Second Quarter 2005: Evotec Progressing as Planned

Hamburg, Germany | Oxford, UK - Evotec AG (Frankfurt Stock Exchange: EVT, TecDAX 30) today announced financial results for the second quarter and the six months to the end of June 2005.
Development of a sustainable CNS pipeline:
*  Lead compound EVT 101 on track to enter Phase I by year end
*  EUR 28.4 m raised in a capital increase to fuel pipeline expansion
*  Drug development and CNS expertise added through appointment of Dr Tim Tasker
*  Supervisory Board adapted to reflect implementation of proprietary drug development strategy
Excellence in customer relations:
*  Later stage services (Chemical and Pharmaceutical Development Services) outstanding
*  Strategic accounts successfully developed: broad, integrated new long-term collaboration signed with Procter & Gamble, substantial chemistry collaboration with Roche extended for another year
*  First research milestone achieved in Boehringer Ingelheim collaboration
*  H1 group revenues increased by 9% to EUR 34.3 m (2004: EUR 31.3 m); continued strong performance in Services Division with sales up 18% to EUR 28.9 m (2004: 24.5 m)
*  Services Division expected to be cash generative in 2005 to support internal research; H1 operating result excluding amortisation charges for the Services Division at break-even (EUR (0.1) m), Q2 positive (EUR 0.4 m)
*  Evotec Neurosciences (ENS) fully consolidated from 26 May; Company name and segment composition adjusted accordingly; EUR 17.9 m in process R&D written off in line with industry practice
*  Cash resources of almost EUR 60 m available now
*  Sales and order book for 2005 increased to EUR 69 m as of July (July 2004: EUR 62 m); on track to reach full-year 2005 guidance
"In Q2 we have made significant progress integrating our Neurosciences acquisition. Our pre-clinical projects from the subtype selective NMDA receptor family of compounds continue to be on track for the entry of the first compound into man by the end of this year," said Joern Aldag, President and Chief Executive Officer of Evotec. "In addition, the quarter has shown a further improvement of order book revenues and our cost structure. Group revenues are 9% higher compared to the same quarter last year; in our Services Division they are 6% higher. Q2 operating income before amortisation for the Services Division was slightly positive. We therefore continue to expect the Services Division to be cash generative in 2005 to support our internal programmes."  
Following the acquisition of Evotec Neurosciences (ENS) by Evotec, and after the transfer of shares and control on 26 May 2005, all numbers reported today for the first half year of 2005 include the results of ENS fully consolidated in the Evotec group accounts from 26 May onwards. For the period before this date they are included as a net loss from equity investments under non-operating expenses.
It is also important to note, that Evotec changed the composition of its segments due to the implementation of its strategy of more rapidly growing internal drug discovery and development. We report on this in detail in our full Q2 report published today.
Evotec revenues for the first half 2005 increased by 9% to EUR 34.3 million (2004: EUR 31.3 million).
Growth was driven by a continued strong sales performance in our Services Division in the second quarter of 2005. For the first six months of 2005, revenues increased by 18% to EUR 28.9 million (2004: EUR 24.5 million). Sales improved over last year across all product lines. Growth was particularly strong in Chemical and Pharmaceutical Development Services with the formulation business (ProPharma) more than doubling sales over the first half year of 2004.

In the second quarter of 2005, revenues of EUR 0.5 million were recognised in our Pharmaceuticals Division. They include revenues Evotec generated with Takeda following the consolidation of ENS since 26 May. As such revenues are not equally distributed over the year, pro-rata sales generated may be lower for the rest of the year.
In 2004, ENS revenues from the target discovery collaboration with Takeda were consolidated for the entire first quarter which resulted in H1 2004 revenues in the Pharmaceuticals Division of EUR 0.9 million.
For the first half 2005, third party revenues in our Tools and Technologies Division (Evotec Technologies) were EUR 4.9 million (2004: EUR 5.9 million). Following the recent launch of a new release of the cell imager OperaTM, significant sales in cell handling technologies have been postponed. We expect to catch up until year end.
Cost of revenue for the first six months of 2005 was EUR 22.2 million (2004: EUR 20.2 million). This translates into a gross margin of 35.3%, stable compared to the same period in 2004 (35.6%). For the second quarter alone, gross margin was 37.2%. This is a significant improvement over Q1 2005 (33.2%) and over Q2 last year (34.1%). 
The relatively strong Q2 gross margin can be attributed to a significant milestone which was achieved from our collaboration with Boehringer Ingelheim, and to increased margins from manufacturing programmes. Gross margins in our Tools and Technologies Division (Evotec Technologies) continued to be strong at 56.2%.
