MorphoSys Corporate outlook

A MOR interesting year Pharma & Biotech

MorphoSys is approaching an important stage in the development of its proprietary 7 June 2012 pipeline. Proof-of-concept data on its lead product MOR103 in rheumatoid arthritis Price €17.10 (RA) should be reported in Q312, which could result in it being out-licensed. More Market cap €396m broadly, the pipeline is generally progressing well with 19 antibodies now in clinical trials, including one in Phase III development, Roche’s gantenerumab for Alzheimer’s disease. Our valuation has been increased from €629m to €659m. Shares in issue 23.0m Free float 100% Code MOR Year end Revenue PBT* EPS* DPS P/E Yield (€m) (€m) (c) (c) (x) (%) Primary exchange Frankfurt 12/10 87.0 17.9 59.2 0.0 28.9 N/A Other exchanges N/A 12/11 100.8 21.9 72.3 0.0 23.6 N/A Share price performance 12/12e 75.3 5.5 21.2 0.0 80.8 N/A 12/13e 79.7 8.3 30.5 0.0 56.1 N/A Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items.

Data in Q312 and potential licensing deal Data from the Phase Ib/II study in RA with MOR103 are due in H212. A related product, (AstraZeneca), has already demonstrated a promising level of efficacy. MorphoSys hopes to out-license MOR103 after the results. This could be challenging because of the competitive nature of the RA market, but partners could % 1m 3m 12m be attracted by MOR103’s potential in multiple sclerosis. Abs -15.0 -3.7 -18.1 Rel (local) -8.5 4.9 -4.8 Broad pipeline progressing, but with some setbacks 52-week high/low €21.40 €15.80 Since the start of 2011, Roche has expanded the Phase II trial with gantenerumab into a pivotal Phase II/III study, three products have advanced into Phase II and two Business description others have entered Phase I studies. However, carlumab (CNTO888) is no longer MorphoSys is a German biotechnology being developed for castration resistant (although development is company. It uses its proprietary continuing for idiopathic pulmonary fibrosis) and a Phase I product has returned to technologies to develop human antibodies preclinical development. Additional partnered products could enter Phase III in 2013. for therapeutic use. It also develops diagnostic antibodies and sells antibodies for use in research. Prospect of new antibody alliances Next events MorphoSys launched its new antibody platform Ylanthia in December 2011, which Data on MOR103 Q312 could enable the formation of major new alliances. Currently, MorphoSys earns Q212 results 2 August 2012 c €40m pa from the 10-year HuCAL alliance with Novartis, but is unable to form new Q312 results 7 November 2012 alliances in most therapeutic fields. We believe the Ylanthia platform should enable MorphoSys to form new alliances without being restricted by the Novartis alliance. Analysts Dr Mick Cooper +44(0)20 3077 5734 Valuation: €659m based on DCF Robin Davison +44(0)20 3077 5737

[email protected] We have raised our valuation of MorphoSys by €30m to €659m because of the

Edison profile page general progress of its pipeline, including gantenerumab. The key catalyst for MorphoSys in 2012 is the results of the Phase Ib/II study with MOR103 in RA in Q312. Our analysis suggests the value of this product is largely excluded from the current share price.

MorphoSys is a research client of Edison Investment Research Limited

MorphoSys | 7 June 2012

Investment summary: A MOR interesting year

Company description: Antibody development company MorphoSys is a biotechnology company with a proprietary antibody development platform that it uses primarily to create therapeutic antibodies. Its main operations are in Munich, Germany, with offices in the UK and US, and it employs c 420 people. It currently has collaborations with many pharmaceutical companies (including major alliances with Novartis and Pfizer) and uses the profits from these alliances to enhance the capabilities of its technology platform and invest in its own pipeline. It has c 70 drug development programmes underway, 19 of which are in clinical trials, including gantenerumab in a Phase II/III study. Its lead proprietary product, MOR103, is being developed for RA and multiple sclerosis (MS). MorphoSys also has a subsidiary, AbD Serotec, which sells antibodies for use in research and develops antibodies for diagnostic tests.

Valuation: €659m based on a risk-adjusted DCF valuation We value MorphoSys at €659m including €137m of cash and equivalents. The main value drivers are the proprietary products (especially MOR103) and potential royalties. MorphoSys reinvests most of the profits from partnered drug discovery in proprietary drug discovery and general operating costs; the net value of partnered drug discovery after other expenses is €55m.

Data on MOR103 from a Phase Ib/II study in RA are due in H212 and from the Phase Ib trial MS in H213. MorphoSys hopes to out-license the product after the RA study. MOR103 is valued at €137m in RA (including risk-adjusted milestones)and €62m in MS. Thus, the current market cap of €396m suggests the market is cautious about MOR103’s prospects, despite good data from a related RA product and promising preclinical data in MS.

Sensitivities: Risk spread across partners and broad pipeline The results of clinical trials will have an impact on MorphoSys’s progress, but the firm is not as sensitive to their outcome as most biotechnology companies. It is profitable and has a broad and deep pipeline of products, and its partners bear most of the risks. The results of the Phase Ib/II trial with MOR103 in RA could have a significant impact on the share price, but if they are negative the future of the company would not be threatened.

MorphoSys’s ability to generate profits, primarily from partnered drug discovery, affects the rate at which it can develop its proprietary pipeline. The company has recently launched a new technology platform, which could lead to the formation of new major alliances and accelerate the development of the proprietary products.

Financials: Profitable and with a strong balance sheet MorphoSys has been profitable since 2004. This should continue in 2012, although at a lower level than in 2011 as the company received a one-off milestone of c €28m from Novartis in Q111. We forecast that MorphoSys will achieve an operating profit of €1.1m (€12.2m in 2011), despite the revenues expected to be 25% lower at €75.3m. This is because investment in proprietary R&D is forecast to be reduced by 36% to €20.7m.

MorphoSys’s net cash position was €137m at Q112, including an interest-bearing €10.0m loan to a third party. It might use its capital to acquire new products or technologies; however, the company is expected to maintain its strong balance sheet.

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Outlook: Key year for antibody development company

MorphoSys uses profits from alliances based on its antibody development platform, HuCAL, to develop a proprietary pipeline. Its lead product MOR103, which is being developed for RA and MS, could be out-licensed in the coming year. This will depend largely on the strength of efficacy signal detected in the Phase Ib/II trial in RA (data due in Q312), because the RA market is highly competitive. However, unlike most biotechnology companies, MorphoSys is not dependent on the success of this product. It has a broad pipeline with 19 antibodies in clinical trials and is profitable, although a failure would still be a significant setback.

The company’s first antibody has entered Phase III development with Roche’s recent decision to expand the Phase II trial with gantenerumab into a pivotal Phase II/III study. Other partners might report data from their programmes with MorphoSys’s antibodies and we believe two more partnered products could enter Phase III development in 2013. Also, Phase I data on MOR208 (proprietary antibody) in chronic lymphocytic leukaemia (CLL) are expected in Q412 and Phase Ib results on MOR103 in MS are due in H213.

The proprietary R&D investment is fully funded by profits from partnered drug discovery and to a limited degree from AbD Serotec. MorphoSys receives c €40m pa from the 10-year alliance with Novartis and increasing milestone payments as partnered products advance through preclinical and clinical development. There are currently 19 antibodies in clinical trials, including three proprietary antibodies (Exhibit 1).

