EVERTEC, Inc. 20-F 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2009
For the transition period from to
Date of event requiring this shell company report
Commission File Number: 001-34041
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or organization)
+49 (40) 56-0810
(Address of principal executive offices)
Klaus Maleck, Tel: +49 (40) 5608-1257, Fax: +49 (40) 5608-1333
Chief Financial Officer, Schnackenburgallee 114, 22525 Hamburg, Germany
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
The number of outstanding ordinary shares as of December 31, 2009 was 108,838,715.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Unless the context otherwise requires, references herein to we, us, our, the Company, Evotec AG or Evotec are to Evotec Aktiengesellschaft and its consolidated subsidiaries.
This Annual Report on Form 20-F may contain trade names or trademarks of companies other than those belonging to Evotec.
Evotec publishes its financial statements in Euro. In this Annual Report on Form 20-F, references to Dollars or $ are to U.S. Dollars, and references to EUR or the Euro are to the European Monetary Union Euro. Except as otherwise stated herein, all monetary amounts in this Annual Report on Form 20-F have been presented in Euro.
The exchange rate used for the Euro was the noon buying rate of the Euro in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Board of New York. This rate at May 28, 2010, was $1.2369 per EUR 1.
For information regarding the effects of currency fluctuations on our results, see Item 5. Operating and Financial Review and Prospects.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our future operating results may be affected by various risk factors, many of which are beyond our control. Certain of the statements included in this Annual Report on Form 20-F and the documents incorporated herein by reference may be forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the Securities Act), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), including statements regarding:
Forward-looking statements also include, but are not limited to, expectations of our future revenues, future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of capital resources and intention to seek revenue from product sales, and upfront fees, milestone payments and royalties resulting from the licensing of our intellectual property. Further, there can be no assurance that the necessary regulatory approvals will be obtained and that we will be able to develop commercially viable products or that any of our programs will be partnered with pharmaceutical companies or other partners. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expects, intends, seeks, plans, anticipates, believes, estimates, predicts, projects, potential, target, continue or the variations on these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, based on information available at the time the statements are made, we cannot guarantee future results, levels of activity, performance or achievements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 20-F. We do not intend to update any of the forward-looking statements after the date of this Annual Report on Form 20-F or to conform these statements to the new information, changes in assumptions or actual results.
We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors. Factors which could cause such results to differ materially from those described in the forward-looking statements include those set forth under the heading Risk Factors in Item 3. Key Information below. As a result, our future development efforts involve a high degree of risk. When considering forward-looking statements, you should keep in mind that the risk factors could cause our actual results to differ significantly from those contained in any forward-looking statement.
Item 3. Key Information
Selected Financial Data
The selected consolidated financial data below are derived from our Consolidated Financial Statements, prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board.
In 2007, we divested certain businesses that were not critical to our strategy of focusing on higher value discovery projects. Effective January 1, 2007, we sold our 89% interest in Evotec Technologies GmbH to PerkinElmer Cellular Technologies Germany GmbH, or PerkinElmer, for 23.9 million in cash. On November 30, 2007, we completed the sale of our Chemical Development Business for 42.5 million. In the table below, the term continuing operations refers to our Consolidated Income Statement for the periods indicated excluding the results of discontinued operations.
On May 2, 2008, we completed the acquisition of Renovis, Inc., or Renovis. The operating results of Renovis for 2009 and from the period May 2, 2008 through December 31, 2008 are included in the selected income statement data below for the years ended December 31, 2009 and 2008 and the assets and liabilities of Renovis at December 31, 2009 and 2008 are included in the selected Statement of Financial Position data below as of December 31, 2009 and 2008.
On August 31, 2009, we completed the acquisition of 70% of the shares in Research Support International Private Limited, Thane, India (RSIPL) including its 51% share in Evotec-RSIL Limited, India (Evotec-RSIL). The operating results of RSIPL and Evotec-RSIL from the period August 31, 2009 through December 31, 2009 are included in the selected income statement data below for the year ended December 31, 2009, and the assets and liabilities of RSIPL and Evotec-RSIL at December 31, 2009 are included in the selected Statement of Financial Position data below as of December 31, 2009.
Due to the above listed transactions, the financial data in the tables below for the years 2009 through 2005 are not fully comparable.
The table below should be read in conjunction with the Consolidated Financial Statements, Item 5. Operating and Financial Review and Prospects and other financial information included elsewhere in this Annual Report on Form 20-F.
Selected income statement data
Selected statement of financial position data
Exchange Rate Information
The table below shows the average noon buying rates for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for U.S. Dollar per Euro for our five most recent fiscal years. The average is computed using the noon buying rate on the last business day of each month during the period indicated.
The following table shows the noon buying rates for Euros in U.S. Dollars for the last six months (through most recent practicable month).
On May 28, 2010, the noon buying rate was U.S. $1.2369 per 1.00.
The above Exchange Rate Information is provided for convenience purposes only. The translation of foreign operations and foreign currency denominated transactions at Evotec AG is outlined in Note (2) to the Consolidated Financial Statements included in this report.
You should carefully consider the following information about these risks, together with the other information included in this Annual Report on Form 20-F. Please also see the discussion regarding forward looking statements at page 1.
Risks Related to Our Company
We engage in drug discovery alliances with our customers and partners that expose us to financial and legal risks.
We are focused on engaging in drug discovery alliances with our customers and partners, and we intend to employ an increasing amount of our resources on the establishment of these results-based deals, with the goal to keep a higher share of value creation. In return, there are scientific and technical delivery risks in the shorter term which can expose our financial performance and in particular the collaborations business margins to the possible failure or delay of certain milestone payments. We have established internal detailed project management and reporting. Overall, this value strategy has been validated to date with only a few customers, and the experiences might not be transferable to other customers and contracts. In addition, the market environment is marked by pricing pressures originating from funding restrictions of some biotechnology customers and from evolving and strengthening competition in individual drug discovery disciplines in low cost countries. Therefore, firm cost management, continuous enhancement of capabilities and technologies, careful market positioning and sales from high-value results-based contracts are mandatory for us.
