Evotec SE (EVO) Q3 2017 Earnings Report, Transcript and Summary

Dear ladies and gentlemen, welcome to the Evotec AG Q3 report 2017. At our customers' 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. Werner Lanthaler, CEO, who will lead you through this conference. Please go ahead, sir.

Welcome. Welcome from sunny Hamburg to our Q3 results of 2017. Throughout this presentation, we will use a document that we have uploaded on the Internet and I hope that you can follow us by using this presentation which my colleagues and I will use to guide you through our Q3 report. It's the expansion of innovation and it's the acceleration of innovation that we are presenting to you as the foundation of our business model. I am here together with my colleagues, Enno Spillner, our CFO, Mario Polywka, our COO and Cord Dohrmann, our CSO. We will share this presentation. And if you go to page number four, you can see the highlights of the first nine months of 2017 and the state of play. I am very happy to report that the state of the company is strong. Actually, it's fair to say that the state of the company is very strong. When I say this, we can underline this with a great expansion of our value chain that we have done, especially for our Execute business through the acquisition of Aptuit. Also following a very well-integrated acquisition of Cyprotex into our Execute business, which translates into significant customer synergies that we feel coming in, in 2017 already, but especially when we look into 2018, 2019 and 2020 where we see the synergies coming of these transactions. On Evotec Innovate, you can see that we are building innovation hotspots that basically represent the technologies of the future to make drug discovery even more efficient and productive and Cord will then bring you into some of the highlights of that. And on a corporate level, I think it's fair to say that even after closing last transaction in 2017, we feel very strongly about this year that we are up for more, which you will see in the months to come. When it comes to our financial reflection of the first nine months, everything else, but saying that we are on the right track would dilute the message here because what you see is a strong growth basically in all areas of the business. Strong growth means for us especially that we see our base business growing, but we also see the innovation part of Evotec Innovate kicking in with not only scientifically important milestones but also increasing the commercially highly interesting milestones, which are driving our numbers on the gross margin to the upside, which is notable. This, all in all, brings us to a very comfortable confirmation of our guidance 2017, which we are confirming that we are doing it on page number five of this presentation. On page six of this presentation, let me just give you a short reminder that we have always been clear, actually yes, very clear on our strategy. In the last years, as we are building Evotec, we have laid out a long-term plan which will not change. This company will be the leading organization to drive innovation on an external platform together with our partners. And when you are looking here on the elements that we are bringing together on our platform, you will see that it all nicely fits together like a puzzle that helps drug discovery to become more productive and efficient in the future. On page number seven, you can see that where we are not leaders in the field, we are inviting others, together with us, to become the leaders of the field. So the 10 acquisitions that we have done in the last eight years are representing an invitation to technologies or to capabilities or teams where together we can make better projects and higher degrees of innovation together with our partners. It is great to see also here the feedback from our partners and customers out there that are especially appreciating the transactions that we have done in the last three years when, trust means here you protect our integration of Evotec, France, especially Cyprotex with DMPK testing and Aptuit, where our partners are telling us, yes, integrating this platform to an integration that is efficiently helping drug discovery going forward is the right way to go, is the confirmation of our strategy, which we will continue into the years to come. Now on page number eight, it is my big pleasure to report back to you that both segments are exactly showing the momentum that we hoped to get into this business into the years to come. So you see Evotec Execute performing very strongly and you see Evotec Innovate performing very strongly and it is my pleasure that both leaders of these segments will now guide you into their highlights of their segments. First Mario and then Cord and with this I want to thank them both for doing an excellent job in driving their segments, respectively forward. With this, I hand over to Mario.

