Ladies and gentlemen, welcome to Evotec AG Annual Report 2019 Conference Call. [Operator Instructions]. May I now hand you over to Dr. Werner Lanthaler, CEO, who will lead you through this conference. Let's -- Sir, please go ahead.

Thank you so much. Welcome to Evotec. This is Werner speaking. We have uploaded a presentation that we would invite you to take on and follow us through this conference call. If you go through this presentation, you will see that we took a very bold word and put it on the front page called excellence. Excellence is a result of long-term learning processes and consequence execution. As drug discovery and development partnering company, we are striving for excellence in everything that we repeatedly do. So excellence for us is not a single act, but it's a habit. That's what we are sharing and multiplying every day and that's what we try to bring forward to our partners every day. With this, let me introduce my team who are building a culture of excellence within here. I'm here with my CSO, Cord Dohrmann; our COO, Craig Johnstone; and our CFO, Enno Spillner. The 4 of us will guide you through this presentation, which you see on Page 2 with the SE mark on the top line. This SE marks that we are converge -- that we are in the process of converting our legal format from an AG into a European SE legal format of the company, which we hope to complete in the next days. If you go to Page 3 of this presentation, you see the agenda that we want to go through together with you by starting and showing you some of the highlights that you see on Page 4 that has been achieved this year. We think that we have done many steps in the right direction. And it's important that what counts for us is to do many small steps in the same direction because that's the way to get to a goal that we…

Yes. Thank you, Werner, and a warm welcome also from my side to the audience today. It's a great pleasure introducing you to our 2018 financials and providing some details on the respective numbers. 2018 once again was, financially speaking, a very successful year with new financial heights across various lines in our P&L, balance sheet and also operating cash flow. On Slide 9, a few comments on our guidance. In 2018, we adjusted our positive guidance twice to the better, confirming the very positive business performance during the course of that respective year. One's and all this due to the successful acquisition of ID Lyon and the respective change in our expected R&D expenses, which we are supposed to increase due to this strategic move, which we took in the Innovate segment. The second change took place in December 2018 after it became transparent and obvious that we most likely would outperform our EBITDA target for 2018 due to the strong business performance leading to increased margin contribution to a milestone on these achievements in the fourth quarter as well as increased other operating income due to, for example, research and development tax credits. So in total, we clearly overachieved our revenue and our adjusted EBITDA targets by showing a growth rate of 42% or even 67%, respectively. Some of you may have noticed that revenue and EBITDA numbers for 2017 have been adjusted quite a bit on this slide on Page 9 and compared to the original financials reported 1 year ago, which is due to the restated numbers in compliance with IFRS 15, which is mandatory for 2018 onwards for your better comparison. So let's take a look a little bit more into the details of 2018 numbers starting on Slide 10. Revenues increased significantly due to…

Thank you, Enno, and good afternoon from me to everyone on the call. It's a great pleasure for joining this team in such an exciting time. I'd like to bring us to Page 15. And this simply -- this is a diagram that simply represents a remainder of our related business model to which we offer access to our scientific excellence and create value for our partners and ourselves, whether it's through an FT or a fee-for-service model or by means of advancing technologies and assets internally for partnering later. It's our intention to build up a broad valuable portfolio of co-owned projects, which have built-in quality for survivability and success through the development process. This is what we do. And on Page 16, I'd like to give you a flavor of how we do it. The product of scientific excellence and operational excellence or excellence squared is laid out here. Drug discovery and development is still a highly human endeavor. It requires creativity, inventor step, inspiration, innovation. But it also acquires expertise and experience and drawing on a long and strong track record to solve some of the more difficult problems in drug discovery and development. These difficult problems typically occur at the interdisciplinary interface and require close interactions between scientists of all realm and disciplines to create the conditions for problem-solving and inventive step creation. High science and high technology, of course, have a critical role to play. And machine learning, deep learning and artificial intelligence all contribute heavily here. And then in addition, the humanization of our case cascades are all increasingly important factors when working really at the cutting edge of drug discovery and technology development. And of course, all of those great characteristics have to sit on top of a very well-oiled high-performing system of…

