patients receiving secukinumab (Cosentyx®); and 85.0 % of patients receiving guselkumab (Tremfya®) achieved an IGA score of 0 or 1 compared to 74.9 % of patients receiv- ing secukinumab (Cosentyx®) (all comparisons with nominal p ≤ 0.001). The remaining major secondary endpoints assessed non- inferiority of guselkumab (Tremfya®) versus secukinumab (Cosentyx®) at week 12. The percentage of patients achieving a PASI 75 response at week 12 was 89.3 % for guselkumab (Tremfya®) and 91.6 % for secukinumab (Cosentyx®) (p < 0.001 for non-inferiority); the percentage of patients achieving a PASI 90 response at week 12 was 69.1 % for guselkumab (Tremfya®) and 76.1 % for secukinumab (Cosentyx®) (p = 0.127 for non- inferiority). Through week 44, 27 patients (5.1 %) randomized to the gusel- kumab (Tremfya®) arm discontinued treatment compared with 48 patients (9.3 %) randomized to the secukinumab (Cosentyx®) arm. The safety profiles observed for guselkumab (Tremfya®) and secukinumab (Cosentyx®) in ECLIPSE were consistent with the known safety profiles seen in the respective registration trials and current prescribing information. Similar percentages of patients receiving guselkumab (Tremfya®) (77.9 %), and secu- kinumab (Cosentyx®) (81.6 %) reported at least one adverse event (AE). Serious AEs were reported in 6.2 % of patients receiving guselkumab (Tremfya®) and 7.2 % of patients receiving secu- kinumab (Cosentyx®). Serious infections occurred in six patients receiving guselkumab (Tremfya®) and five patients receiving secukinumab (Cosentyx®). O per ations and B usiness Env ironment G roup Management Repor t 41 GANTENERUMAB OV ERV I E W Gantenerumab is a HuCAL antibody targeting amyloid beta that is being developed by our partner Roche as a potential treatment for Alzheimer’s disease. Amyloid beta denotes a group of peptides that are centrally involved in Alzheimer’s disease as the main component of the amyloid plaques found in the brains of Alzheimer patients. Gantenerumab binds to the N-terminus and a section in the middle of the amyloid beta pep- tide. On binding, the antibody seems to neutralize and disrupt the formation of amyloid plaque and amyloid oligomers and may also lead to its clearance by recruitment of microglial cells. In phase 1 clinical trials, gantenerumab has been shown to re- duce brain amyloid in mild-to-moderate Alzheimer’s disease patients. Gantenerumab is being investigated in several clini- cal studies to see if there is a positive effect from intervening at an early stage in the disease’s progression. There are currently no drugs available that fundamentally improve the course of Alzheimer’s disease. However, the anti-amyloid beta antibody aducanumab from Biogen Inc., that has been tested in a first-in- human phase 1 study in 2015, showed a substantial clearance of amyloid beta deposition in the brain as determined by Posi- tron Emission Photograpy (PET) and a slowing of the cognitive decline of the patients. Aducanumab is currently in a phase 1 trial, a phase 2 trial and two phase 3 studies to evaluate its effi- cacy in slowing cognitive and functional impairment in pa- tients with prodromal, mild or early Alzheimer’s disease, re- spectively. The market research and consulting firm GlobalData has indicated that the global market for Alzheimer’s disease treatment is expected to grow at double-digit rates each year from US$ 2.9 billion in 2016 to an estimated US$ 14.8 billion by 2026. According to the Alzheimer’s Association, 5.7  million Ameri- cans are living with Alzheimer’s disease, and that figure is projected to increase to nearly 14 million by 2050. Alzheimer’s disease is the sixth leading cause of death in the U.S. N E W C L I N I CA L DATA PRESEN T ED In March 2018, data were presented in which gantenerumab was evaluated at considerably higher doses in an open label extension (OLE) study than previously tested. The data were presented at the Alzheimer’s and Parkinson’s disease confer- ence AAT-AD/PDTM Focus Meeting 2018. The data assessed the clinical effects of higher doses of gan- tenerumab measured by amyloid beta reduction in the brain. Eighty-one patients with prodromal to mild Alzheimer’s dis- ease were enrolled in the OLE study parts and received higher doses of up to 1,200 mg of gantenerumab subcutaneously every 4 weeks. The dose increase, from starting levels of 105 mg or 225 mg of gantenerumab to up to 1,200 mg, was administered using different titration schemes with the goal of controlling potential safety findings due to the increased doses. Fifty-one patients had a brain positron emission tomography (PET) scan to determine amyloid plaques at week 52. According to the data presented, patients who received higher doses of gantenerumab showed a greater and consistent amyloid reduction compared to patients who received lower dosing (105  mg or 225  mg). At week 52, approximately one-third of the high-dose patients had amyloid levels below the threshold that classifies a patient as amyloid beta positive. A review of the data in the OLE studies did not reveal any new or unexpected safety findings of the higher doses for this pa- tient population. As reported previously (Klein et al., 2017, CTAD presentation ), increased doses of gantenerumab led to an increase of amyloid-related imaging abnormalities (ARIA), which, however, remained manageable with the implemented dosing titration scheme. In the higher doses of up to 1,200 mg, severity and seriousness of adverse events were comparable to the lower doses (105  mg or 225  mg) applied in the previous studies. N E W PH ASE 3 PRO G R A M I N I T I AT ED I N A L ZH EI M ER ’ S D ISE ASE In June 2018, we announced that our partner Roche had initi- ated a new phase 3 development program in patients with Alz- heimer’s disease. The program consists of two phase 3 trials – GRADUATE-1 and GRADUATE-2 – which are expected to enroll approximately 1,520 patients in up to 350 study centers in 31 countries worldwide. The two multicenter, randomized, dou- ble-blind, placebo-controlled trials will assess the efficacy and safety of gantenerumab in patients with early (prodromal to mild) Alzheimer’s disease. The primary endpoint for both trials is the assessment of signs and symptoms of dementia, mea- sured as the clinical dementia rating-sum of boxes (CDR-SOB) score, determined as the change of status from baseline to week 104. Patients are to receive a significantly higher dose of gantenerumab than in Roche’s previous trials as a subcutane- ous injection with titration up to the target dose. FINANCIAL STATEMENTSG roup Management Repor t 42 O per ations and B usiness Env ironment OTHER PRO GR AMS In June 2018 , our partner Bayer brought a new compound based on MorphoSys’s HuCAL technology into clinical develop- ment. BAY2287411 is a thorium-227 radiolabeled antibody con- jugate directed against the target molecule mesothelin. In a phase 1 clinical trial, BAY2287411 is being tested for the first time in patients with solid tumors known to express mesothelin in order to evaluate the safety, tolerability, pharmacokinetics and anti-tumor activity of this compound. According to clinicaltrials.gov, in 2018 clinical trials with bimagrumab in patients with sarcopenia or after hip surgery by our partner Novartis reached primary completion. At the end of January 2019, Novartis announced that it would discon- tinue development in these indications. Other programs developed by our partners continued to make progress during 2018. C OLL ABOR ATION WITH LEO PHARMA We have an ongoing strategic alliance with LEO Pharma for the discovery and development of therapeutic antibodies for the treatment of skin diseases. The initial alliance was signed in November 2016 to jointly discover and develop antibody-based therapies in dermatology. Under the terms of this agreement, we are applying our Ylanthia technology platform to generate antibody candidates against targets selected by LEO Pharma and will conduct all development activities up to the start of clinical testing. LEO Pharma is responsible for clinical develop- ment and commercialization of resulting drugs in all indica- tions except cancer. C O L L A B O R AT I O N E X PA N D ED In September 2018, we announced with LEO Pharma an expan- sion of our existing strategic alliance to include peptide-derived therapeutics. The objective of the expansion is to identify novel, peptide-derived therapeutics for unmet medical needs that will be valuable additions to both companies’ pipelines. Under the terms of the agreement, LEO Pharma will select tar- gets against which we will identify lead molecules using our proprietary HTH peptide technology platform. LEO Pharma will either develop these lead molecules or use them to aid the de- sign of other drug candidates. LEO Pharma will have exclusive, worldwide rights and be responsible for development and com- mercialization of resulting drugs in the area of dermatology. MorphoSys will have an exclusive option to secure worldwide rights to any drugs arising from the collaboration in the field of oncology. We will receive R&D funding as well as success-based develop- ment, regulatory and commercial milestone payments, plus royalties on net sales of peptide drugs commercialized by LEO Pharma. Further financial details were not disclosed. PAT EN T S During the 2018 financial year, we continued to consolidate and expand our patent protection of our development programs and our growing technology portfolio, which are our most import- ant value drivers. In April 2016, we filed a lawsuit in the United States at the Dis- trict Court of Delaware against Janssen Biotech and Genmab A/S for patent infringement of U.S. Patent Number 8,263,746. U.S. Patents 9,200,061 and 9,758,590 were added to the case in 2017. In filing the lawsuit, we sought redress for alleged in- fringement of these patents by Janssen’s and Genmab’s daratu- mumab, a CD38-directed monoclonal antibody indicated for the treatment of certain patients with multiple myeloma. The U.S. District Court of Delaware, based on a hearing held Novem- ber 27, 2018, has ruled in a Court Order on January 25, 2019, that the asserted claims of the MorphoSys patents are invalid. The Court thus granted a motion for Summary Judgement of invalidity filed by Janssen Biotech and Genmab, A/S against the three patents held by MorphoSys. As a result of this deci- sion, the jury trial scheduled to start February 11, 2019 to con- sider Janssen’s and Genmab’s alleged infringement and the validity of the MorphoSys patents did not take place. On Janu- ary  31, 2019 we announced that we have settled the dispute with Janssen Biotech and Genmab A/S. The parties agreed to drop the mutual claims related to the litigation: MorphoSys dis- missed claims for alleged patent infringement against Janssen Biotech and Genmab A/S and will not appeal from the court order dated January 25, 2019. Janssen and Genmab dismissed their counterclaims against MorphoSys. At the end of the financial year, we maintained over 60 different proprietary patent families worldwide in addition to the numer- ous patent families we pursue with our partners. Group Development In April 2018, we successfully closed an initial public offering on the Nasdaq U.S. stock exchange. The transaction produced total gross proceeds of US$  239.0  million from the sale of 2,075,000 new ordinary shares in the form of 8,300,000 Amer- ican Depositary Shares (“ADSs”) and from the exercise in full of the underwriters’ option to purchase 311,250 additional new ordinary shares in the form of 1,245,000 additional ADSs, at a price of US$ 25.04 per ADS, respectively. Each ADS represents 1/4 of a MorphoSys ordinary share. At the Annual General Meeting (AGM) of MorphoSys AG on May 17, 2018, our shareholders approved all resolutions of the Company’s management with the required majority of votes. Dr. George Golumbeski and Michael Brosnan were newly elected to the Supervisory Board, replacing Dr. Gerald Möller, who retired from the board, and Klaus Kühn, who resigned for O per ations and B usiness Env ironment G roup Management Repor t 43 personal reasons. Dr. Möller’s retirement and Mr. Kühn’s resig- nation became effective at the conclusion of the 2018 AGM. Dr. Golumbeski most recently served as Executive Vice Presi- dent and Executive Advisor for Innovation at Celgene Corpora- tion, a position from which he retired in April 2018. Over the last 27 years, he held leadership roles in business and corporate development, partnering and M&A with global pharmaceutical and life science companies, including Celgene, Novartis, Elan Corporation (today: Perrigo) and Schwarz Pharma (today: UCB). Mr. Brosnan has over 40 years of experience in finance, con- trolling and auditing. Since 2010, he has served as Chief Finan- cial Officer of Fresenius Medical Care Management AG, a com- pany with a dual listing in Germany and the U.S. For over 20  years, he has worked in various leadership and executive positions for Fresenius Medical Care in the U.S. and Germany. Additionally, Dr. Marc Cluzel was re-elected to the Supervisory Board following the expiry of his term of office. Following the AGM, the Supervisory Board in its inaugural meeting elected Dr. Marc Cluzel as its new Chairman and Dr. Frank Morich as Deputy Chairman. On May 24, 2018, MorphoSys AG published a notification to our shareholders in the German Federal Gazette pursuant to Sec. 62 Para. 2 Sent. 1, Para. 3 Sent. 3 (German Transformation Act) indicating its intention to merge Sloning BioTechnology GmbH as the transferring legal entity into MorphoSys AG, as the ac- quiring legal entity. Upon entry into the commercial register on June 28, 2018 and based on the merger agreement date May 17, 2018, Sloning BioTechnology GmbH, as the transferring legal entity, was merged into MorphoSys AG, as the acquiring legal entity, with the effective date of January 1, 2018. In July 2018 , we announced the establishment of a U.S. subsid- iary, MorphoSys US Inc. We also announced the appointment of Jennifer Herron as President of MorphoSys US Inc. and Execu- tive Vice President, Global Commercial. In November 2018 we reported that Ms. Herron had resigned and James Hussey was appointed Acting President of the U.S. subsidiary. Mr. Hussey joined MorphoSys US Inc. in 2018. He has more than 30 years of experience in leading positions in the biotech and pharma- ceutical industries. Over the last 25 years, he served in senior management positions of various pharmaceutical, biotech, and health care companies. He started his career with Bristol Myers Squibb (BMS) in 1984, where he served for 11 years holding positions of increasing responsibility within the US business. The focus of our U.S. subsidiary will be on building a strong presence in the U.S. to prepare for the planned commercializa- tion of MOR208. In July 2018, MorphoSys AG acquired a minority shareholding position of 19.9 % in adivo GmbH, Martinsried, in the context of a seed financing. MorphoSys paid a cash contribution and a contribution in kind. Adivo is dedicated to the research and development of veterinary therapeutics. In addition to the two founding shareholders, who are former employees of MorphoSys, the only other strategic investors in adivo other than MorphoSys are two financial investors. Under a licensing agreement, MorphoSys granted adivo rights to a fully synthetic canine antibody library based on our proven modular combina- torial approach. Effective September 24, 2018, MorphoSys’s shares were in- cluded in the MDAX. MorphoSys remains a member of the TecDAX segment, which it has been since 2004. The simultane- ous inclusion in both the MDAX and TecDAX indices is based on a revision in rules of the Deutsche Börse for indices, which came into force on September  24, 2018. The TecDAX now in- cludes the 30 largest stocks in terms of market capitalization* and trading volume that are focused on technology. The MDAX now tracks the 60 largest listed companies with the highest trading volume after the DAX index, which continues to contain the 30 largest stocks in Germany. *S E E G L O S S A R Y – page 188 At the beginning of December, the Company held an Investor and Analyst Event in New York City dedicated to MOR208. During this event, the latest L-MIND data, which had been pre- sented at the 60th ASH (American Society of Hematology) con- ference in San Diego, were discussed and the Company gave an outlook on the planned filing strategy. Moreover, further devel- opment plans with MOR208 in first-line DLBCL and also other indolent lymphomas were revealed. To give an overview about the indication and treatment options in DLBCL in more detail, the event also included a discussion of current treatment op- tions. The event was attended by investors and analysts and could also be followed via webcast. GROUP HEADCOUN T DEVEL OPMEN T On December 31, 2018, the MorphoSys Group had 329 employ- ees (December 31, 2017: 326), 134 of whom hold PhD degrees (December 31, 2017: 132). The MorphoSys Group employed an average of 327 employees in 2018 (2017: 344). Of these 329 active employees, 246 were involved in research and development activities, 62 were involved in general admin- istration and 21 were involved in selling. All of these employees are located in our offices in Munich, Germany, in Groningen, the Netherlands and in Princeton, USA. We have no collective bargaining agreements with our employees and we have not experienced any labor strikes. At the end of the reporting year, we had employees represent- ing 34 different nationalities (2017: 34) employed for an aver- age of 7.2 years (2017: 7.6 years). ›› S E E F I G U R E 0 4 – Total Headcount of the MorphoSys Group (page 44) ›› S E E F I G U R E 0 5 – Employees by Gender (page 46) ›› S E E F I G U R E 0 6 – Seniority (page 46) ›› S E E F I G U R E 0 7 – Workforce Turnover Rate (page 46) FINANCIAL STATEMENTSG roup Management Repor t 44 04 Total Headcount of the MorphoSys Group (December 31) (Number) O per ations and B usiness Env ironment T O TA L E M P L O Y E E S 329 365 345 326 329 2014 2015 2016 2017 2018 161 105 60 t n e m g e s y b s e e y o l p m e 209 71 49 n o i t c n u f y b s e e y o l p m e 253 246 59 62 14 21 2017 2018 2017 2018 pro prie tary de v elo pment partnered disc ov ery unallo cated adminis tr atio n employees in r&d employ ees in sales 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 fixed 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. In addition, a “spot bonus” (given “on the spot”) is promptly awarded to employees for exceptional accom- plishments. We again made significant use of this instrument during the reporting year. A detailed description of our activities to promote successful long-term human resource development can be found in the section “Sustainable Business Development.” O per ations and B usiness Env ironment G roup Management Repor t 45 CHANGES IN T HE BUSINESS ENVIRONMEN T According to forecasts by the International Monetary Fund (IMF) in January 2019, global economic growth for 2018 was projected to remain stable at 3.7 %. However, with softer mo- mentum seen in the second half of 2018, the IMF has made downward revisions from earlier forecasts for certain areas including in Germany. Earlier downward revisions reflected surprises that suppressed activity in early 2018 in some major advanced economies, the negative effects of trade measures implemented or approved between April and mid-September, as well as a weaker outlook for some key emerging market and developing economies arising from country-specific factors, tighter financial conditions, geopolitical tensions and higher oil import bills. The 2018 growth forecast for the advanced economies was pro- jected to be 2.3 % (2017: 2.4 %). The emerging and developing economies were expected to experience growth of 4.6 % in 2018 (2017: 4.7 %). The IMF forecast growth in the Euro area of 1.8 % in 2018 (2017: 2.4 %). The 2018 forecast for Germany was 1.5 % (2017: 2.5 %). The United States was projected to grow by 2.9 % in 2018 (2017: 2.2 %). China’s economy was expected to grow 6.6 % (2017: 6.9 %), and the economies of Russia and Brazil were expected to grow by 1.7 % (2017: 1.5 %) and 1.3 % (2017: 1.1 %), respectively. MorphoSys takes into account a wide range of potential macro- economic risks and opportunities when conducting business activities. Political uncertainty in the global markets did not cause us to refrain from or change any key activities in 2018, nor were our operations affected by fluctuations within individ- ual countries. CURRENCY DE VELOPMENTS At the end of December 2018, the exchange rate of the euro to U.S. dollar was approximately 1.14–1.15. A number of analysts expect the euro to remain saddled by soft economic data (partly a result of the moderation in global trade volumes) and political uncertainty (including Brexit and Italy). The European Central Bank, which is still confronted with slow GDP growth, low in- flation and a fragile banking sector, is unlikely to tighten mon- etary policy soon. But at some point investors will expect the central bank to start the process of policy normalization. That, coupled with other macro-economic and geopolitical factors, could allow the common currency to bounce back in 2019. Most of our business is transacted in euros and US dollars. Therefore, changes in these currencies could have an effect on our future costs and revenues. Any weakness in the euro ver- sus the US dollar would have a direct positive influence on our operating results as our commercial and launch activities are conducted in the United States. Conversely, a strong euro re- duces the royalty payments from guselkumab (Tremfya®) sales incurred in US dollars that are converted into euros. We man- age this risk as far as possible with appropriate currency hedg- ing tools. REGUL ATORY ENVIRONMENT The healthcare industry’s regulatory environment is domi- nated by stringent product quality, safety and efficacy require- ments, which place ever-higher demands on the companies in- volved. Novel drugs are required to demonstrate a benefit over existing therapies in order to be approved, gain market accep- tance and be reimbursed. The current trend in the United States is toward faster approv- als by the Food and Drug Administration (FDA). The FDA’s ac- tions are partly due to legislation adopted in 2012 and the mechanisms created to reduce review times, such as break- through therapy designation and the extension of accelerated approvals. These mechanisms are meant to facilitate a faster review process for drug candidates that demonstrate a sub- stantial improvement for patients in urgent need of safer, more effective treatments, such as cancer patients. Indeed, in 2018, the FDA approved 59 new medicines, surpassing the previous year’s record-breaking 46. Biopharmaceutical companies such as MorphoSys, who are focused on the development of therapies for indications with high unmet medical need, could potentially benefit from the mechanisms described above. We have re- ceived FDA breakthrough therapy designation for our drug candidate MOR208. DE VELOPMENT OF THE PHARMACEUTICAL AND BIOTECHNOLO GY SEC TORS Worldwide prescription drug sales were projected to be ap- proximately US$ 830 billion, according to a June 2018 report by EvaluatePharma. This number is projected to increase to US$  1.2 trillion in 2024, a compound average growth rate (CAGR) of 6.4 %. The report indicated that the pharmaceutical sector seemed to have become a more stable place. While the political uncertainty that characterized much of 2017 may not have settled down, the industry appeared less anxious com- pared to earlier in the year. Much of the expansion of the mar- ket is expected to be driven by continuing unmet need in a number of disorders, as demonstrated by sales forecasts for the orphan drug market reaching US$262 billion in 2024, account- ing for 20 % of the total prescription drug market. However, the ever-present danger of product failure remains an intrinsic risk of drug development. Companies also remain under pric- ing pressure from payers, even if the threat of price control from politicians goes away. The demand for real world evidence before insurers and governments will consider reimbursing drugs is expected to continue to intensify, no matter how inno- vative developers claim their products are. FINANCIAL STATEMENTSG roup Management Repor t 46 05 Employees by Gender (December 31) 06 Seniority 07 Workforce Turnover Rate (in %) ) r e b m u n ( s e e n i a r t ) % n i ( 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 O per ations and B usiness Env ironment 4 4 6 2 39 33 23 24 ) r e b m u n ( s e v i t u c e x e 2017 2018 2017 2018 64 2017 36 63 2018 37 2017 2018 < 5 5 -10 10 -15 15 - 2 0 >2 0 2017 2018 7.6 Y E ARS 7.2 YEARS 39 % 30 % 18 % 9 % 4 % % % 10.6 10.0 O per ations and B usiness Env ironment G roup Management Repor t 47 DE VELOPMENT OF THE ANTIBODY SEC TOR The year 2018 was another highly successful year for the clini- cal development and marketing approval of therapeutic anti- bodies. By the end of 2018, marketing approval by the FDA or European Medicines Agency (EMA) had been granted to 13 new antibodies, a new record. According to “Antibodies to Watch in 2019,” published in mAbs Journal, 62 monoclonal antibodies (mAbs) are currently in late-stage clinical studies, represent- ing the largest number to date at this stage of advanced devel- opment. Thirty-three of the 62 mAbs are being developed as cancer treatments. Our lead proprietary development product candidate, MOR208, is listed as one of the “antibodies to watch” in this report. We regard the successful development and commercialization of the antibody segment as a generally positive signal and a validation of our development focus on this drug class. How- ever, no conclusions can be drawn regarding the likelihood of clinical or market success of individual drug candidates. The market for cancer drugs – the primary market for most of MorphoSys’s proprietary compounds – remains one of the most attractive and fastest-growing segments of the pharmaceutical industry. EvaluatePharma stated that worldwide oncology sales were approximately US$ 104 billion in 2017, projected to grow to US$ 233 billion in 2024, at a CAGR of 12 %. In 2024, five of the top ten companies in oncology are expected to maintain their 2017 leadership positions. Outside the top ten, the rest of the industry is expected to have a CAGR of 22 %, bringing their market share in 2024 up to nearly 40 % from nearly 22 % in 2017. Oncology is the leading therapy area in terms of sales and is projected to continue to be the dominant therapy segment in 2024, with sales reaching US$  233  billion in 2024 (2017: US$ 104 billion) and an expected CAGR of 12.2 % per year. Looking at mergers and acquisitions (M&A) activity, according to BioCentury, the number of biotech takeouts closed in 2018 was 55 compared to 60 in 2017, a decline of 8 %. The total value of those deals, though, was up 8 % to US$ 65.2 billion. Not in- cluded in this figure is Takeda’s $ 62  billion acquisition of Shire, which was announced in 2018 but closed in early Janu- ary 2019. According to BioCentury, the top tier of companies have raised enough capital to weather nearly any storm. The year 2018 saw the biotech sector setting records in the total amount of money raised in venture and IPOs, while the amount raised through follow-ons was second behind 2015. But most of the sector didn’t participate in the cash grab; BioCentury’s analysis of public biotech balance sheets shows that about 40 % of loss- making companies have one year of cash or less. For those who did not refinance, the window closed with no IPOs or follow-ons having been completed since the start of the U.S. government shutdown on December 22nd as of January 14th. Information on the development of the stock market environment can be found in the section “Shares and the Capital Market.” FINANCIAL STATEMENTS  G roup Management Repor t 48 08 Revenues by Region (December 31) (in %) O per ating and F inancial Rev iew and Prospects 71 29 41 59 90 10 87 13 75 25 09 Revenues Proprietary Development and Partnered Discovery (December 31) (in million €)1 1 Diff erences due to rounding. 2014 2015 2016 2017 2018 euro pe and asia no rth ameri ca T O TA L 64.0 106.2 49.7 66.8 76.4 59.9 53.6 43.6 42.3 43.6 41.9 15.0 5.4 4.0 5.6 0.6 17.6 7.3 19.3 3.5 2014 2015 2016 2017 2018 segment partnered disc ov ery segment partnered disc ov ery funded research and licesing fees success-based payments segment proprietary de v elo pment O per ating and F inancial Rev iew and Prospects G roup Management Repor t 49 Operating and Financial Review and Prospects You should read the following discussion and analysis of the financial condition and results of operations of the Company in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this report. In addition to historical financial information, the following dis- cussion contains forward-looking statements that reflect our plans, estimates and opinions. Our actual results could differ materially from those discussed in these forward-looking state- ments. Factors that could cause or contribute to these differ- ences or cause our actual results or the timing of selected events to differ materially from those anticipated in these for- ward-looking statements include those set forth under “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this report. Our consolidated financial statements comply with both the IFRSs published by the International Accounting Standards Board (IASB) and those adopted by the EU. The consolidated financial statements also take into account the supplementary provisions under commercial law, which must be applied in accordance with Section 315e (1) of the German Commercial Code (Handelsgesetzbuch – HGB). Results of Operations REVENUES Revenues increased by 14 % or € 9.6 million, from € 66.8 mil- lion in 2017 to € 76.4 million in 2018. The increase in revenues was primarily a result of a € 47.5 million upfront payment re- ceived and fully recognized in 2018 following the signing of an exclusive global license agreement with Novartis Pharma AG for the development and commercialization of MOR106. Had revenues in the 2018 financial year continued to be recognized in accordance with IAS 18, revenues would have been € 1.1 mil- lion higher than under the application of IFRS 15, the new ac- counting standard governing revenue recognition. In 2017, rev- enues were significantly and positively affected by funded research and license fees from a collaboration agreement with Novartis that concluded at the end of 2017 as well as by the signing of an exclusive regional license agreement with I-Mab Biopharma for the development and commercialization of MOR202 in China, Taiwan, Hong Kong and Macao. On a re- gional basis, revenues with biotechnology and pharmaceutical companies in the United States and Canada increased by more than 100 %, or € 10.7  million, from € 8.7  million in 2017 to € 19.4  million in 2018 primarily due to higher success-based payments received mainly from Janssen. Revenues with cus- tomers in Europe or Asia decreased by 2 %, or € 1.0  million, from € 58.1 million in 2017 to € 57.1 million in 2018. In 2018, 95 % of our revenues were attributable to activities with our partners Novartis, Janssen and I-Mab Biopharma, whereas 90 % of our revenues in 2017 were attributable to activ- ities with the same partners. This change was due to the MOR106 agreement with Novartis in 2018 and receipt of the related upfront payment. In 2017, revenues increased by 34 %, or € 17.1  million, from € 49.7 million in 2016 to € 66.8 million in 2017. The increase in revenues was primarily a result of a $20.0  million (equal to € 16.8  million at the then-prevailing exchange rate) upfront payment received and fully recognized in 2017 following the signing of an exclusive regional license agreement with I-Mab Biopharma for the development and commercialization of MOR202 in China, Taiwan, Hong Kong and Macao. In 2016 and 2017, revenues were significantly and positively affected by funded research and license fees from a collaboration agree- ment with Novartis that concluded at the end of 2017. On a re- gional basis, revenues with biotechnology and pharmaceutical companies in the United States and Canada increased by 71 %, or € 3.6 million, from € 5.1 million in 2016 to € 8.7 million in 2017, primarily due to higher success-based payments received mainly from Janssen. Revenues with customers in Europe or Asia increased by 30 %, or € 13.4 million, from € 44.7 million in 2016 to € 58.1 million in 2017 primarily due to the upfront pay- ment received from I-Mab Biopharma, which was partially off- set by lower revenues received from Novartis in 2017. In 2017, 90 % of our revenues were attributable to activities with our partners Novartis, I-Mab Biopharma and Janssen, whereas 95 % of our revenues in 2016 were attributable to activities with our partners Novartis, Pfizer and Janssen. This change is due to entry into the agreement with I-Mab Biopharma in 2017 and receipt of the related upfront payment. ›› S E E F I G U R E 0 8 – Revenues by Region (page 48) ›› S E E F I G U R E 0 9 – Revenues Proprietary Development and Partnered Discovery (page 48) PROPRIE TARY DEVEL OPMEN T In 2018, revenues in our Proprietary Development segment in- creased by € 36.0  million, from € 17.6  million in 2017 to € 53.6 million in 2018. This increase was due to the revenues recognized from the upfront payment received under our MOR106 agreement with Novartis. FINANCIAL STATEMENTSG roup Management Repor t 50 O per ating and F inancial Rev iew and Prospects In 2017, revenues in our Proprietary Development segment increased by € 17.0  million, from € 0.6  million in 2016 to € 17.6 million in 2017. This increase was due to the revenues recognized from the upfront payment received under our 2017 agreement with I-Mab Biopharma. PAR T NERED DIS COVERY In 2018, revenues in our Partnered Discovery segment de- creased by € 26.4  million, from € 49.2  million in 2017 to € 22.8 million in 2018. These amounts included € 41.9 million in 2017 and € 3.5  million in 2018 in funded research and li- cense fees. The decrease was primarily driven by the termi- nated collaboration arrangement with Novartis in 2017. The Partnered Discovery segment also included € 7.3 million in 2017 and € 19.3 million in 2018 in success-based payments received primarily from Janssen. Revenues in our Partnered Discovery segment included royalties on net sales of Tremfya® in the amount of € 1.9 million in 2017 and € 15.4 million in 2018. In 2017, revenues in our Partnered Discovery segment increased by € 0.1 million, from € 49.1 million in 2016 to € 49.2 million in 2017. These amounts included € 43.6  million in 2016 and € 41.9  million in 2017 in funded research and license fees, received primarily in connection with the collaboration with Novartis as well as € 5.6  million in 2016 and € 7.3  million in 2017 in success-based payments received primarily from Janssen and Novartis. Revenues in our Partnered Discovery segment included € 1.9  million of royalties on net sales of Tremfya in 2017. As a result of the conclusion of our collabora- tion arrangement with Novartis, we no longer expect to receive significant recurring research and license fees from Novartis, and further revenues received from Novartis, if any, will con- sist of milestone payments and royalties from sales of approved products. Operating Expenses In 2018, operating expenses increased by 2 %, or € 2.7 million, from € 133.8 million in 2017 to € 136.5 million in 2018. This increase was driven by higher cost of sales and selling ex- penses as well as higher administrative expenses. The line item “cost of sales” was presented for the first time in the third quarter of 2018 and consisted of expenses in connection with services being rendered while transferring projects to custom- ers such as I-Mab Biopharma. In 2018, cost of sales amounted to € 1.8 million. The Group started presenting “selling expenses” as a separate line item since January 1, 2018. In 2018, selling expenses amounted to € 6.4 million compared to € 4.8 million. The presentation of selling expenses led to a change in the pre- sentation of research and development expenses and general and administrative expenses for 2017. These items were re- duced by € 3.5 million and € 1.3 million, respectively, and the corresponding amounts are now included in “selling expenses.” Research and development expenses decreased by 6 %, or € 6.9 million, from € 113.3 million in 2017 to € 106.4 million in 2018 mainly as a result of decreased expenses for external services related to development activities in our Proprietary Development segment as well as decreased expenses in our Partnered Discovery Segment. General and administrative ex- penses increased by 39 %, or € 6.2 million, from € 15.7 million in 2017 to € 21.9 million in 2018 mainly due to higher person- nel expenses and costs for external services. In 2018, operating expenses in our Proprietary Development segment increased by 8 %, or € 7.9 million, from € 99.1 million in 2017 to € 107.0 million in 2018, primarily due to an increase in research and development expenses and selling expenses. Research and development expenses in our Proprietary Devel- opment segment, including technology development, increased by 2 %, or € 2.0 million, from € 96.3 million in 2017 to € 98.3 mil- lion in 2018 mainly due to an increase in research and develop- ment expenses for MOR208. In 2018, operating expenses in our Partnered Discovery seg- ment decreased by 50 %, or € 9.4 million, from € 18.9 million in 2017 to € 9.5  million in 2018, primarily due to a decrease in research and development expenses. Research and develop- ment expenses in our Partnered Discovery segment decreased by 51 %, or € 8.8 million, from € 17.3 million in 2017 to € 8.5 mil- lion in 2018. Research and development expenses in our Part- nered Discovery segment in 2017 related primarily to the Novartis collaboration, which was concluded in 2017. In 2017, operating expenses increased by 22 %, or € 24.0 mil- lion, from € 109.8  million in 2016 to € 133.8  million in 2017. This increase was driven by higher research and development as well as general and administrative expenses. Research and development expenses increased by 21 %, or € 19.3  million, from € 94.0 million in 2016 to € 113.3 million in 2017 mainly as a result of increased expenses for external services related to development in our Proprietary Development segment. General and administrative expenses increased by 17 %, or € 2.3  mil- lion, from € 13.4  million in 2016 to € 15.7  million in 2017 mainly due to higher personnel expenses and costs for external services. In 2017, operating expenses in our Proprietary Development segment increased by 26 %, or € 20.6 million, from € 78.5 mil- lion in 2016 to € 99.1 million in 2017, primarily due to an in- crease in research and development expenses. Research and development expenses in our Proprietary Development seg- ment, including technology development, increased by 24 %, or € 18.7 million, from € 77.6 million in 2016 to € 96.3 million in 2017 due to increases mainly in research and development ex- penses for MOR208, MOR106 and MOR202. O per ating and F inancial Rev iew and Prospects G roup Management Repor t 51 10 Selected R&D Expenses (December 31) (in million €) T O TA L 56.0 78.7 94.0 113.3 106.4 61.1 44.3 21.0 15.0 17.8 29.2 25.6 21.0 25.1 22.3 28.5 21.1 47.9 30.9 25.3 2.3 3.0 2.3 2.6 2.3 2014 2015 2016 2017 2018 e x ternal l ab o r ato ry fundin g perso nnel c o nsumab les other (includes expenses for intan- gible assets, technical infrastructure and external services) In 2017, operating expenses in our Partnered Discovery seg- ment increased by 4 %, or € 0.8 million, from € 18.1 million in 2016 to € 18.9 million in 2017, primarily due to an increase in research and development expenses. Research and develop- ment expenses in our Partnered Discovery segment increased by 5 %, or € 0.8 million, from € 16.5 million in 2016 to € 17.3 mil- lion in 2017. Research and development expenses in our Part- nered Discovery segment related primarily to the Novartis col- laboration, which is now concluded. ›› S E E F I G U R E 10 – Selected R&D Expenses (page 51) RESEARCH AND DEVEL OPMEN T In 2018, research and development expenses decreased by 6 %, or € 6.9 million, from € 113.3 million in 2017 to € 106.4 million in 2018, primarily due to lower expenses for external laboratory services and personnel which were partially offset by higher expenses for intangible assets. External laboratory services and other expenses (including legal and scientific consulting services) decreased from € 61.1 million in 2017 to € 47.9 mil- lion in 2018, primarily due to lower expenses for external labo- ratory services related to the licensing agreements for MOR202 and MOR106. Personnel expenses decreased from € 28.5 mil- lion in 2017 to € 25.3 million in 2018, primarily due to lower share-based compensation and severance expense (in the ag- gregate by € 1.5 million). FINANCIAL STATEMENTSG roup Management Repor t 52 O per ating and F inancial Rev iew and Prospects Expenses for intangible assets increased from € 13.5 million in 2017 to € 22.8 million in 2018. Expenses for intangible as- sets in 2018 were mainly driven by impairment charges of € 19.2 million primarily related to the impairment of goodwill for MOR107 and € 9.8 million in 2017 related to the termination of the cooperation with Aptevo Therapeutics for the develop- ment of MOR209. Depreciation and other costs for infrastruc- ture expenses increased from € 4.9 million in 2017 to € 5.4 mil- lion in 2018, primarily due to higher insurance expenses. Other expenses remained unchanged at € 2.8 million in 2017 and 2018. Expenses for consumable supplies decreased from € 2.6 million in 2017 to € 2.3 million in 2018. In 2017, research and development expenses increased by 21 %, or € 19.3 million, from € 94.0 million in 2016 to € 113.3 million in 2017, primarily due to higher expenses for external labora- tory services and personnel. External laboratory services and other expenses (including legal and scientific consulting ser- vices) increased from € 44.3 million in 2016 to € 61.1 million in 2017, primarily due to increased expenses related to our Propri- etary Development segment. Personnel expenses increased from € 25.1 million in 2016 to € 28.5 million in 2017, primarily due to higher share-based compensation and severance ex- pense (in the aggregate by € 2.5 million) in connection with the conclusion of the Novartis collaboration, which were only par- tially offset by a decrease in the number of employees active in research and development. Expenses for intangible assets remained almost unchanged and decreased slightly from € 13.7 million in 2016 to € 13.5 mil- lion in 2017. Expenses for intangible assets mainly represent impairment charges of € 9.8 million in 2017 related to the ter- mination of the cooperation with Aptevo Therapeutics for the development of MOR209 and € 10.1 million in 2016. In 2017, the reason for the impairment was the termination of the coopera- tion with Aptevo Therapeutics due to the expectation of a delay in the development plan, a delayed market entry and a delay in the occurrence of future cash flows compared to previous as- sumptions. In 2016, the reason for the partial impairment was the expectation of a lower inflow of benefits and of a delay in the occurrence of future cash flows*. Depreciation and other costs for infrastructure expenses decreased from € 5.9  million in 2016 to € 4.9 million in 2017, primarily due to one-time costs related to our move to a new building in 2016. Other expenses increased from € 2.6  million in 2016 to € 2.8  million in 2017 primarily due to higher maintenance expenses for laboratory equipment. Expenses for consumable supplies increased from € 2.3 million in 2016 to € 2.6 million in 2017 in line with the increase in our research and development operations. *S E E G L O S S A R Y – page 188 SEL L ING Selling expenses increased by 33 %, or € 1.6  million, from € 4.8 million in 2017 to € 6.4 million in 2018, primarily due to higher personnel expenses and external services. Personnel expenses increased from € 1.8 million in 2017 to € 2.5 million in 2018 due to intensified commercialization efforts for MOR208. Expenses for external services increased from € 2.7 million in 2017 to € 3.0 million in 2018. Selling expenses increased by 100 %, or € 2.4  million, from € 2.4 million in 2016 to € 4.8 million in 2017, primarily due to higher external services. Expenses for external services in- creased from € 0.3 million in 2016 to € 2.7 million in 2017. GENERAL AND ADMINIS T RAT IVE In 2018, general and administrative expenses increased by 39 %, or € 6.2 million, from € 15.7 million in 2017 to € 21.9 mil- lion in 2018, primarily due to higher personnel expenses and costs for external services. Personnel expenses increased from € 11.8 million in 2017 to € 15.0 million in 2018, primarily due to higher deferred compensation for share-based incentive plans, recruitment expenses and wages. Expenses for external services increased from € 2.2 million in 2017 to € 4.5 million in 2018, primarily due to one-time costs related to our initial pub- lic offering on the Nasdaq. Other expenses increased from € 0.7 million in 2017 to € 1.0 million in 2018, primarily due to higher rent expenses. In 2017, general and administrative expenses increased by 17 %, or € 2.3 million, from € 13.4 million in 2016 to € 15.7 mil- lion in 2017, primarily due to higher personnel expenses. Per- sonnel expenses increased from € 9.2  million in 2016 to € 11.8  million in 2017, primarily due to higher deferred com- pensation for share-based incentive plans and bonus pay- ments. Other expenses decreased from € 0.8 million in 2016 to € 0.7 million in 2017, primarily due to one-time costs related to our move in 2016 to a new building. Other Income In 2018, other income increased by 47 %, or € 0.5 million, from € 1.1 million in 2017 to € 1.6 million in 2018 and mainly con- sisted of currency gains in an amount of € 0.5 million in 2017 and € 0.7 million in 2018, gains from the recognition of previ- ously unrecognized intangible assets of € 0 in 2017 and € 0.4 million (resulting from contribution in kind of the invest- ment in adivo GmbH) in 2018, grant income in an amount of € 0.2 million in 2017 and € 0.2 million in 2018 and miscella- neous income of € 0.4 million in 2017 and € 0.4 million in 2018. O per ating and F inancial Rev iew and Prospects G roup Management Repor t 53 In 2017, other income increased by 57 %, or € 0.4 million, from € 0.7 million in 2016 to € 1.1 million in 2017 and mainly con- sisted of grant income in an amount of € 0.2 million in 2017 and € 0.3 million in 2016, currency gains in an amount of € 0.5 mil- lion in 2017 and € 0.2  million in 2016 and miscellaneous in- come of € 0.5 million in 2017 and € 0.2 million in 2016. Other Expenses In 2018, other expenses decreased by 59 %, or € 1.0  million, from € 1.7 million in 2017 to € 0.7 million in 2018. Other ex- penses mainly consisted of currency losses in an amount of € 0.8 million in 2017 and € 0.5 million in 2018 and miscella- neous expenses of € 0.9  million in 2017 and € 0.2  million in 2018. In 2017, other expenses increased by € 1.1  million, from € 0.6 million in 2016 to € 1.7 million in 2017. Other expenses mainly consisted of currency losses in an amount of € 0.8 mil- lion in 2017 and € 0.4  million in 2016 and miscellaneous ex- penses of € 0.8 million in 2017 and € 0.2 million in 2016. EBIT EBIT, defined as earnings before finance income, finance ex- penses, impairment losses on financial assets and income taxes, amounted to € –59.1 million in 2018, compared to an EBIT of to € –67.6 million in 2017. Finance Income Finance income decreased by 43 %, or € 0.3  million, from € 0.7 million in 2017 to € 0.4 million in 2018, reflecting lower returns from investments. Finance income mainly consisted of realized gains from derivatives of € 0.4  million in 2017 and € 0.3  million in 2018 and interest income of € 0.2  million in 2017 and € 0.1  million in 2018 received from investments in term deposits with fixed or variable interest rates. In 2017, finance income decreased by 50 %, or € 0.7  million, from € 1.4  million in 2016 to € 0.7  million in 2017 reflecting lower returns from investments. Finance income mainly con- sisted of interest income of € 1.0 million in 2016 and € 0.2 mil- lion in 2017 received from investments in term deposits with fixed or variable interest rates, € 0.3 million in 2016 and less than € 0.1  million in 2017 in realized gains from the divest- ment of available-for-sale financial assets and bonds and € 0.1 million in 2016 and € 0.4 million in 2017 in realized gains from derivatives. Finance Expenses In 2018, finance expenses decreased by 5 %, or € 1.1  million, from € 1.9 million in 2017 to € 0.8 million in 2018 and primar- ily consisted of losses on marketable securities and derivatives of € 1.5 million in 2017 and € 0.4 million in 2018 and interest expenses of € 0.5 million in 2017 and € 0.3 million in 2018. In 2017, finance expenses increased by 46 %, or € 0.6 million, from € 1.3 million in 2016 to € 1.9 million in 2017 and consisted primarily of losses on derivatives of € 1.4 million and interest expenses of € 0.4  million in 2017. In 2016, finance expenses mainly consisted of € 1.2  million in realized losses from the sale of available-for-sale financial assets and bonds. Income Tax Expenses In 2018, income tax benefits amounted to € 4.3 million and in 2017 income tax expenses amounted to € 1.0 million. The in- come tax benefit is mainly the consequence of derecognition of a deferred tax liability resulting from the impairment of intan- gible assets. The effective income tax rate changed from negative 1.5 % in 2017 to 7.1 % in 2018. The difference to the expected tax rate of 26.7 % (which would have resulted in an expected income tax benefit of € 16.1 million in 2018 and € 18.3 million in 2017) is primarily the result of the non-recognition of deferred tax as- sets on current year tax losses of € 14.5  million in 2018 and € 22.0  million in 2017 as well as permanent differences re- sulting from transaction costs in connection with the US IPO of negative € 3.7  million in 2018 and the non-recognition of deferred tax assets on temporary differences of € 0.3 million in 2018. In 2017, income tax expenses increased by 100 %, or € 0.5 mil- lion, from € 0.5 million in 2016 to € 1.0 million in 2017, due in large part to an income tax benefit in 2016 related to certain losses that were carried back to offset 2015 taxable income. In 2017, no such tax loss carry back was possible. The effective income tax rate changed from negative 0.9 % in 2016 to negative 1.5 % in 2017. The difference between the expected tax rate of 26.7 % (which would have resulted in an expected income tax benefit of € 18.3 million in 2017 and € 16.0 million in 2016) is primarily the result of the non-recognition of deferred tax as- sets on current year tax losses of € 22.0  million in 2017 and € 13.4 million in 2016 and the non-recognition of deferred tax assets on temporary differences of negative € 3.3  million in 2017 and € 3.8 million in 2016. FINANCIAL STATEMENTSG roup Management Repor t 54 O per ating and F inancial Rev iew and Prospects Consolidated Net Profit/Loss for the Period In 2018, the net result for the period amounted to € –56.2 mil- lion (2017: € –69.8 million). T A B L E 0 3 Multi-Year Overview – Statement of Profit or Loss1 in million € Revenues Cost of Sales Research and Development Expenses2 Selling Expenses2 General and Administrative Expenses2 Other Income/Expenses EBIT Finance Income/Expenses Impairment Losses on Financial Assets Income Tax Benefit/(Expenses) Consolidated Net Profit/(Loss) Earnings per Share, basic and diluted (in €)3 Earnings per Share, basic (in €) Earnings per Share, diluted (in €) 2018 2017 2016 2015 2014 76.4 (1.8) 66.8 0.0 (106.4) (113.3) (6.4) (21.9) 1.0 (59.1) (0.3) (1.0) 4.3 (56.2) (1.79) – – (4.8) (15.7) (0.6 (67.6) (1.2) 0.0 (1.0) (69.8) (2.41) – – 49.7 0.0 (94.0) (2.4) (13.4) 0.2 (59.9) 0.1 1.0 (0.5) (60.4) (2.28) – – 106.2 0.0 (78.7) 0.0 (15.1) 4.7 17.2 3.4 0.0 (5.7) 14.9 - 0.57 0.57 64.0 0.0 (56.0) 0.0 (14.1) 0.2 (5.9) 1.6 0.0 1.3 (3.0) (0.12) – – Shares Used in Computing Earnings per Share (in units), basic and diluted3 31,338,948 28,947,566 26,443,415 – 25,903,995 Shares Used in Computing Earnings per Share (in units), basic Shares Used in Computing Earnings per Share (in units), diluted Dividends Declared per Share – – – – – – – – – 26,019,855 26,244,292 – – – – 1 Differences due to rounding. 2 In 2018, selling expenses were presented for the first time. In order to provide comparative information for the previous year, the figures for 2017 and 2016 have been adjusted accordingly. The figures for 2015 and 2014 were not adjusted due to materiality reasons. 3 Basic and diluted Earnings per Share are the same in each of the years ended December 31, 2018, 2017, 2016 and 2014, because the assumed exercise of outstanding stock options and convertible bonds would be anti-dilutive due to our consolidated net loss in the respective periods. Liquidity and Capital Resources S OURCES OF F UNDING We have funded our operations primarily through the issuance of ordinary shares and through cash received in the ongoing operations of our business, including upfront fees, milestone payments, license fees, royalties, and support fees from our strategic partners and government grants. “financial assets at amortized cost”. As of December 31, 2017, liquidity had been presented in the balance sheet items “cash and cash equivalents”, “available-for-sale financial assets” as well as “financial assets classified as loans and receivables”. Liquidity as of December 31, 2018 is presented in the balance sheet items “cash and cash equivalents”, “financial assets at fair value, with changes recognized in profit or loss” as well as As of December  31, 2018, we had € 45.5  million in cash and cash equivalents, € 44.6 million in financial assets at fair value, with changes recognized in profit or loss, and € 364.7 million in current and non-current financial assets at amortized cost. O per ating and F inancial Rev iew and Prospects G roup Management Repor t 55 As of December  31, 2017, we had € 76.6  million in cash and cash equivalents, € 86.5 million in available-for-sale financial assets and € 149.1 million in current other financial assets cat- egorized as “loans and receivables.” Cash in excess of immediate working capital requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Investments are primarily made in money market funds, corporate bonds and term deposits with fixed or variable interest. shareholders, increased fixed payment obligations or the secu- rities may have rights senior to those of our ordinary shares or the ADSs. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We do not have any financial indebtedness, and we are not sub- ject to any operating covenants or capital requirements. Cash Flows USES OF F UNDING Our primary use of cash is to fund research and development costs related to the development of our product candidates. Our primary future funding requirements include the development of our proprietary clinical pipeline (primarily MOR208) and the advancement of our earlier stage wholly-owned or co-developed product candidates. We believe that our existing cash and cash equivalents and other financial instruments (including cash invested in various financial instruments as described above) will be sufficient to fund our anticipated operating expenses for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Additionally, the process of testing prod- uct candidates in clinical trials is costly, and the timing of prog- ress in these trials is uncertain. Because our product candidates are in various stages of devel- opment and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully com- plete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. We will likely require additional capital for the further develop- ment of our existing product candidates, regulatory approval processes, the potential buildout of a commercial organization and for our operation as a public company in the U.S. and may also need to raise additional funds sooner to pursue other inli- censing or development activities related to additional product candidates. Until we can generate a sufficient amount of reve- nue, we expect to finance future cash needs primarily through public or private equity or debt offerings, including convertible bonds. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of debt or equity securities, it could result in dilution to our existing C ASH F L OWS PROVIDED BY / USED IN OPERAT ING AC T IVI T IES In 2018, net cash used in operating activities was € 33.3 million, primarily driven by the consolidated net loss of € 56.2 million, partially offset by non-cash charges of positive € 27.4 million, and changes in operating assets and liabilities and taxes paid of negative € 4.5 million. The consolidated net loss of € 56.2 mil- lion was primarily driven by expenses incurred to fund our ongoing operations, in particular research and development expenses, selling expenses and general and administrative expenses. Non-cash charges consisted primarily of impairment expenses for intangibles assets in the amount of € 24.0 million, deferred compensation for share-based payment of € 5.6  mil- lion and depreciation and amortization of tangible and intan- gible assets of € 3.8 million, offset by an income tax benefit of € 4.3  million. Changes in operating assets and liabilities for 2018 consisted primarily of an increase in accounts receivable by € 6.6 million and a decrease in other liabilities by € 2.7 mil- lion, offset by contract liabilities in the amount of € 2.4 million incurred during the year as well as an increase in accounts payable and accruals by € 1.9 million. The increase in accounts receivable was mainly due to a comparatively higher level of receivables outstanding at year-end. The decrease in other lia- bilities was mainly due to the payment of tax liabilities and the repayment of a governmental cost subsidy. The contract liabil- ity incurred during the year mainly related to annual license fees. The increase in accounts payable and accruals was mainly due to an increase in external laboratory services that were outstanding at year end. In 2017, net cash used in operating activities was € 38.4 million, primarily driven by the consolidated net loss of € 69.8 million, partially offset by non-cash charges of positive € 0.7  million, and changes in operating assets and liabilities and taxes paid of € 30.6 million. The consolidated net loss of € 69.8 million was primarily driven by expenses incurred to fund our ongoing operations, in particular research and development expenses and general and administrative expenses. Changes in operating assets and liabilities for 2017 consisted primarily of € 18.4 mil- lion in deferred revenue received during the year, a € 7.8 million increase in accounts payable and accruals and a € 3.1  million increase in other liabilities. The deferred revenue received during the year mainly related to annual license fees. The increase in FINANCIAL STATEMENTSG roup Management Repor t 56 O per ating and F inancial Rev iew and Prospects In 2016, net cash used in investing activities was € 80.8 mil- lion, primarily driven by purchase of financial assets of € 423.4 million, partially offset by sales of financial assets and bonds of € 343.5  million. Use of cash in investing activities during the period primarily related to a shift in the composition in our investment portfolio. C ASH F L OWS PROVIDED BY / USED IN F INANC ING AC T IVI T IES In 2018, net cash provided by financing activities was € 179.5 million and mainly related to the gross proceeds from our initial public offering on the Nasdaq of € 193.6 million off- set by the related issuance costs of € 15.0 million. In 2017, net cash provided by financing activities was € 8.2 mil- lion and mainly related to exercises of convertible bonds by members of the Management Board and the senior management. In 2016, net cash provided by financing activities was € 110.4  million. Cash provided by financing activities during the period primarily related to our capital increase in Novem- ber 2016, resulting in gross proceeds of € 115.4 million. Investments In 2018, MorphoSys invested € 1.8  million in property, plant and equipment (2017: € 1.3 million), mainly laboratory equip- ment (i.e. machinery) and computer hardware. Depreciation of property, plant and equipment in 2018 decreased to € 1.8 mil- lion (2017: € 2.0 million). The Company invested € 0.6  million in intangible assets in 2018 (2017: € 11.8  million). Amortization of intangible assets was below the prior year’s level and amounted to € 1.9 million in 2018 (2017: € 2.1 million). In 2018, impairment of € 15.1 mil- lion was recognized on the in-process R&D programs, thereof € 13.4  million on the MOR107 program (2017: impairment of € 9.8 million was recognized on the in-process MOR209/ES414 program). accounts payable and accruals was mainly due to an increase in external laboratory services primarily related to the MOR208 program that were outstanding at year end. The increase in other liabilities was mainly due to the deferral of the rent-free period for the rental agreement for our headquarters. In 2016, net cash used in operating activities was € 46.6 mil- lion, primarily driven by the consolidated net loss of € 60.4 mil- lion, after consideration of the net non-cash charges of negative € 0.7 million, and changes in operating assets and liabilities as well as taxes paid of € 14.4  million. Consolidated net loss of € 60.4 million, after consideration of the net non-cash charges of negative € 0.7  million, was primarily driven by expenses incurred to fund our ongoing operations, in particular research and development expenses and general and administrative expenses. Net cash provided by changes in operating assets and liabilities for 2016, consisted primarily of € 17.4 million in deferred revenue prepayments received during the year and a € 13.0 million increase in accounts payable and accruals, par- tially offset by a € 13.9  million increase in prepaid expenses and other assets. The prepayments for deferred revenue re- ceived during the year mainly related to annual license fees. The increase in accounts payable and accruals was mainly due to an increase in external laboratory services. The increase in prepaid expenses and other assets was mainly due to an in- crease in the purchase of combination compounds and prepaid fees for external laboratory services, in each case primarily related to our MOR208 program. C ASH F L OWS PROVIDED BY / USED IN INVES T ING AC T IVI T IES In 2018, net cash used in investing activities was € 177.3 mil- lion, primarily driven by the purchase of financial assets in the amount of € 451.3 million, of which € 366.8 million were classi- fied at amortized cost, partially offset by proceeds from the sale of financial assets in the amount of € 276.4  million, of which € 150.0 million were classified at amortized cost. Cash used in investing activities primarily related to the investment of the proceeds from our initial public offering on the Nasdaq as well as a shift in the composition in our investment portfolio as finan- cial assets matured and were sold and new, similar financial assets were purchased. In 2017, net cash provided by investing activities was € 32.9 mil- lion, primarily driven by proceeds from the sale of financial assets in the amount of € 210.2 million, partially offset by the purchase of financial assets in the amount of € 164.4 million, of which € 108  million were classified as loans and receivables. Cash provided by investing activities primarily related to a shift in the composition in our investment portfolio as financial assets matured and were sold and new, similar financial assets were purchased. O per ating and F inancial Rev iew and Prospects T A B L E 0 4 Multi-Year Overview – Financial Situation1 G roup Management Repor t 57 in million € 2018 2017 2016 2015 2014 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) Financial Assets at Fair Value through Profit or Loss3 Other Financial Assets at Amortized Cost, Current Portion3 Other Financial Assets at Amortized Cost, Net of Current Portion3 Available-for-sale Financial Assets3 Bonds, Available-for-sale3 Financial Assets Categorized as Loans and Receivables, Current Portion3 Financial Assets Categorized as Loans and Receivables, Net of Current Portion3 (33.3) (177.3) 179.5 45.5 44.6 268.9 95.7 0.0 0.0 0.0 0.0 (38.4) 32.9 8.2 76.6 0.0 0.0 0.0 86.5 0.0 149.1 0.0 (46.6) (80.8) 110.4 73.9 0.0 0.0 0.0 63.4 6.5 136.1 79.5 (23.5) 86.3 (4.1) 90.9 0.0 0.0 0.0 64.3 33.1 94.6 15.5 (14.2) (21.5) (3.9) 32.2 0.0 0.0 0.0 106.0 7.5 157.0 50.0 1 Differences due to rounding. 