R&D expenditure decreased by 30% to EUR 5.0 million for the first six months (2004: EUR 7.1 million). As in previous periods, this does not include R&D conducted in our joint venture with DeveloGen. Following up on the developments seen in Q1, the decline of group R&D is mainly a result of significantly reduced R&D in our Services Division as our fully integrated platform only requires a lower level of investment going forward. R&D for our internal programmes has not yet increased.
For the Evotec group R&D expenses are expected to increase for the full year of 2005 due to higher investments in proprietary CNS research and development as well as the renewed full consolidation of ENS from 26 May 2005 onwards.  
Expenses for research activities directed towards our Metabolic Disease discovery programme in the joint venture with DeveloGen amounted to EUR 1.0 million (2004: EUR 1.4 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 half of 2005 decreased by 4% to EUR 10.0 million (2004: EUR 10.4 million). The decline is a result of diligent cost control including the restructuring of our IT department and sales and marketing management. In the second quarter, these savings have been masked mainly by one-off payments associated with the capital increase and share registrations. In addition, compared to Q1 2005, SG&A expenses originating from Evotec Neurosciences were consolidated for the period between 26 May and 30 June.
These costs have not impacted our Services Division, which in addition to cost savings benefited from lower adjusted allocation of corporate overhead cost. With increased emphasis on proprietary drug development, a higher portion of corporate overhead costs is now attributed to the Pharmaceuticals Division.
Operating result excluding amortisation charges continued to improve in the second quarter, over both Q2 2004 and Q1 2005. For the full first half year it improved by 52% to EUR (4.0) million (2004: EUR (8.3) million). This significant improvement mainly results from continued growth, more favourable product mix and cost reductions in our Services business. The latter includes in particular reduced platform R&D expenses, as well as lower other operating expenses following the asset impairments in Q4 2004 and a higher expected pilot plant utilisation compared to 2004. The remaining other operating expenses reflect the cost associated with capacity which was planned not to be utilised in the period. Together with lower SG&A in the Services business, results from operations excluding amortisation charges in this division reached almost break-even for the first half 2005 (EUR (0.1) million) and were positive (EUR 0.4 million) for the second quarter.
The operating result including amortisation charges amounted to EUR (27.2) million (2004: EUR (13.4) million). We amortised acquired internal R&D projects of ENS through a one time write-off charge amounting to EUR 17.9 million. This accounting treatment of intangible assets from the ENS acquisition is in line with industry practice and adequately reflects the risks inherent in early drug discovery, in particular pre-clinical R&D and concept studies. Including linear amortisation from historically acquired intangible assets, total amortisation was EUR 23.2 million.
Net loss amounted to EUR 28.1 million (2004: EUR 11.8 million), in line with extraordinary amortisation charges exceeding operating cost savings. In addition, we accounted for a foreign exchange loss of EUR 1.2 million. This is mainly cash neutral and a result of the valuation of US-Dollar forward and option contracts at the balance sheet date, a loss which may or may not crystallise within the following months dependent upon the movements of foreign exchange markets.
Net loss before amortisation charges improved by 27% to EUR 4.9 million (2004: EUR 6.7 million).
Net loss per share for the first half of 2005 was EUR 0.68 (2004: EUR 0.33).
Earnings before interest and taxes, depreciation and amortisation (EBITDA) for the first half of 2005 improved by 41% to EUR (2.4) million (2004: EUR (4.1) million).
Following the acquisition of ENS and our capital increase in June, cash and cash equivalents at the end of June increased significantly to EUR 58.3 million.
Guidance for 2005 confirmed. After completion of the first half year 2005, Evotec again confirms the guidance given for the current year on 22 March 2005. The sales and order book for 2005 has increased to EUR 69 million as of July (+11% relative to July 2004: EUR 62 million) and is supporting our projections.
Conference Call
Evotec 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 Q2 results. Jörn Aldag, President & CEO, Dr Dirk Ehlers, CFO, and Dr John Kemp, Executive Vice President Research & Development Pharmaceuticals Division, 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
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 8607941#. The on-demand version of the webcast will be available on our website: - Investors - Financial Reports.
Second Quarter Report 2005
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Contact: Anne Hennecke, Director, Investor Relations & Corporate Communications, Evotec AG, Phone: +49-40-56081-286,
Contact: Anne Hennecke, Director, Investor Relations & Corporate Communications, Evotec AG, Phone: +49-40-56081-286,