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Edited Transcript of MOR.DE earnings conference call or presentation 7-Aug-19 12:00pm GMT

Half Year 2019 Morphosys AG Earnings Call

MARTINSRIED/PLANEGG Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Morphosys AG earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jens H. Holstein

MorphoSys AG - CFO & Member of the Management Board

* Malte Peters

MorphoSys AG - Chief Development Officer & Member of the Management Board

* Sarah Fakih

MorphoSys AG - VP & Head of Corporate Communications and IR

* Simon E. Moroney

MorphoSys AG - Chairman of the Management Board & CEO

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Conference Call Participants

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* Anastasia Karpova

Kempen & Co. N.V., Research Division - Research Analyst

* Daniel Wendorff

Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals

* Danielle Catherine Brill

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* Graig Suvannavejh

Goldman Sachs Group Inc., Research Division - Executive Director & Senior Equity Research Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Jason Nicholas Butler

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Shanshan Xu

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Zoe Karamanoli

RBC Capital Markets, LLC, Research Division - Analyst

* Victoria English

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the MorphoSys Q2 Results 2019 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) Now I would like to turn the conference over to Sarah Fakih. Please go ahead.

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Sarah Fakih, MorphoSys AG - VP & Head of Corporate Communications and IR [2]

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Thank you. Good afternoon, good morning, and welcome to our Q2 2019 conference call and webcast. My name is Sarah Fakih, and I'm the Head of Corporate Communications and Investor Relations at MorphoSys. Before we start, I would like to remind you that during this conference call, we will present and discuss certain forward-looking statements concerning the development of MorphoSys' core technology, the progress of its current research and development programs and initiation of additional programs. Should actual results differ from the company's assumptions, ensuing actions may differ from those anticipated. You are therefore cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

With me on the call today are Simon Moroney, our Chief Executive Officer; Jens Holstein, our Chief Financial Officer; and Malte Peters, our Chief Development Officer.

In the presentation, Simon will start by giving you an operational review of the second quarter as well as an outlook for the rest of this year. After that, Jens will review the financial results of the second quarter and the first 6 months of 2019. The presentation will last about 30 minutes. After the presentation, we will all be available for your questions. You will find a slide deck for this presentation on our corporate website.

And with this, I would now like to hand over to Simon Moroney.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [3]

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Thank you, Sarah, and also from me, a warm welcome to our Q2 results call. MorphoSys continued to make excellent progress on multiple fronts in the second quarter of 2019. As usual, we'll go through the advances that we've made during the quarter as well as a couple of events that happened after the quarter ended. The announcement of Jean-Paul Kress as my successor, effective September 1, 2019, was a decisive event for the company. We're delighted to welcome such a strong and, we believe, perfectly suited candidate to take the helm in more places. Jean-Paul has over 20 years of experience in senior positions in the industry and a strong track record of success, especially in commercial and operational leadership. These were important criteria for us in the search.

Equally important was the fact that Jean-Paul has transatlantic experience. The future of MorphoSys will increasingly be based on operating units in Europe and the U.S. and with Jean-Paul, we believe we've found the ideal person to secure our future. I'm convinced that he will do an outstanding job for MorphoSys, especially regarding the critically important launch and commercialization of our lead program tafasitamab.

Turning now to the operational review. I'll start with our Proprietary Development segment. Tafasitamab is, of course, our most advanced proprietary program. During Q2, we availed a descriptor for the key technological feature of this antibody, namely ENFORCER. ENFORCER stands for enhanced format for cancer eradication and refers to the structural modification of the antibody that brings about better recruitment of effector cells and increased elimination of cancer cells.

As a reminder, we're currently running 3 clinical trials with this antibody. In patients with relapsed or refractory large B-cell lymphoma who are ineligible for high-dose chemotherapy and autologous stem cell transplantation, those trials are L-MIND and B-MIND. In relapsed or refractory CLL and SLL, we're running the Phase II COSMOS study. Strictly speaking, we should count 4 trials, the fourth being the synthetic control arm for L-MIND, which uses real-world data from relapsed and refractory DLBCL patients who have been treated with lenalidomide only. This study is progressing well, and the data will be part of the filing package to the regulatory authorities. During the quarter, we announced positive developments for both the L-MIND and B-MIND. In May, L-MIND reached its primary completion with a follow up of at least 1 year for all enrolled patients. The entire data set included 80 patients and was presented at the 15th International Conference on Malignant Lymphoma in Lugano. Efficacy results were based on response rate assessed by an independent review committee. The effective response rate was 60% with a complete response rate of 43%. Median progression-free survival was 12.1 months and responses were durable with a median duration of response of 21.7 months. Median overall survival is not reached. These outstanding results will go into our regulatory filings. We're delighted by the strength of the data from the primary analysis and are especially encouraged by the durability of the responses and the long overall survival that we've seen. We've also made great progress with our plan to seek regulatory approval for tafasitamab in Europe based on L-Mind. We announced last night, our intention to submit a marketing authorization application to the European Medicines Agency, EMA, based on very constructive discussions we've had with them. Last month, we sent to EMA a letter, announcing our intent to submit L-MIND and aim to complete the submission by mid-2020. Under the assumption that the submission is reviewed positively, we could expect earliest approval in Europe in 2021. For the B-MiND trial, we've just disclosed the biomarker that was implemented in agreement with the FDA as an amendment in the first quarter of this year. This biomarker, which serves as a co-primary endpoint is a low baseline peripheral blood natural killer cell count. Preclinical data generated at MorphoSys suggests that tafasitamab enhanced ability to recruit effector cells, predominantly NK cells may be of particular benefit for patients with a low NK cell count. All together, we're excited about the progress of the tafasitamab program. Supported by the compelling primary analysis data, we are on track to complete our planned BLA submission of L-MIND to the U.S. FDA by the end of 2019, which could, subject to FDA acceptance, allow for an approval in mid-2020.