Well, thank you very much, Werner. Thank you for the very kind introduction and good afternoon to everybody and it is a pleasure to be here with you to report on an excellent nine months for Evotec and especially Evotec Execute segment but importantly to give the message that we are on track for 2017 but now, more importantly for us is that we are fueling the business pipeline for 2018 and our focus now that 2017 is effectively done, is on 2018 and beyond. The revenues for the segment grew an impressive 42% to EUR171 million against the same period of 2016 and this includes, as stated in slide 10, EUR27.5 million of intersegment revenue and this is driven by the utilization of the platform for, as Werner has said, the growing Innovate portfolio of projects. EBITDA grew slightly over the same period, but was impacted by primarily one-off M&A related expenses associated with the acquisition of Cyprotex and Aptuit as well as some timing of milestones which will catch up in Q4. Moving to slide 11 and 12 and following on from Werner's description about the acquisition strategy of Evotec, I would like to give you a little more detail. Slide 11 talks about the acquisition of Cyprotex which we completed in December of 2016. We are very pleased that the performance of Cyprotex has exceeded all our expectations both in terms of revenue, EBITDA but also the scientific contribution to the Evotec group. The year-to-date contribution to revenues is EUR18 million and the operation is said to easily deliver above EUR20 million for the full year. Operational and commercial integration has proceeded well. The increased business development niche of Evotec has transitioned smaller tactical deals into more strategic ones for Cyprotex. Additionally, we closed our Kalamazoo site in Q3 and we have consolidated these operations into the Watertown facility. Moving to slide 12 and continuing with the theme of acquisition, we are pleased to report it that the acquisition of Aptuit was closed effective of August 11. The total deal value, you will recall, was $300 million and the transaction cost primarily allocated to the Execute business was around EUR4 million. This is around 1.5% of the overall transaction and is significantly below what one might expect for a deal of this size and this is a tribute to the real excellent internal effort within Evotec and our organization. Aptuit contributed EUR15 million towards the revenues. Although still very early in the process, the reaction by existing clients in the market has been very positive. We are already seeing cross-selling opportunities between the organizations. Operational integration is proceeding well. The key focus being on maintaining delivery to our existing clients, unifying the business development function and looking at strategic opportunities to drive growth in the next three to five years. Our initial expectations on revenue and margin contribution have been confirmed. Moving to slide 13. This reminds us of the extension of our value chain offering that the acquisition of Aptuit provides. Previously our platform served drug discovery up to the nomination of a preclinical development candidate. Through the acquisition of Aptuit, we can extend this offering up to the submission of an IND and first-in-man support. Having this INDiGO capability is unique in the industry and substantially expedites the time to clinic for our partners. The ongoing ability to support later phase development through our integrated CMC is then a natural extension for these preclinical activities. Moving to slide 14. Our integrated offering is leading to more long-term alliances. The progress in ongoing collaborations has been tremendous so far in 2017. Strong partnerships with Forge, novel technologies for metal binding enzyme antibiotics, endometriosis with Bayer including further clinical and preclinical milestones, multiple platform support programs with Sanofi, CHDI, UCB and Genentech to name just a few, have been augmented as well with new collaborations, such as the oncology collaboration with STORM, an additional viral infectious disease collaboration with Abivax and neurology with Disarm. Finally, the figures that I present today reflect the group excluding Aptuit and this is in terms of the customer mix and the geography mix of our revenue. Although the Aptuit revenues predominantly fall within the same range as we show here. The customer mix continues to be driven by a large, long-term strategic partnership with top clients counting for almost three quarters of revenue and dominated, as you would expect, by large pharma and biotech clients, especially from the U.S. but with an increasing biotech partners now filtering through from the U.K. and Europe. So finally on slide 16, the Execute segment, as the group, has maintained its impressive growth over the last few years into the first nine months of 2017 through continued execution on existing partnerships, achievement of milestones and new alliances with pharma and biotech alike and, of course, through the Aptuit acquisition and the execution on the Cyprotex acquisition. As I said at the beginning, this all fuels into the growth that we expect to drive into 2018 and beyond. So I thank you for your attention and now I will pass you on 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 business segment. Evotec Innovate continues to make progress on multiple fronts and dimensions. Just to name a few key points, we have achieved important milestones in our kidney disease alliance with Bayer and have also significantly expanded this collaboration by a number of additional Evotec projects. We have also achieved important milestones in our iPSC driven drug discovery alliances with Sanofi and Celgene and continue to expand iPSC-based drug discovery platform. Our academic BRIDGE strategy is expanding with a new BRIDGE in Toronto which will give us access to about 15 leading Canadian academic institutions and teaching hospitals. Furthermore, we have expanded our investment into artificial intelligence supported drug discovery through our JV with Exscientia and a strategic investment into Exscientia. Finally, we joined two consortia in the kidney disease field which will significantly expand our kidney disease platform. Through NURTuRE, we are accessing detailed data from kidney disease patients and through NEPLEX we are building highly sophisticated in vitro functional assays systems in the kidney disease space. The next slide, slide 19, summarizes Evotec's financials performance. Along with the extensive scientific progress we have made, Evotec's Innovate in the financial performance continues to grow at an accelerated pace increasing its revenues by 84% over the previous year. A significant portion of this growth in revenue is driven by new partnerships such as the Celgene collaboration in neurodegeneration and the Bayer collaboration in kidney disease but also by the expansion of other preexisting collaborations. As we continue to build revenues and substantial upside for Evotec at an accelerated pace, EBITDA continues to improve while R&D expenses have stayed essentially flat around EUR16 million for the first nine months of 2017. Slide 20 gives you an overview of our continually growing pipeline of co-owned product opportunities that hold significant upside for Evotec. We have further expanded the pipeline and made significant scientific progress on multiple projects. Here we can report a new clinical start with Bayer in the endometriosis as well as a preclinical milestone achievement in a preclinical endometriosis project. In addition, we initiated