Evotec SE (EVO) Q2 2016 Earnings Report, Transcript and Summary

Dear, ladies and gentlemen. Welcome to the Half Year Report 2016 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 Mr. Lanthaler, who will lead you through this conference. Please go ahead, sir.

Welcome to our first half of 2016 and I’m here welcoming you to a very strong first half of 2016 at Evotec. Leading innovation efficiency, that’s the scene that our management team is driving forward. Let me welcome my management team here and in the room I’m here together with Mario Polywka, with Enno Spillner, and Cord Dohrmann. When you go to the presentation, which we have uploaded on the web then it is probably best to go to page number 4 to give you an overview of how we started the year. You remember that we had an excellent first quarter and I think it’s fair to say we had an even better second quarter, which results in a very strong operational performance of the first half year. If you look at our two segments, both of them are performing extremely well and Mario and Cord will then tell you about the individual things that have happened in their segment, but it’s fair to say that the business model works because we deliver milestones, we seek extension of new collaborations, we can show that our global network of compound management alliances is growing and we see a continued expansion of our drug discovery platforms to really lead the quality lines in drug discovery out there. When it comes to our customer base, we started years ago to intensify our work together with foundations and you will see that this is even growing further to a next level of foundations, which we are able to also use the drug discovery services of Evotec in the first half of 2016. And we are very happy also to show progress in the clinic, which we would outline later. When it comes to our Innovate portfolio, we see that the hybrid is working in a sense of the hybrid business model, where we invest initially into first-in-class targets really deliver. So here, the platform is getting broader and we have highlighted this for example with TargetNASH, which is now co-funded with an outside party. And we continue to make first-in-class partnerships where we want to drive science to its edge to ultimately deliver novel products that revolutionize the discovery scenes that we are going into. On that note, if you go to page number 5, it is also important for us to drive the business model, which is growing on a topline and on the bottom line and we are very happy that we were able to report a guidance update in the first half of 2016, where we are not only raising our profitability to a significant level in 2016 higher than 2015, but where we are now at least doubling our profitability in 2016, which is underlined already by the strong financial performance of the first half year where you see our group revenues going up more than 37% to a record level of $75 million in the first half. In the history of the company, we have never been in that level so far where you see our EBITDA at this stage about $15 million and where you see this all despite the fact that we are investing more in R&D than we have done historically. Our liquidity position is very strong and business effect is but that we have initiated the pay back of loans that were in our balance sheet. When you look at our guidance we are very happy to confirm not only the profitability guidance, which has been put out there, but a strong outlook for H2, which we will prove to you by more than 15% revenue growth when it comes to our topline when we exclude milestones upfront and licenses and which will be proven by the fact that also profitability as already mentioned will be at least doubled in 2016. We will do this on the basis of around $20 million R&D expenses, which will drive this company to a long term in sustainable innovation flow forward. On page number 6, you should be reminded of our strategy where it’s fair to say that the business model works. We see synergy between Evotec Execute and Innovate. We see that it is the right strategy to put all our efforts behind highest quality drug discovery and pre-clinical services and that it is the right strategy to build long-term, so called CureX/TargetX alliances. Also in building bridges to academia, we are making progress and that leaves us also to the concept where we say every target and every business idea deserves its right company information. So that’s why we for example in 2016 have also started to spin-off companies from Evotec or to start investing into companies when this is the right formation for a drug target to be put forward in its most capital efficient way. On that note, we are very happy that we see this strategy also already putting its seeds into the years 2017 and 2018 because we have long-term view on our business and that’s what Mario and Cord will illustrate to you in their presentations right now reflecting of course first on H1 2016. With this, I hand over to Mario.