Even when exhibiting a steady revenue stream, fluctuating capacity utilisation and resource allocation between different parts of the business can significantly impair profitability.
Some of our service contracts contain scientific or technical delivery risks, which can be only partly mitigated with high quality project work.
We depend on the efforts of our strategic collaborative partners, particularly Boehringer Ingelheim, Roche, Ono Pharmaceutical, Novartis, Vifor, Biogen Idec, and CHDI, to generate steady revenues for our business.
We are party to contract research and proprietary collaboration projects with strategic partners that include, among others, Boehringer Ingelheim, Roche, Ono Pharmaceutical, Novartis, Vifor, Biogen Idec, and CHDI. These partnerships and collaborations involve the joint discovery and development of product candidates targeting central nervous system, or CNS-related diseases and oncology as well as partnerships granting our collaborators access to our integrated discovery offerings. In exchange for access to our integrated discovery offerings, we receive contractual service fees and ongoing research payments and, in certain circumstances, milestone and royalty payments related to research milestones achieved. The agreements provide for indefinite or medium term joint research periods which are extendable by mutual consent. Our potential rights to receive milestone and royalty payments from our respective partner may survive the joint research terms. The dates of these potential payments depend on the timing of achievement of pre-agreed research and commercialization milestones. We will only be entitled to these potential payments until the expiration of underlying valid patent claims.
We cannot control the time or resources that these strategic partners devote to these collaborations, nor can we control these strategic partners business decisions. In addition, our collaborators may not perform their obligations as expected. Changes in a collaborators business strategy or business combinations involving a collaborator may adversely affect that partys willingness or ability to successfully meet its obligations. Disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive negotiations, litigation or arbitration. In addition, our strategic partners may benefit from customary termination rights (e.g. in a case of a breach of a material obligation by us after expiration of customary cure periods) allowing them to
claim additional rights in the affected research projects. Furthermore, the right to terminate certain research projects may rest within the sole discretion of the partner, which in return may forgo certain future rights in the affected research projects. The failure of our strategic partners to successfully complete their obligations in a timely manner or the termination or breach of agreements by these parties could materially harm our business, financial condition and results of operations. Our key obligations under the collaboration with Boehringer Ingelheim are to jointly explore biological targets and to develop pharmaceutically active compounds, following the decisions and the requirements of a research steering committee established by Boehringer Ingelheim and us. Under the Roche collaboration, our obligation is to provide services for the clinical development of pharmaceutical substances in certain therapeutic areas. We perform these services in accordance with specific research plans agreed to by a joint research steering committee. In the CHDI collaboration, our obligations to provide services are specified by a joint research steering committee. These services are in the field of assay development, reagent development, compound screening, compound profiling, structural biology and chemical synthesis of compounds. Similar services are conducted under our collaborations with Ono Pharmaceutical, Novartis, Vifor and Biogen Idec. We have been and currently are in full compliance with our obligations under our collaboration agreements.
The dependence on such individual larger collaboration contracts needs to be carefully monitored. In 2009, the largest volume generated from one single customer was 21.3% of total revenues.
Despite a stronger strategic focus on drug discovery alliances we continue the development of certain of our proprietary drug candidates, and there is no assurance that we will successfully develop and commercialize these potential products.
Despite a stronger strategic focus on drug discovery alliances, we must still also be evaluated in light of the uncertainties and complexities inherent in an early-stage biopharmaceutical company. All of our product candidates are in the early-stages of development. EVT 201 has undergone two Phase II clinical trials. However, despite very promising scientific data, we have so far not been in the position to partner this product candidate. Given the scope and investment needed for a decisive Phase III clinical trial, EVT 201 will not be further developed without a partner. Regarding EVT 101 we expect to commence Phase II study in treatment-resistant depression in June 2010. EVT 302 was safe and well tolerated in Phase I trials but failed to show proof-of-concept in smoking cessation in a Phase II clinical trial completed in April 2009. Consequently we have stopped internal investments in EVT 302 but may investigate its potential in the treatment of Alzheimers disease if a suitable partner can be found. During the first quarter of 2009 our collaborative partner on the VR1 program, Pfizer, stopped development of the clinical candidate that they had initiated Phase I testing on in 2008. While the collaboration continues, we are uncertain if a commercial product will arise out of this collaboration. The commercialization of these products candidates will not occur, if at all, for at least the next several years. Our future success in drug discovery and development is dependent upon, among other factors, our ability to finance and develop viable product candidates, successfully complete clinical trials and obtain regulatory approval for those product candidates. Most of our early-stage drug discovery programs are focused on CNS disease targets and will require extensive additional research and development prior to the commercial introduction of any product candidates. There can be no assurance that any of our research and development and clinical trial efforts, or those of our strategic partners or licensees, will result in viable new products.
We have expended significant time, money and effort developing our most advanced product candidates to date. Before we or our potential partners can market and sell EVT 201, the EVT 100 compound family and EVT 302, or any other of our candidates, we will need to obtain the necessary approvals from the United States Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, and similar regulatory agencies elsewhere. Even if their further development is successful, it will take several more years before we or our licensees can file for regulatory approval of these product candidates. Therefore, if the necessary regulatory approvals for our candidates are not received from the FDA or EMA, regulatory approval is later withdrawn or the approvals are significantly delayed, it is less likely that we will achieve profitability and our business prospects will be seriously limited. As a result, you could lose all or part of your investment.