a preclinical development with Bayer in an unnamed indication. This project will likely progress for the clinic very swiftly. In our kidney collaboration with Bayer, we can also report significant scientific progress that led to the achievement of an important discovery stage milestone. Furthermore, in our neurodegeneration collaboration with Celgene, we achieved a very significant milestone of $5 million and last but not least we expanded our academic network very significantly through the opening of another academic BRIDGE in Toronto together with MaRS Innovation. On slide 21, we would like to remind everybody that iPSC-based drug discovery has already generated significant value for Evotec and our partners and it continues to be a focus of future R&D activity. In order to expand this platform, we continue to invest into the differentiation of new cell types, the generation of robust and in particular disease relevant readouts as well as a strong network of academic partners to source patient through our cell lines. On the next page, page 21, it is clear that based on our iPSC-based platform, we have structured already three highly productive partnerships. In 2017, we have achieved two very important milestones in these iPSC-based drug discovery alliances. In the first half of the year, we achieved EUR3 million preclinical proof of concept milestone in our diabetes alliance with Sanofi. And more recently, we achieved an important EUR5 million screening milestone in our neurodegeneration alliance with Celgene. We are convinced that iPSC-based drug discovery will continue to set new standards in the industry and very much intent to continue to be on the forefront of this broader trend. Slide 23 gives you an overview of our current iPSC-based partnerships and areas where we are currently investing. In particular, we are currently investing into lysosomal storage diseases, neurodevelopmental disorders, kidney diseases and also retinal diseases. Although most of this work is still at an early stage, we believe that these investments will prime further partnerships in the exciting space of drug discovery. On slide 24, I would like to give you a brief update on our academic partnerships and academic BRIDGE strategy. When it comes to the sourcing of novel, highly innovative projects, Evotec's academic BRIDGE strategy continues to be an important driver. At the end of 2016, we established LAB282 which is a broad and strategic academic partnership with Oxford University. LAB282 has already delivered seven projects within the last year and will continue to deliver more projects going forward with the expected goal to create startup companies around validated projects. More recently, we have established LAB150, which is a new academic BRIDGE in Toronto, Canada. Together with MaRS Innovation, this Toronto-based partnership will give Evotec access to 15 leading Canadian academic institutions and teaching hospitals. The intention remains the same as of LAB282. Together with MaRS Innovation, we translate first-in-class innovation into industrial drug discovery projects which will be the starting point of spin-off companies. On the next slide, I would like to briefly mention an exciting financing tool for Evotec's Innovate strategy we were able to secure. We are extremely proud that we have been selected by the EIB, European Investment Bank, for a new strategic investment into our Evotec Innovate strategy. This is a new EIB financing instrument which incorporates risk and reward sharing components. The EIB will co-finance all Evotec Innovate projects up to EUR75 million over the next four years. The loan comes at very attractive rates and includes a reward sharing component. This EIB loan instrument basically reduces Evotec's cost of capital and allows us to expand our Evotec Innovate strategy much more aggressively. On the next slide, slide 26, you can see one example of how we put this money to work. We recently announced our first EIB supported investment in Exscientia. Exscientia is the world's leader in developing and applying artificial intelligence approaches to design new and better therapeutic molecules in a faster and more cost-effective manner. Exscientia's approach combines the power of artificial intelligence with the discovery experience of drug hunters and medicinal chemists to accelerate the usually very costly hit to lead and lead optimization process. Exscientia and Evotec have cooperated since early 2016 to advance small molecules and biospecific small molecules in the immunooncology space and the ongoing success of this partnership was the basis of this expanded corporate relationship. This investment will enable Excscientia to significantly expand its drug discovery efforts in an automated design platform. Finally, on slide 27, I briefly want to mention two initiatives where we joined leading academic consortia in order to expand our kidney disease discovery and development platform. Kidney disease has emerged as a global epidemic. Currently no treatment options are available that have the potential to slow or stop kidney disease progression. We do not really understand the molecular mechanisms driving the disease process nor do we have currently the appropriate disease relevant models to test drug candidates for disease elements in the preclinical setting. The two academic consortia we joined are called NURTuRE and NEPLEX and both are directly addressing these problems. The NURTuRE consortium will improve our understanding of relevant disease pathomechanisms based on the molecular analysis of well-characterized patient samples. This will allow the identification and exploration of novel genetic and metabolic components which are key drivers of kidney disease. Whereas the NEPLEX consortium is focusing on the development of more disease relevant preclinical models and assay systems. NEPLEX stands for Nephron-on-a-Chip with Cellular and Extracellular Matrix Complexity. The goal of NEPLEX consortium is to develop a functional Nephron-on-a-Chip that reflects both the filtration unit as well as the resorption area of a human kidney. The functional nephrons will be based on fully characterized human cell lines and iPSC-derived human kidney cells. Professor Moin Saleem and his group from University of Bristol will contribute human kidney cell lines focusing on the resorption unit. Dr. Yan Yan Shery Huang and her lab from the University of Cambridge will develop the glomerular part of the chip. Dr. Christodoulos Xinaris and his colleagues from Mario Negri Institute will provide human iPSC lines and expertise. Evotec will contribute its state-of-the-art iPSC and kidney disease platforms. The device will allow testing of drug candidates in a truly human nephron already in place in the preclinical setting and thereby improve and accelerate drug discovery in the field of kidney diseases. Through these initiatives, we continue to put our focus on patients working from patient data to develop novel approaches and then testing these approaches in more disease relevant human preclinical models to deliver more meaningful drug candidates to patients. With this, I would like to move to my final slide, slide 28 and summarize. We have made very significant progress within Evotec Innovate on multiple fronts. New clinical initiations, the expansion of our academic BRIDGE network, very significant scientific progress in our partnered and unpartnered Cure X and Target X projects and finally a significant expansion of our iPSC-based drug discovery platform. With this, I would like to thank you for your attention and hand over to Enno.

