Third Quarter 2002: Evotec OAI Reports Solid Performance in Difficult Market Environment

Download PDF

  • 9 months sales increase of 20% to EUR 47.5m, in line with company guidance
  • Growth in Q3 of 8% lead to a more cautious outlook on sales and profit targets
  • EBITDA slightly below last year (EUR (5.0)m)
  • Measures taken to reduce SG&A and R&D cost by appr. 20% in 2003 and to maintain year end cash position at Q3 levels (EUR 14-15m)
  • Good order book situation: 2002 revenue target (EUR 68-72m) secured, already EUR 35m secured for 2003

Hamburg, Germany | Abingdon, UK - Evotec OAI achieved a solid performance in the first nine months of 2002. Revenues increased by 20% to EUR 47.5 million (2001: EUR 39.6 million). While the growth rate for the whole period was still in line with our target of 20-30% per year, the market environment has deteriorated in Q3 with certain customers now delaying orders for reasons of their cash conservation. Although Evotec OAI has fundamentally progressed well, we could not avoid a slow down of growth in Q3 (+8%).
The Discovery Services Division revenues grew by 19% to EUR 41.2 million (2001: EUR 34.7 million). In line with our plans, our core business, discovery chemistry and biology services, continued to perform strongly (+23%). Our solid basis through long-term partnerships with customers like Merck, Pharmacia, Amgen, Vertex and our strong business development pipeline make us confident to continue to grow in 2003. At the same time development chemistry services experienced a down turn in new orders during Q3 and a decline in visibility for new orders. For the full year 2002, we expect development revenues to remain flat when compared to last year.
For the nine months to September 30, 2002, the Discovery Tools and Technologies Division grew by 30% to EUR 6.2 million (2001: EUR 4.8 million). This is an excellent performance in an industry environment where the general trend in instrumentation sales pointed downwards.
50% of total group revenues were recorded in Europe, 48% in the United States, and 2% in Japan.
Operating loss for the first nine months amounted to EUR (23.5) million, an improvement of 80% over the comparable period for the previous year (2001: EUR (114.9) million). This reduction is a consequence of lower regular amortisation of goodwill and other intangible assets under new US-GAAP accounting rules. Excluding amortisation charges, loss from operations for the first nine months amounted to EUR (14.4) million (2001: EUR (11.9) million). The increase is primarily a result of a decline in gross margins due to a change in revenue mix in this period as well as the planned under-utilisation in development chemistry following the start of our new pilot plant. 
Net loss improved by 82% to EUR (20.6) million (2001: EUR (114.8) million), again, primarily as a consequence of reduced regular amortisation charges. In addition, non-operating  income in the amount of EUR 1.6 million as well as tax treatment contributed to a reduction of net loss.
Earnings before interest and taxes, depreciation and amortisation (EBITDA) amounted to EUR (5.0) million (2001: EUR (4.1) million).
Other noteworthy items and company announcements include:

In light of the increasingly difficult market environment we announced on October, 23, 2002 that we are reducing our financial targets for the year and that we are taking action to significantly bring down our SG&A and R&D expenses. Those expenses will be reduced by appr. 20% in 2003. As we began implementing these measures in Q3, they will start to have an impact in Q4.

One of Evotec OAI's most significant highlights: shortly after the end of Q3 Pfizer signed an expansion of our collaboration with a potential value of more than US-Dollar 25 million. As part of the contract, Pfizer will also acquire a 10% stake in Evotec Technologies which we believe is a strong validation of our fundamental strengths.

Many biotech companies are looking to partner the whole process from target to IND with us. By contributing technology, process know-how and services for their discovery efforts they allow us to become an equity partner in them while at the same time giving Evotec OAI a cash-based cost compensation.
- In August Evotec OAI co-founded Vmax together with UK-based Microscience.
- Shortly after Q3 we signed a letter of intent to become a co-founder of Genovation, a new company emerging from the planned spin-off of MediGene's cardiological drug discovery programme.
In case of successful financings, these partnerships are an excellent way to create additional long-term customer relations.

Our market position is strong. We continue to show excellent performance on customer projects and our ongoing R&D investment in future value drivers yields good results: We expanded our corporate library of high-quality drug-like compounds by adding more compounds and diversity. We were successful in broadening our assay portfolio and in integrating ADME/T and computational chemistry functionality into our service offering.
"In summary, despite a challenging environment we have done well in many respects. We laid the foundation for larger creative outcome-based deal structures in long-term customer relationships and have promising negotiations in progress with pharma and biotech companies", said Joern Aldag, President and Chief Executive Officer of Evotec OAI. "We believe that the current environment also presents a lot of new opportunities: Pharma companies are changing the way they look at collaborations with biotechs. And, genomics/proteomics companies are increasingly concentrating on what they excel in and partner in areas where they believe to find an excellent and established partner  - our integrated process from target to IND. As Evotec OAI is considered a clear leader in this field, we are playing an exciting and valuable role."
Outlook for 2002/2003. Our performance in the first nine months was still in line with our longer term trend guidance. However, as a consequence of depressed capital markets and earnings pressures certain customers have started to delay projects. Even though we believe we are fundamentally well positioned, we could not avoid a down turn in growth in Q3. We therefore announced changed forecasts for 2002 revenue with growth now being expected to be 8-14% (see press release of October 23, 2002). Based on these revenues, Evotec OAI anticipates to reach EBITDA break-even in 2003. EBITDA for 2002 is now expected to be between EUR -3 and -6 million.
In light of these developments in the financial and customer markets we decided to perform an impairment review later this year. Our market capitalisation is below book value, which suggests to carefully analyse any impairment write off requirements. In the past we took a conservative approach to goodwill accounting pushing for a - non cash - linear write down of goodwill over 3 years. New SEC regulation required to change from this policy to regular impairment reviews in 2002. The review which is not finalised suggests that we are likely to take an additional, non-cash write-off charge on goodwill created in the merger with OAI amounting to EUR 110 to 130 million in Q4. This is less than the goodwill amortisation which we would have accounted for following the rules prior to the changes of US-GAAP rules, when we incurred annual amortisation of approximately EUR 140 million including the regular EUR 12.4 million amortisation charge. We deem this procedure to be prudent and conservative. It does not materially change the fundamental strength of our company and does not have an effect on our cash position.
Our order situation is healthy. As of mid November, secured revenues for this year amounted to EUR 69 million (guidance 2002: EUR 68-72 million). Following the signature of the multi year contract with Pfizer, our 2003 order book already amounts to EUR 35 million. The difficult conditions of capital markets and the resulting uncertainties regarding timing of new contracts, however, do make us cautious. For the purpose of our forecast given today we assume a continued weakness in spending in the pharmaceutical and biotechnology industries throughout 2003. While we still believe in the longer term trend of 20 to 30 % revenue growth, we expect revenues to grow only by 10 to 15% in 2003, but possibly faster in 2004. On the basis of our business forecast and our efforts to reduce cost year-end cash will remain at about the level of the end of Q3. Based on this cash position and our strong pipeline of new contracts we remain confident that we can deliver on our business plan without requiring a capital increase through the stock exchange.