Antibody platforms All of the therapeutic antibodies in MorphoSys’s pipeline (except for MOR208) have been developed using its HuCAL (Human Combinatorial Antibody Library, Exhibit 2) technology platform. The strength of this technology led to Novartis essentially out-sourcing antibody development to MorphoSys and several other companies also using MorphoSys’s services. The productivity of the platform is also shown by the increasing number of HuCAL antibodies in clinical development (Exhibit 1), including gantenerumab, which is now in a Phase II/III trial. To date, there have only been two clinical setbacks: J&J recently terminated development of carlumab in oncology indications because of a lack of efficacy in Phase I and II studies (it remains in development for idiopathic pulmonary fibrosis (IPF); and Bayer discontinued BAY 79-4620 because of issues associated with the drug conjugated to the antibody and not the characteristics of the antibody.

Exhibit 1: Number of HuCAL antibodies in clinical development

25

20

15

10

5

0 2005 2006 2007 2008 2009 2010 2011 2012e 2013e

Phase I Phase II Phase III

Source: MorphoSys, Edison Investment Research

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Exhibit 2: An overview of MorphoSys’s technologies HuCAL Human Combinatorial Antibody Library (HuCAL) technology produces fully human antibodies using in vitro techniques. The technology relies on phage display technology, a well established method of identifying which Fab fragments (the parts of an IgG antibody with the variable regions that bind to another protein or antigen, see schematic illustration below) binds to the antigen of interest. However, MorphoSys’s key innovation is the modular approach to optimise the binding of these fragments by systematically altering the CDR motifs in the variable regions (changing specific amino acids in each motif), which are the parts of the antibody that interact with the antigen. A schematic illustrating how MorphoSys is able to replace CDR motifs is shown below. Once the level of binding of the Fab fragment has been optimised it can be attached to the Fc region of an IgG antibody to produce a fully human antibody. MorphoSys uses different Fc regions to produce antibodies with different characteristics (eg greater/lower ability to bind to the Fc Receptor to increase/decrease the ADCC immune response). The platform is patent protected until 2016.

CDR1 CDR2 CDR3 Heavy chain Variable regions with 3 CDRs each Fab fragment

Light chain

Fc region

HuCAL GOLD/ HuCAL GOLD is a DNA library that encodes 1.6 x 1010 different fully human Fab fragments. Each member of the library PLATINUM has different CDR motifs in different combinations, and there are three CDR motifs in the variable regions of both the heavy chain (VH) and the light chain (VL). HuCAL PLATINUM is an improved version of HuCAL GOLD, with DNA encoding c 4.5 x 1010 different Fab fragments because of more variations in CDR3 motifs on the heavy chain. TRIM technology Trinucleotide mutagenesis (TRIM) technology changes the amino acid composition of CDR motifs in a precise manner, so that rare codons are not introduced nor stop codons used, neither of which add functional diversity to the variety of CDRs produced. DNA codons are sequences of three nucleotides that encode specific amino acids; rare codons are poorly translated into amino acids and stop codons do not encode amino acids. This technology has been used to develop the HuCAL libraries and carry out affinity maturation (the process of improving the binding affinities of specific antibodies). In the latter case, the process is carried out in a systematic way, rather than relying on random mutations induced by X-rays, chemicals or error-prone PCR, thus accelerating the procedure. RapMAT RapMAT is a method of accelerating the rate at which antibodies with pMolar affinities are developed. The process uses an enhanced initial panning process during the initial screening of the HuCAL library so that it is not necessary to carry out affinity maturation of the identified antibodies, unless low pM affinities are required. RapSODY RapSODY is a technique of expressing antibodies in the IgG format on the surface of cells and selecting those cells, which express antibodies with a high affinity to a specific antigen, using FACS-based sorting. RapCLONE RapCLONE is a method of converting thousands of Fab fragments into IgG antibodies in a single step. This technology enabled MorphoSys to increase significantly the number of IgGs it could screen per year. AutoCAL AutoCAL is an automated system of robots, which carries out the high-throughput screening of HuCAL libraries to identify Fab fragments/antibodies that bind to the antigen of interest. Slonomics The Slonomics technology is a fully automated platform that is used to create diverse protein libraries, with amino acids in precise, predetermined positions. It will allow MorphoSys to accelerate and use a more flexible approach to the optimisation of antibodies. MorphoSys acquired the technology with the takeover of Sloning in 2010. Slonomics is patent protected until 2023 (and potentially to 2029 if additional patents are granted). arYla arYla is an antibody optimisation platform, which incorporates Slonomics to optimise any given antibody. MorphoSys believes that the new process will reduce the time it takes to develop an antibody with the desired characteristics by c 30% (reduction of c 4.5 months) and increasing the probability that a programme will reach clinical development from 35% to 50%. The platform is patent protected until 2023 and potentially 2029. Ylanthia Ylanthia is MorphoSys’s new antibody development platform, designed to create fully-human antibodies that bind to a wider range of protein targets, have better stability characteristics and are easier to manufacture. It uses a new library with c 10 x 1010 Fab fragments, using 36 fixed, naturally-occurring heavy and light chain framework combinations (giving it added, valuable structural diversity). As with the HuCAL platform, phage display technology is used to identify the Fab fragments in this library that bind to the protein/antigen of interest. The binding of the selected Fab fragments is then optimised using the Slonomics technology, before being attached to an IgG backbone with the correct characteristics (eg. ability to activate ADCC immune response). Platform is patent protected until 2023 and potentially beyond 2030. Source: Edison Investment Research, MorphoSys

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MorphoSys uses its antibody discovery platforms to develop antibodies for therapeutic use, diagnostic kits and use in scientific research. Its core operations are focused on therapeutic antibodies and the AbD Serotec division on diagnostic kits and scientific research.

To maintain the company’s position as a leader in the field of antibody development, MorphoSys is continually innovating and launching new services (Exhibit 2). At the end of 2011, the company launched a totally new antibody development platform called Ylanthia (see note dated 12 December 2011), which promises to deliver a broader range of functional antibodies with better stability and production characteristics. So MorphoSys might be able to develop antibodies against targets that have proven intractable to date, and improve on the success rate of over 50% for antibody programmes that enter clinical development, which has been achieved with the arYla platform. We estimate that it will still take around three years for a programme to be ready for clinical development, as with arYla. The precise capabilities of the platform will gradually become apparent as MorphoSys completes a number of antibody development programmes.

The Slonomics technology has potential beyond the development of antibodies and is used to make specific modifications to other proteins. Pfizer uses Slonomics to modify potential therapeutic proteins, other than antibodies (eg growth factors) and Novozymes to alter industrial enzymes.

Therapeutic antibodies MorphoSys has c 70 development programmes under way across a range of indications including 20 clinical programmes (there are two development programmes for MOR103 as they are being developed in two distinct indications, Exhibits 3 and 4). Most of these programmes are partnered, although it is gradually expanding its proprietary pipeline and has three of its own products in clinical trials.

Partnered drug pipeline An updated version of MorphoSys’s partnered clinical pipeline is shown in Exhibit 3. This includes the 1 advance gantenerumab into Phase III development and details of some partnered programmes0F that have not been disclosed by MorphoSys. There are 16 partnered antibodies in clinical development and a further 48 programmes in discovery and pre-clinical development (including two co-development projects with Novartis).