Yes. Thank you Cord. Thank you very much and it's a great pleasure having you on the call here today, also for my side and I am happy to introduce quite exciting and positive Q3 and nine month numbers to you. As Werner already indicated in the beginning of the call, we are on track and we also can already say that we confirm our guidance for the remainder of the year. That said, let me start on the financial overall performance slide and with one brief reminder here. As you know, Aptuit was acquired effective on August 11 of this year. So for the first time, Aptuit was now fully consolidated into the group from the respective date onwards. So hence, we can not fully compare the 2016 to 2017 numbers year-over-year. Just as a reminder on this. Evotec's group revenues grew to EUR170.9 million which is an increase of 42% or EUR50 million, respectively and this was primarily driven by three major factors. The strong performance in the base business, contribution from the acquired business of Cyprotex which is about EUR17.9 million and the contribution by Aptuit for the first 1.5 months which is, as Mario mentioned already, EUR15 million. We also experienced some increased milestone payments through the course of the year. So also without the acquisitions, we would have experienced a very solid growth in the first nine months of this year. The gross margins slightly decreased to 35.1% due to a slightly different business mix, a higher contribution of the Evotec Execute business and the amortization of the Cyprotex intangibles residing from the purchase price allocation having an impact of roughly EUR1.6 million so far. R&D spendings were according to plan at EUR12.5 million compared to EUR12.8 million in the previous year. SG&A expenses, as expected, increased substantially to EUR29.3 million and were mainly impacted by several topics. So we added the SG&A expenses of nine month, first time full nine month of Cyprotex, 1.5 months of Aptuit and obviously we have the M&A related expenses experienced in this quarter which adds to this transaction. Furthermore, we have an increase in the overall SG&A headcount to mirror the growth of the organization and due to the good performance of the share price we also had some compensation expenses increase related with our LTI program. We saw an impairment charge of EUR1.2 million, which is associated to the intangible asset of our Panion commitment. The change of field and indication resulted in a delay in the drug discovery process and thus changed the underlying valuation model and therefore we had to take out these EUR1.2 million. Other operating income is basically unchanged to the other quarters. It's mainly derived from R&D tax credits, which we received in U.K. and mainly in France. They overall increased by EUR2.4 million year-to-date. That increase is mainly, as I said, coming in from the French side. The adjusted EBITDA in the first nine months of 2017 increased by 28% to EUR39.3 million. The operating income in the first nine months also increased, obviously, to EUR25.9 million. Not on the slide but as a quick reminder, cash position is strong with EUR89 million after the closing of the Aptuit transaction and also the balance sheet total moved up with the total assets acquired from Aptuit to EUR644 million at the end of Q3. Looking at the next slide, separating for a second between the segments. So the revenues from the Evotec Execute segment were at EUR165 million in the first nine months and significantly increased by 30.4% compared to the prior year. And this increase, as Mario indicated already, is primarily attributable to a strong performance of the base business and initial contributions from the acquisitions of Aptuit and Cyprotex. Also included in this amount is the EUR27.4 million intersegment revenue which we saw which is slightly uptick compared to the EUR24 million that we had last year. The increase in revenues from the Evotec Innovate segment went up to EUR33.2 million, resulting primarily from the full nine months impact of our new partnership with Celgene and Bayer which were struck in 2016 as well as milestone achievements from various collaborations. The gross margin of Evotec Execute was at 29%, while Evotec Innovate generated a gross margin of 46.2%, thanks to the recognition of increasing amount of milestones over the year. R&D expenses for the Evotec Innovate segment were at EUR15.3 million in the first nine months of 2017, including intersegment research of EUR3.2 million. High SG&A, as I mentioned already, again a, to the addition of administration from Aptuit and Cyprotex as well as the M&A-related activities taking place in the Execute segment. This is why we have this increase in particular on the Execute side. In the first nine months, the adjusted EBITDA of the Execute segment was strong at EUR41.7 million and slightly improved compared the prior year-to-year period. However the adjusted Execute EBITDA was affected, as I mentioned, by the one-time M&A cost associated with the Aptuit acquisition which is in total cost of more than EUR4 million, as Mario mentioned and basically below 2% of transaction cost compared to the acquisition price. This amount is not adjusted in the EBITDA numbers here. So this is fully covered in the SG&A and in the EBITDA. For the Evotec Innovate segment, we reported an adjusted EBITDA of minus EUR2.4 million which is quite an increase or improvement compared to EUR10.7 million which we saw last year. Looking at the Q3 numbers, the revenue went up to EUR67.5 million which is an increase by almost 50% compared to the previous quarter in the last year. The reasons I have already indicated before. Good base business, increased milestones and the contributions of Cyprotex and Aptuit. The gross margin as compared to 2016 Q3 is affected by the impact that we have experienced, high milestones, in particular, in the Innovate field in 2016. With regard to the SG&A, we have the impact, in particular, strong in this quarter as for the first time Aptuit is joining and this M&A transaction cost is merged in this quarter. Coming to the next slide and looking at the group revenues. So overall, we see a very strong and stable trend continuing during several years and quarters by now and the revenues from increased milestones is one significant part contributing to the overall positive record here of EUR21.1 million, which is a step up of roughly EUR6 million compared to the previous year. The gross margin, as I said already, slightly decreased. And one point, I would like to emphasize that we also have the Cyprotex PPA impact of roughly EUR1.6 million in here, which is reducing the margin or increasing the cost of goods, respectively. With that said, on the next slide I would, again, confirm our guidance on all three topics. So we expect to increase our revenue by more than 40% compared to the previous year. And we also intend to increase our adjusted group EBITDA by more than 50% compared to 2016. With regards to R&D, we want to keep our R&D stable at roughly EUR20 million. And with having said that, I hand over back to Werner. Thank you very much.