2 In 2015, interest paid and interest received were reclassified from operating activities into investing activities and financing activities in the statement of cash flows. In order to provide comparative information for the previous year, the figures for 2014 have been adjusted accordingly. 3 In 2018, due to the first time adoption of IFRS 9 Financial Instruments, the items representing liquidity are presented in different balance sheet than in prior years. Net Assets ASSE T S As of December 31, 2018, total assets amounted to € 538.8 mil- lion and were € 123.4 million above their level on December 31, 2017 (€ 415.4 million). Current assets increased by € 48.2 mil- lion. This change was mainly driven by an overall increase in financial assets and cash and cash equivalents as well as from an increase in accounts receivable and was partly offset by the decline in prepaid expenses and other current assets. As of December 31, 2018, an amount of € 44.6 million (Decem- ber  31, 2017: € 86.5  million) was invested in various money market funds and reported under “financial assets at fair value through profit or loss.” On December 31, 2017, such investments were reported as “available-for-sale financial assets.” The cate- gory “other financial assets at amortized cost” included finan- cial instruments totaling € 268.9 million (December 31, 2017: € 149.1  million). These instruments comprised mainly term deposits with either fixed or variable interest rates as well as three commercial papers. In 2017 such investments were re- ported in the category “loans and receivables”. Non-current assets increased by € 75.2 million to € 149.9 mil- lion compared to their level of € 74.7 million on December 31, 2017. The main reason for this change was an increase in non-current financial assets in the category “other financial assets at amortized cost, net of current portion” which was partially offset by a decline of the line item “In-process R&D Programs”. L IABIL I T IES Current liabilities decreased from € 47.7  million on Decem- ber 31, 2017 to € 45.9 million on December 31, 2018. This effect mainly resulted from a decrease in other provisions and con- tract liabilities. Non-current liabilities (December  31, 2018: € 4.5  million; De- cember  31, 2017: € 9.0  million) decreased mainly due to the decline in deferred tax liabilities. The decrease in deferred tax liabilities is mainly related to the impairment of in-process R&D programs. FINANCIAL STATEMENTSG roup Management Repor t 58 O per ating and F inancial Rev iew and Prospects On December  31, 2018, the Company held 281,036 shares of treasury stock valued at € 10,398,773, representing a decline of € 1,428,208 compared to December  31, 2017 (319,678 shares, € 11,826,981). The cause of the decline was the transfer of 17,129 shares of treasury stock valued at € 636,414 to the Man- agement Board and Senior Management Group from the perfor- mance-based 2014 long-term incentive program (LTI). The vest- ing periods for this LTI program expired on April  1, 2018. Beneficiaries were given the option to receive a total of 17,219 shares within six months. In May 2018, the Management Board, the Senior Management Group and certain employees of the Company who are not part of the Senior Management Group received a one-time entitlement in a total fixed amount of € 2.1  million. As of December  31, 2018, 20,105 shares in an amount of € 2.1 million have been transferred to beneficiaries as a result of this entitlement. S T OCKHOL DERS’ EQUI T Y As of December 31, 2018, Group equity totaled € 488.4 million compared to € 358.7 million on December 31, 2017. As of De- cember 31, 2018, the Company’s equity ratio amounted to 91 % compared to 86 % on December 31, 2017. The number of shares issued totaled 31,839,572 as of Decem- ber  31, 2018, of which 31,558,536 shares were outstanding (December  31, 2017: 29,420,785 shares issued and 29,101,107 shares outstanding). Common stock was higher due to the cap- ital increases carried out in April 2018 as a result of the intial public offering on the Nasdaq Global Market. The capital in- creases were based on American Depositary Shares (“ADS”), with each ADS representing 1/4 of a MorphoSys common share. In the IPO process, 2,075,000 new shares were issued on April 18, 2018 and 311,250 new shares were issued on April 26, 2018 from Authorized Capital 2017-II. Common stock also in- creased by € 32,537 due to the exercise of 32,537 convertible bonds granted to the Management Board and the Senior Man- agement Group. The weighted-average exercise price of the convertible bonds was € 31.88. 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’ Equity2 Total 12/31/2018 12/31/2017 12/31/2016 12/31/2015 12/31/2014 388.9 149.9 538.8 45.9 4.5 488.4 538.8 340.7 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 1 Differences due to rounding. 2 Includes Common Stock as of December 31, 2018: € 31,839,572; December 31, 2017: € 29,420,785; December 31, 2016: € 29,159,770; December 31, 2015: € 26,537,682; December 31, 2014: € 26,456,834 O per ating and F inancial Rev iew and Prospects G roup Management Repor t 59 Contractual Obligations The following table summarizes our contractual obligations at December 31, 2018. T A B L E 0 6 Contractual Obligations (December 31, 2018) (in € thousands) Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Operating Lease Obligations 24,107 4,512 5,720 5,371 8,504 Payments due by period OF F-BAL ANCE SHEE T ARRANGEMEN T S We did not have, during 2018 and 2017, and we do not currently have, any off-balance sheet arrangements. Comparison of Actual Business Results Versus Forecasts MorphoSys demonstrated solid financial performance during the 2018 reporting year. A detailed comparison of the Compa- ny’s forecasts versus the actual results can be found in Table 7. OPERAT ING L EASE OBL IGAT IONS We lease facilities and equipment under long-term operating leases. In 2018, leasing expenses amounted to € 3.2  million. Leasing expenses also include leasing of company cars and machinery. The majority of these leasing contracts can be re- newed on a yearly or quarterly basis, and some agreements may be terminated prematurely. O T HER COMMI T MEN T S Other commitments may become due for future payments for outsourced studies. As of December 31, 2018, we expected to incur approximately € 97.0 million of fees for outsourced stud- ies, of which approximately € 51.4 million will be paid in the next twelve months. Additionally, if certain milestones are achieved in the Proprietary Development segment, for example, filing an application for an investigational new drug, or IND, for specific 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 12 to 18 months. No accruals have been recorded in our consolidated balance sheet for these amounts. FINANCIAL STATEMENTS G roup Management Repor t 60 O per ating and F inancial Rev iew and Prospects T A B L E 0 7 Comparison of Actual Business Results Versus Forecasts 2018 Targets 2018 Results Financial targets Group revenues between € 67 million and € 72 million (initial forecast € 20–25 million; revised on July 19, 2018 upon announcement of licensing agreement with Novartis for MOR106) Expenses for proprietary product and technology development of € 87 million to € 97 million (initial forecast: € 95–105 million; revised on July 19, 2018 upon announcement of licensing agreement with Novartis for MOR106) EBIT of € (55) million to € (65) million (initial forecast: € (110) million to € (120) million; revised on July 19, 2018 upon announcement of licensing agreement with Novartis for MOR106) Proprietary Development segment: R&D expenses to continue to rise (2017: € 99.1 million) EBIT sharply negative due to planned R&D expenditures on proprietary programs (2017: € (81.3) million) Partnered Discovery segment: R&D expenses lower than in the prior year due to the expiration of the partnership with Novartis (2017: € 17.7 million) EBIT positive (2017: € 30.2 million) Group revenues of € 76.4 million; original guidance exceeded due to signing of licensing agreement for MOR106 with Novartis Expenses for proprietary product and technology development of € 98.3 million; original guidance was not met due to changes in individual project plans and signing of licensing agreement for MOR106 with Novartis EBIT of € (59.1) million Proprietary Development segment: R&D expenses of € 107.0 million EBIT of € (53.2) million Partnered Discovery segment: R&D expenses of € 8.5 million EBIT of € 13.3 million Proprietary Development MOR208 • Update on interactions with the FDA based on breakthrough MOR208 • Regular updates on developments regarding path to market therapy designation status • Completion of treatment of 81 patients under the current study protocol of the fully recruited L-MIND trial with MOR208 and lenalidomide in r/r DLBCL and the start of data evaluation • Continuation of the pivotal phase 3 study evaluating MOR208 in combination with bendamustine in comparison to rituximab and bendamustine in r/r DLBCL (B-MIND study) • All 81 patients enrolled in the trial, data evaluation ongoing • B-MIND study ongoing • Continuation of the phase 2 COSMOS trial with MOR208 in • COSMOS trial ongoing, data presented at conferences: EHA combination with idelalisib or venetoclax in r/r CLL or SLL and presentation of study data at conferences • Continue to advance the development towards a potential regulatory approval and begin to set up commercial capabilities in order to commercialize MOR208 in certain geographies (June) and ASH (December) • Preparation for potential regulatory approval ongoing; set-up of commercial capabilities started, foundation of MorphoSys US Inc. to support commercialization of MOR208 in the U.S. MOR202 • Evaluation of new potential partnerships for the compound’s MOR202 • Termination of active partnering efforts for MOR202 in multiple optimal development • Evaluate the start of an exploratory clinical trial in non-small- cell lung cancer (NSCLC) • Presentation of study data after completion of the phase 1/2a dose-escalation trial in multiple myeloma MOR106 • Initiation of a phase 2 trial of MOR106 in atopic dermatitis under our co-development program with Galapagos myeloma outside I-Mab partnership for Greater China • Stop of clinical development plans for NSCLC after discontinuation of a clinical study by Genmab and Janssen of anti-CD38 antibody daratumumab in combination with a checkpoint inhibitor in NSCLC due to safety findings • Presentation of final phase 1/2a data in MM at ASH (December) MOR106 • Start of IGUANA phase 2 trial in atopic dermatitis in May • Start of phase 1 bridging study wih Galapagos evaluating a subcutaneous formulation of MOR106 in September • Exclusive global license agreement with Novartis signed together with Galapagos for further development of MOR106 in atopic dermatitis and potentially other indications MOR107 • Preclinical investigation of MOR107 with a focus on oncology MOR107 • Preclinical investigation in oncology indications ongoing indications based on initial anti-tumor data Initiation and continuation of development programs in the area of antibody discovery and preclinical development • Exclusive strategic collaboration and regional licensing agree- ment for MOR210 with I-Mab Biopharma for development and commercialization in China, Hong Kong, Macao, Taiwan and South Korea • Continuation of antibody discovery programs O per ating and F inancial Rev iew and Prospects G roup Management Repor t 61 2018 Targets 2018 Results Partnered Discovery Progress of partnered development programs Increasing number of partnered programs (103 programs) as maturity progresses Guselkumab (Tremfya®, partner: Janssen): • Further marketing approval for the treatment of moderate to severe plaque psoriasis in Brazil, Australia, South Korea and Japan as well as for psoriatic arthritis in Japan (April) and for the treatment of patients with palmoplantar pustulosis in Japan (November) • Start of phase 2/3 program (GALAXI) in Crohn’s disease (July) • Start of phase 3 trial (PROTOSTAR) in pediatric psoriasis patients (September) • Start of a phase 2 study in patients with moderate to severe hidradenitis suppurativa (HS) (November) • Data from phase 3 head-to-head study ECLIPSE demonstrated superiority of guselkumab (Tremfya®) vs. secukinumab (Cosentyx®) in the treatment of plaque psoriasis (December) Partner Roche started two new phase 3 trials of gantenerumab in patients with early Alzheimer’s disease (June) Expansion of existing strategic alliance with LEO Pharma to include peptide-derived therapeutics with the objective of identifying novel, peptide-derived therapeutics for unmet medical needs (September) Partner GSK reported data from phase 2 BAROQUE clinical study of GSK3196165 (formerly MOR103) in rheumatoid arthritis (RA) at ACR conference (October) The Management Board’s General Assessment Of Business Performance The 2018 financial year was marked by both operational high- lights as well as positive events among our development pro- grams. The successful Nasdaq listing in April strengthened our financial position and gave us more flexibility to allocate our resources. Moreover, the IPO enhanced our visibility in the U.S., which was further increased by the foundation of our wholly owned subsidiary MorphoSys US Inc. With this, we fol- lowed our plan to build a strong U.S. presence as preparation for the planned commercialization of MOR208, our antibody for the treatment of hematological malignancies, which was defi- nitely the key focus during the reporting year. Driven by posi- tive data from our L-MIND trial and encouraged by our ongoing discussions with the FDA we followed our plan to bring the antibody to the U.S. market as fast as possible, pending FDA approval. Revenues in the 2018 financial year increased to € 76.4 million, and EBIT amounted to € –59.1 million. The increase in revenues and the improved operating result compared to the previous year were the result of our exclusive license agreement for MOR106, which we and our partner Galapagos signed with Novartis Pharma AG in July thereby covering the further devel- opment and commercialization of our joint program MOR106. This agreement resulted in an upfront payment of € 47.5 mil- lion, which prompted us to raise our financial forecast for the 2018 financial year. Moreover, guselkumab (Tremfya®) sales grew rapidly during 2018 resulting in royalty payments with strong year-on-year growth as compared to 2017. The net cash outflow from operating activities amounted to € 33.3  million, which was the result of the planned expenses for proprietary research and development. Our equity ratio of 91 % and liquid funds of € 454.7 million are a confirmation of the strength of the Company’s financial resources. FINANCIAL STATEMENTS G roup Management Repor t 62 O per ating and F inancial Rev iew and Prospects Our other Proprietary Development and Partnered Discovery programs made great progress in 2018. For MOR202, we pre- sented final data from our phase 1/2a trial in multiple myeloma at ASH. Our partner I-Mab submitted an investigational new drug application for MOR202 in MM in China in August and we expect them to start pivotal trials soon. We ourselves are not pursuing the further development in MM without a partner, but of course we continue to support I-Mab in their development of MOR202 in Greater China. We made progress evaluating poten- tial options for MOR202 in other indications, such as autoim- mune diseases, while we stopped the clinical development plans in NSCLC. For GSK3196165 (formerly MOR103), GSK pre- sented data from their phase 2 trial in rheumatoid arthritis at the ACR conference in October, where they also announced plans to continue clinical development in this indication. Build- ing on our existing collaboration with I-Mab Biopharma for MOR202 for China and certain other Asian territories, we en- tered into an exclusive strategic collaboration and regional li- censing agreement for MOR210, a preclinical-stage antibody directed against C5aR, which has potential to be developed as an immuno-oncology agent. We were also pleased to report successes of our Partnered Pro- grams. Guselkumab (Tremfya®), developed by our partner Jans- sen and the first approved and marketed therapeutic antibody based on MorphoSys’s proprietary technology, was granted marketing authorization in several additional countries during 2018, including Japan. Janssen continued to develop gusel- kumab (Tremfya®) in several additional indications and re- ported positive long-term data in plaque psoriasis. We were very pleased about the data from the ECLIPSE trial reported by Janssen in December showing superiority of guselkumab (Tremfya®) versus secukinumab (Cosentyx®) for the treatment of plaque psoriasis. Our partner Roche initiated two new phase 3 trials with gantenerumab, the antibody against amyloid-beta, which is being developed by Roche for the treatment of Alz- heimer’s disease patients. By the end of the year, our pipeline comprised a total of 115 drug candidates (103 proprietary and 12 partnered programs), 29 of which are in clinical development. O utlook and Forecast G roup Management Repor t 63 Outlook and Forecast MorphoSys’s business model is focused on developing innova- tive drug candidates derived from its proprietary technologies, such as the HuCAL and Ylanthia antibody libraries. We develop drug candidates both on a proprietary basis and together with partners with the goal of giving patients access to better treat- ment alternatives. Our proprietary development activities fo- cus mainly on oncology compounds, which we aim to bring to market and commercialize. We continue to concentrate on fur- ther developing our technologies in the fast-growing, innova- tion-driven areas of the life sciences sector as the foundation of our business model. General Statement on Expected Development MorphoSys’s strategic focus is on the development of innova- tive drugs to improve the lives of patients suffering 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 flows from our partner- ships with pharmaceutical companies. The Management Board expects, among others, the following developments in 2019: • Complete the L-MIND trial and submit the filing package by end of the year for approval at the FDA • Continue to build capabilities in the U.S. in order to prepare for commercialization of MOR208 there pending regulatory approval and explore commercialization options in other geographies. • Continue the development of other proprietary drug candi- dates such as MOR202 and MOR106 and support our partners in the development of these compounds. • Continue to participate in the development of our partners’ drug candidates through the receipt of success-based reve- nues such as milestone payments or royalties on commercial- ized product sales and continue to invest these funds into the development of our proprietary programs. • Evaluate new strategic agreements based on proprietary technologies focused on gaining access to innovative target molecules and compounds. • Continue expansion of proprietary development activities through potential in-licensing, company acquisitions, co-de- velopment and new proprietary development activities. • Invest in the development of proprietary technologies to maintain and expand our position in therapeutic antibodies and related technologies. Strategic Outlook MorphoSys plans to invest a substantial portion of its financial 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. We plan to advance our portfolio of proprietary development candidates and further strengthen our technology platform. Revenues from R&D fund- ing, royalties, license and milestone payments and a strong li- quidity position should allow us to continue expanding our proprietary drug and technology development. In our Proprietary Development segment, we will continue de- veloping therapeutic antibodies and peptides for our own ac- count. We concentrate on oncology, but also explore our drug candidates in other disease areas such as inflammatory or auto- immune disorders if opportunities arise. Decisions to enter into alliances with other companies to co-develop our proprietary candidates or to outlicense them, either globally or for certain geographies, are made on a case-by-case basis. It has become an increasingly integral part of our strategy to retain projects in proprietary development in-house until later states of clinical development or even until commercialization. Our main focus is currently developing MOR208 towards a potential regulatory approval and to preparing commercialization capabilities for MOR208 in selected geographies, in particular the U.S. FINANCIAL STATEMENTSG roup Management Repor t 64 O utlook and Forecast Our Partnered Discovery segment generates contractually se- cured cash flows based on various partnerships with pharma- ceutical companies. The majority of development candidates in recent years stemmed from our partnership with Novartis. Al- though this partnership ended in accordance with the contract in November 2017, we expect that drug candidates under this and other partnerships will continue to be developed and may lead to additional milestone payments and royalties in the fu- ture. In 2017, Tremfya®, developed and marketed by Janssen, became the first antibody from our partnered discovery busi- ness to reach the market. We expect that Tremfya® will con- tinue to provide the bulk of our royalty revenue for the foresee- able future. Based on its breadth, the partnered pipeline is expected to generate further marketable therapeutic antibodies in the future. Should these be successful, the Company’s finan- cial participation in the form of royalties on product sales would increase. Expected Economic Development In its January 2019 report, the International Monetary Fund (IMF) projected global economic growth of 3.5 % in 2019, com- pared to 3.7 % forecast for 2018. Growth in advanced economies is anticipated to be 2.0 % in 2019, compared to a forecast growth of 2.3 % for 2018. The IMF expects growth in in the euro area to decline to 1.6 % in 2019 compared to the 1.8 % forecast for 2018. Growth rates have been marked down for many economies, in- cluding Germany. The IMF expects growth in Germany to be 1.3 % in 2019 (2018E: 1.5 %); this decrease is due to soft private consumption, weak industrial production following the intro- duction of revised auto emission standards and subdued for- eign demand. The IMF is projecting U.S. economic growth in 2019 to be 2.5 % (and soften further to 1.8 % in 2020) compared to expected growth of 2.9 % in 2018 with the unwinding of fiscal stimulus and as the federal funds rate temporarily overshoots the neutral rate of interest. Nevertheless, the projected pace of expansion is above the U.S. economy’s estimated potential growth rate in both years. Strong domestic demand growth will support rising imports and contribute to a widening of the U.S. current account deficit. According to the IMF, growth in emerging and developing countries in 2019 is expected to be 4.5 % (2018E: 4.6 %). Growth in China is projected to reach 6.2 % in 2019 (2018E: 6.6 %) while Russia is expected to grow 1.6 % compared to growth of 1.7 % in 2018. Brazil is also ex- pected to experience positive growth, projected at 2.5 % for 2019 (2018E: 1.3 %). Expected Development of the Life Sciences Sector According to research by BioCentury, two-thirds of biotech companies could be facing a cash crunch in 2019 if the markets remain difficult. While investors do not expect capital avail- ability to be a problem, they think the rising cost of capital might mean employing alternative financing structures to help biotechs extend their runway. Investors and bankers contacted by BioCentury believe that most of the financial market issues facing the biotech sector in 2019 have nothing to do with indus- try fundamentals but that macro-economic forces have driven a shift toward a risk-off sentiment. The fourth quarter of 2018 was one of the worst quarters for biotech indexes in over 16 years, and investors see little reason to think the sentiment will change in the near-term. One bright spot is the string of M&A events that kicked off 2019 that could draw investors back to the sector. But short of an M&A spending spree, investors expect cost of capital may be one of the most important areas of focus in 2019. Investors are holding a relatively bleak outlook for the sector in 2019, with enough reason to worry from the last three months, which saw biotech enter a bear market. On the positive side, the number of new FDA product approvals reached an all-time high of 59 in 2018. Despite this, investors are wary about companies’ ability to effectively commercialize products once approved, as revenue trajectories, particularly from small and mid-cap companies, have not met projections. Future Research and Development and Expected Business Performance PROPRIE TARY DEVEL OPMEN T The Company’s R&D budget for proprietary drug and technol- ogy development in the 2019 financial year is expected to be in the range of € 95 million to € 105 million. The majority of in- vestment will fund the development of our proprietary drug candidates MOR208, MOR202 and our discovery efforts. The lion’s share of that funding will be dedicated to the clinical de- velopment 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 collabo- rations with partners such as academic institutions to gain ac- cess to new target molecules and technologies. O utlook and Forecast G roup Management Repor t 65 The events and development activities planned in 2019 include the following: • Continue interactions with the FDA during the breakthrough therapy designation process for MOR208. • Complete data evaluation of all 81 patients enrolled under the current study protocol of the fully recruited L-MIND trial in r/r DLBCL and present study results based on the primary completion analysis. • Initiate phase 1b trial with MOR208 in frontline DLBCL in second half of 2019. • Continue the pivotal phase  3 study evaluating MOR208 in combination with bendamustine in comparison to rituximab and bendamustine in r/r DLBCL (B-MIND study). • Continue the phase 2 COSMOS trial of MOR208 with idelal- isib and venetoclax in CLL/SLL and present data. • Complete the regulatory filing package comprising clinical and CMC (chemistry, manufacturing and controls) data for MOR208 and submit the regulatory filing in the U.S. to the FDA by year-end; according to current plans, the filing will be primarily based on data from the L-MIND study in addi- tion to historical data from lenalidomide single-agent treat- ment of the targeted patient population. • Continue the set up of commercial capabilities in the U.S. in order to prepare for expected commercialization of MOR208. • Prepare for and start an exploratory clinical trial of MOR202 in an autoimmune indication. • Continue ongoing clinical studies of MOR106 in atopic derma- titis together with our co-development partner Galapagos un- der the existing global licensing agreement with Novartis including the phase 2 iv* IGUANA study and the phase 1 sc bridging study and prepare the start of additional clinical studies in atopic dermatitis. • Continue preclinical investigations of MOR107 with a focus on oncology indications. • Continue and/or initiate development programs in the area of antibody discovery and preclinical development. *S E E G L O S S A R Y – page 188 Based on announcements made by our partner GSK earlier this year, we might see the initiation of phase  3 development of MOR103/GSK3196165 in rheumatoid arthritis in the second half of 2019 by our partner GSK. 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 collaborations based on its proprietary technologies with pharmaceutical and bio- tech companies, similar to the dermatology partnership with LEO Pharma that was initiated in 2016 based on our Ylanthia antibody platform and that was expanded in 2018 based on our proprietary peptide platform. According to information provided on the website clinicaltrials. gov, by the end of 2019 primary completion may be reached in a total of up to 13 clinical trials in phase 2 and 3 from partners evaluating antibodies made using MorphoSys technology. This includes a potentially pivotal phase 2b study by Mereo Pharma in osteogenesis imperfecta (brittle bone syndrome) of the HuCAL antibody setrusumab (BSP804), directed against the target molecule sclerostin and generated within the scope of the No- vartis partnership. Phase 3 trials with Tremfya® conducted by Janssen in psoriasis and in psoriatic arthritis are also sched- uled for primary completion in 2019. 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 The number of employees in the Proprietary Development seg- ment is expected to increase during the 2019 financial year, partly due the increased number of employees in connection with the build-up of commercial capabilities. The number of employees in the Partnered Discovery segment is expected to remain stable. The number of employees in G&A is expected to increase slightly. FINANCIAL STATEMENTSG roup Management Repor t 66 O utlook and Forecast Expected Development of the Financial Position and Liquidity MorphoSys had financial resources of € 454.7 million at the end of the 2018 financial year. Revenues in the 2019 financial year are expected to be below those achieved in 2018. The main rea- son for this expected decline is a positive one-time effect in 2018, namely the upfront payment of € 47.5  million received from Novartis in connection with a global licensing deal for MOR106. The Management Board is projecting Group revenues of € 43 million to € 50 million in the 2019 financial year. Reve- nues are expected to include royalty income from Tremfya® ranging from € 23 million to € 30 million at constant US$ cur- rency. This forecast does not take into account revenues from future collaborations and/or licensing agreements. R&D expenses for proprietary programs and technology devel- opment are expected to reach € 95 million to € 105 million in 2019. Most of these expenses in the Proprietary Development segment will arise from the development of MOR208, MOR202 and from our early-stage development programs, with the lion’s share expected to stem from clinical development of MOR208. R&D expenses for the Partnered Discovery segment are ex- pected to be lower than in the prior year. MorphoSys will continue to build commercial structures in the U.S. in preparation for the potential commercialization of MOR208 pending regulatory approval and therefore expects to incur a significant amount of selling expenses in the low to mid double-digit million euro range for 2019. The Company expects EBIT of approximately € –127 million to € –137 million in 2019. This guidance does not include a potential larger milestone for the start of a phase  3 clinical trial for MOR103/GSK3196165 that could occur in the course of 2019. The guidance also does not include revenues from potential future partnership or li- censing agreements for MOR208 or any other compound that is in MorphoSys’s proprietary development. Effects from potential in-licensing or co-development deals for new development can- didates are also not included in the guidance. The Partnered Discovery segment is expected to generate a positive operating result in 2019 which will exceed the result of the previous year. The Proprietary Development segment is expected to report a substantially more negative EBIT compared to the previous year due to the one-time effect in 2018 from the payment in the amount of € 47.5 million related to the MOR106 license agree- ment with Novartis Pharma AG and due to the continued high level of 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 impact on the Company’s net assets and financial position. Such events could cause financial targets to change significantly. Similarly, fail- ures in drug development could have negative consequences for the MorphoSys Group. Revenue growth in the near to me- dium term will depend on the Company’s ability to out-license its proprietary programs and/or enter into new partnerships as well as to secure regulatory approval for, launch and success- fully commercialize its first proprietary program MOR208. In addition, revenues should increasingly benefit from royalties based on sales of Tremfya® (guselkumab). At the end of the 2018 financial year, MorphoSys had liquidity of € 454.7 million (December 31, 2017: € 312.2 million). The loss projected for 2019 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 partnering with 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 financial statements of MorphoSys AG, pre- pared in accordance with German Generally Accepted Ac- counting Principles (German Commercial Code), the Company is reporting an accumulated deficit, which prevents it from dis- tributing a dividend for the 2018 financial year. In view of the anticipated losses in 2019, the Company expects to continue to report an accumulated loss for the 2019 financial year. MorphoSys will invest further in the development of propri- etary drugs and the set up of commercial capabilities in the U.S. and will potentially pursue additional in-licensing and ac- quisition transactions to open up new growth opportunities and increase the Company’s value. Based on these plans, the Company does not expect to pay a dividend in the foreseeable future. This outlook takes into account all known factors at the time of preparing this report and is based on the Management Board’s assumptions of events that could influence the Company in 2019 and beyond. Future results may differ from the expecta- tions described in the section entitled “Outlook and Forecast.” The most significant risks are described in the risk report. Shares and the Capital Mar ket G roup Management Repor t 67 Shares and the Capital Market MorphoSys AG shares opened the reporting year at a share price of € 76.58. After a solid start in the first weeks of 2018, the share price dropped in line with the TecDax due to weak trends observed on Wall Street affecting the European markets and MorphoSys’s share reached its low for the year of € 72.05 mid-February. The shares then trended higher in line with the TecDAX before breaking out in April after the Company an- nounced the initial public offering in the United States and the listing of ADSs on the Nasdaq Global Market. From April 9 on, the share price constantly increased, far outpacing the bench- mark index. The dual listing as well as positive news flow, such as approval of Tremfya® for plaque psoriasis in new regions and also for psoriatic arthritis in Japan received by Janssen in June as well as the global licensing agreement with Novartis and Galapagos for MOR106 mid-July, drove MorphoSys shares to a high of €122.20 on July  24. Thereafter, the worldwide stock markets were affected by the U.S. trade war with China and by the jump in returns in the U.S. Moreover, the European Market was marked by insecurities due to the banking crisis in Italy, with all causing a continuous decline for both the TecDAX as well as the MorphoSys shares. This resulted in a low of € 77.75 on October 26. Of note, MorphoSys shares were included into the MDAX as of September  24 while remaining part of the TecDAX segment. The simultaneous inclusion in both indices, MDAX and TecDAX, was based on the reorganization of the index rules of Deutsche Börse, the existing separation into the Tech and Classic segments having been removed. While both the TecDAX and MDAX declined further in the course of the year, MorphoSys’s share price again increased from the begin- ning of November and closed the financial year at € 88.95, amounting to a share price increase of 16 % and a market capi- talization of € 2.8 billion . MorphoSys AG shares therefore clearly outperformed the de- velopment of the relevant indices, namely the Nasdaq Biotech- nology Index (–9 %), the MDAX (–18 %) and the TecDAX (–3 %) in 2018 . ›› S E E F I G U R E 11 – Performance of the MorphoSys Share in 2018 (page 68) ›› S E E F I G U R E 12 – Performance of the MorphoSys Share 2014–2018 (page 68) Stock Market Development 2018 was a difficult year on the stock markets. For the first time since 2011, the leading German index DAX was down signifi- cantly at about –18 %. Concerns about a slowdown in the global economy, the trade dispute between the USA and China, and the approaching Brexit in March have had a greater impact on the German stock markets than on the U.S. markets. However, the Dow Jones index also ended the year down roughly 6 %. Bio- tech shares did not manage to escape this negative stock mar- ket environment and also had to face falling prices. During the reporting year, MorphoSys continued to increase its investor relations activities both in Europe and with a growing focus also in the United States following the listing on the Nasdaq Global Market. Liquidity and Index Membership The average daily trading volume in MorphoSys shares on all regulated trading platforms increased by about 45 % in 2018, reaching a volume of € 22.5 million (2017: € 15.6 million). The average daily trading volume on the TecDAX, which contains the 30 largest technology stocks on the Frankfurt Stock Ex- change, rose 93 %. In addition, in 2018 MorphoSys shares were included for the first time in the German MDAX index, which comprises the 60 largest companies in terms of market capital- ization and turnover on the Frankfurt Stock Exchange behind those that make up the DAX. By the end of 2018, MorphoSys ranked 10th in the TecDAX in terms of market capitalization (2017: 10th) and 14th in terms of trading volume (2017: 12th). In the MDAX, MorphoSys shares ranked 59th in terms of mar- ket capitalization and 65th in terms of trading volume (the rank refers to DAX (30) and MDAX (60) listed companies). The average daily trading volume in MorphoSys shares on al- ternative trading platforms (“dark pools”) in 2018 was approxi- mately € 16.2 million, or 173,000 shares (2017: approx. 98,700 shares valued at € 6.3 million), representing a year-on-year in- crease of 156 %. Market Information Our shares have been trading on the Frankfurt Stock Exchange under the symbol “MOR” since 1999. On April 23, 2018 we an- nounced the closing of our initial public offering (IPO) in the United States through an ADS offering. The ADSs are listed on the Nasdaq Global Market under the symbol “MOR.” The following table sets forth for the periods indicated the re- ported high and low closing sale prices per ordinary share in Xetra trading in euros on the Frankfurt Stock Exchange as well as per ADS in US dollars traded on Nasdaq. FINANCIAL STATEMENTSShares and the Capital Mar ket 4/19/18 M O R P H O S Y S N A S D A Q - L I S T I N G G roup Management Repor t 68 11 Performance of the MorphoSys Share in 2018 (January 1, 2018 = 100 %) * MorphoSys Nasdaq-listing as of 4/19/2018 170 160 150 140 130 120 110 100 90 80 70 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC morphosys xe tr a morphosys nasdaq* tec da x mda x nasdaq b iotech 12 Performance of the MorphoSys Share 2014–2018 (January 1, 2014 = 100 %) 300 250 200 150 100 50 0 2014 2015 2016 2017 2018 morphosys tec da x nasdaq b iotech T A B L E 0 8 Closing Prices of MorphoSys Shares and ADS 2014 2015 2016 2017 2018 ADSs traded on Nasdaq (in US$) Ordinary shares traded on Frankfurt Stock Exchange (in €) High Low High n/a n/a n/a n/a n/a n/a n/a n/a 35.66 21.96 86.72 78.65 56.07 82.95 122.00 Low 55.45 52.52 33.25 47.60 72.05 Shares and the Capital Mar ket Common Stock G roup Management Repor t 69 The Company’s common stock increased to 31,839,572 shares, or € 31,839,572, in the reporting year mainly due to a capital increase in connection with the initial public offering (IPO) on the Nasdaq Stock Market. In April 2018, MorphoSys successfully completed the IPO on the Nasdaq Stock Market, generating gross proceeds of US$ 239,006,800. The transaction was executed in two consec- utive capital increases from Authorized Capital 2017-II, exclud- ing the subscription rights of existing shareholders. Initially, 2,075,000 new ordinary shares were issued as part of a basic offering in the form of 8,300,000 American Depositary Shares (“ADS”). This was followed by the full exercise of an option granted to the underwriters to acquire a further 311,250 new ordinary shares in the form of 1,245,000 ADSs. The price was US$ 25.04 per ADS in both transactions. Each ADS represents 1/4 of a MorphoSys ordinary share. The new ordinary shares underlying the ADSs in the basic offer and the option exercised by the underwriters correspond to approximately 8.1 % of the common stock of MorphoSys prior to the capital increases from Authorized Capital 2017-II. Another reason for the increase in the Company’s common stock was the exercise of convertible bonds granted to the Man- agement Board and the Senior Management Group. A detailed description of the convertible bond program can be found in the Notes (Item 7.2). T A B L E 0 9 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) 2018 2017 2016 2015 2014 488.4 358.7 415.5 362.7 348.8 31,839,572 29,420,785 29,159,770 26,537,682 26,456,834 2,832 88.95 22.5 0.77 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 International Investor Base Annual General Meeting Various voting right notifications were issued during the re- porting year in accordance with Section 26 (1) of the German Securities Trading Act (WpHG). These notifications were pub- lished on the MorphoSys website and can be found under Media and Investors – Stock Information – Recent Voting Rights Notifications. The Management and Supervisory Boards of MorphoSys AG welcomed shareholders to the Company’s 20th Annual General Meeting (AGM) in Munich on May 17, 2018. The shareholders and proxies attending represented more than 60.7 % of the com- mon stock of MorphoSys AG (2017: 54.0 % of the common stock represented). According to the definition given by the Deutsche Börse, the free float in MorphoSys AG’s shares was 99.11 % at the end of the reporting year. All resolution proposals of the management were approved with the required majority of votes. At the close of the 2018 AGM, the terms of office of Supervisory Board members Dr.  Gerald Möller and Dr. Marc Cluzel ended. Klaus Kühn resigned from the Supervisory Board for personal reasons at the end of the 2018 AGM. The Annual General Meeting re-elected Dr.  Marc Cluzel and newly elected Dr. George Golumbeski and Michael Brosnan to the Company’s Supervisory Board. In its constitu- tive meeting following the AGM, the Supervisory Board elected Dr. Marc Cluzel as its new chairman and Dr. Frank Morich as vice chairman. FINANCIAL STATEMENTS G roup Management Repor t 70 Dividend Policy We have not paid any dividends on our ordinary shares since our inception, and we currently intend to retain any future earnings to finance the growth and development of our busi- ness. Therefore, we do not anticipate that we will declare or pay any cash dividends in the foreseeable future. Except as re- quired by law, any future determination to pay cash dividends will be at the discretion of our Management Board and Supervi- sory Board and will be dependent upon our financial condition, results of operations, capital requirements, and other factors our Management Board and Supervisory Board deem relevant. Investor Relations Activities At the beginning of December, the Company held an Investor and Analyst Event in New York City dedicated to MOR208, im- mediately following the 60th ASH conference in San Diego. During this event, the latest L-MIND data were presented and the Company gave an outlook on the planned filing strategy. Following the presentation, participants were given an oppor- tunity to address questions to the management. The event was Shares and the Capital Mar ket also webcast, making it accessible to interested parties world- wide. A total of more than 100 investors, analysts and share- holders watched the Management Board’s presentations. MorphoSys also took part in over 20 international investor con- ferences. 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. Following the listing on Nasdaq in April, we estimate that nearly 50 % of MorphoSys AG shares are meanwhile held by U.S. 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 development of our lead product candidate MOR208, the general progress of our proprietary portfolio and the partnered pipeline were the topics in investor discussions. A total of 14 analysts covered MorphoSys shares at the end of 2018. T A B L E 1 0 Analyst Recommendations (December 31, 2018) Buy/Overweight/Market Outperform Hold/Neutral Reduce/Underperform 7 5 2 Detailed information on MorphoSys shares, financial ratios, the Company’s strategic direction and the Group’s recent de- velopments can be found on the Company’s website (Media and Investors). Sustainable B usiness Development G roup Management Repor t 71 Sustainable Business Development We are aware of our responsibility to present and future gener- ations and see sustainable behavior as a prerequisite for long- term business success. As a biotechnology company conduct- ing both research and drug development, observing the highest ecological, social and ethical standards is a top priority and a key component of our corporate culture. The following section describes our sustainability strategy and the activities carried out during the reporting year that represent non-financial per- formance indicators. The financial performance indicators are presented in the section “Operating and Financial Review and Prospects.” Information on our management structure and cor- porate governance practices can be found in the Corporate Gov- ernance Report. Sustainable Corporate Management Sustainability is a hallmark of our corporate management and plays a major role in the pursuit of corporate goals and in con- tributing value to society. This applies to the short- and long- term objectives of all levels of management and is reflected in our core task of developing even more effective and safer drugs. To ensure lasting business success, we incorporate environ- mental and social responsibility into our daily business and base our business model on sustainable growth that protects the interests of our shareholders, creates long-term value and weighs our actions in terms of their impact on the environment, society, patients and employees. Internally, this business model is reflected in a progressive human resources policy that takes employees’ needs seriously. Our long-term and sustainable business success rests on inno- vative 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 healthcare system. In the opinion of management, all aspects of our current busi- ness model support the sustainable investment interests of our shareholders. A comprehensive risk management system ensures that factors that could threaten sustainable corporate performance are identified early and corrected if necessary. We only accept risk when there is an opportunity to increase our enterprise value. At the same time, great effort is made to systematically identify new opportunities and leverage our business success (more in- formation on risks and opportunities can be found on page 76). Group-wide compliance with the sustainability strategy is monitored by the entire Management Board, with primary re- sponsibility assigned to the Chief Financial Officer. 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 our Code of Conduct. The Compliance Commit- tee consists of six members and is available to employees at all times. The Compliance Officer, who is also a member of the committee, coordinates the elements of MorphoSys’s Compli- ance Management System. More information on this subject can be found on page 107 of the Corporate Governance Re- port. Employees can ask for advice on all matters concerning compliance and report any suspected violations. If preferred, this may be done on an anonymous basis. Violations are sys- tematically pursued, and appropriate remedial action is taken. No such violations have been reported to date. Detailed information on the KPIs for sustainable development used by MorphoSys is provided in the section “Strategy and Group Management” (page 25). The following report on the implementation of our corporate strategy and the Company’s sustainable business development is based on the recommen- dations of the German Sustainability Code originally presented by the Council for Sustainable Development in October 2011 and last updated in 2017. Non-Financial Performance Indicators E T HIC AL S TANDARDS AND COMMUNIC AT ION WI T H S TAKEHOL DERS The highest scientific and ethical principles for conducting hu- man clinical trials and animal testing are anchored in our Code of Conduct. Strict compliance with applicable national and in- ternational regulations is mandatory for all MorphoSys employ- ees and sub-contractors. As European and international legislation requires animal test- ing to determine the toxicity, pharmacokinetics and pharmaco- dynamics* of drug candidates, the biotechnology industry can- not forgo this type of testing. Animal testing for our drug candidates is outsourced to contract research organizations (CROs) as we do not have laboratories suitable for this type of research. As part of our product development activities, we award animal experiments in accordance with the 3Rs princi- ples of animal welfare (Replace, Reduce, Refine) as laid down FINANCIAL STATEMENTSG roup Management Repor t 72 13 Occupational Safety at MorphoSys Sustainable B usiness Development 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 implemented before actual work commences P AT H O G E N I C O R G A N I S M S A R E P R O C E S S E D I N L A B O R AT O R I E S W I T H P A R T I C U L A R S A F E T Y S TA N D A R D S L O W E S T P O S S I B L E A M O U N T S O F H A Z A R D O U S S U B S TA N C E S U S E D ONLY SPECIALLY TRAINED EMPLOYEES ARE ALLOWED TO WORK WITH TOXIC SUBSTANCES in national, European and international regulations. We have established a quality assurance system with written standard operating procedures (SOPs*) that are continuously updated to ensure that we only work with CROs that comply with local, national and international guidelines and animal welfare regu- lations. Animal studies are only conducted after approval by the relevant ethics committee and under the supervision of the attending veterinarian. Contract research organizations cooperating with us must com- ply with ethical principles and legal regulations for research involving animals and, in case required, have the Good Labora- tory Practice (GLP*) certification. This is how we ensure we fulfill our moral obligation for the respectful treatment of ani- mals. We also conduct on-site visits and audits of the research institute’s study centers that include a review of the staff’s skills and training as well as animal welfare. We observe the ethical principles defined in The Declaration of Helsinki, and follow all applicable international and national laws and guidelines, such as Good Clinical Practice (GCP*) guidelines, when conducting clinical trials. The trials are con- ducted in compliance with the relevant provisions on privacy and confidentiality. Protecting the rights, safety and well-being of all clinical trial participants has the highest priority at MorphoSys. Clinical trials are initiated only after the approval of the relevant independent ethics committee and/or institu- tional review board. Before participating in a clinical trial, each participant must voluntarily submit an informed consent. The goal of our business activities is to improve patients’ health through our scientific work. We can only achieve this goal if our activities are socially accepted. Achieving this acceptance re- quires a continuous and open dialog with stakeholders so that we can understand potential concerns with regard to biotechno- logical approaches and explain our activities and their benefits. To accomplish this, we are 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. Sustainable B usiness Development G roup Management Repor t 73 PROCUREMEN T Our Central Purchasing and Logistics Department is responsi- ble for negotiating and purchasing goods and services. The de- partment is continuing to improve the efficiency of procurement management systems and processes including the introduction of electronic approval processes. Also, during this year, a new ERP system has been developed to address our future needs. For more details, please see section “Information Technology” on page 105. ENVIRONMEN TAL PRO T EC T ION AND OCCUPAT IONAL SAF E T Y Because the biotechnology industry is subject to stringent reg- ulatory requirements, environmental protection and occupa- tional safety are important tasks for us. Our Technical Opera- tions Department and its subsections monitor our compliance with all relevant requirements. In addition to strict compliance with all legal requirements, we make a tremendous effort to maintain sustainable environmental management and the ef- fective protection of our employees. We offer employees an extensive range of preventative health- care options. A sample of these options can be found in the section entitled “Human Resources” (page 75). With two reportable occupational accidents in 2018, the num- ber of accidents remained at a very low level, placing our ratio of reportable accidents significantly below the average ratio in the German chemical industry (14.6 reportable occupational accidents as defined by the employers’ liability insurance asso- ciation BG RCI per 1,000 full-time employees in the latest sur- vey conducted in 2017). We try to minimize the amount of harmful substances used in our laboratories. Only specific employees who are specially trained are allowed to work with toxins. Work involving conta- gious pathogens can only be carried out in secure laboratories. We only use certified companies to dispose of chemical waste and also refrain from radioactive substances. ›› S E E F I G U R E 13 – Occupational Safety at MorphoSys (page 72) QUAL I T Y ASSURANCE Biopharmaceutical companies bear a special responsibility to comply with the highest quality and safety standards. We fol- low detailed procedures and stringent rules in drug develop- ment to minimize safety risks for patients and ensure the qual- ity of the investigational medicinal products, integrity and reliability of the data generated. To control and regulate these processes in our own drug devel- opment activities, we implemented an integrated quality man- agement system that complies with the applicable principles of Good Manufacturing Practice (GMP*), Good Clinical Practice (GCP), Good Laboratory Practice (GLP) and Good Distribution Praxis (GDP) to ensure that all development activities follow national and international laws, rules and guidelines. Our inde- pendent quality assurance department prepares an annual risk-based audit plan enabling an objective auditing of contract research organizations, investigational sites, suppliers and con- tract manufacturers selected for clinical studies as well as our own departments involved in drug development activities. The Head of Quality Assurance reports to and coordinates activities with the Chief Executive Officer to meet the stringent quality standards, ensure product quality and data integrity as well as the safety of volunteers and patients in clinical trials. *S E E G L O S S A R Y – page 188 We hold a manufacturing license for the Qualified Person’s cer- tification of investigational medicinal products, as well as a cer- tificate from the German authorities of Upper Bavaria confirm- ing the Company’s compliance with Good Manufacturing Practice (GMP) standards and guidelines. ›› S E E F I G U R E 14 – Quality Management System at MorphoSys (page 74) IN T EL L EC T UAL PROPER T Y Proprietary technology and the drug candidates derived there- from are our most valuable assets. Therefore, it is critical to our success that these assets are protected by appropriate mea- sures such as patents and patent filings. Only through these means can we ensure that these assets are exclusively utilized. It is also the reason our Intellectual Property (IP) Department seeks out the best strategy to protect our products and technol- ogies. The rights of third parties are also actively monitored and respected. Our core technologies, which include the Ylanthia antibody library and the Slonomics technology amongst others, form our basis for success. Each of these technologies is protected by a number of patent families. Meanwhile, most of these patents have been granted in all of the key regions, including the mar- kets 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 filed that cover other aspects of the programs. The relevant patents for our development candidates MOR103/GSK3196165 (out-licensed to GSK) and MOR202 (out- licensed to I-Mab for Greater China) are expected to expire not before 2031 (including the predicted patent term extensions and supplementary protection certificates). The MOR208 pro- gram is also protected by various patents. The key patents are scheduled to expire in 2029 (U.S.) and 2027 (Europe), not tak- ing into account the additional protection of up to five years which is available via supplementary protection certificates or patent term extensions. Likewise, the key patent for MOR106 (out-licensed together with Galapagos to Novartis) expires in 2037, not taking into account any potential extensions. For all development programs regulatory exclusivities are available as well. FINANCIAL STATEMENTSG roup Management Repor t 74 14 Quality Management System at MorphoSys Sustainable B usiness Development 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 2 7 6 T R A I N I N G A N D Q U A L I F I C AT I O N 3 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 R E G U L AT O R Y R E Q U I R E M E N T S 4 5 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 ) S O P S Y S T E M * D O C U M E N TAT I O N S Y S T E M B AT C H R E C O R D R E V I E W / B AT C H R E L E A S E H A N D L I N G O F D E V I AT I O N S , 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 Sustainable B usiness Development G roup