First Quarter 2005: Full-Year Guidance Confirmed Following Strong Q1 2005

Hamburg, Germany | Oxford, UK - Evotec OAI AG (Frankfurt Stock Exchange: EVT, TecDAX 30) today announced financial results for the first quarter 2005.
Financial highlights:
* Revenues for the first quarter increased by 10% to EUR 15.9 m (2004: EUR 14.4 m)
* Performance was driven by strong Discovery and Development Services business with sales up 36% to EUR 13.5 m (2004: 10.0 m)
* Operating cost structure improved, focus on cash generation in Service Business
* Operating result improved by 32% to EUR (4.8) m (2004: (7.1) m) as a result of reduced R&D and SG&A expenses
* Operating result for Discovery and Development Services at break-even (EUR (0.2) m), excluding amortisation charges
* Sales and order book for 2005 increased to EUR 56 m as of April (April 2004: 47 m); on track to reach full-year 2005 guidance
* PIPE transaction for EUR 27 m secured (subject to AGM approval)
Operational highlights:
Development of a sustainable CNS pipeline:
* Acquisition of Evotec Neurosciences in March 2005
* EUR 60 m available to progress and build sustainable CNS pipeline
* On track for first compound to enter Phase I in 2005
* Significant potency gain for front runner metabolic disease compound

