Evotec OAI AG Report Financial Results 2004 and Guidance for 2005: Strong Q4 and Solid Outlook

Hamburg, Germany | Oxford, UK - Evotec OAI AG (Frankfurt Stock Exchange: EVT, TecDAX 30) today announced financial results for the year ended 31 December 2004. All figures reported today are in-line with the Company's guidance given in October and the preliminary results reported in February 2005.
Financial Highlights:
* Group revenues amounted to EUR 72.7 m (2003: EUR 77.2 m); adverse impact from contract research market and foreign exchange
* Impact of non cash impairment of EUR 69.5m on group results
* EBITDA EUR (3.3)m (2003: EUR 4.1m)
* Strong Q4: revenues up 23% to EUR 25.3m (2003: EUR: 20.5m), positive EBITDA (EUR 2.8m)
* Strong sales and order book for 2005 compared to the sales and order book recorded in the same period in 2004
* Strong cash position: EUR 15.3m as of 31 December 2004 with an additional EUR 20m from ENS acquisition and a further EUR 27m from fund raising commitment (announced on 6 March 2005)
Operational Highlights:

Up-turn in deal flow in Discovery and Development Services, including collaborations with Altana Pharma, Curis, sanofi-aventis, Solvay, Biogen Idec, AnorMED, Celgene, Elixir and Morphochem
Global medicinal chemistry alliance with Roche
High value, outcome-based drug discovery collaboration with
Boehringer Ingelheim and ENS
Solid performance in Chemical and Pharmaceutical Development with growth potential in 2005
Share holding in formulation subsidiary ProPharma increased to 81%
Two drug candidates in joint drug discovery programme with DeveloGen in Metabolic Disease advanced into lead optimisation
CNS compounds licensed into ENS from Roche along with a  EUR 25 million VC financing
Re-acquisition of full ownership interest in ENS and _x0080_47m in cash to develop CNS pipeline (announced on 6 March 2005)
Evotec Technologies delivered first EVOscreen® system to a customer outside of original pharma consortium: Institut Pasteur in Korea
"2004 was a difficult year for Evotec OAI in terms of top and bottom line performance. Our contract research (Discovery and Development Services) and technology (Evotec Technologies) divisions are clearly considered the best in the industry; however, in a stagnant pharmaceutical outsourcing market aggravated by the weak US-Dollar, consistent growth of our service activities has been a challenge," commented Joern Aldag, President and Chief Executive Officer of Evotec OAI. "With that said, we are optimistic about the future prospects for Evotec OAI. 2005 will be a critical year in the development of our company and we have taken a number of important measures which will allow Evotec OAI to expand on a continued growth track and to drive the consolidation process in our industry. With the re-acquisition of full ownership interest in Evotec Neurosciences and the committed additional fund raising of EUR 27 million, we have built a fully integrated and streamlined company. Evotec OAI today offers an attractive portfolio of CNS projects, one of the most integrated industrial scale platforms in the industry to develop novel drug candidates and substantial financial resources of more than EUR 60 million to advance and expand our activities into a sustainable pipeline that can fuel Evotec OAI's expansion and value creation."
2004 has been a difficult year for the contract research industry and despite our strong performance compared to our peers and our market share gains, we also experienced a difficult year. Continued emphasis on cost control by pharmaceutical companies and soft financial markets for our biopharmaceutical customers capped our top line growth. In addition, the combination of a weak US-Dollar and a strong GBP-Sterling had a continued strong impact on our margins. Both trends masked our strong underlying operational performance. Under these circumstances, we are proud to have attracted substantial business with established and many new customers with widespread deal flow across all areas of discovery and development and to have further gained market share for contract research services.
Financial review
Total group revenues decreased by 6% to EUR 72.7m (2003: EUR 77.2m). At constant 2003 exchange rates, revenue decline would have been 3%. Evotec OAI's instrumentation business Evotec Technologies showed continued growth, while the total group decline resulted from a revenue shortfall in the Discovery and Development Services division as a result of the challenging contract research market environment and the deteriorating value of the US-Dollar. As anticipated, Q4 sales performance was strong with a revenue growth of 23% to EUR 25.3m (2003: EUR 20.5m).
Third party revenues from Discovery and Development Services (DDS) amounted to EUR 54.1 million (2003: EUR 58.6 million). The DDS division was very strong in a difficult market environment: DDS managed to gain market share and expand its leadership. Its top-line performance was better than that of most of its peers, in particular when measured in constant currencies. Evotec OAI recognised third party revenues of EUR 0.9m from the Discovery Programs Division (DPD), resulting from Evotec Neurosciences' (ENS) business with Takeda in Q1. After Q1, ENS was no longer consolidated, following its venture capital financing on 31 March 2004 and resulting dilution of Evotec OAI's ownership. ENS stand alone revenues for the year were EUR 4.2m. The Tools and Technologies Division (Evotec Technologies, ET) grew by 3% to _x0080_17.7m of revenues with 3rd parties (2003: EUR 17.2). This is a very strong performance considering that revenues recorded in 2003 had an extraordinarily large percentage of revenues with Pfizer, one of its EVOscreen® consortium partners, setting a high hurdle for future revenue growth.
The Evotec OAI total group operating loss increased to EUR 91.3m (2003: EUR 15.8m). The main negative impact on operating results was derived from a EUR 69.5m non-cash impairment which was expected and included in our guidance. This impairment included goodwill and underutilised capacities in the Company's second pilot plant and the new laboratory building in Abingdon, in addition to regular amortisation of EUR 10.0m. Excluding these 2004 non-cash charges, the operating loss would have been EUR 11.8m (2003: EUR 5.1m). Gross margin performance was adversely affected by the weak US-Dollar, strong GBP-Sterling exchange rates, a less favourable sales mix and pricing pressures. Evotec OAI realised a gross margin of 34.3% (2003: 40.2%). If last year's exchange rates were applied, the gross margin would have amounted to 37.1%.