Management Repor t 75 The programs developed in cooperation with or for partners are also fully secured by patent protection. Our patent department 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. In addition, we monitor the activities of our competitors and initi- ate any necessary actions. For IP developments in the reporting year please see section “Patents” under “Research and Development and Business Performance.” HUMAN RES OURCES We follow a progressive human resources policy for the long- term retention of professionally and personally suitable em- ployees from a variety of fields. In an industry such as ours, where success largely depends on the creativity and commit- ment of staff, factors such as employee retention and employee satisfaction are crucial for success. Employees have access to a broad range of in-house and exter- nal training programs, advanced education, specialized con- tinuing education and development programs. Employees also can visit or present at industry conferences. We promote not only ongoing professional education but also the personal de- velopment of our employees and in some cases even offer sup- port through customized coaching. We encourage all employees with management responsibility to take part in management seminars created exclusively for us. The training is offered in several modules with themes that build upon one another. The goal is not only to provide theoret- ical knowledge but also to prepare participants for the special demands placed on our executives. We actively promoted the professional career paths of special- ists and experts once again during the reporting year. The in- tended goal of this type of career promotion, which is also avail- able to employees without personnel responsibilities, is to continue to maintain flat hierarchies and place traditional man- agement and professional career paths on an equal footing, also in terms of titles and compensation structures. We offer in-house vocational training to open up promising ca- reer prospects, particularly for young people. In awarding ap- prenticeships, we have been very successful in considering students who are equally suitable but do not have a diploma. On December 31, 2018, we had two trainees in the IT department and six biology laboratory trainees (December 31, 2017: two IT trainees; six biology laboratory trainees). Our corporate values – Innovation, Collaboration, Courage and Urgency – are the basis of our company culture. They deter- mine how we act and interact. As articulated in our credo, transparent communication between employees is one central aspect of our corporate culture. One example is the employees’ use of our intranet to obtain target-group-specific information. We also have a general meeting every three weeks, in which the Management Board presents the latest developments to em- ployees, answers questions and provides an opportunity 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. We maintain a Facebook career page to promote employer branding. The target group is potential applicants who want to learn more about us. The page presents employee profiles and reports on a variety of activities extending beyond the typical workday to give an authentic and modern impression of us. New employees are helped to become familiar with the Group through extensive onboarding activities. Employees can learn about our processes in one-day orientation seminars with pre- sentations from all operating departments and by participating in laboratory tours. New executives are offered an additional seminar concerning their management duties. Free athletic and relaxation options, such as soccer, volleyball and basketball, as well as autogenic training and massage for a fee, all work to promote health and socializing among employ- ees 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, we have been offering em- ployees a diverse range of options, such as flexible 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 office without interruption. We make it easier for employees with families to reenter the work- force and combine work and family life. We cooperate with an external provider offering employees additional services re- lated to care and nursing. We make every effort to protect employees from workplace haz- ards and maintain their health through preventative measures. The extremely low number of occupational accidents illustrates the success of our strict monitoring of all occupational protec- tion and safety measures. During the reporting year, there were two reportable occupational accidents. We try to maintain the low number of accidents and the highest level of employee safety and well-being through the help of policies and training from the Department of Health and Occupational Safety and by offering routine medical examinations. A detailed overview of the Group’s headcount development can be found in the section “Operations and Business Environment.” FINANCIAL STATEMENTSG roup Management Repor t 76 Risk and O ppor tunit y Repor t Risk and Opportunity Report We operate in an industry characterized by constant change and innovation. The challenges and opportunities in the health- care sector are influenced by a wide variety of factors. Global demographic changes, medical advances and the desire to in- crease quality of life provide excellent growth opportunities for the pharmaceutical and biotechnology industries; however, companies must also grapple with growing regulatory require- ments in the field of drug development as well as cost pressure on healthcare systems. We undertake great efforts to identify new opportunities and to leverage our business success to generate a lasting increase in enterprise value. Entrepreneurial success, however, is not achievable without conscious risk-taking. Through our world- wide operations, we are confronted with a number of risks that could affect our business. Our risk management system identi- fies these risks, evaluates them and takes suitable action to avert risk and reach our corporate objectives. A periodic strat- egy review ensures that there is a balance between risk and opportunity. We only assume risk when there is an opportunity to increase our enterprise value. Risk Management System The risk management system is an essential element of our cor- porate governance and ensures we adhere to good corporate governance principles and comply with regulatory require- ments. We have a comprehensive system in place to identify, assess, communicate and deal with our risks. The risk management system identifies risk as early as possible and details possible actions to limit operating losses and avoid risks that could endanger the Company. All actions to minimize risk are assigned to risk officers, who are also members of our Senior Management Group. All of our material risks in the various business segments are assessed using a systematic risk assessment that is carried out twice a year. Risks are assessed by comparing their quantifi- able financial impact 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 our risks related to proprietary devel- opment that have longer durations. Additionally, there is long- term strategic risk assessment that spans more than three years (qualitative assessment). An overview of our current risk assessment activities can be found in Tables 11 and 12. Risk managers enter their risks into an IT platform that makes monitoring, analyzing and documenting risks easier. The risk management system distinguishes risk owners from risk man- agers. For risks relating to clinical development, the risk owner is the responsible business team head for the respective clini- cal program. For non-clinical risks, the risk owner is the re- sponsible 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 from the Corporate Fi- nance & Corporate Development Department, which is also re- sponsible for monitoring the evaluation process and summariz- ing the key information. The information is regularly presented to the Management Board which, in turn, presents the results to the Supervisory Board twice a year. The entire evaluation process is based on standardized forms for the evaluations. Risk management and monitoring activities are carried out by the relevant managers. The changes in the risk profile result- ing from these activities are recorded at regular intervals. It is also possible to report important risks on an ad hoc basis when they occur outside of the regular intervals. A regular audit by external consultants ensures the ongoing development of the risk management system and that any potential changes in our risk areas are promptly incorporated. The risk and opportunity management system combines a bottom-up approach for recog- nizing both short- and medium-term risks with a top-down ap- proach that systematically identifies 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 opportunities in different areas, including those exceeding a period of three years. The evaluation process is solely qualitative. These risks are listed in Table 11 and 12. Principles of Risk and Opportunity Management We continually encounter both risks and opportunities. These could have a potential material impact on our net assets and fi- nancial position as well as a direct effect on intangible assets, such as our image in the sector or our trademark. We define risk as an internal or external event that has an imme- diate impact and includes an assessment of the potential financial impact on our targets. There is a direct relationship between op- portunity and risk. Seizing opportunities has a positive influence on our targets, whereas risk emergence has a negative influence. Risk and O ppor tunit y Repor t G roup Management Repor t 77 Responsibilities under the Risk and Opportunity Management System Our Management Board is responsible for the risk and opportu- nity management system and ensures that all risks and opportu- nities are evaluated, monitored and presented in their entirety. The Corporate Finance & Corporate Development Department coordinates the risk management process and reports regu- larly to the Management Board. The Supervisory Board has ap- pointed the Audit Committee to monitor the effectiveness of our risk management system. The Audit Committee periodically reports its findings to the entire Supervisory Board, which is also directly informed by the Management Board twice a year. ›› S E E F I G U R E 15 – Risk and Opportunity Management System at MorphoSys (page 78) Accounting-Related Internal Control System We employ extensive internal controls, Group-wide reporting guidelines as well as other measures, such as employee train- ing and ongoing professional education with the goal of main- taining accurate bookkeeping and accounting and ensuring reliable financial reporting in the consolidated financial state- ments and group management report. This essential compo- nent of Group accounting consists of preventative, monitoring and detection measures intended to ensure security and con- trol in accounting and operating functions. Detailed informa- tion about the internal control system for financial reporting can be found in the Corporate Governance Report. Risks According to Risk Management System RISK C AT EGORIES As part of its risk assessment, we assign risks to the six catego- ries 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 11 and 12, which list our biggest risks, do not necessarily include risks from all six categories. FINANCIAL RISK Our financial risk management seeks to limit financial risk and reconciles this risk with the requirements of our 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 under different terms and conditions than originally planned. Risk also arises when revenues do not reach their projected level or when costs are higher than planned due to greater resource requirements. De- tailed project preparations, such as those made through in- depth exchanges with internal and external partners and con- sultants, ensure the optimal starting point early in the process and are important for minimizing risk. Our financial risk re- lated to proprietary programs was reduced in July 2018 when we, together with Galapagos NV, entered into a worldwide, ex- clusive agreement with Novartis Pharma AG covering the de- velopment and commercialization of our joint program MOR106. The financial risk relating to the fully proprietary program MOR208 remains entirely with us. We retain some risk with respect to the clinical development of programs introduced into partnerships; for example MOR210. In 2018 we partnered this program with I-Mab for China, Taiwan, Hong Kong, Macao and South Korea, but retain responsibility for the rest of the world ourselves. The early termination of development partnerships may force us to bear future development costs alone and have a major impact on our statement of profit or loss and financial planning. Through our successful Nasdaq IPO in April 2018, we strengthened our financial position. Continuing economic difficulties in Europe indicate that poten- tial bank insolvencies still pose a financial risk. For this rea- son, we continue to invest only in funds and bank instruments deemed safe – to the extent this is possible and can be esti- mated – and that have a high rating and/or are secured by a strong partner. We limit our dependence on individual financial institutions by diversifying and/or investing in lower risk money market funds. However, a strategy 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 adequate interest on financial investments, particularly in light of today’s negative interest rates. It is currently very difficult for us to invest within the scope of our policies and still avoid negative interest rates. We invest when possible in instruments that yield positive interest rates. However, there is no guarantee that positive, safe, inter- est-bearing investments will always be available. In the Partnered Discovery segment, there is a financial risk associated with royalties on Tremfya® product sales. Revenues generated by our partner Janssen from the drug, which was approved in 2017, are difficult to predict and may lead to devia- tions from the budgeted revenues. We plan to continue to invest a significant portion of our funds in the development of our 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 finan- cial resources and expected revenues are expected to be suffi- cient to meet our current and short-term capital needs. This does not guarantee, however, that sufficient funds will be avail- able over the long term at all times. FINANCIAL STATEMENTSRisk and O ppor tunit y Repor t G roup Management Repor t 78 15 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 O ppor tunit y Repor t G roup Management Repor t 79 OPER ATIONAL RISK Operational risk includes risks related to the discovery and de- velopment 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 does not produce the ex- pected results, shows unexpected adverse side effects or the data are compiled incorrectly. Clinical trial design and drafts of development plans are always completed with the utmost care. This gives the trials the best opportunity to show relevant data in clinical testing and convince regulatory agencies and poten- tial partners of the drug candidate’s potential. External experts also contribute to our existing internal know-how. Special steering committees and panels are formed to monitor the progress of clinical programs. Any changes with respect to clinical trials such as the trial’s design, the speed at which patients can be recruited or upcom- ing alternative therapies may lead to a delay in development and, as a result, have a negative impact on the trial’s economic feasibility and potential. There is also a risk associated with proprietary programs if partnerships fail or are delayed. STR ATEGIC RISK Access to sufficient financing options also poses a strategic risk for us. Following our decision to develop our proprietary portfo- lio in-house, the financing of research and development is now a key focus. Risks in this respect can arise from a lack of access to capital. We established an in-depth budget process to miti- gate these risks. We also employ various departments and ex- ternal consultants to ensure 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 us to search for new devel- opment partners or bear the substantial cost of further develop- ment 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 us due to delayed market entry. Another strategic risk is that preliminary data from clinical tri- als may lead to the trial’s termination or a change in the trial’s design. With respect to the development and potential approval of MOR208, we are currently preparing a submission of a regula- tory filing with the FDA based on the single-arm L-MIND trial. There may be a strategic risk that the regulatory authorities do not accept a filing and/or grant approval based on single-arm data for MOR208 plus lenalidomide. E X TERNAL RISKS We face external risks with respect to intellectual property, among others. The patent protection of our proprietary technol- ogies and compounds is especially important. To minimize risks in this area, we keep a vigilant eye on published patents and patent applications and analyze the corresponding results. We also develop strategies to ensure that the patents or patent applications of others do not limit our ability to pursue our own activities. Through the years, we have seen increasing success with this strategy and have created ample leeway for our pro- prietary technology platforms and products for many years to come. Risks can also arise through the enforcement of our in- tellectual property rights vis-à-vis third parties. The respective proceedings can be costly and mobilize significant resources. There is also the risk that a third party files a counter-claim against us. External risks may also arise as a result of changes in the legal framework. This risk is minimized through contin- ued training of the relevant staff and discussions with external experts. It is also conceivable that competitors might challenge our patents or infringe on our patents or patent families, which in turn could lead us to take legal action against our competi- tors. Such procedures, particularly when they take place in the U.S., are costly and represent a significant financial risk. As an internationally operating biotechnology company with numerous partnerships and an in-house research and develop- ment department for developing drug candidates, we are sub- ject to a number of regulatory and legal risks. These risks in- clude those related to patent, competition, tax and antitrust law, potential liability claims from existing partnerships and envi- ronmental protection. The Regulatory Affairs department is also affected 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 significant impact on our business and results. ORGANIZ ATIONAL RISK Organizational risks arise, for example, with respect to setting up commercial structures and the related costs. For us, this means that processes and procedures need to be adapted ac- cordingly. In September 2017, we established a “Global Com- mercial” department, which works with external consultants to set up commercial structures in the headquarters and supports other functions to get ready for commercialization. In July 2018, we opened a 100 % affiliate in the U.S., MorphoSys US Inc., which will be the first commercial operation. Highly experi- enced employees are being hired to ensure thorough prepara- tion for launch. Risk also arises from missing or delayed information within the organization on patent issues. FINANCIAL STATEMENTSG roup Management Repor t 80 Risk and O ppor tunit y Repor t C OMPLIANCE RISK Compliance risks can arise when quality standards are not met, or business processes are not conducted properly from a legal standpoint. To counter these risks, we are committed to having our 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. Specific risks 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), Good Laboratory Practice (GLP) or Good Distribution Praxis (GDP) then this also would represent a compliance risk. To minimize risk, the internal quality management system is also regularly audited by external experts and subjected to re- curring audits by an internal, independent quality assurance department. Inadequate or late financial communication can lead to fines or even lawsuits. Annual General Meetings conducted incorrectly may lead to legal disputes with shareholders resulting in signifi- cant costs from attempts to prevent either a challenge to or re- peat of the Annual General Meeting. Pending decisions for corpo- rate actions, such as capital increases, could also be compromised. To minimize these risks, the preparation and execution of the Annual General Meeting and all related documents and pro- cesses are carefully reviewed and monitored by the relevant internal departments, as well as by external lawyers and audi- tors when it comes to the annual financial statements. None of the Top 10 Risks listed in Tables 11 and 12 belonged to this risk category in the reporting period. T HE MANAGEMEN T BOARD’S EVALUAT ION OF T HE OVERAL L RISK SI T UAT ION IN OUR GROUP Our Management Board considers the overall risk to be man- ageable and trusts in the effectiveness 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 our continued existence is not jeopardized. This assessment applies to us as a whole as well as to each Group company. This conclusion is based on several factors that are summarized below: • We have an exceptionally high equity ratio. • The Management Board firmly believes that we are well posi- tioned to cope with any adverse events that may occur. • We control a comprehensive portfolio of preclinical and clini- cal programs in partnerships with a number of large pharma- ceutical companies and have a strong foundation of technolo- gies for expanding our proprietary portfolio. Despite these factors, it is impossible to rule out, control or in- fluence risk in its entirety. Opportunities Cutting-edge antibody technologies, excellent know-how and a broad portfolio of validated clinical programs have made us one of the world’s leading biotechnology companies in the field of therapeutic antibodies. This therapeutic class is now one of the most successful in the industry, and there is an impressive number of pharmaceutical and biotechnology companies in the field of antibodies that could potentially become customers or partners for our products and technologies. Based on this fact and our extensive, long-term technological and product devel- opment expertise, we have identified a number of future growth opportunities. Our technologies for developing and optimizing therapeutic an- tibody 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 our core capabilities – even those outside of the field of antibodies – opens up new opportunities for us because 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 our corporate management and is used to identify oppor- tunities as early as possible and generate added value for us. Opportunity management is based on the following pillars: • a routine discussion forum involving the Management Board and selected members of the Senior Management Group; • our business development activities; • a technology scouting team; • a compound scouting team; and • an in-house suggestion scheme, with appropriate incentive systems, for new scientific ideas. Committees discuss specific 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. Our Business Develop- ment Team takes part in numerous conferences and in the process identifies different opportunities that can enhance our growth. These opportunities are presented and considered by the committee by means of an evaluation process. The technol- ogy scouting team searches specifically for innovative technol- ogies that can generate synergies with our existing technology platforms and could be used to source new therapeutic mole- cules. The compound scouting team searches specifically for compounds that can add to our proprietary pipeline or future sales force. These outcomes are also discussed and evaluated in interdepartmental committees. A proven process for evaluating opportunities gives us a qualitative and replicable evaluation. Our key opportunities are described in Table 13 (qualitative evaluation). Risk and O ppor tunit y Repor t G roup Management Repor t 81 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. Scientific and medical progress has led to a better understanding of the biological pro- cess of disease and paves the way for new therapeutic ap- proaches. Innovative therapies, such as fully human antibod- ies, have reached market maturity in recent years and have led to the development of commercially successful medical prod- ucts. 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 significant li- censing agreements made over the past two to three years. MARKE T OPP OR T UNI T IES We believe our antibody platforms HuCAL, Ylanthia, Slonomics, the HTH peptide technology and the in-licensed lanthipeptide technology can all be used to develop products addressing sig- nificant unmet medical needs. October that new Tremfya® (guselkumab) 3-year data show sta- bly maintained rates of skin clearance in patients with moder- ate to severe plaque psoriasis. In December, Janssen reported that results from the ECLIPSE study demonstrated that Tremfya® was superior to Cosentyx® (secukinumab) in treating adults with moderate to severe plaque psoriasis for the primary endpoint of a PASI 90 response at week 48. Tremfya® has received further regulatory approval in a number of territories worldwide, including Canada, the European Union, Brazil, Japan, Australia and South Korea to treat pa- tients suffering from moderate-to-severe plaque psoriasis and in Japan additionally for the treatment of psoriatic arthritis, pustular psoriasis and erythrodermic psoriasis. Moreover, Tremfya® is being investigated in clinical studies including two phase  3 trials in psoriatic arthritis and a phase  2/3 clinical study program in Crohn’s disease. Janssen also initiated a phase 2 study (NOVA) to evaluate guselkumab in hidradenitis suppurativa. In June 2018, we announced new phase  3 clinical trials by our partner Roche with gantenerumab in early Alzheimer’s disease. 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 refill its pipelines and replace key products and blockbusters that have lost patent protection. Our most advanced compounds MOR103/GSK3196165, MOR106, MOR202 and MOR208 place us in an excellent position to capitalize on the needs of pharma- ceutical companies. Our collaborations with GSK (for MOR103/ GSK3196165), with I-Mab (MOR202 and MOR210) and with No- vartis (MOR106) exemplify this point. We are continuously enhancing our proprietary portfolio and will continue to advance it by adding clinical trials with our key drug candidates in new disease areas and by adding additional programs. In this way, we may take advantage of existing and future opportunities for co-development or partnerships. We are also looking for more opportunities to in-license promising drug candidates. The drug candidate MOR208 may provide us with our first op- portunity to independently market a drug. T HERAPEU T IC AN T IBODIES – PAR T NERED DEVEL OPMEN T By developing drugs with a number of partners, we have been able to spread the risk that is inevitably linked with drug devel- opment. With 103 individual therapeutic antibodies currently in partnered development programs, it is becoming more likely that we will have an opportunity to participate financially in marketed drugs. Since the first regulatory approval of Tremfya® by the U.S. FDA in mid-2017, our licensee Janssen reported in T ECHNOL OGY DEVEL OPMEN T We continue to invest in our existing and new technologies to defend our technological leadership. One example is our new antibody platform Ylanthia that enjoys much longer patent pro- tection than its predecessor HuCAL. This type of technological advance can help us to increase not only the speed but also the success rate of our partnered and proprietary drug development programs. New technology mod- ules that enable the production of antibodies against novel classes of target molecules can also provide access to new dis- ease areas in which antibody-based treatments are underrepre- sented. In September 2018, we announced an expansion of the existing strategic dermatology alliance with LEO Pharma A/S. The ob- jective of the alliance is to identify novel, peptide-derived ther- apeutics for unmet medical needs. Under the terms of the agreement, LEO Pharma will select targets against which MorphoSys will identify lead molecules using its proprietary peptide technology platform. MorphoSys has an exclusive op- tion to secure worldwide rights to any drugs arising from the collaboration in the field of oncology. Technology development is carried out by a team of scientists whose focus is the further development of our technologies. We not only develop technology internally but also use external re- sources to enhance our own activities. A good example of this is our acquisition of Lanthio Pharma, a Dutch company develop- ing lanthipeptides. FINANCIAL STATEMENTSG roup Management Repor t 82 Risk and O ppor tunit y Repor t ACQUISI T ION OPP OR T UNI T IES In the past, we have proven our ability to acquire compounds and technologies that accelerate our growth. Potential acquisi- tion candidates are also systematically presented, discussed and evaluated during the routine meetings described above between the Management Board and selected members of the Senior Management Group. After these meetings, promising candidates are reviewed in terms of their strategic synergies and evaluated by internal specialist committees. Protocols are completed on all candidates and evaluations are systematically archived for follow-up and monitoring. A proprietary database 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 affect our financial results. Interest rate and financial market developments are continuously monitored to promptly identify and take advantage of opportunities. T A B L E 11 Summary of MorphoSys’s Key Short- and Medium-Term Risks Proprietary Development segment Risks related to building a marketing structure Failure of one or more proprietary clinical programs Risks related to regulatory approval process Increase in development costs Outside of the Proprietary Development segment Failure to reach revenue targets in Partnered Discovery programs Proprietary Development segment Failure of one or more proprietary clinical programs Risks related to regulatory approval process Delay in the development of one or more proprietary clinical programs and/or higher development costs Risks related to technology access Patent-related risks Outside of the Proprietary Development segment Failure to reach revenue targets in Partnered Discovery programs Risks from bank insolvencies Risk category 3-year assessment Financial Financial, strategic, operational Financial, strategic Strategic •• •• •• •• Moderate Moderate Moderate Moderate Financial •• Moderate Risk category 1-year assessment Operational Strategic ••• •• Financial, operational, organizational Strategic External •• • • High Moderate Moderate Low Low Financial Financial •• • Moderate 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 Risk and O ppor tunit y Repor t T A B L E 12 Summary of MorphoSys’s Key Long-Term Risks G roup Management Repor t 83 Segment Risk Order of importance1 Proprietary Development Failure to get approval or significant delay of approval of lead proprietary program Proprietary Development Failure to build a commercial structure in the U.S. Proprietary Development Negative study outcome of lead proprietary program Partnered Discovery Discontinuation, delay or less revenue than expected from late-stage partnered compounds Proprietary Development Termination of earlier stage proprietary programs 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 1 3 Summary of MorphoSys’s Key Opportunities Segment Opportunity Order of importance1 Proprietary Development Potential FDA approval for MOR208 based on L-MIND study in r/r DLBCL and successful commercialization of the drug Proprietary Development Potential positive outcome in CD38 patent infringement lawsuit2 Proprietary Development MOR202 development in autoimmune disease 1 2 3 1 Declining importance of opportunity from 1 to 3, whereby 1 represents the greatest opportunity. 2 The assessment of opportunities is based on the evaluation of the opportunity management system in the reporting year. Due to the settlement in the patent lawsuit with Janssen Biotech and Genmab A/S as of January 31, 2019, this is no longer an opportunity for MorphoSys and therefore it will not be evaluated in the opportunity management system any more. FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 84 Statement on Corporate Governance, Group 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, November 30, 2018 MorphoSys AG On behalf of the Management Board: On behalf of the Supervisory Board: Dr. Simon Moroney Chief Executive Officer Dr. Marc Cluzel Chairman of the Supervisory Board The Statement on Corporate Governance, the Group Statement on Corporate Governance and the Corporate Governance Re- port are available on our website under Media and Investors – Corporate Governance. Statement on Corporate Governance under Section 289F HGB and Group Statement on Corporate Governance under Section 315d HGB for the 2018 Financial Year In the Statement on Corporate Governance under Section 289f HGB and the Group Statement on Corporate Governance under Section 315d HGB, the Management Board and the Supervisory Board provide information on the main elements of our corpo- rate governance. In addition to the annual Declaration of Con- formity in accordance with Section 161 of the Stock Corporation Act (AktG), the Statement on Corporate Governance and the Group Statement on Corporate Governance also include rele- vant 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  1, 2017, MorphoSys has complied with the recommendations of the “Government Commission on the German Corporate Gov- ernance Code” in the version from February 7, 2017 with the following exception: Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 85 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 We ensure compliance with laws and rules of conduct through the Group-wide enforcement of the following documents: the Code of Conduct, the Compliance Management Handbook and additional internal policies and guidelines. Our Code of Conduct sets out the fundamental principles and key policies and practices for business behavior. The Code is a valuable tool for employees and executives, particularly in busi- ness, legal and ethical conflict situations. It reinforces our prin- ciples of transparent and sound management and fosters trust from the public, business partners, employees and financial markets, and the compliance with the Code of Conduct is care- fully monitored. The Group-wide application of the Code is over- seen by the Compliance Committee, and the Code itself is regu- larly reviewed and updated. The Code of Conduct is being distributed to each new employee and can be downloaded from our website under Media and Investors – Corporate Governance. The Compliance Handbook describes our Compliance Manage- ment System (CMS) and is intended to ensure compliance with all legal regulations as well as high ethical standards that ap- ply to both the management and all employees. The Manage- ment Board has overall responsibility for the Compliance Man- agement System and is required to report regularly to the Audit Committee and the Supervisory Board. In carrying out its com- pliance responsibility, the Management Board has assigned the relevant tasks to various functions at MorphoSys. The Compliance Officer ensures the exchange of information between the internal compliance-relevant functions. The Com- pliance Officer monitors our existing CMS and upgrades it based on decisions taken by the Management Board and Compliance Committee. The Compliance Officer is the first point of contact for each employee for all compliance-related issues. The Compliance Committee includes representatives from dif- ferent functions and meets quarterly. The Compliance Commit- tee supports the Compliance Officer in the implementation and monitoring of the CMS. The Compliance Committee is particu- larly responsible for the identification and discussion of all com- pliance-relevant issues and thus makes it possible for the Com- pliance Officer as well as the other members of the Compliance Committee to periodically verify our compliance status and, if necessary, update the CMS. More information on our Compliance Management System can be found in the Corporate Governance Report. SUPERVIS ORY BOARD MANAGEMENT BOARD The Management Board of the Company consists of a Chief Ex- ecutive Officer and three other members. A schedule of respon- sibilities currently defines the different areas of responsibility as follows: • Dr. Simon Moroney, Chief Executive Officer: 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 vis-à-vis the Supervisory Board • Jens Holstein, Chief Financial Officer: Accounting & Tax, Controlling, Corporate Finance & Corporate Development, IT, Technical Operations, Central Purchasing & Logistics, Corpo- rate Communications & Investor Relations, Environmental Social Governance (ESG) • Dr. Markus Enzelberger, Chief Scientific Officer: Discovery Alliances & Technologies, CMC & Protein Sciences, Alliance Management, Supply Chain, Intellectual Property, Lanthio Pharma • Dr. Malte Peters, Chief Development Officer: Preclinical Re- search, Project Management, Clinical Development, Clinical Operations, Drug Safety & Pharmacovigilance, Regulatory Affairs SUPERVISORY BOARD As of December 31, 2018, our Supervisory Board consisted of six members who oversee and advise the Management Board. The current Supervisory Board consists of professionally qual- ified members who represent our shareholders. The Chairman of the Supervisory Board (Dr. Gerald Möller until May 17, 2018 and Dr. Marc Cluzel since May  17, 2018), coordinates the Board’s activities, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. All Supervisory Board members are independent, as defined in the German Corporate Governance Code and the Nasdaq List- ing Rules, and have many years of experience in the biotechnol- ogy and pharmaceutical industries. The Chairman of the Super- visory Board is not a former member of our Management Board. The members of the Supervisory Board and its committees are listed in the table below. FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 86 T A B L E 14 Composition of the Supervisory Board until Termination of the 2018 Annual General Meeting Name Position Appointment End of Term Committee Initial Audit 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 financial expert   Chairperson   Member T A B L E 1 5 Composition of the Supervisory Board since Termination of the 2018 Annual General Meeting Name Position Appointment End of Term Committee Initial Audit Remuneration and Nomination Committee Science and Technology Committee Dr. Marc Cluzel Chairman Dr. Frank Morich Deputy Chairman Krisja Vermeylen Member Michael Brosnan Member Dr. George Golumbeski Wendy Johnson Member Member 2012 2015 2017 2018 2018 2015 2021 2020 2019 2020 2020 2020 Independent financial expert   Chairperson   Member Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 87 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 our Management Board and Supervisory Board is the open, comprehensive and regular communication of information. The dual board system prescribed by the Ger- man Stock Corporation Act clearly differentiates 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 to- gether to make decisions and take actions for our benefit. Their stated objective is to sustainably increase our value. Management Board members each have their own area of re- sponsibility as defined in the schedule of responsibilities. They regularly report to their Management Board colleagues, their cooperation being governed by the bylaws. The Supervisory Board ratifies both the schedule of responsibilities and the by- laws. Management Board meetings are typically held weekly and are chaired by the Chief Executive Officer. During these meetings, resolutions are passed concerning dealings and transactions that, under the bylaws, require the approval of the entire Management Board. At least half of the Management Board’s members must be present to pass a resolution. Manage- ment Board resolutions are passed by a simple majority and, in the event of a tied vote, the Chief Executive Officer’s vote de- cides. For material events, each Management Board or Supervi- sory 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 e-mail). 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 Officer at the following meeting. In addition to the regularly scheduled meetings, Management Board strategy workshops are also held for developing and pri- oritizing 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 is- sues. 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 funda- mental Company issues. In addition to regular Supervisory Board meetings, a strategy meeting takes place between the Management Board and Supervisory Board once annually to discuss our strategic direction. The Management Board’s by- laws 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 2018 financial 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 four 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 Supervisory Board coordinates the activities of the Supervisory Board, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. The Supervisory Board typically passes its resolutions in 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 Supervi- sory Board is decisive. Minutes are completed for Supervisory Board meetings and resolutions passed outside of meetings. A copy of the Supervi- sory Board’s minutes is made available to all Supervisory Board members. The Supervisory Board conducts an efficiency evalu- ation regularly in accordance with the recommendation in Item 5.6 of the Code. COMPOSI T ION AND WORKING PRAC T ICES OF T HE MANAGE- MEN T BOARD AND SUPERVIS ORY BOARD COMMI T T EES 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 qualified. FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 88 T A B L E 1 6 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 01/16 2018 03/09 2018 05/16 2018 05/17 2018 06/24 2018 07/26 2018 07/27 2018 10/26 2018 12/12 2018 – – – – – – – – – – – – – – – – – – – Name Dr. Gerald Möller1 Dr. Marc Cluzel Wendy Johnson Klaus Kühn1 Dr. Frank Morich Krisja Vermeylen Dr. George Golumbeski2 Michael Brosnan2 1 Supervisory Board member until termination of the 2018 Annual General Meeting. 2 Supervisory Board member since termination of the 2018 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 Wendy Johnson Klaus Kühn1 Krisja Vermeylen Michael Brosnan2 by phone 03/08/2018 04/26/2018 07/25/2018 10/26/2018 12/12/2018 – – – – – 1 Supervisory Board member until termination of the 2018 Annual General Meeting. 2 Supervisory Board member since termination of the 2018 Annual General Meeting. Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 89 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 Möller1 Dr. Marc Cluzel Krisja Vermeylen Dr. Frank Morich by phone by phone by phone by phone by phone 01/16/2018 03/02/2018 05/07/2018 06/08/2018 10/10/2018 – – – – – 1 Supervisory Board member until termination of the 2018 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 Name 03/08/2018 05/16/2018 07/25/2018 10/26/2018 12/12/2018 Dr. Marc Cluzel Wendy Johnson Dr. Frank Morich Dr. George Golumbeski2 – – – – – 2 Supervisory Board member since termination of the 2018 Annual General Meeting. 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 AUDI T COMMI T T EE The main task of the Audit Committee is to support the Super- visory Board in fulfilling its supervisory duties with respect to the accuracy of the annual and consolidated financial 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 until May  17, 2018 were Klaus Kühn (Chairperson), Wendy Johnson and Krisja Vermeylen. The members of the Au- dit Committee since May 17, 2018 are Michael Brosnan (Chair- person), Wendy Johnson and Krisja Vermeylen. Michael Brosnan currently fulfills the prerequisite of an independent financial expert. REMUNERAT ION AND NOMINAT ION COMMI T T EE The Remuneration and Nomination Committee is responsible for preparing and reviewing the Management Board’s compen- sation system annually before its final 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 until May 17, 2018 were Dr. Gerald Möller (Chair- person), Dr. Marc Cluzel and Krisja Vermeylen. The members of the Remuneration and Nomination Committee since May  17, 2018 are Krisja Vermeylen (Chairperson), Dr. Marc Cluzel and Frank Morich. FINANCIAL STATEMENTS G roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 90 S C IENCE AND T ECHNOL OGY COMMI T T EE The Science and Technology Committee advises the Supervi- sory Board on matters concerning proprietary drug and tech- nology development and prepares the relevant Supervisory Board resolutions. The members of the Science and Technology Committee until May 17, 2018 were Dr. Marc Cluzel (Chairper- son), Dr. Frank Morich and Wendy Johnson. The members of the Science and Technology Committee since May 17, 2018 are Dr.  George Golumbeski (Chairperson), Dr. Frank Morich and Wendy Johnson. In line with Section 5.4.1. para. 5 sentence 2 of the Corporate Governance Code, the Supervisory Board members’ biogra- phies are published on our website under Company – Manage- ment – Supervisory Board. Corporate Governance Report At MorphoSys, responsible, sustainable and value-oriented cor- porate governance is a high priority. Good corporate gover- nance is an essential aspect of our corporate management and forms the framework for the Group’s management and supervi- sion, which includes the Group’s organization, commercial principles and tools for its guidance and control. The German Corporate Governance Code (“the Code”) provides a standard for the transparent monitoring and management of companies that strongly emphasizes shareholder interests. The Code was originally published by the German Federal Ministry of Justice (Bundesministerium der Justiz) in 2002 and was most recently amended on February  7, 2017 and published by the German Federal Gazette (Bundesanzeiger) on April  24, 2017. The Code contains recommendations (Empfehlungen) and sug- gestions (Anregungen) relating to the management and super- vision of German companies that are listed on a stock exchange. It follows internationally and nationally recognized standards for good and responsible corporate governance. The purpose of the Code is to make the German system of corporate gover- nance transparent for investors. The Code includes corporate governance recommendations and suggestions with respect to shareholders and shareholders’ meetings, the management and Supervisory Boards, transparency, accounting policies and auditing. There is no obligation to comply with the recommendations or suggestions of the Code. The German Stock Corporation Act re- quires only that the Management Board and Supervisory Board of a German listed company issue an annual declaration that either (i) states that the company has complied with the recom- mendations of the Code or (ii) lists the recommendations that the company has not complied with and explains its reasons for deviating from the recommendations of the Code. In addition, a listed company is also required to state in this annual declara- tion whether it intends to comply with the recommendations or list the recommendations it does not plan to comply with in the future. These declarations have to be published permanently on the company’s website. If the company changes its policy on certain recommendations between such annual declarations, it must disclose this fact and explain its reasons for deviating from the recommendations. Non-compliance with suggestions contained in the Code need not be disclosed. Many of the corporate governance principles contained in the Code have been practiced at MorphoSys for many years. Our corporate governance is detailed in the Statement on Corporate Governance under Section 289f HGB and 315d HGB. The state- ment also contains the annual Declaration of Conformity, rele- vant information on corporate governance practices and a de- scription 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, financial 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 financial analysts and similar recipients and can obtain this information in both Ger- man and English. The Company is firmly committed to follow- ing a fair information policy. 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 financial 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 determine concrete objectives re- garding its composition and prepare a profile of skills and ex- pertise for the Supervisory Board such that (i) the Supervisory Board in its entirety has the necessary knowledge, skills and professional experience to properly perform its duties, (ii) the Company’s international activities and potential conflicts of in- terest are taken into consideration, (iii) a sufficient number of Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 91 independent Supervisory Board members is ensured, (iv) an age limit and a regular limit on the length of service is speci- fied for members of the Supervisory Board, and (v) the aspect of diversity is taken into account. In view of these factors and in consideration of the Company’s specific circumstances (Section 5.4.1 of the German Corporate Governance Code), the Supervisory Board first set targets for its composition in July 2015 and reviewed and updated these targets on July 26, 2017. The Supervisory Board has taken these targets into account when it submitted its proposal for the elec- tion of three new members to the Supervisory Board to the 2018 Annual General Meeting, while at the same time aiming at ful- filling the overall profile of reported skills and expertise of the Supervisory Board. The implementation of these targets is as follows: APPROPRIATE REPRESENTATION OF WOMEN AND DIVERSIT Y Our Supervisory Board has a total of six members, two of whom are women. The Supervisory Board strongly believes that, at 33.33 %, the current proportion of women is appropriate and intends to maintain this proportion in the future. The Supervi- sory Board currently fulfills 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 our international orientation. The Supervisory Board cur- rently 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 and the Nasdaq listing rules). 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 affiliate that may give rise to a material and more than tempo- rary conflict of interest. All six current members of the Super- visory Board meet the criteria to be classified as independent. Therefore, the Supervisory Board currently meets the quota of four independent members. Significant and more than temporary conflicts of interest should be avoided, especially when it involves work for major competitors. It should be noted, however, that conflicts of inter- est in certain cases cannot be excluded. Any potential conflicts of interest must be disclosed to the Chairperson of the Supervi- sory Board and remedied appropriately. There are currently no conflicts 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 specific cases. The age limit of 75 years is cur- rently met 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 office 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 specific cases and propose to the Annual General Meeting to 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 defining specific targets, the Supervisory Board should develop a profile of skills and experience for the entire Supervisory Board (Section 5.4.1 of the German Corporate Gov- ernance Code). On July 26, 2017, the Supervisory Board defined the following profile of skills and experience for the entire Su- pervisory Board: PROFES SIONAL E XPER TISE AND E XPERIENCE Supervisory Board members should possess the necessary pro- fessional expertise and experience to fulfill 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 personal- ity is sufficiently taken into account. GENER AL KNOWLEDGE All members of the Supervisory Board should have general knowledge of the industry in which we operate in order to make sufficient and substantial contributions to Supervisory Board meetings. All Supervisory Board members have the necessary expertise in the pharmaceutical and biotechnology industries based on their background and, therefore, meet this requirement. 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. FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 92 SUFFICIENT AVAIL ABILIT Y OF TIME All members of the Supervisory Board must ensure that they have sufficient 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 specific topics; • the Supervisory Board member is able to attend the Annual General Meeting; • the Supervisory Board member has sufficient time available to review the annual and consolidated financial 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 profile 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 it 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 Su- pervisory Board confirms 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.” We continue to meet this target. 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 five 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.” We do not currently meet this target. The reason this target has not been met was the unplanned departure of Dr. Marlies Sproll as Chief Scientific Officer as of October  31, 2017 for personal reasons and the appointment of Dr. Markus Enzelberger ini- tially as Interim Chief Scientific Officer from April 15, 2017 to October 31, 2017, and then as Dr. Marlies Sproll’s successor as Chief Scientific Officer beginning on November  1, 2017. As a result, since October 31, 2017, the Management Board 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 first 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 first 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 confirms its July 2015 decision on the quota of women in the first level of management below the Management Board and intends to continue to maintain a minimum ratio of 30 % until June 30, 2022.” We continue to meet this target. 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 confirms 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.” We continue to meet this target. DIVERSI T Y PL AN Diversity is firmly anchored in our corporate culture and our affiliates. All dimensions of diversity are of equal importance, be it age, gender, educational background, occupation, origin, religion, sexual orientation or identity. Our Management Board and Supervisory Board see it as their responsibility to further increase and effectively 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. Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 93 We have not yet developed our own diversity plan with respect to the composition of the Management and Supervisory Boards. Nevertheless, the internal organization and continued develop- ment of an open and inclusive corporate culture play an import- ant role in the day-to-day work of the Management and Super- visory Boards. The skills and experience profile 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, defines specific goals for this purpose and contains guidelines on how these goals should be achieved. Remuneration Report 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 considers the recommendations of the German Corporate Gov- ernance Code. MANAGEMEN T BOARD REMUNERAT ION 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 different compo- nents: fixed 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 and prior year. Due to the successful U.S. listing the Management Board members received a special one-time bonus in the form of trea- sury shares held by MorphoSys AG. These shares could be called by the individual Management Board members during the time period from June 1 until end of December 2018 for a pre-defined maximal amount in EUR. The relevant number of shares was determined on the basis of the share price of one MOR share (final auction price in Xetra-trading on the Frank- furt Stock Exchange) on the date the shares were called. Man- agement Board members also receive fringe benefits in the form of non-cash benefits, mainly the use of a company car and the payment of insurance premiums. All 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 2018. OVERVIE W In the 2018 financial year, total benefits of € 6,904,508 (2017: € 6,453,649) 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 2018, € 3,616,602 was cash compensation and € 3,287,906, or 48 %, resulted from personnel expenses for share-based compensa- tion (remuneration with short-term incentive: one-time bonus award in shares due to the successful U.S. listing; remunera- tion with long-term incentive: performance share plan, stock option plan and convertible bond plan). The total amount of benefits paid to the Management Board in the 2018 financial year amounted to € 7,505,917 (2017: € 10,593,126). In addition to cash compensation payments of € 3,189,972 (2017: € 2,963,485), this amount includes primarily the relevant value under German tax law of the transfer of trea- sury stock from a performance-based share plan (share-based compensation), which amounted to € 626,606 (2017: € 1,986,671) as well as from the one-time bonus award in shares due to the successful U.S. listing, which amounted to € 1,483,804 in 2018. Because convertible bonds were exercised in 2018 and 2017, the total amount for 2018 also included proceeds from the exer- cise of convertible bonds in the amount of € 2,205,535 (2017: € 4,743,008). As of April 11, 2018, a total of 6,969 treasury shares from the 2014 performance-based share plan for the Management Board vested because the vesting period for this LTI program had ex- pired. The beneficiaries had the option to call the shares during a six-month period ending on October 10, 2018. All transactions in MorphoSys shares executed by members of the Management Board were reported as required by law and are 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 differ from the information about Management Board remuneration presented in the Notes of this report (Item 7.4). These differences are due to the differing presentation requirements under the German Corporate Governance Code and IFRS*.  *S E E G L O S S A R Y – page 188 FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 94 T A B L E 17 Compensation of the Management Board in 2018 and 2017 (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 Benefits1 Total Fixed Compensation One -Year Variable Compensation2 One-Time Bonus in Shares Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2017 Long-Term Incentive Program4 (Vesting Period 4 Years) 2018 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Stock Option Plan4 (Vesting Period 4 Years) 2018 Stock Option Plan4 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation in € Fixed Compensation Fringe Benefits1 Total Fixed Compensation One -Year Variable Compensation2 One-Time Bonus in Shares Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2017 Long-Term Incentive Program4 (Vesting Period 4 Years) 2018 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Stock Option Plan4 (Vesting Period 4 Years) 2018 Stock Option Plan4 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation Dr. Simon Moroney Chief Executive Officer 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 500,876 542,074 542,074 542,074 372,652 402,235 402,235 402,235 397,800 397,800 397,800 32,654 32,654 32,654 574,728 574,728 574,728 46,725 448,960 30,613 30,613 30,613 428,413 428,413 428,413 35,912 536,788 368,144 0 58,224 343,009 455,343 483,616 0 0 0 307,529 267,861 0 0 300,770 1,037,238 1,547,258 0 0 0 0 0 0 0 0 474,315 483,616 0 0 1,230,116 0 1,203,080 3,391,127 149,567 158,788 158,788 158,788 1,723,593 2,280,774 733,516 4,124,643 Dr. Markus Enzelberger5 Chief Scientific Officer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 321,300 321,300 321,300 31,211 31,211 31,211 352,511 352,511 352,511 204,698 417,158 621,856 121,688 0 0 144,354 269,892 286,650 0 0 0 201,463 112,745 0 378,787 29,186 0 197,065 955,070 68,515 0 0 0 0 0 0 0 0 281,138 286,650 0 0 805,852 0 788,260 2,161,900 68,515 68,515 1,029,829 1,376,096 421,026 2,582,926 Jens Holstein Chief Financial Officer Dr. Malte Peters Chief Development Officer Appointment: March 1, 2017 2017 2018 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 2018 (Mini- mum) 2018 (Maxi- mum) 42,905 415,557 273,899 0 0 0 59,641 224,747 175,498 46,725 448,960 337,877 358,857 0 0 0 201,463 197,065 281,500 568,644 850,144 206,903 224,747 175,498 46,725 448,960 351,955 358,857 0 0 0 805,852 788,260 334,152 354,900 0 0 0 201,463 197,065 348,075 354,900 0 0 0 805,852 788,260 2,297,087 733,785 1,095,262 2,304,924 607,148 1,087,580 99,949 111,233 111,233 111,233 60,967 76,190 76,190 76,190 1,249,291 1,655,455 560,193 2,865,117 1,518,259 1,592,183 504,603 2,801,690 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dr. Marlies Sproll6 Chief Scientific Officer Temporary Leave: April 15, 2017 – October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius Chief Development Officer Resignation: February 28, 2017 2017 2018 2017 2018 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 2018 (Mini- mum) 2018 (Maxi- mum) Total 2018 (Mini- mum) 2018 (Maxi- mum) 222,450 20,427 242,877 67,745 0 0 0 39,879 168,543 131,629 407,796 77,976 728,649 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 103,253 9,161 112,414 23,490 39,879 63,369 28,245 204,028 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,685,429 1,663,409 1,663,409 1,663,409 1,094,207 141,203 141,203 141,203 2,779,636 1,804,612 1,804,612 1,804,612 1,061,869 1,397,264 0 1,484,023 197,623 1,105,400 863,231 0 0 0 0 0 911,918 891,965 3,228,123 4,685,170 0 0 0 0 0 0 0 0 1,455,483 1,484,023 0 0 0 3,647,672 3,567,860 10,155,038 445,890 414,726 414,726 414,726 6,453,649 6,904,508 2,219,338 12,374,376 1 In 2017, the fringe benefits 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 one-year compensation granted for the 2018 financial year represents the bonus accrual for 2018 that will be paid in February 2019. The bonus granted for the 2017 financial year was paid in February 2018. 