Thank you Werner and good afternoon everybody. I’m very pleased to report on what has been an excellent first half for the group, but more specifically for Evotec’s Execute statement, especially following on from the excellent Q1 we reported a few months ago. Looking at slide 8, revenues rose to $18 million in the first half of 2016 from $59 million in 2015. That represents a growth of 35% on a year-on-year basis. The key drivers for this revenue growth, this was fundamental growth in the core business, achievement of milestones and of course a full two quarters contribution of our five reaching strategic collaboration with Sanofi. Coupled with an increase in the margin of our core business and fully profitable milestones, this gave rise to a huge jump in adjusted EBITDA, which grew from $10 million in last year to $22.5 million in the first half of 2016, a truly excellent performance. Key highlights going on to the next slide nine in the first half that contributed into this excellent performance of being the extension of various important alliances of which we will speak later. Milestone achievements, which we’ve reported some previously, alongside of course keeping up with the very latest technologies such as CRISPR/Cas9, the Trianni Mouse platform, which continues to support our strong drug discovery platform and the ability for us to deliver to our partner's needs. Of course large-scale multi-year research alliances that use our multifaceted drug discovery platform are strategic and vital to our core business model. In the first half of 2016, we are very pleased to announce the extension of the Genentech pharmacology alliance, which now runs into its sixth year, as well as the chemical proteomics collaboration with Janssen, which is based off our unique proteomics platform. The ongoing collaboration with Sanofi where we provide a multitude of services and FTE support across the whole platform to lease has grown significantly from what we had first anticipated and continues to deliver strongly. Also and updating you on the progress within our Toulouse operation we are very pleased to report that the strategic compound management program and the initiative with UCB is progressing better than expected. A key driver of course for building new integrated projects and that associated business across our platforms is the number of screening campaigns that we deliver on. For the first half of 2016, and we envisage to the rest of this year, we see a significant upward trend in the number of screens partnered with us, compared to 2015 and even former years. As mentioned a little earlier, it is important that be leverage within the Execute segment to the best of our ability our existing drug discovery platform and to do this in a most capital efficient manner. However, we must continually strive to have access to the latest technologies that drive such efficiency. Early in the year, we obtained access to the CRISPR/Cas90 technology to our license agreement with the board institute. CRISPR/Cas9 gene editing has emerged as a very powerful tool of functional genomics studies and the associated RNA libraries enabled a very rapid high throughput analysis of hundreds of genes with multiple target sites per gene. In particular, here at Evotec we will use this for genome wide or target specific screening, but also of course have the option to use to establish various knock-out, knock-in in vivo models in significantly quicker timelines using fewer animals. I’d like to give you a little update on the world leading effort that we are associated with Bayer in endometriosis. This effort in endometriosis continues to perform extremely well. And to remind you, we entered the collaboration in 2012, it is a strategic collaboration with Bayer, which has the name of addressing treatments towards endometriosis, which affects the huge number of women of the reproductive age. And the goal is to generate three clinical milestones within five years. We acquired 12 million research upfront payment and have the ability to earn up to nearly €600 million of milestones associated with the progression of projects. The alliances are really truly collaborative effort with teams from both companies working on a multi-target portfolio of projects contributed from both parties. The collaboration is now reaching the end of its first four years and in that time has now achieved four preclinical milestones and the latest one is due to the progression of our first preclinical candidate into Phase I, just fuelling our pharmaceutical pipeline without any further financial risk from Evotec. This milestone nearly is a tremendous reflection of the innovation and the efficiency such collaborations can achieve within Evotec. We remain confident we will continue to meet the goals of this collaboration and continue to build on our pipeline and importantly continue to earn significant milestone payments in the future. On slide 13, we just like to give you the basis of our revenue mix based on the up customer type, customer segment and also a region. The execution, and indeed the whole Evotec group revenues come from a well-balanced customer mix. The 10 largest clients account for nearly 75% of revenue, which is a healthy, healthy percentage, as it reflects significant long term secure revenue in the main balance against the risk of over reliance on just a few small clients. And the balance of clients type for revenue is of course bias towards the larger farmer skewed somewhat by the alliance with Sanofi, but also shows a good mix of biotech where we see still see a growing trend of business over the last few years, foundation's and mid-size Pharma. Revenue is split is quite even between the US and Europe. So to conclude my little part of this presentation, it has been a tremendous first half for both revenues and profitability for the Execute segment driven by significant growth in the core business, milestone achievements, and the continuing performance of our strategic Sanofi collaboration. Moving through to the rest of 2016 and as Werner alluded to earlier, moving also into 2017, we anticipate continuing to see this trend and look forward to informing you about new alliances, new milestone achievements, and extensions or expansions of our current business. Thank you very much for your attention and now I will pass over to Cord Dohrmann.