As in 2003, Evotec Technologies (ET) was again close to break-even, before taking amortisation charges into account. Excluding the allocation of corporate overheads, ET achieved positive operating results.
R&D expenses amounted to EUR 13.8m (2003: EUR 15.5m), an expected cost reduction of 11%. The main reason for this decline is the deconsolidation of Evotec Neurosciences (ENS) since 1 April 2004. R&D activities for internal discovery programmes within DPD, adding the 50/50 joint venture with DeveloGen (EUR 2.9m shown under non-operating expenses), amounted to EUR 5.1m (2003: EUR 5.7m). Not taking the ENS business into account (2004: EUR 0.2m, 2003: EUR 3.1m), DPD related R&D expenses including the contribution to the DeveloGen joint venture increased by 88%, in line with Evotec OAI's strategy to shift R&D to proprietary drug discovery.
SG&A costs increased by 8% to EUR 19.3 m (2003: EUR 17.9m) as a result of costs denominated in the stronger GBP-Sterling, and of higher marketing and sales expenses in DDS. In addition, ET invested more heavily in its US and Asian sales efforts. Evotec OAI continues to be very stringent with regard to SG&A costs going forward.
EBITDA amounted to EUR (3.3)m (2003: EUR 4.1m). At constant (2003) exchange rates, 2004 EBITDA would have been approximately break-even at EUR (0.3)m. EBITDA for the fourth quarter was EUR 2.8m (Q4 2003: EUR 0.6m).
Net loss increased to EUR 84.2m (2003: EUR 14.2m) primarily as a result of the substantial impairment. Excluding the EUR 79.5 impairment and amortisation charge, net loss was EUR 4.7m (2003: EUR 3.6m). R&D investments in the Metabolic Disease research programme with DeveloGen (EUR 2.9m) and in Evotec Neurosciences (EUR 0.8m), classified as non-operating "net loss from equity investments", increased as planned but were more than offset by foreign exchange gains and strong deferred tax benefits.
At 31 December 2004, Evotec OAI's position in cash and marketable securities amounted to EUR 15.3m. The strong December business has led to high accounts receivable of approximately EUR 16m which are expected to be collected and converted into cash at the beginning of 2005.
2005 is the year in which our business strategy for proprietary drug development will become more apparent. Our goal is to build a sustainable CNS pipeline that can create substantial value. Through the acquisition of ENS in March 2005 and with the necessary funding in place, we intend to capitalise on our strong expertise and critical mass in drug discovery and development and rapidly progress our current internal programmes. We plan to continue to expand these activities through product or company acquisitions. Evotec OAI projects to have two products in clinical trials in 2006, and at least one product developed to proof-of-concept and ready for partnering by 2008.
Discovery and Development Services (DDS) remains the core of our business and very much underpins the success of our expanding focus on proprietary drug discovery. Moving into 2005, we are experiencing greater momentum in the Chemical and Pharmaceutical Development part of this business, whilst the market for Discovery Services remains challenging. Our goal with our DDS division is to maintain market share, with an emphasis on higher-valued, strategic shared risk/reward contracts that provide milestones and royalties. Rather than just maximizing revenues short-term, we will focus on maximizing bottom-line performance of DDS. Combined with a tightened cost structure this should allow us to generate cash to re-invest in and support our proprietary product programmes.
In line with previous years we give guidance today on estimated key figures for the year. For the Evotec OAI group we expect revenues to grow by up to 5%. This scenario is based on our strategy to increase the portion of our resources dedicated to proprietary research instead of maximising third party revenues in contract research.
We anticipate third party revenues in Discovery and Development Services (DDS) to reach levels similar to last year (2004: EUR 54m). This revenue number is now exclusive of third party sales to Evotec Neurosciences (ENS), following the re-acquisition in March 2005. Based on these revenue assumptions, as well as an improved capacity utilisation in Chemical and Pharmaceutical Development and positive results from our re-structuring programme, operating income of DDS is expected to reach levels close to break-even, excluding charges for the amortisation of intangibles. This is a significant improvement over 2004 when we recorded a loss of EUR 7.8 m.
With the implementation of our CNS drug development strategy, R&D expenses of the Evotec OAI group will significantly increase. We expect to invest a minimum of EUR 12 -14 m in internal discovery and development programmes, including our joint venture with DeveloGen. This level of investment in our proprietary pipeline will be at the expense of short-term profitability, but to the benefit of mid- and long-term value generation.
Conference Call
Evotec OAI will hold a conference call today at 02.00 p.m. CET (01.00 p.m. GMT/08.00 a.m. US time East Coast) to discuss the financial results. Joern Aldag, President & CEO, and Dr Dirk Ehlers, CFO, will lead the call.
Conference call numbers (listen only):
Germany:        +49.(0)69.22222 247
UK:                  +44.(0)20.7365 1850
US:                  +1.718.354 1152
Webcast:        www.evotecoai.com
A replay of the conference call will be available for 24 hours and can be accessed in Germany by dialing +49.(0)69.22222 0418, in the UK by +44.(0)20.7784 1024 and in the US by +1.718.354 1112. The access code is 1493964#. The on-demand version of the webcast will be available on our website: www.evotecoai.com - Investors - Financial Reports.
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Contact: Anne Hennecke, Director, Investor Relations & Corporate Communications, Evotec OAI AG, Phone: +49-40-56081-286, anne.hennecke@evotecoai.com
Contact: Anne Hennecke, Director, Investor Relations & Corporate Communications, Evotec OAI AG, Phone: +49-40-56081-286, anne.hennecke@evotecoai.com