The most interesting discoveries suggest that:

 Centocor (J&J) is developing a follow-on product (CNTO1959) to (Stelara) for treating psoriasis, which only targets IL-23 (by binding to the p19 subunit) unlike Stelara that binds to IL- 12 and IL-23 (via the p40 subunit, which is a component of both IL-12 and IL-23). It is hoped that this product will have similar efficacy but a better safety profile, as IL-23 is thought to play a more important role in psoriasis. Merck & Co also has an antibody specific to IL-23 in Phase II (MK- 3222/SCH 900222).

 Centocor is developing an IL-13 antibody for the treatment of asthma (CNTO3157). Phase II data on Roche’s IL-13 antibody , published in the NEJM, showed that there was a 5.5% greater improvement in FEV1 in patients (with severe asthma inadequately controlled by glucocorticoids) receiving lebrikizumab compared to placebo (p=0.02).

 Novartis’s ophthalmology product is LFG316, targeting the complement pathway for the treatment of age-related macular degeneration (AMD).

1 Our research (which included a search of patents that cite MorphoSys’s vector, pMORPH, used during the production of its HuCAL antibodies) allows the identification of certain hitherto undisclosed programmes.

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Exhibit 3: The partnered clinical R&D pipeline

Product (target) Development Partner Notes stage (Indication) Gantenerumab Phase III Roche Phase II/III with prodromal Alzheimer’s disease (placebo, n=770, double-blind). Primary (ß amyloid) (Alzheimer’s endpoint is change in Clinical Dementia Rating scale Sum of Boxes (CDR-SOB) and disease) change in brain amyloid. First patient treated: Q410, estimated completion date: January 2017. The trial could be used to support a marketing application for the product. Completed Phase I study in patients with mild to moderate AD (n=60), analysis of 16 patients showed a dose dependant reduction in brain amyloid level. Undisclosed Undisclosed Novartis No details have been disclosed because of Novartis’s commercial considerations. BHQ880 Phase II (multiple Novartis Phase II study in patients with MM and renal insufficiency (n=144); primary endpoint is (DKK1) myeloma) time to first SRE; estimated completion date is 2016. Phase II trial in smouldering myeloma (n=40); primary endpoint is ORR; expected completion date is March 2013. Phase I/II study completed in relapsed/refractory myeloma (MM) patients (in combination with zoledronic acid and standard of care , n=267). Data from the Phase I portion showed increased levels of biomarkers associated with bone formation. BYM338 Phase II Novartis Phase II study in cachexia (double blind, n=50); primary endpoint is increase in thigh (Act RIIB*) (cachexia, muscle volume in eight weeks; estimated primary completion date is September 2012. sporadic inclusion Phase II in sporadic inclusion body myositis (double blind, n=12); primary endpoint: body myositis, change in thigh muscle volume in eight weeks; trial should have been completed. Phase II sarcopenia) in sarcopenia (double blind, n=40); primary endpoint: change in thigh muscle at 24 weeks; estimated completion date is December 2012. Carlumab/ Phase II J&J Phase II trial with idiopathic pulmonary fibrosis completed (placebo, n=120, double-blind). CNTO888 (IPF) (Janssen Primary endpoint is efficacy (pulmonary function) and safety. No data published. (CCL2/MCP-1) Biotech) Development of carlumab in metastatic castrate resistant prostate cancer (mCRPC) and other tumours stopped because of insufficient efficacy, but the drug was well tolerated in Phase I (n=44, n=53) studies in solid tumours and a Phase II in mCRPC (n=46). CNTO1959 Phase II J&J Phase II in moderate-to-severe psoriasis (placebo and , n=280, double-blind), (IL-23*) (psoriasis) (Janssen primary endpoint: physician’s global assessment (PGA) score, estimated completion date: Biotech) February 2014. Phase I study in Japanese patients with moderate-to-severe psoriasis (n=32, double-blind), primary endpoints: various safety measures, estimated completion date: June 2013. Phase I trial in healthy people (n= 47) and patients with moderate to severe psoriasis (n=24) was completed in October 2010, no data published. LFG316* Phase II Novartis Phase II trial in advanced age-related macular degeneration (n=60, single-blind); primary (Complement (AMD, MCP) endpoint: growth of geographic atrophy lesions, expected completion date: June 2013. C5*) Phase II study in AMD (n=57, single-blind), primary endpoint: number of treatments with anti-VEGF therapy, estimated completion date: January 2013. Phase II study in multifocal choroiditis and panuveitis (MCP, n=24, open-label), primary endpoint: clinical response rate, estimated completion date: December 2012. Phase I trial in patients with AMD (open label, n=30); trial probably completed. CNTO3157 Phase I J&J Phase I trial in healthy people (single ascending dose, n= 56, double-blind) and patients (IL-13*) (asthma) (Janssen with asthma (multiple ascending doses, n=16, double-blind). Trial was completed in Biotech) January 2012, no data published. OMP-59R5 Phase I OncoMed Phase I dose escalation study (open label, n=44). Trial to assess maximum tolerated dose, (hNotch 2/3*) (solid tumours) safety, PK profile and preliminary efficacy. Estimated completion date is July 2012. OMP-18R5 Phase I OncoMed Phase I dose escalation study (open label, n=44). Trial to assess maximum tolerated dose, (Frizzled (solid tumours) safety, PK profile and preliminary efficacy. Estimated completion date is November 2012. ligands*) BI 836845* Phase I Boehringer Two Phase I dose escalation studies (both open label and n=70). Trials to assess (IGF1, IGF2*) (solid tumours) Ingelheim maximum tolerated dose, safety, PK profile, immunogenicity and preliminary efficacy. Estimated completion dates are March 2013 and September 2013. BAY94-9343 Phase I (solid Bayer Phase I dose escalation study (open label, n=58). Trial to assess maximum tolerated dose, (mesothelin*) tumours) safety, PK profile, immunogenicity and preliminary efficacy. Estimated primary completion date is January 2013. BAY94-9343 is an antibody drug conjugate (ADC). Undisclosed Phase I Novartis - (hTSLP*) (inflammation) Undisclosed Phase I (cancer) Pfizer Phase I trial initiated in December 2010. Undisclosed Phase I (inflam) J&J - Undisclosed Phase I (cancer) Novartis Phase I trial initiated in Q112. Source: Edison Investment Research; Note: * Information not disclosed or confirmed by MorphoSys.

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 The target of Novartis’ BYM338 is ActRIIB, a well-validated target for the improvement of muscle mass. However, there could be issues with its safety profile as a Phase II trial in muscular dystrophy with a related product, Acceleron’s ACE-031 (a fusion protein with the extracellular domain of the ActRIIB receptor which binds to myostatin), terminated because patients experienced minor nosebleeds, gum bleeding, and/or small dilated blood vessels within the skin. Novartis has included BYM338 in its product pipeline for a planned filing in 2016 or beyond for treating sporadic inclusion body myositis.

 Boehringer Ingelheim’s undisclosed product is BI 836845, an antibody that targets the insulin pathway for treating solid tumours. Roche has recently expanded the trial with gantenerumab into a pivotal Phase II/III trial by increasing the number of patients in the trial from 360 to 770. This trial could now be used to support a marketing application, probably with another Phase III trial with c 1,000 patients. The decision by Roche to enlarge the trial provides an indication of its belief in the programme and means that MorphoSys now has a HuCAL antibody in Phase III development.