Let me continue with an update on MOR106, our antibody directed against IL-17C for the treatment of inflammatory diseases, currently in clinical development for atopic dermatitis. You'll recall that we jointly discovered and developed the antibody with Galapagos before signing an exclusive license agreement with Novartis in July of last year.

Since the effective date of the agreement, all the research, development, manufacturing and commercialization cost for MOR106 are owned by Novartis. There are currently 3 studies ongoing for MOR106. The newer study in this program is the Phase II GECKO trial, which was started in April of this year to evaluate the combination of MOR106 with topical corticosteroids. GECKO serves as an IND opener with the FDA as the combination with corticosteroids needs to be shown to be safe for the treatment of the atopic dermatitis. The other studies are the Phase II IGUANA trial in atopic dermatitis patients, which we started together with Galapagos in May 2018. This assesses the safety and efficacy of an intravenous application of MOR106 in patients with moderate-to-severe atopic dermatitis. And a Phase I bridging study that evaluates the safety and efficacy of a subcutaneous formulation of MOR106 in healthy volunteers and atopic dermatitis patients. Turning to another program from our proprietary development segment, we received very good news in July for Otilimab, the new INN name for MOR103. Our proprietary antibody directed against GM-CSF out-licensed to GSK. GSK has now started a Phase III development program in rheumatoid arthritis called ContRAst, which comprises 3 pivotal studies and one long-term extension study. Based on Phase IIb data, Otilimab seems to have a particularly strong effect on the pain experienced by patients with moderate-to-severe RA and could there -- therefore offer improvement in their quality of life. The program compares the antibody Otilimab to 2 different approved drugs, a JAK inhibitor and an anti-IL6 antibody and will enroll between 3,500 and 4,100 patients. We're delighted to see GSK's major commitment to the program.

Start of the Phase III program triggered a milestone payment of EUR 22 million to us, which Jens will talk about in his presentation.

Let me now turn to MOR202, our proprietary anti-CD38 antibody. We have licensed rights of MOR202 in the Chinese region to I-Mab Biopharma and they are currently conducting 2 clinical studies of MOR202 in multiple myeloma, a Phase II study in third line and a Phase III study in combination with lenalidomide in second line. The Phase III trial was initiated in April and triggered a milestone payment of $3 million to us. At MorphoSys, we will shortly start clinical development with MOR202 in an inflammatory autoimmune disease of the kidneys called anti-PLA2R antibody positive membranous nephropathy. This disease is mediated by autoantibody against the phospholipase receptor called PLA2R, which causes the deposition of immune complexes along with glomerular membrane and as a result, dysfunction of kidneys. There are currently no approved treatments available, and there is a high need for the new treatment options. The study has a very clear endpoint and should provide a good proof-of-concept for the use of MOR202 in autoimmune diseases.

Shortly after the quarter ended, we announced an option agreement with Vivoryon Therapeutics. This deal gives us access to a family of slow molecule inhibitors of the QPCTL enzyme that is involved in CD47 served out of signaling to the field of oncology. The deal gives us sufficient time to evaluate the compounds before committing to an exclusive license. The price of the option is a EUR 15 million equity stakes in Vivoryon, which will be taken up later this year. The CD47 pathway, also known as don't eat me signal, is used by cancer cells to evade the innate immune system. The Small Molecule inhibitors are a highly innovative and differentiated approach to interfering with this don't eat me signal. Blocking the QPCTL enzyme prevents the formation of functional CD47 before it's even presented on the cancer cell surface. This approach will, therefore, unmask and expose cancer cells to the immune system. The key to assess the potential of these compounds in combination with our antibodies, first and foremost, the tafasitamab. Phase IIa clinical safety data are already available for Vivoryon's lead compounds PQ912, which should accelerate our own development. These compounds have potential whatever effect the cells play a role in cancer treatment and, therefore, could represent an extremely valuable addition to our proprietary portfolio. I'll turn now to out Partnered Discovery segment. Even though we're no longer actively seeking deals in this segment, it remains a substantial part of our overall value proposition and our balanced financing model. This segment comprises more than 100 programs currently in R&D, 24 of which are in clinical development. Our loyalty participation in these promising drug programs will continue to provide more focus with a reliable revenue stream well into the future. The most advanced product in this segment is Janssen's Tremfya, which in July 2017 became the first drug based on our antibody technology to reach the market. In June of this year, Janssen reported that the 2 ongoing Phase III trials in psoriatic arthritis met their primary endpoint. The data is planned to be presented at medical conferences later this year.

According to Janssen, this data will serve as the basis of submissions to the U.S. FDA and European EMA, later this year, seeking approval for treatment of psoriatic arthritis. We're pleased by the broad clinical development in a variety of indications and are looking forward to clinical updates and presentations of data by Janssen. To conclude the review, our pipeline currently comprises of 119 programs, of which 1 is on the market, 5 are in registrational studies and 24 are in other clinical trials. Before handing over to Jen, I'll summarize what you can expect from us in the months ahead. Starting with our Proprietary Development segment. Here, we expect the following news flow. [First up] will probably be headline data from the lenalidomide-only control arm for L-MIND. We plan to present data from this study at an appropriate medical conference towards the end of this year but we'll probably announce headlines data by press release prior to the conference. Our BLA submission to the FDA based on L-MIND is planned to be completed by end of this year, enabling approval by mid-2020, assuming a positive FDA review. We remain on track to achieve this important goal. For B-MIND, the event-driven interim analysis is expected to occur in Q4 of this year, following a longer-than-expected duration of response in the overall patient population. Our preparation for the Phase Ib frontline DLBCL study with tafasitamab are ongoing, and we expect to start the trial in the fourth quarter of this year. The trial will evaluate safety and first signs of efficacy of combination of tafasitamab plus R-CHOP or tafasitamab plus R-CHOP plus lenalidomide in previously untreated DLBCL patients. Depending on the outcome, we plan to start a pivotal Phase II/III study in mid-2020 for which we would expect to enroll about 650 patients. For COSMOS, we plan to present updated data at the medical conference towards the end of the year.

