Evotec SE (EVO) Q2 2017 Earnings Report, Transcript and Summary

Dear ladies and gentlemen, welcome to the conference call of Evotec AG regarding the Q2 Report 2017. 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, CEO who will lead you through this conference. Please go ahead, sir.

Thank you very much and welcome to Evotec’s reporting of the first half year of 2017. Leading external innovation to execute on innovate, that’s what the title page says on the presentation that we have uploaded for you on the webcast. And I hope that you can download that to follow this presentation. I’m here with my team, as you can see on page number 2 of this presentation, Enno Spillner, our CFO; Mario Polywka, our COO; and Cord Dohrmann, our CSO. When it comes to page four of this presentation, let me step back for a second and tell you the speed of the company is strong. Actually it’s very strong. We’re performing in our Execute segment, as Mario will show you. We are delivering on our Innovate project and are constantly creating more upside in our pipeline. And on a corporate formation track that we are on, we can see a lot of positive movement, which are basic in making the company strong when it comes to our shareholder base, but also when it comes to the opportunities that we are creating on our track to form a great company. On page number five, you'll see that our financials reflect our strong business performance and we’ll guide you into that in the second part of this conference call. But I think just by the first look to the numbers, you can see that we are growing in a controlled and high quality fashion in all segments of the business and that’s also what makes us confidently confirm our guidance that we have given out at the beginning of the year. When you go to page number six of this presentation, let me reiterate that most important for us it is to be clear. Clear within our strategy, clear towards our partner in basically putting out a very clear vision what we want to achieve as the leader in external innovation for our partners. This slide never changes as you know. Nevertheless, it is important to show you that we have initiated the track to create the leading company in this megatrend of external innovation about eight years ago. And I think it’s fair to say that many things are just at the beginning at this stage, because we see that the megatrend is continuing. When it comes to page number seven of this presentation, it is our goal to provide the highest quality integrated platform when it comes to science, capital efficiency and capital elasticity to our partners. When it comes to new science, we don't shy away from accepting that also other companies do great things, and we often invite other companies to join us in creating the best network and the best platform for our partners. We have in the last year joined forces together with a company called Cyprotex, which today operates still under Cyprotex’s and Evotec’s company and is the leader in DMPK services. And we have recently announced that we want to join forces and we hope for a soon closing on Aptuit. Aptuit, Mario will tell you more about it, is a company which really brings us to a next step in our vision to create not only pre-candidate discovery candidates, but really to create with our partners, clinical products. On page number eight of this presentation, you should see that the rational for us to invite other companies to join us has only one goal, to make our Execute business and Innovate business, stronger at the same time. We want to leverage innovation for our partners and for ourselves on the most efficient platform. And if you look at this in every project that you will follow us - that you can follow us in the future, you will see that with these platforms that we have put together, all of a sudden we can increase capital efficiency dramatically for our partners and that’s ultimately the goal of all of us in the industry to come to pass the decision points for new cures. On this point, let me stop and hand over to Mario who will give you a first insight into the progress of Evotec Execute for the first half of 2017.