Thank you, Craig, and good afternoon to everybody on the call. As always, it is my great pleasure to summarize the progress we have made within Evotec Innovate in 2018. As Enno already mentioned, Evotec Innovate revenues very significantly increased to €69 million in 2018. This represents an accelerated growth of revenues by close to 6%. And thus, another fantastic year for Evotec Innovate. The growth on revenues has associated that significantly improved profitability has been achieved despite €35 million of R&D investments, the highest level of R&D investment since the inception of Innovate. Even more importantly though, through Innovate, we continue to deliver pharma partnerships, which not only generate R&D payments, but most importantly, enable Evotec to co-own drug opportunities whose development is fully financed by our partners. Our current pipeline of co-owned drug product opportunities is shown on Page 23. The pipeline consists of well over 100 co-owned projects, all of which are associated with substantial financial upside for Evotec. This upside consists of potential milestone payments that are usually in the range of €100 million to €300 million and tiered loyalty payments that reach into double-digit percentages of every potential product sale. The key measure of our success here is not only the steady expansion of this pipeline, but also the progression of individual project along the value chain. In both aspects, 2018 was a tremendously successful year as can be seen with the many key highlights shown on the pipeline chart. Unfortunately, we won't be able to go through all of the highlights, but we would like to point out the progress we have made in clinical stage drug opportunities. Most importantly, our partner, Bayer, initiated 2 Phase II studies in chronic cough based on compounds originally identified with our endometriosis collaboration. Furthermore, our partner, Second…

Thank you so much. Bringing all of this together and summarizing this should bring it to the outlook for 2019 going forward. And I think it is important to stress, as you see on Page 35, that it's a strong year ahead and that the state of the company is strong. But it's just how Cord already framed it, it's the beginning of a longer path that we are on, but we are happy to, at this stage, announce that we expect double-digit growth on our revenues with approximately 10% -- we expect approximately 10% EBITDA growth. We have to take into account the onetime effect that you have seen in 2018 with the number to compare to the €92 million. And very importantly, we are increasing our focus in partnered investments to about €30 million to €40 million in order to create long-term upside value for the company and for our shareholders. With this, we want to round up this -- the results of our 2018 and want to thank you for following Evotec, for supporting us. And we want to thank you for continuing the support that you bring to this company. Thank you so much. With this, I hand back to you, operator, and we are hoping for your questions.

[Operator Instructions]. Our first question comes from Falko Friedrichs from Deutsche Bank.

Three, please. Firstly, can you give us an idea of the time line for potential partnering of these other indications on your iPSC platform? Secondly, can you share how the integration of the infectious disease units from Sanofi is progressing? And whether the pipeline projects there are also progressing in line with your expectations? And then thirdly, on M&A, is this still a focus for you in 2019? And can you share which areas would be of most interest to you when thinking about potential additions?

Thank you so much, Falko. I will take the third question on M&A, question number one on future partnering; product Innovate, I'll give back to Cord and also the integration of infectious disease, I'll give back to Cord. When it comes to M&A, you should always also look here at the long-term view of this company that in the last 10 years, we've done 9 inorganic steps in our growth. Continuing this seems logical, especially in the light of the ability to better understand what it takes to make long-term successful integrations. And here, as we all know, not all M&A transactions on the planet always have a positive outcome, but I think our learning curve in what it takes to make successful integrations is a very good one. And that's why I think we are a company that is a good home for M&A transactions to be done. Having said this, the focus areas are clearly here to get stronger in what we already do. That's the first thing. And what we do is integrated drug discovery projects. Integrated drug discovery projects translating into development, how we have shown this for the INDiGO and development aspect, adding to that to make the value chain more complete. But I think a very important step, broadening this to having more modalities on the platform is definitely 1 priority that we set for 2019, 2020. This goes into expanding, for example, our cell therapy approaches discovery into expanding our biology/antibody approaches. This goes into expanding our approaches that we do in all modalities. But that's 1 aspect. The other aspect is something where I think taking on more co-owned projects in the form of as we have done this is something when a project fits to our areas of strengths. There's almost no limit of how we could build this on our platform. And I think that's why we are staying very picky, staying only for high-quality assets here, but we never exclude moves that we can do here. Question one and two, back to you, Cord.