We have historically incurred significant losses and might not achieve or maintain operating profitability.
Since our formation, we have incurred significant net losses and, as of December 31, 2009, had an accumulated deficit of 618.9 million. Our net losses from continuing operations were 48.1 million in 2007, 78.3 million in 2008, and 45.5 in 2009, with all figures determined in accordance with IFRS. Our historical losses have resulted mainly from amortization of intangible assets and goodwill from acquisitions as well as from costs incurred in our research and development programs and from our sales, general and administrative expenses. In March 2009, we initiated a restructuring process to concentrate on drug discovery alliances, focus our research and development activities on core value programs and to significantly reduce our operating costs. We also decided to engage in strategic high-value license agreements for selected drug candidates with pharmaceutical partners that might provide us with sizeable payments from such a partner, and to expand our indication focus beyond neuroscience, pain and inflammation. With this new strategic focus, we mitigated some of the risk associated with our business model with the aim to eventually become sustainable. However, whether we are able to achieve operating profitability in the future will depend upon our ability to generate revenues that exceed our expenses. Changes in market conditions, including the failure or approval of competing products, may require us to incur more expenses or change the timing of expenses such that we may incur unexpected losses. In addition, we have historically experienced considerable quarter-to-quarter variation in our results of operations and may not generate sufficient revenues in the future to achieve or maintain profitable operations. Further, we may not be able to sustain or increase profitability on a quarterly or an annual basis. Although as a result of our restructuring measures, even without a significant licensing agreement for one of our clinical or preclinical assets, we believe that existing liquidity reserves are sufficient under our risk management plan to cope with all cumulated, identified risk implications and that those reserves are a strong basis to develop the Company to sustainability, if we are unable to achieve and maintain profitability, the market value of our ordinary shares and ADSs will likely decline and you could lose all or a part of your investment.
Clinical trials have in the past and may in the future fail to demonstrate the safety and efficacy of our product candidates, including the EVT 100 series and our P2X7 Antagonist candidate EVT 401, which could prevent or significantly delay their regulatory approval and may adversely affect our business and stock price.
Any failure or substantial delay in completing clinical trials for our product candidates, including the EVT 100 series and our P2X7 Antagonist candidate EVT 401, have in the past and may in the future severely harm our business. Before obtaining regulatory approval for the sale of any of our potential products or the potential products of our current and future strategic partners and licensees, we and our strategic partners or licensees must submit these product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. The success of this preclinical and clinical testing is critical to achieving our product development goals. If our product development efforts are unsuccessful, we will not obtain regulatory approval for them, we will not generate sales from them, and our business and results of operations would be adversely affected. We suffered such a setback when EVT 302 failed to demonstrate any significant efficacy in smoking cessation in a Phase II trial in 2009.
Clinical trials are expensive, time-consuming and typically take years to complete. In connection with clinical trials, we face the risks that:
The results in early phases of clinical testing are based upon a limited numbers of patients and a limited follow-up period and success in early phase trials may not be indicative of results in a large number of patients or long-term efficacy. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in earlier development activities, including previous late-stage clinical trials. Failure by us to demonstrate the safety and effectiveness of our product candidates in larger patient populations as with EVT 302 for smoking cessation could prevent or significantly delay their regulatory approval and may adversely affect our business and the price of our ordinary shares and ADSs.
We depend on intellectual property licensed from third parties including Roche, and termination of any of these licenses could result in the loss of significant rights, which would harm our business.
We hold licenses granted by F. Hoffmann-La Roche Ltd., or Roche, for EVT 201, the EVT 100 compound family and EVT 302, and by other parties related to certain of our preclinical research projects. Any termination of these licenses could result in the loss of significant rights and could harm our ability to commercialize our drug candidates. Our ownership of patents relating to some or all of our product candidates will not reduce our reliance on these and other third party patents. Our rights relating to EVT 201, the EVT 100 compound family and EVT 302 are subject to the terms of the license agreements entered into with Roche. We must therefore rely on Roche to enforce its rights and obligations and if Roche is unable to enforce such rights and obligations, our development and commercialization of EVT 201, the EVT 100 compound family and EVT 302 could be delayed or prevented.
When we license intellectual property from third parties, including Roche, those parties generally retain most or all of the obligations to maintain and extend, as well as the rights to assert, prosecute and defend, that intellectual property. We generally have no rights to require our licensors, including Roche, to apply for new patents, except to the extent that we actually assist in the creation or development of patentable intellectual property. With respect to intellectual property that we license, we are generally also subject to all of the same risks with respect to its protection as we are for intellectual property that we own, which are described below under Risk FactorsRisks Related to Our Industry. We are dependent on patents and proprietary technology, both our own and licensed from others. If we or our licensors fail to adequately protect this intellectual property or if we do not have exclusivity for the marketing of any future products, our ability to commercialize products could suffer.
We may not achieve the anticipated benefits of our acquisitions, which may adversely affect our business and the price of our ADSs and our ordinary shares.
We pursue ambitious goals regarding our growth rate through both internal organic growth development and opportunistic acquisitions of financially rewarding and suiting service capacities and capabilities. In 2009, this was exemplified in the acquisition of a 70% controlling majority stake of the Indian company Research Support International Private Limited (RSIPL). However, such merger and acquisition activities involve specific risks that need to be managed.
The acquisition of RSIPL bears the risk that the integration of RSIPL into the Evotec group may be difficult and expensive to achieve. The merger will present challenges to our management including the integration of RSIPLs operations and personnel. In addition, the merger may present special risks including possible unanticipated liabilities, unanticipated costs, diversion of management attention and loss of personnel. We may not be able to integrate RSIPL into our operations or successfully manage the operations acquired in the merger. So far, there is no indication that any material agreement between RSIPL and a third party, will be terminated. Nonetheless, following the merger, if our management is not able to implement a business plan that effectively integrates RSIPLs operations, the anticipated benefits of the merger may not be realised which may adversely affect the price of our ADSs and our ordinary shares.