Thank you very much, Werner, and good afternoon to you all. As Werner said, I'm very pleased to be here today to report on another record quarter, and consequently record half one for Evotec and especially here, the Evotec Execute segment. The revenues grew 26% around €100 million, a significant increase over the same period in 2016. And that led of course to a resulting increase in EBITDA of more than 25% to €28.4 million. And I’ll tell you over the next few slides what has driven this growth. Moving to slide 11, reassuringly, this growth in revenues has led to a somewhat decreased dependence on the top 10 clients. A strong growth in the number of indicated programs at biotech partners, is shown in the customer mix analysis, illustrating and maintaining the strong biotech upturn first seen a few years ago. This continuing trend I think will benefit Evotec significantly with the acquisition of Aptuit, as these partners typically require a first class, fully integrated end to end set of capabilities to proceed into the clinic. Europe continues to dominate the geographical split of revenue, but this is primarily driven by the majors Sanofi partnership, and accounting for that would probably be a 50-50 mix. Moving to Slide 12, as previously stated in the first slide, the growth in revenues is first of all driven by our core business, growth in new collaborations, expansions and extensions of existing collaborations, and milestone achievements. This is very important that we continue to grow what we have booked together organically. Examples are collaborations with Amira, STORM, Blackthorn Therapeutics, all of which appear on our website. We have received both pre-clinical and clinical milestones in the longstanding partnership with Bayer, which has also itself been extended and expanded into 2018. Moving to slide 13, with the acquisition of Aptuit, Evotec is now a truly global company providing drug discovery and development innovation and expertise from a number of centers of excellence. As you'll see, the addition of Aptuit adds around 600 employees in Verona, Basel and a further 170 or so in Abingdon in the UK. In total, Evotec now has a footprint across the world of more than 2,000 employees. Moving over to slide 14, we're very pleased to say that the acquisition of Cyprotex which was completed at the end of 2016, is fully on track and is in fact delivering more than anticipated. It is always our intention that in such acquisitions, they perform better within the Evotec group than they would standalone. So the performance exceeded our expectations. Many new clients have been won through cross selling from our extended business development resource, and this includes major strategic collaboration with large pharma. We increasingly will focus on driving longer term strategic partnerships in this business to give longer term security and visibility on revenues. With such a strong HI performance, we expect an out turn for the rest of the year in excess of €20 million. We announced earlier the closure of the Kalamazoo site of Cyprotex and consolidation of its activities into Watertown, as well as the consolidation of our San Francisco activities through to Branford on the East Coast. Moving to slide 15, and some further background on the developments on the acquisition of Aptuit. This transaction is all about delivering the very highest level of drug discovery and development innovation to our clients and partners. It’s about delivering beyond the PDC and into the clinic, a point which is increasingly the true value inflection point for both our projects and our partners’ projects. having a world class pre-clinical and high end integrated CMC capability under one roof, dovetailed with our drug discovery capabilities, will significantly reduce the time and cost and risk of our projects as they go through to the clinic, an absolute must, especially with the increasing number of projects that have significant clinical milestones. As mentioned, Aptuit operates from Verona, from Basel and from Abingdon in Oxford, Oxford being an API centric facility; Basel, high throughput screening; and Verona, fully integrated drug discovery and development. The acquisition will be accretive in revenues and will contribute strongly to the good EBITDA and cash generation moving forward. So slide 16, this gives a little more detail. I’m not going to go through every single activity. What it brings to us is much needed additional capacity in drug discovery, especially in the areas of CNS, as well as new therapeutic areas such as fibrosis and respiratory diseases. Importantly, IND iGO, INDiGO, represents a truly innovative end to end industry leading capability going from PDC to IND submission under one roof. This is a key differentiator now for Evotec and completely complementary for Evotec. Coupled with the first class integrated CMC offering, we will now be able to progress our projects and clients through discovery, through pre-clinic and into the clinical phases. To Slide 17, as I said, it is all about bringing the most innovative and complete platform to play for our partners on their projects and our own projects. The acquisition transforms Evotec from the premier innovation and efficiency led drug discovery company, to the premier drug discovery and development company, delivering clinic ready programs through an integrated suite of capabilities. To end on slide 18, the Execute segment, like the group, is bang on course to deliver all of our objectives for 2017 through new alliances signed, especially integrated programs, expansion of existing ones, achievement of milestones and now with Aptuit, we can provide our partners with a truly extended value offering. On that note, thank you for your attention. I will hand over to my colleague, Cord Dohrmann.