Also since the start of 2011, three other products (BYM338, CNTO1959 and LFG316) have advanced into Phase II development and two (OMP-18R5 and BAY94-9343) have started Phase I trials. However, the clinical development of BAY79-4620 (Bayer, an antibody drug conjugate) was stopped in Q311, presumably because of issues associated with the drug conjugated with the antibody, as Bayer has retained the target licence for CAIX. Similarly, Jansen has terminated development of carlumab in oncology indications because of a lack of efficacy (no details are available), although this antibody is still in development for IPF.

More HuCAL antibodies could enter Phase III development in 2013. We believe that the most likely to advance are Novartis’s undisclosed antibody (it is understood that clinical proof-of-concept has been achieved) and BYM338 (Phase II study in cachexia should be completed in September 2012).

Proprietary pipeline MorphoSys has one proprietary product (MOR103) in Phase II studies and two others in Phase I (MOR202 and MOR208; Exhibit 4). A further four drug candidates are in discovery for inflammatory (co-developed with Galapagos), infectious diseases (co-developed with Absynth) and oncology indications (two programmes, co-developed with Novartis). The development of these products is wholly funded by profits from partnered drug discovery and milestone payments.

MOR103 MOR103 is being developed for both RA and MS. Phase I/II data in RA should be reported in Q312. These results could lead to the product being out-licensed, as MorphoSys has indicated it would like to partner the product at this stage to expedite development in RA, and not wait for results of the Phase Ib trial in MS (due in H213).

The HuCAL-derived antibody binds to GM-CSF (granulocyte-macrophage colony-stimulating factor), which appears to play an important role in the development of these diseases. The role of this cytokine was identified by Melbourne University and in 2007 MorphoSys in-licensed the IP relating to its role in autoimmune disease. MOR103 entered clinical development the following year. GM-CSF causes the activation of macrophages and release of various other cytokines, including TNFα and IL-17.

The mechanism of action for MOR103 in RA has been validated to some extent by the data from AstraZeneca’s Phase II trial in RA with mavrilimumab. In this 233-patient study, the cohort receiving the highest dose (100mg every other week) showed a significant improvement in various disease measures (ACR20/50/70; DAS28-CRP) at week 12. The antibody also showed an acceptable safety

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profile. Although mavrilimumab targets the GM-CSF receptor whereas MOR103 binds to GM-CSF, the mechanism of action is essentially the same. Hence these results increase our confidence that MorphoSys will report positive data from the Phase Ib/IIa trial in RA.

Exhibit 4: Proprietary clinical R&D pipeline

Product (target) Development stage Notes (Indication) MOR103 Phase II Phase Ib/IIa trial in active RA (four doses of placebo, 0.3, 1.0, 1.5mg/kg iv, n=92, double-blind). (GM-CSF) (rheumatoid Primary endpoint is adverse event rate and safety; secondary endpoints are various efficacy arthritis, multiple measures; data expected in Q312. Phase Ib trial in multiple sclerosis (four doses of placebo, 0.5, sclerosis) 1.0, 2.0mg/kg iv, n=30, double-blind), primary endpoint: incidence and severity of adverse events; data expected in H213. A Phase I study with a sub-cutaneous formulation is expected to report data in Q312. Phase I (n=63) successfully completed. MOR208 / Phase I (chronic Phase I trial in CLL/SLL (small lymphocytic lymphoma; n=30, dose escalation study, open label). Xmab5574 lymphocytic Endpoints are maximum tolerated dose, safety, efficacy, PK and PD data and preliminary anti- leukaemia) tumour activity. Trial is completed and data are expected in Q412. MorphoSys in-licensed (CD19) MOR208 from Xencor for an upfront payment of $13m, milestone payments and royalties. Agreement with Boehringer Ingelheim to manufacture MOR208 for use in clinical trials and to provide a commercial supply potentially. MOR202 Phase I/II (multiple Phase I/II dose escalation trial in multiple myeloma in combination with bortezomib and (CD38) myeloma) lenalidomide (open label, n=82). Endpoints are maximum tolerated dose, safety, efficacy, PK and PD data and overall response rate, estimated primary completion date is November 2014. Multiple myeloma tumour cells express CD38 in c 98% of patients. Preclinical data shows MOR202 acts synergistically with lenalidomide and bortezomib. Source: Edison Investment Research

It will be important for MorphoSys that the data from the Phase Ib/IIA study suggest MOR103 is at least as efficacious as mavrilimumab, if it is going to be able to out-license the product without the MS data. The biologicals markets for RA and related autoimmune diseases is worth >$20bn, but is very competitive with many therapeutic antibodies in development for this indication (Exhibit 6). There is also added uncertainty caused by the potential impact on the RA market of a new generation of oral DMARDS (disease-modifying anti-rheumatic drugs), such as Pfizer’s tofacitinib and AstraZeneca/Rigel’s fostamatinib. However, large pharmaceutical companies still appear to be interested in acquiring the rights to promising biological products, as shown by Abbott’s in-licensing deal for Biotest’s anti-CD4 antibody (BT-061) in a $480m deal in June 2011.

Even if MOR103 does not have commercial potential as a treatment for RA, it could still become a valuable therapy for MS. A paper published in Nature Immunology indicates that GM-CSF plays a key role in the progression of MS in an animal model of the disease, suggesting that MOR103 could prevent MS from advancing in humans. The current Phase Ib study should provide evidence of MOR103’s potential in MS. However, as in RA, the antibody will face considerable competition from new oral and biologic drugs (Exhibit 7), which promise to transform the treatment of MS.

MOR208 Although MorphoSys had the capability to develop its own anti-CD19 antibody, it licensed MOR208 from Xencor. It wanted to develop such an antibody to treat various haematological cancers but discovered that Xencor had already created an antibody with the desired characteristics (a high affinity for CD19, and its Fc domain is modified to enhance the antibody-dependent cell-mediated cytotoxicity (ADCC) and subsequent elimination of cancerous cells). MorphoSys in-licensed the antibody to accelerate the development process. CD19 is expressed by B-cells (a class of white blood cell), including its precursor cells so that MOR208 could become an effective treatment for non-Hodgkin’s lymphoma (NHL), chronic lymphocytic leukaemia (CLL) and acute lymphoblastic leukaemia (ALL).

CD19 has been validated as a target by the impressive Phase II results with blinatumomab (Amgen) in adult patients with relapsed/refractory ALL – 12 out of 18 patients reached complete remission within

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two cycles of treatment. Data from an open-label Phase I trial with MOR208 in 30 patients should be reported in Q412, and a Phase II trial in NHL and ALL should start before the end of the year.

If MOR208 is shown to have similar efficacy to blinatumomab, it should have a significant commercial advantage because MOR208 can be delivered intravenously over 30-90 minutes whereas blinatumomab needs to be delivered by continuous intravenous infusion for 28 days.