Turning to MOR106, we expect a number of milestones from the ongoing studies over the next 12 to 16 months. For IGUANA, the primary completion is now scheduled for the first half of 2020. As the number of patients has been increased from 180 to 240, the recruitment will take a bit longer than initially expected. For GECKO, we expect primary completion in mid-2020. The Phase I bridging study is currently scheduled to reach its primary completion in the second half of 2020. In addition to the ongoing trials, Galapagos and MorphoSys are preparing to start the Japanese ethno-bridging study in the second half of this year. For MOR202, I-Mab will continue the ongoing trials in multiple myeloma. We've also announced plans to start clinical development in Systemic Lupus Erythematosus. At MorphoSys, we'll start a Phase I/II study of MOR202 and anti-PLA2R antibody positive membranous nephropathy, as mentioned earlier, in Q4 of this year.

Finally, we're conducting preclinical validation experiments on the Vivoryon's family of QPCTL inhibitors to inform our decision on whether or not to exercise our exclusive option. We expect to take up our equity stake in Vivoryon before year end.

Turning to the Partnered Discovery segment, according to clinicaltrials.gov by the end of 2019, private completion may be reached in up to 8 clinical trials in Phase II and III from our partners. These include a potentially pivotal Phase IIb study by Mereo BioPharma in osteogenesis imperfecta, brittle bone syndrome, in HuCAL antibody setrusumab and further Phase III trials of Tremfya, conducted by Janssen in psoriatic arthritis. As mentioned earlier, we also await submission of the BLA for Tremfya in psoriatic arthritis later this year as communicated by Janssen. Moreover, Janssen plans to start a Phase I trial with guselkumab in Chinese healthy volunteers. The Phase II trial of guselkumab pityriasis rubra pilaris, the Phase II/III trial in ulcerative colitis and a Phase III trial in palmoplantar-non-pustular psoriasis, according to clinicaltrials.gov.

As a reminder, we have no control over when and to what extent our partners will communicate news about any programs based on our technology. That concludes my part of the presentation. I'll now hand over to Jens for his financial review.

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Jens H. Holstein, MorphoSys AG - CFO & Member of the Management Board [4]

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Thank you, Simon. Ladies and gentlemen, also from my side a warm welcome to all of you. As Simon already planned it out, we're very pleased with the developments and outperformance in the second quarter of the year. Let's now have a closer look at the most important financial figures at MorphoSys of the second quarter of 2019. I would like to start with our P&L statement on Slide 17. Gross revenues in Q2 totaled EUR 34.7 million compared to revenues of EUR 8.1 million in the second quarter of 2018. This increase was mainly driven by the milestone payments from GSK in the amount of EUR 22 million due to the start of the clinical development program in rheumatoid arthritis, as mentioned by Simon before. Please note that this payment had to be recognized in the second quarter in accordance with IFRS 15 on revenues from variable considerations. In addition, increasing Tremfya royalties contributed to the increase in our group revenues. As in previous quarters, the contractual relative reports from Janssen and Tremfya has not been received yet. Tremfya royalties books for Q2 2019 were estimated based on the public announcement by Janssen, J&J. Final numbers can still vary slightly on the basis of foreign exchange effects. Looking at expenses, our total operating expenses reached EUR 40.3 million.

The expenses for research and development, amounted to EUR 24.7 million compared to EUR 25.8 million in Q2 2018. Expenses for proprietary R&D and technology development amounted to EUR 22.5 million compared to EUR 23.7 million in the previous year.

Selling expenses rose to EUR 3.2 million as compared to EUR 1.5 million, the year before. General and administrative expenses increased to EUR 7.5 million versus EUR 5.5 million in Q2 2018. Cost of sales for the second quarter of 2019 amounted to EUR 4.9 million. This item consists of expenses related to services provided to partners such as Novartis or ImiD and also manufacturing costs, fully expected market supply of tafasitamab.

In the second quarter of 2018, this cost item had not been reported. Earnings before interest and taxes amounted to minus EUR 5.7 million in Q2 2019 in comparison to minus EUR 24.1 million in the second quarter of 2018. Our consolidated net loss after taxes amounted to EUR 5.9 million in Q2 2019 compared to a net loss after taxes of EUR 23.5 million in Q2 of the previous year. The earnings per share for Q 2019 reached minus EUR 0.19 after minus EUR 0.76 in Q2 of the previous year.

I'm now on Slide 18 to give you an overview of our segment reporting for Q2 2019. In our Proprietary Development segment, in which we focus on the research and clinical development of our own drug candidates. We recorded revenues of EUR 25.9 million in the second quarter of 2019 as compared to EUR 0.1 million in Q2 of 2018. As mentioned earlier, this increase was mainly driven by the milestone payment of EUR 22 million from GSK.

Operating expenses in the second end amounted to EUR 32.9 million (sic) [EUR 40.3 million] as compared to EUR 24.7 million (sic) [EUR 32.7 million] in Q2 2018. The main reason for this increase is our increasing investment for the development of our proprietary programs. Consequently, the EBIT of our Proprietary Development segment came in at minus EUR 7 million compared to minus EUR 24.6 million in the previous year. In our Partnered Discovery segment, we apply our proprietary technology to discover new antibodies [for third parties] and benefit from our partner's development advancements through R&D funding, licensing success-based milestone payments and royalties.