Thank you Mario and good afternoon to everybody on the call. It is my pleasure to give you an update on Evotec Innovate. Just as a reminder, within Evotec Innovate we generate starting points for strategic longer term research collaboration for the substantial upside for Evotec. On page 16, you can see that Evotec Innovate had a very good first half in 2016 with significant revenue growth of 44% versus prior year, while also significantly improving EBITDA. R&D experiences during the same period have slightly increased due to an increased number of projects including in particular a growing portfolio of oncology projects, as well as more extensive investments in chronic kidney disease and the CNS diseases. Regarding our partner product pipeline, which is shown on the next slide, we also continue to make significant progress. The big news here is that in our strategic multi-target collaboration with Bayer in the treatment of endometriosis we have progressed the first drug candidate into clinical development. Endometriosis is a little talked about indication, but nevertheless represents a huge potential market. Endometriosis affects about 10% of all the women of reproductive age and is characterized by an abnormal growth of tissue in uterine and uterine cavities, which cause lesions and there by debilitating pain. There are very few not very effective treatment options up front of surgery mainly due to the fact that the underlying mechanism of the disease is very poorly understood. Together with Bayer, a world-leading company, we have taken a very systematic approach to endometriosis with multiple-development candidates Mario has already pointed out. We are very proud that the first drug candidate out of this collaboration is clearly first-in-class potential successful enter clinical development. The following slide once again highlights our key areas of interest within Evotec Innovate and that we have achieved in the first half of 2016. I already mentioned the products we made in the main phase led to continue to increase our investments in oncology, neuroscience as well as diabetes and diabetic applications. The portfolio continues to be very much focused on first-in-class approaches as well as on other platforms. We have recently structured an innovative partnership with a venture company to expand our efforts in metabolic diseases, particularly in NASH. We have formed a partnership with ex scientia to expand our ability to use computational drug design to accelerate the process from head to lead optimisation to get to development candidates and we have spun out our efforts in tolerance reduction, which is one of the most attractive mechanism to address autoimmune diseases into a new company called Topas Therapeutics. On Page 19, I would like to briefly elaborate a bit on our recently announced partnership with Ellersbrook GmbH in the field of NASH. NASH stands for non-alcoholic steatohepatitis or more simply put fatty liver disease, which actually leads to liver fibrosis, liver cirrhosis and hepatocellular carcinoma. During the effect, an estimated 6.5 million patients in the U.S. and in Europe and is expanding based on the ever rising prevalence of [indiscernible] metabolic syndrome. Currently, there are no approved treatment options. Couple of years ago, we initiated a very systematic effort within a need of taking this space to identify noble mechanisms and targets that could help to address this disease. These efforts have been very productive and delivered pipeline of target options. In order to pursue these targets adequately, we decided to expand our investments here and join forces with Ellersbrook, a life science focused investment firm. Together with Ellersbrook, we have committed €5 million to bring Target to tangible value inflection point. This alliance with Ellersbrook is an interesting new model that allows us to expand our R&D investments and allow the [indiscernible] companies to invest into Evotec projects and thus create essentially virtual biotech companies, which are prime for strategic pharma partnership [indiscernible]. Page 20 summarizes our growing portfolio of Cure X/Target X initiatives, which has been primed for partnerships. Most of these have been mentioned already. So with this, I would like to comment on the outlook for Innovate for the rest of 2016. What you can expect from Evotec Innovate are new clinical initiations and progress in the clinical stage pipelines. You can expect the expansion of our academic alliances, new pharma partnerships based on Target X/Cure X initiatives and more R&D investments in highly differentiated platforms such as the iPSC for various disease levels. With this, I’d like to thank you for your attention and hand over to Enno.