Thank you, Mario and good afternoon to everybody on the call. It is my great pleasure to give you an update on Evotec’s Innovate. As you may remember, in contrast to say the Evotec Execute business where we largely focus on fee-for-service work, in the Evotec Innovate business, we invest into projects to create new starting points for new strategic partnerships with pharma companies that carry a very significant upside for Evotec in terms of upfront payments, preclinical, clinical and regulatory based milestones, and participation in product sales through royalties. However, although Evotec Execute and Evotec Innovate are two separate business units, I would like to remind everybody that both business segments are operating from the same Evotec platforms. The next slide shows Evotec Innovate financial performance in the first half of 2017 compared to previous years. As you can see, Evotec Innovate continues on a very strong growth path. In the first half of 2017, we achieved a very significant growth in revenues, exceeding last year's numbers by almost 80%. This increase in revenues was driven by additional alliances, but also through the achievement of significant preclinical milestones. In particular, out of our Bayer kidney disease alliance and the Sanofi diabetes alliance. Along with the increased revenues, the adjusted EBITDA continues to improve, while the R&D expenses have decreased slightly compared to 2016. However, this bit in R&D expenses does not reflect the scarcity of new investment opportunities, but rather reallocation of project, resources and costs from R&D into comps. Over the last few years, we have continuously invested in the expansion of disease focused platforms, and on slide or page 21, you can see how we continue to do so. As well as putting platforms that would allow us to improve the translatability from preclinical data into the clinic. With Aptuit joining the Evotec family, we are excited about a further expansion of our disease focused platforms, in particular in two areas. In fibrosis, we will significantly expand our current infrastructure and expertise. And with Aptuit’s respiratory disease discovery platform, we are adding a new dimension, which we are very excited about as it does fit extremely well to some of our own initiatives in immunology information, but also fibrosis. In addition to expanding our disease area focus platform, we continue to invest in more fundamental discovery platforms that cut across different disease areas and have paradigm shifting potential. Here in particular, we continue to invest into our iPSC based drug discovery platform. Similarly, we have continued to expand our academic bridge efforts between projects through our collaboration with Oxford University. And furthermore, we continue to expand our efforts in key disease areas such as kidney disease and immune-oncology, and I will come back later to this in the presentation. On the next slide, you can see that one of our primary goal is to - Evotec Innovate, is to create a pipeline of co-owned drug candidates, which we then develop together with our partners. On slide 22, you can see that we continue to grow our co-own product portfolio, with now over 80 product opportunities and significant progress on a number of these. Today, I just want to point out a few examples of progress in some of these programs. For example, in our endometriosis alliance with Bayer, we continue to make excellent progress on various fronts. We are extremely excited about a new clinical start based on one of our projects. And we have also reached other important preclinical milestones in earlier stage programs. Similarly, in our kidney disease collaboration with Bayer, we have achieved a number of preclinical milestones which demonstrate that this collaboration has gotten off to an excellent start and we are looking forward to further progress as well. In our diabetes alliance with Sanofi, we were able to announce a significant and very important preclinical milestone, which also triggered a further expansion of the collaboration. And finally, in our partnership with Oxford University, we added two more projects, which expands our portfolio project in lab 282 now to seven projects overall. Beyond the progress in these collaborations I just mentioned, I would like to point out in the next page, page 23, that we are also making significant progress in other Evotec Innovate alliances. Although these projects for now have not culminated in milestone payments yet, we are very confident that they will do so in the future. Two examples are here, the fibrosis alliance with Pfizer and the immune-oncology alliance with Sanofi. On the next slide, I'd like to switch gears and talk a little bit more about our iPS cell-based drug discovery platform. We are continuing to expand our broad network to source high quality patient-derived iPS cells from various vendors. We continue to expand our portfolio of differentiation protocols into new additional cell types. We also continue to expand our network of partners and here we are very proud that we could add two key additional partners, Censo and Fraunhofer. These new partnerships support us specifically in sourcing iPS cell lines for various indications and expand our collection of cell lines representing a larger cohort of patient population. Both partners work at the same highest industrial standards in generating iPS sell lines, including the conduct of quality control services and the expansion of cell lines. We are very confident that these two partnerships will provide another boost to iPS - our iPS sell based drug discovery efforts. Furthermore, on the next page, page 25 you can see that we have already forged two alliances in the iPS cell phase based on iPS drug discovery partnership with leading pharma partners. I already mentioned that in our Sanofi alliance, we achieved a very important first milestone that leads to further expansion of the work here. But I also want to mention that in our more recently forged iPS cell based neurodegeneration alliance for Celgene, we are also are making significant progress, and with a little bit of luck, we believe we can reach first milestones already this year. Now, I’d like to move forward to page 26. Another important way of expanding our platforms and generating - is generating access to patient data and patient material. This is important in order to create the best possible connections between pre-clinical projects and their translatability into the clinic. In the kidney disease field, we recently have made a very significant step forward in our efforts to use patient derived information to identify and validate novel drug discovery starting points. Evotec has joined together with UCB and AbbVie, the National Unified Renal Translational Research Enterprise, which in short is called NURTuRE. NURTuRE is a large consortium of UK based hospitals and academic institutions that have access to the largest collection of kidney disease patients, with complete patient histories and access to patient derived body fluids and tissue samples. NURTuRE currently has access to over 3,000 patients with chronic kidney disease and over 1,000 patients with nephrotic syndrome. Together with our partners, Evotec will have access to all patient data in a blinded fashion and also have access to patient materials. This will allow us to better understand the molecular mechanisms that are driving these diseases and thereby identify and validate disease relevant mechanisms in drug targets and drug candidates. Finally on page 27, I would like to mention that beyond our internal R&D investments, we are also investing in spin-off companies and startup companies that are aligned with our vision to bring first in class drug candidates with disease modifying potential to patients. The key principle of these investments is that the projects of these companies fall into our core competencies, areas of core competencies and that the preclinical work is conducted on Evotec platforms with the input of Evotec scientists. Here I only want to briefly mention the two latest investments, namely Forge Therapeutics which is developing a new class of antibiotics to fight Gram-negative superbugs. Whereas another investment in Facio Therapeutics is focused on FSHD, also called Facioscapulohumeral disease, which is a genetically driven muscular dystrophy. The approach that Facio is taking is very much based on iPSC like cell based patient derived assay systems, and therefore belongs essentially into this kind of portfolio. Although most programs here are still in an early stage, we are very excited about the promise of the portfolio and the energy and the enthusiasm of the teams behind these programs. Finally, on page 28, I’d like to summarize where we currently stand. We have already achieved a lot within Evotec Innovate in 2017 and continue to be very excited about the prospect of this business segment for the second half and 2017. What can you expect for the second half?? We currently anticipate further progress in our drug - clinical stage drug pipeline. We aim to continue and expand our academic bridge partner network and partnerships. We expect strong progress in our Cure X and Target X initiatives. And finally, we will continue to focus on our iPS cell platform and expand this going forward. With this, I'd like to thank you for your attention and hand over to Enno.