We have experienced such difficulties of integration in connection with our acquisition of Renovis, Inc., or Renovis in 2008. On May 5, 2009, we announced that all our proprietary programs including those which were worked on at Renovis will be managed through our European operations and the winding down of our U.S. operations at Renovis in South San Francisco, California.
In the future, we may acquire additional technologies, products or businesses to expand our existing and planned business. Acquisitions expose us to the addition of new operating and other risks including the risks associated with the:
Our failure to address the above risks successfully in connection with any acquisition may prevent us from achieving the anticipated benefits from any such acquisition in a reasonable time frame, or at all.
We have no experience selling, marketing or distributing products and no internal capability to do so.
Despite a stronger strategic focus on drug discovery alliances we are still engaged in selective proprietary discovery and development activities. If we receive regulatory approval to commence commercial sales of any of our product candidates for which we have retained marketing rights, we will have to establish a sales and marketing organization with appropriate technical expertise and supporting distribution capability. At present, we have no sales or marketing personnel for any of our product candidates and as such we intend to partner and out-license our product candidates to pharmaceutical companies to undertake such activities. Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include:
We may not be able to successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products. To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties, and we may not succeed in achieving any such partnering or out-licensing arrangement on a satisfactory basis, if at all.
Even if our product candidates are approved and commercialized, competitive products may impede market acceptance of our products.
Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than existing drugs. Even if approved and commercialized, any future product candidates may fail to achieve market acceptance with hospitals, physicians or patients. If our products do not receive market acceptance for any reason, our revenue potential could be diminished, which would materially adversely affect our business, financial condition and results of operations. Further, our competitors may develop new products that could be more effective or less costly, or that may seem more cost-effective, than our products.
Many of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. As a result, they may achieve product commercialization or patent protection earlier than we can, if at all. Hospitals, physicians, patients or the medical community in general may not accept and use any products that we may develop.
We may elect to further expand our discovery alliance, research, clinical development, and sales and marketing capabilities and, as a result, may encounter difficulties in managing our growth, which could disrupt our operations.
We have decided to increase our focus on engaging in strategic high-value license agreements for selected drug candidates with pharmaceutical partners with the potential for sizeable payments to us by such a partner, and to expand our indication focus beyond neuroscience, pain and inflammation, while we continue the development of certain of our proprietary product candidates. As a result, our operations may expand through mergers and acquisitions and in-licensing. In addition, we may elect to grow the number of our employees and the scope of our operations. To manage our potential future growth, we would need to continue to improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Because we are a relatively small company, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The possible physical expansion of our operations could increase our costs significantly and may divert our management and business development resources. Our future financial performance will depend, in part, on our ability to manage potential future growth effectively.
Global economic conditions could adversely affect our business, results of operations and financial condition.
Our results of operations could be materially affected by general conditions in the global economy and in the global financial markets. The global financial crisis has caused extreme volatility and disruptions in the capital and credit markets. Therefore, access to financing has been adversely affected for many borrowers. A severe or prolonged economic downturn could result in a variety of risks to our business, including:
Our business may require substantial additional capital, which we may not be able to obtain on terms acceptable to us, if at all, and which may significantly dilute existing shareholders ownership percentage in us.
Based on our current financial plan, we expect that our current cash and cash equivalents, short-term and long-term investments, together with our operating revenues will be sufficient to fund our planned activities beyond 2012. During the year ended December 31, 2009, we used net cash in operating activities of 21.9 million and had capital expenditures for property, plant and equipment of 2.1 million.
Our future capital requirements, however, depend on many factors, including:
We currently do not foresee that this will happen, but if at some point in time our existing resources should be insufficient to fund our activities, we may need to raise additional funding through public or private sales of our securities, or entering into credit arrangements or licensing all or a portion of our technology. Any such funding activity may significantly dilute existing shareholders ownership percentage or may limit our rights to our technology. We cannot be certain that any such funding will be available on acceptable terms, if at all.
We intend to seek additional funding through strategic collaborations. We face intense competition from many other companies in the pharmaceutical and biotechnology industry for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology. If we are unable to attract and retain corporate partners to develop, introduce and market our products, our business may be materially and adversely affected. Our strategy and any reliance on corporate partners are subject to additional risks. Our collaborators may not devote sufficient resources to the development, introduction and marketing of our products or may not pursue further development and commercialization of products resulting from collaborations with us. If a corporate partner elects to terminate its relationship with us, our ability to develop, introduce and market our products may be significantly impaired and we may be forced to discontinue the product altogether. We may not be able to negotiate alternative corporate partnership agreements on acceptable terms, if at all. The failure of any collaboration efforts could have a material adverse effect on our ability to develop, introduce and market our products and, consequently, could have a material adverse effect on our business, results of operations and financial condition.
Currency fluctuations may expose us to increased costs or revenue decreases.
Our business is affected by fluctuations in foreign exchange rates between the U.S. Dollar, UK Sterling and the Euro. A significant portion of our revenues are denominated in U.S. Dollars but are reported in Euro, while
the majority of our expenses are denominated in Euro and UK Sterling. Therefore currency fluctuations could cause our revenues to decline or our costs to increase. Our cash and investments are denominated in Euro, U.S. Dollars and UK Sterling.
Risks Related to an Investment in Our ADSs and Ordinary Shares
The price of our ordinary shares and our ADSs has fluctuated significantly and may continue to do so.