Thank you very much to the team. Also on this note, thank you very much to the 2,100 scientists and administrative people working within Evotec to make this company better every day. And on that note, this is also the invitation to you to follow us into 2018 where you see important dates on this calendar, where we hope that we can report to you strong quarters to come, innovation to be built and strong partnerships to be continued. On that note, we are happy to take all questions now.

[Operator Instructions]. The first question comes from Igor Kim. Your line is now open.

Hello everyone. Igor Kim from ODDO BHF. I have got a couple of questions. Now when you are almost done with the acquisition of Aptuit or with integration, could we expect further M&A deals sometime in the near future? And if yes, should it be in your traditional space in drug discovery? Or more likely in your new, so to say, area of CMC and IND, which you recently expanded with the acquisition of Aptuit? So maybe you plan to strengthen your position upstream to the value chain. And second question, I think it's for the first time that your equity ratio is around 50% or a touch below that. Do you consider it as a long-term balance sheet structure? Or you feel more comfortable with the equity ratio that you have seen before, above 60%? Thank you.

I answer to that directly on the first question. For us, it's very clear that we use all tools at this stage that are available to make better partnerships happen and we feel very strongly about the current setup of the platform that it is in excellent shape. And with the acquisition of Aptuit, we have really come to a situation that the platform for the first time is through the whole value chain able to offer integrated deals from the very beginning of academic partnerships up to basically clinical manufacturing that we can provide. So it's a very, very strong platform, which is unique in the industry. And that's why we are so optimistic also with this platform to become and grow further as the excellent leader in the industry. Every opportunity to make this platform even stronger for our shareholders, we will consider and we will look at that, yes. But it's a different perspective today than it was, for example, five years ago when we had many holes that we wanted to fulfill. Today, we feel that we have really come together as a pearl of chains or string of pearls, so to say, from technologies and capabilities on this platform that we always wanted to build. And on M&A, to finalize this statement, as you have seen, we will stay active but we will go where innovation will happen in the future. We will not go where innovation is not happening anymore or where it has happened in the past. And we don't consider this as M&A transactions, but where Cord was, for example, alluding today on what we are doing in NEPLEX, this is not an M&A transaction but it is bringing together into one value format where today no one would be able to put a platform as elegantly to work as we are doing it. And with this new form, on a very cost-efficient way, things that in two to three years will show dramatic values and that's why the platform I think today is allowing us to create sculptures which you can not buy on the market, but we are building these sculptures on the platform. And that's how we currently look at our M&A strategy where, I think the short version is, we are very happy the way we look and we will look even better in the future.

Thank you. Then I take the second question with regards to the equity ratio. Yes, indeed. The equity ratio changed which is obviously in context of the Aptuit transaction having triggered a EUR140 million bridge loan by Deutsche Bank. And what I have to say is that currently the cost of capital and the market conditions on these kinds of tools are extremely attractive in context of financing of such a transaction. And since we have a certain size and certain critical amounts we can, up to a certain extent, afford these kinds of tools to be applied. As I said, this is a bridge loan. So we would have to hand it over into a long-term solution but we have not yet decided how we structure this long-term solution. So we have, to the max, two years here bridging time which we can apply. What I can say is, in any case, if we would continue on the debt side, we would definitely choose a conservative approach here and not leverage to the max making sure that we also maintain our investment grade status that we have.

There's one further comment on that. With the biotech innovation that we are, at this stage, bringing to our partners and to Evotec Innovate, leveraging this on cost of capital that we can do that is unique in the industry at this stage because we are a profitable biotech company that can use all tools of the capital markets.

Yes. Absolutely. Thanks a lot.

Thank you. The next question is from Samir Devani, Rx Securities. Your line is open.

Thanks for taking my question. It's just on your announcement earlier this week, Nephron-on-a-Chip NEPLEX. I was wondering whether you could give us a bit more details as to when you might expect to have that chip ready for more testing? Thanks.

Thank you for the question. So I can't give any exact timelines on this. But essentially pieces and components of this already have been developed and are working and it's now basically come to the point where it's really about putting these components together and creating really a functional chip environment for this. As you may know, microfluidic devices have been developed for a long term. Now it's simply applying this technology to certain organs or tissues. And here we feel very strongly about the strength of our consortium that we joined. So I don't want to put an exact timeline on this. It's either next year or the following year, but we are very certain that we will get there.

Thank you very much.

Thank you. The next question is from Brigitte de Lima, goetzpartners. Your line is open.

Good afternoon. I have got two question. Maybe the first one might be for Werner and the second for Cord. We talked a lot about cross-selling opportunities following the acquisition of Aptuit and how having an integrated service staff is going to help you win clients. What I am particularly interested in now as you look how Evotec has been changing, if you look back, say, three to four years before you had a more integrated platform, do you see customer relationships, particularly in the Execute business becoming stickier? Are customers staying with you for longer and longer because they see that you have got more chunks of the value chain and they can do more services with you? Have you really seen the impact of that? Maybe you have got a couple of examples where you can show how customers have come back and say, well, now you guys have got the, say, the CMC, we would like to extend the contract for another year or so to continue development? And then the second is one of the EIB loan. I am just wondering how that will impact the activities in Innovate? Should we think about that loan as helping you finance some of the work you are doing? Or should we think about an acceleration in your Innovate activities because you have got someone else now contributing to the cost that you incur?