Yes. Thank you, Cord very much and also a warm welcome to this half year report from my side. It’s a pleasure having you all on the line today. And let me start with slide number 30, summarizing the overall group numbers here. And upfront, what Mario already mentioned, clearly this is the H1 record that we have to report compared to the previous years. And second message is we are clearly on track with regards to our numbers as we planned. So looking at the revenue first and breaking this down a little bit, so you see a significant step up by 37%, going to €103 million in total revenue. And this is based on a broad growth and also organic growth. That is important to mention here. So we have a strong base revenue growth going up 31% or 21.6 million. We have a good contribution by Cyprotex of €3 million, but we also have other important factors like to lose third party revenue going up, milestone growth as Cord and Mario both indicated. So we have a really broad development here with regards to revenue, which obviously then translates into a strong, slightly growing gross margin of 35.8%, which has slightly improved compared to last year, which is mainly due to milestones and good utilization. I mentioned to lose contributing and obviously also having a favorable FX impact of roughly 1.5 percentage points. One counterpoint that I would like to point out here is that we will see in the future and also here in Q2, roughly 1.3 million amortization from the Cyprotex customer list that we will have to amortize. On the R&D, we see pretty stable numbers in the range of €8.5 million to €9 million euros. That’s ongoing like that, aiming for the total goal of roughly €20 million. That said, Cord indicated this already. We shifted some of the projects into cost of goods since there’s partnerships behind that, mainly to name Celgene here as the most prominent one. Looking at SG&A, we have a quite significant upswing here, which was expected in that range of 34%. This is also again through Cyprotex SG&A (authentication). This is also through higher growth of people in fields like HR, legal, business development, simply to cover the growth of the organization in total. And obviously, we see an impact from the M&A and equity transactions that we conducted in the first half year. So some of the numbers from up three year, but also what Cord reported to you, looking at these new equity stakes that’s in here as well. The other operating income is mainly - as in the previous quarters as well, is mainly credited to the tax credits, which are contributing here from France mainly and also from the UK. That’s important to keep in mind. And overall, this translates into a very positive growing - strongly growing EBITDA plus 64% going to 26 million this year. So this is based on the significantly improved gross profit and again a positive Cyprotex contribution and the higher tax credits that are important here. Let me switch to the next slide, slide number 31 comparing or breaking it up into our two segments, Execute and Innovate. And here, what you also can see and what confirms what I just said on the previous page is that we see a strong growth on both sides. So revenue is growing in Execute as much as it is in Innovate and we have a positive impact on both sides with growing milestones. And this also obviously translates into good continued gross margin of 29.4 with regard to Execute and 46.1 with regards to Innovate. And obviously both also made good progress on the adjusted EBITDA, 28.4 on Execute. As a reminder, here we had 22.5 in the previous year at the same time, and Innovate growing from minus 6.7 now to minus 2.4. So it’s good progress. On the next slide, number 32, I actually don't want to say too much since this is only the Q2 numbers and all the statements that I made for the half one year report are also true here. Revenues up by 40% and the other numbers being in compliance with the overall development. So that also the adjusted group EBITDA going to 12.8 million, which is an upswing of 49% compared to the previous year. Looking at the trends of the group revenues and at the gross margin on slide number 33, you can really see that we have a consistent trend over three years now in the group revenues. And even if you break them down into base revenues as well as into the milestones, you see also these both parts to grow for each other. Looking at the gross margin, also here again we have a good reflection of the milestones/ if we look at the major numbers here, growing from 34.5 to 35.8. So plus 1.3 percentage points going up. And in the base margin, we experienced the amortization of the already mentioned Cyprotex customer list which hasn’t impacted yet. This is why we are going slightly down here. At least that’s the major driver. Coming to slide number 34, just a brief update or reminder of the Aptuit transaction which Werner and Mario mentioned already. This is the slide we introduced already during our call on 31st of July. And so we are on track here for consolidation for Q4 if everything works out according to plan and currently it looks like that. so we expect to close this in Q3 so that then the latest could consolidate on the Q4 numbers, which then will be accretive on the revenue level as much as on the EBITDA level. And if we should close early, obviously then we will already consolidate those numbers maybe for September, let’s see. So that would be positive. Obviously the other side that we have to consider is the transaction cost that we then will subtract here, but we will report on that in the Q3 in more detail. And obviously also the guidance will be updated once we have this finally close. That said, I'm coming back to what Werner said very much in the beginning on slide number 35. We are on track with our guidance. Actually we can pretty comfortably confirm that our goals with regard to review to grow more than 15% is clearly reached at this stage. Please keep in mind there's milestones and there’s planning for the future as well, which we always - which we do not always fully control, but we feel comfortable to conform this and the same has been true for the EBITDA level where we also have good progress so far, and I think we can confirm this for the second half of the year as well. And I mentioned already on D, which should be €20 million or slightly below. Having said that, I hand back over to Werner. Thank you very much.