In the second quarter of 2019, revenues amounted to EUR 8.7 million as compared to EUR 8.1 million in Q2 2018. Consequently, the EBIT in our partner discovery segment increased and amounted to EUR 6.3 million compared to 5.5 million in 2018. Moving on the balance sheet on Slide 19. As of June 30, 2019, we recorded total assets of EUR 556.8 million. This represents an increase of EUR 18 million compared to year-end 2018. The increase is a result of the application of the new IFRS 15 standard with respect to leases and higher accounts receivables and contract assets related to the GSK milestone offset, by the use of cash and cash equivalents for operations in the first half of 2019. At the end of Q2, we had a cash position of EUR 409.2 million compared to EUR 454.7 million as of December 31, 2018. On the balance sheet, this cash position is reported under the following items: cash and cash equivalents, financial assets at fair value for profit and loss, and turned and unturned other financial assets at amortized costs. The numbers of shares issued totaled 31,839,572 at the end of Q2 2019, which is the same number as of year-end 2018.

So to briefly sum up the key figures for the first half year, please turn to Slide 20. We see Group revenues amounted to EUR 48.2 million for the first half of 2019. In the first 6 months of '18, Group revenues reached EUR 10.9 million. As for revenues in the first 6 months of 2019, EUR 43.4 million were success-based payments. The majority of the sum was made up by the milestone payment received from GSK as well as Tremfya royalty income that amounted to, in total, [EUR 13.7 million]. R&D expenses amounted to EUR 49.3 million for the first 6 months of which EUR 45.1 million represents R&D expenses for the proprietary development and technology development. Hence, the EBIT in the first half of 2018 came in at minus EUR 29.3 million compared to minus EUR 43.2 million for the first half of 2018. The consolidated net loss reached EUR 28.5 million for the first 6 months of 2019.

Let's now move to our financial guidance. Today, we would like to reaffirm our financial guidance for the full year 2019, which was updated in July in connection with the start of the Phase III clinical development program for otilimab, formerly MOR103, as described before. For 2019, we anticipate group revenues in the range of EUR 65 million to EUR 72 million. Thereof, we estimate Tremfya royalties to be in the range of EUR 23 million to EUR 30 million when it comes to U.S. currency. Given the book results for the first 6 months, we believe that the royalty income from those sources will come in at the upper end of the guidance. We expect an EBIT in the range of minus EUR 105 million to minus EUR 115 million. Our proprietary R&D expenses, including technology development in 2019 are anticipated in the corridor of EUR 95 million to EUR 105 million. This guidance includes the recently announced cost for the first preclinical activities on PQ912 that we recently in-licensed from Vivoryon. Of note, the guidance stock prediction revenues from potential future partnerships or licensing agreements such as tafasitamab or any other compound that is in our proprietary development. Effects and potential in-licensing or co-development deals for new development candidates are also not included in the guidance.

Before I now conclude my section, let me shortly take the opportunity to thank Simon, in the name of everyone in the company, for 27 years of service to MorphoSys as the founder and CEO. Today -- today's call is Simon's last one as CEO. So it's a very special one for him. Simon, I'm sure that everyone on this call wishes you all the best for the future. And I'm convinced that you will stay close to the company in the years to come as you remain a shareholder, going forward. Thank you, Simon. And again, all the best for your future.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [5]

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Thank you, Jens. Thank you very much.

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Jens H. Holstein, MorphoSys AG - CFO & Member of the Management Board [6]

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Ladies and gentlemen, this concludes our review for the second quarter of 2019, I'll hand back to Sarah.

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Sarah Fakih, MorphoSys AG - VP & Head of Corporate Communications and IR [7]

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Thank you, Jens. We will now open the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from James Gordon of JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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James Gordon from JPMorgan. A couple of questions on tafasitamab, if I call it that. One was on Europe and the L-MIND filing, you said you filing by mid-2020, which is almost a year away. Just -- what further work the EU application require in the U.S. file? And are you going to do that work internally? Or could you use any external assistant that might allow you to speed up that filing in Europe? Other question on Europe, will just be partnering, how advanced the discussions? Could we see a partnering announcement ahead of the B-MIND futility? Or a potential partners keen to get a clarity on the EU -- on the futility analysis first? And on the U.S. filing, where are we on preparing application? Can you talk about what you've already got done and what's still outstanding before you'd be in a position to file in the U.S., please?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [3]

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Thanks, James. Let me just mention that we're in a couple of different locations. So we'll try and orchestrate the answers to your questions -- all your questions as well as possible. And I would ask Malte Peters to take the questions on the L-MIND filing in EU and the U.S. filing, first, and then I'll talk to the partnering question.

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [4]

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Yes, James, if you could repeat your third question related to the U.S. filing, I couldn't hear everything you said. Could you repeat the question? Please.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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Sure. Apologies, I think I had a bad line. So the third question was for the U.S. filing. Just where are you on preparing the application on L-MIND? So what have you already got done and what's the outstanding before you'd be in a position to submit the file, please?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [6]

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Okay. So let me start with that part. We are well on track with the preparation of our BLA dossier preparation. I am reviewing the first part of the dossier as we speak. We have agreed with FDA on the rolling submission. So we will submit in 2 waves. The first wave will consist of the preclinical data and our PTA data, which is already in a good shape to be sent out, and we will probably submit this portion of the file in September, October time frame or the other data we're going in at the end of December. So we are completely on track with our projected submission timelines in the U.S. by the end of December of this year.

With respect to the European filing, we think, having done this a couple of time in my previous slide, the fastest way of submitting a global submission is actually to start with 1 dossier, in this case, the U.S. dossier and then transcribe it for the European submission. And that's what we are going to do. The transcription of the U.S. dossier into the European dossier will take us a couple of months. So -- and that's why we said we would be ready to submit our 2 dossier in the middle of 2020. That's much fast and also a lot easier than doing both activities basically from scratch. But it's easier and better to start with one dossier then make the -- then basically transcribe it into the second dossier that's needed for the second geography. And that's why we do it this way.