Yeah, thank you, Cord, and warm welcome to the call also from my end. First of all, for those of you who don’t know me yet, I’m pleased to introducing myself, Enno Spillner, I’m the new CFO of Evotec and just joined on July 18 of this year, currently digging into all the financial and administrative details of the company making myself comfortable with the data. So I’m happy to take over from Werner Lanthaler, who acted as an Interim CFO here and doing that obliviously had very exciting half year numbers, which I’m going to introduce to you in more detail in a second. So coming to slide number 23, let’s focus on the H1 group consolidated numbers first. The group revenue was up significantly, as Werner indicated already, by 37% due to growth in the core Execute business, contribution of the Sanofi collaboration and obliviously milestone achievements that triggered in the first half year. Also, Innovate showed good increase in revenue and is contributing to this positive results. The gross margin also improved as well stepping up from 26% to 34.5%. R&D expenses are slightly up as expected and within budget and similar applies for the SG&A expenses, which reduced a couple of €100,000 and here as a reminder in 2016 the cost here included a one-time M&A effort in context of the French transaction. The impairment that you can see of the first half year of €1.4 million due to the Evotec 101 Series, which was already reported in the Q1 of this year. So it should not be a surprise to anyone at this point in time. Income from bargain purchase, also as a reminder, here – in 2015 a one-off event also resulting from the French Sanofi transaction. For those of you who might wonder about the other operating income, this is mainly affected by R&D tax credits, which we are receiving in the UK and in France and where we will also in the future apply to achieve these in a bigger scale. So what we take out among others, the one-off impact from last year’s transaction, we do see a very positive development, showing an adjusted EBITDA of €15.8 million in first half of 2016 compared to €0.8 million in the first half of 2015. Net income in the same period H1 2016 is positive as well, thanks to the increased revenue, positive and improved margins and relatively stable costs in the fields like R&D and SG&A. Coming to Slide 24, analyzing the segment a little bit more. Overall, the good thing is that we do see growth across all contributions of the revenue streams, so it’s not only depending on one-arm and showing that we are making progress in all different levels of the company triggering a total revenue growth, but it’s really the combination of the Execute, Innovate and the milestone achievements. So, having a focus on Execute first, here, and Mario already mentioned that, we have a significant improvement coming up, €79.8 million in revenues compared to €59 million in the previous reporting period, which is a step-up of 35% and also the growth margin could be improved from 21.6% in H1 2015 to 28.8% in 2016. R&D expenses are not of importance in a direct cost relation here and the EBITDA is the significant driver here coming from €9.8 million, going up to €22.5 million, which is more than a doubling on this level already. Looking at the Innovate side, here we have a similar trend with slightly different numbers. So the revenue increased also by 44% coming from 8.2% up to almost €12 million. At the same time, the margin improved from 43.4% to 50% and the R&D expenses moved up and as Cord indicated only a slight move from €10.4 million to €11.9 million. The overall result as expected in this segment is still negative, but improving from minus €9 million in the past year or the past first half, compared to €6.7 million loss in H1 of 2016. So, obviously, we do have some inter-segment elimination as well due to services provided by Execute to the Innovate segment, which is amounting to €16.3 million mainly triggered by an increased number of projects with the Innovate portfolio. And the same is true for the increase in R&D expenses going up accordingly. Both segments do show a strong improvement in the margins and both segments showed great progress on the adjusted EBITDA level compared to the first half of 2015 coming back to the record half year as I indicated previously. Now, looking at the second quarter of 2016 on Slide 25, also from this angle numbers are very positive and up, so we see the same trend. Revenues increased by 14% to €38 million and also the gross margin went up 35.6% coming from 24.7% in Q2 of 2015. Reason is again identical for those for the full half year and the revenue growth on the one implied milestone achievements form our ongoing partnerships while applying good cost control for the whole unit. The big difference obviously is again the one-off effects from the Evotec France Sanofi transaction last year providing an extra €18.5 million as a onetime event which has then having impact on the net income. If we adjust for this in context of the EBITDA, you will recognize a clear step-up on this level for the Q2 basis increasing adjusted EBITDA from €1.1 million to €8.6 million period to period. Overall, Q2 is a profitable quarter. Also on the net income level, obliviously, thanks to the onetime effect from last year, this number is lower in Q2, but this should not be a surprise due to this aforementioned effect. On Slide 26, just looking at some trends that we see in group revenue and also on the milestone achievements and the margins, this is basically kind of summarizing of what I’ve mentioned before. Regarding group revenues, we do see a nice and very positive trend during the past three first half years, with a solid growth and base revenue on the one hand side and milestones coming on top of that. Said that, we all know that milestones are always a little bit volatile and hard to predict, so it’s even more important that we have a solid revenue base growth below that. Also, if one takes – look at the margin from a base or from a total perspective, we do see encouraging numbers showing good growth and good performance in H1 2016 and coming from a solid platform during the previous two years, 2014 and 2015. So in total, the major message I’d like to get across to you today is that revenue is up significantly across all fields and all segments, margin has improved as well, meaning we have a higher revenue and better margin and Evotec shows profitable numbers on quarterly as well as on day-to-day level and this is true for the adjusted EBITDA as well as looking at net income. On top, we do have various challenge. Liquidity position of €18.5 million and this is even despite repayment of a loan starting that already and also including some strategic investments. Just very briefly on the outlook. The statement is mainly unchanged with one major exemption and thus probably have to trigger the ad hoc news where the adjusted group EBITDA is expected to more than double compared to 2015 as a reminder of the previous segment was that we had positive and significant improved numbers compared to 2015. The rest is an reiteration of the statements that we have done already in context of the Annual Report on March. Thus having said that, I’m handing over to Werner. Thank you very much.

Thank you very much. Thank you very much Enno for your first quarter delivery here. It’s great to be – with you together in the team and we are very happy that you have arrived here. On that note, let me close by reiterating that it was a good first half, but we expect also a very strong second half. And we, again, are not working here from quarter to quarter, we are working here to build leading platform interactive discovery together with our partners in the long run. So this is why it’s not about the view from quarter-to-quarter, this is for us right about the view for the next years to come. And here we see that Evotec has taken some steps in the right direction to benefit from megatrends that will not go away. So the megatrend of us being in the middle of innovation outsourcing will continue. And on that note, it’s just the flow of events that will happen for the next years to come that you will see Evotec Execute performing and that you will see Evotec Innovate performing. And here we are very happy that you follow us and we want to thank you for following us over the last years and the years to come. Thank you so much. With this, we hand over to your question.