Excellence in customer relations:
* Business development management strengthened
* Discovery Chemistry contracts with Roche, Solvay, Elixir, Vitex and Chroma Therapeutics extended in challenging market environment
* Chemical and Pharmaceutical Development business showing good growth and higher order visibility through commercial supply of a number of APIs
All numbers reported today for the first quarter include the results of Evotec Neurosciences (ENS) as net loss from equity investments under non-operating expenses for the entire reporting period. Following the acquisition of ENS by Evotec OAI, and after transfer of shares and control, ENS will be fully consolidated in the Evotec OAI group accounts from May 2005 onwards.
 "In the first quarter we have delivered on all important value drivers we have identified for our future success. We believe that the first of the three main value drivers for Evotec OAI is the development of a sustainable pipeline of drug candidates. By building a proprietary drug discovery and development company and developing compounds through to proof-of-concept in man we can leverage our engine, skill base and critical mass we have built over many years in our Service Business. Through the acquisition of ENS in March we gain ownership of an exciting pipeline of new drug candidates and world-class science in the field of central nervous systems diseases. In addition, we have attracted a leading group of investors who have committed to invest an additional EUR 27 million in a PIPE transaction to fuel the expansion of ENS' pipeline. The second major value driver is excellence in our relationships with our customers. Growth in the Service Business was particular strong in the first quarter. To assure we continue to nurture and develop our close relationships with our partners, we have made management changes which reinforce our commitment to deliver the highest quality with regard to customer needs. We have streamlined our Business Development team with a stronger focus on high quality customer contact by putting some of our most experienced people from operations in charge of sales and marketing," said Joern Aldag, President and Chief Executive Officer of Evotec OAI. "The third important value driver for Evotec OAI is our ability to generate cash in our Service Business to support our proprietary development activities. Restructuring and cost control significantly improved results in our Service Business. We have made substantial savings by streamlining Business Development and through restructuring both our IT department and our Chemical and Pharmaceutical Development management team. With these restructuring measures we have so far taken approx. EUR 1.5 million out of operating expenses on an annual basis. Also, we have reduced the level of spending in technology platform R&D. Consequently, in our Service Business, operating income excluding amortisation charges reached almost break-even in the first quarter."
Evotec OAI revenues for the first quarter 2005 increased by 10% to EUR 15.9 million (2004: EUR 14.4 million). Performance has been driven by strong sales in Discovery and Development Services.
Business in our Discovery and Development Services Division (DDS) significantly improved over Q1 2004. Revenues (excluding intra-company sales) increased by 36% to EUR 13.5 million (2004: EUR 10.0 million). Growth resulted predominantly from Chemical and Pharmaceutical Development which almost doubled business over Q1 2004. Discovery Services showed a stable performance compared to last year, a success in the current environment.
In the first quarter 2005, no revenues were booked in our Discovery Programs Division (DPD) (2004: EUR 0.9 million). From May onwards, revenues from proprietary research within ENS will be shown in our DPD division. 
For the first three months 2005, revenues (excluding intra-company sales) in our Tools and Technologies Division (Evotec Technologies) were EUR 2.3 million (2004: EUR 3.4 million). These numbers include EUR 0.4 million from the uHTS business acquired from Carl Zeiss, effective 1 January 2005. Sales performance in the first quarter has been weak. It was affected by the launch of a new release of the cell imager OperaTM announced for the second quarter 2005. The currently observed healthy order situation, comparable to the order book recorded at the same time in the previous year, supports our belief that the full year performance of Evotec Technologies will be strong.
Cost of revenue for the first quarter of 2005 was EUR 10.6 million (2004: EUR 9.0 million). Gross margin was 33.2% compared to 37.3% in 2004. This apparently adverse development, however, is not a fair representation of the underlying performance: Last year, a more significant planned under-utilisation of the pilot plant was accounted for as a "strategic under-recovery" and recorded as Other Operating Expenses. This year the strategic under-recovery was significantly reduced due to the predicted higher utilisation of the plants. In the first quarter the manufacturing schedules of one of the pilot plants did not permit full utilisation against the predicted utilisation increase - despite a strong order situation - and hence the pressure on the margins for the plant. This impacted the overall margins in the Service Business. Excluding numbers from our pilot plant business, gross margins for the Evotec OAI group increased by an average 1%. Gross margins in our Tools and Technologies Division (Evotec Technologies) continued to be strong at 57.4%. Assuming strong pilot plant deliveries in the following quarters, the negative margin development in the first quarter should not pertain.  
R&D expenditure does not include R&D conducted in our joint venture with DeveloGen and decreased by 36% to EUR 2.5 million for the first three months (2004: EUR 3.9 million). The decline is a result of (i) significantly reduced R&D in Discovery and Development Services (DDS) as our fully integrated platform now only requires a lower level of investment going forward and (ii) the non-consolidation of ENS' R&D expenses when compared with the first quarter of 2004 following our reduction in ownership in ENS in early 2004.
For the Evotec OAI group R&D expenses are expected to increase for the full year 2005 due to higher investments in proprietary CNS research and the renewed full consolidation of ENS from May 2005 onwards.  
Expenses for research activities directed towards our Metabolic Disease discovery programme with DeveloGen amounted to EUR 0.6 million. The expenses associated with the DeveloGen-related programmes are booked as a net loss from equity investments under non-operating expenses.
SG&A costs for the first quarter of 2005 decreased by 11% to EUR 4.5 million (2004: EUR 5.0 million). The decline is a result of diligent cost control including the restructuring of our IT department and sales and marketing management. In addition, compared to Q1 2004, SG&A expenses originating from Evotec Neurosciences were not fully consolidated.
As a result of the reduced R&D and SG&A expenses, as well as lower Other Operating Expenses following the impairments in Q4 2004, the operating result for the first quarter 2005 improved by 32% to EUR (4.8) million (2004: EUR (7.1) million). Excluding amortisation charges, results from operations amounted to EUR (2.3) million (2004: EUR (4.5) million) and reached almost break-even for Discovery and Development Services in the first quarter (EUR (0.2) million).
Net loss improved to EUR 4.7 million (2004: EUR 6.2 million). Net loss per share for the first quarter of 2005 was EUR 0.12 (2004: EUR 0.17).
Earnings before interest and taxes, depreciation and amortisation (EBITDA) for the first quarter 2005 improved by 64% to EUR (1.0) million (2004: EUR (2.7) million), despite almost unchanged investments in our Discovery Programs Division.
Cash and cash equivalents at the end of March amounted to EUR 15.5 million, almost unchanged to EUR 15.3 million as of 31 December 2004.
Guidance for 2005 confirmed. After completion of the first quarter 2005, Evotec OAI confirms guidance given for the current year on 22 March 2005:
For the Evotec OAI group we expect revenues for the full year 2005 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. The sales and order book for 2005 continues to build positively and is supporting our projections. As of April, it amounted to EUR 56 million, an increase of 19% over the same period in 2004 (April 2004: EUR 47 million).
Revenues in Discovery and Development Services (DDS) (not including intra-company revenues) are anticipated to reach levels similar to last year (2004: EUR 54 million). The underlying growth trend in this division is expected to be masked by the fact that following the recent re-acquisition of Evotec Neurosciences (ENS) business with ENS will not be accounted as revenues anymore.
Based on these revenue assumptions, as well as on an improved capacity utilisation in Chemical and Pharmaceutical Development and positive results from our restructuring programme, operating income of DDS excluding charges for the amortisation of intangibles is expected to reach levels close to break-even. We are pleased that the results of the first quarter of 2005 confirm our guidance.
R&D expenses of the Evotec OAI group will significantly increase with the implementation of our CNS drug development strategy. We expect to invest a minimum of EUR 12 -14 million in internal discovery and development programmes, including our joint venture with DeveloGen. This level of investment in our proprietary pipeline will reduce our short-term profitability, but is expected to benefit our mid- to long-term value generation. Evotec OAI expects to have two products in clinical trials by 2006, and at least one product developed to proof-of-concept and ready for partnering by 2008.
Conference Call / Webcast:
Joern Aldag, President & CEO, and Dr Dirk Ehlers, CFO, will present the results of the reporting period as well as provide further details on the Company's latest developments at the "IPMC 2005 Biotech/Healthcare" conference in Frankfurt/Germany. You will have the opportunity to follow the presentation live on the internet or via a conference call:
Presentation details:
Date:                10 May 2005
Time:                03.45 p.m. CET
                        02.45 p.m. GMT
                        09.45 a.m. US time (East Coast)
Conference call numbers:
Germany:         +49.(0)69.2222 2221
UK:                  +44.(0)20 7365 1852
The on-demand version of the webcast will be available on our website shortly after the event: - Investors - Financial Reports.
About Evotec OAI AG
Evotec OAI is a leader in the discovery and development of the next generation of novel small molecule drugs both through its own discovery programmes and through contract research partnerships. In its own discovery programmes, the Company specialises in finding new treatments for diseases of the central nervous system (CNS), which were expanded in March 2005 through the acquisition of Evotec Neurosciences. The Company now has a number of products in late stage pre-clinical development, the most advanced of which, a subtype selective NMDA receptor antagonist for the treatment of Alzheimer's disease, Parkinson's disease and neuropathic pain, is expected to enter clinical trials later this year.
In contract research, Evotec OAI has established itself as the partner of choice for pharmaceutical and biotechnology companies worldwide. The Company provides innovative solutions from drug target to clinic through an unmatched range of integrated capabilities, including early stage assay development and screening through to medicinal chemistry and drug manufacturing.
With over 600 people located in Hamburg, Germany and near Oxford, UK, Evotec OAI is committed to generating value for its partners, shareholders and employees through a sustainable strategy that balances short and long-term business opportunities.
First Quarter Report 2005:

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Contact: Anne Hennecke, Director, Investor Relations & Corporate Communcations, Evotec OAI AG, Phone: +49-40-56081-286
Contact: Anne Hennecke, Director, Investor Relations & Corporate Communcations, Evotec OAI AG, Phone: +49-40-56081-286