Thank you very much for the question. On the first one, I will hand over to Mario.

Okay. Yes. Thank you for the question. Absolutely. And I think Werner said in his summing up, over the last two years, we have filled in the holes in the platform. And thirdly, we have found a stickier, as you say, relationship with biotechs and pharma going up to preclinical development candidates and more integrated projects. Now we find already in the short time that we have had Aptuit and actually Aptuit, we are already demonstrating this model. Being able to translate your learnings in late lead optimization into planning your preclinical-enabling studies and then your first-in-man completely expedites your time to the clinic. It's a very attractive offering for the clients and we are already seeing now existing discovery customers talking about accessing the INDiGO platform. We are already seeing a very positive take-up on what would have been classical integrated drug discovery proposal that when you add on the ability to take them seamlessly into IND studies, the take-up, I think, is much more positive. So it's a tremendous value enhancement. And it's not just to biotech who, of course, don't have many of this. This is also to pharma because one of the key aspects of the INDiGO platform was that they have demonstrated quite clearly that they can typically do this IND enabling studies within a year and at significantly reduced costs that pharma companies and by using multiple vendors typically takes. So it's a tick in every single box and as you say, yes, many more sticky client interactions.

Let me add to that one aspect that this is not only for the market in Execute, but this is also very, very important for our whole Innovate portfolio and ongoing partnerships because what it essentially does, there is no more delay that could be experienced by waiting for capacity that is not out there and available if you have a high-value point that you want to achieve out of your partners for internal pipeline. And with this, we see the dual benefit of having this integration of the value chain not only for outside customers and by the way, our customers are convinced and are a not sticky with us. They are permanently convinced to work with us. And on the Innovate side, we also see that we basically can cut out every whitespace on every time line by basically moving things much, much faster along than it would be on any other platform. And with this, I give back to Cord on the comment on the EIB.

So thank you for the question on the EIB loan facility. For us, it's really a fantastic tool to accelerate Evotec strategy, Innovate strategy. It not only reduces our cost of capital here, but it's a, in a way, the loan has provided, it really creates a ton of flexibility for us to more aggressively invest into our Innovate equity strategy but also to essentially very flexibly invest into internal R&D efforts where the EIB essentially matches all investments into all Evotec Innovate projects that we choose to do to take forward. So really a fantastic tool to accelerate strategy here and we are very happy and thankful that the EIB selected us to put this tool to work for the very first time.

Thanks very much.

Thank you. The next question is from Martin Brunninger, goetzpartners securities. Your line is open.

Thanks for taking my questions. I have a couple of additional questions to read. One is on opportunity. You mentioned that you have cross-selling opportunities. From what you have seen already from August till now, could you perhaps quantify what you could expect for 2018? And the reason why I am asking this question is not just to just get only the number, but I think we can learn quite a lot what you can get from completing a portfolio vice versa from Aptuit customers but also from your existing customers. That will be the first question. And the second question is a more conceptional question about your BRIDGE initiative with the funding gap that you have explained on slide 24. When you look at the slide, it is quite an interesting concept and I would quite be interesting to hear what you think would happen with venture capital once you professionalize that model more? And also, how much risk would you be willing to take on the funding side? How much more risk would you take on the funding side when you take on projects from university? Thank you very much.

Thank you. Going forward into 2018, 2019, 2020 and quantifying the cross-selling opportunities is not possible at this stage. What we can already tell you that everything that we see at this stage is indicating to us double-digit growth into 2018 and we see the highest booking rate on our platform ever before. This goes to our base business. This goes to our Innovate business and that's basically a situation where we would not now be able to relate this if is it cross-selling or is it Execute business or Innovate business, which we have already produced. All we can say at this stage that we have, in reality, only one big bottleneck. This is, can we build high-quality capacity at this stage to what we see as opportunities in the market? And that's I would say is the limiting factor. And one last sentence to that, we will not compromise on quality because we are building a very long-term vision to be the leaders of external innovation that really leads to drugs and drug products that are on the market. So that's why that's our parameter to guide us into 2018, 2019, 2020. And this has basically translated into the fact that we don't accept any work where the long-term gross margin is not above 25%. That is the security for us that we basically don't go down in quality on the operations going forward. That should just to give you a few guidelines how we are operating on the first parameter. On the second, I am very thankful for your question on BRIDGE, because it is important to build a company like Evotec also into the next decades and not only for one, two, three year value creation. So it would, of course, be an illusion to expect a higher IRR return in the next two to three years out of this concept. But if you think for five to 10 years and if you today are co-owning the outputs of the top scientific places that we are partnering with, like Oxford or Toronto or other places that will come, then you see that we basically are tapping into the later stage science pool which will fill the need of the 3,300 diseases that are currently not treatable because that's what we are looking for in this BRIDGE's and on the work packages that we are building. This is, so venture capitalists are our friends and partners. Pharma companies are our friends and partners in this model. So this is not built to be competitive. This is built to basically go together into working groups and into investment groups that together come to the most efficient and cost efficient data point to validate experiments to then have a higher degree of certainty to make the next dollar investment. So what we are effectively doing, we very often need only very small work packages to translate and validate an academic experiment, which sometimes is about $250,000 to $500,000 on our industrial platform. But the next dollar that is then invested after that experiment is done on a significantly higher security than it can be done today when most of the data investment that is made is on PowerPoint information. We do this information on the basis of real industrially validated experiments. And that's the power of this platform and that's why we can, as an operating platform, together here with venture capital who doesn't have a platform to make the experiments or with pharma companies who cannot put platforms at work very, very elegantly built high cost efficient models going forward and that's why BRIDGE has to be seen as an additional tool. This is not a competitive tool. This is an additional tool that every academic center that wants to be also translating into the industry has to use in the long term. We will not be able to do all of them but we will focus on the best one.