Yes. Thank you, Werner. So in regards to the time lines on potential partnerships for iPSC-based alliances, this is a tough question to answer. Essentially, at this point in time, we are still very much focused on delivering on our -- the existing alliances. And we would argue that we do this quite successfully, as you can see, through the various milestones that have been achieved in those partnerships. Beyond that, we have actually expanded these partnerships for both the diabetes as well as the degenerative partnerships with Celgene a couple of times because they have essentially added to existing partnerships. And that, of course, takes -- that is essentially an expansion. We are or we have prepared the groundwork, I would say, for multiple additional partnerships here. And we have -- we do have a number of discussions with these. But when exactly they will come to fruition, it's hard to predict. On the integration of our infectious disease unit in Lyon, we have made great strides forward here. And I would say, in many areas, fully on track on bringing really new platforms through the field of infectious diseases. And without going into too much detail, I think you will see that especially when we are going to talk about in the future about our HPV portfolio, these are going to be new modalities. These are going to be new approaches to old problems. And we, hopefully, will come to highly innovative solutions to these old problems.

Our next question comes from Jonathan Hagan [ph] from RX Securities.

First of all, could you give us an idea of what the R&D tax credit level going in your operating -- other operating income line in 2019 might be? Second question, I was wondering if you could give us an idea of the INDiGO -- the rollout of INDiGO is going in line with your expectations. Could you possibly disclose what proportion of the Aptuit revenues you've got from INDiGO in 2018 and what the long-term target is? And then finally, just some -- you've spent a lot more in CapEx this year. Just want some guidance going into 2019 if possible.

Pleasure. R&D tax credits will go to Enno, and INDiGO integration will go to Craig, and reason for CapEx expansion is directly here with me because that's just a reflection of our footprint expansion. It's a reflection of our total commitment to high-end technologies. And therefore, you should expect us to continue our CapEx investments. You should expect us to continue our CapEx investments however necessary to deliver excellence, but the level that you should plan for is at the same level in the past of what you have seen this year. R&D tax credits to Enno.

Yes. Pleasure. So for 2018, we have seen more than €24 million in R&D tax credits in total across both segments, please bear in mind and I referenced during the call, due to the one-off effects of roughly €3.5 million that came from 2016 and '17. And for 2019, you probably could expect a number that is kind of similar to what we had in 2018 in total.

INDiGO?

Yes. Thanks for the question, Jonathan. INDiGOs, as you'll appreciate, are really critical part of the transition between drug discovery and development, very attractive to be able to have that picked up and handed over, especially to biotech companies. And those biotech companies are exactly the ones who really appreciate the intellect and the capabilities we bring to that part. It's gone very well. We have arranged 15 parallel INDiGOs at any one time on the platform. And I would say that's fully in line with our expectations at the beginning. And the impact of how much that contributed and also the impact on the customer mix is evidenced in the Annual Report there, yet the proportion of biotech companies and our business mix has increased compared to previous years.

Our next question comes from Brigitte de Lima from goetzpartners.

Can anyone hear me?

Yes.

I've got three questions, if I may. So the first will be sort of going back to what you just talked about, the biotech. 2018 was really an exceptional year when it comes to bench capital funding and also the funds raised despite some of the leading funds in the field. And you -- it seems to me that you must have benefited based on what you just said. But can you just confirm if you've seen that trickling into Evotec. And also, if that trend seems to be continuing into 2019, would you see very strong demand from biotech, which has raised -- been raising a lot of cash in the last year? The second question would be on your machine learning tools and we've talked a lot about that back then. The feedback seems to be that it's still early days. You were very discreet, and there's a lot of expectations. Some people are more positive than others. And you're still working, I guess, from the first program that is meant to sort of hit clinical development, I guess, in the next year or so. If you look longer term and say once you've got the first couple of molecules out of the way, what are you really seeing expectations in terms of the gains you might expect to see with regard to three parameters? I.e., duration of the discovery process, that sort of percentage cost savings you may see per molecule that makes it successfully through discovery? And then thirdly, increase in the likely chance of success because I think it's this -- would be why you're doing machine learning and that's a tie because, I guess, in improvements people are looking for by using these tools. And then the last one, I guess, an easy one. Just going back to M&A. Although they're pretty big acquisitions, I guess, as everyone your competitive [indiscernible] we've talked a lot about. I always felt that was probably one of the largest remaining private companies in Europe and in this field -- in early-stage field. And I'm just wondering if this is -- when you look at perhaps was it -- whether it's going to get fit with Evotec or was it, I guess, too much focus in animal work and not really on your radar at that time they launched the sale?

