Evotec's (EVOTF) CEO Werner Lanthaler on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Evotec AG (EVOTF)

Evotec AG (OTC:EVOTF) Q2 2014 Earnings Conference Call August 12, 2014 3:30 AM ET

Executives

Werner Lanthaler – CEO

Cord Dohrmann – Chief Scientific Officer

Colin Bond – CFO

Analysts

Igor Kim – Close Brothers Seydler Research AG

Thomas Schießle – EQUI.TS

Victoria English – Mednous

Mark Pospisilik – Kempen & Co

Mick Cooper – Edison Investment Research

Heinz Müller – DZ Bank AG

Robin Maxwell – Commerzbank AG

Operator

Dear ladies and gentlemen, welcome to the Q2 Report 2014 telephone conference of Evotec AG. At our customer’s request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

May I now hand you over to Dr. Lanthaler, who will lead you through this conference. Please go ahead sir.

Werner Lanthaler

Good morning. Welcome from Hamburg. Welcome to Evotec. Our H1 has the headline, strong execution for more innovation. Welcome to this conference call to give you better insights into the company. I am here with my colleague, Colin Bond, our CFO; and Cord Dohrmann, our Chief Scientific Officer, and the three of us will handle this conference call for you.

I hope you had an opportunity to download your presentation, which we put on the internet. We will guide you through this presentation by basically also always telling you which page that we are on.

On Page #4 of this presentation, let me bring you directly into the state of play of the company. I think we can present a strong set of financials and a very good progress of our portfolio at this stage. You see improved operational performance, you see increased revenues, and you see also confirmed guidance for the full-year 2014.

Our financials basically show an increase of more than 9% on the top line. You see positive adjusted Group EBITDA for the first half-year of EUR 0.6 million, and you see that the segmentation of the company is delivering quite nicely also when it comes to generation of cash and use of cash while at this stage holding a very strong cash position of about EUR 85.6 million.

When it comes to our operation, we are very happy that we can present at this conference call, new and extended collaborations. For example, we closed a new collaboration in H1 with Shire, which we didn’t discuss so far. We also are very nicely progressing with some of our active customers and have extended our relationships here, and we are happy that we can report some first milestones dripping into the company in the first-half of 2014, but we expect the second-half of 2014 to deliver more milestones than the first-half.

When it comes to our product pipeline, Mr. Dohrmann will tell you a bit more about it later. I think we are entering a phase of critical data point by the end of 2014, beginning of 2015, in two very advanced projects, and in projects that are in their Phase I, Phase II stage we also will see nice progress over the coming months.

As the fourth bullet point on this Page #4, I want to highlight that Evotec is growing, and that we are also growing on an inorganic way, and in the first-half of 2014, we have acquired two companies, one being Bionamics and the second one being Euprotec.

When you go to Page #6 of your presentation, I think clarity of our business model is helping us at this stage quite nicely in the marketplace. Clarity for the two segments that we bring to the market; Evotec Execute as the segment, where you can access our high-quality platform in a fee-for-service mode, selectively also driven by milestone arrangements, but where we basically work on the target this customers bring to us.

And the clarity that we build around our Evotec Innovate strategy, where we have built a series of highly interesting first-in-class projects that are very early at this stage, but where we can optimally use our platform to progress novel targets, that we typically bring into this pipeline on our own, into very interesting value points for the future.

Page #7, shows you that strong performance of our Execute business in 2014 first-half, which is really driven by extending active collaboration, broadening active collaboration and also new alliances, for example, as already mentioned one that we closed with Shire.

Page #8 shows you that the constant upgrade of our core competences is what makes Evotec the leader, the quality leader in the discovery market globally. We are convinced that our customer should get the highest quality opportunity to work on their target to have access to all platforms and all technologies, at the same time, so that the purpose of accelerating target is seamless from the beginning to the end of the point that we are generating.

In this period, we acquired Euprotec recently, which is a Manchester-based CRO company, where we are very convinced that by providing a novel set of access in the field on infectious diseases, we will help many, many new customers in the future.

We also acquired Bionamics, which is mainly there to basically support our Evotec Innovate business also in Europe, where we see a lot of potential for this market.

Page #9, shows you that we feel our Execute strategy is fully on track, and despite the fact that you already see most of the things ticked here, you will see more ticks in the future, because we will expand more pharma alliances than we have already done, and we will also close more alliances than we have already done in the first-half year.

Page #10 shows you how nicely we think Euprotec splits into our idea of building systematic, unbiased and comprehensive pipeline building blocks for our customers. Anti-infectives as a novel field was always on our wish list of services to bring to the CRO market, and with Euprotec, we have really found a platform, which we will initially use as a service platform for customers, but where we increasingly will also shift the capabilities that we access into novel projects which we already have in our pipelines, and where we build also a quite broad pattern in the future.

Page #11 shows you that Euprotec so far is a small company, but it’s one where we see a lot of growth potential in the future, and where in H2, we will also invest into the growth of this platform to fit into our portfolio nicely.

