Third Quarter 2005: Third consecutive quarter of strong services performance and first compound in Phase I clinical trials

Hamburg, Germany | Oxford, UK - Evotec AG (Frankfurt Stock Exchange: EVT, TecDAX 30) today announced financial results for the third quarter and the nine months to the end of September 2005.
Development of a sustainable CNS pipeline:
* Evotec's first Phase I study for EVT 201, a potential novel treatment for insomnia, successfully completed - After period end -
* EVT 101, in development for Alzheimer's disease, Parkinson's disease and/or neuropathic pain, on track to enter Phase I by year-end
* Dr David Hallet to head CNS medicinal chemistry team
* Pharmaceutical Scientific Advisory Board established
Excellence in customer relations:
* Strategic discovery partnerships successfully developed:
o Scope of collaboration with Boehringer Ingelheim extended
o Another medicinal chemistry agreement signed with Procter & Gamble Pharmaceuticals, Inc. (P&GP)
o Extension of strategic chemistry collaboration with Roche by increasing the number of FTEs
* Continued strong sales performance in formulation business
* Major new contracts signed with Celgene, Point Therapeutics and Oxagen for custom synthesis, process research and development, and pilot plant manufacturing
* ProPharma fully integrated into Evotec's service offering
* Nine months revenues for the Group increased by 12% to EUR 53.2 m (2004: EUR 47.4 m); Q3 revenues up 18% to EUR 19.0 m (2004: EUR 16.1 m)
* Continued strong sales performance in our Services Division with 9 months sales up 14% to EUR 43.2 m (2004: EUR 38.0 m)
* Services Division's 9 months operating result excluding amortisation charges at break-even (EUR (0.2) m)
* Cash position of EUR 54 m
* Sales and order book for 2005 increased to EUR 76 m as of October (October 2004: EUR 72 m) exceeding last year's revenues
* On track to reach full-year 2005 guidance
"2005 continues to be extremely successful for Evotec. Q3 was an important quarter during which we successfully conducted our first clinical study and showed a third consecutive quarter of strong operating performance in our services business. We had set ourselves two goals for 2005: Our goal for the Pharmaceuticals Division was to submit one compound into clinical trials. We have achieved this ahead of time by successfully completing our first clinical proof-of-principle study for EVT 201, a novel potential treatment for insomnia. The study provided promising results with respect to a good balance between the duration of promotion of sleep and subject alertness the following morning. A second programme, EVT 101, our subtype selective NMDA receptor antagonist for the potential treatment of Alzheimer's disease, neuropathic pain and Parkinson's disease, remains on schedule to enter clinical trials before year end", said Joern Aldag, President and Chief Executive Officer of Evotec. "In our Services Division we wanted to achieve at least the prior year's revenue levels and an operating result of break-even before amortisation of intangibles for the full year 2005. After having executed well on our re-direction of this division, we are getting closer to achieving this goal: Q3 has shown 6% revenue growth over the same quarter in 2004. In addition, Q3 operating result before amortisation of the Services Division was almost break-even."
Evotec revenues for the first nine months 2005 increased by 12% to EUR 53.2 million (2004: EUR 47.4 million). Q3 revenues increased by 18% to EUR 19.0 million (2004: 16.1 million). This strong Q3 performance was driven by an acceleration in sales in Evotec Technologies and continued strong sales performance in our Services Division.
For the first nine months of 2005, revenues in our Services Division increased by 14% to EUR 43.2 million (2004: EUR 38.0 million). Q3 revenue growth amounted to 6% year-on-year. While all product lines reported growth over last year, Chemical and Pharmaceutical Development Services and in particular our formulation business in Scotland continued to be the major contributors.
For the first nine months of 2005, we reported revenues from our target discovery collaboration with Takeda of EUR 1.1 million (2004: EUR 0.9 million) in our Pharmaceuticals Division. In 2005, revenues with Takeda were consolidated from 26 May onwards and, in 2004, for the first quarter only. 