Okay. That was quite clear, I have to say. But what I meant also was, in a way, what you are doing, you are professionalizing the output from basic research on the journey towards industry. And clearly, you minimize the risk for venture capital with your platform. So what I meant also to ask is how much value do you think you can get from that? Because clearly, you minimize the risk for venture capitals.

Just one more drug that comes out of that is justifying all the BRIDGEs that will ever be built. I think that's one conceptional answer here. And on the other hand it's, I think, very simple that you see here a new tool where we all have to be aware of the fact that currently costs are too high for the overall development of experiments and products that we are making and what you are doing here, you basically bring much, much earlier an educated situation into your cost cascade. And if you can bring this down by 30% or 50% even by having better investment decisions that's the value that you then bring and you can translate this into many models how you can calculate that. But we really think it's just learning from what we have done not so efficiently in the past and applying this into a new concept.

Okay. Great. Thanks very much.

Thank you. The next question is from Falko Friedrichs, Deutsche Bank. Your line is now open.

Hi. Thanks for taking my questions. I would have three, if I may. Firstly, you said that the EUR4 million in transaction related one-off cost booked into the SG&A expenses now in Q3. Then following on to that, are there any specific reasons why you are not adjusting for this one-off on the EBITDA level? Then secondly, on your milestone payments from Celgene in the third quarter, could you share a bit more insight into the, let's say, scientific significance behind that milestone payment? As your iPS cell screening platform now seems to work for neurodegenerative diseases, what would be the next steps that we could expect from the collaboration and when? And then my last question is on the R&D tax credits in France and the U.K. and these come up to a sizeable portion of your EBITDA on an annual basis, obviously. And could you share how sustainable you think these are going forward?

So I would suggest that Enno takes question one and three and I will give you are very short answer on question number two, because we have a very strict policy when it comes to what we can and cannot disclose when it comes to the significance or not significant of milestones. What we have disclosed is what we have discussed with our partner how we want to disclose that, that's the communication that we can do on that. I think you should see smiling faces at Celgene and smiling faces at Evotec that we were able to create an experiment that is novel in the industry and it worked. And with this, we have a platform where we are accelerating the platform and more information on that, we cannot give.

Okay. Then I will take the next two questions with regards to the EUR4 million one and the respective booking. We did not book it into the adjusted EBITDA or take it out respectively is simply because the definition that we currently have of adjusted EBITDA, which is behind that, does not cover this at this point in time. And changing this would then have switched all the comparable numbers in that regard. This is why we have kept it out there. The second question was with regard to R&D tax credits. I think here, as they are project related, we have growing basis where we can try to receive tax credits. So this should be relatively stable, at least for the countries of U.K. and France. And as we grow in the field of R&D work, we probably can even claim more in the future.

Great. Thank you.

Thank you. The next question is from Thomas Schießle, EQUI.TS. Your line is now open. Thomas Schießle: Hello. Thank you for taking my questions. Actually there are three. One for Enno, one for Werner and one for Cord, I assume. Starting with Cord, you alluded to the new LAB150 collaboration. Could you shed a little bit more light on the prospects? You stated that there are 15 and even more hospitals within this network and whether the new indications are covered by those activities? And to close it with a question on Cord concerning increasing activities in the North American hemisphere, will you have to increase capacities in North America to cover the activities? This is the question for Cord. And we may go one by one.

Thank you for your question in regards to the academic BRIDGE strategy and LAB150, in particular. May be let me go back one step. So we started our academic BRIDGE strategy essentially structuring quite a large number of partnerships with Harvard University, Yale, Brigham and Women's Hospital, Boston and MIT and so on and so forth. And that was sort of one-off individual projects that we partnered on and it worked extremely well for us. More recently, with the structuring of a more strategic relationship with Oxford University and LAB282, we basically created a new paradigm where we align with venture capital, in the case of Oxford University that is Oxford Sciences Innovation, a huge venture fund that actually went in on this together with us in Oxford University and they cover a large portion of all associated costs here. And this paradigm is a paradigm that I would say that really hits a chord in the industry and venture capital community and here we chose to in particular, go to Toronto because Toronto is really a hub of innovation that in contrast to the northeast coast in the U.S. is essentially lots of untapped potential. And here we expect to continue to fill our current disease areas, but very open also to new areas. Thomas Schießle: So it's the same procedure as with LAB282. So you joined forces with a private equity?

It's venture capital of MaRS Innovation. Thomas Schießle: Venture capital or whatever

Yes, exactly. That's the same procedure, same model as LAB282 that we bought. Thomas Schießle: Okay. Fine. Thank you.