The third question, I can answer immediately. Every acquisition that we wanted to make, we made. Others we don't make. On your first question, biotech funding is very clear megatrend, which we are benefiting from. It's also something where we are increasingly seeing not only that the funding trend is continuing, but what is more important than that is that the business models that risk capital is putting behind science is changing towards increasingly virtual models. And that's where the efficiency that our platforms provide to create data points really kicks in. And that's where you see I think again the value chain changing intermodal where positive data points are supported with a lot of capital, which is available very fast and negative data points should be shut down. Providing this capital elasticity format for data points, that's exactly what Evotec does. And that's why it's so appealing for risk capital to put it behind these models. And that's why biotechs who work that way are the companies that are highly attractive also for then pharma partnerships or pharma acquisitions because they come with data points but not with fixed costs. And that's what you have seen in the recent 12 to 18 months that many of the biotech companies, who worked with Evotec has been very nicely built into the pipelines and acquisition portfolios of large pharma companies. And there, I think, is feeding also the success that these venture capitalists then have. And that, ultimately, is the argument for them to raise the next round. So to make a long answer short, we always see a stop and go a bit on the public capital markets. But I think for the private capital markets, especially out of the U.S., we see this -- such a clear go ahead for more than intra-base funding than ever before into 2019, 2020, 2021, and we will benefit from that. On the 3 parameters of AI, that's the core numbers that Craig is asked every time. So maybe this time, a consequent answer [indiscernible].

Hi, Brigitte. The questions you asked are quite literally billion dollar questions, aren't they? The -- as you said, the approach we are taking is to be targeted and quick focused on the areas that we invest in because there are many areas that one could think of applying AI and machine learning right across the value stream. And then the problem becomes one of choice about we have to invest. And so we have been very pragmatic, very targeted and placing our AI investments in areas where we really feel there's a major inflection gain. In terms of the answers to your questions, I would say that even in the near term, and by that, I mean in the next 2 to 3 years, I think what's realistic and reasonable to expect is that the duration -- you asked about duration, you asked about cost and you asked about probability of success. I would say, it's quite reasonable to hope and expect that the duration of drug discovery projects from a standing start to IND submission could be consistently delivered at less than three years if we apply all that we have, even in front of us today, in a tight well executed and most advanced method. And that in itself would probably provide cost savings or substantial proportions, 30%, 40% per candidate would be realistic. But as you say, it really did -- the highest opportunity for gain is actually in adjustments of probability of success because as we all know, the major cost of -- the major attrition weighted cost of portfolio execution is actually in failure rather than the successful projects. And therefore, the inflection that we can bring to bear is really are in probability of success. And this is why Cord and I are both very much of the view that the integration of the translational par with machine learning on the interpretation of the data is actually where most gains in terms of prediction of clinical outcomes and probability of success, both for efficacy and for safety. Those are the big value drivers.

Our next question comes from Victoria English from MedNous.

Werner, I have three questions. The first concerns your opening remark about the SE designation. Can you first tell us if there's any operational impact that will have on Evotec? The second question concerns your comment about your partnership with Celgene, which you described as a targeted protein degradation project. Are we talking about misfolding of proteins? That's a technical question. And the third question is a bit more open-ended, and that concerns your comments about molecular phenotyping, which sounds very interesting. Where would you see this application in your company first arise? Is it in the drug discovery segment? Or is it in the conduct of your clinical trials or -- in terms of choosing patients? Where is this going to have its first impact?

