EVO

Business Context and Reporting Period

Company: Evotec SE (Evotec Aktiengesellschaft)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Evotec is a drug discovery and development company focused on novel small molecule therapeutics, primarily in neuroscience, pain, and inflammation. The company operates through two main pillars: proprietary drug development and discovery alliances with pharmaceutical partners. In May 2008, Evotec acquired Renovis, Inc., adding late-stage preclinical programs for pain and inflammation. In 2007, the company divested its Instrument Business and Chemical Development Business, which are reported as discontinued operations.

Key Financial Metrics (2008)

Note: 2007 Net Loss includes a gain of €36.9 million from discontinued operations. 2008 had no discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Revenue from continuing operations increased 20% to €39.6 million, driven primarily by €8.5 million in milestone payments from the Boehringer Ingelheim collaboration. Underlying revenue from discovery alliances remained flat, negatively impacted by currency fluctuations (USD and GBP vs. EUR).
• Increased Losses: The operating loss widened to €73.2 million from €58.1 million. This was primarily due to a €20.3 million non-cash impairment of goodwill and a €7.3 million impairment of intangible assets related to the Evotec NeuroSciences acquisition. Additionally, R&D expenses increased 15% to €42.5 million, largely due to the inclusion of Renovis expenses and a €2.7 million milestone payment to Roche.
• Acquisition Impact: The acquisition of Renovis, Inc. in May 2008 added approximately €44.6 million in cash and investments but also increased R&D and SG&A expenses. The company subsequently announced plans to wind down Renovis US operations in 2009.
• Discontinued Operations: Unlike 2007, which reported a €36.9 million gain from the sale of the Chemical Development Business and Evotec Technologies, 2008 reported no income from discontinued operations.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Restructuring: In March and May 2009, the company announced restructuring plans to reduce the workforce by approximately 95 positions (50 in March, 45 in May) and wind down US operations at Renovis. This is expected to result in €4.0 million in restructuring expenses in 2009 and reduce annual operating expenses by over €14.0 million compared to 2008.
• 2009 Guidance: Management expects 2009 revenues (before out-licensing income) to be above €35.0 million. R&D expenses are expected to decrease to below €30.0 million, and SG&A expenses to below €18.0 million.
• Liquidity: The company believes its cash reserves (€55.1 million) and investments (€29.0 million) are sufficient to fund operations beyond 2012, especially following the restructuring measures which aim to reduce the cash burn rate by a minimum of 30%.

Key Risks and Contingencies

• Clinical Trial Failures: In April 2009, the Phase II proof-of-concept study for EVT 302 (smoking cessation) failed to show significant improvement over placebo. In early 2009, Pfizer stopped development of the VR1 clinical candidate. Internal investment in EVT 201 (insomnia) was also stopped due to market conditions.
• Partnership Dependence: The company relies heavily on strategic partners (Roche, Boehringer Ingelheim, Pfizer) for revenue and development. Termination or failure of these collaborations could materially harm the business.
• Intellectual Property: Significant reliance on licensed IP from Roche. Termination of these licenses could result in the loss of rights to key drug candidates.
• Currency Risk: Significant exposure to fluctuations between the Euro, US Dollar, and UK Sterling, which can materially affect reported revenues and expenses.

Important Facts for Investor Verification

• Cash Runway: Verify the sufficiency of the €92.4 million in total cash and investments against the projected cash burn rate post-restructuring.
• Impairment Charges: Review the assumptions used in the discounted cash flow models that led to the €27.6 million in total impairment charges (goodwill and intangibles) in 2008.
• Renovis Integration: Assess the impact of winding down Renovis US operations on the company's pipeline and the potential loss of scientific know-how.
• Roche Collaboration: Monitor the progress of the Phase II study for EVT 101 (treatment-resistant depression) funded by Roche, which includes a potential €65 million buy-back payment.
• Stock Price Volatility: Note the significant decline in share price (Frankfurt: €4.88 to €0.54 between 2005-2009) and the potential for further volatility based on clinical trial results.