You are welcome. Thomas Schießle: Another question is on Enno concerning the financials. Could you give us the PPA for Aptuit on the annual basis? Must be a quite impressive number, I guess. And the other question is on the segment reporting. So the intersegment elimination is increasing quite rapidly. Will this go on in the future? I guess, yes. And what will be the impact on the set of margins? Thank you.

Okay. So with regards to the PPA, I can simply say that we don't have a PPA in place yet. We will do that in context of the year-end work, so in Q4, early Q1 2018. So that number still has to be developed and currently we have the whole transaction or the Aptuit in the balance sheet of the goodwill with an amount of EUR218 million right now. That's the first question. The second one for the segment reporting. Obviously, there's a slight increase. I would not really describe it as very dramatic or too significant, but there's a slight increase obviously through demand from R&D here to get different capacities. But this is in-house at arm's length calculation when we do that. So that's at a fair market condition with a cost-plus model that we have behind embedded. So even if we would increase or reduce that, the margin here is not impacted by this. Thomas Schießle: Okay. Thank you. And last question for Werner. Werner, concerning your M&A strategy, it's doing fine. Actually, it's doing excellent, to be open. When will be the time to exit some of those collaborations? And to put it the other way around, to which extent do you want to invite partners to share with you the growing projects? Will we always, in the majority? Are you always steering the call?

If I am understanding you correctly, I think on our acquisition strategy, we are very clear. We don't acquire to resale. We acquire to integrate and build and bring value to our partners. So that's the only denominator that is there. We sometimes have to get a few things right after an acquisition like, for example, we have done it in the Cyprotex case by closing down one site, which we could provide more efficiently through other parts of our footprint. So that's how we do that. And I think your second part of the question relates to our strategy when we sometimes co-own companies. Here, we basically have to go always with the data that is generated in these companies and it's a separate process. We want to co-own projects where we are first-in-class going for highly innovative strategies where it's not only potential to see that within Evotec as a core process, but where it's sometimes better placed outside because the platforms can be used broader or can be used also into different segments where we are not going strategically. Having said that, if we go together with partners, we always do this for the long-term value creation of the companies that we step into. And at this stage, we make the experience that we can, given our strong equity situation where we want to co-invest and where we want to keep our equity positions in the future, we will do that and where we don't want to do that, we will not do that. So that is a case-by-case decision, where we basically will do the best for our long-term shareholders. Thomas Schießle: Okay. Thank you.

Thank you. The next question is from William Ellington, MedNous. Your line is now open.

Good afternoon. My question relates to what you are doing with your now wonderfully integrated innovation platform? I still don't understand why it wouldn't be more efficient for you to do innovation for yourself? And in particular, could you tell me how many proprietary projects you have underway and in what disease areas are they?

Thank you for the question. I think we are not giving away too much information, if at this stage we tell you that we are spending around EUR20 million to EUR25 million in variable costs on the large portfolio of wholly-owned projects within Evotec. These are typically first-in-class, very of them only in-class innovation projects where we will at whatever biological time point always make the decision, is this now better off if we partner that or is it better off if we continue such a project on our own pipeline? And the wonderful new situation, given the acquisition of Aptuit, is that we can progress these projects, all of these projects, seamlessly on our own platform which makes them highly cost-efficient to translate them even further. So I think the short answer is, data tells us how fast we bring projects forward and the high value that we can generate with partnerships is something that we look at on an individual basis and by partner-by-partner situation. Thank you.

And anything on disease areas?

We have our core disease areas defined and at this stage, there is no need to expand that. I think the only attention and idea at this stage is to make it even deeper where we are in our disease areas. Otherwise we feel that we have elegant portfolio set up here.

Good. Thank you.

Thank you. There is another question from Mr. Mick Cooper, Trinity Delta. Your line is now open.

Hi. Good afternoon everyone. A couple of questions from me. Firstly, with the NEPLEX alliance, who will own the IP at the end of that? And secondly, could you give us a feel for where the EUR75 million from the EIB is going to be spread? How much of it will be withdrawn, say, for example, the iPS cells? How much will be used to invest in portfolio companies? Just trying to get a feel for that.

So on the NEPLEX consortium and project, essentially this will be a co-owned IP situation, but we are able to commercialize on this.

And the second question with regards to the EIB. I think here if you just mirror the spending along the disease areas, how we have it right now, that would give you the corridor of the disease areas where we are looking at and then the second note, of course, we go here case-by-case, where because it's essentially helping the whole Innovate portfolio to be progressed, that gives you the direction of where the money is going. And on a case-by-case, where we would do something, which is not directly on our platform but an equity investment, which initially is outside of our platform like Exscientia, for example, that of course, then goes into, for example, the direction of artificial intelligence in chemistry or in drug discovery so that's then outside of that corridor. Do we have a predefined or do we have a closet ready? Yes. It would have put us how we have to spend that money, no. This really is there to go for the best innovation that is out there to leverage this opportunity on a case-by-case decision, which we do on a scientific diligence basis.

Thanks very much.

Pleasure.

Thank you. There are no more questions. I will hand back to the speakers.

Thank you so much. Also thank you so much for your excellent questions and for following us. What you see is that we are, at this stage, able to present you a company where already many ticks have been made on the first quarter, second quarter and on the third quarter. And if you would look at the ticks that were given us at the beginning of the year, one could have the impression that we are already done. But we promise you that this is not the end of the year for us and you will hear significant yields to come also still in this year. Thank you so much.

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