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 financial year. 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 In 2017, the figures 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, Dr. Marlies Sproll has taken on a new part-time role at MorphoSys as Special Advisor to the CEO. Therefore, the figures presented for Dr. Marlies Sproll do not include any remuneration granted for these activities. T A B L E 17 Compensation of the Management Board in 2018 and 2017 (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 Benefits1 Total Fixed Compensation One -Year Variable Compensation2 One-Time Bonus in Shares Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2017 Long-Term Incentive Program4 (Vesting Period 4 Years) 2018 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Stock Option Plan4 (Vesting Period 4 Years) 2018 Stock Option Plan4 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation in € Fixed Compensation Fringe Benefits1 Total Fixed Compensation One -Year Variable Compensation2 One-Time Bonus in Shares Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2017 Long-Term Incentive Program4 (Vesting Period 4 Years) 2018 Long-Term Incentive Program4 (Vesting Period 4 Years) 2017 Stock Option Plan4 (Vesting Period 4 Years) 2018 Stock Option Plan4 (Vesting Period 4 Years) Total Variable Compensation Service Cost Total Compensation Dr. Simon Moroney Chief Executive Officer 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 35,912 536,788 368,144 0 0 0 58,224 343,009 267,861 32,654 32,654 32,654 574,728 574,728 574,728 455,343 483,616 474,315 483,616 0 0 0 0 0 0 307,529 1,230,116 300,770 1,037,238 1,547,258 1,203,080 3,391,127 149,567 158,788 158,788 158,788 1,723,593 2,280,774 733,516 4,124,643 Dr. Markus Enzelberger5 Chief Scientific Officer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 321,300 321,300 321,300 31,211 31,211 31,211 352,511 352,511 352,511 204,698 417,158 621,856 121,688 0 0 0 0 144,354 112,745 378,787 29,186 269,892 286,650 0 0 0 201,463 197,065 955,070 68,515 281,138 286,650 0 0 0 805,852 788,260 2,161,900 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,029,829 1,376,096 421,026 2,582,926 68,515 68,515 Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 95 Jens Holstein Chief Financial Officer Dr. Malte Peters Chief Development Officer Appointment: March 1, 2017 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 500,876 542,074 542,074 542,074 372,652 402,235 402,235 402,235 397,800 397,800 397,800 30,613 30,613 30,613 428,413 428,413 428,413 42,905 415,557 273,899 0 59,641 224,747 46,725 448,960 337,877 358,857 0 0 0 201,463 175,498 0 0 197,065 733,785 1,095,262 46,725 448,960 0 0 0 0 0 0 0 0 46,725 448,960 351,955 358,857 0 0 281,500 568,644 850,144 206,903 0 0 224,747 334,152 354,900 0 0 805,852 0 201,463 0 175,498 0 788,260 0 197,065 2,304,924 607,148 1,087,580 0 0 0 0 0 0 0 0 348,075 354,900 0 0 805,852 0 788,260 2,297,087 99,949 111,233 111,233 111,233 60,967 76,190 76,190 76,190 1,249,291 1,655,455 560,193 2,865,117 1,518,259 1,592,183 504,603 2,801,690 Dr. Marlies Sproll6 Chief Scientific Officer Temporary Leave: April 15, 2017 – October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius Chief Development Officer Resignation: February 28, 2017 Total 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 2017 2018 2018 (Mini- mum) 2018 (Maxi- mum) 222,450 20,427 242,877 67,745 0 39,879 168,543 0 131,629 0 407,796 77,976 728,649 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 103,253 9,161 112,414 23,490 0 39,879 0 0 0 0 63,369 28,245 204,028 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,685,429 1,663,409 1,663,409 1,663,409 1,094,207 141,203 141,203 141,203 2,779,636 1,804,612 1,804,612 1,804,612 1,061,869 1,397,264 0 1,484,023 197,623 1,105,400 0 0 0 911,918 863,231 0 0 891,965 3,228,123 4,685,170 0 0 0 0 0 0 0 0 1,455,483 1,484,023 0 0 3,647,672 0 3,567,860 10,155,038 445,890 414,726 414,726 414,726 6,453,649 6,904,508 2,219,338 12,374,376 1 In 2017, the fringe benefits 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 one-year compensation granted for the 2018 financial year represents the bonus accrual for 2018 that will be paid in February 2019. The bonus granted for the 2017 financial year was paid in February 2018. 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 financial year. 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 In 2017, the figures 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, Dr. Marlies Sproll has taken on a new part-time role at MorphoSys as Special Advisor to the CEO. Therefore, the figures presented for Dr. Marlies Sproll do not include any remuneration granted for these activities. FINANCIAL STATEMENTS G roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 96 P A Y M E N T S D U R I N G T H E F I N A N C I A L Y E A R Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Malte Peters Chief Development Officer Appointment: March 1, 2017 Appointment (Interim-CSO): Temporary Leave: Dr. Arndt Schottelius7 April 15, 2017 April 15, 2017 – October 31, 2017 Chief Development Officer Appointment: November 1, 2017 Resignation: October 31, 2017 Resignation: February 28, 2017 Total Dr. Markus Enzelberger5 Chief Scientific Officer Dr. Marlies Sproll6 Chief Scientific Officer in € 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 Fixed Compensation Fringe Benefits1 Total Fixed Compensation One-time bonus award in shares One-Year Variable Compensation2 Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) 2013 Long-Term Incentive Program3 (Vesting Period 4 Years) 2014 Long-Term Incentive Program3 (Vesting Period 4 Years) Other4 Total Variable Compensation Service Cost Total Compensation 500,876 35,912 536,788 0 210,873 0 650,378 0 0 861,251 149,567 1,547,606 542,074 32,654 574,728 483,597 368,144 372,652 42,905 415,557 0 143,054 402,235 46,725 448,960 358,785 273,899 0 0 658,350 2,205,535 445,431 0 351,412 0 1,203,153 158,788 1,936,669 0 0 1,246,835 99,949 1,762,341 223,600 0 3,061,819 111,233 3,622,012 281,500 568,644 850,144 0 0 0 0 0 0 0 60,967 911,111 397,800 30,613 428,413 354,822 206,903 0 0 0 0 561,725 76,190 1,066,328 204,698 417,158 621,856 0 0 0 0 0 0 0 29,186 651,042 321,300 31,211 352,511 286,600 121,688 0 0 0 51,594 459,882 68,515 880,908 222,450 20,427 242,877 0 143,054 2,800,381 445,431 0 0 3,388,866 77,976 3,709,719 0 0 0 0 0 0 0 0 0 0 0 0 103,253 9,161 112,414 0 140,940 1,284,277 445,431 0 0 1,870,648 28,245 2,011,307 0 0 0 0 0 0 0 0 0 0 0 0 1,685,429 1,094,207 2,779,636 637,921 1,663,409 141,203 1,804,612 1,483,804 970,634 4,743,008 2,205,535 0 0 0 0 1,986,671 7,367,600 445,890 10,593,126 0 0 0 626,606 5,286,579 414,726 7,505,917 1 In 2017, the fringe benefits of Dr. Malte Peters and Dr. Markus Enzelberger each included a one-time compensation in the form of MorphoSys shares as an incentive 5 In 2017, the figures 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 join the Management Board of MorphoSys AG. 2 The one-year variable compensation presented here represents the bonus paid in the respective financial year for the previous financial 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 benefits arising in the respective financial year from the difference between the exercise or conversion price and the stock market price at the time of exercising the convertible bonds or at the time of transfer of own shares from a performance share plan. 4 No compensation recovery claims against the Management Board existed in 2018 or 2017. 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, Dr. Marlies Sproll has taken on a new part-time role at MorphoSys as Special Advisor to the CEO. Therefore, the payments presented for Dr. Marlies Sproll do not include any remuneration for these activities.  7 In 2017, the figures 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 Officer. These were granted for his activities as a member of the Management Board in previous years. FIXED REMUNER ATION AND FRINGE BE NE FITS The non-performance-related remuneration of the Management Board consists of fixed remuneration and additional benefits, which primarily include the use of company cars, as well as subsidies for health, welfare and disability insurance. The Chief Financial Officer, Mr. Jens Holstein, receives an additional expense allowance for maintaining two households. PENSION E XPENSES The Company also provides payments to Management Board members equal to a maximum of 10 % of the member’s fixed annual salary and partly plus any taxes payable. This compen- sation is intended for the members’ individual retirement plans. Additionally, all Management Board members partici- pate in a pension plan in the form of a provident fund, which was introduced in cooperation with Allianz Pensions-Manage- ment e.V. The pension obligations of the provident fund will be met by Allianz Pensions-Management e.V. These pension obli- gations are not pension benefit plans. Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 97 P A Y M E N T S D U R I N G T H E F I N A N C I A L Y E A R Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Chief Development Officer Appointment: March 1, 2017 Dr. Malte Peters Dr. Markus Enzelberger5 Chief Scientific Officer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 Dr. Marlies Sproll6 Chief Scientific Officer Temporary Leave: April 15, 2017 – October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius7 Chief Development Officer Resignation: February 28, 2017 Total in € 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 Fixed Compensation Fringe Benefits1 Total Fixed Compensation One-time bonus award in shares Multi-Year Variable Compensation: 2013 Convertible Bonds Program3 (Vesting Period 4 Years) One-Year Variable Compensation2 210,873 2013 Long-Term Incentive Program3 (Vesting Period 4 Years) 650,378 2014 Long-Term Incentive Program3 (Vesting Period 4 Years) Other4 Total Variable Compensation Service Cost Total Compensation 861,251 149,567 1,547,606 500,876 35,912 536,788 0 0 0 0 542,074 32,654 574,728 483,597 368,144 0 0 0 351,412 1,203,153 158,788 1,936,669 372,652 42,905 415,557 0 143,054 402,235 46,725 448,960 358,785 273,899 281,500 568,644 850,144 658,350 2,205,535 445,431 0 0 1,246,835 99,949 1,762,341 0 0 223,600 3,061,819 111,233 3,622,012 397,800 30,613 428,413 354,822 206,903 0 0 0 0 0 0 0 0 0 0 0 60,967 911,111 561,725 76,190 1,066,328 204,698 417,158 621,856 0 0 0 0 0 0 0 29,186 651,042 321,300 31,211 352,511 286,600 121,688 0 0 51,594 0 459,882 68,515 880,908 222,450 20,427 242,877 0 143,054 2,800,381 445,431 0 0 3,388,866 77,976 3,709,719 0 0 0 0 0 0 0 0 0 0 0 0 103,253 9,161 112,414 0 140,940 1,284,277 445,431 0 0 1,870,648 28,245 2,011,307 0 0 0 0 0 0 0 0 0 0 0 0 1,685,429 1,094,207 2,779,636 0 637,921 0 1,663,409 141,203 1,804,612 1,483,804 970,634 0 4,743,008 2,205,535 1,986,671 0 0 0 7,367,600 445,890 10,593,126 626,606 0 5,286,579 414,726 7,505,917 1 In 2017, the fringe benefits of Dr. Malte Peters and Dr. Markus Enzelberger each included a one-time compensation in the form of MorphoSys shares as an incentive 5 In 2017, the figures 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 join the Management Board of MorphoSys AG. 2 The one-year variable compensation presented here represents the bonus paid in the respective financial year for the previous financial 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 benefits arising in the respective financial year from the difference between the exercise or conversion price and the stock market price at the time of exercising the convertible bonds or at the time of transfer of own shares from a performance share plan. 4 No compensation recovery claims against the Management Board existed in 2018 or 2017. 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, Dr. Marlies Sproll has taken on a new part-time role at MorphoSys as Special Advisor to the CEO. Therefore, the payments presented for Dr. Marlies Sproll do not include any remuneration for these activities.  7 In 2017, the figures 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 Officer. These were granted for his activities as a member of the Management Board in previous years. PERFORMANCE - BASE D C OMPE NSATION (SHOR T-TERM INCENTIVE – STI) Members of the Management Board each receive perfor- mance-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 dependent on the achievement of corporate targets speci- fied by the Supervisory Board at the start of each financial year. Targets are typically based on, amongst other objectives, the Company’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 2018 finan- cial year will be paid in February 2019. FINANCIAL STATEMENTS G roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 98 LONG -TERM INCENTIVE C OMPENSATION (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 predefined performance targets over a four-year period. Each year, the Supervisory Board determines the number of shares to be allocated to the Management Board. On April  1, 2018, the Management Board members were granted a total of 8,804 shares. Each Management Board member received an en- titlement benefit for a specific number of shares. For more infor- mation, please refer to Item 7.3.5 in the Notes to the Consoli- dated Financial 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 specific year. The defined targets for the 2018 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 Biotechnol- ogy 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 relevant 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 predefined 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, 2018, a total of 29,312 stock op- tions were granted to the Management Board. Each member of the Management Board received a specific number of stock op- tions that entitle them to purchase up to two MorphoSys shares each. Further details can be found in Item 7.1 in the Notes to the Consolidated Financial Statements and the explanations on stock repurchases in the Corporate Governance Report. *S E E G L O S S A R Y – page 188 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 first 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 final percentage of target achievement for each performance target. The final 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 C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 99 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 rel- evant 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 in- crease 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 specified 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 final 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). MISCELL ANEOUS None of the Management Board members were granted any loans or similar benefits in the reporting year nor have they received any benefits from third parties that were promised or granted based on their positions as members of the Manage- ment Board. PAYMENTS UP ON TERMINATION OF MANAGEMENT BOARD EMPLOYMENT C ONTR AC TS/CHANGE OF C ONTROL In case of a premature termination of the service contract with a Management Board member, the compensation, including fringe benefits, is capped at 200 % of the fixed yearly gross sal- ary and the annual bonus (Severance Cap) and no more than the remaining term of the service contract is compensated. If the service contract is terminated for good cause for which the Management Board member is responsible, such member is not entitled to any payments. The Severance Cap is calculated on the basis of the total compensation of the full business year prior to the termination and, if appropriate, the expected total compensation of the business year in which the termination occurs. If a Management Board member’s service contract terminates due to the member’s death, the member’s spouse or life partner is entitled to the fixed monthly salary for the month of death and the 12 months thereafter. In the event of a change of con- trol, Management Board members are entitled to exercise their extraordinary right to terminate their employment contracts and demand the fixed salary and annual bonus still outstand- ing until the end of the service contract, however at least 200 % of the fixed yearly gross salary and annual bonus. Moreover, in such a case, all stock options and performance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting periods or blackout periods. A change of control has occurred when (i) MorphoSys transfers FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 100 assets or a substantial portion of its assets to unaffiliated third parties, (ii) MorphoSys merges with an unaffiliated company, (iii) MorphoSys AG as dominated company becomes party to an agreement pursuant to Section 291 of the German Stock Cor- poration Act or MorphoSys is integrated in accordance with Section 319 of the German Stock Corporation Act, or (iv) a shareholder or third party holds 30 % or more of MorphoSys’s voting rights. In addition, post-contractual non-compete clauses exist with the members of the Board of Management, providing for com- pensatory payments to be made by MorphoSys AG until six months after the service contract has terminated. During the duration of the non-compete clause, the compensatory payment amounts to up to 100 % of the fixed salary. CHANGE IN THE C OMP OSITION OF THE MANAGEMENT BOARD There was no change in the composition of our Management Board in the 2018 financial year. AGE LIMIT The age limit for Executive Board members at the time of their appointment or re-appointment by the Supervisory Board shall correspond to 67  years. Exceptions thereto may be resolved by the Supervisory Board in the individual case. The age limit of 67  years is currently respected by the Executive Board members. SAY ON PAY Due to the existing legal uncertainty resulting from the forth- coming legal changes to the Shareholders’ Rights Directive and the German Corporate Governance Code, MorphoSys will de- liberately refrain from submitting the Management Board compensation system to a vote at its forthcoming 2019 Annual General Meeting. The current remuneration system for the members of the Management Board remains unchanged from the remuneration system approved by the Annual General Meeting on May 19, 2011 with a majority of more than 91 %. A corresponding vote on the remuneration system is planned for the 2020 Annual General Meeting. SUPERVIS ORY BOARD REMUNERAT ION The remuneration of Supervisory Board members is governed by our Articles of Association and a corresponding Annual Gen- eral Meeting resolution on Supervisory Board remuneration. In the 2018 financial year, Supervisory Board members received fixed compensation, attendance fees and expense allowances for their participation in Supervisory Board and committee meetings. Each Supervisory Board member has received an- nual fixed compensation (€ 85,400 for Chairpersons, € 51,240 for Deputy Chairpersons and € 34,160 for all other members) for their membership of the Supervisory Board. The Chairper- son receives € 4,000 for each Supervisory Board meeting chaired and the other members receive € 2,000 for each Super- visory Board meeting attended. For committee work, the com- mittee Chairperson receives € 12,000 and other committee members each receive € 6,000. Committee members also re- ceive € 1,200 for their participation in a committee meeting. 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 fixed expense allowance of € 2,000 (plus any sales tax due) for additional travel time in addition to attendance fees and reim- bursed expenses. Supervisory Board members are also reimbursed for travel expenses and value-added taxes (VAT) on their compensation. In the 2018 financial year, Supervisory Board members re- ceived a total of € 525,428 (2017: € 523,015) excluding the reim- bursement of travel expenses. This amount consists of fixed compensation and attendance fees for participating in Supervi- sory Board and committee meetings. We did not grant any loans to Supervisory Board members. The table below details the Supervisory Board’s remuneration. Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 101 T A B L E 1 8 Compensation of the Supervisory Board in 2018 and 2017 in € Dr. Marc Cluzel Dr. Frank Morich Krisja Vermeylen Wendy Johnson Dr. George Golumbeski2 Michael Brosnan2 Dr. Gerald Möller3 Klaus Kühn3 Karin Eastham4 TOTAL Fixed Compensation Attendance Fees1 Attendance Fees 2018 2017 2018 2017 2018 2017 76,742 61,004 49,916 46,160 28,961 28,961 36,558 17,326 – 52,160 57,240 28,961 46,160 – – 95,156 46,160 19,578 32,400 23,200 24,400 37,400 25,200 18,600 11,800 6,800 – 26,800 23,200 16,000 38,000 – – 36,800 22,000 14,800 109,142 84,204 74,316 83,560 54,161 47,561 48,358 24,126 – 78,960 80,440 44,961 84,160 – – 131,956 68,160 34,378 345,628 345,415 179,800 177,600 525,428 523,015 1 The attendance fee contains expense allowances for the attendence at the Supervisory Board and the Committee meetings. 2 Dr. George Golumbeski and Michael Brosnan have joined the Supervisory Board of MorphoSys AG on May 17, 2018. 3 Dr. Gerald Möller and Klaus Kühn have left the Supervisory Board of MorphoSys AG AG on May 17, 2018. 4 Karin Eastham has left the Supervisory Board of MorphoSys AG 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. FINANCIAL STATEMENTS G roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 102 T A B L E 19 Directors’ Holdings S H A R E S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters Dr. Markus Enzelberger TOTAL SUPERVISORY BOARD Dr. Marc Cluzel Dr. Frank Morich Krisja Vermeylen Wendy Johnson Dr. George Golumbeski1 Michael Brosnan1 Dr. Gerald Möller2 Klaus Kühn2 TOTAL S T O C K O P T I O N S MANAG EMENT BOARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters Dr. Markus Enzelberger TOTAL 01/01/2018 Additions Sales 12/31/2018 483,709 11,000 9,505 7,262 511,476 500 1,000 350 500 - - 11,000 0 13,350 8,928 36,554 3,313 3,248 52,043 0 0 0 0 0 0 900 0 900 8,928 30,537 0 8,834 48,299 0 0 0 0 0 0 0 0 0 483,709 17,017 12,818 1,676 515,220 500 1,000 350 500 0 0 - - 2,350 01/01/2018 Additions Forfeitures3 Exercises 12/31/2018 12,511 8,197 8,197 5,266 34,171 9,884 6,476 6,476 6,476 29,312 0 0 0 0 0 0 0 0 0 0 22,395 14,673 14,673 11,742 63,483 Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 103 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 Peters Dr. Markus Enzelberger 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 Peters Dr. Markus Enzelberger TOTAL 01/01/2018 Additions Forfeitures3 Exercises 12/31/2018 88,386 60,537 0 0 148,923 0 0 0 0 0 0 0 0 0 0 0 30,537 0 0 88,386 30,000 0 0 30,537 118,386 01/01/2018 Additions Forfeitures3 Allocations4 12/31/2018 30,060 20,086 3,187 5,987 59,320 2,969 1,945 1,945 1,945 8,804 2,182 1,495 0 329 4,006 3,797 2,600 0 572 6,969 27,050 17,936 5,132 7,031 57,149 1 Dr. George Golumbeski and Michael Brosnan have joined the Supervisory Board of MorphoSys AG on May 17, 2018. 2 Dr. Gerald Möller and Klaus Kühn have left the Supervisory Board of MorphoSys AG AG on May 17, 2018. Changes in the number of shares after resignation from the Supervisory Board of MorphoSys AG are not presented in the tables. 3 Forfeited performance Shares are a result of the KPI achievement rate of 63.5 % and a company factor of 1.0 as determined at the end of the performance period of the LTI plan 2014. 4 Allocations are made as soon as performance shares are transferred within the six-month exercise period after the end of the four-year waiting period. The members of our Supervisory Board do not hold stock op- tions, 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 para. 1 (a) 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 notifications under Article 19 para 1 (a) MAR listed in the table below. FINANCIAL STATEMENTS G roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 104 T A B L E 2 0 Managers Transactions in 2018 Party Sub- ject to the Notification Requirement Markus Enzelberger Simon Moroney Simon Moroney Markus Enzelberger Markus Enzelberger Malte Peters Jens Holstein Function Chief Scientific Officer Chief Executive Officer Chief Executive Officer Chief Scientific Officer Chief Scientific Officer Chief Development Officer Chief Financial Officer Date of Transaction in 2018 Type of Transaction Aggregated Share Price Aggregated Volume Place of Transaction 09/24/2018 Disposal € 91.43 € 52,296.75 09/20/2018 Disposal € 93.63 € 323,300.40 09/19/2018 Disposal € 94.1 € 515,186.55 08/07/2018 Disposal € 107.35 € 886,946.90 Xetra Xetra Xetra Xetra 08/06/2018 08/06/2018 Purchase of 2,676 shares as part of his remuneration as member of the Managing Board (issuer’s own shares) Purchase of 3,313 shares as part of his remuneration as member of the Managing Board (issuer’s own shares) not numberable not numberable not numberable not numberable Outside a trading venue Outside a trading venue 08/06/2018 Disposal € 105.58 € 622,920.00 Xetra Purchase of 3,417 shares as part of his remuneration as member of the Managing Board (issuer’s own shares) 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) not numberable not numberable Outside a trading venue € 31,875 € 973,366,875 Outside a trading venue Jens Holstein Chief Financial Officer 08/03/2018 08/03/2018 Jens Holstein Jens Holstein Dr. Gerald Möller Chief Financial Officer Chief Financial Officer Member of the Supervisory Board 08/03/2018 Disposal € 105.13 € 259,084.30 Xetra 05/09/2018 Purchase € 88.70 € 79,830.00 Xetra Dr. Simon Moroney Chief Executive Officer 04/11/2018 Jens Holstein Chief Financial Officer 04/11/2018 Markus Enzelberger Chief Scientific Officer 04/11/2018 Simon Moroney Chief Executive Officer 04/10/2018 Jens Holstein Chief Financial Officer 04/10/2018 Markus Enzelberger Chief Scientific Officer 04/10/2018 Malte Peters Chief Develop- ment Officer 04/10/2018 Allocation of 3,797 shares as part of his remuneration as member of the Managing Board (Long-Term Incentive Program 2014) (issuer’s own shares) Allocation of 2,600 shares as part of his remuneration as member of the Managing Board (Long-Term Incentive Program 2014) (issuer’s own shares) Allocation of 572 shares as part of his remuneration as member of the Managing Board (Long-Term Incentive Program 2014) (issuer’s own shares) Acceptance of 9,884 stock options to subscribe for up to 2 shares each within the compensation as a Management Board Member (Stock Option-Program 2018) Acceptance of 6,476 stock options to subscribe for up to 2 shares each within the compensation as a Management Board Member (Stock Option-Program 2018) Acceptance of 6,476 stock options to subscribe for up to 2 shares each within the compensation as a Management Board Member (Stock Option-Program 2018) Acceptance of 6,476 stock options to subscribe for up to 2 shares each within the compensation as a Management Board Member (Stock Option-Program 2018) not numberable not numberable not numberable not numberable not numberable not numberable 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 Outside a trading venue Outside a trading venue Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 105 in our hybrid IT environment. The new tool provides additional intelligence to identify security risks, detect anomalous user behavior and investigate threat patterns in time to prevent damage. INFORMAT ION ON THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM WITH REGARD T O THE ACCOUNT ING PROCESS UNDER SECTION 289 (4) AND SECTION 315 (4) HGB In the 2018 financial year, we completed a regular update of the documentation for our existing internal control and risk man- agement system. This update serves to maintain adequate in- ternal control over financial reporting and to ensure the avail- ability of key controls so that financial figures can be reported as precisely and accurately as possible. COSO (Committee of Sponsoring Organizations of the Treadway Commission) de- fines the corresponding COSO framework (“Internal Control – Integrated Framework”). We use this framework which is the most commonly used for the internal control over financial 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 financial reporting. Internal controls can only provide reasonable assur- ance that financial reporting is reliable and verify that the financial statements were prepared in accordance with the IFRS standards that were effective on and endorsed by the European Union (EU) for external purposes. The consolidated financial 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 ac- complish this, our executives have a coordinated plan for which all internal and external resources are made available. We also use a strict four-eye principle to ensure the accuracy of the key financial ratios reported and the underlying execution of all ac- counting processes. Numerous rules and guidelines are also followed to ensure the strict separation of the planning, posting and execution of financial transactions. This functional separa- tion of processes is ensured by all of our operating IT systems through an appropriate assignment of rights. External service providers regularly review the implementation of and compli- ance with these guidelines as well as the efficiency of the ac- counting processes. 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 conflict 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 conflicts of interest and their handling. In the 2018 financial year, no conflicts 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 spec- ified in the authorizing resolution. It is at the Management Board’s discretion to decide whether to carry out a repurchase on a stock exchange, via a public offer or through a public invi- tation to submit a bid. In 2018, MorphoSys did not repurchase any shares based on the authorization from the year 2014. INF ORMAT ION T ECHNOL OGY In preparation for our planned transition to a commercial bio- pharmaceutical company, the replacement of our current ERP system with SAP Business By Design was started in April 2018. In parallel, we started the integration of SAP Concur in July 2018 to substitute our legacy systems for absence and business travel management. IT security and compliance continued to be key topics in the area of information technology in 2018. External security ex- perts checked the technical security controls, inter alia, using simulated different hacking attacks to detect potential weak- nesses. The IT Security Awareness Campaign (ISAC) simulated deceitful phishing attacks to sensitize employees for their co-responsibility and essential contribution to IT security in our organization. Any security-relevant system notifications or user notifications that occurred were analyzed by the internal CERT (Computer Emergency Response Team) with partial external support. As in the previous year, no serious security incidents occurred. A SIEM (Security Information and Event Management) system was integrated to optimize our cyber defense measures. The previous system for auditing and tracking system changes, configurations and access controls was replaced with a new tool enabling control over changes, configurations and access FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 106 16 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 C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 107 Predicting future events is not the job of our internal control and risk management system. Our risk management system does, however, ensure that business risks are detected and as- sessed early. The risks identified are eliminated or at least brought to an acceptable level using appropriate corrective measures. Special attention is given to risks that could jeopar- dize us. 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 our risks and opportunities can be found in the “Risk and Opportu- nity Report.” ACCOUN T ING AND EX T ERNAL AUDI T We prepare our financial statements in accordance with the provisions of the German Commercial Code (HGB) and the Stock Corporation Act (AktG). The consolidated financial statements are prepared in accor- dance with International Financial Reporting Standards (“IFRS”) and take into account the recommendations of the Interna- tional Financial Reporting Standards Interpretations Commit- tee (IFRS IC). We have applied all standards and interpretations that were effective on and endorsed by the European Union (EU) as at December 31, 2018. There were no standards or inter- pretations as at December 31, 2018, impacting our consolidated financial statements for the years ended December 31, 2018 and 2017, that were effective but not yet endorsed. As a result, our consolidated financial statements comply with both the IFRSs published by the International Accounting Standards Board (IASB) and those adopted by the EU. These consolidated financial statements also take into account the supplementary provisions under commercial law, which must be applied in accordance with Section 315e (1) of the German Commercial Code (Handelsgesetzbuch – HGB). For the election of our auditor, the Audit Committee of the Su- pervisory Board submits a nomination proposal to the Supervi- sory Board. At the 2018 Annual General Meeting, Pricewater- houseCoopers GmbH Wirtschaftsprüfungsgesellschaft was appointed as auditor for the 2018 financial year. As proof of its independence, the auditor submitted an Independence Declara- tion to the Supervisory Board. The lead auditor of these consol- idated financial statements was Stefano Mulas, who has audited the consolidated financial statements since 2018. PricewaterhouseCoopers GmbH has been our auditor since the 2011 financial year. Information on audit-related fees and all other fees provided by PricewaterhouseCoopers GmbH to us during the 2018 financial year can be found in the Notes under Item 6.1. COMPL IANCE MANAGEMEN T SY S T EM Our basic mechanisms of the Compliance Management System (CMS) are presented in the section “Relevant Information on Corporate Governance Practices.” The identification and assessment of compliance risks are an important part of the CMS, and feed the overall CMS strategic development. Our main compliance-relevant risk areas are evaluated using a systematic approach, taking into account our current business strategy and priorities. In the 2018 financial year, we carried out a compliance risk analysis, including anti- bribery and corruption risks. Risk mitigation measures are being identified for the areas requiring action. As part of the CMS, employees are given the opportunity to report suspected breaches of law within the MorphoSys Group in a protected manner. In connection with the General Data Protection Regulation of the EU (Regulation (EU) 2016/679 – “GDPR”) which came into effect on May 25, 2018, we implemented various procedures in 2018 to safeguard compliance with the GDPR. ›› S E E F I G U R E 16 – Compliance Management System (CMS) (page 106) IN T ERNAL AUDI T DEPAR T MEN T Our Internal Audit Department is an essential element of the Corporate Governance structure. The Internal Audit Depart- ment assists us in accomplishing our objectives by bringing a systematic approach to evaluate and improve the effectiveness of our risk management, internal control and other corporate governance processes. The accounting and consulting firm KPMG was mandated for 2018 as a co-sourcing partner for the internal auditing process. The Corporate Internal Audit Department executes on a risk- based audit plan including requirements and recommendations of the Management Board and Supervisory Board’s Audit Committee. Our Internal Audit Department reports regularly to the Man- agement Board. The Head of Internal Audit and the Chief Exec- utive Officer both report to the Supervisory Board’s Audit Com- mittee twice a year or on an ad hoc basis when necessary. Five audits were conducted successfully in the course of 2018. Some areas requiring action were identified and corrective ac- tion plans were agreed. The Corporate Internal Audit Depart- ment is planning four audits in 2019. FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 108 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, 2018, the Company’s statutory common stock amounted to € 31,807,035.00 and was divided into 31,807,035 no-par-value bearer shares. Excluding the 281,036 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. On January 17, 2019, our Supervisory Board resolved to adjust the share capital to reflect the issuance of new shares in 2018 based on the exer- cise of 32,537 convertible bonds. This results in an increase of the share capital from € 31,807,035 to € 31,839,572, which was entered in the commercial register on February 2, 2019. RES T RIC T IONS AF F EC T ING VO T ING RIGH T S OR T HE T RANSF ER OF SHARES Our Management Board is not aware of any restrictions that may affect voting rights, the transfer of shares or those that may emerge from agreements between shareholders. Voting rights 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 notified of any direct or indirect interests in the Company’s common stock that exceed 10 % of the voting rights. SHARES WI T H SPEC IAL RIGH T S CONF ERRING P OWERS OF CON T ROL Shares with special rights conferring powers of control do not exist. CON T ROL OVER VO T ING RIGH T S WI T H REGARD T O EMPL O YEE OWNERSHIP OF C API TAL Employees who hold shares in the Company exercise their vot- ing rights directly in accordance with the statutory provisions and the Articles of Association as do other shareholders. APP OIN T MEN T AND DISMISSAL OF MANAGEMEN T BOARD MEMBERS AND AMENDMEN T S T O T HE AR T ICL ES OF ASSOC IAT ION The number of Management Board members, their appointment and dismissal and the nomination of the Chief Executive Officer are determined by the Supervisory Board in accordance with Section 6 of the Articles of Association and Section 84 AktG. Our Management Board currently consists of the Chief Execu- tive Officer and three other members. Management Board mem- bers may be appointed for a maximum term of five years. Reap- pointments or extensions in the term of office are allowed for a maximum term of five years in each case. The Supervisory Board may revoke the appointment of a Management Board member or the nomination of a Chief Executive Officer for good cause within the meaning of Section 84 (3) AktG. If a required member of the Management Board is absent, one will be ap- pointed 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, our 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 repre- sented. If the law stipulates a higher mandatory majority of votes or capital, this shall be applied. Amendments to the Arti- cles of Association that only affect their wording can be re- solved by the Supervisory Board in accordance with Section 179 (1) sentence 2 AktG in conjunction with Section 12 (3) of the Articles of Association. Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 109 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 Associa- tion and the statutory provisions: 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 € 11,768,314.00 for cash contributions and/or contributions in kind by issuing up to 11,768,314 new, no-par-value bearer shares until and including the date of April  30, 2022 (Authorized Capital 2018-I). Shareholders are principally entitled to subscription rights in the case of a capital increase. One or more credit insti- tutions may also subscribe to the shares with the obliga- tion to offer the shares to shareholders for subscription. With the Supervisory Board’s consent, the Management Board is, however, authorized to exclude shareholder sub- scription 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 contribu- tion when the new shares are placed on a domestic and/or foreign stock exchange in the context of a pub- lic offering. 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 effective 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 effective date of these authorizations (un- less they service the entitlements of members of the Man- agement Board and/or employees under employee partici- pation programs), (ii) shares that are issued from other authorized capital existing on the effective date of these authorizations and excluding preemptive rights during the effective period of these authorizations or resolved by the same Annual General Meeting that resolved these au- thorizations, and (iii) shares to be issued during the effec- tive period of these authorizations to service convertible bonds and/or bonds with warrants whose basis for autho- rization exists on the effective date of these authorizations provided that the convertible bonds and/or bonds with warrants have been issued with the exclusion of the pre- emptive rights of shareholders (unless they service the entitlements of members of the Management Board and/or employees under employee participation programs). With the Supervisory Board’s consent, the Management Board is authorized to determine the further details of the capital increase and its implementation. b) 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 insti- tutions may also subscribe to the shares with the obliga- tion to offer the shares to shareholders for subscription. With the Supervisory Board’s consent, the Management FINANCIAL STATEMENTS G roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 110 Board is, however, authorized to exclude shareholder sub- scription rights: aa) to the extent necessary to avoid fractional shares; or bb) if the issue price of the new shares is not significantly below the market price of shares of the same class al- ready listed 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 au- thorization takes effect 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’ effective 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 effective date of these authorizations (unless they service the entitlements of members of the Management Board and/or employees un- der employee participation programs); (ii) shares to be is- sued with the exclusion of subscription rights during the effective period of these authorizations from other autho- rized capital existing on the effective date of these autho- rizations or to be resolved by the same Annual General Meeting resolving these authorizations; and (iii) shares to be issued during the effective period of these authoriza- tions to service bonds with conversion or warrant rights, whose authorization basis exists on the effective date of these authorizations, to the extent the bonds with conver- sion or warrant rights were issued with the exclusion 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 fulfill conversion obligations under such bonds. The shares will be entitled to dividends as of the begin- ning of the previous financial year, provided they were issued before the start of the Company’s Annual General Meeting, or as of the beginning of the financial 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 € 188,985.00 through the issue of up to 188,985 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 profits from the beginning of the financial 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. On January 17, 2019, our Supervisory Board resolved to adjust the conditional capital to reflect the issuance of new shares in 2018 based on the exercise of 32,537 convertible bonds. This results in a reduction of the conditional capital 2008- III from € 188,985 to € 156,448, which was entered in the commercial register on February 1, 2019. Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t G roup Management Repor t 111 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 An- nual General Meeting’s resolution dated June 2, 2016; Sec- tion 9 (1) AktG remains unaffected. The new shares are entitled to dividends for the first time for the financial 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 ex- ercising 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 offer 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 offer if the shares are sold for cash at a price that is not significantly below the market price of the Company’s shares of the same class at the time of the sale. 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 fulfill 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 offered or transferred to employees of the Company and those of affiliated companies, members of the Company’s management and those of affiliated companies and/or used to meet commitments or obligations to purchase Company shares that were or will be granted to employees of the Company or those of affiliated companies, members of the Company’s management or managers of affiliated compa- nies. The shares may also be used to fulfill obligations or rights to purchase Company shares that will be agreed with the Company’s employees, members of the senior manage- ment and affiliates 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 The Company has not entered into any material agreements that fall under the condition of a change of control after a take- over bid. FINANCIAL STATEMENTSG roup Management Repor t Statement on C or por ate G over nance, G roup Statement on C or por ate G over nance and C or por ate G over nance Repor t 112 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 service contract and demand the fixed sal- ary and annual bonus still outstanding until the regular end of the service contract, however at least 200 % of the fixed yearly gross salary and the annual bonus. 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. 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 fixed salary and the full contractual bonus for the calendar year in which the termination is exercised, whereby a target achieve- ment rate of 100 % shall be applied. Moreover, in such a case, all stock options 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 unaffiliated entity, (ii) MorphoSys merges with an unaffiliated entity, (iii) MorphoSys AG as dominated company becomes party to an agreement pursuant to Section 291 of the German Stock Corporation Act or MorphoSys is integrated in accor- dance with Section 319 of the German Stock Corporation Act, or (iv) a shareholder or third party directly or indirectly holds 30 % or more of MorphoSys’s voting rights. Subsequent Events G roup Management Repor t 113 At the end of February 2019, our partner Janssen announced that it had received U.S. FDA approval for Tremfya® One-Press, a single-dose, patient-controlled injector for adults with mod- erate-to-severe plaque psoriasis. This is a device that allows patients to administer the drug subcutaneously by themselves and is thus intended to provide a higher convenience to psori- asis patients with respect to the treatment of their chronic disease. On March 7, 2019 MorphoSys announced that during the first quarter of 2019, the Company in agreement with the FDA im- plemented an amendment of the B-MIND study by introducing a co-primary endpoint into the trial. The scientific rationale for the amendment is based on published literature as well as MorphoSys’s own pre-clinical data, which indicate that MOR208 might be particularly active in patients who can be character- ized by the presence of a certain biomarker. Discussions with the FDA regarding the biomarker assay are currently being planned and are expected to take place in the middle of 2019. The pre-planned, event-driven interim analysis of B-MIND remains projected to take place in the second half of 2019. Depending on the outcome of the interim analysis, an increase from 330 to 450 patients may be required, in which case an event-driven primary analysis of the study is expected in the first half of 2021. Subsequent Events On January 26, 2019, we announced that in our lawsuit against Janssen Biotech and Genmab A/S, the United States (U.S.) Dis- trict Court of Delaware, based on a hearing held November 27, 2018, ruled in a Court Order on January 25, 2019, that the as- serted claims of three MorphoSys patents with U.S. Patent Numbers 8,263,746, 9,200,061 and 9,758,590 are invalid. The Court thus granted a motion for Summary Judgement of inva- lidity filed by Janssen Biotech and Genmab, A/S against the three patents held by MorphoSys. As a result of this decision, the jury trial scheduled for February 2019 to consider Janssen’s and Genmab’s alleged infringement and the validity of the MorphoSys patents did not take place. On January 31, 2019 we announced that we had settled the dispute with Janssen Bio- tech and Genmab A/S. The parties agreed to drop the mutual claims related to the litigation: MorphoSys dismissed claims for alleged patent infringement against Janssen Biotech and Genmab A/S and agreed not to appeal from the court order dated January 25, 2019. Janssen and Genmab dismissed their counterclaims against MorphoSys. In early February 2019, we announced the appointment of David Trexler as President and Member of the Board of Directors of MorphoSys US Inc. effective February  6, 2019. Mr. Trexler will lead the further development of MorphoSys’s U.S. subsidiary with a focus on building commercial capabili- ties. Mr. Trexler joins MorphoSys from EMD Serono, a subsidi- ary of Merck KGaA, Darmstadt. AT EMD Serono, he was respon- sible, among other things, for establishing the first commercial organization of Merck KGaA’s oncology division in the U.S. and for the market launch of the cancer drug avelumab for the treat- ment of metastatic Merkel cell carcinoma. On February 19, 2019, Simon Moroney, CEO and co-founder of MorphoSys AG (informed the Company’s Supervisory Board that he has decided not to renew his contract as a member of the company’s Management Board. As a result of his decision, Dr.  Moroney will step down as CEO on expiry of his current contract on June 30, 2020, or when a successor is appointed, whichever comes sooner. FINANCIAL STATEMENTSF inancial Statements 114 C ontents Financial Statements C ontents F inancial Statements 115 S T N E M E T A T S L A I C N A N I F 116 117 118 120 122 n o t e s 124 124 143 146 151 158 161 Consolidated Statement of Profit or Loss (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 Significant Accounting Policies Segment Reporting Notes to Profit or Loss Notes to the Assets of the Balance Sheet Notes to Equity and Liabilities of the Balance Sheet Remuneration System for the Management Board and Employees of the Group 172 Additional Notes F inancial Statements 116 C onsolidated Statement of Prof it or Loss (IFRS) Consolidated Statement of Profit or Loss (IFRS) in € Revenues Operating Expenses Cost of Sales Research and Development Selling General and Administrative Total Operating Expenses Other Income Other Expenses Earnings before Interest and Taxes (EBIT) Finance Income Finance Expenses Impairment Losses on Financial Assets Income Tax Benefit/(Expenses) Consolidated Net Loss Earnings per Share, basic and diluted Shares Used in Computing Earnings per Share, basic and diluted Note 2018 2017 2016 2.7.1, 4.1 76,442,505 66,790,840 49,743,515 2.1.1, 2.7.2, 4.2.1 (1,796,629) 0 0 2.7.2, 4.2.2 (106,397,017) (113,313,679) (93,962,975) 2.1.1, 2.7.2, 4.2.3 (6,382,510) (4,816,038) (2,444,224) 2.7.2, 4.2.4 (21,927,731) (15,717,578) (13,431,955) 2.7.3, 4.3 2.7.4, 4.3 2.7.5, 4.3 2.7.5, 4.3 2.3.1 2.7.6, 4.4 2.7.7, 4.5 2.7.7, 4.5 (136,503,887) (133,847,295) (109,839,154) 1,644,632 (689,343) 1,119,598 (1,670,792) 708,571 (553,925) (59,106,093) (67,607,649) (59,940,993) 417,886 (753,588) (1,035,000) 4,304,674 712,397 (1,894,852) 0 1,385,164 (1,308,322) 0 (1,036,365) (518,625) (56,172,121) (69,826,469) (60,382,776) (1.79) (2.41) (2.28) 31,338,948 28,947,566 26,443,415 The notes are an integral part of these consolidated financial statements. C onsolidated Statement of C omprehensi ve Income (IFRS) F inancial Statements 117 Consolidated Statement of Comprehensive Income (IFRS)1 in € Consolidated Net Loss Change in Fair Value of Equity Instruments through Other Comprehensive Income2 Foreign Currency Translation Differences from Consolidation3 Change in Unrealized Gains and Losses on Available-for-sale Financial Assets and Bonds (Thereof € 0 for 2018, € 86,685 for 2017 and € 251,455 for 2016, respectively, Reclassifica- tions of realized Gains and Losses to Profit or Loss) Change of Tax Effects 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 Effects Change in Unrealized Gains and Losses on Cash Flow Hedges (Thereof € 0 for 2018, € 256,085 for 2017 and € 0 for 2016, respectively, Reclassifications of realized Losses to Profit or Loss) Change of Tax Effects presented in Other Comprehensive Income on Cash Flow Hedges Change in Unrealized Gains and Losses on Cash Flow Hedges, Net of Tax Effects Other Comprehensive Income Total Comprehensive Income 2018 2017 2016 (56,172,121) (69,826,469) (60,382,776) (127,458) (83,432) 0 0 0 0 0 0 0 0 0 0 (210,890) 54,170 115,396 63,659 (136,550) 117,829 (21,154) (490,164) 130,751 (359,413) (241,584) 490,164 (130,751) 359,413 338,259 (56,383,011) (70,068,053) (60,044,517) 1 In financial years 2017 and 2016, the statement of comprehensive income only comprised components which will be reclassified in terms of IAS 1.82A(a)(ii) to profit or loss in subsequent periods when specific conditions are met. 2 Item will not be reclassified in terms of IAS 1.82A(a)(i) to profit or loss in subsequent periods. 3 Item will be reclassified in terms of IAS 1.82A(a)(ii) to profit or loss in subsequent periods when specific conditions are met. The notes are an integral part of these consolidated financial statements. F inancial Statements 118 C onsolidated B alance Sheet (IFRS) Consolidated Balance Sheet (IFRS) in € AS SE TS Current Assets Cash and Cash Equivalents Available-for-sale Financial Assets Financial Assets classified as Loans and Receivables Financial Assets at Fair Value through Profit or Loss Other Financial Assets at Amortized Cost 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 Other Financial Assets at Amortized Cost, Net of Current Portion Shares at Fair Value through Other Comprehensive Income 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 financial statements. Note 12/31/2018 12/31/2017 2.8.1, 5.1 2.8.1, 5.2 2.8.1, 5.2 2.1.2, 5.2 2.1.2, 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 2.8.8, 5.9 45,459,836 0 0 44,581,264 268,922,724 17,732,933 161,048 147,449 245,161 76,589,129 86,538,195 149,059,254 0 0 11,234,308 654,511 84,727 300,753 11,654,880 16,219,761 388,905,295 340,680,638 3,530,709 3,938,739 2,526,829 37,019,370 203,807 3,676,233 95,749,059 232,000 2,981,716 149,858,462 3,526,351 4,669,128 2,999,074 52,158,527 655,399 7,364,802 0 0 3,344,292 74,717,573 538,763,757 415,398,211 C onsolidated B alance Sheet (IFRS) F inancial Statements 119 in € Note 12/31/2018 12/31/2017 LIABILITIES AND STO CK HOLDERS ’ EQUIT Y Current Liabilities Accounts Payable and Accruals Tax Provisions Other Provisions Current Portion of Contract Liability (2017: Current Portion of Deferred Revenue) Total Current Liabilities Non-current Liabilities Other Provisions, Net of Current Portion Contract Liability, Net of Current Portion (2017: 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 (31,839,572 and 29,420,785 for 2018 and 2017, respectively) Ordinary Shares Outstanding (31,558,536 and 29,101,107 for 2018 and 2017, respectively) Treasury Stock (281,036 and 319,678 shares for 2018 and 2017, respectively), at Cost Additional Paid-in Capital Revaluation Reserve Other Comprehensive Income Reserve Accumulated Deficit Total Stockholders’ Equity 2.9.1, 6.1 2.9.2, 6.2 2.9.1, 6.2 2.9.3, 6.3 44,760,615 208,034 160,411 44,811,718 314,944 1,185,741 794,230 45,923,290 1,388,638 47,701,041 2.9.1, 6.2 23,166 23,166 2.9.4, 6.3 2.9.5 2.9.6, 4.4 2.9.7, 6.4 158,024 71,517 3,507,233 707,893 4,467,833 50,391,123 306,385 87,785 7,811,258 797,537 9,026,131 56,727,172 2.9.8, 6.5.1 31,839,572 29,420,785 2.9.8, 6.5.4 2.9.8, 6.5.5 2.9.8, 6.5.6 2.9.8, 6.5.7 2.9.8, 6.5.8 (10,398,773) 619,908,453 0 (210,890) (152,765,728) 488,372,634 (11,826,981) 438,557,856 (105,483) 0 (97,375,138) 358,671,039 TOTAL LIABILITIES AND STO CK HOLDERS ’ EQUIT Y 538,763,757 415,398,211 The notes are an integral part of these consolidated financial statements. F inancial Statements 120 C onsolidated Statement of Changes in Stockholder s ’ Equit y (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 Effects Change in Unrealized Gains on Cash Flow Hedges, Net of Tax Effects 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 Effects Change in Unrealized Gains on Cash Flow Hedges, Net of Tax Effects Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2017 Application of IFRS 9 Application of IFRS 15 BAL ANCE AS OF JANUARY 1, 2018 Capital Increase, Net of Issuance Cost of € 15,038,362 Compensation Related to the Grant of Stock Options 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 Related Parties Reserves: Change in Fair Value of Equity Instruments through Other Comprehensive Income Foreign Currency Losses from Consolidation Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2018 The notes are an integral part of these consolidated financial statements. Common Stock Note Shares € 26,537,682 2,622,088 26,537,682 2,622,088 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 29,420,785 319,678 (11,826,981) 438,557,856 (97,375,138) 358,671,039 0 0 29,420,785 2,386,250 0 32,537 0 0 29,420,785 2,386,250 0 32,537 0 0 0 0 0 0 0 0 0 0 0 0 31,839,572 31,839,572 281,036 (10,398,773) 619,908,453 (152,765,728) 488,372,634 7.1, 7.2, 7.3 7.2 7.3.1 7.4 6.5.8 2.1.2, 6.5.6, 6.5.8 2.1.2, 6.5.8 6.5.1, 6.5.5 7.1, 7.3 7.2, 7.4 7.3.2, 7.4 6.5.4, 7.3.7, 7.4 5.8, 6.5.7 6.5.7 6.5.8 Additional Paid-in Capital Revaluation Reserve Other Compre- hensive In- come Reserve Accumulated Stockholders’ Deficit 434,670 (15,827,946) (202,158) 32,834,107 Treasury Stock Shares 52,295 (90,955) (2,181,963) 3,361,697 319,394,322 109,971,132 2,357,418 (3,361,697) 396,010 396,010 (14,648,212) (14,648,212) 428,361,175 428,361,175 (61,871) (14,461) 2,286,752 534,479 4,974,599 8,043,313 (2,286,752) (534,479) 319,678 (11,826,981) (17,219) (21,423) 636,414 791,794 438,557,856 176,189,256 5,584,969 1,004,580 (636,414) (791,794) € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (21,154) 359,413 338,259 136,101 136,101 117,829 (359,413) (241,584) (105,483) 105,483 € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Equity € 362,736,007 112,593,220 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 0 0 117,829 (359,413) (69,826,469) (70,068,053) (248,000) 1,135,014 359,558,053 178,575,506 5,584,969 1,037,117 (127,458) (83,432) (56,172,121) (56,383,011) € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (60,382,776) (60,382,776) (27,548,669) (27,548,669) (69,826,469) (69,826,469) (353,483) 1,135,014 (96,593,607) € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (127,458) (83,432) (210,890) (210,890) (56,172,121) (56,172,121) C onsolidated Statement of Changes in Stockholder s ’ Equit y (IFRS) F inancial Statements 121 Common Stock Treasury Stock Additional Paid-in Capital Revaluation Reserve Other Compre- hensive In- come Reserve Accumulated Deficit Total Stockholders’ Equity 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 Effects Change in Unrealized Gains on Cash Flow Hedges, Net of Tax Effects 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 Effects Change in Unrealized Gains on Cash Flow Hedges, Net of Tax Effects Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2017 Application of IFRS 9 Application of IFRS 15 BAL ANCE AS OF JANUARY 1, 2018 Capital Increase, Net of Issuance Cost of € 15,038,362 Compensation Related to the Grant of Stock Options 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 Related Parties Reserves: Change in Fair Value of Equity Instruments through Other Comprehensive Income Foreign Currency Losses from Consolidation Consolidated Net Loss Total Comprehensive Income BAL ANCE AS OF DECEMBER 31, 2018 The notes are an integral part of these consolidated financial statements. 