After a weak start into 2005, our Tools and Technologies Division (Evotec Technologies (ET)) has now completed the roll-out of new technology and software modules for a major part of its instrument product range. Third-party revenues for the nine months (EUR 8.9 million) are now ahead of the same period last year (+5%; 2004: EUR 8.5 million). Q3 revenue growth amounted to 54% year-on-year. Despite the expectation of strong Q4 revenues we do not see Evotec Technologies sales growing over 2004 due to the above average performance in Q4 2004.
Interest in our cell handling devices including OperaTM and ElektraTM remain strong, the OperaTM both as a stand alone device or integrated into larger platforms. We have delivered instruments to pharmaceutical customers and academic institutions during the quarter. In addition, ET installed the first plate:explorer(TM) system from the former Zeiss portfolio at a major pharmaceutical company and took an order to integrate an OperaTM analyser for application in cell based screening.
Cost of revenue for the first nine months of 2005 were EUR 35.5 million (2004: EUR 31.0 million). This translates into a gross margin of 33.2%, (2004: 34.6%). For the third quarter, gross margin was 29.5% (2004: 32.9%).
The slight decline in gross margin for Q3 has primarily three reasons which we believe are all temporary. In our Services Division we incurred in Q3 above average costs in parts of one library synthesis project as well as in our collaboration with Boehringer Ingelheim. In addition, in our Pharmaceuticals Division, we ramped up our external efforts for target validation in context of our collaboration with Takeda as we move closer to the time frame in which Takeda may select targets for their internal discovery programmes. Margins are therefore expected to come back to average levels in the fourth quarter of 2005.
For the first nine months of 2005, R&D expenditure decreased by 10% to EUR 9.0 million (2004: EUR 10.0 million). As in previous periods, this does not include R&D conducted in our joint venture with DeveloGen.
In Q3 alone, however, R&D expenditure increased as planned, by 40% year-on-year. It was the first quarter in 2005 that Evotec Neurosciences was fully consolidated for the entire period, and R&D expenses in our Pharmaceuticals Division have started to pick-up with the first clinical study conducted for EVT 201. By adding EUR 1.7 million in Q3, divisional R&D expenses increased to EUR 2.1 million (2004: EUR 0.9 million) for the first nine months. R&D expenses for proprietary CNS research are expected to further increase during the fourth quarter of 2005. 
The overall decline of group R&D expenses year to date is therefore mainly a result of significantly reduced R&D in our Services Division. As our fully integrated platform requires a lower level of investment going forward, R&D expenses in the division decreased by 51% to EUR 2.7 million (2004: EUR 5.5 million). 
Expenses for our Metabolic Disease research activities in the joint venture with DeveloGen amounted to EUR 1.5 million (2004: EUR 2.2 million). They are booked as a net loss from equity investments under non-operating expenses.
SG&A costs for the first nine months of 2005 decreased by 7% to EUR 14.6 million (2004: EUR 15.7 million). Although Q3 was the first full quarter of Evotec Neurosciences (ENS) being fully consolidated in the Evotec Group, SG&A expenses were reduced by 14% (to EUR 4.6 million). Unlike Q2 2005 there were no further acquisition related extraordinary SG&A costs. In addition, the full effect of underlying improvements from our cost control and restructuring measures were seen. In Q3, SG&A costs in our Services Division improved significantly by 34% to EUR 2.6 million (Q2: -24%, Q1: -9%).
Operating result excluding charges from amortisation of intangibles for the first nine months improved by 31% to EUR (8.4) million (2004: EUR (12.1) million). This is mainly a result of continued growth and cost reductions in our Services Division. Reduced platform R&D and SG&A expenses, as well as lower other operating expenses, following (i) the asset impairments in Q4 2004 and (ii) higher expected pilot plant utilisation compared to 2004, resulted in operating result excluding amortisation charges in this division reaching almost break-even for the first nine months 2005 (EUR (0.2) million). This is in line with our 2005 guidance.