Thank you. Now we will begin our question-and-answer session. [Operator Instructions] The first question is from Jonas Peciulis, Edison Investment Research. Your line is open, please go ahead.

Hi. Thank you for taking my questions and congratulations for the great first six months. So I was wondering about the improved guidance on EBITDA, [indiscernible] prospect of a top line or maybe improvements in cost basis or maybe some mix of those? And a closely related question on gross margin, so I understand that 54.5% gross margin increase also markdown payments, obviously the wildcard, so I was wondering whether this gross margin is sustainable, let’s say, upcoming few quarters and then couple of years? Thank you.

On the question about volatility of milestones, I would like to handover to Mario and on the question of improved guidance, I would like to handover to Enno.

Okay. Thank you. Thank you for the questions. The milestones are always dependant on the readout of significant biological data and is a digital event. And sometimes despite all of our best efforts to produce the best compounds to guarantee these biological tests, we can have a failure. So that leads to the volatility. There is always the opportunity to go back and rework material and projects to have another go at the milestones. The aim of the business in terms of developing a broad portfolio of projects and targets is to be able to smooth this out. So the more targets you have and the more projects you have, you can effectively reduce this attrition and try to bring down the attrition in milestones and also the volatility of milestones. We’ve had a very, very good and strong milestone achieving first half of the year and it all continues to go well with the biology within our project. We anticipate that similarly strong achievement in the second half. And, of course, you will see from this particular presentation that’s the Bayer milestone, the clinical milestone actually falls into the second half of 2016. So that then underlines the significant growth in revenues needed that which Enno will now tell you about.

Maybe just one sentence to add to this. The portfolio of milestone options that we currently are working on is larger than ever before and that’s also something, which will already from today’s view translate into 2017 and 2018. But it’s digital events and they are high risk, then probably have switched to a guidance structure, which doesn’t include milestones. And on that note, back to the improved guidance question on Enno.

Thank you. I think it’s a mix of different reasons, which we have used. So, first of all, the product mix that we can offer to potential partners in the industry. Second, the rangeing of clients and customers who is getting broader from biotic companies, even smaller biotic companies up to the large scale pharma companies. And this product mix in combination with a better use of our capacities that we have has different types in particular France is kicking in here step-by-step and this year is having an impact. And by that we are making good progress in different fields and this makes the total calculation is enabling us to this additional fee of the outlook in particular as you could see in our numbers, there is not a single field which is lacking behind so we have a pretty moving right now in the different segments which is the reality.

Great, thank you. One more question, if I may, on the [indiscernible] project, so in general obviously there is no question that you potentially in this disease which is still high unmet need. I was curious about the potential of the specific project to the Bayer. So as you take advantage when looking at currently existing conservative treatment just basically hormonal balance, intervention of the hormonal balance, is it somehow let’s say the project is plaintiff looking at existing options out there?

Thank you very much. It’s a very good question but I hope that you can appreciate that it is an agreement with our partner Bayer to let them communicate to the outside how they want to position this project. They will do so in due time but one thing we can say very clearly that it’s a first-in-class approach which will be absolutely helpful to the world in this field and will absolutely change the treatment paradigm here. And with it, I have to be unfortunately a bit secretive here.

Great, that’s understandable of course, thank you.

Thank you. The next question is from Jean-Paul Mannie, Kempen & Co. Your line is open. Please go ahead.

Thank you. Good afternoon gentlemen. Thanks for taking my question. I’ve two – maybe a quick follow-up on the Bayer project, understanding you cannot share lots on this but maybe you can give us a bit of color on when you would expect the product to progress to the clinic? And when would you expect some news flow from Bayer on that roughly and maybe you mentioned that there are now three candidates deliberates and you have agreed to four if I remember correctly and could we also – so I expect that to enter the clinic anytime soon. And then maybe a financial question, you mentioned that you’re repaying some debt, is there a broader plan to do that and could you also or should we also expect some of that in the second half of the year. Thank you.

First question, I get back to Mario.

Yes, we are getting I think we are probably not in the game of predicting when a product will come to market especially as it’s driven by our partners. But I will show you can do the mathematics that we have our first project going into Phase I. So this won’t be within the next two to three years. The aim of the collaboration which was initially a five year effort was to try and produce three candidates that move towards the clinic and of course a significant number of candidates of projects were very early starting. So it is unbelievable progress, that one has now entered into Phase I and we anticipate being able to meet the objectives as we clinical candidates by the end of the initial phase of this collaboration.