Thank you all. With this, let me thank my management team for excellent work in the first half. Let me thank our whole group of employees in all sites at this stage who are really working for our partners and for Evotec projects as good as they can and as rational as they can to make new cures in a capital efficient way for the population out there. With this, let me also thank you for supporting us, for following us and for raising questions that we are happy to answer.

[Operator Instructions]. The first question comes from Mr. Daveni of Rx Securities. Please go ahead. The line is now open.

Thanks for taking my question. Congrats on a good quarter. I’ve got a couple. First question is just on the equity investments that you’ve made in the first half. I was wondering if you can just outline Evotec’s equity ownership of Forge and at Eternygen please.

Yes, we can. The question will go to Enno.

So you were asking, Samir about the share that we own in these companies?

Yes.

In Forge and in Eternygen.

That’s right.

Yes. So in Forge, we have 15.5% and in Eternygen it’s 22%.

Okay, that’s great. Thank you. And then my final question is just, I think this is the first time you disclosed the deal with Blackthorn Therapeutics. Perhaps you can just tell us a little bit more about that. And are we right to assume that’s an Execute deal?

Yes, but the disclosure level is here on the level that you get because we’re not allowed by our partner to say more at this stage. And thank you for respecting that.

Okay. Thanks very much.

Thank you. The next question comes from Falko Friedrichs of Deutsche Bank. Please go ahead. Your line is now open.

Hello. Thanks for taking my questions. I would have three. Firstly, could you provide us with the organic growth that you saw in H1 in your base business and how you see the trends for the second half of 2017 and outer years. Then secondly, regarding the faster than expected integration of Cyprotex, does this make you confident that the integration of Aptuit would also go very smoothly? And also, could you maybe provide more color on which steps of the Cyprotex integration are progressing faster than expected. And then my last question regarding the 13.3 million in milestones in the first half, and I know that visibility is fairly limited here, but are you reasonably optimistic that on a full year basis, you could reach at least the prior year’s level of roughly 20 million? And in this context, is there any more color you could provide on the potential milestones from Celgene in the second half?