Talking about the portfolio on Page #12, you can see that at this stage, Evotec owns more than 50 projects where Evotec owns product upside and where will have a true portfolio of Phase III, Phase II, Phase I, Phase 0 projects running, and where especially in many discovery alliances give us big comfort for the future that we will create first-in-class access that will really change some of the diseases that are out there.

At this point, I will now hand over to our Chief Scientific Officer, Cord Dohrmann.

Cord Dohrmann

Thank you, Werner. So there are limited news on the product development from our clinical-stage project at this point. And nevertheless, Diapep277 continues to be on track in terms of its development. DiaPep is currently evaluated in a confirmatory Phase III study that has been fully recruited. Based on this, results are expected from this study for Q1 in 2015.

Nevertheless there has been a significant change in ownership of DiaPep277, in June, Hyperion Therapeutics acquired Andromeda, who has been the principal owner of DiaPep so far. Hyperion Therapeutics is a U.S. based commercial stage biopharma company, that is focused on the supply and development of treatments for orphan diseases, and therefore DiaPep fits very nicely to their portfolio.

Evotec still continues to hold certain milestones on royalty-wise on DiaPep and these haven’t changed to this transaction.

On the next slide, Page 14, there is – we continued to develop Evotec’s 302 together with our partner Roche in the Alzheimer’s disease field. Evotec’s 302 is a MAO-B inhibitor program that is currently evaluated in one of the largest Phase III trials in patients with moderate to severe Alzheimer’s disease. The progress to report here is that the study has been fully recruited in Q1, 2014. And based on this, results can be expected for the first half in 2015.

In the next two slides, starting with Page 15, we are addressing – we continued to build the portfolio of product opportunities with upfront Evotec in various disease indication. And I won’t spend a lot of time to go through these product opportunities line by line, but essentially just highlight a few additions and progress. I’ve already talked about DiaPep277 in our diabetes portfolio.

And with this, it gets to the next page, Page 16, where we are looking at many options in the CNS space. And here I would like to highlight in particular, a new collaboration with Shire Pharmaceuticals in the Fabry’s disease that we have recently structured, and that is slated to run for an initial period of three years.

I also would like to highlight that we are very proud of our collaboration with Johnson & Johnson in the Alzheimer’s disease space TargetAD. This collaboration has made significant progress in terms of selecting novel targets in this space and driving this forward, which also have led to the first milestones in this program, and the overall collaboration is continued to grow on this basis.

And on the next page, Page 17, I am sufficed to say that Evotec remains committed to its pain and inflammation franchise. We’ve continued to grow the franchise into the future.

Next page, Page 18 is the slide for our oncology pipeline. And here I would like to highlight one collaboration we struck in Q1 of 2014. This is a TargetCanMet for Cancer Metabolism, a collaboration that we entered in with the Debiopharm Group in Switzerland. Here, we partnered a discovery-stage project that was only initiated about a year earlier within Evotec and have attracted quite a bit of interest, right from the start.

We feel that this collaboration with Debiopharm is really innovative structure, where Debiopharm will fund all discovery efforts, as well as pre-clinical efforts, to drive this program to the clinic and then we’ll take over clinical development.

I am now going to skip forward to Page 20 to briefly highlight how we continue to build our Target X/Cure X portfolio. As you can see on this page, we have been pretty active in the last three years in building quite substantial portfolio programs in this space, and have continued to do this in 2014. And even though, we are running short on space in 2014, you will see additional partnerships in this space.

Skipping forward to Page 22, in summary I would say that we have made significant progress in building our Innovate strategy. We intend to continue on this strategy and have already closed first partnerships here in 2014, but hope to be able to do it – enter into additional partnership. However major drivers in 2014 and in particular, 2015 will be clinical results from our two most advanced programs, in particular DiaPep277, and EVT302 of course. But in order to continue to fill that in vivo also and add additional programs in the pre-clinical stage.

With this, I’d like to hand over to Colin, who will take you through the financial performance and outlook.

Colin Bond

Slide 24. Slide 24 presents the P&L for the first six months of 2014, compared to the first six months of 2013. As Werner highlighted previously, Group revenues increased by 9% compared to the same period in the prior year to EUR 40.1 million. At constant 2013 exchange rate, the increase would have been 12%.

Overall gross margin for the first six months of 2014, increased to 29.4% compared to 28.8% for the first six months of 2013. For the first six months of 2014, EBITDA adjusted for changes in contingent consideration was EUR 600,000 which was slightly above prior year of $500,000.

This was achieved despite the significant planned increase in R&D expenditure, with the investments being made in the Cure X and Target X initiatives.

Slide 25. Slide 25 shows the results for the first six months of 2014, presented according to the Execute and Innovate segments. Consistent with our strategy, the results of the Execute segment for 2014 shows strong revenues, solid margins, low R&D investment and relatively high profitability, with EBITDA adjusted for changes in contingent consideration for the first six months of 2014 of EUR 5.5 million.

Meanwhile the results of the Innovate segment reflect the significant investments being made to drive the long-term upside for the business. EBITDA adjusted for changes in contingent consideration for the first six months of 2014 was minus EUR 4.9 million. However the high gross margin of 44.7% reflects the value of partnered assets and the overall Innovate strategy.