Our ordinary shares are traded on the Frankfurt Stock Exchange. The price of our ordinary shares has fluctuated between 4.88 and 0.54 from February 1, 2005 and May 31, 2010. Our ADSs, each of which represents two of our ordinary shares, traded on the NASDAQ Global Market (NASDAQ) from May 6, 2008 until we voluntarily delisted trading of the ADSs on NASDAQ effective November 30, 2009, and since then have traded, and currently trade, on the over-the-counter market. The price of our ADSs has fluctuated between $7.49 to $1.18 during the period that the ADSs have traded from May 6, 2008 through May 31, 2010.
Factors that could cause volatility in the market price of our ordinary shares and ADSs include:
These and other external factors may cause the market price and demand for our ADSs or ordinary shares to fluctuate substantially, which may limit or prevent investors from readily buying and selling the securities and
may otherwise negatively affect the liquidity of our ADSs or ordinary shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The delisting of our ADSs from NASDAQ and our intended deregistration under the Exchange Act may influence the trading opportunities for your ADSs
We voluntarily delisted trading of our ADSs on the NASDAQ Global Market effective November 30, 2009. As soon as we are eligible, we intend to file a Form 15 with the U.S. Securities and Exchange Commission, or SEC, to terminate the registration of the ADSs and the underlying ordinary shares under the Securities Exchange Act of 1934, as amended, which will not occur for at least one year from the NASDAQ delisting. We will remain subject to all SEC requirements until such time as our ADSs and the underlying ordinary shares are deregistered.
Following the delisting from NASDAQ, the ADSs now trade on the U.S. over-the-counter (OTC) market in the form of a Level 1 ADR program. The OTC market is a significantly more limited market than NASDAQ, and as a result trading volume in the ADSs may be limited and investors may not have sufficient liquidity.
The delisting from NASDAQ had no impact on the voting rights of the holder of ADSs. As an ADS holder on an applicable record date, you will have the right to vote the equivalent number of underlying shares as represented by your Evotec ADS holdings. ADS holders will still receive their proxy materials in English through their usual financial intermediary if they hold ADSs in beneficial form or through J.P.Morgan if they are registered holders.
A decline in the value of the Euro could reduce the value of your investment in our ADSs.
Fluctuations in the exchange rate between the U.S. Dollar and the Euro will affect the U.S. Dollar equivalent of the Euro price per ADS. If the value of the Euro relative to the U.S. Dollar declines, the market price of our ADSs is likely to be adversely affected. The value of the Euro relative to the U.S. Dollar has increased by 58.7% from the introduction of the Euro on January 1, 2002 through December 31, 2009, with the Euro increasing 3.0% against the U.S. Dollar during 2009 when comparing the beginning of the year exchange rates with the end of the year exchange rates. We manage this exposure through either natural hedges with same currency expenses or through active hedging techniques during service contract work. Additionally, opportunities to reduce liquidity risk by converting excess U.S. Dollar into Euro are taken when opportune.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for our ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in rights offerings and may experience dilution in their holdings as a result.
If the depositary is unable to sell the rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.
You may not be able to exercise your right to vote the ordinary shares underlying your Evotec ADSs.
Holders of our ADSs may exercise voting rights with respect to the ordinary shares represented by our ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights.
As promptly as practicable after the depositary receives (i) notice of any meeting or solicitation of consents or proxies of holders of shares and (ii) the statement of the custodian which will act as a proxy bank in accordance with Sections 128 and 135 of the German Stock Corporation Act (Aktiengesetz) setting forth its recommendations with regard to voting of the shares pursuant to Section 128 (2) of the German Stock Corporation Act as to any matter concerning which the notice from us indicates that a vote is to be taken by holders of shares, together with an English translation thereof, the depositary shall, subject to applicable law and our articles of association, mail to registered holders of ADSs a notice (a) containing such information as is contained in such notice and any solicitation materials, (b) stating that each registered holder of ADSs on the record date set by the depositary therefore will be entitled to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the whole number of shares underlying such registered holders ADSs, (c) containing the recommendation of the custodian, and (d) specifying how and when such instructions may be given.
You may instruct the depositary of your Evotec ADSs to vote the ordinary shares underlying your ADSs but only if we ask the depositary to ask for your instructions. Otherwise, you will not be able to exercise your right to vote, unless you withdraw our ordinary shares underlying our ADSs that you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. There can be no guarantee that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. As a result, you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
Under the deposit agreement for our ADSs, we may choose to appoint a proxy bank in accordance with the German Stock Corporation Act. In this event, the depositary will receive a proxy which will be given to the proxy bank to vote our ordinary shares underlying your ADSs at shareholders meetings if you do not vote in a timely fashion and in the manner specified by the depositary. The effect of this proxy is that you cannot prevent the ordinary shares underlying your ADSs from being voted, and it may make it more difficult for shareholders to influence our management, which could adversely affect your interests. Holders of our ordinary shares are not subject to this proxy.
You may not receive distributions on our ordinary shares represented by our ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.
The depositary of our ADSs has agreed to pay to you distributions with respect to cash or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of the ordinary shares your Evotec ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of our ADSs. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. As a result, you may not receive the distributions made on our ordinary shares or any value from them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.
You may be subject to limitations on transfer of your Evotec ADSs.
Your Evotec ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or government or governmental body, or under any provision of the deposit agreement, or for any other reason.
The rights of shareholders in German companies differ in material respects from the rights of shareholders of corporations incorporated in the United States, and as a result our public shareholders may have greater difficulty protecting their interests than would shareholders of a corporation incorporated in the United States.
We are incorporated in Germany, and the rights of our shareholders are governed by German law, which differs in many respects from the laws governing corporations incorporated in the United States. For example, individual shareholders in German companies do not have standing to initiate a shareholder derivative action, either in Germany or elsewhere, including the United States, unless they meet thresholds set forth under German corporate law. As a result, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
It may be difficult for you to bring any action or enforce any judgment obtained in the United States against us or members of our Supervisory or Management Boards, which may limit the remedies otherwise available to you.