So let me probably start with the Celgene question where Cord said was luck. We could potentially achieve a milestone and I think it’s important to underline that. The biology is not under control. So we don't know the outcome of biology. We just know that we are on the execution of the experiments, very well on track. So that’s all the color we can give you on that. And again, this is a five year contract as a minimum. So therefore we are not here counting on is this happening in this or in that quarter. It’s really counting on long term scientific breakthrough that we are trying on a new platform together with Celgene. And I also would want to caution all of us that we don’t put these milestones into a race for a quarter or not. It really comes down to the innovation potential of these milestones. And let me highlight again on this one, for example what we have achieved in the beta cell collaboration with Sanofi because this is just one, putting a flashlight onto early biology that can change potentially the world we have thought about when it comes to beta cell replication. And that’s what is always putting I think a different situation behind every milestone, that’s it’s not only a reflection of what’s the number there. It’s also what is the scientific breakthrough potential of these milestones that are reached there. Sorry for being so long on this one. Which also brings me to the guidance on milestones for the second half, which if you don't mind, we will not give because milestones depend on biology. But we give a clear guidance what we expect on our upside from EBITDA by growing that significantly. And we also show that our growth in revenues is comfortably confirmed, with more than 15%. But as you hear us, there is a lot of milestones in the pipeline and we are comfortable that we will achieve several of them. What makes us comfortable on the integration process of Cyprotex, I would hand over this question to Mario and how can we translate this to Aptuit. So before I hand over to Mario, I would say what is the key competence within Evotec and also here really thanks to our team in SG&A and people who are helping us on the outside for this is that we have established a process knowhow in how to tackle complex transactions. And if you look at our history in the last three to four years, you see more than eight transaction that were of significant size that we have done, which gives us core knowhow in these processes, not only to come to a transaction, but also to deliver on a transaction. And this is very important for us also when it comes to, for example the equity investments that we’re making and how to really make these things work on a company formation point of view. And that's why we think applying these toolbox into how we can make those parties, Aptuit and us feel comfortable, we look forward to this process and we look forward to working with the people there. And maybe on Cyprotex, Mario, if I can hand over to you and then we go back to the organic growth question that you have raised to Enno.

Yes. Thank you very much. So I think with Cyprotex, we would kind of classify as a scope acquisition i.e. an acquisition where we’re acquiring something which we don’t have. So it’s add-on, a complementary set of high class suite of assays for add-me talks. So they were a fantastic company already. We don’t need to badge in and add too much and there’s no cost synergies there. what we did I think is A, we helped them move to a better facility, which means that they can perform their science in a better infrastructure, which means they can deliver more efficiently, which of course translates through to the client. We have a much greater network of clients than Cyprotex had. Cyprotex sold in a very tactical manner. We’ve been able to, through our strategic relationships with a number of companies, sell through the Cyprotex offering in more strategic type deals. So that’s gone tremendously well. It’s all about not messing with what works, but bringing the best of Evotec to what they have. And that, as Werner says, will translate to the acquisition of Aptuit, which for the most part again is an increasing scope where I think this high class, preclinical and integrated CMC activities, which we don’t have. The cross selling opportunities, they’re absolutely fabulous for us, for our clients as well as for their clients into Evotec. And as Cord has pointed out as well, the opportunities to derisk our projects going through to the clinic will increasingly be in our hands due to this IND iGO suite of capabilities especially. We make sure that we keep people motivated. We have the ambitious and the energetic individuals managing these businesses. And as Werner says, we have become masters at this. We’ve become more experienced with every acquisition and they are able to use what are our lessons learned going forward.

Good. Then I take over. Coming back to the question of organic growth. So if you would for instance subtract Cyprotex, then you would go - come down from 103 million to 91 million in total revenues. So that is compared to previous year. That’s a growth of 21%. And you then would exclude also the Sanofi collaboration, then you would have a growth rate of 30%.

Which has told you that again, we don't think that way because on day one when we’re making acquisition, it is part of the whole systematic thinking of the company and that’s where people start sharing ideas, putting better solutions together for clients. But if want to carve out the numbers, you see especially the strong underlying growth, which I think is always only the entry ticket for doing an organic growth.