MOR202 MOR202 is being developed to treat multiple myeloma (MM). It targets CD38, which is expressed on tumour cells in c 98% of patients with MM. MorphoSys developed it using HuCAL, and has designed it to activate ADCC. Preclinical studies demonstrate its potential as a treatment of MM, possibly in combination with bortezomib (Velcade) and lenalidomide (Revlemid). Recruitment for a Phase I trial in patients with relapsed/refractory MM is progressing as expected and should be completed in 2014; however data from the dose escalation stage of the trial could be completed and reported in 2013.

Drug discovery partnerships MorphoSys has used partnerships to develop its broad therapeutic antibody pipeline and continues to use them to fund its proprietary drug discovery (Exhibit 8). Its most important partnership is with Novartis (which owns 7% of MorphoSys); the alliance covering the HuCAL technology lasts for 10 years (2007 to 2017) with the possibility of a two-year extension. MorphoSys earns c €40m pa and potential milestones (during and after completion of the alliance). There is a steady state of c 20 discovery programmes during the alliance, which could result in c 50 antibodies entering clinical trials (assuming it takes four years to conduct all preclinical development and there is a 41% success rate). A limitation of this collaboration is that it prevents MorphoSys forming new collaborations with other partners (excluding in infectious diseases and co-development discovery programmes eg with Galapagos), however it does provide MorphoSys with a reliable revenue stream to allow it to implement a long-term strategy.

MorphoSys has completed a number of discovery alliances with companies such as Boehringer Ingelheim, Merck & Co and Roche, and still generates significant revenues from them in the form of milestones. A general breakdown of milestones that MorphoSys can receive from individual programmes is indicated in Exhibit 5.

Exhibit 5: Typical deal structure of HuCAL deals

Milestone /royalties Value Notes License fee and R&D funding €1.5-2.5m c 50% margin on development costs Start of Phase I milestone €1.0-2.0m Start of Phase III milestone €2.0-3.5m BLA and approval milestones €3.5-5.0m Royalties c 5% Source: Edison Investment Research

MorphoSys has not signed any major antibody development collaborations since it started the 10-year alliance with Novartis. The alliances with Pfizer (signed in December 2010) and the unnamed large biopharmaceutical company (signed in February 2012) cover the use of the Slonomics technology for developing all therapeutic proteins, except for antibodies. However, there is the prospect of MorphoSys signing new antibody collaborations this year because of the launch of Ylanthia platform (Exhibit 2) at the end of 2011. This uses a different library to HuCAL and does not rely on previous technologies’ modular approach, although Novartis might challenge this interpretation.

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Exhibit 6: Biologic rheumatoid arthritis treatments in clinical development or on the market

Mechanism Drugs Development Notes stage TNFα (cytokine) Adalimumab (Humira, Abbott) Market FY11 sales: $7.9bn; approved for RA, JIA, PsA, AS, CD, Ps inhibition Etanercept (Enbrel, Amgen/Pfizer) Market FY11 sales: $7.4bn; approved for RA, JIA, PsA, AS & Ps (Remicade, J&J/Merck) Market FY11sales: $8.2bn; approved for RA, PsA, AS, Ps, UC, CD Certolizumab-pegol (Cimzia, UCB) Market FY11 sales: $413m; approved for RA & CD (Simponi, J&J/Merck) Market FY11 sales: $674m; approved for RA, PsA & AS ATN-103 (Ablynx) Phase II Being developed for RA IL-6R (cytokine (Actemra, Roche) Market FY11 sales: $694m, approved for RA, JIA receptor) inhibition (Regeneron/ Sanofi) Phase III Being developed for RA ALX-0061(Ablynx) Phase II Being developed for RA CD20 (mature B cells Rituximab (Rituxan, Biogen/Roche) Market FY11 Sales:$6.7bn*, approved for CLL, NHL and RA receptor) inhibition Veltuzumab Phase II Being developed for RA and oncology indications (Nycomed/Immunomedics) ofatumumab (Arzerra, GSK/Genmab) Market Approved for CLL; in Phase III for RA, Phase I/II for MS SBI-087 (Emergent BioSol/Pfizer) Phase II Being developed for RA, SLE B7 inhibition (T cell Abatacept (Orencia, BMS) Market FY11 sales: $917m, approved for RA, JIA inhibitor) IL-1R inhibition Anakinra (Kineret, SOBI) Market FY11 sales: $60m, approved for RA BAFF (cytokine) LY2127399 (Eli Lilly) Phase III Being developed for RA, SLE, MM, MS, CKD inhibition CD3 (T cell receptor) (Tolerx/GSK) Phase III Being developed for RA (in Phase II), thyroid eye disease inhibition CD6 (T cell receptor) T1h (Biocon/CIMAB) Phase III Being developed for RA, Ps; suppresses T-cell proliferation inhibition CD4 (T cell receptor) BT-061 (Abbott/Biotest) Phase II Being developed for RA, Ps inhibition GM-CSF (cytokine) MOR103 (Morphosys) Phase II Being developed for RA, MS KB003 (KaloBios) Phase II Being developed for RA MT203 (Amgen/Takeda) Phase I Being developed for RA GM-CSF receptor Mavrilimumab (AstraZeneca) Phase II Being developed for RA inhibition IL1B (cytokine) /XOMA 052 Phase II Being developed for T2D, RA, JIA, gout, Behcet’s disease inhibition (XOMA/Servier) IL6 (cytokine) (J&J) Phase II Being developed for RA, lupus nephritis inhibition ALD 518/BMS-945429 (BMS) Phase II Being developed for RA, CD & PsA /CDP6038 (UCB) Phase II Being developed for RA IL-17 (cytokine) LY2439821 (Eli Lilly) Phase III Being developed for Ps, RA (in Phase II). inhibition /AIN457 (Novartis) Phase III Being developed for Ps, PsA, RA (in Phase II), AS, and MS IL-17R inhibition AMG 827 (Amgen) Phase II Being developed for RA, CD, Ps, asthma IL-20 (cytokine) NN8226 (Novo Nordisk) Phase II Being developed for RA, Ps inhibition LTα (cytokine) RG7416 (Roche) Phase II Being developed for RA inhibition CCR1 ( GSK2941266 (GSK) Phase II Being developed for RA receptor) inhibition RANKL (cytokine) Denosumab (Prolia/Xgeva, Market Approved for osteoporosis, skeletal-related events with Amgen/GSK) bone metastases, in Phase II for RA Immune response TNFα-kinoid (Neovacs) Phase II TNFa conjugated to the highly immunogenic limpet protein, against TNFα KLH. PoC data expected mid 2011 Source: Edison Investment Research; Note: RA: rheumatoid arthritis; JIA: juvenile idiopathic arthritis; PsA: Psoriatic arthritis; AS: Ankylosing spondylitis; CD: Crohn’s disease; Ps: psoriasis, UC: Ulcerative colitis; CLL: chronic lymphocytic lymphoma; NHL: Non- Hodgkin’s lymphoma; SLE: systemic lupus erythematosus; MM: multiple myeloma; CKD: chronic kidney disease; T1D: Type 1 ; T2D: Type 2 diabetes. *Majority of sales of rituximab for oncology indications.