Thank you so much, Victoria. Good to hear your voice yesterday in Vienna, today in Hamburg. Question two and three, Cord will take. Question one is very simply answered. There is no operational impact that we expect from the SE conversion. It's truly a simple reflection of our footprint that we want to really go to more European operation here and also European jurisdiction here. We've got operations in France, in Italy, in Germany and in the U.K. SE is really what should be the leading form that we have here. Nevertheless, of course, we have big operations in the U.S. as well, and we continue to grow in all these sites. But SE now seems the most appropriate format for us. Question two and three, I'll hand over to Cord.

Thank you for your question. So the Celgene collaboration in -- is really a collaboration that is very systematically explored. There are opportunities for targeted protein degradation, which means really the specific degradation of individual target molecules that are of therapeutic value. And this is a more recent approach that has emerged in academia and the pharmaceutical industry that it is actually possible to direct certain proteins for -- or target and for degradation for very specific degradation. And thereby, achieve potentially enhanced effects or target proteins that are not addressable or retractable via small molecules or other means. So this is a very exciting field for us. This falls under the bigger heading of protein homeostasis to really recognize and correct potentially disease element situations where proteins are either -- or mutant proteins are either expressed or wrongly expressed or are misfolded, all of that could fall into that absolutely. When it comes to molecular phenotyping and when it will have its biggest impact, that's very hard for us to say. We are using -- well, implementing molecular phenotyping in various settings. They're using it for the redefinition of disease. As I mentioned, in the context of chronic kidney disease, to really define kidney disease, chronic kidney disease situations. Particular in a more specific fashion, we use it for screening campaigns to actually get more out of our screening campaigns in terms of formation, what individual compounds profiles look like in terms of potential efficacy and safety. And we also are exploring opportunities here to then use enough phenotypes to devise biomarkers for clinical development. And the immediate impact is probably most strongly felt to us in drug discovery and screening space, but going forward, this could be -- the other areas could be just as well the cutting edge of this.

[Operator Instructions]. Our next question comes from Mick Cooper from Trinity Delta.

I have a couple of questions. With -- when you're looking at making investments, can you give a bit indication of what your -- the targeted ROI that you're hoping to achieve on your investments? And I appreciate, it's very early. But can you give us indication of what you're tracking towards achieving that? And secondly, you've got increasing number of iPSC protocols now, either done or in development. If you can't find a partner for the -- to use those iPSC cells, might you use them to develop drugs yourselves and how far might you take those drugs?

Thank you so much. The return on investment for our "Evotec venture investments" has to be 100% aligned what the risk/reward profile of such an investment represents. And there are different risks of what profiles. But in our industry, it has pre-venture returns like investments that we are doing here that's -- that's what we're going to answer where everything has to go way beyond 3x expectation. The second thing that you should see here is, we never wanted to be a financial investor because bringing finances to bear is "almost a commodity." What Evotec does is we bring platforms to work. What essential progress really means is that you can make projects better by linking them up with our platforms. And that's the key that ultimately makes these projects better and allows them to continue on these platforms into INDiGO projects and into early development projects. That's also I think a key feature of the investments that we do to allow these other companies within this environment. And when it comes to projects that are not partnered or not partnerable, I think here, you don't know Cord well enough, that there is a very clear stop-loss logic in our company, that we would never go forward by default because we don't find a partner. And then all of a sudden, by accident or end up developing products. So I think that's very important that we look at it the other way around. As we have a platform on this platform, we can bring products forward into the clinic. And therefore, there is a seamless path that these projects can be supported on, but this path is not supported by default. This part -- this path is supported by enthusiasm that we have for this projects. And if these projects on their way bring a term sheet, every term sheet is evaluated if it's better for us to partner or to wait before partnering. As Cord has mentioned, at this stage, thanks, God, there is no shortage on partnering interest, especially when it comes to our iPS platform.

[Operator Instructions]. Our next question comes from Marish Johan from Instant Research [ph].