Great. Thank you I would have a short follow up question on the organic growth. So in your calculation, do you include or exclude the milestones?

In the number that I just mentioned, the milestones are included.

Okay. Thank you.

Thank you. The next question comes from Igor Kim. Please go ahead. Your line is now open.

Hello everyone. This is Igor Kim. I’ve got a couple of questions and first on the gross margin. You said that the two (indiscernible) that was (devalued), the amortization of customers of Cyprotex of 1.3 million, what should we expect here? Will it continue in a similar way to the rest of the year or was it rather a one-time event?

No. that will continue throughout the year.

Throughout the year. So until the end of the year, right?

Yes. That will go over several years. That’s part of the PPA allocation from the acquisition price. A major portion of it remains as goodwill, but a certain part has been translated into this value.

Okay, very well. (Indiscernible). Yes, that actually - that was my question.

Thank you so much and you’ve got wind plates obviously. We look forward to the next question.

The next question comes from Michael Higgins. Please go ahead. Your line is now open.

Hello. This is David Solomon in for Michael Higgins. Thanks for taking my question and congrats on the great quarter. I was curious with respect to the Aptuit acquisition, what steps are necessary to integrate the drug discovery division of Aptuit with Evotec’s drug discovery group. And as - related to that, what potential respiratory indications are targeted by this group. And my last question is regarding the target BCD Sanofi project, which recently achieved the milestone and whether - what steps are necessary and how close to IND submission that would be and how the Aptuit, INDiGO could contribute to that. Thank you.

Thank you so much. On the question around BCD, I hand over to Cord. On the question regarding the Aptuit setup and how it will go forward, I can give you a brief answer because it’s the intention to let the very well performing business of Aptuit, continue as a very well performing business without much interventions. We will just integrate where it is making sense and otherwise let’s just leave it as it is. And then the discovery part that you're mentioning, here as you know, we have the capacity need at Evotec, especially for Evotec Innovate, but also for Evotec Execute. There we just look at the project potentials and do those projects that create most value for the joint group. And with this, over to BCD and to respiratory diseases to Cord.

Well, thank you for your question. So in regards to the potential, what projects we have in mind here, currently all projects at Aptuit are customer driven projects in the respiratory space. And we view this mainly as area for potential future growth of the Evotec Innovate business. And here, in particular one area that we currently have in mind is as you know, we have been active, very active in the fibrosis space in particular kidney fibrosis and liver fibrosis and essentially lung fibrosis is just a small step away here. And we see this as a very exciting area where Aptuit can contribute really a whole slew of in vitro as well as in vivo models.

Thank you very much.

And BCD. The mass from BCD that was triggered in bringing this to the clinical situation of course would be immediately synergistic with INDiGO, but in all fairness we're not there yet to have a full clinical path laid out. But that’s all that we can say on behalf of this project because - and I also thank you for respecting that we cannot say more than our partners allow us to say about this project, but that we’re very excited about it. I think you hear that.

Thank you very much. I appreciate it.

The next question comes from William Ellington of Evernow Publishing. Please go ahead. Your line is now open.

Good afternoon. I would like to know when you plan to publish your second quarter results. Or should one just simply subtract the first quarter from first half to get the figures.

If you take the presentation which we have put out on the Internet, you’ll find the second quarter explicitly stated on page number 32. That’s broken down for Q2. So that answers your question.

Okay. Thank you very much.

Thank you. The next question comes from Mike Cooper of Trinity Delta. Please go ahead. Your line is now open.

A couple of questions. Firstly, can you quantify the revenue synergies that you’ve achieved so far with Cyprotex? And secondly, you’ve invested so far in seven companies. Is your plan to follow you investment, to maintain your position full time and if that is, what funds do you have reserved for follow on investments?