Remember in our previous calls, we were always assuming that it was better the European submission by 9 to 12 months, and we have moved this time line up now because of the very encouraging feedback we received from the European authority. So we believe that we can speed up the European submission by approximately, I would say, roughly, (inaudible). And with partnering, Simon, do you want to take this question?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [7]

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Yes, let me handle that one. So James, to your second question regarding partnering. Please understand that as a standard policy, we don't comment on the timing or the content of potential partnering. We're engaged in discussions with interested parties, potential partners. We're happy with the way those discussions are going, but we don't want at this stage to comment on the potential outcome or timing of partnering discussions.

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Operator [8]

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The next question is from Shanshan Xu of Berenberg.

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Shanshan Xu, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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Congratulation, Simon, on your next chapter in your life. So the first question from me. You mentioned that the interim analysis of B-MIND now is expected in Q4 '19, due to a lower event number. Could you please confirm that the low event number is seen in both active control arms or more in the active arm? And what kind of maturation of PFS events do you need for the interim analysis? And then I have 2 follow-ups.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [10]

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Matle, do you want to take that?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [11]

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Yes, thanks, Simon. So for the interim analysis, we are blinded with respect to the arm. So we don't know from what arm the treatment effects come, and we will also not note it until we have -- until we become unblind. The way the interim analysis work is that there is an independent data review committee who will look at the data and they will recommend to us what to do. If we want to continue the study, if we want to stop the study for futility. If we want to be consistent with the 330 patients, so they will recommend of what to do based on their analysis, but we are blinded with respect to the treatment arm. So I cannot really comment to where -- to which arm the treatment effect is coming from. So what I'm referring to is actually the pooled data that consists of data from both arms.

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Shanshan Xu, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Okay, that makes sense. Another technical question on B-MIND. So now you define the PFS in a biomarker-only patients as the co-primary endpoint. This during the interim analysis in Q1 '19, if B-MIND cells passes the futility analysis in all comers, but pass the futility test in the biomarker-only patients. Does that mean that you get to conserve all the [R-CHOP] to the PFS in biomarker-only patients?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [13]

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Yes. So we have, in the past, avoided to give any details on our statistical analysis plan, and that involves also all details with respect to the (inaudible). I can only say that the (inaudible) on the (inaudible) situation has been very thoroughly discussed with FDA when we presented the amendment to FDA, and we have reached a very good agreement with FDA on the statistical details on the statistical analysis plan. So everything we do here is in complete accordance and support with the FDA. And -- so I would leave it that -- that's maybe some some.

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Shanshan Xu, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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So last question on signs. There are a few compounds targeting CD47 pathway in a clinic already. So what is the differentiation of this Vivoryon compound, except that, that it is oral compound? And how should we think about a synergistic mechanism of action between this compound and tafasitamab?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [15]

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Malte, do you want to handle this one?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [16]

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Yes, I can quickly speak to that. So you are right that there are other compounds [interim to developing] CD47 pathway, all of these molecules, to the best of our knowledge, are antibodies directed against CD47, some of them come with toxicity effects related to the fact that CD47 is expressed on the [wishful] side, the red blood cell. And we are quite excited that the [Gregorian] compound, it's a small molecule that may inhibit the pathway effectively. So we could have a small molecule made of it which are completely different, more actually targeting the same molecule. So that's why we are really excited about this opportunity. We don't know if we will find out that there's additional toxicity profile, but the compound has been already used in the clinic. And so far, no metallurgical toxicity has occurred with the compound. So that would be my answer to sum up the presence, the available or the presently studied compound, antibodies. We have a small molecule, and we are excited about targeting the new exciting pathway here with a different model.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [17]

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Maybe Shanshan just to add one additional point to that, of course, these compounds, the family of compounds is covered by IP that is completely independent of the antibody IP of the compounds that Malte talked about. And so we have a totally independent IP estate that's associated with this family of compounds.

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Operator [18]

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The next question is from Anastasia Karpova of Kempen.

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Anastasia Karpova, Kempen & Co. N.V., Research Division - Research Analyst [19]

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Three questions, if I may. Can you, following on your discussions with the regulators, elaborate a little bit more, what would be the role of B-MIND in the upcoming L-MIND based filings in Europe and in U.S.? Do you expect to use it as a confirmatory for any of the files? Also, in your virtual control arm, do you see any significant deviations in terms of response rate and duration of response from the historical data and (inaudible) lenalidomide? And finally, in regards to the biomarker and preclinical data that you saw, what is the magnitude of the different or efficacy difference you observed in the clinical models compared to rituximab? Are we talking several fold increase or something more minute?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [20]

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Malte, do you want to take those?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [21]

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Yes, thank you. Thanks, Anastasia, and thank you, Simon. So for the role of B-MINDs, I think we can say the following. In both geographies in the United States and in Europe, it is entirely possible that we will get full approval based on L-MINDs and [C-MINDs]. In this case, we may not need the MINDs for any further discussion with as such. However, in the U.S., for example, it is in the case with the events that we will get an accelerated approval, B-MIND may serve as the confirmatory study. FDA is positive, thinking about this. But based on the discussions we had, I think that's a very realistic possibility. In Europe, the discussions are a little bit less mature. So in Europe, the situation is a bit more influx, I would say. But it's also possible that if we get a conditional approval in Europe that B-MIND could serve as the confirmatory study. Whether or not the approval -- whether we get full approval or an accelerated/conditional approval in both geography will be a ready ratio and where we communicate or discussed with the agency, I would say, within the first 6 months after submissions.

To your second question, with respect to the B-MIND differences -- or to the differences between the virtual control arm and the historical lenalidomide in the single agent data, we don't know any details regarding this question yet, because the data is still being collected. We are really quite happy with the data in stock that we are seeing at the moment. And we have not made any formal statistical comparison between L-MIND, historical data and data that we are collecting currently in our virtual control arm. So it's a bit early to comment on this.

With respect to your last question on the biomarker and the efficacy related to the fold difference between the rituximab and tafasitamab data and preclinical experiment, I would say the differences were several fold. So the difference were quite strong. And that's why we are pretty encouraged by this data, and that was, as you can imagine, a big component in our decision of implementing the [amendment]. So maybe I'll stop here and ask if my answers make sense.