Operating result before amortisation in our Tools and Technologies Division fell to EUR (3.9) million (2004: EUR (2.3) million), as it incurred an extraordinary restructuring charge. Evotec Technologies has decided to close its Düsseldorf operations and transfer the activities to Hamburg. This will streamline operations and enhance its offering by more closely integrating the development of assay applications, technologies and software.
The operating result including amortisation charges amounted to EUR (34.9) million (2004: EUR (19.6) million) for the first nine months. This increase was driven by a one-off effect in the second quarter, when we amortised acquired internal R&D projects of Evotec Neurosciences through a write-off charge amounting to EUR 17.9 million (see Q2 report). For Q3 the operating result was closer to last year's level at EUR (7.7) million (2004: EUR (6.3) million), despite Evotec Technologies' restructuring, higher R&D investment and amortisation. Going forward, regular amortisation of intangible assets from the acquisition of OAI (appr. EUR (2.5) million per quarter) will no longer occur.
Net loss amounted to EUR 35.5 million (2004: EUR 17.7 million). The increase is a result of extraordinary Q2 amortisation charges from the acquisition of Evotec Neurosciences of EUR 17.9 million. In Q3, net loss amounted to EUR 7.4 million (2004: EUR 5.9 million). This slight increase over last year is a result of the slightly higher operating loss, which includes the restructuring cost in Evotec Technologies.
Net loss before amortisation charges improved by 13% to EUR 8.9 million (2004: EUR 10.2 million).
Net loss per share for the first nine months of 2005 was EUR 0.73 (2004: EUR 0.49).
Earnings before interest and taxes, depreciation and amortisation (EBITDA) for the first nine months of 2005 improved by 18% to EUR (4.9) million (2004: EUR (6.1) million).
Cash and cash equivalents at the end of September amounted to EUR 54.3 million and provide a solid basis for developing and expanding our proprietary CNS pipeline.
Guidance for 2005 confirmed. Based on the strong development during the first nine months of 2005 we believe that we are well on track to reach our development milestones and financial targets for the current fiscal year. The major milestone in our Pharmaceuticals Division of bringing one compound into phase I clinical trials has been achieved in October, earlier than anticipated. This is a great success, particularly in light of the fact that our second compound is also expected to start phase I before the end of the year. We are therefore anticipating having two compounds in clinical trials by year end.
We continue to manage our cash position diligently. We expect to spend less on R&D this year than originally planned. This is a consequence of our in-licensing activities, which have led us to not ramp up the expense for internal earlier stage discovery projects as fast as originally anticipated.

We expect that we will also reach our two financial targets for 2005 and confirm the guidance given on 22 March 2005. The sales and order book for 2005 has increased to EUR 76 million as of October (+6% relative to October 2004: EUR 72 million) and is supporting our target of up to 5% revenue growth for the Evotec Group and achievement of last year's revenues for the Services Division. Secondly, the restructuring programme in this division has put it on track to deliver operating result before amortisation at break-even, which should translate into solid positive contributions to operating cash flow.
In summary, the Company has made significant progress - strategically and financially - during 2005.
Conference Call
Evotec will hold a conference call today at 04.30 p.m. CET (03.30 p.m. GMT/10.30 a.m. US time East Coast) to discuss Q3 results. Joern 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)30.2215 1094
UK:                  +44.(0)20.7365 1844
US:                  +1.718.354 1171
A replay of the conference call will be available for 24 hours and can be accessed in Germany by dialling +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 4152090#. The on-demand version of the webcast will be available on our website: - Investors - Financial Reports.
On the same day Joern Aldag, President & CEO, and Dr John Kemp, EVP Research & Development Pharmaceuticals Division, will present the Company to a broad audience of institutional investors at the Rodman & Renshaw Techvest 7th Annual Healthcare Conference in New York. The presentation will start at 09.05 a.m. US time (East Coast) and will be broadcast live on the internet at:
Third Quarter Report 2005
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Contact: Anne Hennecke, Evotec AG, Director, Investor Relations & Corporate Communications, Phone: +49-40-56081-286,
Contact: Anne Hennecke, Evotec AG, Director, Investor Relations & Corporate Communications, Phone: +49-40-56081-286,