Slide 26. Slide 26 presents the P&L for Q2 2014, compared to Q2 2013. Revenues increased by 15% compared to the same period in the prior year to EUR 22.5 million. At constant 2013 exchange rate, the increase would have been 18%.

Overall gross margin for Q2 of 2014 increased to 31.9% compared to 31.1% in the prior year period. EBITDA adjusted for changes in contingent consideration in Q2 2014, increased to EUR 1.9 million, compared to prior year of EUR 900,000.

Slide 27. On Slide 27, the left-hand box shows the three-year trend in H1 revenues. As stated previously, overall reported revenue increased by 9% to EUR 40.1 million in H1 2014, compared to EUR 37.7 million in the same period in 2013.

The right-hand box shows the three-year trend in gross profit. As previously mentioned, overall gross margin, for the first six months of 2014, increased 29.4%. In addition, gross profit excluding milestones, upfronts and licenses for Q1 2014 of 23.2% was absolutely in line with the prior year of 23.5%. This was an excellent achievement given that the significantly weaker dollar reduced the reported margin by 2.2% versus prior year, and it reflects the results of increased operational efficiency and higher productivity.

Slide 28. On Slide 28, the left-hand box shows the three-year trend in R&D expenditure. Consistent with the strategy of the company, R&D expenditure for the first six months of 2014, increased by 30% to EUR 6.3 million, compared to EUR 4.8 million in the same period of the prior year, with significant investments made in the Cure X and Target X initiatives.

The right-hand box shows the three-year trend in SG&A expenses. SG&A expenditure for the first six months of 2014, increased by 9% to EUR 8.9 million, compared to EUR 8.2 million for the first six months of 2014. This increase was planned and was mainly due to an expansion of the business development team to support the company’s future growth, as well as the impact of the Bionamics and Euprotec acquisitions.

Slide 29. Slide 29 summarizes the 2014 guidance for the company that is unchanged from that published on the March 25, 2014. Revenues are expected to grow with high-single-digit percentage growth, excluding milestones, upfronts and licenses. EBITDA before changes in contingent considerations is expected to be at a similar level to 2013. Liquidity is expected to exceed EUR 90 million at the end of 2014, and investments of approximately EUR 10 million to EUR 14 million, will be made in R&D, predominantly in the strategic Cure X and Target X initiatives.

However, it is important to remind everyone and we do this continually is that, our guidance is very much dependent on achieving certain key scientific milestones in the second half of 2014.

With that, I would like to pass back to Werner Lanthaler.

Werner Lanthaler

Thank you. When you come to Page #30, just a few other highlights that happened in the first-half of 2014. As this is a company built on people, it’s key for us to recruit the best people that can make Evotec grow. So first to give you here one data point, in Hamburg only, which is one of our six sites, we have recruited more than 40 scientists already in the first-half year, which is excellent talent to build Evotec into the future.

A few of them highlighted here is Timm Jessen, who will predominantly take over our Evotec Innovate Business and especially focus on European driven Cure X and Target X initiatives. We are also very happy to welcome to Lloyd Payne and Peter Warn as new Anti-infectives Discovery leaders within Evotec.

When it comes to our governance structure and our Supervisor Board, we are very happy that we were able to elect in our AGM, a new Supervisory Board where Professor Wolfgang Plischke is now our new Chairman of the Supervisory Board. And Professor Iris Löw-Friedrich is a new member of the Supervisory Board, and Professor Paul Linus Herrling is also a new member of the Supervisory Board. Yet it’s true, being a professor makes it much easier to become a new member of the Supervisory Board, like [indiscernible] and therefore we really want to welcome our new team here. Walter Wenninger, Claus Braestrup and Bernd Hirsch are confirmed and re-elected in this AGM.

Page 31 basically gives you our rounding up or summing up statement for H1. We think H1 was solid. We are increasing pace in this year, and we are increasing the ideas that we bring to the market at Evotec.

We are also quite optimistic about H2, whereas Cord and Colin already mentioned, of course, milestones have to deliver on our top line and also on our bottom line. There are more opportunities for milestones out there than in many years before, but of course there is a reach to that milestone also failed because this is biology-driven.

Having said that, the beauty of the different model of Evotec is that Evotec executes and Evotec innovates together, make a mix of a company which is in that what we are expecting in the second-half of 2014 growing our discovery alliance business and also growing our Innovative business quite nicely.

At this point, let me thank you for listening into this call. Let me thank my team, Mario, Cord and Colin for delivering the first-half of 2014 that nicely together, and that we thank you for all your questions that hopefully will come now.

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. (Operator Instructions) One moment please for the first question. The first question comes from Igor Kim, Close Brothers. Your line is now open. Please go ahead.