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Exhibit 7: Multiple sclerosis treatments on the market or filed for approval

Drug Dosing (administration) Efficacy (reduction in annualised relapse Safety 2011 sales (launch rate) date) Glatiramer 20mg once per day (s/c) Reduction of 29% (0.60 vs 0.84 with Injection site reactions and $3.88bn (1996) acetate placebo) transient chest pains (Copaxone, Teva) β-interferon Avonex: 30µg once per Avonex: Reduction of 18% (0.67 vs 0.82 Depression, injection site Avonex: $2.68bn (Avonex week (intramuscular) with placebo) reactions and flu-like (1996) Pfizer/Merck Betaseron: 0.25mg every Betaseron: Reduction of 53% (0.90 vs symptoms Beterseron: Serono; other day (subcutaneous) 1.3 with placebo) $1.55bn (1993) Betaseron, Rebif: 22/44µg three Rebif: Reduction of 32% (0.87 vs 1.28 Rebif: $2.35bn Bayer; times per week with placebo) (1998) Rebif, Biogen) (subcutaneous) 300mg once every four Reduction of 67% (0.22 vs 0.67 with PML, hypersensitivity, $1.51bn (2004) (Tysabri, weeks (intravenous) placebo) infections and hepatotoxicity Biogen/Elan) Fingolimod 0.5mg once per day Reduction of 55% (0.18 vs 0.40) with Heart failure and arrhythmias, $494m (2010) (Gilenya, (orally) placebo and of 52% (0.16 vs 0.33) with infections Novartis) Avonex Alemtuzumab 12mg for three days once CARE-MS I study: Reduction of 55% Auto-immune thyroid-related Filed for approval (Lemtrada, per year. (0.18) vs Rebif; CARE-MS II study: adverse events, cytopenias, Sanofi) Reduction of 49% (0.26) vs Rebif infections Teriflunomide 14mg once per day Reduction of 32% (0.37) vs placebo; no Mild to moderate diarrhea, Filed for approval (Aubagio, (orally) significant difference to Rebif (0.26 vs nausea and alopecia Sanofi) 0.22) BG-12 240mg, two or three DEFINE study: Reduction of 53% (BID) Mild to moderate diarrhea, Filed for approval (Biogen) times per day and 48% (TID) vs placebo nausea and abdominal pain CONFIRM trial: Reduction of 44% (BID) and 51% (TID) vs placebo Source: Edison Investment Research; Note: PML: progressive multifocal leukoencephalopathy.

Assuming MorphoSys is free to form new antibody alliances with Ylanthia, we would still be cautious about the size and rate at which new collaborations are formed. The production of antibodies is increasingly a commoditised process, so MorphoSys will have to demonstrate its new platform does indeed produce antibodies that have better characteristics more quickly. So it will take time for MorphoSys to convince companies to use its service, which will have a premium pricing.

AbD Serotec The core business of AbD Serotec is selling over 14,000 antibodies and immunological reagents through a global distribution network for research use; however, growth of the division is being driven by contracts to produce customised antibodies using the HuCAL platform for non-therapeutic uses and other technology alliances.

The research antibody business is struggling because of the impact of government austerity measures on research funding and stiff competition. The research antibody was growing at over 10% pa, but this has fallen to 2-3% and the situation is particularly challenging in Europe. It is also competing against competitors with considerably larger catalogues, which provide more data on their antibodies (Abcam sells c 90,000 products – primary antibodies account for 89% of sales – and provides detailed information on each of its antibodies).

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Exhibit 8: A summary of MorphoSys’s active partnerships that are developing therapeutic products

Partner Therapeutic areas Notes Absynth Infections Initiated in September 2010. MorphoSys generates antibodies against proteins associated with Biologics Staphylococcus aureus (including MRSA) using HuCAL PLATINUM and Absynth tests the antibodies in disease models; MorphoSys will be solely responsible for developing and partnering of any products. Absynth received an upfront payment, and could receive milestones and royalties. ContraFect Infections The five-year collaboration was signed in 2011. ContraFect will receive access to HuCAL PLATINIUM; MorphoSys will earn annual licence fees and potential milestones and royalties. Galapagos Bone and joint Collaboration initiated in 2008 to develop treatments of diseases that include rheumatoid arthritis, diseases osteoarthritis and osteoporosis. Galapagos generates the antibody targets and MorphoSys produces the fully human antibodies against them. The resultant antibodies will be developed until proof-of- concept clinical trials have been completed, before being partnered for subsequent development and marketing. All revenues and all costs are shared equally. GeneFrontier Various The initial agreement was signed in 2004 and extended in 2007. MorphoSys has installed the HuCAL technology at GeneFrontier laboratories to provide Japanese institutes with HuCAL derived research antibodies in exchange for commercialisation rights. MorphoSys receives an annual technology access fee from GeneFrontier, and has access to any research data and an option on the worldwide rights to any antibody programme that has used HuCAL technology. Novartis Various In December 2007, Novartis and MorphoSys formed a 10-year strategic alliance with a two year option. MorphoSys will receive €400m over the 10 years, as well as milestones (potentially over $1bn, >€250m risk-adjusted) and royalties/profit share (MorphoSys can co-promote products in certain countries). There is a steady state of 20 discovery programmes, with c 75 FTEs assigned. Four therapeutic antibodies are in Phase II clinical trials and a further one is in a Phase I study. Pfizer Various Pfizer has signed a 10-year agreement to use the Slonomics platform during the development of therapeutic proteins. MorphoSys has received an up-front payment and will be paid annual licence fees over the patent life of the Slonomics technology (until 2023). MorphoSys develop therapeutic antibodies with HuCAL GOLD for Pfizer from 2003 to 2011. Source: Edison Investment Research; Note: MorphoSys has completed collaborations with Astellas, Bayer Schering, Boehringer Ingelheim, Daiichi-Sankyo, J&J, Merck & Co, OncoMed, ProChon Biotech, Roche and Shionogi.

Exhibit 9: AbD Serotec’s diagnostic antibodies pipeline

Therapeutic field Partner Status Autoimmune diseases Phadia Market Rheumatoid arthritis Proteomika Market Maternal healthcare Not disclosed Market Source: MorphoSys; Note: There are two other programmes at the antibody generation stage.

However, MorphoSys is able rapidly to develop new, high-affinity antibodies to order on a competitive basis because of the HuCAL and Ylanthia platform. This is particularly important in the diagnostic antibodies market or for pharmaceutical companies, which need high-quality, novel antibodies to support drug discovery programmes. It is developing diagnostic antibodies for many clients, including Phadia and Proteomika, and similarly develops research antibodies for Merck & Co and Shinogi.

AbD Serotec also generates revenues from technology licensing agreements, if the partner does not use the technology in therapeutic programmes. Thus, the division earns licence fees from Dana-Faber and Novozymes, which use Slonomics for the development of research tools and industrial enzymes, respectively.

MorphoSys is cautious about the division’s growth prospects in 2012 (revenue guidance of €20-22m, compared to €19.3m in 2011) but hopes to achieve growth of 10% in subsequent years. In future years, some growth should come from royalty streams for diagnostic antibodies (up to c 1m per diagnostic antibody) so that AbD Serotec can achieve double-digit operating margins (5.0% in 2011). So far three sets of diagnostic antibodies are on the market (Exhibit 9).

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Sensitivities

MorphoSys, like all biotechnology companies, is sensitive to the outcome of clinical trials. But its broad pipeline and business model, in which partners bear most of the development risk, means its risk profile is considerably lower than that of other drug discovery and development companies. Thus, a clinical trial failure will not put the future of the company at risk.