When it comes to the debt trade, so let me comment on that briefly. We see a very changed environment when it comes to excess to cash and especially we see at this stage every predication that we look at from Evotec to be highly cash generative, that’s why we have made a strategic review of the debt instrument that were in the company or are the company and we have decided to pay back all the debt that we don’t consider to be strategic. So we will hold certain debts when they are for example on very, very low interest rate leveraging innovate projects that we are working on and the length or the depth we will pay back overtime as we see this in the good cause of business possible to be done. And on that note, it’s a good situation to be in to think that way. We could do it faster but we do this in the most capitalization way as well to get a bit of [indiscernible]. But I think one thing have to be fit, excess to cash and then excess to liquidity at this stage for Evotec given the strong growth of our top line and bottom line is excellent.

Great and thank you gentlemen.

Thank you. The next question is from Igor Kim, Oddo Seydler Bank. Your line is open, please go ahead.

Yes, I’ve got a couple of questions. The first one regarding your partnership with Sanofi, I think I’ve said we had first two quarters where contribution of Sanofi. Could you probably mention how much of it was in terms of revenues and should we expect a similar run rate going forward? The second question is on SG&A expenses, I think it was about – even below the prior year despite the fact that revenues were higher. So should we expect the same level for the rest of the year? Thanks.

Thank you so much. On the SG&A expenses if I may comment, I would think that you will see a similar to slight increase going forward at this stage, always excluding any work on major transactions. That is ongoing. The company is from an SG&A perspective in good shape. What we have to do, we have to do certain upgrades. On revenue contribution from Sanofi I hand it over to Enno.

And indeed we do have significant contribution by Sanofi obviously. And that is about €25 million is contribution from the French side, that is including all the work being done through this.

If I may that one part, but please don’t forget that a major contribution is also through two Innovate partnerships and also other initiatives in this multi-LMS collaboration as we have made. So it’s not on the site into lose, it’s really LMS partnership that is contributing here.

Will you keep a same level of some of the contribution going forward, at this stage we are very confident that this will continue at least for awhile? Depending on the progress of the innovate projects and depending on how what we call Emid partnership with Sanofi, so the work that we do with Sanofi continues out of Tulips, but at this stage it was stable or even slightly increasing.

Okay. Thanks.

Thank you. The next question is from Mr. Samir Devani. Your line is open. Please go-ahead.

Thanks for taking my questions. Congratulations on a strong quarter. I just wanted one question, the biotech, and there is a couple of housekeeping of numbers. With one year left on the bio initial collaboration, is it fair to assume that the other two preclinical candidates you’d enter clinical development over that period. And then just on the numbers, in terms of that you’re booking R&D tax credits in operating income, what are your operating expenses and perhaps you can give us if possible a bit of guidance on the tax charge for the full year. Thanks.

First question on Bayer, Mario will take second question on other operating income in Evotec. Okay?

Thanks for the question on that particular collaboration. We have one moving forward, we have the year left on the initial data and of course to anticipate that the other two clinical milestones to met within, because there the objectives of the collaboration. However, once the compounds go into preclinical as we said before uncertainty can arise and also scheduling within Bayer is little bit out of the our hand. So we anticipate the milestones being achieved but of course we can’t absolutely accurately predict that.

But there is a portfolio in place, which absolutely justifies what Mario has just said from the pure portfolio attrition perspective, but you know how our industry works.

Good. And coming to the question regarding the other operational expenses, operational income sorry is the objects which is the major part of it in terms of – there is point recharge to the customer that we received.

Okay. Just maybe if I could add one question in terms of the weakening pound. Could you give us some indication of how much of your revenues are starting to nominated.

Echoes to it, but the answer is very short, because it’s very small. Sorry for taking that but I think on the contrast you should see - so to be precise less than 2% what we have in sterling denominated top line but we have about 300-ish scientists working in the UK where of course our cost base is in pounds at this stage. So going forward, we see “A positive impact from the Brexit currency changes that you have are experiencing in the last weeks. Having said that for 2016, you should not expect too much, currency positive impact because we at the beginning of the year hedge half of our cost basis for the full year so we will only benefit from that change for the second part of the year, and we had a bit of a disadvantage for the first half of the year. For 2017, if things remain as they look right now, there could be an additional positive effect on our cost basis.

Great. Thanks very much.

Pleasure.

Thank you. The next question is from Heinz Muller, DZ Bank. Your line is open, please go ahead.

Hi, good afternoon. Heinz Muller speaking from Frankfurt. I would like to raise two questions. You show a very high currency gains which was already mentioned now and also high tax rate in the second quarter, so perhaps you could give us an indication about the situation in the second half of the year and the second question is what was the reason for the reduction of R&D expenses in your Execute segment shown, which declined from $190 million in the previous year to $46 million? Thank you.

Sorry, the last part of your question, can you please repeat that, that’s unclear to me. The text question Enno will then take over, and on the currencies I will comment, but the last bit was unclear.