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Operator [22]

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The next question is from Geoffrey Porges of SVB Leerink.

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Unidentified Analyst, [23]

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This is Andrew filling in for Geoff. So I have a follow-up question for -- regarding the EU filing? Can you give us a little bit more color on does the early EU filing alter your commercial strategy for excess market?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [24]

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The question was really -- the volume was very low, I couldn't hear well, could you come closer to the microphone a little bit or could someone hear better and [run] it?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [25]

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Yes, Malte, we got it. It's fine. It's on whether the early EU filing altered our commercial strategy. And the answer is no. So you'll recall that our goal for partnering of tafasitamab is that we intend to retain U.S. rights ourselves and to seek a partner for territories outside of the U.S. and that strategy hasn't changed.

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Operator [26]

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The next question is from [Constantinos Abgulakis] of (inaudible).

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Unidentified Analyst, [27]

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Jumping in to my questions, I'd like to better understand the primary driving force behind an inclusion of the low NK cell biomarker and B-MIND first. What caused you to implement this biomarker in the first place? There was an amendment to the trial in the first quarter, but it's not clear to me what traded you to pursue it? And second, regarding mechanistic rationale, is it that rituximab is expected to perform poorly in these patients or that tafasitamab is expected to do particularly well, given its [outstanding] engineering. I know you mentioned it in the prepared remarks. I'm just looking for the dominant driving force and to help address the question empirically, have you gone back and performed a retrospective analysis on L-MIND, examining this biomarker? If I recall correctly, you measured NK cells in that trial to further understand the mechanistic synergy between tafasitamab and Revlimid.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [28]

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Malte, do you want to take that?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [29]

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Yes. I can take the questions. Let me start with the first question, [Constantinos], on the rationale of implementing the management and identifying the biomarker. So the first data that really came out, what's actually coming from Roche's clinical trials, volume and GOYA, where they found that in [case of] numbers, actually had an influence with respect to treatment effects of their CD20 antibody. And that data was presented, if I'm not mistaken, at ASH 2018. And we saw the data, of course, and we asked ourselves similar things. Or if this finding could have implication for tafasitamab as well. And that's why we had started [our own] experiment in our laboratories, as I described before, to understand whether patients with low numbers of NK cells could respond differently to rituximab as compared to tafasitamab. And, interestingly, we found that in case the numbers are very low, tafasitamab has a higher effect against the tumor. So that we -- probably because the [FT] modification in tafasitamab is so active -- so active attracting NK cells to the tumor cells, that, that might be the reason why, particularly in patients with low numbers of NK cells, tafasitamab could be of particular benefit. So your second question -- the answer to your second question is clear that in these situations where people have low number of NK cells, tafasitamab could actually be a much better choice than rituximab. For L-MIND, we have also looked into the NK cell number. But the NK cell number has less of a differentiating effect in L-MIND as compared to maybe in the combination with bendamustine. So the differential effect could be quite dependent upon the combination partner of tafasitamab. So currently, we don't believe that the biomarker that we have described is so important in L-MIND compared to B-MIND.

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Unidentified Analyst, [30]

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You're not seeing differentiation in L-MIND. But there's something about the bendamustine combination that's doing it. Okay. And then regarding the 50% of the overall study population that seems to have this biomarker. Is that by design? Is it to sort of facilitate the valuation of the biomarker on a one-to-one basis? Or do you think it somehow reflects the epidemiology that you'd expect in a real-world setting?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [31]

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That's just a reflection of the epidemiology of this particular patient population. Yes, yes.

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Operator [32]

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The next question is from Danielle Brill of Piper Jaffray.

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Danielle Catherine Brill, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [33]

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Regarding B-MIND, curious what studies did you evaluate when you characterized the [RSPFS] as 3 to 5 months, how does the patients in those studies compare to those enrolled in B-MIND? And then with the interim being pushed out again, is PFS for the total population now exceeding the high end of that historical range?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [34]

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So we, of course, took into account the available data at the time of the study design. We were aware of the fact that there's quite some range in PFS numbers of the studies testing bendamustine and rituximab in this patient population. We based our statistical model on a good average of its available information. And now based on what we said today and also earlier, we find that we are probably at the upper earnings of that spectrum. So we are clearly being higher [up] in terms of our situation than what our usual functions were.

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Operator [35]

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The next question is from Graig Suvannavejh of Goldman Sachs.

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Graig Suvannavejh, Goldman Sachs Group Inc., Research Division - Executive Director & Senior Equity Research Analyst [36]

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My first question has to do with the commercial opportunity in Europe and would love to get your perspective on how that commercial opportunity in Europe changes or not, but I assume it does, if you have an initial approval based on an L-MIND based regimen versus a B-MIND based regimen. So could you talk about kind of qualitatively and maybe quantitatively, how that commercial picture changes in Europe? And then I've got one follow-up, please.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [37]

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Yes, Graig. The way we look at this is thinking about the eligible patient population, which we estimate in Europe is of a similar magnitude to what it is in the U.S. And we estimate that in that taken blind later patient population, we're looking at around sort of 8,000 to 10,000 patients in Europe. We think that the opportunity is really going to be driven by the outcome of the trial and the strength of the data from that trial. That will determine how widely tafasitamab gets adopted, regardless of the combination, to a large extent. One thing that's worth keeping in mind is that lenalidomide will be generic in the near future, which, of course, is going to have an impact on its price, and therefore, the overall price of the combination therapy. But we don't think really so much about the pros and cons of an L-MIND approval and the commercial opportunity versus a B-MIND. We think that uptake will be driven by the power of the combination, whatever it is and the data and the outcomes that the combination can produce.