7.1, 7.2, 7.3 7.2 7.3.1 7.4 6.5.8 2.1.2, 6.5.6, 6.5.8 2.1.2, 6.5.8 6.5.1, 6.5.5 7.1, 7.3 7.2, 7.4 7.3.2, 7.4 6.5.4, 7.3.7, 7.4 5.8, 6.5.7 6.5.7 6.5.8 26,537,682 2,622,088 26,537,682 2,622,088 29,159,770 29,159,770 29,159,770 29,159,770 261,015 261,015 29,420,785 2,386,250 29,420,785 2,386,250 32,537 32,537 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Note Shares Shares € € € 434,670 (15,827,946) 0 0 52,295 (90,955) 0 0 (2,181,963) 3,361,697 319,394,322 109,971,132 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 29,420,785 29,420,785 319,678 (11,826,981) 438,557,856 0 0 0 0 319,678 (11,826,981) 0 0 0 (17,219) (21,423) 0 0 0 0 0 0 0 636,414 791,794 0 0 0 0 0 0 438,557,856 176,189,256 5,584,969 1,004,580 (636,414) (791,794) 0 0 0 0 31,839,572 31,839,572 281,036 (10,398,773) 619,908,453 (202,158) 0 0 0 0 (21,154) 359,413 338,259 136,101 136,101 0 0 0 0 117,829 (359,413) 0 (241,584) (105,483) 105,483 0 0 0 0 0 0 0 0 0 0 0 0 € 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (127,458) (83,432) 0 (210,890) (210,890) € € 32,834,107 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) 362,736,007 112,593,220 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 (353,483) 1,135,014 (96,593,607) 0 0 0 0 0 0 0 (56,172,121) (56,172,121) (248,000) 1,135,014 359,558,053 178,575,506 5,584,969 1,037,117 0 0 (127,458) (83,432) (56,172,121) (56,383,011) (152,765,728) 488,372,634 F inancial Statements 122 C onsolidated 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 Financial Assets at Fair Value through Profit or Loss (2017 and 2016: 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 Proceeds from Recognition of previously unrecognized Intangible Assets Recognition of Contract Liability (2017 and 2016: Recognition of Deferred Revenue) Share-based Payment Income Tax (Benefit)/Expenses Changes in Operating Assets and Liabilities: Accounts Receivable Prepaid Expenses and Other Assets, Tax Receivables and Other Receivables Accounts Payable and Accruals, Tax Provisions and Other Provisions Other Liabilities Contract Liability (2017 and 2016: Deferred Revenue) Income Taxes Paid Note 2018 2017 2016 (56,172,121) (69,826,469) (60,382,776) 5.6, 5.7 5.6, 5.7 24,033,479 3,750,259 9,863,582 4,028,948 10,141,187 3,763,813 5.2 5.4 5.4 5.8 6.3 4.2.5, 7 4.4 5.3 1,114,330 (488,201) 121,717 (24,093) 84,841 (589,134) 919,042 11,314 915,201 725,157 (29,879) (4,037) (350,000) 0 0 (1,993,763) 5,584,969 (4,304,674) (19,595,746) (19,042,772) 4,974,599 1,036,365 2,357,418 518,625 (6,610,625) 1,362,347 (1,154,597) 5.4, 5.5 545,816 1,807,670 (13,912,263) 6.1, 6.2 6.4 6.3 1,890,046 (2,718,825) 7,819,386 3,133,558 2,386,009 (33,837) 18,385,824 (1,861,982) 13,010,160 (421,492) 17,440,930 (540,383) Net Cash Provided by/(Used in) Operating Activities (33,269,514) (38,445,855) (46,615,708) The notes are an integral part of these consolidated financial statements. C onsolidated Statement of Cash Flows (IFRS) F inancial Statements 123 in € INVESTING AC TIVITIES: Purchase of Financial Assets at Fair Value through Profit or Loss (2017 and 2016: Available-for-sale Financial Assets) Proceeds from Sales of Financial Assets at Fair Value through Profit or Loss (2017 and 2016: Available-for-sale Financial Assets) Proceeds from Sales of Bonds, Available-for-sale Purchase of Other Financial Assets at Amortized Cost (2017 and 2016: Financial Assets Classified as Loans and Receivables) Proceeds from Sales of Other Financial Assets at Amortized Cost (2017 and 2016: Financial Assets Classified as Loans and Receivables) Purchase of Property, Plant and Equipment Proceeds from Disposals of Property, Plant and Equipment Purchase of Intangible Assets Purchase of Financial Assets at Fair Value through Other Comprehensive Income 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 Outflows in Connection with Convertible Bonds Granted to Related Parties Interest Paid Net Cash Provided by/(Used in) Financing Activities Effect of Exchange Rate Differences on Cash Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Period Cash and Cash Equivalents at the End of the Period Note 2018 2017 2016 5.2 (84,511,324) (56,406,580) (166,923,795) 5.2 5.2 126,388,925 0 33,231,500 6,500,000 167,873,152 25,770,000 5.2 (366,810,000) (108,000,000) (256,499,997) 5.2 5.6 5.7 5.8 6.5 6.5 7.2 149,980,211 (1,820,749) 28,444 (644,575) 170,498,593 (1,317,058) 84 (11,831,789) 149,894,769 (2,502,286) 5,000 (411,204) (9,458) 136,124 0 0 257,752 2,008,325 (177,262,402) 32,932,502 (80,786,036) 0 193,613,868 (15,038,362) 0 0 (15,525) (2,181,963) 115,371,872 (2,778,652) 1,020,849 8,189,345 0 0 (134,269) 179,462,086 (59,463) (31,129,293) 76,589,129 45,459,836 0 0 (6,707) (1,819) 8,173,820 110,402,731 0 2,660,467 73,928,661 76,589,129 0 (16,999,013) 90,927,673 73,928,661 The notes are an integral part of these consolidated financial statements. F inancial Statements 124 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. MorphoSys 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 offering on Germany’s “Neuer Markt”: the segment of the Deutsche Börse at that time designated for high-growth companies. On January 15, 2003, MorphoSys AG was admitted to the Prime Standard segment of the Frankfurt Stock Exchange. On April 18, 2018, MorphoSys completed an IPO on the Nasdaq Global Market through the issue of American Depositary Shares (ADS). MorphoSys AG’s registered office is located in Planegg (district of Munich), and the registered business address is Semmelweisstraße 7, 82152 Planegg, Germany. The Com- pany is registered in the Commercial Register B of the District Court of Munich under the number HRB 121023. 2 Summary of Significant Accounting Policies 2.1 BASI S OF AND CHANGE S IN ACCOUN T ING S TANDARD S 2 .1.1 BASIS OF APPLICATION These consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (“IFRS”), taking into account the recommendations of the International Financial Re- porting Standards Interpretations Committee (IFRS IC). We have applied all standards and interpretations that were in force as of December 31, 2018 and adopted by the European Union (EU). As of December 31, 2018, there were no standards or interpretations that affected our consoli- dated financial statements for the years ended December 31, 2018 and 2017 that were in effect but not yet endorsed into European law. As a result, our consolidated financial statements comply with both the IFRSs published by the International Accounting Standards Board (IASB) and those adopted by the EU. These consolidated financial state- ments also take into account the supplementary provisions under com- mercial law, which must be applied in accordance with Section 315e (1) of the German Commercial Code (Handelsgesetzbuch – HGB). These consolidated financial statements as of December 31, 2018 and 2017 and for each of the years in the three years period ended Decem- ber 31, 2018, comprise MorphoSys AG and its subsidiaries (collectively referred to as the “MorphoSys Group” or the “Group”). In preparing the consolidated financial statements in accordance with IFRS, the Management Board is required to make certain estimates and assumptions, which have an effect on the amounts recognized in the consolidated financial statements and the accompanying Notes. The actual results may differ from these estimates. The estimates and the underlying assumptions are subject to continuous review. Any changes in estimates are recognized in the period in which the changes are made and in all relevant future periods. The annual financial statements of the foreign Group companies are prepared in their respective functional currencies and converted into the euro prior to their consolidation. The consolidated financial state- ments were prepared in euros. The financial statements are prepared on the basis of historical cost, with the exception of derivative financial instruments and financial assets at fair value, which are recognized at their respective fair value. All figures in this report have been rounded to the nearest euro, thou- sand euros or million euros. The line item “cost of sales” in profit or loss was first introduced in the third quarter of 2018 and includes the expenses related to the provi- sion of services for the transfer of projects to customers. The rationale for introducing this item is the generally increasing significance of this item in the course of the Group’s planned business development. In 2017 and 2016, there were no material comparable transactions to be reported under this item. Since January 1, 2018, the Group has reported the line item “selling expenses” separately under “operating expenses” in profit or loss. The reason for introducing this new line item and the concomitant changes to the presentation of existing items is the increasing importance of marketing expenses in connection with the preparations planned for the commercialization of MOR208. To ensure comparability of the in- formation, the previous year’s figures have been adjusted accordingly. The disclosure of selling expenses resulted in a change in the record- ing of research and development and general and administrative ex- penses in 2017, which reduced these items in 2017 by € 3.5 million and € 1.3 million and in 2016 by € 1.7 million and € 0.7 million, respectively. The corresponding amounts are now reported in “selling expenses”. Unless stated otherwise, the accounting policies set out below have been applied consistently to all periods presented in these consoli- dated financial statements. Notes F inancial Statements 125 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. N E W A N D R E V I S ED STA N DA R DS A N D I N T ER P R E TAT I O N S A P P L I ED F O R T H E FI RST T I M E I N T H E FI N A N C I A L Y E A R Standard/Interpretation IFRS 9 IFRS 15 and IFRS 15 (A) Instruments Financial Revenue from Contracts with Customers Classification and Measurement of Share-based Payment Transactions Applying IFRS 9 ‘Financial Instruments’ with IFRS 4 ‘Insurance Contracts’ Revenue from Contracts with Customers Transfers of Investment Property Foreign Currency Transactions and Advance Consideration Annual Improvements to IFRS Standards 2014 – 2016 Cycle IFRS 2 (A) IFRS 4 (A) IFRS 15 (C) IAS 40 (A) IFRIC 22 (A) Amendments (C) Clarifications Mandatory Application for financial years starting on 01/01/2018 01/01/2018 01/01/2018 01/01/2018 01/01/2018 01/01/2018 01/01/2018 01/01/2018 Adopted by the European Union Impact on MorphoSys yes yes yes yes yes yes yes yes yes yes yes none yes none none none The impact of the amendments to IFRS 2 on the consolidated financial statements is deemed not to be material. I FRS 9 – FI N A N C I A L I N ST RU M EN TS As of January 1, 2018, the Group has been applying the new standard for financial instruments, IFRS 9. In this context, the exception granted by IFRS 9 Section 7.2.15 is applied for the transitional provisions for classification and measurement according to which the adjustment of prior year figures is not required. Financial instruments were accounted for in accordance with IAS  39 in fiscal years 2017 and 2016. The Group applied the provisions of IAS 39 on the classification, recognition, measurement and derecognition of financial instruments. As of January 1, 2018, financial instruments, namely money market funds, previously reported in accordance with IAS  39 until Decem- ber 31, 2017, in the balance sheet item “available-for-sale financial as- sets” are now classified as “financial assets at fair value, with changes recognized in profit or loss” in accordance with IFRS 9. These items do not meet the IFRS  9 criteria for classification at amortized cost, be- cause their cash flows do not represent solely payments of principal and interest. Financial instruments, namely term deposits with fixed and variable interest rates as well as corporate bonds, previously classified in accor- dance with IAS 39 as “financial assets classified as loans and receiv- ables” until December 31, 2017, are now presented in the balance sheet item “other financial assets at amortized cost” in accordance with IFRS  9. At the date of initial application the Group’s business model is to hold these financial instruments for collection of contractual cash flows, and the cash flows represent solely payments of principal and interest on the principal amount. F inancial Statements 126 Notes Available-for- sale Financial Assets Financial As- sets at Fair Value through Profit or Loss Financial As- sets classified as Loans and Receivables Other Financial Assets at Amortized Cost 86,538 (86,538) 0 0 0 0 149,059 86,538 0 0 86,538 0 (149,059) 0 0 0 0 149,059 (136) 148,923 in 000’ € Balance as of December 31, 2017 Reclassifications of “Available-for-sale Financial Assets” to “Financial Assets at Fair Value through Profit or Loss” Reclassifications of “Financial Assets classified as Loans and Receivables” to “Other Financial Assets at Amortized Cost” Impairment Balance as of January 1, 2018 As of January 1, 2018, there was no difference between the previous carrying amounts of financial instruments in accordance with IAS 39 and the carrying amounts in accordance with IFRS 9. As a result, no change in value has been recognized in accumulated deficit as of Janu- ary 1, 2018. For financial instruments classified as “at amortized cost”, impairment losses for the expected twelve-month loss were recog- nized in accumulated deficit as of January 1, 2018. For financial instru- ments previously classified as “available-for-sale financial assets”, all unrealized gains and losses recognized in the revaluation reserve as of December 31, 2017 were reclassified to accumulated deficit as of January 1, 2018, as these financial instruments are now classified as “financial assets at fair value, with changes recognized in profit or loss”. No reclassification adjustment was required to be made to other financial assets at amortized cost under IFRS 9 compared to the appli- cation of IAS 39. in 000’ € Revaluation Reserve Accumulated Deficit Balance as of December 31, 2017 Reclassifications of “Available-for-sale Financial Assets” to “Financial Assets at Fair Value through Profit or Loss” Balance as of January 1, 2018 (105) 105 0 0 (105) (105) The group recognized impairments on financial instruments in accor- dance with the incurred loss model of IAS 39 until December 31, 2017, by recognizing an allowance once objective evidence of impairment occurred. On January 1, 2018, an expected twelve-month loss for finan- cial instruments, namely for the cash and cash equivalents as well as the term deposits, amounting to € 0.1 million, was recognized as strictly required by IFRS 9. All of these debt investments at amortized cost are considered to have a low credit risk, and the risk provision recognized was therefore limited to twelve-month expected losses. For accounts receivable, the simplified impairment model was applied, which requires expected lifetime losses to be recognized. This resulted in a risk provision of € 0.1 million as of January 1, 2018. Notes F inancial Statements 127 Impair- ment IAS 39 General Impairment Model Simplified Impairment Model Accumu- lated Deficit in 000’ € Stage 1 Stage 2 Stage 3 Stage 2 Stage 3 Balance as of December 31, 2017 Other Financial Assets at Amortized Cost Accounts Receivable Balance as of January 1, 2018 0 0 0 0 0 (136) 0 (136) 0 0 0 0 0 0 0 0 0 0 (112) (112) 0 0 0 0 0 (136) (112) (248) MorphoSys did not apply hedge accounting under IAS  39 as of De- cember 31, 2017, nor during the year 2018, therefore the first time application of IFRS 9 has no impact on the accounting of hedging rela- tionships. I FRS 15 – R E V EN U E FRO M C O N T R ACTS W I T H C U STO M ERS Since January 1, 2018, the Group has been applying IFRS 15, the new accounting standard governing revenue recognition, using the modified retrospective method. Using this method requires that the cumulative effects of the first adoption of IFRS 15 to be recognized in accumulated deficit as of January 1, 2018 without an adjustment of previous periods. Hence, deferred revenue and accumulated deficit each decreased by € 1.1 million. This effect resulted from license payments which, under IFRS 15, are to be realized at a specific point in time rather than over a period of time, as was the case under IAS 18. in 000’ € Balance as of December 31, 2017 Application of IFRS 15 Balance as of January 1, 2018 Had revenues in the 2018 financial year continued to be recognized in accordance with IAS 18, revenues would have been € 1.1 million higher. This reflects the aforementioned effect as of January 1, 2018, which would have been fully realized as revenue until December 31, 2018, without the application of the new IFRS 15 standard. For the revenue realized under IFRS 15 in the 2018 financial year, the accounting under IAS 18 would have resulted in revenue recognition in the same amount and at the same point in time. Accounting principles for accounts receivable assets are presented in Items 2.4.2*, 2.5.1* and 2.8.2* of these Notes. *C R O S S - R E F E R E N C E to page 136 and page 140 Current Portion of Contract Liability (2017: Current Portion of Deferred Revenue) Contract Liability, Net of Current Portion (2017: Deferred Reve- nue, Net of Current Portion) 1,389 (1,041) 348 306 (94) 212 Accumulated Deficit 0 1,135 1,135 As of January 1, 2018, contract liabilities as defined by IFRS 15 rather than deferred revenue were recorded in the consolidated balance sheet. The accounting policies that apply to contract liabilities are presented in Items 2.9.3* and 2.9.4* of the Notes. *C R O S S - R E F E R E N C E to page 142 N E W A N D R E V I S ED STA N DA R DS A N D I N T ER P R E TAT I O N S T H AT W ER E N OT Y E T M A N DATO RY The following new and revised standards and interpretations that were not yet mandatory for the financial year or were not yet adopted by the European Union were not applied. Standards with the remark “yes” are likely to have an impact on the consolidated financial statements, and their impact is currently being assessed by the Group. Only those standards having a material impact are described in more detail. The impact on the consolidated financial statements of the amendments to IAS 1 and IAS 8 is not expected to be material and therefore these are not explained separately. Standards with the remark “none” are unlikely to have a material impact on the consolidated financial statements. F inancial Statements 128 Notes Standard / Interpretation IFRS 3 (A) IFRS 16 IFRS 17 IFRS 9 (A) IAS 1 and IAS 8 (A) IAS 19 (A) IAS 28 (A) IFRIC 23 Business Combinations Leases Insurance Contracts Prepayment Features with Negative Compensation Definition of Material Plan Amendment, Curtailment or Settlement Long-term Interests in Associates and Joint Ventures Uncertainty over Income Tax Treatments Amendments to References to the Conceptual Framework in IFRS Standards Annual Improvements to IFRS Standards 2015 – 2017 Cycle Mandatory Application for financial years starting on Adopted by the European Union Possible Impact on MorphoSys 01/01/2020 01/01/2019 01/01/2021 01/01/2019 01/01/2020 01/01/2019 01/01/2019 01/01/2019 01/01/2020 01/01/2019 no yes no yes no no yes yes no no none yes none none yes none none none none none (A) Amendments I FRS 16 – L E AS ES As of January 1, 2019, the new IFRS 16 standard for leases, replaces the previous IAS 17 standard for leases, including the related interpreta- tions (IFRIC 4, SIC-15, SIC-27). Currently, all leases are accounted for as operating leases in accordance with IAS 17. The Group reviewed IFRS 16 for its potential impact on existing lease contracts and will apply the standard for the first time as of the date of its mandatory adoption on January 1, 2019, using the modified retro- spective method. The Group will not retroactively adjust comparative amounts for the year prior to first-time adoption and will recognize right-of-use assets in the amount of the lease liabilities in accordance with IFRS 9.C8 (b)(ii) on January 1, 2019. The analysis of the first-time application of IFRS 16 showed that IFRS 16 will have a material impact on components of the consolidated financial statements and the pre- sentation of net assets, financial position and results of operations. For lessees, IFRS 16 introduces a uniform approach to the accounting treatment of leases, whereby assets for the right of use and liabilities for the payment obligations must be recognized in the balance sheet for all leases. The right of use is initially measured at the present value of the future lease payments plus the initial direct costs and subse- quently amortized over the term of the lease. The lease liability is the present value of the lease payments that are paid during the term of the lease. For subsequent measurement, the carrying amount of the lease liabilities is compounded with the interest rate or the incremental borrowing rate underlying the lease and reduced by lease payments made. For low value lease assets or short-term leases (less than twelve  months), the simplified method is applied. Under this method, the lease payments are recognized as expenses over the term of the lease. The analysis of the first-time application of IFRS 16 has shown that, as of January 1, 2019, the conversion is expected to result in the recogni- tion of rights of us right-of-use assets and lease liabilities of around € 40.6 million in the balance sheet. In addition, current prepaid ex- penses of € 0.3 million resulting from rent paid in advance and non-current prepaid expenses of € 2.1 million are reclassified to the capitalized right-of-use asset as of January 1, 2019. Furthermore, as of January 1, 2019, current other liabilities of € 0.1 million and non-cur- rent other liabilities of € 0.7 million resulting from deferred rent-free periods are offset against the right-of-use asset. The resulting expan- sion in total liabilities is expected to decrease the equity ratio. The first-time adoption of IFRS 16 is not expected to have an impact on equity as of January 1, 2019. The lease expenses currently recognized in the statement of income will be replaced by depreciation on assets and interest expenses from the compounding of lease liabilities. This means that the related costs will be presented in different line items in the statement of income and may differ in their total amount compared to the application of IAS 17. The first-time application of IFRS 16 is not expected to have a material impact on Group EBIT. Payments for the repayment of lease liabilities and payments relating to the interest portion of the lease liability will be allocated to cash flow from financing activities.   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 prepar- ing consolidated financial statements pursuant to IFRS 10.B86. Unreal- ized losses are eliminated in the same manner as unrealized gains. Accounting policies have been applied consistently for all subsidiaries. For all contracts and business transactions between Group entities, the arm’s length principle was applied. Notes F inancial Statements 129 2 .2 .1 C ONSOLIDATE D C OMPANIES AND SC OPE OF C ONSOLIDATION MorphoSys AG, as the ultimate parent company, is located in Planegg, near Munich. MorphoSys AG has two wholly owned subsidiaries (collectively referred to as the “MorphoSys Group” or the “Group”): MorphoSys US Inc. (Princeton, New Jersey) 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). On July 2, 2018, MorphoSys AG established the wholly owned subsidi- ary, MorphoSys US Inc., under Section 102 of the General Corporation Law of the State of Delaware. Since its foundation, the company has been fully included in the MorphoSys AG scope of consolidation. Upon entry into the commercial register on June 28, 2018, and based on the merger agreement dated May 17, 2018, Sloning BioTechnology GmbH, as the transferring legal entity, was merged into MorphoSys AG, as the acquiring legal entity, with retroactive effect from January 1, 2018. The consolidated financial statements for the year ended December 31, 2018, were prepared and approved by the Management Board in its meeting on March 13, 2019, by means of a resolution. The Management Board members are Dr. Simon Moroney (Chief Executive Officer), Jens Holstein (Chief Financial Officer), Dr. Markus Enzelberger (Chief Scien- tific Officer) and Dr. Malte Peters (Chief Development Officer). On March 13, 2019, the Management Board authorized the consoli- dated financial statements for issue and passed it through to the Super- visory Board for review and authorization. 2 .2 .2 C ONSOLIDATION ME THODS The following Group subsidiaries are included in the scope of consoli- dation as shown in the table below. Company Lanthio Pharma B.V. LanthioPep B.V. MorphoSys US Inc. Purchase of Shares/ Establishment Included in Basis of Consolidation since May 2015 May 2015 July 2018 05/07/2015 05/07/2015 07/02/2018 These subsidiaries are fully consolidated because they are either directly or indirectly wholly owned. MorphoSys controls these sub- sidiaries because it possesses full power over the investees. Addition- ally, MorphoSys is subject to risk exposure and has rights to variable returns from its involvement with the investees. MorphoSys also has unlimited capacity to exert power over the investees to influence their returns. The Group does not have any entities consolidated as joint ventures using the equity method as defined by IFRS 11 “Joint Arrangements”, nor does it exercise a controlling influence as defined by IAS 28 “In- vestments in Associates and Joint Ventures”. Assets and liabilities of fully consolidated domestic and international entities are recognized using Group-wide uniform accounting and val- uation 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 financial statements. 2 .2 .3 BASIS OF FORE IGN CURRE NCY TR ANSL ATION IAS 21 “The Effects of Changes in Foreign Exchange Rates” governs the accounting for transactions and balances denominated in foreign currencies. Transactions denominated in foreign currencies are trans- lated at the exchange rates prevailing on the date of the transaction. Any resulting translation differences are recognized in profit or loss. On the reporting date, assets and liabilities are translated at the clos- ing rate for the financial year. Any foreign exchange rate differences derived from these translations are recognized in profit or loss. Any other foreign exchange rate differences at the group level are recognized in the “Other Comprehensive Income Reserve” (stockholders’ equity). 2.3 F INANC IAL INS T RUMEN T S AND F INANC IAL RI SK MANAGEMEN T 2 .3.1 CRE DIT RISK AND LIQUIDIT Y RISK Financial instruments in which the Group may have a concentration of credit and liquidity risk are mainly cash and cash equivalents, finan- cial assets at fair value, with changes recognized in profit or loss, other financial assets at amortized cost, derivative financial instruments and receivables. The Group’s cash and cash equivalents are mainly denominated in euros. Financial assets at fair value, with changes rec- ognized in profit or loss and other financial assets at amortized cost are high-quality assets. Cash, cash equivalents, financial assets at fair value, with changes recognized in profit or loss and other financial assets at amortized cost are generally held at numerous reputable financial institutions. With respect to its investments, the Group con- tinuously monitors the financial institutions that are its counterparties to the financial instruments, as well as their creditworthiness, and does not anticipate any risk of non-performance. The changes in impairment losses for credit risks required to be recog- nized under IFRS 9 on the financial year's profit or loss in the line item “impairment losses on financial assets” (see Item 2.4* of the Notes) were as follows. Negative values represent additions and positive val- ues represent reversals of this risk provision. No utilization of impair- ments was recognized in 2018. The increase of this risk provision resulted from a higher volume of financial assets at amortized cost due to the cash raised in connection with the IPO on the Nasdaq and higher premiums on counterparties’ credit default swaps compared with Jan- uary 1, 2018. *C R O S S - R E F E R E N C E to page 136   F inancial Statements 130 Notes General Impairment Model Simplified Impairment Model Total in 000’ € Stage 1 Stage 2 Stage 3 Stage 2 Stage 3 Balance as of January 1, 2018 Unused Amounts Reversed Increase in Impairment Losses for Credit Risks recognized in Profit or Loss during the Year Change between Impairment Stages Amounts written off during the Year as uncollectible Balance as of December 31, 2018 (136) 0 (570) 41 0 (665) 0 0 (465) (41) 0 (506) 0 0 0 0 0 0 (112) 112 (90) 0 0 (90) 0 0 0 0 0 0 (248) 112 (1,125) 0 0 (1,261) The Group recognizes impairment losses for credit risks on financial assets as of December 31, 2018 as follows. Balance Sheet Item Cash and Cash Equivalents Other Financial Assets at Amortized Cost Accounts Receivable Internal Credit Rating Basis for Rec- ognition of Ex- pected Credit Loss Provision Gross Carrying Amount (in 000’ €) Impairment (in 000’ €) Carrying Amount (in 000’ €) Average Im- pairment Rate Expected Twelve-Month Loss Expected Twelve-Month Loss low low medium Lifetime Expected Credit Losses Lifetime Expected Credit Losses low 43,165 (16) 43,149 0.0 % 275,805 93,102 17,823 (649) (506) (90) 275,156 92,596 17,733 0.2 % 0.5 % 0.5 % The Group is also exposed to credit risk from debt instruments that are measured at fair value in profit or loss. As of December 31, 2018, the maximum credit risk corresponded to the carrying amounts of these investments amounting to € 44.6 million. One of the Group’s policies requires that all customers who wish to transact business on credit undergo a credit assessment based on ex- ternal ratings. Nevertheless, the Group’s revenue and accounts receiv- able are still subject to credit risk from customer concentration. The Group’s most significant single customer accounted for € 5.9 million of accounts receivables as of December 31, 2018 (December 31, 2017: € 5.1 million) or 33 % of the Group’s total accounts receivable at the end of 2018. The Group’s top three single customers accounted for of 65 %, 25 % and 5 % of the total revenue in 2018. On December 31, 2017, one customer had accounted for 45 % of the Group’s accounts receivable, and the top three customers had individually accounted for 55 %, 25 % and 10 % of the Group’s revenue in 2017. In 2016, the top three cus- tomers had individually accounted for 85 %, 5 % and 5 % of the Group’s revenue. The carrying amounts of financial assets represented the maximum credit risk. The table below shows accounts receivables by region as of the report- ing date. in € 12/31/2018 12/31/2017 Europe and Asia USA and Canada Other Impairment TOTAL 13,176,523 4,646,410 0 (90,000) 17,732,933 8,838,884 2,395,424 0 0 11,234,308 The following table shows the aging of accounts receivable as of the reporting date. The loss rate for accounts receivable is valued at 0.5 % as of December 31, 2018. Notes in €; due since F inancial Statements 131 12/31/2018 0 – 30 days 12/31/2018 30 – 60 days 12/31/2018 60+ days 12/31/2018 Total Accounts Receivable Impairment Accounts Receivable, Net of Allowance for Impairment 17,822,933 (90,000) 17,732,933 0 0 0 0 0 0 17,822,933 (90,000) 17,732,933 in €; due since 12/31/2017 0 – 30 days 12/31/2017 30 – 60 days 12/31/2017 60+ days 12/31/2017 Total Accounts Receivable Write-off Accounts Receivable, Net of Allowance for Impairment 11,234,308 0 11,234,308 0 0 0 0 0 0 11,234,308 0 11,234,308 On December 31, 2018 and December 31, 2017, the Group’s exposure to credit risk from derivative financial instruments was assessed as low. The maximum credit risk (is equal to carrying amount) for rent de- posits on the reporting date amounted to € 0.7 million (December 31, 2017: € 1.1 million). The following table shows the maturities of accounts payable as of the reporting date. in €; due in Trade Accounts Payable Convertible Bonds due to Related Parties in €; due in Trade Accounts Payable Convertible Bonds due to Related Parties 12/31/2018 Between One and Twelve Months 12/31/2018 More than 12 Months 12/31/2018 Total 7,215,127 71,517 0 0 7,215,127 71,517 12/31/2017 Between One and Twelve Months 12/31/2017 More than 12 Months 12/31/2017 Total 4,621,918 87,785 0 0 4,621,918 87,785 Financial assets and financial liabilities were not netted as of Decem- ber 31, 2018. There is no current legal right to offset amounts recog- nized against each other, to settle on a net basis or to settle an associ- ated liability simultaneously with the realisation of an asset. There were no financial instruments pledged as collateral as of December 31, 2018. Under existing framework netting agreements, there was no net- ting potential as of December 31, 2018. C U R R EN CY R I S K The consolidated financial statements are prepared in euros. Whereas MorphoSys’s expenses are predominantly incurred in euros, a portion of the revenue is dependent on the prevailing exchange rate of the US dollar. Throughout the year, the Group monitors the need to hedge foreign exchange rates to minimize currency risk and addresses this risk by using derivative financial instruments. 2 .3.2 MARKE T RISK Market risk represents the risk that changes in market prices, such as foreign exchange rates, interest rates or equity prices, will affect the Group’s results of operations or the value of the financial instruments held. The Group is exposed to both currency and interest rate risks. Under the Group’s hedging policy, highly probable cash flows and defi- nite foreign currency receivables collectible within a twelve-month period are tested to determine if they should be hedged. MorphoSys had begun using foreign currency options and forwards to hedge its foreign exchange risk against US dollar receivables in 2003. For deriv- atives with a positive fair value, unrealized gains are reported in other receivables and for derivatives with a negative fair value, unrealized losses are reported in other liabilities. F inancial Statements 132 Notes As of December 31, 2018, there were nine unsettled forward rate agreements with terms ranging from one month to nine months (De- cember 31, 2017: twelve unsettled forward rate agreements; Decem- ber 31, 2016: ten unsettled forward rate agreements). The unrealized gross gains from these agreements amounted to € 0.1 million as of December 31, 2018, and were reported in the finance result (Decem- ber 31, 2017: € 0.3 million unrealized gross loss; December 31, 2016: less than € 0.1 million unrealized gross gain). The table below shows the Group’s exposure to foreign currency risk based on the items’ carrying amounts. as of December 31, 2018; in € EUR US$ Other Impairment Total Cash and Cash Equivalents Financial Assets at Fair Value through Profit or Loss Other Financial Assets at Amortized Cost Accounts Receivable Restricted Cash (included in Other Current Assets) Accounts Payable and Accruals TOTAL 38,732,565 34,971,116 365,823,783 17,570,035 772,425 (43,638,268) 414,231,656 6,743,271 9,610,148 0 252,898 12,901 (1,122,347) 15,496,871 0 0 0 0 0 0 0 (16,000) 0 (1,152,000) (90,000) (3,000) 0 (1,261,000) 45,459,836 44,581,264 364,671,783 17,732,933 782,326 (44,760,615) 428,467,527 as of December 31, 2017; in € EUR US$ Other Impairment Total Cash and Cash Equivalents Available-for-sale Financial Assets Financial Assets classified as Loans and Receivables Accounts Receivable Restricted Cash (included in Other Current Assets) Accounts Payable and Accruals 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 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 Various foreign exchange rates and their impact on assets and liabili- ties were simulated in an in-depth sensitivity analysis to determine the effects on profit or loss. A 10 % increase in the euro versus the US dollar as of December 31, 2018, would have reduced the Group’s in- come by € 1.4 million. A 10 % decline in the euro versus the US dollar would have increased the Group’s income by € 1.7 million. 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 mil- lion. A 10 % decline in the euro versus the US dollar would have in- creased 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 fixed term deposits and corporate bonds. Changes in the general level of interest rates may lead to an increase or decrease in the fair value of these securities. The Group’s investment focus places the safety of an investment ahead of its return. Interest rate risks are limited because all securities can be liquidated within a maximum of two years and due to the partially fixed interest commitment during the term. Different interest rates and their effects on existing investments with variable interest rates were simulated in a detailed sensitivity analysis in order to determine the effects on profit or loss. An increase of the variable interest rate by 0.5 % would have increased the Group’s result by € 0.4 million as of December 31, 2018 (December 31, 2017: € 0.6 mil- lion; December 31, 2016: € 0.3 million). A decrease of the variable Notes F inancial Statements 133 interest rate by 0.5 % would have reduced the Group’s result by € 0.1 million as of December 31, 2018 (December 31, 2017: € 0.4 mil- lion; December 31, 2016: € 0.5 million). Changes in the interest rate had no material impact on equity as of December 31, 2017 or Decem- ber 31, 2016. The Group is not subject to significant interest rate risks from the liabilities currently reported in the balance sheet. 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 ap- plied when measurement at fair value is required or permitted or dis- closures 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 be- tween 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 reflects 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. 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-specific measurement. The fair value of non-financial assets is based on the best use of the asset by a market participant. For financial instruments, the use of bid prices for assets and ask prices for liabili- ties is permitted but not required if those prices best reflect the fair value in the respective circumstances. For simplification, mean rates are also permitted. Thus, IFRS 13 not only applies to financial assets, but all assets and liabilities. MorphoSys applies the following hierarchy in determining and disclos- ing the fair value of financial instruments: Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities to which the Company has access. Inputs other than quoted prices included within Level  1 that are observable for assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Inputs for asset or liability that are not based on observable market data (that is, unobservable inputs). Level 2: Level 3: The carrying amounts of financial assets and liabilities, such as other financial assets at amortized cost, as well as accounts receivable 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 financial instruments traded in active markets is based on the quoted market prices on the reporting date. A market is considered active if quoted prices are available from an exchange, dealer, broker, industry group, pricing service or regulatory body that is easily and regularly accessible and prices reflect 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 Hierarchy Level 1 (see Item 5.2* of the Notes). *C R O S S - R E F E R E N C E to page 152 H I ER A RC H Y L E V EL 2 A N D 3 The fair value of financial instruments not traded in active markets can be determined using valuation methods. In this case, fair value is estimated using the results of a valuation method that makes maxi- mum use of market data and relies as little as possible on entity-spe- cific inputs. If all significant inputs required for measuring fair value by using valuation methods are observable, the instrument is allocated to Hierarchy Level 2. If significant inputs are not based on observable market data, the instrument is allocated to Hierarchy Level 3. Hierarchy Level 2 contains forward exchange contracts to hedge ex- change rate fluctuations, term deposits and restricted cash. Future cash flows for these forward exchange contracts are determined based on forward exchange rate curves. The fair value of these instruments corresponds to their discounted cash flows. The fair value of the term deposits and restricted cash is determined by discounting the ex- pected cash flows at market interest rates. Financial assets belonging to Hierarchy Level 3 are shown in Item 5.7* of the Notes to the Consolidated Financial Statements. No financial liabilities were assigned to Hierarchy Level 3, and there were no Hier- archy Level 3 balance sheet items measured at fair value in 2017. *C R O S S - R E F E R E N C E to page 155 There were no transfers from one fair value hierarchy level to another in 2018 or 2017. The table below shows the fair values of financial assets and liabilities and the carrying amounts presented in the consolidated balance sheet. F inancial Statements 134 Notes December 31, 2018 (in 000’ €) Cash and Cash Equivalents Financial Assets at Fair Value through Profit or Loss Other Financial Assets at Amortized Cost Accounts Receivable Other Receivables thereof Financial Assets thereof Forward Exchange Contracts used for Hedging Current Assets Other Financial Assets at Amortized Cost, Net of Current Portion Shares at Fair Value through Other Comprehensive Income Prepaid Expenses and Other Assets, Net of Current Portion thereof Non-Financial Assets thereof Restricted Cash Non-current Assets TOTAL Accounts Payable and Accruals Current Liabilities Convertible Bonds - Liability Component Non-current Liabilities TOTAL Note Hierarchy Level Not classified into a Measurement Category Financial Assets at Amortized Cost Financial Assets at Fair Value Financial Assets at Fair Value (Through Other Financial Financial (Through Profit Comprehensive Liabilities at Liabilities at Total Carrying or Loss) Income) Amortized Cost Fair Value Amount Fair value 5.1 5.2 5.2 5.3 5.4 5.2 5.8 5.9 6.1 * 1 * * * 2 2 3 n/a 2 * 2 45,460 0 268,923 17,733 81 0 332,197 95,749 0 711 96,460 428,657 0 0 0 0 0 2,271 2,271 2,271 * Declaration waived in accordance with IFRS 7.29 (a). For these instruments the carrying amount is a reasonable approximation of fair value. December 31, 2017 (in 000’ €) Cash and Cash Equivalents Available-for-sale Financial Assets Financial Assets classified as Loans and Receivables Accounts Receivable Other Receivables Prepaid Expenses and Other Current Assets thereof Non-Financial Assets thereof Restricted Cash Current Assets Prepaid Expenses and Other Assets, Net of Current Portion thereof Non-Financial Assets thereof Restricted Cash Non-current Assets TOTAL Accounts Payable and Accruals Other Provisions thereof Non-Financial Liabilities thereof Forward Exchange Contracts used for Hedging Current Liabilities Convertible Bonds - Liability Component Non-current Liabilities TOTAL Note Hierarchy Level Not classified into a Measurement Category Loans and Receivables Available- Other Financial Total Carrying for-sale Liabilities Amount 5.1 5.2 5.2 5.3 5.4 5.5 5.9 6.1 * 1 * * * n/a * n/a 2 * n/a 2 2 76,589 0 149,059 11,234 85 432 237,399 701 701 238,100 0 0 0 0 0 0 15,788 15,788 2,643 2,643 18,431 (886) (886) (886) * Declaration waived in line with IFRS 7.29 (a). For these instruments carrying amount is a reasonable approximation of fair value. 45,460 44,581 268,923 17,733 147 81 66 376,844 95,749 232 2,982 2,271 711 98,963 475,807 (44,761) (44,761) (72) (72) (44,833) 44,581 66 95,749 * * * * 0 * n/a 701 (72) 44,581 66 44,647 44,647 86,538 86,538 86,538 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 232 232 232 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (44,761) (44,761) (72) (72) (44,833) 76,589 86,538 149,059 11,234 85 16,220 15,788 432 339,725 3,344 2,643 701 3,344 343,069 (44,812) (1,186) (886) (300) (45,998) (88) (88) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 * * * * Fair value 86,538 n/a * n/a 701 * n/a (300) (88) (44,812) (300) (45,112) (88) (88) (45,200) (46,086) December 31, 2018 (in 000’ €) Note Level Category Cost Not classified Hierarchy Measurement at Amortized into a Financial Assets Financial Assets at Fair Value (Through Profit or Loss) Financial Assets at Fair Value (Through Other Comprehensive Income) Financial Liabilities at Amortized Cost Financial Liabilities at Fair Value Total Carrying Amount Fair value Notes F inancial Statements 135 * Declaration waived in accordance with IFRS 7.29 (a). For these instruments the carrying amount is a reasonable approximation of fair value. Note Hierarchy Level Not classified into a Measurement Category Loans and Receivables Cash and Cash Equivalents Financial Assets at Fair Value through Profit or Loss Other Financial Assets at Amortized Cost Accounts Receivable Other Receivables thereof Financial Assets Current Assets thereof Forward Exchange Contracts used for Hedging Other Financial Assets at Amortized Cost, Net of Current Portion Shares at Fair Value through Other Comprehensive Income Prepaid Expenses and Other Assets, Net of Current Portion thereof Non-Financial Assets thereof Restricted Cash Non-current Assets TOTAL Accounts Payable and Accruals Current Liabilities Convertible Bonds - Liability Component Non-current Liabilities TOTAL December 31, 2017 (in 000’ €) Cash and Cash Equivalents Available-for-sale Financial Assets Financial Assets classified as Loans and Receivables Accounts Receivable Other Receivables Prepaid Expenses and Other Current Assets Prepaid Expenses and Other Assets, Net of Current Portion thereof Non-Financial Assets thereof Restricted Cash Current Assets thereof Non-Financial Assets thereof Restricted Cash Non-current Assets TOTAL Accounts Payable and Accruals Other Provisions thereof Non-Financial Liabilities thereof Forward Exchange Contracts used for Hedging Current Liabilities Convertible Bonds - Liability Component Non-current Liabilities TOTAL 5.1 5.2 5.2 5.3 5.4 5.2 5.8 5.9 6.1 5.1 5.2 5.2 5.3 5.4 5.5 5.9 6.1 * 1 * * * 2 2 3 * 2 * 1 * * * n/a * n/a 2 n/a * 2 2 n/a 2 2,271 2,271 2,271 15,788 15,788 2,643 2,643 18,431 (886) (886) (886) 45,460 0 268,923 17,733 81 0 0 332,197 95,749 711 96,460 428,657 76,589 0 149,059 11,234 85 432 237,399 701 701 238,100 0 0 0 0 0 0 0 0 0 0 0 * Declaration waived in line with IFRS 7.29 (a). For these instruments carrying amount is a reasonable approximation of fair value. 0 44,581 0 0 66 44,647 0 0 0 0 44,647 0 0 0 0 0 0 0 0 0 0 0 0 232 0 232 232 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (44,761) (44,761) (72) (72) (44,833) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 45,460 44,581 268,923 17,733 147 81 66 376,844 95,749 232 2,982 2,271 711 98,963 475,807 (44,761) (44,761) (72) (72) (44,833) * 44,581 * * * 66 95,749 0 n/a 701 * (72) Available- for-sale Other Financial Liabilities Total Carrying Amount 0 86,538 0 0 0 0 86,538 0 0 86,538 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (44,812) (300) (45,112) (88) (88) (45,200) 76,589 86,538 149,059 11,234 85 16,220 15,788 432 339,725 3,344 2,643 701 3,344 343,069 (44,812) (1,186) (886) (300) (45,998) (88) (88) (46,086) Fair value * 86,538 * * * n/a * n/a 701 * n/a (300) (88) F inancial Statements 136 Notes 2.4 IMP AIRMEN T S 2 .4.1 FINANCIAL INSTRUME NTS As of January 1, 2018, the Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost, namely term deposits with fixed and variable inter- est rates as well as corporate bonds. The impairment method applied depends on whether there has been a significant increase in credit risk. If, at the reporting date, the credit risk of a financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to twelve-month expected credit losses (Level  1). In case the credit risk of a financial instrument has increased significantly since initial recognition, the Group measures the loss allowance for that finan- cial instrument at an amount equal to the lifetime expected credit losses. The Group currently classifies an increase in credit risk on debt instruments as significant if the premium on a counterparty credit default swap exceeds 100 basis points at the reporting date (Leve 2). If there is an objective indication of impairment, the interest received must also be adjusted so that as of that date the interest is accrued on the basis of the net carrying amount (carrying amount less risk provi- sions) of the financial instrument (Level 3). Objective evidence of a financial instrument’s impairment may arise from material financial difficulties of the issuer or the borrower, a breach of contract such as a default or delay in interest or principal payments, an increased likelihood of insolvency or other remediation process, or from the disappearance of an active market for a financial asset due to financial difficulties. Financial instruments are derecognized when it can be reasonably ex- pected that they will not be recovered and when one of the objective evidences occurs. Impairment of financial intruments is reported un- der impairment losses on financial assets. 2 .4.2 RECE IVABLES In the case of accounts receivable, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from the initial recognition of the receivables (Leve 2). In the case of insufficient reason to expect recovery, the expected loss shall be calculated as the difference between the gross carrying amount and the present value of the expected cash flows discounted at the original effective interest rate (Level 3). An indicator that there is insufficient reason to expect recovery includes a situation, among others, when internal or external information indicates that the Group will not fully receive the contractual amounts outstanding. All accounts receivable were aggregated to measure the expected credit losses as they all share the same credit risk characteristics. All accounts receivable are currently due from customers in the same in- dustry and are therefore exposed to the same credit risks. The impair- ment is determined on the basis of the premium for an industry credit default swap. In the event that accounts receivable cannot be grouped together, they are measured individually. Accounts receivable are derecognized when it can be reasonably ex- pected that they will not be recovered. Impairment of accounts receiv- able is reported under other expenses. If in subsequent periods amounts are received that were previously impaired, these amounts are recog- nized in other income. 2 .4.3 NON - FINANCIAL AS SE TS The carrying amounts of the Group’s non-financial assets and invento- ries are reviewed at each reporting date for any indication of impair- ment. The non-financial asset’s recoverable amount and inventories’ net realizable value is estimated if such indication exists. For goodwill and intangible assets that have indefinite useful lives or are not yet available for use, the recoverable amount is estimated at the same time each year, 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 flows are discounted to their present value using a pre-tax discount rate that reflects current market assess- ments of the time value of money and the risks specific to the asset or CGU. For the purposes of impairment testing, assets that cannot be tested individually are grouped into the smallest group of assets that generates cash flows from ongoing use that are largely independent of the cash flows of other assets or CGUs. A ceiling test for the operating segment must be carried out for goodwill impairment testing. CGUs that have been allocated goodwill are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination may be allocated to groups of CGUs that are expected to benefit from the combination’s synergies. The Group’s corporate assets do not generate separate cash flows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and are tested for impair- ment as part of the impairment testing of the CGU that was allocated the corporate asset. Impairment losses are recognized in profit or 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. 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 historical experience and other factors that include expectations of future events that are believed to be realistic under the prevailing circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting-related estimates will, by definition, seldom correspond to the actual results. The estimates and assumptions that carry a significant risk of causing material adjustments to the carry- ing amounts of assets and liabilities in the next financial year are addressed below. Notes F inancial Statements 137 R E V EN U E Revenues from milestones, royalties and contracts with multiple per- formance obligations are subject to assumptions regarding probabili- ties of occurrence and individual selling prices within the scope of the accounting and measurement principles explained in Note 2.7.1*. *C R O S S - R E F E R E N C E to page 137 FI N A N C I A L AS S E TS Impairment losses on financial assets in the form of debt instruments and accounts receivable are based on assumptions about credit risk. The Group exercises discretion in making these assumptions and in selecting the inputs to calculate the impairment based on past experi- ence, current market conditions and forward-looking estimates at the end of each reporting period. 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 an annual review to determine whether in-pro- cess R&D programs or goodwill is subject to impairment in accordance with the accounting policies discussed in Item 2.4.3*. The recoverable amounts from in-process R&D programs and cash-generating units have been determined using value-in-use calculations and are sub- jected to a sensitivity analysis. These calculations require the use of estimates (see 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 136 and page 156 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 fiscal authorities, tax calculations are generally subject to an elevated amount of uncer- tainty. To the extent necessary, possible tax risks are 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 148 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 confidence of investors, business partners, and the capital market and to support future business development. As of December 31, 2018, the equity ratio was 90.6 % (December 31, 2017: 86.3 %; see also the following over- view). The Group does not currently have any financial liabilities. 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 stock op- tion plans (SOP) set up in 2017 and 2018. MorphoSys also established Long-Term Incentive plans (LTI plan) in 2014, 2015, 2016, 2017 and 2018. These programs are based on the performance-related issue of shares, or “performance shares”, which are granted when certain pre- defined 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 163 in 000’ € 12/31/2018 12/31/2017 Stockholders’ Equity In % of Total Capital Total Liabilities In % of Total Capital TOTAL CAPITAL 488,373 90.6 % 50,391 9.4 % 538,764 358,671 86.3 % 56,727 13.7 % 415,398 2.6 USE OF IN T ERE S T RAT E S F OR MEASUREMEN T The Group uses interest rates to measure fair value. When calculating share-based payment, MorphoSys uses the interest rate on four-year German government bonds on the date the share-based payment was granted. 2.7 ACCOUN T ING P OL IC IE S APPL IED T O L INE I T EMS OF PROF I T OR L O SS 2 .7.1 RE VE NUES AND RE VE NUE REC O GNITION As of January 1, 2018, the Group has adopted IFRS 15, the new account- ing standard governing revenue recognition, using the modified retro- spective method. The application of IFRS 15 requires a five-stage approach: • Identification of the contract • Identification of performance obligations • Determination of the transaction price • Allocation of the transaction price • Revenue recognition The Group’s revenues typically include license fees, milestone pay- ments, service fees, and royalties. L I C EN S E FEES A N D M I L ESTO N E PAY M EN TS The Group recognizes revenues from license fees for intellectual prop- erty (IP) both at a point in time and over a period of time. An assess- ment needs to be made as to whether such a license represents a right to use (at a point in time) or a right to access (over time). Revenue for a right to use a license is recognized by the Group when the customer can use the IP and benefit from it as well as when the license term be- gins, e.g. for outlicensing of a drug candidate or technology without any further obligations for the Group. A license is treated as a right to access if the Group will undertake activities that significantly affect the IP during the license term, and the customer is directly exposed to any positive or negative effects of these activities, and these activities do not result in the transfer of a good or service to the customer. Reve- nues from right to access licenses are recognized linear over the license term. Milestone payments for research and development are contingent upon occurrence of a future event and represent variable consideration. The Group determines that at contract inception the most likely amount for milestone payments is zero. The most likely amount method of estima- tion is considered to be the most predictive for the outcome, since the outcome is binary, such as achieving a certain success in clinical de- velopment (or not). The Group will recognize milestone payments as revenue when it is highly unlikely that there will be a material reversal of cumulative revenue in future periods. Sales-based milestone payments included in contracts for licenses of IP are considered by the Group to be sales-based license fees because they are solely determined by sales of an approved drug. Accordingly, such milestones are recognized as revenue once sales of such drug occur or later if the performance obligation has not been fulfilled. F inancial Statements 138 Notes S ERV I C E FEES Service fees for the assignment of personnel in research and develop- ment collaborations are recognized as revenues in the period the ser- vices are provided. In case a Group company acts as agent, revenues are recognized on a net basis. ROYA LT I ES With regard to royalties (income based on a percentage of sales of a marketed product), the same revenue recognition principles apply as for sales-based milestones as described above. AG R EEM EN TS W I T H M U LT I P L E P ER F O R M A N C E O B L I G AT I O N S A Group company may enter into agreements with multiple perfor- mance obligations that include both licenses and services. In such cases, it has to be assessed as to whether the license is distinct from services (or other performance obligations) provided under the same agreement. The transaction price is allocated to separate performance obligations based on the relative stand-alone selling price of the perfor- mance obligations in the agreement. The Group company estimates stand-alone selling prices for non-individually sold goods and services on the basis of comparable transactions with other customers. A resid- ual approach is used as a method to estimate the stand-alone selling price when the selling price for a good or service is highly variable or uncertain. P R I N C I P L E - AG EN T R EL AT I O N S H I P S In agreements involving two or more independent parties that contrib- ute to the provision of a specific good or service to a customer, a Group company assesses as to whether it has promised to provide the specific good or service itself (the company acting as a principal) or to arrange for this specific good or service to be provided by another party (the company acting as an agent). Depending on the result of this assess- ment, the Group company records revenues on a gross (principal) or net (agent) basis. A Group company is an agent and recognizes revenue on a net basis if its obligation is to arrange for another party to provide goods or services, i.e., the Group company does not control the speci- fied good or service before it is transferred to the customer. Indicators to assist a company in determining whether it does not control the good or service before it is provided to a customer, and is therefore an agent, include, but are not limited to, the following criteria: • Another party is primarily responsible for fulfilling the contract. • The company does not have inventory risk. • The company does not have discretion in establishing the price. No single indicator is determinative or weighted more heavily than other indicators. However, some indicators may provide stronger evidence than others, depending on the individual facts and circumstances. A Group company’s control needs to be substantive, so obtaining legal title of a good or service only momentarily before it is transferred to the cus- tomer does not necessarily indicate that a Group company is a principal. In general, the assessment whether a Group company is acting as a principal or as an agent in a transaction requires significant judgement. Based on the relevant facts and circumstances, the assessment of an agreement may lead to the conclusion that the counterparty is a coop- eration partner or partner rather than a customer, meaning the agree- ment does not fall in the scope of IFRS 15 because the parties equally share the risks of co-developing a drug and the future profits from the marketing of the approved drug. R E V EN U E R EC O G N I T I O N T H RO U G H D EC EM B ER 31, 2017 The group applied the revenue recognition principles of IAS 18 Reve- nue through December 31, 2017. The Group’s revenue included license fees, milestone payments and service fees in 2017 and 2016. Under IAS  18.9, revenues were mea- sured at fair value of the consideration received or receivable. In accor- dance with IAS 18.20b, revenues were recognized only to the extent that it was sufficiently probable that the Company will have received the economic benefits 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 were recog- nized immediately and in full, if all IAS 18.14 criteria were met. Specif- ically, when significant risks and rewards of a license ownership have transferred to the customer and a Group company does not retain any continuing managerial involvement or effective control. In case these criteria were not met, revenues were recognized on a straight-line ba- sis over the period of the agreement unless a more appropriate method of revenue recognition was available. The period of the agreement usually corresponded 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. Revenues from milestone payments were recognized upon achievement of certain contractual criteria. S ERV I C E FEES Service fees from research and development collaborations were rec- ognized in the period the services were provided. Discounts that were likely to be granted and whose amount could be reliably determined were recognized as a reduction in revenue at the time of revenue recognition. The timing of the transfer of risks and rewards varied depending on the terms of the sales contract. In accor- dance with IAS  18.21 and 18.25, revenue from multiple-component contracts was recognized by allocating the total consideration to the separately identifiable components based on their respective fair val- ues and by applying IAS  18.20. The applicable revenue recognition criteria were assessed separately for each component. 