However, MorphoSys’s prospects in 2012 and 2013 will be significantly affected by the outcome of the Phase Ib/II study with MOR103 in RA. As previously discussed, MorphoSys’s ability to out-license the programme (and development continuing in RA) depends on a strong efficacy signal being detected. If the results are disappointing, the product’s commercial potential will depend on the outcome of the Phase Ib trial in MS.

The development risk associated with monoclonal antibodies is lower than that with small molecules; c 25% of monoclonal antibodies successfully complete clinical trials compared with less than 10% of small chemical entities (Tufts Centre for the study of Drug Development). But this benefit is partially offset by the added uncertainty associated with the reimbursement of biological drugs because of their higher prices.

MorphoSys has indicated that it will remain profitable, so its ability to advance its proprietary products depends on the profits from partnered drug discovery (licence fees and milestones) and to a limited degree AbD Serotec. MorphoSys’s main revenue stream is from the Novartis alliance (c €40m pa), so it would be significantly affected if Novartis changed its strategy. However, this is unlikely because of the size and long-term nature of the alliance. Milestone payments are dependent on clinical trial success and commercial considerations of partner companies. MorphoSys could generate larger licence fees if the Ylanthia platform enables major new alliances to be formed, without infringing the Novartis alliance agreement.

Valuation

Our valuation of MorphoSys is increased by €30m at €659m (€28.51 per share) following a detailed review of our valuation. The key assumptions for the risk-adjusted, sum-of-the-parts DCF valuation are detailed in Exhibit 10. The value of any royalties from unnamed clinical programmes (including Novartis’s unknown Phase II product, or of the c 50 candidate antibodies that are yet to reach the clinic) are excluded from our calculations. The main changes to the valuation are:

 the inclusion of potential royalties from LFG316 and BI 836845;  a reduction of 15% to the risk adjustment for gantenerumab to 30% following Roche’s decision to expand the current clinical trial into a pivotal study – a high level of risk adjustment is maintained because of the challenges of demonstrating a clinical benefit in AD and competition from other anti-β-amyloid antibodies (Pfizer/Elan’s bapineuzumab and Eli Lily’s solanezumab, both in Phase III development);

 removal of potential royalties from carlumab in CRPC; and  changes to discount factors due to the progression of time.

The valuation demonstrates that the main value drivers are the proprietary products, especially MOR103, and the potential royalty streams from its partnered products. The partnered drug discovery after proprietary drug development and unallocated costs is worth €70m and is not a major value driver because MorphoSys invests most of the profits from partnered drug discovery in the development of its proprietary pipeline.

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Financials

MorphoSys’s revenues in 2012 are forecast to be 25% lower at €75.3m (company guidance: €75- 80m) than they were in 2011; this is primarily because the company received a one-off milestone from Novartis of c €28m in Q111 for the completion of the HuCAL technology transfer (revenues in Q112 were 67% lower than in Q111 at €16.1m). Despite the decline in revenues, MorphoSys has repeated that it will remain profitable and we forecast an operating profit of €1.0m in 2012 (company guidance: €1-5m). Profitability is being maintained by a reduction in proprietary R&D spending from €32.6m to a forecast €20.7m (lower costs associated with the Phase Ib/II MOR103 trial, which has completed recruitment and in 2011 clinical trial material was manufactured).

The company has a strong balance sheet at Q112 with cash of €137m (including an interest-bearing €10.0m loan to a third party). MorphoSys will probably use some of this capital to buy new technologies or products. However, any acquisitions are likely to be limited, similar to the purchase of Slonomics for €19m or MOR208 for a $13m upfront payment (no other financial terms disclosed), to maintain the strong financial position.

Exhibit 10: Valuation of MorphoSys

Value driver Value (€m) Value per share (€) Notes Partnered drug 243.0 10.52 DCF valuation of cash flows until 2025; sales in 2012 of €52.5m (including discovery potential milestones) grow at a CAGR of 8.1% for three years, growth rate then expected to decline to 2% over next four years; WACC=10% AbD Serotec 39.7 1.72 Three-stage DCF valuation; WACC=10%, terminal growth 2.5% MOR103 royalties in 136.7 5.91 For RA, launch date: 2016; peak sales: $1.2bn; risk adjustment 25%; royalty: RA & milestones 15%; milestones, $30m in 2013, $100m in 2015, $150m in 2016 MOR103 royalties in 62.2 2.69 For MS, launch date: 2016; peak sales: $1.5bn; risk adjustment 15%; royalty: MS 15% MOR208 royalties 35.6 1.54 For CLL, ALL and NHL, launch date: 2016; peak sales: $1.1bn; risk adjustment 20%; royalty: 10% (effective rate after royalties to Xencor) MOR202 royalties 4.9 0.21 For MM, launch date: 2017; peak sales: $240m; risk adjustment 5%; royalty: 15% Gantenerumab* 41.2 1.78 For AD, launch date: 2018; peak sales: $1.62bn; risk adjustment 30%; royalty: royalties 5% BHQ880* royalties 7.0 0.30 For MM, launch date: 2015; peak sales: $240m; risk adjustment 30%; royalty: 5% BYM338* royalties 23.6 1.02 For cachexia, launch date: 2015; peak sales: $820m; risk adjustment 30%; royalty: 5% carlumab* royalties 18.5 0.80 For IPF: launch date: 2016; peak sales: $770m; risk adjustment 30%; royalty: 5% CNTO1959* 25.4 1.10 For psoriasis, launch date: 2016; peak sales: $990m; risk adjustment 30%; royalties royalty: 5% LFG316* royalties 18.8 0.81 For AMD, launch date: 2017; peak sales: $875m; risk adjustment 30%; royalty: 5% CNTO3157* 11.0 0.48 For asthma, launch date: 2017; peak sales: $615m; risk adjustment 10%; royalties royalty: 5% Other royalties 14.3 0.62 OMP-59R5*, OMP-18R5*, BI 836845* and BAY 94-9343* for cancer, launch date: 2017; peak sales per product: $500m; risk adjustment 10%; royalty: 5% Cost of proprietary (98.2) (4.25) DCF valuation of cashflows until 2025; WACC=12.5% drug discovery Unallocated costs (74.5) (3.22) DCF valuation of cashflows until 2025; WACC=10% Other 12.7 0.55 Grants, capital expenditure, depreciation, and changes in working capital Cash 137.4 5.94 Net cash at Q112 Total 659.0 28.51 Source: Edison Investment Research; Note: WACC of 12.5% was used on all potential product royalties; *Partnered products.