We are incorporated in Germany and the majority of our assets are located outside the United States. In addition, most of the members of our Supervisory Board, Management Board and other senior management are nationals and residents of Germany or the United Kingdom. Most or all of the assets of these individuals are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe your rights have been infringed under the securities laws or otherwise. In addition, a German or United Kingdom court may prevent you from enforcing a judgment of a U.S. court against us or these individuals based on the securities laws of the United States or any state thereof. A German or United Kingdom court may not allow you to bring an action in their respective jurisdictions against us or these individuals based on the securities laws of the United States or any state thereof.
We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our ADSs appreciates.
We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any determination by our Supervisory and Management Boards to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of our ADSs falls in the foreseeable future and you sell your ADSs, you will lose money on your investment, without the likelihood that this loss will be offset in part or at all by cash dividends.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs.
If we were treated as a passive foreign investment company, or PFIC, for any taxable year during which a U.S. person held an ADS, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See Material U.S. Federal Income Tax Consequences Relating to the Ownership and Disposition of Evotec ADSs under Item 10. Additional Information.
Risks Related to Our Industry
Drug discovery and development is subject to a high degree of failure.
Despite a stronger strategic focus on drug discovery alliances, we are still engaged in selective proprietary discovery and development activities. Although we continue to devote resources to the discovery of new therapeutic drugs and employ advanced technologies in our efforts to identify promising drug candidates to advance into preclinical studies, the risk that all or any one of our early-stage product candidates will fail is high. According to pharmaceutical industry statistics published in 2001 by the Pharmaceutical Research and Manufacturers of America, only one in 1,000 early-stage drug discovery compounds advances to clinical trials, and only one in five compounds that enters clinical trials receives FDA approval for marketing as a prescription drug. Moreover, the results from preclinical studies and early clinical trials may not accurately predict the results obtained in later stage clinical trials required for regulatory approval. We cannot assure you that our early-stage product candidates will prove in clinical testing to be effective and safe for use in humans. If our early-stage product candidates do not prove to be effective or safe in such tests, regulatory approval for such products would be delayed or may not be obtainable.
Competition in the biotechnology and pharmaceutical industries is intense, and if we fail to compete effectively our financial results will suffer.
Our business is characterized by extensive research efforts, rapid developments and intense competition. Our competitors may have or may develop superior technologies or approaches to the development of competing products, which may provide them with competitive advantages. Our potential products may not compete successfully. We believe that successful competition depends on product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things. Important factors to our success also include speed in developing product candidates, completing laboratory testing, clinical development and obtaining regulatory approvals and manufacturing and selling commercial quantities of approved products to the market.
We expect competition to increase as technological advances are made and commercial applications broaden. In commercializing our initial product candidates and any additional product candidates, we will face substantial competition from pharmaceutical, biotechnology and other companies, universities and research institutions.
Many of our competitors have substantially greater capital resources, research and development staff, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Our competitors may achieve product commercialization or patent protection earlier than we achieve commercialization or patent protection, if we do so at all. Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage.
We are dependent on patents and proprietary technology, both our own and licensed from others. If we or our licensors fail to adequately protect this intellectual property or if we do not have exclusivity for the marketing of our products, our ability to develop and commercialize products could suffer.
As of December, 31, 2009, we had more than 110 families of intellectual property rights under our full control, with each such family protecting an invention in one or more countries by one or more patent applications, patents and/or utility models. A utility model is an intellectual property right similar to that of a patent, and it is available in a number of countries through domestic legislation and typically has a shorter term and less stringent patentability requirements than a patent. In particular, few patent applications have been filed that relate to three compound series and their uses in a variety of disorders, such as metabolic diseases as well as neurological and neurodegenerative diseases.
In addition, we are party to licensing agreements that grant us rights under third-party patents or patent families. We have exclusively in-licensed intellectual property from Roche with respect to EVT 201 in the field of CNS indications, the EVT 100 compound family for prevention, diagnosis and/or treatment of human diseases and EVT 302 for treatment of any indication in humans and are party to further exclusive in-licensing agreements with Garching Innovation GmbH (now renamed Max-Planck-Innovation GmbH) and other third parties.
Our success depends in part on our ability, and the ability of our licensors, to obtain patent protection for product candidates, products, technologies and processes, to preserve trade secrets, to defend patents against third parties seeking to invalidate such patents, and to enforce rights against infringing parties, in the United States, Europe and elsewhere. The validity and breadth of claims in medical or pharmaceutical technology and biotechnology or life science patents involve complex legal and factual questions and, therefore, may be highly uncertain. For example, the value of our intellectual property rights, both our own and those licensed from others, depends on whether:
We try to protect our proprietary position by generally filing national and foreign patent applications related to those of our proprietary technologies, inventions and improvements that are important to our business,
including those related to the development of our product candidates. Our ability to obtain patents is, however, highly uncertain because, to date, some legal principles remain unresolved and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, European countries and elsewhere. Moreover, the specific content of patents and patent applications that is necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. The policies governing biotechnology patents throughout various countries, including Germany, are even more uncertain. Changes in either patent laws or in interpretations of patent laws in European countries, the United States and elsewhere may diminish the value of our and our licensors intellectual property or narrow the scope of our and our licensors patent protection.
Many of our and our collaborators research and development employees and/or consultants work in Germany or other European countries and are subject to German employment law or comparable rules in other European jurisdictions. Ideas, developments, discoveries and inventions made by such employees and consultants are subject to the provisions of the German Employees Inventions Act (Gesetz über Arbeitnehmererfindungen) or similar European legislation, which regulates the ownership of, and compensation for, inventions made by employees. For such inventions, we face the risk that disputes can occur between employer and employee, ex-employee, or consultants pertaining to alleged non-adherence to the provisions of this act. Even if we, the co-owners of our intellectual property rights or licensors prevailed in any such dispute, such action could result in substantial costs and be a distraction to management. If we fail in such dispute, in addition to paying substantial monetary damages, we may lose valuable intellectual property rights.
Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, and U.S. patents may be subject to re-examination proceedings. In other countries, patents may be subject to opposition or comparable proceedings. Such proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, re-examination and opposition proceedings may be costly and time-consuming and, even if we were to prevail, would distract our management. Moreover, the U.S. Federal Food, Drug, and Cosmetic Act and related regulations provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug in order to facilitate the approval of abbreviated new drug applications for generic versions of drugs that have the same active ingredients and the same therapeutic effect but are offered at a lower price. Although we and, to our knowledge, our licensors, are not currently faced with any of these types of legal actions with respect to our product candidates, the risk of these legal actions increases as our product candidates progress toward commercialization and after our product candidates are ultimately approved and commercialized.
Any patents or patent applications that we own, co-own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we have licensed or may license from third parties, may not result in patents being issued. If issued, the patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology, products or processes. Furthermore, others may independently develop similar technologies, products or processes or duplicate any of those that we have developed. We and our licensors depend on third parties, such as patent-annuity payment companies and patent law firms, to pay the annuity, renewal and other fees as well as to take additional measures required to maintain our respective patents and patent applications. Non-payment or delay in the payment of these fees or non-adherence to take such additional measures is likely to result in irrevocable loss of patents or patent rights important to our business.
We, the co-owners of our intellectual property rights or our licensors may face difficulties in protecting or enforcing intellectual property rights in countries outside the United States and the member states of the European Patent Convention, which may diminish the value of our intellectual property in those countries.
The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the United States and countries in the European Patent Convention, and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we, the co-owners of our
intellectual property rights or our licensors encounter such difficulties in protecting, or are otherwise precluded from effectively protecting, in foreign jurisdictions the intellectual property rights important for our business, the value of these rights may be diminished and we may face additional competition from others in these jurisdictions.
Many countries, including, but not limited to, certain European countries, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (if, for example, the patent owner has failed to work the invention in that country, or the third party has patented improvements). Compulsory licensing of life-saving drugs is also becoming increasingly popular, especially in developing countries. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Moreover, the legal systems of certain countries do not favor the efficient enforcement of patent and other intellectual property rights which makes it difficult to stop infringement and diminishes the value of such rights.
Claims that we infringe a third partys intellectual property may give rise to burdensome litigation, result in potential liability for damages or stop our development and commercialization efforts.
Not infringing on the intellectual property rights of others is important to our, our strategic partners and our licensees success. Third parties may assert patent or other intellectual property infringement claims against us, our strategic partners or our licensees with respect to technologies used in our, our strategic partners or our licensees businesses. Numerous patent applications are currently pending and we expect that further patents may be filed in the future for technologies generally related to our technologies, including many patent applications that at least initially remain confidential after filing. United States, European and other patents in other jurisdictions have been or may be issued to third parties in the same fields as some of our product candidates. These third-party intellectual property rights could subject us to infringement actions. A risk inherent in any patent search to determine potential rights of third parties is that search results may be inconclusive. For example, the searches will bring to attention only those patents and patent applications indexed by search terms and classification marks used in the searches. Furthermore, searches will not reveal patent applications pending, which are not yet published or have not yet been incorporated into the search database at the date of search. Assessing the validity of claims of third party patents can be uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the success of potentially challenging the validity of third party patents is not certain. Although we have not been subject to any infringement actions to date, due to these factors and the inherent uncertainty in conducting patent searches, we may violate third-party patent rights that we have not yet identified as being relevant or at all.
The owners or licensees of these and other patents may file one or more infringement actions against us. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages. Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or our licensees may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third partys intellectual property unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if our strategic partners, licensees or we were able to obtain rights to the third partys intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate or cease some of our business operations as a result of patent infringement claims, which could severely harm our business.
Rapid technological change could make our products and collaborative projects obsolete.
Biopharmaceutical technologies have undergone rapid and significant technological change and we expect that they will continue to do so. Any compounds, products or processes that we or our strategic partners or licensees develop may become obsolete or uneconomical before achieving significant revenues.
If we or our strategic partners or licensees fail to obtain U.S. or European regulatory approval for product candidates under development, we will not be able to generate revenue in the U.S. and European markets from the commercialization of product candidates.
Despite a stronger strategic focus on drug discovery alliances, we are still engaged in selective proprietary discovery and development activities. We must receive FDA approval for each of our product candidates before we can commercialize or sell that product candidate in the United States, and we must receive EMA approval for each of our product candidates before we can commercialize or sell that product candidate in Europe. The FDA and EMA can limit or deny their approval for many reasons, including:
Failure to obtain FDA or EMA approval or any delay or setback in obtaining such approval could:
Any such failures or delays in the regulatory approval process for any of our product candidates would delay or diminish our receipt of product revenues, if any, and would materially adversely affect our business, financial condition and results of operations.
Even if we obtain FDA or EMA approval, our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales. If FDA or EMA approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies. As to any product for which marketing approval is obtained, the production, labeling, packaging, adverse event reporting, advertising, promotion and record keeping related to the product, among other things, will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market. We may be slow to adapt, or may never adapt, to changes in existing requirements or adoption of new requirements or policies.
If we fail to comply with applicable U.S. and European regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, injunctions, civil penalties and criminal prosecution.
If we or our strategic partners or licensees fail to obtain regulatory approvals in other countries for product candidates under development, we will not be able to generate revenue in such countries from the commercialization of product candidates.