2 .7.2 OPE R ATING E XPE NSES C OST O F SA L ES Cost of sales is recognized as an expense in the period in which the associated revenue accrues. This line item currently includes person- nel expenses only. R ES E A RC H A N D D E V ELO P M EN T Research costs are expensed in the period in which they occur. Devel- opment costs are generally expensed as incurred in accordance with IAS 38.5 and IAS 38.11 to 38.23. Development costs are recognized as an intangible asset when the criteria of IAS 38.21 (probability of ex- pected future economic benefits, 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 charges, amortization and other costs of intangible assets (additional information can be found under Item 5.7* in the Notes), costs 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 155 Notes F inancial Statements 139 S EL L I N G The item includes personnel expenses, consumables, operating costs, amortization of intangible assets (software; further details in Item 5.7* of the Notes), costs for external services, infrastructure costs and depreciation. *C R O S S - R E F E R E N C E to page 155 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), expenses 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 155 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 of 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 beneficiaries provide the services which triggered the granting of the share-based payments. IFRS  2 “Share-based Payment” requires the consideration of the ef- fects 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 specific number of shares or stock options (“cash settlement”). The key impact of IFRS 2 on the Group is the personnel expense resulting from the use of an option pricing model in relation to share-based incentives for the Man- agement Board and employees. 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 161–167 O P ER AT I N G L E AS E PAY M EN TS Payments made under operating leases are recognized in profit or loss 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 recog- nized as an integral part of the net consideration agreed for the use of the leased asset. The total amount of income from incentives is recog- nized as a reduction in lease expenses on a straight-line basis over the term of the lease. All of the Group’s lease agreements are classified exclusively as operating leases. The Group did not engage in any finance lease arrangements. 2 .7.3 OTHE R INC OME In addition to government grants, other income primarily included currency gains from operating activities and income related to the Company’s canteen. G OV ER N M EN T G R A N TS Grants, not repayable, received from government agencies to fund spe- cific research and development projects are recognized in profit or loss in the separate line item “other income” to the extent that the related expenses 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 profit or 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 2018, 2017 and 2016 financial year that are required to be classified as investment subsidies. 2 .7.4 OTHE R E XPE NSES The line item “other expenses” consisted mainly of currency losses from the operating business. 2 .7.5 FINANCE INC OME AND FINANCE E XPE NSES Gains and losses arising from changes in fair value, as well as interest effects from the application of the effective interest method to financial assets are recognized in profit or loss when incurred. 2 .7.6 INC OME TA X E XPE NSES/BE NE FIT Income taxes consist of current and deferred taxes and are recognized in profit or loss 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 differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. The method of calculating deferred taxes depends on how the assets’ carrying amount is expected to be realized and how the liabilities will be repaid. The calculation is based on the prevailing tax rates or those adopted on the reporting date. Deferred tax assets are offset 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. Deferred tax assets are recognized only to the extent that it is likely that there will be future taxable income to offset. Deferred tax assets are reduced by the amount that the related tax benefit is no longer ex- pected to be realized. 2 .7.7 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 profit 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 profit or loss attributable to parent company shareholders and the weighted-average number of ordinary shares outstanding are adjusted for any dilutive effects re- sulting from stock options and convertible bonds granted to the Man- agement Board and employees. In 2018, 2017 and 2016, diluted earnings per share equaled basic earn- ings per share. The effect of 120,214 potentially dilutive shares in 2018 (2017: 87,904 dilutive shares; 2016: 99,764 dilutive shares) resulting from stock options and convertible bonds granted to the Management Board, the Senior Management Group and employees of the Company who are not members of the Senior Management Group, has been ex- cluded from the diluted earnings per share because it would result in a decrease in the loss per share and should therefore not be treated as dilutive. F inancial Statements 140 Notes The 52,930 stock options not yet vested as of December 31, 2018 are not included in the calculation of potentially dilutive shares, as they are anti-dilutive for the 2018 fiscal year. These shares could possibly have a dilutive effect in the future. 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 C L AS S I FI CAT I O N As of January 1, 2018, the Group classifies its financial assets (debt in- struments) in the following measurement categories: those that are subsequently measured at fair value (either through other comprehen- sive income or profit or loss) and those that are measured at amortized cost. The classification depends on the Company’s business model with respect to the management of the financial assets and the contractual cash flows. For assets measured at fair value, gains and losses are rec- ognized either within other comprehensive income or profit or loss. The Group only reclassifies debt instruments when the business model for managing such assets changes. 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 financial institutions: Commerzbank, UniCredit, BayernLB, LBBW, BNP Paribas, Deutsche Bank, Sparkasse, Rabobank and Bank of America Merrill Lynch. 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. R EC O G N I T I O N A N D D ER EC O G N I T I O N A purchase or sale of financial assets in a manner that is customary for the market is recognized as of the trade date, which is the date on which the Group commits to buying or selling the asset. Financial as- sets are derecognized when the claims to receive cash flows from the financial assets expire or have been transferred, and the Group has transferred substantially all the risks and rewards of ownership. M E AS U R EM EN T Upon initial recognition, the Group measures a financial asset at fair value plus transaction costs directly attributable to the acquisition of that asset when a financial asset is not subsequently measured at fair value in profit or loss. Transaction costs of financial assets measured at fair value through profit or loss are recognized as expenses in profit or loss. The subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the asset’s cash flow characteristics. The Group classifies its debt instruments in one of the following measurement categories. Assets that are held in order to collect the contractual cash flows and for which these cash flows represent only interest and principal pay- ments are measured at amortized cost. Interest income from these financial assets is recognized in finance income using the effective interest method. Gains or losses on derecognition are recognized directly in profit or loss and recorded in the finance result. Impairment losses are recognized as a separate line item in profit or loss. Assets that are held to collect the contractual cash flows and to sell the financial assets and where the cash flows represent solely principle and interest payments are measured at fair value through other com- prehensive income. Changes in the carrying amount are recognized in other comprehensive income, with the exception of impairment losses and income from the reversal of impairment, interest income, and for- eign currency gains and losses, which are recognized in profit or loss. Upon derecognition of the financial asset, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss and is recorded in the finance result. Interest income from these financial assets is reported in finance income using the effective interest method. Foreign exchange gains and losses are shown under other income/expenses, and impairment losses are in- cluded in a separate line item in profit or loss. Assets that do not meet the criteria of the categories at amortized cost or at fair value through other comprehensive income are allocated to the category at fair value through profit or loss. Gains or losses on a debt instrument that is subsequently measured at fair value through profit or loss, are recognized on a net basis in the finance result in the period in which they occur. D ER I VAT I V ES The Group uses derivatives to hedge its foreign exchange risk and cash flows. The use of derivatives is subject to a Group policy approved by the Management Board, which sets out a written guideline on the use of derivatives. According to the Group’s hedging policy, only highly probable future cash flows and clearly identifiable receivables that can be collected within a twelve-month period are hedged. Derivatives are initially recognized at fair value at the time of the con- clusion of a derivative transaction and subsequently remeasured at fair value at the end of each reporting period. Changes in the fair value of a derivative instrument that are not accounted for as a hedging rela- tionship are recognized directly in the finance result in profit or loss. MorphoSys did not apply hedge accounting under IAS 39 as at Decem- ber 31, 2017, nor during the year 2018, therefore IFRS 9 has no impact on the recognition of hedging relationships. 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 using the simplified impairment model (see Items 2.3.1*, 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 129, page 136 and page 153 Income tax receivables mainly include receivables due from tax author- ities in the context of capital gain taxes withheld. Other non-derivative financial instruments are measured at amortized cost using the effective interest method. 2 .8.3 INVE NTORIES Inventories are measured at the lower value of production or acquisi- tion cost and net realizable value under the first-in first-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 ex- penses necessary for completion and sale. Inventories are divided into the categories of raw materials and supplies. Notes F inancial Statements 141 2 .8.4 PRE PAID E XPE NSES AND OTHE R CURRE NT AS SE TS Prepaid expenses include expenses resulting from an outflow of liquid assets prior to the reporting date that are only recognized as expenses in the subsequent financial year. Such expenses usually involve main- tenance contracts, sublicenses and upfront payments for external laboratory services not yet performed. Other current assets primarily consist of receivables towards tax authorities from input tax surplus resulting from value-added taxes, combination compounds and receiv- ables from upfront payments. This item is recognized at nominal value. 2 .8.5 PROPE R T Y, PL ANT AND EQUIPME NT Property, plant and equipment is recorded at historical cost less accu- mulated depreciation (see Item 5.6* in the Notes) and any impairment (see Item 2.4.3* in the Notes). Historical cost includes expenditures directly related to the purchase at the time of the acquisition. Replace- ment purchases, building alterations and improvements are capital- ized while repair and maintenance expenses are charged as expenses as they are incurred. Property, plant and equipment is depreciated on a straight-line basis over its estimated 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 154 and page 136 Asset Class Computer Hardware Low-value Laboratory and Office Equipment between € 250 and € 800 Permanent Improvements to Property/Buildings Office Equipment Laboratory Equipment Useful Life 3 years Immediately 10 years 8 years 4 years Depreciation Rates 33 % 100 % 10 % 13 % 25 % The residual values and useful lives of assets 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 finances the entire operating business with equity. 2 .8.6 INTANGIBLE AS SE TS Purchased intangible assets are capitalized at acquisition cost and exclusively 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 specification of the product or procedure, technical feasibility, inten- tion of completion, use, commercialization, coverage of development costs through future free cash flows, reliable determination of these free cash flows and availability of sufficient resources for completion of development and sale. Amortization of intangible assets is recorded in research and development expenses. Expenses to be classified as research expenses are allocated to re- search and development expenses as defined by IAS 38. Subsequent expenditures for capitalized intangible assets are capital- ized only when they substantially increase the future economic bene- fits of the specific asset to which they relate. All other expenditures are expensed as incurred. PAT EN TS Patents obtained by the Group are recorded at acquisition cost less accumulated amortization (see below) and any impairment (see Item 2.4.3* 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 identified 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 136 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 financial year in accordance with 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- licensing of compounds for the Proprietary Development segment, as well as milestone payments for these compounds subsequently paid as milestones were achieved. Additionally, this line item also includes compounds or antibody programs resulting from acquisitions. The assets are recorded at acquisition cost and are not yet available for use and therefore not subject to scheduled amortization. The assets are tested for impairment annually or in case of triggering events, as re- quired 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 2.4.3* in the Notes). Amor- tization is recognized in profit or loss on a straight-line basis over the estimated useful life of three to five years. Software is amortized from the date the software is operational. *C R O S S - R E F E R E N C E to page 136 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 Item 5.7.5* in the Notes). *C R O S S - R E F E R E N C E to page 156 Intangible Asset Class Useful Life Amortization Rates Patents License Rights In-process R&D Programs Software Goodwill 10 years 8 – 10 years Not yet amor- tized, Impair- ment Only 3 – 5 years Impairment Only 10 % 13 % – 10 % - 33 % – 20 % - F inancial Statements 142 Notes 2 .8.7 INVESTME NTS AT FAIR VALUE , WITH CHANGES REC O GNIZE D IN OTHE R C OMPRE HE NSIVE INC OME The investment in adivo GmbH is accounted for as an equity instru- ment at fair value. Changes in fair value are recognized in other com- prehensive income. This was irrevocably determined when the invest- ment was first recognized. This investment is a strategic financial investment, and the Group considers this classification to be more meaningful. If the investment is derecognized, no subsequent reclassi- fication of gains or losses to profit or loss will occur. Dividends from this investment are recognized in profit or loss when there is a justified right to receive payment. 2 .8.8 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 report- ing date, but are to be recognized in subsequent financial years is recorded in prepaid expenses. This line item contains maintenance contracts and sublicenses. This line item also includes other non-current assets, which are rec- ognized at fair value. Other non-current assets consist mainly of re- stricted 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 OTHE R PROVISIONS Accounts payable and other liabilities are initially recognized at fair value and subsequently at amortized cost using the effective interest method. 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 rec- ognized for legal or factual obligations to third parties if the event’s occurrence is more likely than not. Provisions are recognized at the amount required to settle the respective obligation and discounted to the reporting date if the interest effect is material. The amount re- quired to meet the obligation also includes expected price and cost increases. The interest portion of other provisions is recorded in the finance result. The measurement of provisions is based on past experience and considers the circumstances in existence on the re- porting 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 costs are recorded as re- search and development expenses as incurred. The Group records accruals for estimated ongoing research costs that have been incurred. When evaluating the adequacy of the accruals, the Group analyzes the progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Group’s estimates. The Group’s historical accrual estimates have not been materially different 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 C ONTR AC T LIABILITIES Upfront payments from customers for services to be rendered by the Group and revenue that must be recognized over a period of time in accordance with IFRS 15.35 are deferred and measured at the nominal amount of cash received. The corresponding rendering of services and revenue recognition is expected to occur within a twelve-month period following the reporting date. Prior to December 31, 2017, this item was recognized as deferred revenue. 2 .9.4 C ONTR AC T LIABILITIES , NE T OF CURRE NT P OR TION This line item includes the non-current portion of deferred upfront pay- ments and income from customers that is required to be recognized over a period of time in accordance with IFRS 15.35. These are mea- sured at the nominal amount of cash received. Prior to December 31, 2017, this item was reported as deferred revenue, net of current portion. 2 .9.5 C ONVE R TIBLE BONDS DUE TO RE L ATE D PAR TIES The Group had issued convertible bonds to the Group’s Management Board and employees. In accordance with IAS 32.28, the equity compo- nent of a convertible bond must be credited separately in 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 debit effect of the equity component is recognized in profit or loss in personnel expenses from share-based payments, whereas the effect on profit or loss from the liability compo- nent is recognized as interest expense. The Group applies the provi- sions of IFRS 2 “Share-based Payment” for all convertible bonds granted to the Management Board and the Group’s employees. 2 .9.6 DE FE RRE D TA 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 financial years are based on the applicable tax rate at the time of recognition. Deferred tax assets and liabilities are recorded separately in the bal- ance sheet and take into account the future tax effect resulting from temporary differences between values in the balance sheet for assets, liabilities as well as for tax loss carryforwards. Deferred tax assets are offset 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. 2 .9.7 OTHE R LIABILITIES The line item “other liabilities” consists of a deferred amount related to rent-free periods as agreed. The corresponding reduction of these liabilities over the minimum rent period is calculated based on the effective interest method. Other liabilities are discounted due to their long-term maturities at an interest rate equivalent to the rent term. Notes F inancial Statements 143 2 .9.8 STO CKHOLDE RS ’ EQUIT Y C O M M O N STO C K Ordinary shares are classified as stockholders’ equity. Incremental costs directly attributable to the 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 exchange or at market value are recorded in this line item as a deduc- tion from common stock. When common stock that is recorded as stockholders’ equity is repur- chased, the amount of consideration paid, including directly attribut- able costs, is recognized as a deduction from stockholders’ equity net of taxes and is classified as treasury shares. When treasury shares are subsequently sold or reissued, the proceeds are recognized as an in- crease in stockholders’ equity, and any difference between the proceeds from the transaction and the initial acquisition costs is recognized in additional paid-in capital. The allocation of treasury shares to beneficiaries under Long-Term Incentive plans (in this case: performance shares) is reflected 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 line item treasury stock, which is a deduction from com- mon stock, while simultaneously reducing additional paid-in capital. Further information can be found in Items 7.3.1* and 7.3.2* in the Notes. *C R O S S - R E F E R E N C E to page 163 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 stock options, 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 consisted of unrealized gains and losses on available-for-sale financial assets that were measured directly in equity until they were sold. Starting with the application of IFRS 9 as of January 1, 2018, the reporting of this reserve is no longer required. OT H ER C O M P R EH EN S I V E I N C O M E R ES ERV E The item “other comprehensive income reserve” includes changes in the fair value of equity instruments that are recognized in other comprehensive income and foreign exchange differences that are not recognized in profit or loss. AC C U M U L AT ED I N C O M E/D EFI C I T The “accumulated income/deficit” line item consists of the Group’s accumulated consolidated net profits/losses. A separate measurement of this item is not made. 3 Segment Reporting MorphoSys Group applies IFRS 8 “Operating Segments”. An operating segment is defined as a unit of an entity that engages in business activities 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 financial information is available. Segment information is provided for the Group’s operating segments based on the Group’s management and internal reporting structures. The segment results and segment assets include items that can be either directly attributed to the individual segment or allocated to the segments on a reasonable basis. The Management Board evaluates a segment’s economic success using selected key figures so that all relevant income and expenses are included. EBIT, which the Company defines as earnings before finance income, finance expenses, impairment losses on financial assets 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 finance income and expenses. Other key internal reporting figures include revenues, operating expenses, segment results and the liquid- ity position. The Group consists of the following operating segments. *C R O S S - R E F E R E N C E to page 144 and page 148 3.1 PROPRIE TARY DEVEL OPMEN T The segment comprises all activities related to the proprietary develop- ment of therapeutic antibodies and peptides. Currently, this segment’s activities comprise a total of twelve antibodies and peptides, with MOR208 representing the Company’s most advanced proprietary clin- ical program. Also included are the antibody MOR202, which was par- tially out-licensed to I-Mab Biopharma and MOR106, which had been co-developed with Galapagos and was out-licensed to Novartis during the reporting year. Also included is the Company’s MOR103 program, which was out-licensed to GlaxoSmithKline (GSK) in 2013. The par- tially or completely out-licensed programs have been part of the Pro- prietary Development segment since the beginning of their develop- ment and will therefore continue to be reported in this segment. MorphoSys is also pursuing other early-stage proprietary develop- ment and co-development programs. These include the clinical pro- gram MOR107 (formerly LP2), which originated from the acquisition of Lanthio Pharma B.V. This program was evaluated in a phase 1 study in healthy volunteers and is currently undergoing preclinical studies for oncology indications. One other program is in preclinical development and another six programs are in drug discovery. The Proprietary Development segment also manages the development of proprietary technologies. 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 technology commercially through its partnerships with numerous pharmaceutical and biotechnology companies. The Partnered Discov- ery segment encompasses all operating activities relating to these commercial agreements. F inancial Statements 144 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 December 31 External Revenues Operating Expenses SEG MENT RESULT Other Income Other Expenses SEG MENT EB IT Finance Income Finance Expenses Impairment Losses on Financial Assets E ARNINGS BEFORE TA XES Income Tax Benefit/(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 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 53,610 (107,019) (53,409) 159 0 (53,250) 17,635 (99,106) (81,471) 157 0 (81,314) 621 (78,515) (77,894) 327 0 (77,567) 15,842 42,041 57,883 32,167 3,291 0 35,458 1,319 1,903 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 22,832 (9,516) 13,316 0 0 13,316 7,114 6,288 13,402 1,471 158 0 1,629 879 1,429 49,156 (18,906) 30,250 0 0 30,250 18,054 8,490 26,544 4,083 1,045 0 5,128 602 2,075 49,123 (18,113) 31,010 0 0 31,010 18,415 10,165 28,580 2,512 2,165 0 4,677 1,181 2,117 0 (19,969) (19,969) 1,486 (689) (19,172) 365,949 101,530 467,479 12,285 1,019 488,373 0 (15,835) (15,835) 963 (1,671) (16,543) 313,825 5,569 319,394 10,610 909 358,671 (13,384) (59,106) 0 (13,212) (13,212) 382 (554) 276,484 86,087 362,571 14,842 743 415,460 76,442 (136,504) (60,062) 1,645 (689) 418 (754) (1,035) (60,477) 4,305 (56,172) 388,905 149,859 538,764 45,923 4,468 488,373 501,677 370,190 431,045 538,764 268 418 204 400 374 375 2,466 3,750 66,791 (133,847) (67,056) 1,120 (1,671) (67,607) 712 (1,895) 0 (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) 0 (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 defined as a segment’s revenue less the seg- ment’s operating expenses. The unallocated other operating expenses of € 20.0 million (2017: € 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, finance expense and income tax are also not allocated to the segments as they are man- aged on a Group basis. In the 2018 financial y ear, impairments total- ing € 19.2 million were recognized in the Proprietary Development segment (2017: impairments of € 9.9 million in the Proprietary Devel- opment segment; 2016: impairments of € 10.1million in the Proprietary Development segment). customer accounted for € 36.9 million of the Group’s total revenue, the second largest € 16.8 million and the third largest € 6.7 million. The largest and third largest customers were allocated to the Partnered Discovery segment, and the second largest customer to the Proprietary 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. The Group’s key customers are allocated to either the Proprietary Development or Partnered Discovery segments. As of December 31, 2018, the single most important customer represented accounts re- ceivable with a carrying amount of € 5.9 million (December 31, 2017: € 5.1 million). The largest customer accounted for revenues in 2018 of € 49.5 million, the second largest for € 19.0 million and the third largest for € 3.9 million. The largest and third largest customers are allocated to the Proprietary Development segment and the second larg- est customer to the Partnered Discovery segment. In 2017, the largest in 000’ € Germany Europe and Asia USA and Canada TOTAL 2018 309 2017 851 2016 1,621 56,784 57,229 43,046 19,350 76,443 8,711 66,791 5,077 49,744 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 December 31 External Revenues Operating Expenses SEG MENT RESULT Other Income Other Expenses SEG MENT EB IT Finance Income Finance Expenses Impairment Losses on Financial Assets E ARNIN GS BEFORE TA XES Income Tax Benefit/(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 53,610 (107,019) (53,409) 159 0 17,635 (99,106) (81,471) 157 0 621 (78,515) (77,894) 327 0 22,832 (9,516) 13,316 0 0 49,156 (18,906) 30,250 0 0 49,123 (18,113) 31,010 0 0 (53,250) (81,314) (77,567) 13,316 30,250 31,010 15,842 42,041 57,883 32,167 3,291 0 35,458 1,319 1,903 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 7,114 6,288 13,402 1,471 158 0 1,629 879 1,429 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 The segment result is defined as a segment’s revenue less the seg- ment’s operating expenses. The unallocated other operating expenses of € 20.0 million (2017: € 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, finance expense and income tax are also not allocated to the segments as they are man- aged on a Group basis. In the 2018 financial y ear, impairments total- ing € 19.2 million were recognized in the Proprietary Development segment (2017: impairments of € 9.9 million in the Proprietary Devel- opment segment; 2016: impairments of € 10.1million in the Proprietary Development segment). The Group’s key customers are allocated to either the Proprietary Development or Partnered Discovery segments. As of December 31, 2018, the single most important customer represented accounts re- ceivable with a carrying amount of € 5.9 million (December 31, 2017: € 5.1 million). The largest customer accounted for revenues in 2018 of € 49.5 million, the second largest for € 19.0 million and the third largest for € 3.9 million. The largest and third largest customers are allocated to the Proprietary Development segment and the second larg- est customer to the Partnered Discovery segment. In 2017, the largest Notes F inancial Statements 145 Proprietary Development Partnered Discovery Unallocated Group 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 0 (19,969) (19,969) 1,486 (689) (19,172) 365,949 101,530 467,479 12,285 1,019 488,373 501,677 268 418 0 (15,835) (15,835) 963 (1,671) (16,543) 313,825 5,569 319,394 10,610 909 358,671 370,190 204 400 0 (13,212) (13,212) 382 (554) (13,384) 276,484 86,087 362,571 14,842 743 415,460 431,045 374 375 76,442 (136,504) (60,062) 1,645 (689) (59,106) 418 (754) (1,035) (60,477) 4,305 (56,172) 388,905 149,859 538,764 45,923 4,468 488,373 538,764 2,466 3,750 66,791 (133,847) (67,056) 1,120 (1,671) (67,607) 712 (1,895) 0 (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) 0 (59,864) (519) (60,383) 308,056 155,544 463,600 38,302 9,838 415,460 463,600 2,913 3,764 The following overview shows the timing of the satisfaction of perfor- mance obligations in 2018. in 000’ € Proprietary Development Partnered Discovery At a Point in Time thereof perfor- mance obligations fulfilled in previ- ous periods: € 0 in Proprietary De- velopment and € 19.0 million in Partnered Discovery Over Time TOTAL 53,610 0 53,610 22,268 564 22,832 A total of € 136.1 million (December 31, 2017: € 42.2 million) and € 13.7 million (December 31, 2017: € 32.6 million) of the Group’s non-current assets, excluding deferred tax assets, are located in Ger- many and the Netherlands, respectively. There are no non-current as- sets in the USA as of December 31, 2018. The Group’s total investments of € 2.4 million (December 31, 2017: € 13.1 million) were made in Germany, except for € 0.1 million (December 31, 2017: € 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 busi- ness combinations. F inancial Statements 146 Notes 4 Notes to Profit or Loss 4 .1 REVENUE S In 2018, revenues consisted of milestone payments and royalties total- ing € 19.3 million (2017: € 7.3 million; 2016: € 5.6 million). In 2018, 2017 and 2016 these were entirely generated by the Partnered Discovery segment. Revenues from license fees (except milestone payments and royal- ties) amounted to € 51.2 million in 2018 (2017: € 37.5 million; 2016: € 22.8 million) and was attributable to the Proprietary Development segment in the amount of € 50.6 million (2017: € 16.8 million), and to the Partnered Discovery segment in the amount of € 0.6 million (2017: € 20.7 million; 2016: € 22.8 million). Of the service fee revenues totaling € 5.9 million (2017: € 22.0 million; 2016: € 21.4 million), € 3.0 million (2017: € 0.8 million; 2016: € 0.6 mil- lion) was attributable to the Proprietary Development segment, and € 2.9 million (2017: € 21.2 million; 2016: € 20.8 million) to the Part- nered Discovery segment. Substantially all service fee revenues relate to revenue on a gross basis (principal). Of the total revenues in 2018, revenues of € 19.0 million were recognized from performance obligations that were fulfilled in previous periods and relate to milestone payments and royalties (2017: € 7.8 million; 2016: € 7.1 million). 4 .2 OPERAT ING EXPENSE S 4.2 .1 C OST OF SALES Cost of sales consists of the items below. in 000’ € Personnel Expenses TOTAL 2018 1,797 1,797 2017 2016 0 0 0 0 4.2 .2 RESE ARCH AND DE VE LOPME NT E XPE NSES Research and development expenses are composed of the items below. in 000’ € 2018 2017 2016 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 .3 SE LLING E XPE NSES Selling expenses consist of the items below. in 000’ € Personnel Expenses Consumable Supplies Other Operating Expenses Amortization of Intangible Assets External Services Depreciation and Other Costs for Infrastructure TOTAL 25,288 2,310 2,761 22,760 47,889 5,389 106,397 2018 2,536 3 538 25 2,953 328 6,383 28,482 2,588 2,757 13,503 61,119 4,865 113,314 2017 1,771 1 386 0 2,658 0 4,816 25,145 2,321 2,608 13,689 44,311 5,889 93,963 2016 1,661 1 444 0 338 0 2,444 Notes F inancial Statements 147 4.2 .4 GE NE R AL AND ADMINISTR ATIVE E XPE NSES General and administrative expenses included the items below. in 000’ € 2018 2017 2016 15,016 15 1,012 97 4,475 1,313 21,928 11,797 33 714 112 2,224 838 15,718 9,208 97 847 111 2,244 925 13,432 2018 2017 2016 30,349 4,341 5,585 1,241 3,121 44,637 28,196 4,542 4,975 881 3,456 42,050 27,146 4,570 2,357 1,061 880 36,014 segment while 71 employees were not allocated to a specific segment (December 31, 2017: 161 in the Proprietary Development segment, 105 employees in the Partnered Discovery segment and 60 employees were unallocated; December 31, 2016: 135 in the Proprietary Develop- ment segment, 156 employees in the Partnered Discovery segment and 54 employees were unallocated). Costs for defined-contribution plans amounted to € 0.7 million in 2018 (2017: € 0.6 million; 2016: € 0.5 million). Personnel Expenses Consumable Supplies Other Operating Expenses Amortization of Intangible Assets External Services Depreciation and Other Costs for Infrastructure TOTAL 4.2 .5 PE RSONNE L E XPE NSES Personnel expenses included the items below. in 000’ € Wages and Salaries Social Security Contributions Share-based Payment Expense Temporary Staff (External) Other TOTAL Personnel expenses from share-based payment in 2018 included a one- time entitlement granted to related parties to receive treasury shares amounting to € 2.1 million. Further details can be found in Item 6.5.4* of the Notes. *C R O S S - R E F E R E N C E to page 160 In 2018, other personnel expenses mainly included costs for personnel recruitment as well as promotion and development measures. In 2017, this item consisted primarily of costs for severance payments and mea- sures to recruit, promote and develop personnel. In 2016, other person- nel expenses comprised mainly of recruitment costs. Due to the increasing importance of selling expenses in connection with the planned preparations for the commercialization of MOR208, the existing functions presented in profit or loss were expanded in 2018 to include the area of “sales”. In order to ensure the comparability of information, the previous year’s figures have been adjusted accord- ingly. The average number of employees in the 2018 financial year was 327 (2017: 344; 2016: 354). Of the 329 employees on December 31, 2018 (December 31, 2017: 326; December 31, 2016: 345), 246 were active in research and development (December 31, 2017: 253; December 31, 2016: 280), 21 in sales (December 31, 2017: 14; December 31, 2016: 12), and 62 were engaged in general and administrative functions (Decem- ber 31, 2017: 59 employees; December 31, 2016: 53 employees). As of December 31, 2018, there were 209 employees in the Proprietary De- velopment segment and 49 employees in the Partnered Discovery F inancial Statements 148 4 .3 O T HER INCOME AND EXPENSE S, F INANCE INCOME AND F INANCE EXPENSE S in 000’ € Grant Income Gain on Foreign Exchange Gain from recognition of previously unrecognized intangible assets 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 Financial Assets at Fair Value through Profit or Loss (2017 and 2016: Gain on Available-for-sale Financial Assets and Bonds) Interest Income on Other Financial Assets at Amortized Cost Gain on Derivatives Finance Income Loss on Financial Assets at Fair Value through Profit or Loss (2017 and 2016: Loss on Available-for-sale Financial Assets and Bonds) Interest Expenses for Other Financial Assets at Amortized Cost Interest Expenses for Financial Liabilites at Amortized Cost Loss on Derivatives Bank Fees Finance Expenses The following net gains or losses resulted from financial instruments in the fiscal year. 2018 153 677 350 0 465 1,645 (457) 0 (232) (689) 5 91 322 418 (85) (53) (126) (444) (46) (754) 2017 157 485 0 76 402 1,120 (844) 0 (827) (1,671) 35 236 441 712 (120) (374) 0 (1,360) (41) (1,895) in 000’ € 2018 2017 Financial Assets at Fair Value through Profit or Loss Other Financial Assets at Amortized Cost Shares at Fair Value through Other Comprehensive Income Financial Liabilities at Amortized Cost Available-for-sale Financial Assets Financial Assets classified as Loans and Receivables TOTAL Net gains or losses mainly comprised gains and losses on derivatives, interest income and expenses as well as valuation effects from changes in fair value. INCOME TAX EXPENSE S/ BENEF I T 4 .4 MorphoSys AG is subject to corporate taxes, the solidarity surcharge and trade taxes. The Company’s corporate tax rate in 2018 remained unchanged (15.0 %) as did the solidarity surcharge (5.5 %) and the effec- tive trade tax rate (10.85 %). MorphoSys US Inc. is subject to Federal Corporate Income Tax (21 %) and the State Income Tax for Princeton, New Jersey (9 %). (202) (978) (127) (126) 0 0 (1,433) (919) 0 0 0 (190) (164) (1,273) 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 %. De- pending on certain conditions, a tax rate of previously 5 % and from January 1, 2018, 7 % may be applicable under what is known as the “Innovation Box.” Notes 2016 327 192 0 15 175 709 (400) (7) (147) (554) 294 1,017 74 1,385 (1,209) (20) 0 (44) (35) (1,308) 2016 30 0 0 0 (1,069) 918 (121) F inancial Statements 149 2018 1 4,304 4,305 0 0 0 2017 (534) (502) (1,036) 0 0 0 2016 45 (564) (519) (82) (112) (194) Notes Income taxes consist of the items listed below. in 000’ € Current Tax Income/(Expense) (Thereof Regarding Prior Years: k€ 1; 2017: k€ 171; 2016: k€ (60)) Deferred Tax Benefit/(Expenses) Total Income Tax Benefit/(Expenses) Total Amount of Current Taxes Resulting from Entries Directly Recognized in Other Comprehensive Income Total Amount of Deferred Taxes Resulting from Entries Directly Recognized in Other Comprehensive Income Total Amount of Tax Effects Resulting from Entries Directly Recognized in Equity or Other Comprehensive Income The deferred tax benefit in 2018 mainly resulted from the impairment on intangible assets within the cash-generating unit, the Lanthio Group (€ 3.8 million). Further information can be found in Item 5.7.5* in the Notes. *C R O S S - R E F E R E N C E to page 156 The following table reconciles the expected income tax expense to the actual income tax expense as presented in the consolidated financial statements. The combined income tax rate of 26.675 % in the 2018 finan- cial year (2017: 26.675 %) was applied to profit before taxes to calculate the statutory income tax expense. This rate consisted of 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. in 000’ € 2018 2017 2016 (60,477) 26,675 % 16,132 (363) (126) 3,716 (349) (14,497) (268) 1 59 4,305 (68,790) 26,675 % 18,350 (290) (134) 37 3,256 (22,007) (71) (171) (6) (1,036) (59,864) 26,675 % 15,969 5 (135) 812 (3,766) (13,354) (46) 0 (4) (519) Earnings Before Income Taxes Expected Tax Rate Expected Income Tax Tax Effects Resulting from: Share-based Payment Non-Tax-Deductible Items Differences in Profit or Loss-Neutral Adjustments Non-Recognition of Deferred Tax Assets on Temporary Differences Non-Recognition of Deferred Tax Assets on Current Year Tax Losses Tax Rate Differences to Local Tax Rates Prior Year Taxes Other Effects Actual Income Tax The differences in profit or loss-neutral adjustments mainly contained the permanent differences of the issuance costs from the Nasdaq IPO. As of December 31, 2018, neither deferred tax assets on tax loss carry- forwards in the amount of € 51.0 million (December 31, 2017: € 37.4 mil- lion) nor deferred tax assets on temporary differences in the amount of € 0.7 million (December 31, 2017: € 0.5 million) were recognized by MorphoSys Group due to losses to be incurred as a result of continued substantial investments in proprietary product development and related business development. F inancial Statements 150 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 Other Provisions Other Liabilities TOTAL in 000’s €, as of December 31 Intangible Assets Receivables and Other Assets Prepaid Expenses and Deferred Charges Other Provisions Other Liabilities TOTAL Deferred Tax Asset 2018 Deferred Tax Asset 2017 Deferred Tax Liability 2018 Deferred Tax Liability 2017 0 319 0 278 213 810 0 0 0 253 236 489 4,317 0 0 0 0 4,317 8,297 0 3 0 0 8,300 Changes in Deferred Taxes in 2018 Recognized in Profit or Loss Income/(Expense) Recognized in Other Comprehensive Income 3,980 319 3 25 (23) 4,304 0 0 0 0 0 0 As of December 31, 2018, temporary differences of € 1.0 million (De- cember 31, 2017: € 0.2 million) existed in connection with investments in subsidiaries (known as outside basis differences) for which no de- ferred tax assets were recognized (2017: no deferred tax liabilities). Notes F inancial Statements 151 5 Notes to the Assets of the Balance Sheet 5.1 C ASH AND C ASH EQUIVAL EN T S in 000’ € 12/31/2018 12/31/2017 Bank Balances and Cash in Hand Impairment Cash and Cash Equivalents 45,476 (16) 45,460 76,589 0 76,589 Restricted cash of € 0.7 million mainly consisted of rent deposits (2017: € 1.1 million). The presentation of the development of the expected twelve-month loss for cash and cash equivalents to be recognized under IFRS 9 can be found in Item 2.3.1* of the Notes. *C R O S S - R E F E R E N C E to page 129 EARNINGS PER SHARE 4 .5 Earnings per share are computed by dividing the 2018 consolidated net loss of € 56,172,121 (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 (2018: 31,338,948; 2017: 28,947,566; 2016: 26,443,415). The table below shows the calculation of the weighted-average number of ordinary shares. SHARES IS SUED ON JANUARY 1 29,420,785 29,159,770 2018 2017 Effect of Treasury Shares Held on January 1 Effect of Share Issuance Effect of Transfer of Treasury Stock to Members of the Management Board Effect of Transfer of Treasury Stock/ Shares Issued in January Effect of Transfer of Treasury Stock/ Shares Issued in February Effect of Transfer of Treasury Stock/ Shares Issued in March Effect of Transfer of Treasury Stock/ Shares Issued in April Effect of Transfer of Treasury Stock/ Shares Issued in May Effect of Transfer of Treasury Stock/ Shares Issued in June Effect of Transfer of Treasury Stock/ Shares Issued in July Effect of Transfer of Treasury Stock/ Shares Issued in August Effect of Transfer of Treasury Stock/ Shares Issued in September Effect of Transfer of Treasury Stock/ Shares Issued in October Effect of Transfer of Treasury Stock/ Shares Issued in November Effect of Transfer of Treasury Stock/ Shares Issued in December (319,678) 2,208,146 (396,010) 0 0 278 0 0 7,759 0 0 0 1,863 154,250 4,128 756 1,874 17,754 2,818 76 85 63 3,778 1,094 2,038 2,669 3,976 2,566 5,549 127 WEIG HTED - AVER AG E NUMBER OF SHARES OF C OMMON STO CK 31,338,948 28,947,566 In 2018 and 2017, diluted earnings per share equaled basic earnings per share. The effect of 52,930 potentially dilutive shares in 2018 (2017: 87,904 dilutive shares; 2016: 99,764 dilutive shares) resulting from stock options granted to the Management Board, the Senior Man- agement 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. F inancial Statements Notes 152 5.2 F INANC IAL ASSE T S AT FAIR VAL UE , WI T H CHANGE S RECO GNI ZED IN PROF I T OR L O SS AND O T HER F INANC IAL INCOME AT AMOR T I ZED CO S T S in 000’ € DECEMBER 31, 2018 Money Market Funds TOTAL DECEMBER 31, 2017 Money Market Funds TOTAL Maturity Cost Gains Losses Market Value Gross Unrealized daily 44,718 daily 86,644 0 0 (137) (106) 44,581 44,581 86,538 86,538 As of January 1, 2019, realized and unrealized gains and losses on money market funds held or sold were recognized in the finance result in profit or loss in accordance with IFRS 9. The sale of financial assets in 2018 resulted in net losses of less than € 0.1 million. In 2017, in ac- cordance with IAS  39, the Group recognized a net gain of less than € 0.1 million in profit or loss resulting from the sale of financial assets previously recognized in equity (2016: net gain of € 0.3 million). in 000’ € DECEMBER 31, 2018 Term Deposits, Current Portion Commercial Papers Term Deposits, Net of Current Portion TOTAL DECEMBER 31, 2017 Term Deposits, Current Portion TOTAL Maturity Cost Unrealized Interest Gain Impairment Carrying amount 4 – 12 Months 4 – 12 Months More than 12 Months 219,720 50,000 96,090 4 – 12 Months 149,000 2 0 12 59 (744) (55) (353) 0 218,978 49,945 95,749 364,672 149,059 149,059 In 2018, current and non-current financial assets were categorized as “at amortized cost” in accordance with IFRS 9 “Financial Instruments”, and in 2017 as “loans and receivables” in accordance with IAS  39 “Financial Instruments”. These assets mainly consisted of term de- posits with fixed or variable interest rates as well as corporate bonds without interest, in which the nominal value invested is credited at their maturity. The increase in financial assets resulted mainly from the capital increases executed in April 2018 in connection with the IPO on the Nasdaq. Interest income from financial assets “at amortized cost” in 2018 amounted to € 0.1 million in 2018 (2017: € 0.2 million from financial assets “loans and receivables”; 2016: € 0.9 million from financial as- sets “loans and receivables”) and were recorded in the finance result. The risk associated with these financial instruments primarily re- sulted from bank credit risks. The presentation of the development of the expected twelve-month loss and the lifetime expected credit loss for term deposits and commercial papers, which must be recognized under IFRS 9 can be found in Item 2.3.1* of the Notes. *C R O S S - R E F E R E N C E to page 129 Further information on the accounting for financial 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 140 Notes F inancial Statements 153 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, 2018 and December 31, 2017, accounts receivable included unbilled receiv- ables amounting to € 14.1 million and € 5.3 million, respectively. Un- billed receivables increased mainly due to unbilled amounts related to royalties and the provision of services in connection with the transfer of projects to customers. The presentation of the development of the risk provisions to be recog- nized in accordance with IFRS 9 in the 2018 financial year for accounts receivable using the simplified impairment model can be found in Item 2.3.1* of the Notes. *C R O S S - R E F E R E N C E to page 129 Based on the Management Board’s assessment, no net loss for allow- ances for doubtful receivables was recognized in profit or loss in 2017. 5.4 O T HER RECEIVABL E S Other receivables as of December 31, 2018, mainly consisted of receiv- ables from unrealized gross gains on forward rate agreements in the amount of € 0.1 million (December 31, 2017: € 0.3 million unrealized gross loss, included under provisions for onerous contracts. This can be found in Item 6.2* of the Notes.). The forward rate agreements were classified as financial assets at fair value through profit or loss in ac- cordance with IFRS 9. *C R O S S - R E F E R E N C E to page 158 As of December 31, 2018 and December 31, 2017, there were no impair- ments recognized for other receivables. 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, 2018 income tax receivables amounted to € 0.2 mil- lion (December 31, 2017: € 0.7 million) and consisted of receivables from capital gain taxes withheld and income taxes for prior years. Inventories amounting to € 0.2 million as of December 31, 2018 (De- cember 31, 2017: € 0.3 million) were stored at the Planegg location and consisted of raw materials and supplies. As in the previous year, there were no inventories recognized at fair value less selling costs as of the reporting date. As of December 31, 2018, prepaid expenses and other current assets mainly consisted of combination compounds in the amount of € 5.4 mil- lion (December 31, 2017: € 11.2 million), receivables towards tax au- thorities from input tax surplus of € 2.7 million (December 31, 2017: € 2.4 million), upfront fees for external laboratory services of € 1.9 mil- lion (December 31, 2017: € 0.6 million), upfront fees for sublicenses of € 0.4 million (December 31, 2017: € 0.4 million), restricted cash for rent deposits of € 0.0 million (December 31, 2017: € 0.4 million) and other prepayments amounting to € 1.3 million (December 31, 2017: € 1.1 million). An impairment of € 4.5 million was recognized on com- bination compounds in 2018. F inancial Statements 154 5.6 PROPER T Y, PL AN T AND EQUIPMEN T in 000’ € Cost JANUARY 1, 2018 Additions Disposals DECEMBER 31, 2018 Accumulated Depreciation and Impairment JANUARY 1, 2018 Depreciation Charge for the Year Disposals DECEMBER 31, 2018 Carrying Amount JANUARY 1, 2018 DECEMBER 31, 2018 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 No impairment losses on property, plant and equipment were recog- nized in the 2018, 2017 and 2016 financial years. No borrowing costs were capitalized during the reporting period, and 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. Depreciation is included in the following line items of profit or loss. in 000’ € Research and Development Selling General and Administrative TOTAL Notes Total 19,836 1,821 (3,060) 18,597 16,310 1,812 (3,056) 15,066 3,526 3,531 19,047 1,317 (528) 19,836 14,858 1,969 0 (517) 16,310 4,189 3,526 Office and Laboratory Equipment Furniture and Fixtures 17,335 1,780 (1,457) 17,658 14,490 1,723 (1,455) 14,758 2,845 2,900 16,658 1,205 (528) 17,335 13,120 1,887 0 (517) 14,490 3,538 2,845 2,501 41 (1,603) 939 1,820 89 (1,601) 308 681 631 2,389 112 0 2,501 1,738 82 0 0 1,820 651 681 2018 1,398 87 327 1,812 2017 1,672 0 297 1,969 2016 1,518 0 268 1,786 Notes 5.7 IN TANGIBL E ASSE T S F inancial Statements 155 in 000’ € Patents License Rights In-process R&D Programs Software Goodwill Total Cost JANUARY 1, 2018 Additions Disposals DECEMBER 31, 2018 Accumulated Amortization and Impairment JANUARY 1, 2018 Amortization Charge for the Year Impairment Disposals DECEMBER 31, 2018 Carrying Amount JANUARY 1, 2018 DECEMBER 31, 2018 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 16,995 590 0 17,585 12,326 1,320 0 0 13,646 4,669 3,939 16,419 640 (64) 16,995 11,096 1,230 64 (64) 12,326 5,323 4,669 23,896 0 0 23,896 20,897 112 360 0 21,369 2,999 2,527 23,896 0 0 23,896 20,749 148 0 0 20,897 3,147 2,999 52,159 0 0 52,159 0 0 15,140 0 15,140 52,159 37,019 60,960 11,140 (19,941) 52,159 10,141 0 9,800 (19,941) 0 50,819 52,159 5,853 55 (264) 5,644 5,198 506 0 (264) 5,440 655 204 5,800 53 0 5,853 4,515 683 0 0 5,198 1,285 655 11,041 0 0 11,041 3,676 0 3,689 0 7,365 7,365 3,676 11,041 0 0 11,041 3,676 0 0 0 3,676 7,365 7,365 109,944 645 (264) 110,325 42,097 1,938 19,189 (264) 62,960 67,847 47,365 118,116 11,833 (20,005) 109,944 50,177 2,061 9,864 (20,005) 42,097 67,939 67,847 Impairment losses of € 0.4 million were recognized on licenses in the 2018 financial year. In the 2017 financial year, € 0.1 million of impair- ment losses were recognized on patents and licenses. No impairment on patents and licenses was recognized in the 2016 financial year. As of December 31, 2018, in-process research and development pro- grams were subject to an impairment test as required by IAS 36. This test indicated a need for impairment. Further details on the impair- ment of in-process research and development programs and goodwill can be found in 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 156 The carrying amount of intangible assets pledged as security amounts to € 13.1 million and relates to a government grant in the amount of € 1.5 million. F inancial Statements 156 Notes Amortization is included in the following line items of profit or loss. in 000’ € Research and Development Research and Development (Write-off) Selling General and Administrative TOTAL 2018 2017 2016 1,822 19,189 25 91 21,127 1,958 9,864 0 103 11,925 1,872 10,141 0 106 12,119 5.7.1 PATE NTS In the 2018 financial year, the carrying amount of patents declined by € 0.8 million from € 4.7 million to € 3.9 million. This was the result of additions amounting to € 0.6 million for patent applications, particu- larly for proprietary programs and technologies, which were offset by straight-line amortization of € 1.3 million. 5.7.2 LICE NSES In the 2018 financial year, the carrying amount of licenses declined by € 0.5 million from € 3.0 million to € 2.5 million as a result of sched- uled and unscheduled amortization. 5.7.3 IN - PRO CES S R&D PRO GR AMS The carrying amount of in-process R&D programs decreased in 2018 by € 15.1 million to € 37.0 million. This was due to impairments in a total amount of € 15.1 million. These included € 1.7 million in the sec- ond quarter of 2018 and € 13.4 million in the fourth quarter of 2018 (see section Lanthio Group in Item 5.7.5* of these Notes). *C R O S S - R E F E R E N C E to page 156 As of December 31, 2018, this balance sheet item contained capitalized upfront payments from the in-licensing of one compound for the Pro- prietary Development segment as well as subsequent milestone pay- ments for this compound that were paid at a later point in time. This line item also included one compound resulting from an acquisition (see Item 5.7.5* in the Notes). *C R O S S - R E F E R E N C E to page 156 M O R 20 8 As an intangible asset with indefinite useful life (no foreseeable limit to the period over which this compound is expected to generate cash flows) and a carrying amount of € 23.9 million, MOR208 was subject to an annual impairment test on September 30, 2018, as required by IAS  36. The recoverable amount of the MOR208 cash-generating unit was determined on the basis of value-in-use calculations, which concluded that the recoverable amount of the cash-generating unit exceeded its carrying amount. The cash flow forecasts took into ac- count expected cash inflows from the potential commercialization of MOR208, the cash outflows for anticipated research and development, and the costs for MOR208’s commercialization. The cash flow forecasts are based on the period of patent protection for MOR208. For this rea- son, a planning horizon of approximately 20 years is considered appro- priate 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 information). Based on the updated cash flow forecast, the value-in-use was determined as follows: A beta factor of 1.2 (2017: 1.2) and WACC before taxes of 10.0 % (2017: 9.4 %). A detailed sensitivity analysis was performed for the dis- count rate. A sensitivity analysis for changes in the cash flows was not performed since the cash flows from research and development and the commercialization of the compound have already been probability- adjusted in the value-in-use calculations so as to reflect the probabili- ties of success in phases of clinical trials. The analysis did not reveal any need for impairment. The values ascribed to the assumptions cor- respond 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 of impairment were identified at December 31, 2018. 5.7.4 SOF T WARE In the 2018 financial year, additions to this line item totaled € 0.1 mil- lion. The carrying amount decreased by € 0.5 million from € 0.7 mil- lion in 2017 to € 0.2 million in 2018. Additions were offset by amortiza- tion of € 0.6 million. 5.7.5 G O ODWILL The annual goodwill impairment test was performed on Septem- ber 30, 2018. S LO N O M I C S T EC H N O LO GY As of September 30, 2018, goodwill of € 3.7 million from the 2010 ac- quisition of Sloning BioTechnology GmbH was subject to an impairment test as required by IAS 36. The recoverable amount of the cash-gener- ating unit Slonomics technology, which is part of the Partnered Dis- covery 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 flow forecasts took into account the payments expected under existing con- tracts as well as the future free cash flows from the contribution of the Slonomics technology to partnered programs and was offset by ex- pected personnel and administrative expenses. Cash flow forecasts are based on a period of ten years because the Management Board believes that commercialization through licensing agreements, upfront pay- ments, milestone payments, funded development services and royal- ties is only feasible by means of medium- to long-term contracts. For this reason, a planning horizon of ten years is considered appropriate for the value-in-use calculation. The cash flow 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 flow forecast, the value-in-use was determined as follows: Notes F inancial Statements 157 changes in the cash flows has not been performed since the cash flows had already been probability-adjusted in the value-in-use calculations so as to reflect the probabilities of success in phases of clinical trials. This analysis did not reveal the need for any additional 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 additional impairments were identified at Decem- ber 31, 2018. 5.8 INVE S T MEN T S AT FAIR VAL UE , WI T H CHANGE S RECO GNI ZED IN O T HER COMPREHENSIVE INCOME This line item consisted of an investment in adivo GmbH, Martinsried, amounting to 19.9 %, which was purchased by MorphoSys AG in July 2018 in the context of start-up financing. MorphoSys paid a cash con- tribution of € 9,458 and a contribution in kind of € 350,000, which con- sisted of the adivo brand and a license to a fully synthetic canine-based antibody library. A beta factor of 1.2 (2017: 1.2), WACC before taxes of 9.6 % (2017: 10.6 %) and a perpetual growth rate of 1 % (2017: 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 remain- ing unchanged from the original calculation. A sensitivity analysis for changes in the cash flows has not been performed since the cash flows have already been probability-adjusted in the value-in-use calcula- tions so as to reflect the probabilities of success in phases of 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. L A N T H I O G RO U P As a result of a regular review of the Company's proprietary portfolio it was decided in the second quarter of 2018 to discontinue a project in the research stage of the cash-generating unit, the Lanthio Group, in the Proprietary Development operating segment. Accordingly, an im- pairment of € 1.7 million was recorded in research and development expenses as of June 30, 2018. On September 30, 2018, goodwill of € 3.7 million and the related intan- gible asset with indefinite useful life (no foreseeable limit to the period over which MOR208 is expected to generate cash flows) of € 26.5 mil- lion from the Lanthio Group acquisition were subject to an annual im- pairment test. This did not result in an impairment loss as of Septem- ber 30, 2018. In the fourth quarter of 2018, updated study data led to the need for further studies, and the existing development plan was adjusted ac- cordingly. This resulted in the expectation of a delayed market entry and a delay in the occurrence of future cash flows compared to previ- ous assumptions. The cash flow forecasts included planned cash inflows from the potential sale of compounds based on lanthipeptides expected to achieve market approval. These cash inflows were offset by expected operating expenses for compound development and clinical trials as well as sales and administrative expenses. The duration and likelihood of individual stages of the study were taken into consideration. Cash flow forecasts are based on a period of 30 years as the Management Board believes that after the successful approval of compounds, the drugs that follow can generate free cash flows within that period of time. The recoverable amount resulting from this adjusted cash flow forecast of the cash-generating unit Lanthio Group, which is part of the Proprietary Development segment, was determined on the basis of value-in-use calculations and amounted to € 13.3 million, i.e., the recoverable amount of the cash-generating unit was lower than its carrying amount. This resulted in an impairment of € 17.1 million, consisting of € 3.7 million attributed to goodwill and € 13.4 million to in-process R&D programs. After impairment, the carrying amount of in-process R&D programs amounted to € 13.1 million. The values of the underlying assumptions were determined using both internal (past experience) and external sources of information (market infor- mation). On the basis of the updated cash flow forecast, the value-in- use was determined as follows: A beta factor of 1.2 (2017: 1.2) and WACC before taxes of 11.5 % (2017: 12.1 %). A detailed sensitivity analysis was performed with regard to the discount rate. A sensitivity analysis for F inancial Statements 158 Notes The change in investments in the 2018 financial year is shown below. in 000’ € Shareholdings 01/01/2018 Additions Disposals Through Other Com- prehensive Income Through Profit or Loss 12/31/2018 0 359 0 (127) 0 232 As of December 31, 2018, the fair value of the investment was mea- sured at € 0.2 million. The decrease of € 0.1 million was recognized directly in equity. 