Igor Kim – Close Brothers Seydler Research AG

Hello everyone, and congratulations with strong results. I have three questions. The first one is do you expect significant triggers with regard DiaPep and EVT302 in 2015? Now, do these milestones should trigger the payment for you? And the second question is your partner in China, JingXin, plans to start Phase IIb trial with EVT201. Can you provide with more details regarding the trial design, are they involving? And the third question is, what was your adjusted EBITDA on constant currency basis, is it possible to quantify? Thank you.

Werner Lanthaler

Thank you, Kim. I’ll take the first two questions. Colin will take the third question. When it comes to – I think you are especially alluding to DiaPep and 302, the data points as we are speaking can happen late 2014, beginning of 2015, in both clinical trials that are ongoing there. Both of them are recruited, both of them are full stream at this stage, top priority of the both – of the two companies.

And at the same time, you have to say that the timeline and the results are in the hand of our partners, and therefore it’s not us who can effectively drive the key endpoint and give you exact data in which week or which months this comes, but the key message is there is no insecurity there anymore that these data points will come.

These will trigger significant payments, especially EVT302 will trigger significant payments on the situation, if this trial would be brought forward into Phase III trial, which we will not expect in 2014, which is the earliest to expect in 2015, which would be a double-digit million number to come as a milestone here, but much more important is that this would be a key novel mechanism in Alzheimer’s as one of the few medicines that is out there for this disease hopefully. And I don’t have to remind you that this of course a very risky trial.

When it comes to China, I think on those projects, we can report nice progress. So our alliance with CONBA in the field of inflammation diseases is going quite nicely forward here. We expect clinical progress in 2014, 2015 to come. And when it comes to trial design of our 201 project, which is an insomnia project in China ongoing, I think we have to say that is also in the hands of our partners to disclose the exact trial design, but all I can say is it’s very similar to the Phase II of Evotec which already been done, but they are trying to repeat now in China, and they are also using the same compound that was used in Europe before.

On the EBITDA question, I hand back to Colin.

Colin Bond

Yes. Igor, it’s Colin here. So we reported for the first-half 2014, EUR 600,000. At constant 2013 exchange rates, that would have increased to EUR 1.6 million, compared to EUR 500,000 in the first-half 2013.

Igor Kim – Close Brothers Seydler Research AG

Okay, thank you.

Operator

The next question comes from Thomas Schießle, EQUI.TS. Your line is now open. Please go ahead.

Thomas Schießle – EQUI.TS

Hello, thank you for taking my question. Good morning gentlemen. It’s definitely a question on strategy. Werner, you mentioned that you were working along in progressing and broadening the pipeline in discovery launches and Innovate as well. Could you give us a hint on which indications are you looking for, or is it where you’ve costs [ph] or where you are even odd in the space you will grow in, in the future? Thank you.

Werner Lanthaler

Thank you very much. We are very happy now with the situation that we have created to have our diabetes and complications of diabetes franchise, our CNS franchise, our oncology franchise, our pain franchise and our anti-infective franchise. I think it’s fair to say, as already mentioned, anti-infective have really always been on our reflex, so this completes the situation of diseased areas where we are currently building up our discovery platforms and where we are using our discovery platforms.

It also shows you that from our partnering approaches and from our customer demand, we have been able to build platforms, where for example in pain, we are clearly the number one provider of all platform technologies that are needed for every pharma partner of that at this stage.

So I think on that level, we are quite happy with the current set-up and we are intend from a strategic point here rather to go deeper than to go broader. With this, we also mean that there are certain disease areas where we feel that we are really hitting here the right points and hitting here the right franchises, also going more to the strategy of going deeper than broader, in the sense of, for example, taking our CureNephron franchise. Here we have something in our hands, which is getting excellent feedback in the industry, in the medical community, and it’s clearly one of the assets that we want to hold on for a certain period of time and hope to also continue to invest in that.

So here as a summary, the idea is we have built it at the rate and now we go deeper than broader in all disease areas. I want to make maybe one more statement here, the disease area that we want to clearly strengthen is pain. Here we see a world leading position evolving. We also see a world leading position evolving in everything which is diabetes and complications of diabetes evolving, we see a world leading position evolving in the field of IPXL and IPXL [ph] views in many disease franchises.

And in the oncology field, I think it’s also fair to highlight that some elements or some disease areas within the oncology field, we will go deeper than broader into the future.

Thomas Schießle – EQUI.TS

Okay. With the U.S. sector, which is you increased in the past helpful to reach those strategic points?

Werner Lanthaler

Sorry, I did not get the question. I couldn’t get you.

Thomas Schießle – EQUI.TS

Yes, we had some thunderstorms here in the region, but pardon me. A question on the U.S. activities. Does the increased U.S. activities help you?

Werner Lanthaler

Well first of all, I hope nothing happens in the thunderstorm to you. Secondly, U.S. activities, I think here we feel very well on track. And if you look at our increased revenues coming from the United States in H1 2014, you can get a lot of comfort by seeing that the U.S. based biotech and pharma companies use Evotec more and more as their source for discovery, innovation and as a platform.