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Exhibit 11: Financial summary €'000s 2009 2010 2011 2012e 2013e 2014e Year end 31 December IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 81,024 87,036 100,777 75,320 79,708 84,812 Cost of Sales (6,744) (7,284) (7,024) (7,549) (7,764) (7,998) Gross Profit 74,280 79,752 93,753 67,771 71,944 76814 EBITDA 16,751 15,969 18,787 6,794 7,888 9,124 Operating Profit (before GW and except.) 15,122 13,834 20,496 4,464 6,871 8,051 Intangible Amortisation (3,720) (3,985) (8,338) (3,398) (4,112) (3,845) Exceptionals/Other 0 0 0 0 0 0 Operating Profit 11,402 9,849 12,158 1,066 2,759 4,206 Net Interest 1,992 4,089 1,412 1,017 1,425 1,463 Other (360) (767) (2,139) 0 0 0 Profit Before Tax (norm) 17,114 17,923 21,908 5,481 8,296 9,515 Profit Before Tax (FRS 3) 13,034 13,172 11,430 2,084 4,183 5,669 Tax (4,070) (3,975) (3,214) (618) (1,255) (1,701) Deferred tax 0 0 0 0 0 0 Profit After Tax (norm) 13,044 13,948 18,694 4,863 7,040 7,814 Profit After Tax (FRS 3) 8,964 9,196 8,216 1,465 2,928 3,968 Average Number of Shares Outstanding (m) 22.5 22.7 22.9 23.0 23.1 23.1 EPS - normalised (c) 56.5 59.2 72.3 21.2 30.5 33.8 EPS - FRS 3 (c) 39.9 41.6 35.9 6.4 12.7 17.2 Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 0.0 Gross Margin (%) 91.7 91.6 93.0 90.0 90.3 90.6 EBITDA Margin (%) N/A 18.3 18.6 9.0 9.9 10.8 Operating Margin (before GW and except.) (%) N/a N/A N/A N/A N/A N/A BALANCE SHEET Fixed Assets 50,499 80,047 73,718 70,850 68,511 66,561 Intangible Assets 44,109 69,208 66,028 62,677 59,760 57,187 Tangible Assets 4,997 6,190 6,106 6,573 7,150 7,774 Other 1,394 4,649 1,583 1,601 1,601 1,601 Current Assets 155,592 132,506 154,693 155,909 163,616 171,958 Stocks 3,990 4,135 3,281 4,136 4,254 4,382 Debtors 11,157 15,009 12,203 8,254 8,735 9,294 Cash 135,139 108,422 134,365 139,524 146,632 154,166 Other 5,306 4,939 4,843 3,994 3,994 3,994 Current Liabilities (24,252) (21,351) (23,751) (18,558) (19,099) (20,930) Creditors (24,252) (21,351) (23,751) (18,558) (19,099) (20,893) Short term borrowings 0 0 0 0 0 0 Long Term Liabilities (7,904) (5,281) (7,524) (7,380) (7,678) (7,785) Long term borrowings (33) (128) (74) (74) (74) (74) Other long term liabilities (7,871) (5,153) (7,451) (7,307) (7,605) (7,711) Net Assets 173,934 185,922 197,136 200,821 205,349 209,719 CASH FLOW Operating Cash Flow (2,141) 4,571 28,564 7,266 10,152 9,856 Net Interest (281) 121 358 1,016 1,425 1,463 Tax 1,443 (2,160) (1,852) (1,851) (1,679) (817) Capex (3,810) (13,810) (3,453) (2,827) (2,790) (2,968) Acquisitions/disposals 0 (18,096) 0 0 0 0 Financing 1,546 2,836 1,377 607 0 0 Dividends 0 0 0 0 0 0 Other (126) (640) 0 794 0 0 Net Cash Flow (3,369) (27,178) 24,994 5,006 7,108 7,534 Opening net debt/(cash) (137,817) (135,106) (108,295) (134,291) (139,450) (146,558) HP finance leases initiated 0 0 0 0 0 0 Exchange rate movements (91) (51) (177) (11) 0 0 Other 749 418 1,178 164 (0) (0) Closing net debt/(cash) (135,106) (108,295) (134,291) (139,450) (146,558) (154,092) Source: Edison Investment Research, company accounts

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Contact details Revenue by geography

Lena-Christ-Str 48 N/A 82152 Martinsried/Planegg, Germany +49 (0) 89 899 270 www.morphosys.com

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation

EPS 09-13e (27.4%) ROCE 12e 24.9% Gearing 12e N/A Litigation/regulatory  EPS 11-13e (40.4%) Avg ROCE 09-13e 27.4% Interest cover 12e N/A Pensions  EBITDA 09-13e (25.2%) ROE 12e 8.4% CA/CL 12e 6.5 Currency  EBITDA 11-13e (34.8%) Gross margin 12e 93.0% Stock turn 12e 11.9 Stock overhang  Sales 09-13e 1.3% Operating margin 12e 20.3% Debtor days 12e 44.2 Interest rates  Sales 11-13e (7.0%) Gr mgn / Op mgn 12e 4.6% Creditor days 12e 69.2 Oil/commodity prices 

Management team

CEO: Dr Simon Moroney Chairman: Dr Gerald Möller Dr Simon Moroney is one of the founders of MorphoSys. He has Dr Gerald Möller has over 30 years of experience in senior held positions at Harvard Medical School, the University of British management positions in the pharma and diagnostics industry. He Columbia and the University of Cambridge. He also worked on the was CEO of Boehringer Mannheim Group and on the executive first generation of anti-cancer antibody conjugates at ImmunoGen committee at Roche. He is also chairman of FIND and chairman of Inc. the supervisory board at BioAgency AG.

CFO: Jens Holstein Chief development officer: Dr Arndt Schottelius Jens Holstein became CFO in May 2011. He held various general Dr Arndt Schottelius became CDO in 2008, having been Medical management and financial positions at Fresenius between 1995 and Director, Immunology Department at Genentech. Previously he has 2010, including being CFO of Fresenius Kabi Asia Pacific. worked at Berlex Biosciences and Schering AG.

Principal shareholders (%)

Novartis 6.97 AstraZeneca 4.98 Oppenheimer Funds 4.32 Norges Bank Investment Management 2.65 MorphoSys management and employees 1.99 Credit Suisse Asset Management 1.83

Companies named in this report

Abbott (ABT), Amgen (AMGN), AstraZeneca (AZN), Bayer (BAYN), Biogen Idec (BIIB), Boehringer Ingelheim, Bristol-Myers Squibb (BMY), Elan, Eli Lilly (LLY), Galapagos (GLPG, GlaxoSmithKline (GSK), J&J (JNJ), Merck & Co (MRK), Merck KGaA , Novartis (NOVN), Novo Nordisk (NVO), OncoMed, Pfizer (PFE), Roche (ROG), Sanofi (SAN), Shionogi (4507), Teva (TEVA), UCB (UCB), Xencor

EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. It has won industry recognition, with awards both in Europe and internationally. The team of 90 includes over 55 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 350 companies across every sector and works directly with corporates, fund managers, investment banks, brokers and other advisers. Edison’s research is read by institutional investors, alternative funds and wealth managers in more than 100 countries. Edison, founded in 2003, has offices in London, New York and Sydney and is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584).

DISCLAIMER Copyright 2012 Edison Investment Research Limited. All rights reserved. This report has been commissioned by MorphoSys and prepared and issued by Edison Investment Research Limited for publication in the United Kingdom. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison Investment Research Limited at the time of publication. The research in this document is intended for professional advisers in the United Kingdom for use in their roles as advisers. It is not intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. A marketing communication under FSA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison Investment Research Limited has a restrictive policy relating to personal dealing. Edison Investment Research Limited is authorised and regulated by the Financial Services Authority for the conduct of investment business. The company does not hold any positions in the securities mentioned in this report. However, its directors, officers, employees and contractors may have a position in any or related securities mentioned in this report. Edison Investment Research Limited or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. This communication is intended for professional clients as defined in the FSA’s Conduct of Business rules (COBs 3.5).

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