6 Notes to Equity and Liabilities of the Balance Sheet The significant unobservable input parameters used in the measure- ment were corporate planning assumptions, the probability-weighted estimate of cash flows and the discount rate. From the information cur- rently available, a material change in corporate planning is not consid- ered likely and therefore the cash flow forecasts used are considered as a suitable basis for determining the fair value. A change in the pre-tax WACC of +/–1.0 % would cause a € 0.1 million lower or € 0.1 million higher amount of equity. A sensitivity analysis for changes in cash flows was not performed because the cash flows have already been probability-adjusted in the fair value calculation to reflect the proba- bilities of success in the various stages of development. There are no significant relationships between the significant unobservable input parameters. 5.9 PREP AID EXPENSE S AND O T HER ASSE T S, NE T OF CURREN T P OR T ION 6.1 ACCOUN T S P AYABL E AND ACCRUAL S Accounts payable and licenses payable were non-interest-bearing and, under normal circumstances, have payment terms of no more than 30 days. Accounts payable are listed in the table below. in 000’ € 12/31/2018 12/31/2017 Trade Accounts Payable Licenses Payable Accruals Other Liabilities TOTAL 7,215 184 36,530 832 44,761 4,622 196 36,408 3,586 44,812 This line item included the non-current portion of prepaid expenses and other assets and mainly resulted from prepaid rent for the prem- ises in Semmelweisstraße 7 in Planegg. The Group classified certain line items in 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, 2018, the Group held long-term restricted cash in the amount of € 0.7 million for issued rent deposits (December 31, 2017: € 0.7 million) and of € 0.1 million for convertible bonds granted to em- ployees (December 31, 2017: € 0.1 million). *C R O S S - R E F E R E N C E to page 140 and page 151 Accruals consisted mainly of accruals for external laboratory services in the amount of € 26.2 million (December 31, 2017: € 26.3 million), accrued personnel expenses for payments to employees and manage- ment amounting to € 5.1 million (December 31, 2017: € 5.0 million), provisions for outstanding invoices in the amount of € 2.8 million (December 31, 2017: € 2.6 million), expenses for legal advice in the amount of € 1.5 million (December 31, 2017: € 2.1 million), audit fees and other audit-related costs in the amount of € 0.5 million (Decem- ber 31, 2017: € 0.2 million) and license payments in the amount of € 0.1 million (December 31, 2017: € 0.2 million). The breakdown of this line item is shown in the table below. in 000’ € 12/31/2018 12/31/2017 Prepaid Expenses, Net of Current Portion Other Current Assets TOTAL 2,199 783 2,982 2,546 798 3,344 At the Company’s Annual General Meeting in May 2018, the Price- waterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (PwC GmbH), Munich, was appointed as the auditor. The Supervisory Board engaged the PwC GmbH to audit the financial statements. In the 2018 financial year, PwC GmbH received a total fee from MorphoSys in the amount of € 1,274,165, including audit fees in the amount of € 468,803, audit-relatd fees of € 516,408, as well as all other fees for other services in the amount of € 288,954. PwC GmbH did not provide tax services in 2018. TAX PROVI SIONS AND O T HER PROVI SIONS 6.2 As of December 31, 2018, the Group recorded tax provisions and other provisions of € 0.4 million (2017: € 1.5 million). Tax provisions mainly consisted of income tax expenses and other pro- visions mainly included expenses for personnel recruitment. As of December 31, 2018, tax provisions and other provisions were uncertain in their amount and are expected to be utilized in 2019. Notes F inancial Statements 159 The table below shows the development of tax provisions and current and non-current other provisions in the 2018 financial year. in 000’ € Tax Provisions Other Provisions TOTAL 01/01/2018 Additions Utilized Released 12/31/2018 315 1,209 1,524 0 773 773 72 1,192 1,264 35 606 641 208 184 392 6.3 CON T RAC T L IABIL I T IE S Contract liabilities related to transaction prices paid by customers, which were allocated to the performance obligations not fulfilled as of December 31, 2018. It is expected that current contract liabilities will be realized in the 2019 financial year and non-current contract liabili- ties mainly in the 2020 financial year. The changes in this item are set out below. in 000’ € 2018 2017 OPENING BAL ANCE BEFORE APPLICATION OF IFRS 15 Application of IFRS 15 OPENING BAL ANCE AF TER APPLICATION OF IFRS 15 Prepayments Received in the Fiscal Year Revenues Recognized in the Reporting Period that was included in the Contract Liability at the Beginning of the Period Revenues Recognized for Received Prepayments and Services Performed in the Fiscal Year CLOSING BAL ANCE thereof short-term thereof long-term 1,695 (1,135) 560 2,386 2,905 0 2,905 18,386 (306) 0 (1,688) 952 794 158 (19,596) 1,695 1,389 306 6.4 O T HER L IABIL I T IE S Other liabilities exclusively consisted of the deferred amount related to 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 included in the item accounts payable and accruals. increased by € 32,537 as a result of the exercise of 32,537 convertible bonds that were granted to the Management Board and the Senior Management Group. The weighted-average exercise price of the con- vertible bonds exercised amounted to € 31.88. 6.5.2 AUTHORIZE D CAPITAL Compared to December 31, 2017, the number of authorized ordinary shares increased from 14,579,885 to 14,684,291. This overall change comprised a decline in the number of authorized ordinary shares as a result of the two capital increases from Authorized Capital 2017-II to- taling 2,386,250 ordinary shares in April 2018 in the context of the IPO in the United States. At the Annual General Meeting on May 17, 2018, Authorized Capital 2018-I in the amount of € 11,768,314 was created and the remaining Authorized Capital 2017-II in the amount of € 9,277,658 was canceled. Under the terms of Authorized Capital 2018-I, the Management Board, with the Supervisory Board’s consent, was authorized to increase the Company’s share capital once or several times until April 30, 2023, (inclusive) by a total of € 11,768,314 by issu- ing up to 11,768,314 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 five years by issuing shares for a certain total amount, which are referred to as authorized capital (genehmigtes Kapital) and are 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 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, 2017 decreased from 6,491,683 to 6,459,146 shares due to the exercise of 32,537 conversion rights in 2018. The reduction in ordi- nary shares of conditional capital through the exercise of 32,537 con- version rights was entered in the commercial register in February 2019. 6.5 S T O CKHOL DERS’ EQUI T Y 6.5.1 C OMMON STO CK As of December 31, 2018, the Company’s common stock including trea- sury stock amounted to € 31,839,572, which represents an increase of € 2,418,787 compared to € 29,420,785 on December 31, 2017. Each share of common stock grants one vote. The increase in common stock resulted from the capital increases carried out in April 2018 following the IPO on the Nasdaq Global Market. The capital increases were made through American Depositary Shares (“ADS”), with each ADS repre- senting 1/4 of a MorphoSys ordinary share. A total of 2,075,000 new shares were issued from Authorized Capital 2017-II on April 18, 2018 followed by 311,250 new shares on April 26, 2018. Common stock also 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 affiliated 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 ex- ceed 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 F inancial Statements 160 Notes rights to employees and members of the management of our Company or of an affiliated company may not exceed 10 % of the share capital ex- isting at the time of the shareholders’ meeting adopting such resolution. 6.5.4 TRE ASURY STO CK In the years 2018 and 2017, the Group did not repurchase any of its own shares. The composition and development of this line item is listed in the following table. In addition, a total of 1,318 treasury shares in the amount of € 48,713 were transferred to related parties. As a result, the number of MorphoSys shares owned by the Company as of December 31, 2018, was 281,036 (December 31, 2017: 319,678). The repurchased shares may be used for all purposes named in the authorization of the Annual General Meeting on May 23, 2014 and particularly for any existing or future employee participation schemes and/or to finance acquisitions. The shares may also be redeemed. 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 Transfer in 2018 As of 12/31/2018 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 (38,642) 281,036 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 (1,428,208) 10,398,773 As of December 31, 2018, the Company held 281,036 shares of treasury stock valued at € 10,398,773, representing a decline of € 1,428,208 compared to December 31, 2017 (319,678 shares; € 11,826,981). The reason for this decline was the transfer of 17,219 shares of treasury stock to the Management Board and Senior Management Group from the 2014 Long-Term Incentive plan (LTI plan) in the amount of € 636,414. The vesting period for this LTI program expired on April 1, 2018 and all beneficiaries had or have the option within six months to receive a total of 17,219 shares. In May 2018, the Management Board, the Senior Management Group and certain employees of the Company who are not members of the Senior Management Group received a one-time entitlement in a total fixed amount of € 2.1 million. This entitlement was settled in treasury shares of the Company when the option was exercised by the benefi- ciaries. Beneficiaries were free to choose the exercise day within a vesting period expiring on December 31, 2018. Upon exercise, the fixed amount of the entitlement was divided by the XETRA closing price on the exercise date and the resulting number of treasury shares was transferred to the beneficiary. As of December 31, 2018, a total of 20,105 shares valued at € 2.1 million were transferred as part of this entitlement. 6.5.5 ADDITIONAL PAID - IN CAPITAL On December 31, 2018, additional paid-in capital amounted to € 619,908,453 (December 31, 2017: € 438,557,857). The total increase of € 181,350,597 resulted mainly from two capital increases in April 2018 with total proceeds of € 176,189,256. The allocation of person- nel expenses resulting from share-based payments amounted to € 5,584,969, and the exercise of convertible bonds totaled an amount of € 1,004,580. There was an offsetting effect from the decline in the reclassification of treasury shares in the context of the allocation of shares under the 2014 performance-based share plan in the amount of € 636,414 and the allocation of treasury shares to related persons in the amount of € 763,076. 6.5.6 RE VALUATION RESE RVE On December 31, 2018, the revaluation reserve amounted to € 0 (December 31, 2017: € –105,483). The change by € 105,483 resulted from the adoption of the new IFRS  9 standard for financial instru- ments. Hence, since January 1, 2018, the reporting of this equity posi- tion is no longer required. 6.5.7 OTHE R C OMPRE HE NSIVE INC OME RESE RVE The other comprehensive income reserve is being reported for the first time as of January 1, 2018. On December 31, 2018, this reserve con- tained changes in the fair value of equity instruments through other comprehensive income in the amount of € 127,458, and currency losses from consolidation of € 83,432. The currency losses from consol- idation include exchange differences from the revaluation of foreign currency financial statements of Group companies and differences be- tween the exchange rates used in the balance sheet and profit or loss. As of December 31, 2017, the Group consisted solely of companies with financial statements prepared in euros. 6.5.8 AC CUMUL ATE D DE FICIT The consolidated net loss for the year of € –56,172,121 is reported under accumulated deficit. The first-time adoption of IFRS 9 and IFRS 15 re- sulted in an adjustment of € –248,000 and € 1,135,014, respectively. Further details can be found in Item 2.1.2* of the Notes. The accumu- lated deficit being a result of the effects above therefore increased from € –97,375,138 in 2017 to € –152,765,728 in 2018. *C R O S S - R E F E R E N C E to page 125   Notes F inancial Statements 161 7 Remuneration System for the Management Board and Employees of the Group 7.1 S T O CK OP T ION PL ANS 7.1.1 2017 STO CK OP TION PL AN On April 1, 2017, MorphoSys established a stock option plan (SOP) for the Management Board, the Senior Management Group and selected employees of the Company who are not members of the Senior Manage- ment Group (beneficiaries). 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 pe- riod/performance period is four years. Each stock option grants up to two subscription rights to shares of the Company. The subscription rights vest each year by 25 % within the four-year vesting period, pro- vided that the performance criteria specified for the respective period have been 100 % fulfilled. The number of subscription rights 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 200 %. If the share price development falls short of the program’s performance parameters, the target achievement for that year is 0 %. The exercise price, derived from the average market price of the Com- pany’s shares in the XETRA closing auction on the Frankfurt Stock Exchange from the 30 trading days prior to the issue of the stock op- tions, is € 55.52. MorphoSys reserves the right to settle the exercise of stock options through newly created shares from Conditional Capital 2016-III, the issuance of treasury shares or in cash. The exercise period is three years after the end of the four-year vesting period/performance pe- riod, which is March 31, 2024. If a member of the Management Board ceases to hold an office at MorphoSys Group through termination (or the Management Board member terminates the employment contract), resignation, death, in- jury, disability or the attainment of retirement age (receipt of a stan- dard retirement pension, early-retirement pension or disability pen- sion, 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 amount of subscription rights. If a member of the Management Board ceases to hold an office at MorphoSys Group for good reason as defined by Section 626 (2) of the German Civil Code (BGB), all unexercised 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. As of April 1, 2017, a total of 81,157 stock options had been granted to the beneficiaries, 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 selected Company employees who do not belong to the Senior Management Group. The original number of stock options granted was based on 100 % target achievement. Based on the perfor- mance criteria that have been met to date, the target achievement is expected to be 125 %. For performance criteria that have not yet been met, 100 % target achievement is assumed. Under this assumption, the total number of subscription rights to be exercised, i.e., the total num- ber of shares to be issued at the end of the four-year holding period/ performance period would currently increase to 90,949 shares. 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 Decem- ber 31, 2018, seven beneficiaries left MorphoSys, resulting in the for- feiture of 8,398 stock options. For the calculation of personnel expenses resulting from share-based payment under the 2017 Stock Option Plan, the assumption is that two beneficiaries would leave the Company during the four-year period. This assumption was updated in 2018. *C R O S S - R E F E R E N C E to page 167 In 2018, personnel expenses from stock options under the Group’s 2017 SOP amounted to € 436,154 (2017: € 801,330). 7.1.2 2018 STO CK OP TION PL AN On April 1, 2018, MorphoSys established a stock option plan (SOP) for the Management Board, the Senior Management Group and selected Company employees who are not members of the Senior Management Group (beneficiaries). In accordance with IFRS 2, the program is con- sidered an equity-settled share-based payment and is accounted for accordingly. The grant date was April 1, 2018 and the vesting period/ performance period is four years. Each stock option grants up to two subscription rights to shares of the Company. The subscription rights vest each year by 25 % within the four-year vesting period, provided that the performance criteria specified for the respective period have been 100 % fulfilled. The number of subscription rights 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 program’s performance criteria can be met annually up to a maximum of 200 %. If the share price development falls short of the performance parameters, the target achievement for that year is 0 %. The exercise price, derived from the average market price of the Com- pany’s shares in the XETRA closing auction on the Frankfurt Stock Exchange from the 30 trading days prior to the issue of the stock op- tions, is € 81.04. MorphoSys reserves the right to settle the exercise of stock options through either newly created shares from Conditional Capital 2016-III or, alternatively, through the issuance of treasury shares or in cash should the exercise from Conditional Capital 2016-III not be possible. The exercise period is three years after the end of the four-year vesting period/performance period, which is March 31, 2025. If a member of the Management Board ceases to hold an office at MorphoSys Group prior to the end of the four-year vesting period/ performance period, the Management Board member (or the mem- ber’s heirs) is entitled to a precise daily pro rata amount of subscrip- tion rights. F inancial Statements 162 Notes If a member of the Management Board ceases to hold an office at MorphoSys Group for good reason as defined by Section 626 (2) of the German Civil Code (BGB), all unexercised stock options will be for- feited without any entitlement to compensation. If a cumulative absence of more than 90 days occurs during the four- year vesting period/performance period, the beneficiary is entitled to a precise daily pro rata amount of subscription rights. Absence is de- fined as either a continued period of lost work time due to illness or inactivity of a beneficiary or employment relationship without contin- ued pay. 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. As of April 1, 2018, a total of 67,778 stock options had been granted to beneficiaries, of which 29,312 had been granted to the Management Board (further details can be found in the “Stock Options” table in Note 7.4* “Related Parties”), 34,276 to the Senior Management Group and 4,190 to selected 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, 2018) was € 30.43 per stock option. In the period from the grant date to December 31, 2018, two beneficiaries left MorphoSys, resulting in the forfeiture of 2,136 stock options. For the calculation of personnel expenses resulting from share-based pay- ment under the 2018 Stock Option Plan, the assumption is that four beneficiaries 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 167 In 2018, personnel expenses from stock options under the Group’s 2018 SOP amounted to € 925,635. The fair value of the stock options from the 2018 and 2017 stock option plans was determined using 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 consid- ered 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 % April 2017 Stock Option Plan April 2018 Stock Option Plan 55.07 55.52 37.49 25.07 16.94 4.0 n/a 81.05 81.04 35.95 25.10 17.73 4.0 n/a Risk-free Interest Rate in % between 0.03 and 0.23 between 0.02 and 0.15 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 (beneficiaries) convertible bonds with a total nominal value of € 225,000, divided into 449,999 no-par-value bearer bonds with equal rights from “Conditional Capital 2008-III”. The beneficiaries have the right to convert the bonds into Company shares. Each convertible bond can be exchanged for one of the Company’s no-par-value 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 achieve- ment of performance targets, the expiration of vesting periods, the ex- ercisability 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 following table shows the development of the convertible bond plans for Group employees in the 2018, 2017 and 2016 financial years. Convertible Bonds Weighted- average Price (€) 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 OU TSTANDIN G ON JANUARY 1, 2018 Granted Exercised Forfeited Expired OU TSTANDIN G ON DECEMBER 31, 2018 449,999 0 0 (13,414) 0 436,585 436,585 0 (261,015) 0 0 175,570 175,570 0 (32,537) 0 0 143,033 31.88 0.00 0.00 31.88 0.00 31.88 31.88 0.00 31.88 0.00 0.00 31.88 31.88 0.00 31.88 0.00 0.00 31.88 Notes F inancial Statements 163 From the grant date until December 31, 2018, one beneficiary left MorphoSys and, therefore, 13,414 convertible bonds were forfeited. As of December 31, 2018, the number of vested convertible bonds totaled 143,033 shares (December 31, 2017: 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 significant groups of convertible bonds as of December 31, 2018. Range of Exercise Prices € 25.00 - € 40.00 Number Outstanding Remaining Contractual Life (in Years) Weighted- average Exer- cise Price (€) Number Exercisable Weighted- average Exer- cise Price (€) 143,033 143,033 1.25 1.25 31.88 31.88 143,033 143,033 31.88 31.88 The Group recognized 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 was recog- nized as personnel expenses from convertible bonds. Compensation expenses related to convertible bonds amounted to € 0 in 2018, to € 287.601 in 2017 and to € 40.375 in 2016. 7.3 L ONG -T ERM INCEN T IVE PRO GRAMS 7.3.1 2013 LONG -TE RM INCE NTIVE PL AN On April 1, 2013, MorphoSys established a long-term incentive plan (LTI plan) for the Management Board and the Senior Management Group (beneficiaries). The vesting period of this plan expired on April 1, 2017. 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 is paid out in ordinary shares (performance shares) of MorphoSys AG if predefined 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 Super- visory Board. The fulfillment 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 € 1.0million in the 2017 financial 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 61,323 performance shares of MorphoSys AG was transferred to beneficiaries until October 2, 2017 after the expira- tion of the four-year vesting period. The Management Board received 36,729 performance shares (for further information, please see the tables titled “Shares” and “Performance 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 167 On October 1, 2013, MorphoSys established another long-term incen- tive plan (LTI plan) for Senior Management Group members (beneficia- ries). The vesting period of this plan expired on October 1, 2017. The terms of this plan were identical to the plan granted as of April 1, 2013. The fulfillment 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 previously recognized personnel expenses of € 0.02 million in the 2017 financial year. Previously, personnel ex- penses 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 beneficiaries after the expiration of the four-year vest- ing period in December 2017. The Senior Management Group received all of the 548 performance shares. In 2018, personnel expenses from performance shares under the Group’s 2013 LTI plan amounted to € 0 (2017: € 1,038,639; 2016: € –23,571). 7.3.2 2014 LONG -TE RM INCE NTIVE PL AN On April 1, 2014, MorphoSys established a Long-Term Incentive plan (LTI plan) for the Management Board and the Senior Management Group (beneficiaries). The vesting period of this plan expired on April 1, 2018. 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 is paid out in ordinary shares (performance shares) of MorphoSys AG if predefined 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 Super- visory Board. The fulfillment 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 1.0, meaning the number of performance shares to be allocated was scaled by a factor of 1.0. Based on these terms and the company factor, a total of 17,219 performance shares of MorphoSys AG was transferred to beneficiaries until October 10, 2018 after the expiration of the four-year vesting period. The Management Board received 6,969 performance shares (for further information, please see the tables titled “Shares” and “Performance Shares” in Item  7.4* “Related Parties”), the Senior Management Group received 8,216 performance shares and former members of the Management Board and Senior Management Group, who have since left the Com- pany, received 2,034 performance shares. *C R O S S - R E F E R E N C E to page 167 F inancial Statements 164 Notes In 2018, personnel expenses resulting from performance shares under the Group’s 2014 LTI plan amounted to € 6.388 (2017: € 55,759; 2016: € 178.518). 7.3.3 2015 LONG -TE RM INCE NTIVE PL AN On April 1, 2015, MorphoSys established a Long-Term Incentive plan (LTI plan) for the Management Board and the Senior Management Group (beneficiaries). 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 predefined 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 predefined key performance criteria 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 per- formance shares vested per year is calculated based on key perfor- mance criteria comprising 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 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. However, in justified cases, the Supervisory Board may set this factor freely between 0 and 2, for example, if the level of payment is re- garded 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- ficiaries. Beneficiaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office at MorphoSys Group because of termination (or if the Management Board member terminates the employment contract), resignation, death, in- jury, disability, by reaching retirement age (receipt of a normal retire- ment 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 discre- tion, the Management Board member (or the member’s heirs) is enti- tled to a precise daily pro rata amount of performance shares. If a member of the Management Board ceases to hold an office at MorphoSys Group for good reason as defined by Section 626 (2) of the German Civil Code (BGB) and/or as defined by Section 84 (3) of the German Stock Corporation Act (AktG), the beneficiary 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 40,425 of these shares were allocated to beneficiaries on April 1, 2015 with 21,948 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”) and 18,477 performance shares to the Senior Management Group. The original number of perfor- mance shares allocated was based on the full achievement of the per- formance criteria and a company factor of 1. Based on the performance criteria that have been met to date, the overall achievement of the tar- get is expected to be 123.5 %. For performance criteria that have not yet been met, 100 % target achievement is assumed. Under this assump- tion, the total number of performance shares to be allocated at the end of the four-year holding period/performance period would currently increase to 44,599 shares. The fair value of the performance shares on the grant date (April 1, 2015) was € 61.40 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, 2018, five beneficiaries left MorphoSys, and therefore 3,093 performance shares were forfeited. For the calculation of the personnel expenses from share-based payment under the 2015 LTI plan, it was initially assumed that one beneficiary would leave the Company during the four-year period. This assumption was updated in 2018. *C R O S S - R E F E R E N C E to page 167 In 2018, personnel expenses resulting from performance shares under the Group’s 2015 LTI plan amounted to € 109,511 (2017: € 201,608: 2016: € 837.153). 7.3.4 2016 LONG -TE RM INCE NTIVE PL AN On April 1, 2016, MorphoSys established a Long-Term Incentive plan (LTI plan) for the Management Board and the Senior Management Group (beneficiaries). 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 predefined 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 predefined key performance criteria 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 per- formance shares vested per year is calculated based on key perfor- mance criteria comprising 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 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 %). Notes F inancial Statements 165 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 justified cases, the Supervisory Board may set this factor freely between 0 and 2, for example, if the level of payment is regarded as unreasonable in view of the general development of the Company. The right to receive a certain allocation of 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- ficiaries. Beneficiaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office at MorphoSys Group because of termination (or if the Management Board member terminates the employment contract), resignation, death, in- jury, disability, by reaching retirement age (receipt of a normal retire- ment 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 discre- tion, the Management Board member (or the member’s heirs) is enti- tled precise daily pro rata amount of performance shares. If a member of the Management Board ceases to hold an office at MorphoSys Group for good reason as defined by Section 626 (2) of the German Civil Code (BGB) and/or as defined by Section 84 (3) of the German Stock Corporation Act (AktG), the beneficiary 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 68,143 of these shares were allocated to beneficiaries on April 1, 2016 with 35,681 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”) and 32,462 performance shares to the Senior Management Group. The original number of perfor- mance shares allocated was based on the full achievement of the per- formance criteria and a company factor of 1. Based on the performance criteria that have been met to date, the overall achievement of the tar- get is expected to be 123.5 %. For performance criteria that have not yet been met, 100 % target achievement is assumed. Under this assump- tion, the total number of performance shares to be allocated at the end of the four-year holding period/performance period would currently increase to 68,595 shares. The fair value of the performance shares on the grant date (April 1, 2016) was € 46.86 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, 2018, eight beneficiaries left MorphoSys, and therefore 10,998 performance shares were forfeited. For the calculation of the personnel expenses from share-based payment under the 2016 LTI plan, it was initially assumed that one beneficiary would leave the Company during the four-year period. This assumption was updated in 2018. *C R O S S - R E F E R E N C E to page 167 In 2018, personnel expenses resulting from performance shares under the Group’s 2016 LTI plan amounted to € 330,727 (2017: € 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 selected employees of the Company who are not members of the Senior Management Group (beneficiaries). According to IFRS  2, this program is considered a share-based payment program with set- tlement 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 predefined key performance criteria are achieved. The grant date was April 1, 2017 and the vesting/performance period is four years. If the pre- defined performance criteria 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 key performance criteria comprising 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 specified 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 determined by the Group, which generally amounts to 1. How- ever, in justified cases, the Supervisory Board may set this factor freely between 0 and 2, for example, if the level of payment is regarded as unreasonable in view of the general development of the Company. The right to receive a certain allocation of 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 vesting period, there is a six-month exercise period during which the Company can transfer the shares to the bene- ficiaries. Beneficiaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office at MorphoSys Group because of termination (or if the Management Board member terminates the employment contract), resignation, death, in- jury, disability, by reaching retirement age (receipt of a normal retire- ment 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 discre- tion, the Management Board member (or the member’s heirs) is enti- tled to performance shares determined on a precise daily pro rata basis. F inancial Statements 166 Notes If a member of the Management Board ceases to hold an office at MorphoSys Group for good reason as defined by Section 626 (2) of the German Civil Code (BGB) and/or as defined by Section 84 (3) of the German Stock Corporation Act (AktG), the beneficiary 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 beneficiaries 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 selected employees of the Company who are not members of the Senior Management Group. The original number of performance shares allocated was based on the full achievement of the performance criteria and a company factor of 1. Based on the perfor- mance criteria that have been met to date, the overall achievement of the target is expected to be 150 %. For performance criteria that have not yet been met, 100 % target achievement is assumed. Under this as- sumption, the total number of performance shares to be allocated at the end of the four-year holding period/performance period would currently increase to 43,196 shares. The fair value of the performance shares on the grant date (April 1, 2017) was € 70.52 per share. From the grant date until December 31, 2018, seven beneficiaries left MorphoSys, and therefore 1,711 performance shares were forfeited. For the calculation of the personnel expenses from share-based payment under the 2017 LTI plan, the assumption is that two beneficiaries would leave the Company during the four-year period. This assump- tion was updated in 2018. *C R O S S - R E F E R E N C E to page 167 In 2018, personnel expenses resulting from performance shares under the Group’s 2017 LTI plan amounted to € 558,446 (2017: € 1,026,037) 7.3.6 2018 LONG -TE RM INCE NTIVE PL AN On April 1, 2018, MorphoSys established another Long-Term Incentive plan (LTI plan) for the Management Board, the Senior Management Group and selected employees of the Company who are not members of the Senior Management Group (beneficiaries). According to IFRS 2, this program is considered a share-based payment program with set- tlement 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 predefined key performance criteria are achieved. The grant date was April 1, 2018 and the vesting/performance period is four years. If the pre- defined performance criteria 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 key performance criteria comprising the absolute MorphoSys share price performance and the relative MorphoSys share price performance compared to the Nasdaq Biotech- nology 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 specified performance criteria are met by less than 0 % in one year, no shares will be earned for that year (entitle- ment). In any case, the maximum pay-out at the end of the four-year period is limited by a factor determined by the Group, which generally amounts to 1. However, in justified cases, the Supervisory Board may set this factor freely between 0 and 2, for example, if the level of pay- ment is regarded as unreasonable in view of the general development of the Company. The right to receive a certain allocation of perfor- mance 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 vesting period, there is a six-month exercise period during which the Company can transfer the shares to the bene- ficiaries. Beneficiaries are free to choose the exercise date within this exercise period. If the number of repurchased shares is not sufficient for servicing the LTI plan, MorphoSys reserves the right to pay a certain amount of the LTI plan in cash in the amount of the performance shares at the end of the vesting period, provided the cash amount does not exceed 200 % of the fair value of the performance shares on the grant date. If a member of the Management Board ceases to hold an office at MorphoSys Group prior to the end of the four-year vesting period, the Management Board member (or the member’s heirs) is entitled to a precise daily pro rata amount of performance shares. If a member of the Management Board ceases to hold an office at MorphoSys Group for good reason as defined by Section 626 (2) of the German Civil Code (BGB), the beneficiary will not be entitled to perfor- mance shares. If a cumulative absence of more than 90 days occurs during the four- year vesting period/performance period, the beneficiary is entitled to a precise daily pro rata amount of performance shares. Absence is de- fined as either a continued period of lost work time due to illness or inactivity of a beneficiary or employment relationship without contin- ued pay. 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 20,357 of these shares were allocated to beneficiaries on April 1, 2018 with 8,804 performance shares allocated to the Manage- ment Board, 10,291 performance shares allocated to the Senior Man- agement Group and 1,262 performance shares allocated to selected employees of the Company who are not members of the Senior Manage- ment Group. The number of performance shares allocated is based on 100 % achievement of the performance criteria and a company factor of 1. The fair value of the performance shares on the grant date (April 1, 2018) was € 103.58 per share. From the grant date until December 31, 2018, two beneficiaries left MorphoSys, and therefore 641 performance shares were forfeited. For the calculation of the personnel expenses from share-based payment under the 2018 LTI plan, the assumption is that four beneficiaries would leave the Company during the four- year period. In 2018, personnel expenses resulting from performance shares under the Group’s 2018 LTI plan amounted to € 946,346. Notes F inancial Statements 167 April 2015 Long- Term Incentive Program April 2016 Long- Term Incentive Program April 2017 Long- Term Incentive Program April 2018 Long- Term Incentive Program 57.18 n/a 33.09 20.70 20.10 4.0 n/a 0.07 43.28 n/a 34.637 23.39 17.01 4.0 n/a 55.07 n/a 37.49 25.07 16.94 4.0 n/a 81.05 n/a 35.95 25.10 17.73 4.0 n/a between between 0.05 0.03 und 0.23 0.02 und 0.15 The fair value of the performance shares from the Long-Term Incentive plans 2015 until 2018 has been determined using a Monte Carlo simu- lation. 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 develop- ment of the Nasdaq Biotech Index and the TecDAX Index. The parame- ters 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 % 7.3.7 INITIAL EQUIT Y GR ANT On September 10, 2018, MorphoSys established an initial equity grant for one employee of MorphoSys US Inc. According to IFRS 2, this pro- gram is considered a share-based payment program with settlement in equity instruments (treasury shares of MorphoSys AG) and is ac- counted for accordingly. The grant date was September 25, 2018 and the total vesting/performance period is one year with the shares vest- ing on a monthly basis, provided that the beneficiary is still with the company as of the respective vesting date. A portion of the shares is transferred to the beneficiary as soon as a monthly vesting period has ended. The total number of shares granted was calculated by dividing the overall grant value of US$ 370,000 by the average closing price of MorphoSys shares as quoted in Xetra on the Frankfurt Stock Exchange on the 30 trading days prior to the start date of the grant (€ 102.95). As a result, the grant comprised a maximum of 3,104 shares. The fair value as of the grant date amounted to € 91.90 per share. 7.4 REL AT ED P AR T IE S Related parties that can be influenced by the Group or can have a significant influence on the Group can be divided into subsidiaries, members of the Supervisory Board, members 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 respon- sible for the planning, management and monitoring of the Group. In addition 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 Supervi- sory Board, as well as the changes in their ownership during the 2018 financial year. F inancial Statements 168 SHARE S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters Dr. Markus Enzelberger TOTAL SUPERVISORY B OARD Dr. Marc Cluzel Dr. Frank Morich Krisja Vermeylen Wendy Johnson Dr. George Golumbeski1 Michael Brosnan1 Dr. Gerald Möller2 Klaus Kühn2 TOTAL S T O C K OP T IONS MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters Dr. Markus Enzelberger TOTAL CONVER T IBL E B OND S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters Dr. Markus Enzelberger TOTAL PERF ORMANC E SHARE S MANAG EMENT B OARD Dr. Simon Moroney Jens Holstein Dr. Malte Peters Dr. Markus Enzelberger TOTAL Notes 01/01/2018 Additions Sales 12/31/2018 483,709 11,000 9,505 7,262 511,476 500 1,000 350 500 - - 11,000 0 13,350 8,928 36,554 3,313 3,248 52,043 0 0 0 0 0 0 900 0 900 8,928 30,537 0 8,834 48,299 0 0 0 0 0 0 0 0 0 483,709 17,017 12,818 1,676 515,220 500 1,000 350 500 0 0 - - 2,350 01/01/2018 Additions Forfeitures3 Exercises 12/31/2018 12,511 8,197 8,197 5,266 34,171 9,884 6,476 6,476 6,476 29,312 0 0 0 0 0 0 0 0 0 0 22,395 14,673 14,673 11,742 63,483 01/01/2018 Additions Forfeitures3 Exercises 12/31/2018 88,386 60,537 0 0 148,923 0 0 0 0 0 0 0 0 0 0 0 30,537 0 0 30,537 88,386 30,000 0 0 118,386 01/01/2018 Additions Forfeitures3 Allocations4 12/31/2018 30,060 20,086 3,187 5,987 59,320 2,969 1,945 1,945 1,945 8,804 2,182 1,495 0 329 4,006 3,797 2,600 0 572 6,969 27,050 17,936 5,132 7,031 57,149 1 Dr. George Golumbeski and Michael Brosnan have joined the Supervisory Board of MorphoSys AG on May 17, 2018. 2 Dr. Gerald Möller and Klaus Kühn have left the Supervisory Board of MorphoSys AG on May 17, 2018. Changes in the number of shares after resignation from the Supervisory Board of MorphoSys AG are not presented in the tables. 3 Forfeited performance Shares are a result of the KPI achievement rate of 63.5 % and a company factor of 1.0 as determined at the end of the performance period of the LTI plan 2014. 4 Allocations are made as soon as performance shares are transferred within the six-month exercise period after the end of the four-year waiting period. Notes F inancial Statements 169 If a Management Board member’s employment contract terminates due to death, the member’s spouse or life partner is entitled to the fixed monthly salary for the month of death and the 12 months thereafter. In the event of a change of control, Management Board members are enti- tled to exercise their extraordinary right to terminate their employ- ment contracts and receive any outstanding fixed salary and the an- nual bonus for the remainder of the agreed contract period, but at least 200 % of the annual gross fixed salary and the annual bonus. Moreover, in such a case, all stock options and performance shares granted will become vested immediately 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 as- sets to unaffiliated third parties, (ii) MorphoSys merges with an unaf- filiated company, (iii) an agreement pursuant to § 291 AktG is entered into with MorphoSys as a dependent company or MorphoSys is incor- porated pursuant to § 319 AktG or (iv) 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. In May 2018, the Management Board was granted a one-time entitle- ment to treasury shares of the Company with a fixed total amount of € 1.5 million, which could be exercised by December 31, 2018. Further details can be found in Item 6.5.4* of the Notes. Dr. Moroney exercised 5,131 shares with a value of € 483,597 from this program, Mr. Holstein exercised 3,417 shares with a value of € 358,785, Dr. Peters exercised 3,313 shares with a value of € 354,822 and Dr. Enzelberger exercised 2,676 shares valued at € 285,600. *C R O S S - R E F E R E N C E to page 160 The Supervisory Board of MorphoSys AG does not hold any stock op- tions, 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 fixed compensation, an annual cash bonus that is dependent upon the achievement of corporate targets (short-term in- centives – STI), variable compensation components with long-term in- centives (LTI) and other remuneration components. Variable remuner- ation components with long-term incentive consist of Long-Term Incentive plans (LTI plan) from previous years and the current year, a convertible bond program from 2013 and stock option plans from the prior and current years. The members of the Management Board addi- tionally receive fringe benefits in the form of benefits in kind, essen- tially consisting of a company car and insurance premiums. All total remuneration packages are reviewed annually by the Remuneration and Nomination Committee 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 mem- bers of the Management Board is based largely on the duties of the re- spective Management Board member, the financial situation and the performance and business outlook for the Company versus its compe- tition. All resolutions on adjustments to the overall remuneration pack- ages are passed by the plenum of the Supervisory Board. The remuner- ation of the Management Board and the pension contract were last adjusted in July 2018. F inancial Statements 170 Notes MANAGEMEN T B OARD REMUNERAT ION F OR T HE Y EARS 2018 AND 2017 ( IA S 24) : Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Malte Peters Chief Development Officer Appointment: March 1, 2017 Dr. Markus Enzelberger3 Chief Scientific Officer Appointment (Interim-CSO): April 15, 2017 Dr. Marlies Sproll 4 Chief Scientific Officer Temporary Leave: April 15, 2017 - October 31, 2017 Dr. Arndt Schottelius Chief Development Officer Appointment: November 1, 2017 Resignation: October 31, 2017 Resignation: February 28, 2017 Total 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 Fixed Compensation Fringe Benefits1 One -Year Variable Compensation Total Short-Term Employee Benefits (IAS 24.17 (a)) Service Cost Total Benefit Expenses - Post- Employment Benefits (IAS 24.17 (b)) One-Time Bonus in Shares Multi-Year Variable Compensation2: 2013 Convertible Bonds 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) 2018 Long-Term Incentive Program (Vesting Period 4 Years) 2017 Stock Option Plan (Vesting Period 4 Years) 2018 Stock Option Plan (Vesting Period 4 Years) Total Share-Based Payment (IAS 24.17 (e)) Total Compensation 500,876 35,912 368,144 904,932 149,567 149,567 0 58,224 202,349 22,460 67,635 542,074 32,654 455,343 1,030,071 158,788 158,788 483,616 0 0 1,452 26,657 372,652 42,905 273,899 689,456 99,949 99,949 0 59,641 138,585 15,383 46,324 171,688 86,435 112,481 402,235 46,725 337,877 786,837 111,233 111,233 358,857 0 0 994 18,257 56,632 281,500 568,644 206,903 1,057,047 60,967 60,967 - 0 0 0 0 0 163,906 104,449 107,395 68,437 107,395 0 140,040 0 127,997 81,566 83,861 0 136,980 0 91,595 53,441 89,593 0 83,861 0 397,800 30,613 334,152 762,565 76,190 76,190 354,900 0 0 0 0 0 68,437 91,595 53,441 89,593 814,259 1,868,758 1,061,195 2,250,054 563,670 1,353,075 737,806 1,635,876 191,256 1,309,270 657,966 1,496,721 122,854 895,584 655,245 1,346,163 496,088 884,686 (19,507) 144,642 2,168,620 6,456,015 204,698 417,158 121,688 743,544 29,186 29,186 – 0 0 0 0 0 0 0 53,875 321,300 31,211 269,892 622,403 68,515 68,515 286,650 0 0 0 0 0 91,595 82,185 89,593 222,450 20,427 67,745 310,622 77,976 77,976 0 39,879 138,585 15,383 46,324 112,481 62,898 0 0 68,979 105,222 80,538 103,253 9,161 23,490 135,904 28,245 28,245 0 39,879 138,585 (42,038) (79,105) (76,828) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,685,429 1,094,207 1,061,869 3,841,505 445,890 445,890 0 197,623 618,104 11,188 81,178 1,663,409 141,203 1,397,264 3,201,876 414,726 414,726 1,484,023 0 0 2,446 44,914 405,759 3,112,212 6,728,814 319,822 143,067 528,213 346,545 0 414,825 412,492 270,633 1 In 2017, the fringe benefits 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 fair value was determined pursuant to the regulations of IFRS 2 “share-based payment”. This table shows the pro-rata share of personnel expenses resulting from share-based payment for the respective financial year. Further details can be found in Sections 7.1*, 7.2*. and 7.3*. 3 The figures presented for 2017 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 figures 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 161–163 MANAGEMEN T B OARD REMUNERAT ION F OR T HE Y EARS 2018 AND 2017 ( IA S 24) : Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Malte Peters Chief Development Officer Appointment: March 1, 2017 Dr. Markus Enzelberger3 Chief Scientific Officer Appointment (Interim-CSO): April 15, 2017 Appointment: November 1, 2017 Dr. Marlies Sproll 4 Chief Scientific Officer Temporary Leave: April 15, 2017 - October 31, 2017 Resignation: October 31, 2017 Dr. Arndt Schottelius Chief Development Officer Resignation: February 28, 2017 Total 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 Notes F inancial Statements 171 204,698 417,158 121,688 743,544 29,186 29,186 – 0 0 0 0 0 321,300 31,211 269,892 622,403 68,515 68,515 286,650 0 0 0 0 0 222,450 20,427 67,745 310,622 77,976 77,976 0 39,879 138,585 15,383 46,324 112,481 163,906 104,449 107,395 68,437 107,395 68,979 105,222 80,538 0 53,875 0 122,854 895,584 91,595 82,185 89,593 655,245 1,346,163 0 62,898 0 496,088 884,686 Fixed Compensation Fringe Benefits1 One -Year Variable Compensation Total Short-Term Employee Benefits (IAS 24.17 (a)) Service Cost Total Benefit Expenses - Post- Employment Benefits (IAS 24.17 (b)) One-Time Bonus in Shares Multi-Year Variable Compensation2: 2013 Convertible Bonds 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) 2018 Long-Term Incentive Program (Vesting Period 4 Years) 2017 Stock Option Plan (Vesting Period 4 Years) 2018 Stock Option Plan (Vesting Period 4 Years) Total Share-Based Payment (IAS 24.17 (e)) Total Compensation 500,876 35,912 368,144 904,932 149,567 149,567 0 58,224 202,349 22,460 67,635 0 0 542,074 32,654 455,343 1,030,071 158,788 158,788 483,616 0 0 1,452 26,657 140,040 136,980 1,061,195 2,250,054 372,652 42,905 273,899 689,456 99,949 99,949 0 59,641 138,585 15,383 46,324 0 0 402,235 46,725 337,877 786,837 111,233 111,233 358,857 0 0 994 18,257 56,632 91,595 53,441 89,593 281,500 568,644 206,903 1,057,047 60,967 60,967 - 0 0 0 0 0 0 0 397,800 30,613 334,152 762,565 76,190 76,190 354,900 0 0 0 0 0 68,437 91,595 53,441 89,593 171,688 86,435 112,481 127,997 81,566 83,861 83,861 814,259 1,868,758 563,670 1,353,075 737,806 1,635,876 191,256 1,309,270 657,966 1,496,721 1 In 2017, the fringe benefits 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 fair value was determined pursuant to the regulations of IFRS 2 “share-based payment”. This table shows the pro-rata share of personnel expenses resulting from share-based payment for the respective financial year. Further details can be found in Sections 7.1*, 7.2*. and 7.3*. 3 The figures presented for 2017 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 figures 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 161–163 – – – – – – – – – – – – – – – – – – 103,253 9,161 23,490 135,904 28,245 28,245 0 39,879 138,585 (42,038) (79,105) (76,828) – – – – (19,507) 144,642 – – – – – – – – – – – – – – – – – – 1,685,429 1,094,207 1,061,869 3,841,505 445,890 445,890 0 197,623 618,104 11,188 81,178 1,663,409 141,203 1,397,264 3,201,876 414,726 414,726 1,484,023 0 0 2,446 44,914 319,822 143,067 528,213 346,545 0 414,825 412,492 270,633 405,759 3,112,212 6,728,814 2,168,620 6,456,015 F inancial Statements 172 Notes In the years 2018 and 2017, there were no other long-term benefits in accordance with IAS 24.17 (c) or benefits upon termination of employ- ment in accordance with IAS  24.17 (d) accruing to the Management Board or Supervisory Board. In 2018, the total remuneration for the Supervisory Board, excluding reimbursed travel costs, amounted to € 525,428 (2017: € 523,015). SUPERVI S OR Y B OARD REMUNERAT ION F OR T HE Y EARS 2018 AND 2017: Fixed Compensation Attendance Fees1 Total Compensation in € 2018 2017 2018 2017 2018 2017 Dr. Marc Cluzel Dr. Frank Morich Krisja Vermeylen Wendy Johnson Dr. George Golumbeski2 Michael Brosnan2 Dr. Gerald Möller3 Klaus Kühn3 Karin Eastham4 TOTAL 76,742 61,004 49,916 46,160 28,961 28,961 36,558 17,326 – 345,628 52,160 57,240 28,961 46,160 – – 95,156 46,160 19,578 345,415 32,400 23,200 24,400 37,400 25,200 18,600 11,800 6,800 – 179,800 26,800 23,200 16,000 38,000 – – 36,800 22,000 14,800 177,600 109,142 84,204 74,316 83,560 54,161 47,561 48,358 24,126 – 525,428 78,960 80,440 44,961 84,160 – – 131,956 68,160 34,378 523,015 1 The attendance fee contains expense allowances for the attendence at the Supervisory Board and the Committee meetings. 2 Dr. George Golumbeski and Michael Brosnan have joined the Supervisory Board of MorphoSys AG on May 17, 2018. 3 Dr. Gerald Möller and Klaus Kühn have left the Supervisory Board of MorphoSys AG AG on May 17, 2018. 4 Karin Eastham has left the Supervisory Board of MorphoSys AG AG on May 17, 2017. No other agreements presently exist with current or former members of the Supervisory Board. 8 Additional Notes As of December 31, 2018, the Senior Management Group held 72,604 stock options (December 31, 2017: 35,978 shares), 11,233 convertible bonds (December 31, 2017: 13,233 convertible bonds) and 83,660 per- formance shares (December 31, 2017: 67,149 performance shares), which had been granted by the Company. In 2018, a new stock option program and a new performance share program were issued to the Senior Management Group (see paragraphs 7.1.2* and 7.3.6*). In May 2018, the Senior Management Group was granted a one-time entitle- ment to treasury shares of the Company with a fixed total amount of € 0.5 million, which could be exercised by December 31, 2018. Further details can be found in Item 6.5.4* of the Notes. By December 31, 2018, 4,685 shares under this entitlement worth € 0.5 million had been transferred to the Senior Management Group. On April 1, 2018, the Senior Management Group was granted 9,360 shares under the 2014 LTI program, which had the option to receive these shares within six months. As of December 31, 2018, the option was exercised by the Senior Management Group for 9,360 shares. *C R O S S - R E F E R E N C E to page 161, page 166 and page 160 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 The Group leases facilities and equipment under long-term operating leases. In financial years 2018 and 2017, leasing expenses amounted to € 3.2 million and € 2.6 million. Leasing expenses for the financial years 2018 and 2017 include expenses for company cars and machin- ery 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 terminated 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. The future minimum payments under non-terminable operating leases, insurance contracts and other services as of December 31, 2018 are shown in the table below. in 000’ € Up to One Year Between One and Five Years More than Five Years TOTAL Rent and Leasing Other 2,935 1,577 Total 4,512 11,091 8,504 22,530 0 11,091 0 1,577 8,504 24,107 Notes F inancial Statements 173 Additionally, the future payments shown in the table below may be- come due for outsourced studies after December 31, 2018. These amounts could be shifted or substantially lower due to changes in the study timeline or premature study termination. in million € Up to One Year Between One and Five Years More than Five Years TOTAL Total 2018 51.4 45.6 0.0 97.0 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 confirmed. Current obliga- tions can represent a contingent liability if it is not probable enough that an outflow of resources justifies the recognition of a provision. Moreover, it is not possible to make a sufficiently reliable estimate of the amount of the obligations. The Management Board is unaware of any proceedings that may result in a significant obligation for the Group and may lead to a material adverse effect on the Group’s net assets, financial position or results of operations. If certain milestones are achieved in the Proprietary Development seg- ment, such as filing an application for an investigational new drug (IND) for specific target molecules, this may trigger milestone pay- ments to licensors of up to an aggregate of US$ 287 million related to regulatory events and achievement of sales targets. The next milestone payment of US$ 12.5 million will presumably be due in approximately 12 to 18 months. If a partner achieves certain milestones in the Partnered Discovery segment, for example, filing an application for an investigational new drug (IND) for specific target molecules or the transfer of technology, this may trigger milestone payments to MorphoSys. However, no fur- ther details can be published since the timing, and the achievement of such milestones are uncertain. Obligations may arise from enforcing the Company’s patent rights versus third parties. It is also conceivable that competitors may chal- lenge the patents of MorphoSys Group or MorphoSys may also come to the conclusion that MorphoSys’s patents or patent families have been infringed upon by competitors. This could prompt MorphoSys to take legal action against competitors or lead competitors to file counter- claims against MorphoSys. Currently, there are no specific indications such obligations have arisen. 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 2018 financial year under Section 161 of the German Stock Corporation Act (AktG). This declaration was pub- lished on the Group’s website (www.morphosys.com) on November 30, 2018 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 describes the agreements that have a material effect on the Group and the devel- opments under the research and development agreements in the 2018 financial 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 inflammatory diseases. Our partners include (in alphabetical order): Galapagos, GlaxoSmithKline, I-Mab Biopharma, Immatics Biotechnologies, Merck Serono, MD Anderson Cancer Center, Novartis and Xencor. In November 2008, MorphoSys and Galapagos announced a long-term drug discovery and co-development cooperation aimed at exploring novel mechanisms for the treatment of inflammatory diseases and developing antibody therapies against these diseases. The agreement covers all activities ranging from the probing of target molecules to the completion of clinical trials for novel therapeutic antibodies. After demonstrating clinical efficacy 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 identified that are associated with bone and joint diseases. MorphoSys provided access to its antibody technologies used for gen- erating 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 col- laboration advanced into the preclinical development of MOR106, an antibody from MorphoSys’ next-generation library Ylanthia directed against a novel Galapagos target molecule. On July 19, 2018, MorphoSys announced an exclusive global agreement between MorphoSys and Galapagos with Novartis Pharma AG for the development and commercialization of MOR106. Under the agreement, the companies will work together to significantly expand the existing development plan for MOR106. Novartis exclusively holds all rights to the product’s commercialization resulting from the agreement. With the signing of the agreement, all future research, development, manu- facturing and marketing costs for MOR106 will be borne by Novartis. Included in this is the ongoing phase 2 trial “IGUANA” in patients with atopic dermatitis, as well as the phase 1 trial also initiated to evaluate the safety and efficacy of the subcutaneous administration of MOR106 F inancial Statements 174 Notes in healthy volunteers and patients with atopic dermatitis. MorphoSys and Galapagos also intend to conduct further studies to support the development of MOR106 in atopic dermatitis. As part of this agree- ment, Novartis will explore the potential of MOR106 in other indica- tions beyond atopic dermatitis. In addition to receiving financing from Novartis’ for the current and future development program for MOR106, MorphoSys and Galapagos also jointly received an upfront payment of € 95 million. Of this amount, MorphoSys recognized its 50 % share of € 47.5 million as revenue in 2018. MorphoSys and Galapagos will con- tinue to jointly receive significant milestone payments of up to approx- imately US$ 1 billion (based on the current euro-dollar exchange rate at the time the agreement was signed) when specific development, regulatory, commercial and revenue milestones are met. MorphoSys and Galapagos also stand to jointly receive tiered royalties ranging up to a low 10 % to low 20 % range of net sales. According to their 2008 agreement, MorphoSys and Galapagos will share in all payments equally (50/50). 