So I think point number one. The idea of positioning Evotec as the key pharma outsourcing player is working. Point number two, just one side-note, if the U.S. dollar would have not been that weak in the first-half, this would have been a very nice effect, also on our numbers, but I think more importantly as we did a strategic point, that through our alliances that has been built with big pharma companies and with biotech companies on the East Coast, especially we see here a very nice flow coming into Evotec.

One element of this is, as you are all aware, there was a big trend of fundraisings of biotech companies in the United States in the year 2012, 2013. So you see a very well-funded class of companies now out there which increasing build their companies on high efficient purposes to get with Evotec. So that’s really something where we are benefiting from the IPO class of 2012, 2013.

At this stage, we are benefiting from the U.S. trend, which is of course also increasingly have been in Europe of pharma restructuring, which creates a lot of volatility for our business, but at the same time it also creates the ongoing opportunity to generate new business.

And the third element in United States is that we have built a very nice network of academic collaborations starting with Harvard, Hughes and other universities that you will see also in the future, where we see a trend of American institutions buying into our innovation efficiency concept that we are offering to translate their assets into pharma-grade asset in the future. So I think our U.S. strategy at this stage is really working quite nicely.

One other element, in the U.S., we have built a quite substantial compound management facility in the West Coast and one also in the East Coast. This is going a bit slower than originally expected to generate new sales here.

It’s also going a bit slower to attracting new customers, but nevertheless, strategically I think the idea of building an outsourced compound management facility and operation is the right way to go.

Thomas Schießle – EQUI.TS

Okay, thanks.

Operator

The next question comes from Victoria English. Your line is now open. Please go ahead.

Victoria English – Mednous

Yes. Werner, I’d like to ask you about the agreement with Shire. Presumably, this will be an agreement with AbbVie. How are you planning to approach rare diseases, and do you have any specific ideas within the therapeutic areas of priority that you outlined earlier, where you think rare disease exploration would significantly help you?

Werner Lanthaler

Hello Victoria. First of all, thank you for your questions. Secondly, I think what you should see is that Evotec has already been in the rare disease space for a very long time, and that there are other collaborations ongoing in many rare diseases where we have built significant expertise.

Of course with Shire, the most prominent strategic player in this field, we are very happy to expand this portfolio. But I think one aspect here to say is that in the rare disease field, we are working a lot with foundations and NGOs that are using Evotec as an outsourced partner to basically get to the initial biology for many of these rare diseases, so let me highlight here our cooperation with the CHDI in Huntington’s disease.

This is a rare disease, and obviously it’s a big disease of course, but it’s something which is a very niche market where you have to have key expertise and we are – for example, this foundation is using Evotec at the very broad scale to do the work here. I think capabilities for rare diseases has been done up here and can be broadened quite nicely.

The second one I want to highlight is that also, we are approaching this as an active theme, so that we are actively choosing Cure X and Target X initiatives into rare diseases, where we think that there is a huge unmet medical need. As we highlight here, our CureMotoneuron alliance that we have built with Kevin Eggan and Lee Rubin from Harvard University, where I think it’s fair to say that the first indication area where want to build this into is ALS, which is a big rare disease field, where with a novel technology we want to enter that.

And as a third element to this strategy, we are of course offering our platforms to all the players in rare diseases, and there will be more and more of them out there, because also large pharma is growing increasing into rare diseases. So we see here a nice customer pool evolving for this field.

Victoria English – Mednous

Thank you.

Operator

There are no further questions at the moment. (Operator Instructions)

Werner Lanthaler

I hope Mr. Schießle the thunderstorm is not getting worse, otherwise…

Operator

We have another question. The next question comes from Mark Pospisilik, Kempen & Co. Your line is now open. Please go ahead.

Mark Pospisilik – Kempen & Co

Hi there, good morning everyone. Thanks for taking my questions. Three if I may. On CureBeta, I was wondering if you could help me understand – my understanding was that the agreement with Janssen had been “phased-out” meaning, sort of put on a hold, and there was no desire or defined alternate partners for, but I see today that apparently you are actively looking for partners, so if you could just help me understand what’s there? And perhaps how we should think about Cure X, Target X programs in terms of timelines, because I think this was one of the – one that was maybe granted CureBeta as a difficult area, but we have experience of Melton’s lab etcetera might be expect to move quite quickly, but I think the deal with Harvard was originally signed in 2011, and then with the Janssen in 2012. So just in terms of how should we think in terms of timelines for Target X, Cure X in general? And then on the FX effect, the foreign exchange effect you just mentioned recently. I was wondering if you could give us just a broad high level breakdown of what proportion of your revenues are U.S. dollar-denominated? Maybe help us get a sense of how foreign exchange will impact growth going forward? And then maybe just one comment on the MAO-B program? If you could just brief descriptive comment to see – help us understand how it fits in with current amyloid beta-thesis and Tau. Why this is particularly interested program? Thanks.

Werner Lanthaler

On the first two and on the fourth one, I will comment. On the third one, Colin will comment, if that’s okay. I think the term phasing-out is a nice way of saying on the target that we have worked on with Janssen was ended the collaboration with Janssen. So let’s be blunt here. Having said that, this was only one set of targets, one set of ideas within the whole CureBeta portfolio of ideas that is at this stage in the hands of Evotec.