It's Marish Johan [ph] from [indiscernible]. Firstly, on R&D this year, we're expecting -- if you strip out the infectious disease payments, the underlying R&D was -- I think is around 50% growth. Can you help us understand what that's being spent on? And are there any -- how do we kind of value the expected returns from this kind of comment to your growth. And assuming that growth will continue, so are there things moving into late stages? Are the new assets going in there? And are there milestones for those issues toward this, that would be helpful to have a feel for that. Secondly, on kind of bigger-picture question. The business is getting increasingly complex now with 100 co-owned products, [indiscernible]. For BRIDGE investments, I don't see your whole end technology platform like iPSC, which themselves are in a -- inherent value. What do you feel the market is missing in terms of inappropriate valuing Evotec? And your thoughts on that will be helpful. And then thirdly, do you feel the lack of material manufacturing capability, particularly on the biologic side is potentially limiting the ability to sign new customers either in Innovate or Execute? Obviously, there is a move in the market to be fully integrated. It'd be helpful to understand your thoughts there.

So question number one, Cord will take over on R&D growth dynamic and what's behind there. Question number two on complexity, I think the easy answer here is that it's not complex at all. Evotec is laser-sharp focused on drug discovery and development where the platform that we bring to work is always the same. The only thing that we do is, we sometimes change the business model behind the platform. But the processes behind it are always the same. And that's why for us, it is not a lot of complexity to run that platform. It's not a lot of complexity to even grow this platform because it's a very clearly defined scalable process that is the underlying platform. I understand that from the types of arrangements that we bring to the public, it might appear complex. But that's -- complexity had to be translated into tailor-made because we respect the best business model for our partner and bring the best business model of our partner along the platform. And this can be a risk-shared alliance, this can be a service alliance, this can be BRIDGE alliance, this can be whatsoever, it's tailor-made. And -- but there's no complexity that is not something that is completely under control when it comes to the platform. And on the multi-modality of discovery projects that has to be put to work today, I think you make an excellent point because none of our partners today says, please discover an antibody for us or please discover a small molecule for us or please make us accretive sector or please make a cell therapy. Everyone wants to have the right modality applied for a disease area where people are focused. So being here in the early-stage drug discovery arena in multi-modality oriented, that's what Evotec is, gives us a very, very good starting point and allows us many good discussions to have with our partners, which if they would go to single-modality companies, they could do. And expanding on this multi-modality, especially also into larger molecules and other modalities, is of course, core of our strategy into the next years to come. Back to Cord.

To answer your question on our increased R&D spend. The increased R&D spend goes, in particular, in the platforms that I mentioned. So here, we continue to invest in molecular phenotyping. Here, increased investments into phenotyping of patient populations. We continue to invest in iPSC technologies and platforms that they are -- continue to expand here. We continue to invest in our PanOmics efforts, which means the high-throughput application of Omics technologies through the lab discovery process right from the start since transcriptomics protium is for screening all the way to -- head to lead and lead up programs. And on the basis of these platforms, we have projects, individual drug discovery projects that we run in order to, first of all, demonstrate that these platforms are highly productive but on the other hand, to create assets that are -- can be positioned for more advanced partnerships. The expected return for these investments is relatively simple. What we do expect is our deals where we true up on payments, recoup our investments. And through the upside in terms of research payments, milestones and royalties, we'll get a multiple on our investments back in the future as these collaborations progress.

Are there any other further questions out there? Otherwise I would invite you to...

We have...

Sorry?

Yes, please go ahead.

More questions are more than welcome.

So we have no other questions. Dear speakers, back to you for the conclusion.

Thank you so much. If there are questions arising, please don't hesitate to send an email. You'll find my email on Page 43 on this presentation or send an email to Gabby Hansen, to Katja Werner, we are happy to bring this forward to you. And with this, let me thank you for following Evotec, and I hope to hear you soon, latest at our Q1 report, which will come in May. Thank you so much.

Thank you. Ladies and gentlemen, this concludes our conference call. Thank you all for participating. You may now disconnect.

Perfect. Thank you so much.