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 de- velopment and commercialization. MorphoSys has already received an upfront payment of € 22.5 million under this agreement and, next to tiered double-digit royalties on net sales, is still eligible to receive ad- ditional payments from GSK in an amount of up to € 423 million, depend- ing on the achievement of certain developmental stages and regula- tory, commercial and revenue-related milestones. GSK has clinically tested MOR103 in rheumatoid arthritis (RA) and inflammatory hand osteoarthritis in, among others, a phase 2b study in RA and a 2a study in patients with inflammatory hand osteoarthritis. The respective study data was presented in October 2018 at the annual conference of the American College of Rheumatology (ACR). At the same time, GSK also announced that it does not intend to continue to pursue further development in the indication of hand osteoarthritis. In 2017, MorphoSys announced it had signed an exclusive regional licensing agreement with I-Mab Biopharma to develop and commer- cialize MOR202 in China, Taiwan, Hong Kong and Macao. MOR202 is MorphoSys’s proprietary antibody targeting CD38. MOR202 was eval- uated in a phase 1/2a clinical trial in Europe in patients with multiple myeloma. MorphoSys is currently evaluating the further development of the antibody in autoimmune diseases. Under the terms of the agreement, I-Mab Biopharma has the exclusive rights for the later development and commercialization of MOR202 in the agreed regions. MorphoSys received an upfront payment of US$ 20.0 million and is also entitled to receive additional success-based clinical and commer- cial milestone payments from I-Mab of up to roughly US$ 100 million. In addition, MorphoSys will also be entitled to receive double-digit, staggered royalties on net revenue of MOR202 in the agreed regions. I-Mab now plans to launch a pivotal study in early 2019. In the reporting year, MorphoSys announced the completion of an ex- clusive strategic development collaboration and regional licensing agreement with I-Mab Biopharma for the MOR210 antibody. MOR210 is a preclinical antibody candidate developed by MorphoSys against C5aR with the potential for development in immuno-oncology. I-Mab has exclusive rights to develop and market MOR210 in China, Hong Kong, Macao, Taiwan and South Korea, while MorphoSys retains the rights for the rest of the world. Under the terms of the agreement, I-Mab will exercise the exclusive rights to develop and market MOR210 in its contracted territories. With the support of MorphoSys, I-Mab will undertake and fund all global development activities, including clinical trials in China and the United States, to clinical proof of concept in can- cer medicine. MorphoSys received an upfront payment of US$ 3.5 mil- lion and is further eligible to receive performance-related clinical and sales-based milestone payments of up to US$ 101.5 million. MorphoSys recognized the upfront payment of US$ 3.5 million (€ 3.1 million) as revenue in 2018. In addition, MorphoSys will receive tiered royalties in the mid-single-digit percentage range of net sales on the contracted territory of I-Mab. In return for conducting a successful clinical proof of concept trial, I-Mab is entitled to low-single-digit royalties on net sales of MOR210 outside the I-Mab territory, as well as staggered shares of proceeds from the further out-licensing of MOR210. In August 2015, MorphoSys announced a strategic alliance in the field of immuno-oncology with the German company Immatics Biotechnolo- gies 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 antibodies against several TUMAPs. The companies will pay each other milestone payments and royalties on commercialized products based on the companies’ development progress. In June 2014, MorphoSys and Merck KGaA announced an agreement to identify and develop therapeutic antibodies against target molecules of the class of immune checkpoints. Under this agreement, both MorphoSys and Merck Serono, the biopharmaceutical division of Merck, will co-de- velop therapies intended to trigger the immune system to attack tumors. MorphoSys will use its proprietary Ylanthia antibody library and other technology platforms to generate antibodies directed against the se- lected target molecules. Merck Serono is contributing its expertise in the field 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 Can- cer Center announced a long-term strategic alliance. With MorphoSys applying its Ylanthia technology platform, the partners will work to- gether 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 antibodies in later stages of clinical development for its own proprietary pipeline. Notes F inancial Statements 175 In June 2010, MorphoSys AG and the US-based biopharmaceutical com- pany Xencor signed an exclusive global licensing and cooperation agree- ment under which MorphoSys receives exclusive global licensing rights to the XmAb5574/MOR208 antibody for the treatment of cancer and other indications. The companies jointly conducted a phase 1/2a trial in the US in patients with chronic lymphocytic leukemia. MorphoSys is solely responsible for further clinical development after the success- ful 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 enti- tled 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 predefined 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 specific antibody programs. Prior to the 2018 financial year, active collaborations with a number of partners had already ended because the agreements had expired. How- ever, drug development programs initiated in the active phase are designed so that they can be continued by the partner and, therefore, still result in performance-based payments for the achievement of the defined milestones. Partnerships in the Partnered Discovery segment that ended before the beginning of 2018 but where drug development programs were still being pursued, include (in alphabetical order): Astellas, Bayer AG, Boehringer Ingelheim, Daiichi-Sankyo, Fibron Ltd. (continuation of con- tract with Prochon Biotech Ltd.), Janssen Biotech, Merck & Co., Novartis, OncoMed Pharmaceuticals, Pfizer, Roche and Schering-Plough (a sub- sidiary of Merck & Co.). Partnerships that were still active in 2018 include (in alphabetical or- der): GeneFrontier Corporation/Kaneka, Heptares and LEO Pharma. In the year under review, MorphoSys announced that it expanded its existing strategic alliance with LEO Pharma to include peptide-based therapeutics. The goal of the partnership is to discover new, pep- tide-based drugs for the treatment of diseases with high unmet medi- cal needs and that are a valuable addition to the development pipelines of both companies. The collaboration extends the two companies’ part- nership to discover and develop antibody-based therapies for derma- tology, which has already been in place since November 2016. Under this agreement, LEO Pharma will select therapeutic target molecules against which MorphoSys will identify target molecules using its proprietary peptide technology platform. LEO Pharma will then either choose to further develop these target molecules or use them to create other drug candidates. LEO Pharma will retain exclusive worldwide rights to the active ingredients and be responsible for the development and commercialization of the dermatology medicines that result. MorphoSys will retain an exclusive option to secure worldwide rights to all oncology medicines stemming from the collaboration. The Group’s alliance with Novartis AG for the research and develop- ment of biopharmaceuticals came to an end in November 2017. The companies’ collaboration began in 2004 and led to the creation of sev- eral ongoing therapeutic antibody programs against a number of dis- eases. 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. 8.5 SUBSEQUEN T EVEN T S On January 26, 2019, we announced that in our lawsuit against Janssen Biotech and Genmab A/S, the United States (U.S.) District Court of Delaware, based on a hearing held November 27, 2018, ruled in a Court Order on January 25, 2019, that the asserted claims of three MorphoSys patents with U.S. Patent Numbers 8,263,746, 9,200,061 and 9,758,590 are invalid. The Court thus granted a motion for Summary Judgement of invalidity filed by Janssen Biotech and Genmab, A/S against the three patents held by MorphoSys. As a result of this decision, the jury trial scheduled for February 2019 to consider Janssen’s and Genmab’s alleged infringement and the validity of the MorphoSys patents did not take place. On January 31, 2019 we announced that we had settled the dispute with Janssen Biotech and Genmab A/S. The parties agreed to drop the mutual claims related to the litigation: MorphoSys dismissed claims for alleged patent infringement against Janssen Biotech and Genmab A/S and agreed not to appeal from the court order dated January 25, 2019. Janssen and Genmab dismissed their counterclaims against MorphoSys. In early February 2019, we announced the appointment of David Trexler as President and Member of the Board of Directors of MorphoSys US Inc. effective February 6, 2019. Mr. Trexler will lead the further devel- opment of MorphoSys's U.S. subsidiary with a focus on building com- mercial capabilities. Mr. Trexler joins MorphoSys from EMD Serono, a subsidiary of Merck KGaA, Darmstadt. AT EMD Serono, he was respon- sible, among other things, for establishing the first commercial organi- zation of Merck KGaA's oncology division in the U.S. and for the market launch of the cancer drug avelumab for the treatment of metastatic Merkel cell carcinoma. On February 19, 2019, Simon Moroney, CEO and co-founder of MorphoSys AG (informed the Company’s Supervisory Board that he has decided not to renew his contract as a member of the company’s Management Board. As a result of his decision, Dr. Moroney will step down as CEO on expiry of his current contract on June 30, 2020, or when a successor is appointed, whichever comes sooner. At the end of February 2019, our partner Janssen announced that it had received U.S. FDA approval for Tremfya® One-Press, a single-dose, patient-controlled injector for adults with moderate-to-severe plaque psoriasis. This is a device that allows patients to administer the drug subcutaneously by themselves and is thus intended to provide a higher convenience to psoriasis patients with respect to the treatment of their chronic disease. F inancial Statements 176 Notes On March 7, 2019 MorphoSys announced that during the first quarter of 2019, the Company in agreement with the FDA implemented an amendment of the B-MIND study by introducing a co-primary endpoint into the trial. The scientific rationale for the amendment is based on published literature as well as MorphoSys’s own pre-clinical data, which indicate that MOR208 might be particularly active in patients who can be characterized by the presence of a certain biomarker. Dis- cussions with the FDA regarding the biomarker assay are currently being planned and are expected to take place in the middle of 2019. The pre-planned, event-driven interim analysis of B-MIND remains projected to take place in the second half of 2019. Depending on the outcome of the interim analysis, an increase from 330 to 450 patients may be required, in which case an event-driven primary analysis of the study is expected in the first half of 2021. 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 financial statements give a true and fair view of the Group’s net assets, financial 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. Planegg, March 13, 2019 Dr. Simon Moroney Chief Executive Officer Jens Holstein Chief Financial Officer Dr. Malte Peters Chief Development Officer Dr. Markus Enzelberger Chief Scientific Officer Independent Auditor ’s Repor t Additional Infor mation 177 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 financial statements of MorphoSys AG, Planegg, and its subsidiaries (the Group), which comprise the consolidated balance sheet as of December  31, 2018, and the consolidated statement of profit or loss, consoli- dated statement of comprehensive income, consolidated state- ment of changes in equity and consolidated cash flow statement for the financial year from January 1, to December 31, 2018, and notes to the consolidated financial statements including a sum- mary of significant accounting policies . In addition, we have audited the group management report of MorphoSys AG for the financial year from January 1, to December 31, 2018. 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 financial 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 financial position of the Group as at December 31, 2018, and of its financial performance for the financial year from January 1, to December 31, 2018, and • the accompanying group management report as a whole pro- vides an appropriate view of the Group’s position. In all mate- rial respects, this group management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportuni- ties 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 financial statements and of the group management report. BASIS F OR T HE AUDI T OPINIONS We conducted our audit of the consolidated financial statements and of the group management report in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to sub- sequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial State- ment Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our responsi- bilities 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 Manage- ment Report” section of our auditor’s report. We are indepen- dent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsi- bilities in accordance with these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regula- tion, 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 obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and on the group manage- ment 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 significance in our audit of the consoli- dated financial statements for the financial year from January 1 to December  31, 2018. These matters were addressed in the context of our audit of the consolidated financial 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 significance in our audit were as follows: 1. Impairment of goodwill and intangible assets with indefinite useful lives 2. Revenue recognition related to the outlicensing of drug pro- gramm MOR106 3. Accounting for the capital raise in the financial year 2018 Our presentation of these key audit matters has been structured in each case as follows: 1) Matter and issue 2) Audit approach and findings 3) Reference to further information Additional Infor mation 178 Independent Auditor ’s Repor t Hereinafter we present the key audit matters: 1. Impairment of goodwill and intangible assets with in- definite useful lives 1) In the consolidated financial statements of the Company, an amount of € 3.7 million is reported under the balance sheet item “Goodwill”. In addition, intangible assets with an indefinite useful life totaling € 37.0 million are re- ported under the item “Research and development pro- grams under development”. This balance sheet item con- tains capitalized prepayments from the in-licensing of active substances and active substances from acquisi- tions. The assets are not yet available for use and are therefore not yet amortized. Goodwill and intangible as- sets with an indefinite useful life are tested for impair- ment by the Company once a year or on an ad hoc basis in order to determine the potential need for depreciation. The impairment test is carried out at the level of the cash- generating units. As part of the impairment test, the book values of the respective goodwill or intangible assets with an indefinite useful life are compared with the corre- sponding recoverable amount. This is the higher of the value in use and the fair value less costs of disposal. The basis for measuring goodwill is regularly the present value of future cash inflows and outflows of the respective group of cash-generating units. The bases of valuation of the research and development programs under develop- ment are the present values of future cash inflows and outflows of the cash-generating unit. The cash values are determined using discounted cash flow models. The adopted cash flow forecast of the Group is the starting point, which is updated with assumptions about long-term growth rates. This also takes into account expectations about future market developments and assumptions about the development of macroeconomic factors. Discounting is done using the weighted average cost of capital. As a result of the impairment test, an impairment charge of € 18.8 million was identified for the cash-generating unit Lanthio Group. The result of this valuation depends to a large extent on the assessment of future cash inflows by the legal representatives as well as the discount rate used and is therefore subject to considerable uncertainty. Against this background and due to the underlying com- plexity of the applied valuation models, this issue was of particular importance during our audit. 2) During our audit, we reviewed, among other things, the methodology used to carry out the impairment tests and assessed the determination of the weighted capital costs. Among other things, the appropriateness of the future cash inflows used in the valuation is matched with the current budgets from the group's cash flow forecast drawn up by the legal representatives and acknowledged by the Supervisory Board, as well as through coordination with general auditors and industry-specific market expectations. With the knowledge that even relatively small changes in the discount rate used can have a material effect on the amount of the recoverable amount determined in this way, we dealt in detail with the parameters used to determine the discount rate used and followed the calculation method. In addition, due to the significant importance of goodwill and capitalized research and development programs, we conducted additional sensitivity analyzes for the cash- generating units (book value in comparison with the re- coverable amount). In order to assess the unscheduled depreciation in the cash-generating unit Lanthio Group, we reviewed the planning documents and assessed the resulting triggering event for the extraordinary deprecia- tion. Furthermore, on the basis of the findings from the planning documents, we have reconstructed the determi- nation of the amount of unscheduled depreciation and its accrual accounting. Overall, the valuation parameters and assumptions used by the legal representatives are in line with our expectations. 3) The information provided by the Company on goodwill and intangible assets with an indefinite useful life is con- tained in sections 5.7.3 and 5.7.5 of the notes to the con- solidated financial statements. 2. Revenue recognition related to the outlicensing of drug programm MOR106 1) The consolidated financial statements of the Company in- clude € 47.5 million in revenue from the contractual agree- ment signed on July 19, 2018 for the development and com- mercialization of the MOR106 drug program with Novartis Pharma AG. The drug program MOR106 was developed by MorphoSys in collaboration with Galapagos N.V. Novartis Pharma AG now exclusively holds all rights to market the products resulting from the collaboration. All research, de- velopment, manufacturing and marketing costs are borne by Novartis Pharma AG in the future. The revenue gener- ated by MorphoSys in 2018 is mainly related to the trans- fer of rights to the MOR106 drug program. In return for this transfer, MorphoSys received a licence payment from Novartis Pharma AG. Realization of the revenue from the license fee in 2018 was timely, as control of the drug pro- gram MOR106 was transferred to Novartis Pharma AG with the transfer of the license. Revenue recognition in connection with the out-licensing of the MOR106 drug program is associated with significant risk in view of the extensive and complex contractual agreement and is also partly based on the judgment of the legal representatives. Considering this background information, this issue was of particular importance for our audit. 2) Among other things, we assessed the appropriateness and effectiveness of the Group’s established internal control system with regard to the complete and correct recording and realization of the revenues in connection with out- licensing, taking into account the IT systems used. In addition, we have gained an understanding of the under- lying contractual agreement and have assessed it with respect to the realization of the revenue in accordance with the provisions of IFRS 15. In order to assess revenue Independent Auditor ’s Repor t Additional Infor mation 179 recognition, we have used and awarded corresponding contract documents. We were able to satisfy ourselves that the systems and processes in place and the controls that were put in place were adequate and that the assessments and assumptions made by the legal representatives were sufficiently documented and justified to ensure the proper recording of revenues in connection with these exemptions. 3) The Company's revenue disclosures are included in sec- tions 3.3 and 4.1 of the notes to the consolidated financial statements. 3. Accounting for the capital raise in the financial year 2018 1) In the consolidated financial statements of the Company, the targeted gross proceeds of € 194 million ($ 239 mil- lion) from the capital increase in the 2018 financial year are reported under the item “Equity”. This was achieved in connection with the IPO on the US stock exchange Nasdaq in April 2018. The transaction was made through two successive capital increases from the authorized capital, excluding existing shareholders’ subscription rights, at a price of $ 25.04 per American Depository Share. Each of these shares represents one quarter of a MorphoSys com- mon share. In a first step, a basic offer was issued to issue 2,075,000 new ordinary shares in the form of 8.3 million American Depository Shares. Subsequently, an option was offered by the underwriting banks to acquire a further 311,250 new ordinary shares in the form of 1.2 million American Depository Shares. The net proceeds from the capital increase after deduction of bank commissions and other fees amounted to € 178.6 million, of which € 2.4 mil- lion resulted in an increase in share capital, a further € 176.2 million less transaction costs of € 15.0 million the capital reserve is discontinued. The capital increase is associated with a significant degree of risk given the complex accounting requirements, in particular to narrow the picture of direct and indirect transaction costs and the assessment of whether transaction costs are incremental, high transaction volumes and legal requirements, and is also partly based on estimates the legal representative. Considering this background information, this issue was of particular importance for our audit. 2) In our audit, we assessed the accounting treatment of the capital increase in accordance with the provisions of IAS 32 in conjunction with IFRS 9. The focus of our assess- ment was on the presentation of gross proceeds and the assessment of the accounting of direct and indirect costs in connection with the capital increase. First, we assessed whether the transaction costs associated with the capi- tal increase are incremental and directly attributable to them, and whether the discretionary powers of the legal representatives were properly exercised in this allocation. Among other things, we have agreed the costs incurred with invoices and framework agreements with the under- writing banks and have subsequently carried out a re- calculation of the costs. In addition, we assessed the con- sideration of exchange rate effects in accordance with IAS  21 and reviewed the conversion rate using external sources. In addition, we have recorded the entry in the commercial register with regard to the amount and the date of registration of the capital increase and have checked the corresponding incoming payments by means of the bank statements of the participating credit institu- tions. From our point of view, the disclosure of the capital increase and the associated assessments of the legal rep- resentatives are sufficiently documented and justified. 3) The Company's capital raise disclosures are included in sections 6.5.1, 6.5.2 and 6.5.5 of the notes to the consoli- dated financial statements. O T HER INF ORMAT ION The executive directors are responsible for the other informa- tion. The other information comprises the following non-audited 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 remuner- ation 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 financial 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 financial 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 STATEMENTS AND THE GROUP MANAGEMENT REPORT The executive directors are responsible for the preparation of the consolidated financial 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 financial state- ments, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial 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 financial statements that are free from material misstatement, whether due to fraud or error. Additional Infor mation 180 Independent Auditor ’s Repor t In preparing the consolidated financial statements, the execu- tive directors are responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an in- tention to liquidate the Group or to cease operations, 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 finan- 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 sufficient appropriate evidence for the assertions in the group manage- ment report. The supervisory board is responsible for overseeing the Group’s financial reporting process for the preparation of the consoli- dated financial statements and of the group management report. 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 financial 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 financial 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 financial 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, individ- ually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial 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 financial 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 sufficient 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 financial 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 effectiveness 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 significant 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 financial statements and in the group management report or, if such disclosures are inadequate, 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 financial statements, including the disclo- sures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and finan- cial 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 sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express audit opinions on the consoli- dated financial 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. Independent Auditor ’s Repor t Additional Infor mation 181 German Public Auditor Responsible for the Engagement The German Public Auditor responsible for the engagement is Stefano Mulas. Munich, March 13, 2019 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (signed Stefano Mulas) Wirtschaftsprüfer (German Public Auditor) (signed Holger Lutz) Wirtschaftsprüfer (German Public Auditor) • Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with German law, and the view of the Group’s position it provides. • Perform audit procedures on the prospective information pre- sented by the executive directors in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by the executive directors as a basis for the prospective infor- mation, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate audit opinion on the prospective information and on the assumptions used as a basis. There is a substantial un- avoidable risk that future events will differ 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 significant audit findings, including any significant deficiencies 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 financial 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. 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, 2018. We were engaged by the supervisory board on July 4, 2018. We have been the group auditor of the MorphoSys AG, Planegg, without interruption since the finan- cial 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). Additional Infor mation 182 Repor t of the Super v isor y B oard Report of the Supervisory Board COOPERAT ION OF T HE MANAGEMEN T BOARD AND SUPERVIS ORY BOARD MEE T INGS IN T HE 2018 F INANC IAL SUPERVIS ORY BOARD During the 2018 financial 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 Man- agement Board fulfilled its duty to inform and furnish us with periodic written and verbal reports containing timely and de- tailed information on all business transactions and events of significant 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 discuss the Management Board’s reports and the proposed resolutions in full. The Management Board answered our questions on strategic topics affecting the Company with a great level of detail and submitted the relevant documents in a timely manner. Any deviations from the business plan were thoroughly explained to us and we were directly involved at an early stage in all decisions relevant to the Company. An appropriate 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 approved all actions by the Management Board requiring Supervisory Board approval 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 requiring decision. All matters requiring approval were submitted for review by the Manage- ment Board to the Supervisory Board on a timely basis. Outside of the meetings of the Supervisory Board plenum and the Committees, the chairman of the Supervisory Board regu- larly exchanged information and ideas with the Management Board and especially the Chief Executive Officer, Dr. Simon Moroney. The Supervisory Board chairman was always kept promptly informed of the current business situation and any significant business transactions. The other Supervisory Board members also had regular contact with the individual Manage- ment Board members. YEAR AND KEY I T EMS OF DIS CUSSION A total of eight Supervisory Board meetings were held in the 2018 financial year, whereby two meetings were conducted by telephone. With the exception of one meeting, all Supervisory Board members were present at all Supervisory Board meetings. In urgent cases occurring outside of meetings, the Supervisory Board passed resolutions by written procedure. In addition to the above, a one-day strategy meeting took place between the Management Board and the Supervisory Board in July 2018 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, financial position and results of operations. During the 2018 financial year, the Supervisory Board paid particular attention to the following topics and passed resolu- tions on these topics after a thorough review and discussion: • evaluation of the Company’s achievement of the 2017 financial year corporate targets, an interim review and minor adjust- ments to the corporate targets defined by the Super visory Board at the end of 2017 for the 2018 financial year and defin- ing the corporate targets for the 2019 financial year; • commencing and executing an initial public offering in the United States of up to 8,300,000 American Depositary Shares (“ADSs”) pursuant to a Registration Statement on Form F-1 (“Initial Public Offering”) and granting the underwriters a 30-day option to purchase up to 1,245,000 additional ADSs following the offering (“Greenshoe”); • increasing the share capital of the Company by issuing 2,075,000 new ordinary shares (each ADS representing 1/4 of a MorphoSys ordinary share, i.e. in total 8,300,000 ADSs) from the authorized capital 2017-II, excluding pre-emptive rights of existing shareholders, to implement the Initial Public Offering, and further increasing the share capital of the Company by issuing 311,250 additional new ordinary shares (each ADS representing 1/4 of a MorphoSys ordinary share, i.e. in total 1,245,000 ADSs) from the authorized capi- tal 2017-II, excluding pre-emptive rights of existing share- holders, to implement the Greenshoe; Repor t of the Super v isor y B oard Additional Infor mation 183 • modification of the rules of procedure of the Supervisory Board as well as the charter of the Audit Committee and the charter of Remuneration and Nomination Committee to reflect changes required by Nasdaq and US securities law; • agenda and proposed resolutions for the 2018 Annual Gen- eral Meeting, particularly the nominations of Dr. George Golumbeski, Michael Brosnan and Dr. Marc Cluzel as Super- visory Board candidates for election and re-election at the 2018 Annual General Meeting; • election of the chair and re-election of the deputy chair of the Supervisory Board and establishment and staffing of the Committees in the Board’s constituent meeting following the 2018 Annual General Meeting; • award of the audit contract to the auditor for the 2018 finan- cial year; • founding of the subsidiary MorphoSys US Inc., which fo- cuses on establishing the Company’s commercial capabilities in the US; • conclusion of a worldwide exclusive agreement between MorphoSys and Galapagos NV as licensors and Novartis Pharma AG as licensee covering the development and com- mercialization of our joint program MOR106; • expansion of our strategic alliance to develop peptide-derived therapeutics with LEO Pharma; • conclusion of a strategic partnering agreement with I-Mab granting exclusive rights to develop and commercialize our novel immuno-oncology agent MOR210 in China, Hong Kong, Macao, Taiwan and South Korea; • budget for the 2019 financial year. We also passed a resolution in the Supervisory Board plenum on the remuneration of Management Board members for the period July  1, 2018 to June  30, 2019 taking external bench- marking into consideration. We evaluated the achievement of the 2017 corporate targets that were agreed with the Manage- ment Board and discussed the corporate targets for 2019. We commissioned an independent remuneration consultant to con- firm 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. Furthermore, we approved the financial statements for the 2017 financial year and dealt with the Corporate Governance Report and the Statement on Corporate Governance. Our regular discussions in the Supervisory Board’s plenary meetings were focused on MorphoSys’s revenue and earnings development, the financial reports, the progress of the two business segments Partnered Discovery and Proprietary Devel- opment, the results and progress of the clinical programs for the development of proprietary drugs, the future development strategy and the development of new technologies. Furthermore, we discussed the financial outlook for the 2020/2021 financial years and MorphoSys’s associated future potential financing needs. In addition, we carried out an efficiency review of the Supervisory Board’s work. And lastly, we kept ourselves regu- larly 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 conflicts of interest arose within the Supervisory Board in the 2018 financial 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 efficiently, 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 85 to 90. The Audit Committee met on five occasions in the 2018 finan- cial year, one of those meetings was held by telephone. All Committee members were present at all Audit Committee meetings. The Committee dealt mainly with accounting issues, quarterly reports, financial statements and consolidated finan- cial statements. The Committee discussed these topics with the Management Board and recommended the approval of the financial statements to the Supervisory Board. The auditor took part in four Audit Committee meetings and informed its mem- bers of the audit results. Against the background of the Auditors Reform Act and the requirements for the external and internal rotation of the auditor, in 2017 the Audit Committee carried out a public tender for the 2018 annual audit on a voluntary basis. As a result, the Audit Committee made a recommendation to the Supervisory Board with respect to the Supervisory Board’s proposal at the Annual General Meeting for the election of the independent auditor for the 2018 financial year. In addition, the Additional Infor mation 184 Repor t of the Super v isor y B oard Audit Committee dealt with the annual update of a list of per- mitted and pre-approved non-audit services of the auditor. The Committee also discussed the risk management system, the compliance management system and the results of the internal audit conducted in the 2018 financial year, as well as specific accounting issues under International Accounting Standards (IFRS) relevant to the Company. In addition, the Committee reg- ularly discussed the Company’s asset management policy and the investment recommendations made by the Management Board. The Committee also discussed in depth the 2019 budget and the financial outlook for the 2020/2021 financial years, as well as options for the commercialization strategy for the Com- pany’s most advanced proprietary drug candidate MOR208. In addition, the Audit Committee discussed in depth IT security measures undertaken in 2018 and the company’s plan to change the ERP landscape from Mircosoft Dynamics AX to SAP Busi- ness by Design. As in previous years, the Audit Committee dis- cussed the proposed impairment tests in preparation for the annual audit. To increase efficiency, there is a joint Remuneration and Nomi- nation Committee, which deliberates on matters relating to remuneration and nomination. The Committee met on five occa- sions in the 2018 financial year, each time by telephone. All Committee members participated at all Committee meetings. In its function as a remuneration committee, the Committee mainly dealt with the Management Board’s remuneration sys- tem and level of compensation. In this context, the Committee also commissioned an independent remuneration expert with the task of preparing a Management Board remuneration re- port to verify the appropriateness of the Management Board’s remuneration. Based on this report, the Committee prepared a recommendation on the future structure of the Management Board’s compensation and submitted this to the Supervisory Board for approval. The Committee also dealt with the ratio of compensation between the Management Board and the Senior Management Group and the staff overall and had this ratio re- viewed by the commissioned remuneration expert. This expert confirmed the appropriateness of these “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 offered 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 recom- mended the re-appointment of Dr. Malte Peters as Chief Devel- opment Officer for the duration of three years, effective July 1, 2019 until June  30, 2022. In addition, this Committee dealt with succession planning within the company. The Science and Technology Committee met on five occasions during the 2018 financial year. All Committee members partici- pated in all Committee meetings. The Committee dealt mainly with the Company’s discovery activities as well as overall strat- egy to expand the proprietary drug pipeline, the development of new technologies, the Company’s drug development plans and future development strategy, progress in the clinical trials as well as required budget resources. One major focus was the approval strategy for MOR208 and the interactions with the FDA. The Committee also addressed the production of clinical trial and commercial materials for the Company’s proprietary drug candidates including readiness for commercial supply and the competitive and patent situations of the Company’s pro- prietary drug candidates. Finally, the Committee discussed the development and partnering of MOR106 as well as the further development of MOR202 in autoimmune diseases. 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 Regierungs- kommission Deutscher Corporate Governance Kodex (Govern- ment Commission for the German Corporate Governance Code) in February 2017. The detailed Corporate Governance Report, including the Corporate Governance Statement according to Section 289f HGB and the Group Statement on Corporate Gover- nance according to Section 315d HGB (German Commercial Code), can be found on the Company’s website under the head- ing “Media & Investors > Corporate Governance > Corporate Governance Report” and in the Annual Report on pages 84 to 112. We also discussed with the Management Board the Company’s compliance with the Code’s recommendations and in one justi- fied 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 November 30, 2018. 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.” Repor t of the Super v isor y B oard Additional Infor mation 185 CHANGES IN T HE COMP OSI T ION OF T HE MANAGEMEN T BOARD AND SUPERVIS ORY BOARD There were no changes in the composition of the Management Board during the reporting period. However, the Chief Executive Officer, Dr. Simon Moroney, in- formed the Supervisory Board on February 19, 2019 that he has decided not to renew his contract as a member of the company’s Management Board. As a result of his decision, Dr. Moroney will step down as CEO on expiry of his current contract on June 30, 2020, or when a successor is appointed, whichever comes sooner. The following changes in the composition of the Supervisory Board took place during the reporting period. Klaus Kühn re- signed from his office as a member of the Supervisory Board for personal reasons as of the conclusion of the 2018 Annual General Meeting. Dr. Marc Cluzel was re-elected and Dr. George Golumbeski and Michael Brosnan were newly elected to the Supervisory Board by 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 2018 financial 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, 2018. 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 financial statements and the consolidated financial statements of MorphoSys AG, as well as the Management Report and Group Management Report for the 2018 financial year, were properly audited by PwC and issued with an unqualified Audi- tor’s Report. The key topics of the audit for the consolidated and annual financial statements for the 2018 financial year were the revenue accounting for complex out-licensing arrange- ments and the completeness of revenue recognition in general, the measurement of the carrying amounts of goodwill and in- tangible assets that have indefinite useful lives, the recognition and measurement of the 2018 share-based payment programs, the accounting for accruals for outstanding invoices for exter- nal laboratory funding and external services, the presentation and measurement of financial assets, the effectiveness of inter- nal controls, as well as the capital increase in connection with the US Initial Public Offering on the Nasdaq (dual listing). In addition, the auditor confirmed 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 finan- cial statements and consolidated financial statements were pro- vided on a timely basis to all Supervisory Board members for review. The audit report, the consolidated financial statements, the Group Management Report of the MorphoSys Group and the audit report, the annual financial statements and the Manage- ment Report of MorphoSys AG were discussed in detail at the Audit Committee meeting on March 12, 2019, and the meeting of the Supervisory Board on March 13, 2019. The auditor attended all meetings concerning the financial 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 financial statements prepared by the Management Board. The Supervisory Board also took note of the audit results and, in turn, reviewed the financial statements and management 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 financial statements and consolidated financial 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 financial statements were adopted. RECO GNI 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 financial year. Through their efforts, MorphoSys’s portfolio has continued to mature and expand and important milestones have been achieved. Planegg, March 13, 2019 Dr. Marc Cluzel Chairman of the Supervisory Board Additional Infor mation 186 Super v isor y B oard of Mor phoSys AG Supervisory Board of MorphoSys AG DR. MARC CL UZEL Chairman, Montpellier, France member of the supervisory board of: Griffon Pharmaceuticals Inc., Canada (Member of the Board of Directors) Moleac Pte. Ltd., Singapore (Member of the Board of Directors) DR. F RANK MORICH Deputy Chairman, Berlin, Germany member of the supervisory board of: Cue Biopharma Inc., Cambridge, MA, USA (Member of the Board of Directors) MICHAEL BRO SNAN Board Member, Westford, MA, USA member of the supervisory board of: Fresenius Medical Care Holdings, Inc., USA (Member of the Board of Directors) Vifor Fresenius Medical Care Renal Pharma Ltd., Switzerland (Member of the Board of Administration) The CVs of our Supervisory Board Members can be found on the Company’s website under the heading “Company > Management > Supervisory Board”. Super v isor y B oard of Mor phoSys AG Additional Infor mation 187 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) DR. GEORGE G OL UMBE SK I Board Member, Far Hills, NJ, USA member of the supervisory board of: Carrick Therapeutics Ltd., Ireland (Chairman of the Board of Directors) Enanta Pharmaceuticals, Inc., USA (Member of the Board of Directors) Grail Inc., USA (Member of the Board of Directors) KSQ Therapeutics, Inc., USA (Member of the Board of Directors) Sage Therapeutics, USA (Member of the Board of Directors) Shattuck Labs, Inc., USA (Member of the Board of Directors) Additional Infor mation 188 Glossary A B AD – Atopic dermatitis; Chronic autoimmune disease of the skin; formerly also called neurodermatitis B cells – White blood cells, part of the immune system, capable of generation antibodies 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 effector cell of the immune system actively destroys a target cell that has been bound by specific antibodies ADCP – Antibody-dependent cellular phagocytosis ALL – Acute lymphoblastic leukemia; a form of cancer of the white blood cells characterized by excess lymphoblasts Amyloid beta – Protein produced by the body that can be deposited in the brain and is associated with the development of Alzheimer’s disease Antibody – Proteins of the immune system that recognize antigens, thereby triggering an immune response B-MIND – Study to evaluate Bendamustine-MOR208 IN DLBCL Biosimilars – Term used to describe officially approved new versions of innovator biopharmaceu- tical products, following patent expiration Bispecific – Antibody consisting of parts from two different antibodies, thereby being able to bind two different antigens BTD – Breakthrough Therapy Designation; Status granted by the U.S. Food and Drug Administration FDA given to a drug candidate for the treatment of a serious or life-threatening disease if there is initial clinical evidence that the drug could represent a sig- nificant improvement over available therapies BTK inhibitor – Bruton’s tyrosine kinase, a key kinase of the B cell receptor signaling pathway that plays a significant role in the proliferation, differen- tiation and survival of B cells Antibody library – A collection of genes that encode corresponding human antibodies C Antigen – Foreign substance stimulating antibody production; binding partner of antibody ASCT – Autologous stem cell transplantation; Treat- ment with stem cells from a patients own body for the treatment of lymphomas C5a – Part of the immune system; involved in growth of certain cancers C5aR – Receptor for C5a G lossar y CI – Conficence interval; statistical quantity indicat- ing the range which, with a certain probability (the confidence level), includes the true position of the parameter when a random experiment is repeated indefinitely 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, affect- ing the B cells CMC – Chemistry, manufacturing and controls CMO – Contract manufacturing organization COSMOS – CLL patients assessed for ORR / Safety in MOR208 Study CR – Complete response CRO – Contract research organization Crohn’s Disease – Chronic inflammatory bowel disease CRP – C-reactive protein; Inflammatory marker that can be measured in the blood in various diseases, including RA CAR-T technology – New therapeutic approach in which immune cells are reprogrammed CTO – Contract testing organization Autoimmune disease – Disease caused by an im mune response by the body against one of its own tissues, cells or molecules Cash flow – Key performance indicator in the cash flow statement used to assess the financial and earning capacity D 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 Discounted cash flow model – Method of valu- ing assets, especially for due diligence DLBCL – Diffuse large B cell lymphoma, a subform of ›› NHL DoR – duration of response G lossar y Additional Infor mation 189 E H L EASI – Exczema area and severity Index; Value for measuring the severity of atopic dermatitis HDCT – High-Dose Chemotherapy; High-dose chemo- therapy used in conjunction with ›› ASCT to treat ›› DLBCL Lanthipeptides – Novel class of therapeutics with  high target selectivity and improved drug-like properties EGFR – Epidermal growth factor receptor; cell- surface receptor for members of the epidermal growth factor family (EGF-family) of extracellular protein ligands; the epidermal growth factor recep- tor is a receptor tyrosine kinase EMA – European Medicines Agency F HS – Hidradenitis Suppurativa; a skin disease that causes inflammation of the hair follicles; also known as acne inversion L-MIND – Study to evaluate Lanalidomide-MOR208 IN DLBCL HTH – Helix-Turn-Helix; specific structure and fold- ing of a peptide which confer stability M HuCAL – Human Combinatorial Antibody Library; pro prietary antibody library enabling rapid genera- tion of specific human antibodies for all applications Market capitalization – Value of a com pany’s outstanding shares, as measured by shares times current price Fab format – The antigen binding fragment of the antibody Human – Of human origin Fc part – Constant part of an antibody known as the Fc (fragment, crystallizable) region I Mesothelioma – Diffusely growing tissue tumor affecting for example the pleura Monoclonal antibody – Homogeneous antibody origin ating from a single clone, produced by a hybrid oma cell FDA – Food and Drug Administration; US federal agency for the supervision of food and drugs IFRS – International Financial Reporting Stan- dards; accounting standards issued by the IASB and adopted by the EU MRD – Minimal Residual Disease; minimal amount of residual tumor cells G GCP – Good clinical practice; an inter national ethi- cal and scientific quality standard for designing, conduct ing, recording and reporting trials that in- volve the par ticipation of human subjects IL-12 – Cytokine involved in inflammatory processes IL-23 – Cytokine involved in inflammatory processes; target of guselkumab Multiple myeloma – Type of cancer that develops in a subset of white blood cells called plasma cells formed in the bone marrow; abbreviation: MM Immuno-oncology – New class of compounds that stimulate the immune system to attack tumors N GLP – Good laboratory practice; a formal framework for the implementation of safety tests on chemical products IND – Investigational New Drug; application for permission to test a new drug candidate on humans, i.e. in clinical studies NHL – Non-Hodgkin’s lymphoma; diverse group of blood cancers that include any kind of lymphoma except Hodgkin’s lymphoma GM-CSF – Granulocyte-macrophage colony-stimu- lating factor; underlying target molecule of MOR103 program IRR – Infusion-related reactions; Response of the immune system to intravenous administration of a drug GMP – Good manufacturing practice; term for the control and management of manufacturing and quality control testing of pharmaceutical products and medical devices iv – Intravenous infusion O ORR – Overall response rate OS – Overall survival Additional Infor mation 190 Glossary G lossar y P R T Palmoplantar pustulosis – Psoriasis on hands and feet r/r – relapsed/refractory Target – Target molecule for therapeutic interven- tion, e.g. on the surface of diseased cells PASI – Psoriasis area and severity Index; value for determining the extent and severity of the psoriasis disease R-CHOP – Rituximab, Cyclophosphamid, Doxorubi- cin, Vincristin and Prednison; Combination treat- ment with rituximab and combination chemotherapy as standard first-line treatment of ›› DLBCL 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 PFS – Progression-free survival Rheumatoid arthritis – Inflammatory disease of the joints; abbreviation: RA TTP – Time to progression Pharmacodynamics – Study of the effects of drugs on the body Pharmacokinetics – Determination of the fate of substances administered externally to a living organism PoC – Proof-of-Concept; clinical evidence that its active substance leads to an improvement of a dis- ease PR – Partial response Preclinic – Preclinical stage of drug development; tests in animal models as well as in laboratory essays Protein – Polymer consisting of amino acids, e. g. antibodies and enzymes Psoriasis – A chronic, non-contagious autoimmune disease which affects the skin and joints Psoriatic arthritis (PsA) – Chronic joint inflam- mation that occures in connection with psoriasis Royalties – Percentage share of ownership of the rev enue generated by drug products Toxicity – Poisonousness S SAEs – Severe adverse events U UC – Ulcerative Colitis; chronic inflammatory bowel disease; Crohn’s disease sc – subkutan; administration via an injection under the skin SD – Stable disease; stable state of the cancer disease V SD KPI – Sustainable Development Key Performance Indicators; sustainability indicators in corporate management SLL – Small lymphocytic lymphoma VGPR – Very good partial response Y Slonomics – DNA engineering and protein library gene ration platform acquired by MorphoSys in 2010 Ylanthia – The novel next-generation antibody platform of MorphoSys Small molecules – Low molecular compounds SOP system – SOP = standard operating procedure List of F igures and Tables Additional Infor mation 191 List of Figures and Tables Figures 01 Revenues of the MorphoSys Group by Segment 02 MorphoSys’s Product Pipeline 03 Active Clinical Studies with MorphoSys Antibodies 04 Total Headcount of the MorphoSys Group 05 Employees by Gender 06 Seniority 07 Workforce Turnover Rate 08 Revenues by Region Tables 01 Development of Financial Performance Indicators 02 Sustainable Development Key Performance Indicators (SD KPIs) at MorphoSys 03 Multi-Year Overview – Statement of Profit or Loss 04 Multi-Year Overview – Financial Situation 05 Multi-Year Overview – Balance Sheet Structure 06 Contractual Obligations 07 Comparison of Actual Business Results Versus Forecasts 08 Closing Prices of MorphoSys Shares and ADS 09 Key Data for the MorphoSys Share 10 Analyst Recommendations 11 Summary of MorphoSys’s Key Short- and Medium-Term Risks 29 30 30 44 46 46 46 48 26 27 54 57 58 59 60 68 69 70 82 09 Revenues Proprietary Development and Partnered Discovery 48 10 Selected R&D Expenses 51 11 Performance of the MorphoSys Share in 2018 68 12 Performance of the MorphoSys Share 2014 – 2018 68 13 Occupational Safety at MorphoSys 72 14 Quality Management System at MorphoSys 74 15 Risk and Opportunity Management System at MorphoSys 78 16 Compliance Management System (CMS) 106 12 Summary of MorphoSys’s Key Long-Term Risks 13 Summary of MorphoSys’s Key Opportunities 14 Composition of the Supervisory Board until Termination of the 2018 Annual General Meeting 83 83 86 15 Composition of the Supervisory Board since Termination of the 2018 Annual General Meeting 86 16 Participation of Supervisory Board Members 88 17 Compensation of the Management Board in 2018 and 2017 94 18 Compensation of the Supervisory Board in 2018 and 2017 101 19 Directors’ Holdings 102 20 Managers Transactions in 2018 104 Additional Infor mation 192 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 +49-89-89927-5404 Fax: investors@morphosys.com Email: Impr int Concept and Design 3st kommunikation GmbH, Mainz Photography/Picture Credits Andreas Pohlmann, Munich Matthias Haslauer, Hamburg Getty Images Translation Klusmann Communications, Niedernhausen Lennon.de Language Services, Münster Editorial Office Götz Translations and Proofreading GmbH, Hamburg Typesetting and Lithography Knecht GmbH, Ockenheim Printer Woeste Druck + Verlag GmbH & Co. KG, Essen-Kettwig Copy Deadline March 12, 2019 (except financial statements) This financial report is also published in German and is available for download on our website. For better readability, the masculine form has been used in this report equally to all genders. 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. Hoffmann-La Roche AG. Gazyva® is a registered trademark of F. Hoffmann-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. Key Figures (IFRS) MorphoSys Group (in million €, if not stated otherwise) 12/31/18 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 RESULTS1 Revenues Cost of Sales R&D Expenses Selling Expenses2 G&A Expenses Personnel Expenses (Excluding Stock-Based Compensation) Capital Expenditure Depreciation of Tangible Assets Amortization of Intangible Assets EBIT Net Profit/(Loss) Net Profit/(Loss) from Discontinued Operations BAL ANCE SHEE T Total Assets Cash and Financial Assets Intangible Assets Total Liabilities Stockholders’ Equity Equity Ratio (in %) MORPHOSYS SHARE 76.4 1.8 106.4 6.4 21.9 39.2 2.5 1.8 1.9 (59.1) (56.2) 66.8 0.0 113.3 4.8 15.7 37.1 13.1 2.0 2.1 (67.6) (69.8) 49.7 0.0 94.0 2.4 13.4 33.7 2.9 1.8 2.0 (59.9) (60.4) 106.2 0.0 78.7 0 15.1 32.4 8.8 1.5 1.9 17.2 14.9 64.0 0.0 56.0 0 14.1 26.7 20.5 1.4 2.7 (5.9) (3.0) 78.0 0.0 49.2 0 18.8 51.9 0.0 37.7 0 12.1 82.1 0.0 55.9 0 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 – – – – – 6.0 (0.4) 538.8 454.7 47.4 50.4 488.4 91 % 415.4 312.2 67.8 56.7 359.0 86 % 463.6 359.5 67.9 48.1 415.5 90 % 400.1 298.4 79.6 37.3 362.7 91 % 426.5 352.8 46.0 77.7 348.8 82 % 447.7 390.7 35.1 95.5 352.1 79 % 224.3 135.7 35.0 22.3 202.0 90 % 87.0 7.3 46.9 0 23.2 29.6 13.8 2.1 4.0 13.1 9.2 81.0 6.7 39.0 0 23.9 26.1 3.8 1.6 3.8 12.8 9.0 – – 209.8 108.4 69.2 23.9 185.9 89 % 206.1 135.1 17.4 32.2 173.9 84 % 2.9 1.7 3.8 9.8 8.2 0.0 228.4 134.4 66.0 31.3 197.1 86 % Number of Shares Issued 31,839,572 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 Group Earnings/(Loss) per Share, Basic and Diluted (in €) Dividend (in €) Share Price (in €) PERSONNEL DATA (1.79) (2.41) (2.28) – – – 0.57 – (0.12) – 88.95 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 Total Group Employees (Number3) 329 326 345 365 329 299 421 446 464 404 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 Profit/(Loss) from Discontinued Operations.” All other line items consist of amounts from continuing operations. 2 In 2018, selling expenses were presented for the first time. In order to provide comparative information for the previous year, the figures for 2017 and 2016 have been adjusted accordingly. 3 2009 to 2012 including employees from the discontinued operations of AbD Serotec. Financial Calendar 2019 March 13 p u b l i c at i o n o f 2 0 1 8 y e a r - e n d r e s u lt s May 22 2 0 1 9 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 May 7 publication of first quarter interim statement 2 0 1 9 August 6 p u b l i c at i o n o f 2 0 1 9 h a l f - y e a r r e p o r t 8 1 0 2 t r o p e R l a u n n A October 29 publication of third quarter interim statement 2 0 1 9 MorphoSys AG Semmelweisstrasse 7 82152 Planegg Germany Phone: +49-89-89927-0 Fax: +49-89-89927-222 www.morphosys.com 

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