So we will continue together with Doug Melton’s Lab to evaluate these opportunities forward further, and there is no question whatsoever that controlling the beta cell or evaluating the beta cell or focusing the science around the beta cell is the key path to go, if you want to change the burden of diabetes. So that’s why we will stay to this theme. Are completely committed to this theme, and are increasingly investing also into this theme.

I want to make it very, very clear as priority because once that fixed, should not be here end of the completely clear strategy within Evotec.

Having said that, there is also a very good relationship ongoing with Janssen, also in this field. So I think it’s fair to say that there would be many telephone lines open if we want to re-partner a project here if we have brought it to the right data point to re-partner that.

On timelines of Cure X and Target X initiatives. I think we should here over depreciate the fact that translating science from academic institutions into our pharma grade situation takes time and investment, and ultimately it takes data points before you can, or data packages probably is the better term to use, before you can translate this into pharma developments.

So I think putting timelines here behind would be a bit too aggressive to say that there is a standard, but I would say the standard is somewhere between two and three years that it takes to evaluate such a project and just create it then also into pharmaceutical situation.

Under this aspect, CureBeta clearly has been faster than what I would consider to be the norm. Having said that, two to three years is very fast in creating these data packages that are attractive to pharma companies, but I think that’s the timeline that we feel more and more confident of this, this is bit a probably a bit longer than initially envisioned but that’s also what we see what it takes to have systematic, unbiased and comprehensive data package in place where pharma then really wants to go forward in novel disease franchises.

Having said that, I want to repeat what I said before, strategically, I think in many of these fields where we are currently see a lot of incentives to grow deeper than broader, and with deeper, I probably also mean that keeping a bit longer sometimes makes it upper value creation things from our side, because we can just optimally leverage the platforms as we have been in Tau’s.

And I want to highlight here for example again our CureMotoneuron initiative that we are at this stage doing with Harvard, because here we are creating completely novel ground in industrializing beta cells and iPS cells on our platforms, and there is just such a lot of value created on creating this platform, which ultimately then will attract many partners to using that. Sorry for being so long here.

Let me jump to the MAO-B first before I hand back to Colin. I think the MAO-B hypothesis is a completely different one to the beta amyloid and the Tau hypothesis that you have seen in the field of Alzheimer’s diseases, where this is a small molecule approach, which is also a different approach to many antibody approaches out there. So I think you have to categorize it as a completely different hypothesis in the field of Alzheimer’s, which makes it I think so attractive as a small molecule approach to be offered potential combination with future antibody approaches that are out there, if there are ever antibody approaches out there, but I think we have to, for the time being, believe that there will be the next generation of beta amyloid antibodies somewhat successful, hopefully at least in mild to moderate Alzheimer’s, but of course everything there is far away from disease modifying. We are only talking about here slowing down of the progression of the disease but yes, very small effect of slowdown effect, but nevertheless this will create already substantial health and substantial markets.

So I think the application of this MAO-B is wide, wide open, if we see an effect in this Phase IIb. And I think again here we should be cautious because predicting the outcome of the Phase IIb in Alzheimer’s is just not easy, but I think what is fair to say, there has never been a more professional trial being set-up with a small molecule in this hypothesis than Russia has done it now with this MAO-B, nothing from that front. We are very happy with the way is running this project.

Let me stress also here, it’s not only beta-amyloids, it’s not only Tau’s and it’s not only Mau’s [ph]. We have initiated together with Janssen’s innovation an early-stage project in Alzheimer’s novel target in identification, where at this stage we are not allowed to disclose more than we had achieved the first milestones, small milestones in this partnerships, but it shows us that there is hope to finding novel targets, completely novel targets in the case Alzheimer’s in this very, very productive alliance which is ongoing at this stage, beyond the three mechanisms that are out there at this stage.

And with this, on the FX effects, back to Colin.

Colin Bond

Yes, obviously with the size of our contracts and our milestones, the currency distribution can fluctuate quite significantly from quarter-to-quarter, but when you look at the first six months of 2014, 60% of the revenues were in dollars and the remaining 40%, the vast majority was in euros.

On our cost base, we have about 45% of our expenditures in pounds, 45% in euros and 10% in dollars. So the conclusion is we are very long in dollars and we’re short in pounds, and that’s what we manage. We took out forward exchange contracts in Q4 covering the first half of 2014, selling dollars for pounds. And on those contracts, we made more than EUR 500,000 that are realized gain in the first six months.

Unfortunately that gain is not in operating income, it’s in other non-operating income, but we do manage the risk and we benefited from that gain on the financial instruments.

Mark Pospisilik – Kempen & Co

Great, thanks gentlemen.

Werner Lanthaler

And we are happy that we are out of the Indian rupee at this stage, but of course when it comes to our FX mixture at this stage, we had in the first-half, the worst of all wealth coming together. Very strong pound, very weak dollar, but that’s life and we should always focus our business on the operations and not only on currency effects, but very good to see that FX is very resonated in this company.