You reduced R&D expenses in the Execute segment versus last year from $190 million to $46 million, which was shown in the Execute segment, so what was the reason for that?

Yes, it is not million, it’s thousand. And remember the business model is that R&D did expand it with innovators, we develop our internal assets and that Execute just uses the platform on third party intellectual property. So there is very, very little R&D expenditure.

Okay.

So that’s thousands, not million.

Okay.

I wish. I don’t know but we would wish.

I am saying you will grow.

On currency, I think just as a general comment, you should view Evotec at this stage of the business where our major new business comes into the company out of the U.S., especially U.S. East Coast, West Coast, Biotech foundations, Pharma companies. For Europe, we count a large proportion of Sanofi as European, so that’s why you see about a 50/50 split in the currency base here. So, our income that’s euros and dollars, the dollar has been relatively stable, I don’t have to comment on currency market as you know, but that has been a positive sector for us and as already mentioned we have costs at this stage predominantly in euros, a little bit in U.S. dollars because of our about 80 to 100 people in the United States and of course because of our about 300 people in the UK and that makes the currency mix at this stage for us from a current point of view relatively favorable when we look into the remainder of the year and also into 2017 at this stage. But first you don’t invest into a company like ours because of currency effects, you invest because of the plans [ph].

Okay.

Which leaves the question regarding the tax rate, simple reason is that we became profitable in France in particular, so we are mater pay taxes, but we should see this in context of the tax credits on the other side, which we are receiving in UK and in France. So the netted tax rate, so to say, significantly lower than what you see that’s simply shown in different lines.

Okay, thank you.

Thank you.

Thank you. The next question is from Thomas Schießle, EQUI.TS. Your line is open, please go ahead. Thomas Schießle: Hello, this is Thomas Schießle from EQUI.TS calling. Congratulations indeed on the impressive numbers you have shown to us. My question is on your Innovate and Execute Synergies you indicated Werner, in speech, you probably did that there will be more Cure X and Target X alliances, is this all over, the whole bunch of indications or is this, will there be a new focus and the second question is on your daughter companies, R&D companies you are investing in, are you striving for majority stakes in those companies or will these companies be, where you held minorities in general; and the third question is on, maybe on Enno, hi Enno, the full impairment of EVT100, does this mean besides the fact that the financials are done so far? Will there be no revaluation going on, on this project anymore? Thank you.

Thank you very much. If okay, I would ask Cord to comment a bit on his, let’s call it business development strategy along Cure X and Target X initiatives in two minutes, let me before that comment on your question about minority and majority stakes. We want to enable targets to find their best company formations or platforms to find their company formations. If this, what we are then taking a minority or a majority stake, we really at this stage look for the best thing to be put behind the target and not for any other practical reason and also some of the balance sheets driven technical reason here. When it comes to Topas for example it’s been a company that we have created, we are no longer a shareholder above 50%, we are a shareholder below 50%, when it comes to other investments that we are evaluating at this stage. You will see us really trying to do the right thing with the right consortia that are aligning interest with us like we have done it with Ellersbrook and how we will do it also in the future. When it comes to the impairment of 100 series, we, as you know have been notified by Janssen that they will not push this project forward into the clinic, the rights on their project have fallen back to us, but it was a tickle event to basically write-off the whole 100 series which we have done in Q1 and with this there is no financial liability coming with this anymore, there is also no technical liability, there is no thorough liability on this project, it would be possible to re-partner this project because it is there in our hands, but I would not want to raise any expectations on that. With this to Cord.

Thank you very much for the question regarding the Innovate strategy Cure X, Target X initiatives. The long term goal of course is to create further upside for Evotec here and attrition is our big enemy, the only way to counter attrition here is to really focus on highest quality work and platforms to really drive projects in optimal fashion forward and the other component is to create a larger portfolio and thereby mediate attrition. We do this very systematically or we have done that very systematically over the past several years constantly expanding our portfolio and constantly working on quality platforms and adding quality platforms to Evotec. And in terms of focus areas, we have largely remained same. So, we will continue to invest in metabolic disease, including complications here in particular chronic kidney disease. We will continue to work to invest in the CNS space, which is really a huge portfolio of potential indications, but here in particular neurodegenerative disease is of interest to us and we will - also based on the more recent Sanofi acquisition, or the acquisition of the Sanofi side and Toulouse we will continue to invest in the oncology space. And beyond these areas we will simply be opportunistic and go out to opportunities that these here will be particularly attractive and fit to our platforms and our expertise. Thomas Schießle: Okay, thank you.

Thank you. Are there further questions out there?

We have two more questions. The next question is from Victoria English, your line open. Please go ahead.