Maybe I start with the second question, Mario then we’ll come to the revenue synergies on Cyprotex. The great thing about what we are doing at this stage in company formation participation is that we really follow our principle of capital efficiency and capital elasticity on the data driven session. What do I mean if I say that? We want to not make any rule here, but the rule is that biology decides our capital intensity and our capital elasticity that we put behind certain projects. So if biology tells us that a project goes very well, we are able to scale up capacity, to scale up investment momentum and to scale up resources. If biology tells us that it doesn't go that well, we can scale it down, and that’s really always coming to this fast (surplus) decisions that we all need in this industry to work on the projects with the best opportunity cost that are provided to us. We have the potential to follow every financial round because as you see, we have a highly profitable business platform built. We have the intention to do much more than what you see today by leveraging our Innovate cross over platforms into much more company formations. And you will be surprised when I say much more, how much more we need. And on the other hand, we really want to follow the principle that only good biology deserves future investments. And that’s I think the strategy that we can apply. There’s no need to put a certain fund in place because we have given ourselves the most stringent governance by saying every single investment case has to be cleared through our supervisory board, by having here not a mixed up incentive structure, but a clear incentive structure. We only invest if we believe in the biology behind that investment. And that’s how we will continue to build this, and as I said before, make it really big in the future.

Hi Mike. It’s Mario here. Just on the Cyprotex question, of course I’m not sure we absolutely quantify what we bought in terms of revenue growth to what the current operation performs. But you know, Cyprotex will grow by more than 20% in 2017 over 2016. And I would give an estimate that we probably can see between 10% and 15% of that growth.

Great. Thank you.

Thank you. The next question comes from Volker Braun of Bankhaus Lampe. Please go ahead. Your line is now open.

Thank you for taking my question. I guess it's about order book and capacity. When looking at the inter segment revenues, it’s sequentially down versus Q1 and I guess that's not because of a lack of ideas in EVT Innovate, but more likely because of the strong order book in Execute. To what extent does that limit your projects in EVT Innovate if there’s not enough staff? I wouldn’t say not enough, but a limited amount of staff available for Innovate projects and how should we model that going forward? And maybe related to that capacity question, second part is related to Celgene in particular. Could you share an idea to what extent you have already started projects here percentage wise in relation to the total amount of theoretical projects or whatever I should take as a reference measure. So I hope the intention of the question is clear. To what extent is capacity limited and what does it take to ramp up?

Thank you for your question. Generally we view it really as an abnormality. So we are aggressively expanding, continue to expand our Innovate portfolio. Here in this situation, there were just a number of factors they came on top of each other. First of all, a very sizable Celgene deal where we also had to expand capacity. At the same time, we also forged a kidney alliance with Bayer that was also expanded - really expanded the BCD alliance with Sanofi. So it was just sort of in that regard an unfortunate coincidence that everything was going our way and that we had to start reallocating resources into those partnerships, rather than continue to focus on our own R&D efforts. But overall we are very convinced that by the end of the year we’ll be back on track and catching up here on all efforts. Once again, you heard me say that we have started a number of projects with Oxford University. So overall, the portfolio has not gotten any smaller. It’s just at an earlier stage and requires currently a little less resource, but this will change quickly.

Could you hire people fast enough or do you have to go for external growth for them?

No. we’re very happy at this stage as a general comment in how we can attract talent, which is also a fact that people want to try in Evotec. So that’s good and of course situation in going together with Aptuit is for us a situation where capacity can be built fast. And also what I would want to highlight here is the fantastic performance that we see in our site in Toulouse where we have been able to attract fantastic talent and where we were able from a capacity point of view when it comes to buildings, lab space and other things, to have people immediately on, I would say high performance and high value projects. That’s very important. I want to hand back to Cord again on the Celgene question if you want to comment on that, how many projects we have started with what percentage.

I don't think we can disclose it in detail, but it’s essentially a very solid number of projects that we have initiated. And the way the Celgene deal is structured, there is always scope for more, and we are basically on a very strong path currently to continue to fill in the pipeline here. Even in the Celgene, also that's not done. That is still work in progress. And we - but we are overall, I think we’re on an extremely good track and once again, from a technical point of view, how we initiate a project, brought them forward, we are extremely happy and very confident that we will come to value inflection point, quicker milestones. But the exact timeline for this is unclear, but so far we are extremely happy with the overall progress.

Okay. Thank you much.

Thank you, Volker. Next question please.

As there are no further questions at the moment, I would hand back to you, gentlemen.

This is fantastic. If at this point in time, you can of course also always accept the invitation if there are further question upcoming, don’t hesitate to send us an email, give us a ring, contact our IR and we are very happy to help you to better understand our business model, help you better understand our projects and help you better understand support our role. And on the other hand, let me wish all of you a continued great summer, and if you can send a little bit of sun to Hamburg, people would like that. Thank you so much.

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