Operator

The next question comes from Mick Cooper, Edison. Your line is now open. Please go ahead.

Mick Cooper – Edison Investment Research

Good morning, everyone. Just following with your comments about biotech and the fundraising there. I was wondering what the splits in revenues were between big pharma and biotech. And I am assuming from what you said you’re seeing a definite shift towards the biotech at the moment if trends are confirmed. And secondly, can you just give us an update on how many products could enter clinical development over the next year?

Werner Lanthaler

The second question is easy. There is the number that we are guiding here is we expect two projects to enter the clinic in next 12 months. We are very comfortable with this number. It could also be more from the price band as we see them from our partners, but I think with too little quite comfortable.

And on the biotech to pharma split, I am looking to Colin at this stage, if you have it on the top of your hand, but before I hand over, we really see a trend of, for example, venture-capital based companies, a very small in NGO initiatives increasingly coming to this idea which has been one of the essence of building Evotec the way we are building it to working on development costs and both working on fixed costs when it comes to the data points.

And on the splits, Colin?

Colin Bond

Yes. We don’t actually sum the different buckets, because of course there is judgment on which belongs in which, but when you look at – I am looking at the distribution of customers that we have, and there is a whole range of new customers. You have Debiopharm is one of them, the Convergence deal that we did would not fit into the second category. There is definitely been a shift, or an increase in the amount of biotech work that we’ve done in the first six months of this year.

Mick Cooper – Edison Investment Research

But do you think roughly 50/50 between the two to quantitatively kind of – we don’t know that’s any help on numbers.

Werner Lanthaler

No, I think it’s more – it’s split at this stage that is 70% to 80% larger customers out of pharma and something of 20% to 30% of biotech and smaller initiatives here, but I would say a trend where both on absolute terms, growing. That’s the first message. And the second message, we see a very nice opportunity of deal flows of smaller initiatives coming, where we are increasingly also, I would say shifting and tweaking our business model to come into more customer-tailored solutions, when it for example, comes to exchanging short-term revenues for royalties and milestones driven project with certain initiatives that are in our key focus, that’s what we increasingly see also as very attractive for us.

So for example, when you look at initiatives that we are doing with small biotech companies like Convergence, here we clearly trade in our services for long-term potential, also taking the risk here on our services. And that’s why I think the mix of customers is very nice here.

Mick Cooper – Edison Investment Research

Okay, good. Thanks.

Operator

The next question comes from Heinz Müller, DZ Bank. Your line is now open. Please go ahead.

Heinz Müller – DZ Bank AG

Yes, good morning. Heinz Müller speaking. I have a question regarding your authorized capital. On the AGM, you asked for a new authorized capital. Do you already have some concrete plans, how to use this authorized capital? Thank you.

Werner Lanthaler

Thank you for your question. And I think it’s fair to note that there has been significant rumor out there in the summer of what we’re going to do with our authorized capital, and if there is an imminent capital markets transaction out there. I hope you understand that we don’t comment any rumors and will not do so also in the future.

Having said that, it was of course be a stupidity just to raise capital for the sake of raising capital. So that’s not what we want to be known as, to be stupid, that’s the first thing. The second thing, only if we strategically have the reason to use the decisions that our shareholders have given us, we will strategically use this, and then we are happy to communicate it in the way proper companies communicate with the market on our plan here. So that’s how we envision this.

So to be short is the answer here, we are very happy that we have the authorization in place. That’s something when you look back into the company’s history that the authorization is part of our flexibility program that we want to have for strategic measures in place and where we are very thankful to our shareholders that they give us this flexibility, but we are very cautious in using it.

Heinz Müller – DZ Bank AG

Thank you.

Operator

The next question comes from Robin Maxwell, Commerzbank. Your line is now open. Please go ahead.

Robin Maxwell – Commerzbank AG

Yes, good morning gentlemen. As a generous, I thought of asking you a couple of just generalist type questions on your people. You mentioned that you attracted 40 scientists in the first-half of the year. Could you just tell me how this is taking place? Are these coming from your partners? Is this something that you’re knocking on the doors, the people knocking on your doors, anything changing in the way you recruit? And the second question is just on the new members of the Supervisory Board. You’ve definitely recruited a lot of new well-known faces, if that’s the right way of putting it, but it looks Mr. Plischke from Bayer – Dr. Plischke from Bayer should I say.

Werner Lanthaler

Professor.

Robin Maxwell – Commerzbank AG

He is a professor is obviously a continuation of the Bayer involvements in the Supervisory Board. Then you got UCB and Mr. – Professor Herrling comes from Novartis as I understand. Two generalists, how important are these people to in terms of introducing Evotec to new potential projects going forward? And is there any particular reason why you are keeping the Supervisory Board Chairman rather than introducing some international blood?

Werner Lanthaler

So thank you very much for these questions, and let me start by your recruitment question. The recruitment question, I’d like to give you a bit of more insight here. This is for Hamburg only, the 40 net recruitments that we had in Hamburg. So we are growing in all sides at this stage, especially in Hamburg and Oxford. This is a reflection of our growth. This is also a reflection of our investments into the future.