Yes, thank you for taking my questions. Three things rose in my mind when I was listening to the presentations. Mario talked about a significant upward trend in the number of screens and I was wondering whether you could tell us if that’s an industry trend or an Evotec specific trend? Secondly, in Cord’s presentation and he just mentioned this as well, increasing R&D and CNS diseases, if you could be bit more specific about which diseases? And thirdly, at the end of Cord’s presentation he just kind of very quickly showed us a slide, the fourth line which said IPS sales, and I’m wondering whether you are planning to use endues potent stem cells as research tools or as therapies?

Excellent questions. Hello Victoria, first on Mario, two times [ph] Cord.

Thank you, Victoria. Well I suppose, the answer is two-fold on the screen. Yes, I think we do see probably industry wide, an increase in screens that are required to be done. We say, probably from big pharma and continue to consolidate and look to outsource screening to companies and I would say this like Evotec who actually, probably have the strongest screening platform in the industry, so we are a natural partner. We’ve also seen a significant increase in Biotech formations, especially on the East and now a little bit more on the West Coast of the U.S., as well as Europe and of course Evotec we are very bolstered that we along with our screening platform have a library. So, we are able to bring to these biotech companies starting points for their drug discovery collaborations. So, we are the best at doing it. So of course people would come to us. If there is an increase in the industry, then it – then [indiscernible] that will be seeing the increase coming to Evotec.

Thank you.

And regards to your questions on the Innovate side of what our key indication area is in the CNX base that you are interested in, here – so currently they are particularly focused on annuity [indiscernible] including the larger indications such as Alzheimer’s Parkinson's, but also un thinking and we are also pursuing small indications and more full indications relative to the easiness in this space that have genetic component, which we believe. And in that context this is also how we are using an IPS or to rise that these models as a research tool and as a therapeutic option on its own.

Okay, thank you very much.

Thank you.

Thank you. The last question is from Emily De Silva, your line is open please go ahead.

Hello, thank you for taking my questions. I have three. First one on the Innovate, I have a question on the partnership portfolio, I see that on EVT302 and EVT100 you will regain the license rights, could you elaborate a little bit more about the potential business for [indiscernible] mentioning and maybe on the news flow you are expecting on the most advanced clinical partnership? I have a second question on the R&D tax credit, I guess which is something that is going to be recurring each year, could you give us an idea of the average amount you are expecting in terms of tax credit? And my last question is on the guidance in terms of EBITDA, you mentioned that you are expecting the EBITDA to double this year, on the first half of the year you already have reached this amount, what did it imply for the next probably second half of the year?

I am very sorry, the first part of your question, I did not understand properly.

The EBITDA guidance.

No, no, no. The first part which was relating to EBT302 and EBT100, what’s the question?

The question is, are you walking on your – you will gain the rights on this projects, right, and my question is, do you, are you working on new partnership following the new study on this one?

Okay, thank you. Then I would comment on your first part of the question, Enno will comment on the R&D tax credit and on the profitability also I will comment. Regarding EVT302 and EVT100, I think you see a situation where rights have fallen back to us, but we also don’t want to make any hope and any expectation at this stage for potential re-partnering of this assets, which will be seen as pure upside if it happens, I have not any expectations that we would want to raise, so therefore please accept my apologize if I am not commenting on our activity level at this stage. But what you should know that we have been working here with partners who don’t hand back projects lightly and we are fully aware that Roche and JNJ have tried a lot to bring these assets forward. On the profitability guidance, it was a multiple sector situation in a positive way that came together that made us raise this guidance, we want to keep all our options open to optimally invest in R&D in the second half, so that could be the only driver why this trend will not clearly be achieved in 2016 second half. We will definitely double so that’s not the question, on what dimension we will double, that’s the open question here, we just want to keep all our options open. I am sure you understand that. And on the R&D tax credit Enno will comment.

Okay. So as you all know, the tax credit is obviously co-related to our R&D spending in France and in UK, so it really depends on these numbers which will go up. As we indicated in our outlook not dramatically, but they will continue to rise, in particular since France is picking up more and more speed, these numbers will increase and therefore to the tax credits that we regain here, should increase at the same time, obviously also the tax applications could increase on the other side, so the net impact is probably not too significant to the company at the end of the day, but overall it’s been upwards trend.

Okay, thank you very much.

Thank you very much. Are there further questions?

At the moment there are no further questions.

If there are no further questions, then please take the opportunity if any question arise just to send us an email, call us or reach out us. Happy to help and if this is not the case, let me wish you a great continued summer. We are very happy that in the middle of the summer we can bring a lot of sun shine to you even in rainy days here in Germany with great numbers from Evotec and we want to thank you for following us also into the years to come. Thank you so much.

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