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Graig Suvannavejh, Goldman Sachs Group Inc., Research Division - Executive Director & Senior Equity Research Analyst [38]

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Okay. And then my second question has to do more with your BD strategy going forward. So certainly, the deal for your anti or your CD47 modulators, it's something that at least I haven't seen from MorphoSys in terms of being opportunistic. So on a go-forward basis, is this something we should be looking more coming from MorphoSys in terms of adding to your proprietary pipeline efforts?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [39]

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You shouldn't be so surprised. We've done deals in the past, which has given us access to compounds, MOR208, of course, tafasitamab is a licensed compound. We're constantly scouring the landscape for good additions to the proprietary portfolio and the fact that this is a small molecule is neither here nor there, really. What counts most of all is that it potentially fits perfectly in our development strategy. Certainly tafasitamab, which relies on the recruitment of macrophages for its effect. And this is a way of empowering, if you like, that recruit the macrophages. So [effects of] small molecules are relevant. The fact that it's potentially strongly synergistic with tafasitamab, we think makes it really, really attractive. And those are exactly the kind of opportunities that we'd be looking for, and we'll continue to look for.

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Operator [40]

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The next question is from Zoe Karamanoli of RBC.

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Zoe Karamanoli, RBC Capital Markets, LLC, Research Division - Analyst [41]

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Two questions for me, please. The first one, when do you expect recruitment of the B-MIND to be completed? And second, on the low levels of NK cells, which is typically 100 microliters or less, do you know how much, if at all, this level fluctuates within a patient? What I mean is, for example, if a relapsed patient can just go up or down that 100 microliter threshold, depending on the timing of the measurement? And are there any characteristics for those relapsed/refractory DLBCL patients with low NK cells?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [42]

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Malte?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [43]

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Yes. So we are seeing very good enrollment applications for B-MIND. I can't precisely tell you when the enrollment is completed. We are on track of this solution enrollments, I would say, in the third or fourth quarter. We have the best month, one of the 2 best months of enrollment in the month of July. So B-MINDs. If we keep up with speed of enrollment over the month of August and September, we will be done fairly soon with our 330 patients. And then we are hopeful that we will sort of carry forward that momentum if needed -- if we need to put more patients on so far. So so far, we are quite optimistic with our enrollment situation for the month. With respect to your question of NK cells in the same patient over time. We are -- we are gathering data, we are collecting data, but we don't have anything to report yet. So it's part of B-MIND, it's part of L-MIND, but we have not analyzed the longitudinal dynamics of the NK cells in these patients. So I can't give you a good answer to your question, but it's a very good question scientifically, and we will try to answer it. But today, I can't give you an answer.

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Operator [44]

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The next question is from Jason Butler of JMP Securities.

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Jason Nicholas Butler, JMP Securities LLC, Research Division - MD and Senior Research Analyst [45]

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Just a couple on MOR202 in membranous [nephropathy]. Can you speak from a big picture, what the goal of therapy we hear would be in terms of impact on kidney function. And then could you benchmark how a therapy like what rituximab is used in these patients, to what extent is it used, how well does it work? And how does it all work in the antibody positive patients?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [46]

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Yes. Thanks, Jason. It's Simon. So the clinical course of the disease is quite clear. Mutations with this disease are positive for the antibody in 75% of cases. And 33% of these patients develop end-stage renal disease with [rituximab]. So there is quite a high medical need. The current treatment involves several standard of care treatment, such as ACE inhibitor, receptor blockers, statins and diuretics. But with proteinuria, that means the protein excretion in the urine exceeds the 13 thresholds, more active treatments are required, including immunosuppressive therapies such as cyclophosphamide or cyclosporin A and currently in cases that the patients progress, rituximab is used in certain cases. There was a recent publication in autoimmune kidney disease comparing rituximab and immunosuppressive therapy where rituximab turned out to be equally efficacious, non-inferior compared to immunosuppressive therapy. Based on the mode of action of our CD28 antibody, our prediction are -- our hypothesis that MOR202 may be superior to rituximab or may easily work in patients in whom rituximab is no longer effective. And that will be part of the cancer program. The design of the study will allow us to answer these questions. Maybe I'll stop here and ask if that was a satisfactory answer for you.

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Operator [47]

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The next question is a follow-up from James Gordon of JP Morgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [48]

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So the follow-up question is just around the confirmatory studies and how that would work. There was your comments about that you could potentially get a conditional approval and then B-MIND might be confirmatory. So how would that work in terms of if you did get a conditional approval, and then it was contingent on B-MIND, and B-MIND didn't work. Would that be a big issue? Or would it be then you would just instead wait for the first line study? So would a conditional approval will be contingent on a particular subsequent study working or would it just be on any subsequent study working? And also, in the same vein, if B-MIND went on to work with just as a subset, but your initial approval was in everyone, how would that work? Can you discuss how that would work with the FDA?

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Jens H. Holstein, MorphoSys AG - CFO & Member of the Management Board [49]

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Yes. So -- so first of all, the introduction of the biomarker with our management has significantly lowered the risk of B-MIND being a negative study. So in our eyes, the probability that B-MIND will not yield any positive results, is [expendable]. But in the case of the unlikely event that, that happens, we would have to go back to the authorities and discuss what other studies that we have currently ongoing, including the frontline, as you correctly mentioned, could be the confirmatory study. Overall, FDA has been fairly open with respect to accepting confirmatory studies involving different patient population and different combination partner so we are quite confident that B-MINDS would actually serve as a proper confirmatory study if we need it. But again based on the introduction of the biomarker, in my personal mind, in our minds is that the probability of a negative study of B-MIND is extremely low.

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Operator [50]

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The next question is from [Ann Wendorff] of Commerzbank].