So we are clearly recruiting talent, where we see that talent fits to our disease areas and to our areas that we want to build going forward.

So coming to your process question here. This is a mixture of them knocking on our doors. We’re basically trying to extract top talent from academia and also from pharma companies. But at these pharma companies, we are clearly benefiting at this stage from the restructuring situations of other companies. So there is more talent out there from pharma restructuring situations than ever before. So that’s very good for us.

And when it comes to recruiting here in Hamburg especially, I think we are able to provide people with a mixture of a workplace, which leads to the old days of biotech also, a bit more attractive for many of them, because they see that this is not hip or hop biotech involvement, because even if their project fails, they understand that this company was built on a business model, where a single fail of a project which can always have been in discovery is not the end of their job and that’s why many people appreciate the portfolio that we are running also as a point of workplace attractiveness.

The second aspect, here in the U.K. believe it or not, we are the largest medicinal chemistry company in the U.K. now, which used to Pfizer, then it used to be GSK, then it used to Shire, but it’s really a function of the restructuring situation of pharma companies that now Evotec is the largest chemistry – a medicinal chemistry provider with more than 250 top scientists working outside of Oxford. For us, that is also very nice.

Let me, on this note.

Robin Maxwell – Commerzbank AG

Do you have any – should analysts be modeling increasing wage inflation? You’ve given me the impression it’s actually quite easy to find these people?

Werner Lanthaler

I would say it’s easier than it has been many, many times before to – let me – sorry for being so long here, but I think one thing that really changed in the marketplace is Evotec as an attractive brand for top class scientists.

So for example, sometime ago, we were not considered to be a prime place. Now many people in the discovery space, our focus area, this year there is a prime place to go. So that’s really helping for more people in general to recruit.

The second thing is of course there is more “talent availability” than ever before out there. So for example, we are also benefiting a lot at this stage from many top-class scientists out of Spain, out of Italy, out of other countries in Europe to applying to Evotec.

In the U.K., we had very low problem at this stage to attract people because there is still high number of unemployed scientists out there, and of course there is restructuring situation in pharma ongoing. Having said that, this is not about having access to more people, this is about having access to the right quality of people. And here we really, really have a very stringent process before you are allowed to enter Evotec.

Robin Maxwell – Commerzbank AG

Okay.

Werner Lanthaler

On your perception that our Supervisory Board is German, I unfortunately have to correct you, because more than 50% of our Supervisory Board is not German, despite they are German names and they are professors.

Robin Maxwell – Commerzbank AG

Okay.

Werner Lanthaler

For example, Claus Braestrup is as Danish as it gets.

Robin Maxwell – Commerzbank AG

Yes.

Werner Lanthaler

And Paul Herrling is as Swiss as it gets. And all of them having a global background as it gets, for example, Mr. Plischke has been the longest Bayer employee ever in the leading function to live in Japan. And so I would really not – first of all, I think German is a good thing to be. Second, this is not how we take on nationalities. We even employ Australians in the first place [ph]. So that’s really not how we are thinking.

This is based on talent only, and on what people can bring. There is also no buy up buyers in the way of Supervisory Board was coming together, because these are all independent members of the Supervisory Board, and independent means also independent of their cooperation. It’s really based on their personalities.

And just also to note, has this on the wrong perception. This is a governance structure of this company. This is not our business development force. And that’s also how we act. So it’s really not about having them being our business development force, that’s what the company has to do. This is our Supervisory Board governance, and that’s how we have the role play defined.

Of course, if you would ask them to have an introduction into company, they would all be happy to help, but it’s not the typical old chain [ph]..

Robin Maxwell – Commerzbank AG

Okay. That’s great. Thank you sir.

Werner Lanthaler

Thanks Rob. Hope to see you soon again.

Robin Maxwell – Commerzbank AG

Okay, yes.

Operator

The next question comes from Igor Kim, Close Brothers. Your line is now open. Please go ahead.

Igor Kim – Close Brothers Seydler Research AG

Thanks for taking my follow-up question. The question is regarding EVT100 program. Is it known when Janssen plans to resume the program? And if I correctly remember, what percent of last year the advance of this program should have triggered the amounts on payments which didn’t occur. So do you still eligible to this milestone payment and should we expect it anytime soon? Thank you.

Werner Lanthaler

Janssen has informed us that they are resuming the EVT100 series, but it would be a false expectation to expect any big milestone in 2014 here to come. Yes, we are still eligible for the milestones, but at this stage the strategy of how they will re-enter the clinic is evaluated, and I think all I can say that they are doing a fantastic job in preparing for this evaluation and getting forward with this, but it’s not up to me to comment more than that.

Igor Kim – Close Brothers Seydler Research AG

Okay, very helpful. Thank you.

Operator

There are no further questions at the moment. I hand back to the speakers.

Werner Lanthaler

I want to thank you very much for your questions. I hope that Mr. Schießle is getting out the thunderstorm, and I wish you all a great summer, and hope to see you soon again. Bye-bye.

Operator

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.

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