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [51]

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It's Daniel Wendorff, from Commerzbank. And 2 questions, if I may. First one is on MOR202. Can you talk a bit about the second line for MOR202 and potentially in a different jurisdiction. That would be helpful. And my second question would be how far advanced are you in preparing for the launch of MOR208 in the U.S., i.e., where are we with regards to building up the cost structure there?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [52]

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Many thanks, Dan. Let me take those 2 questions. So maybe starting with the second one. The buildup in the U.S. is proceeding well. You may recall that we said that we estimate that by launch time, so assuming that mid next year, assuming an FDA approval, we estimate that we're going to need around 90 or so people in the U.S., roughly half of them will be sales force, which won't be recruited, by the way, until next year. So we're estimating that by the end of this year, we will be roughly 40 or so people in the U.S. We're currently at around half that, which means that we need to add about 20 or so additional people prior to year-end. And that's proceeding -- is proceeding well. I think we've mentioned before, and I'll confirm, but again, we're really happy with the quality of the people that we're being able to hire over there. Not surprising, I think, based on the effectiveness of the asset. We're really attracting good quality people. So I'm very confident that the organization will be in place and fully up and running in time for an assumed launch of tafasitamab in the middle of next year.

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [53]

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And then maybe, Daniel, of the patent life on 202. So the basic composition of [meta-patent] expires in October 26 outside the U.S., on January 28 in the U.S., but in both cases, this is not including any potential patent terms extensions. So that can be significantly longer.

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Operator [54]

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The next question is from Victoria English of Evernow Publishing.

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Victoria English, [55]

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Yes, Simon, this takes us back to the beginning of your presentation about the synthetic control arm for the L-MIND. Can you give us a little bit of background as to how long this has been going on and whether the fact that you did it was a plus in your discussions with the European Medicines Agency?

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [56]

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Victoria, I think Malte is the best qualified person to speak to that question.

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [57]

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Yes. So thanks, Victoria, good question. So when we approached the FDA for the first time (inaudible) you remember that FDA was immediately very impressed and gave us breakthrough therapy designation based on very, very immature data set with only 44 patients. We didn't even have a PFS curve at that time. At that initial discussions, we discussed with the agency of how we could potentially invest, compare our single arm uncontrolled L-MIND study with the treatment effect of lenalidomide. So it was clearly -- the discussion was clearly centering around how can we decide (inaudible) treatment effect and compare it against the lenalidomide single agent treatment effect. And we went through a period of approaches and discussions with FDA. And finally saw that we had some better control on the probably [year's] the most robust data set. And during the several new treatment discussions we had with the SEC, it was clear that they were highly interested in using watching approach. And if you remember, FDA has appointed the deputy commissioner from Flatiron and that tells you a bit the direction FDA is moving in terms of making that approval faster and also easier for everybody. Yes, for the agency but also for company. So I think if you look at the recent publication at the FDA on real world data, it made perfect sense, let's say, 1 to 2 [mules] on our example at our pilot project, if you wish, to showcase that real world data is actually a very good approach and to give approval for a single-arm uncontrolled study of an effective combination. So the discussion -- I can't really tell you when was the moment that we agreed on doing this, but a bit of evolution of the discussion it's been up at the agency. But I think if you look at the overall publications at the agency have made perfect sense that they are highly interested in our approach.

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Operator [58]

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The last question is from [Klaus Bonner] of (inaudible).

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Unidentified Analyst, [59]

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I'm interested a little bit in the dynamics of Tremfya. You revealed that in the second quarter, the sales contribution is estimated to be at EUR 7.1 million. If I did my math correctly, then that's EUR 0.5 million higher than in the first quarter. What kind of dynamics can we put underneath its development there? Is it going to be like that for the remainder of the year? Or what else shall we assume?

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [60]

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I'm happy to take it. I mean, our expectation is that Tremfya will generate more ROEs, the higher ROEs, some of those in the quarters to come. And that's driven by the fact that more and more countries are now taking Tremfya on the reimbursement list, that they -- that Johnson, J&J, is developing that compound in various additional indications. We talked about psoriatic arthritis. As an example, it's approved in Japan, then there will be a couple of additional geographies that will get some time in indication as well as well as multiple other indications. So we're absolutely convinced that we see in this increasing figure and the royalty stream from Tremfya in the years to come for MorphoSys.

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Unidentified Analyst, [61]

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But you wouldn't be able to put any kind of a factor on the leases that you assume.

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Malte Peters, MorphoSys AG - Chief Development Officer & Member of the Management Board [62]

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That is, that's quite difficult. But if you look at the guidance that we currently have given us, so basically the -- for '19, which is 23 million to 30 million. I said in my speech that I would expect that we end up at the upper end which if you have 13.7% for the first half year should be reachable. And then I would expect that this number will grow significantly. But I can't tell you what the type of multiple will be. That's a bit too much of a chance.

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Operator [63]

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Thank you. We have no further questions coming through. So I will now hand back over to Dr. Simon Moroney to wrap up today's call.

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Simon E. Moroney, MorphoSys AG - Chairman of the Management Board & CEO [64]

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Yes, to wrap up, we're well on track to achieving or exceeding our goals for the year. For tafasitamab, we'll file our BLA based on L-MIND in the U.S. by year-end as planned. And in Europe, we'll file by mid-2020. Our other programs, including otilimab or MOR103, MOR106 and MOR202 are also making good progress and contribute to our broad clinical footprint. Most recently, our agreement with Bavarian provides a potentially valuable addition to our proprietary portfolio. We're excited about the potential of these small molecule inhibitors in combination with our antibodies, first and foremost, tafasitamab.

Finally, with our solid financial position, MorphoSys is well equipped to execute its plans during the remainder of the year and beyond. That brings to an end of my 107th. Yes, you heard that right, 107th and last conference call for MorphoSys. Thank you all for your interest in and support for the company over the last 20 years. I've enjoyed all of our interactions. I plan to make an introductory tour with Jean Paul in early September and look forward to seeing as many of you as possible, then.

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Sarah Fakih, MorphoSys AG - VP & Head of Corporate Communications and IR [65]

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That concludes the call. If any of you would like to follow-up, we are in the office for the remainder of the day. Thank you for your participation on the call, and goodbye.

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Operator [66]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.