In order for us to market our products outside of the United States and the European Union, we and our strategic partners and licensees must comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval or EMA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States and EMA approval in the European Union. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory review processes in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States and EMA approval in the European Union. The adverse effects include the risk that our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales, and the risk that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to penalties and suspension or withdrawal of regulatory approvals.
If our partners, licensees or contract manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may rise.
We have no manufacturing facilities, limited experience in the commercial manufacturing of drugs and limited experience in designing drug manufacturing processes. We depend on our partners, licensees and contract manufacturers to produce our product candidates for clinical trials and to manufacture, supply, store and distribute any resulting products.
While we have not experienced problems with our partners, licensees or contract manufacturers to date, our reliance on these third parties exposes us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our product candidates by the FDA, EMA or other regulatory agencies, or the commercialization of our products, result in higher costs or deprive us of potential product revenues:
Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. We are not aware of any violations by our partners, licensees or contract manufacturers of any of these regulations or standards. While we will be obligated to audit the performance of
our contractor manufacturers, we will not have control over their compliance with these regulations and standards. Failure by our partners, licensees, contract manufacturers or us to comply with applicable regulations could result in sanctions that would have a material adverse effect on our business, including fines, injunctions, civil penalties, failure of the government to grant pre-marketing approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions.
We depend on the efforts of our strategic partners, licensors and licensees to develop and commercialize many of our product candidates.
We cannot control the time or resources that our strategic partners, licensors or licensees devote to our collaborations with them, nor can we control our strategic partners, licensors or licensees business decisions. In addition, our collaborators may not perform their obligations as expected. Changes in a collaborators business strategy or business combinations involving a collaborator may adversely affect that partys willingness or ability to successfully meet its obligations. Disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive negotiations, litigation or arbitration. The failure of our strategic partners, licensors or licensees to successfully complete their obligations in a timely manner or the termination or breach of agreements by these parties could materially harm our business, financial condition and results of operations.
We or our strategic partners or licensees may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates.
To date, our product candidates have been manufactured in small quantities for preclinical and clinical trials. If any of our product candidates are approved by the FDA, EMA or other regulatory agencies for commercial sale, they will need to be manufactured in larger quantities. We or our strategic partners or licensees, as applicable, may not be able to successfully increase the manufacturing capacity, whether in collaboration with contract manufacturers or independently, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA and the EMA must review and approve. If we or our strategic partners or licensees are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply. Our product candidates require precise, high-quality manufacturing. Failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could adversely affect our business.
The contract research organizations and independent clinical investigators that we and our strategic partners or licensees rely upon to conduct preclinical studies and clinical trials may not be diligent, careful or timely, and may make mistakes in the conduct of these studies.
We depend on contract research organizations, or CROs, and independent clinical investigators to conduct certain preclinical studies and clinical trials under their agreements with us or our collaborators. In our preclinical research programs, we depend on CROs to conduct certain efficacy, safety and toxicity testing activities that we are not staffed to perform ourselves. The personnel at these CROs are not our employees and we cannot control the amount or timing of resources that they devote to such programs. Our contracts with CROs may involve fixed fees. If the costs of performing the research activities or clinical trials exceed estimates, the CROs may fail to devote sufficient time and resources to our drug discovery and development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory manner. Failure of the CROs to meet their obligations could adversely affect the development of our product candidates and delay the regulatory approval and commercial introduction of our product candidates. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us. If independent investigators and CROs assist competitors, it could harm our competitive position.
Failure to enroll patients for clinical trials may cause delays in developing our product candidates.
We may encounter delays or rejections if we or our strategic partners or licensees are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and the number and size of ongoing clinical trials sponsored by others that seek to enroll similar patients. When one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Any delays in planned patient enrollment may result in increased costs and delays, which could harm our ability to develop products.
If we are unable to retain and recruit qualified scientists or if any of our key executives, key employees or key consultants discontinues his or her employment or consulting relationship with us, this may delay our development efforts or otherwise harm our business.
We, like many biotechnology companies, are highly dependent on the key members of our management and scientific staff. The loss of any of our key employees or key consultants could impede the achievement of our research and development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future is critical to our success. We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists.
Currently, we consider three employees to be key to our success. These are Werner Lanthaler, Chief Executive Officer, Dr Mario Polywka, Chief Operating Officer, and Dr Klaus Maleck, Chief Financial Officer. All of these employees are highly qualified and very experienced in the biotechnology industry and therefore departure of one or all of these key employees would mean a significant loss to us.
We have service agreements with each of these key employees which contain a change of control clause that gives them the right of extraordinary termination if a shareholder acquires a holding of more than 30% of our shares. Among other benefits, we have granted stock options as a method of attracting and retaining employees. Due to fluctuations in the trading price of our ordinary shares, a substantial portion of the stock options held by our employees have exercise prices that are significantly higher than the current trading price of our ordinary shares. If we are unable to offer competitive remuneration including stock options that provide sufficient incentives, we may be unable to retain our existing employees and attract additional qualified candidates.
In the recent past, we have not encountered difficulties in attracting and retaining qualified employees.
Governmental and third party payors may impose sales and pharmaceutical pricing restrictions or controls on our potential products that could limit our future product revenues and adversely affect our profitability.
The commercial success of our potential products is substantially dependent on whether third-party reimbursement will be available for our potential products. Government medical reimbursement programs, such as Medicare and Medicaid in the United States, health maintenance organizations and other third-party payors may not fully cover or provide adequate payment for our potential products. They may not view our potential products as cost-effective and reimbursement may not be available to patients or may not be sufficient to allow potential products to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control or reduce health care costs or reform government health care programs could result in lower prices or rejection of our potential products. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our future product revenues, if any, to decline.
In the United States, the recently enacted Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (Health Care Reform) authorized broad-reaching health insurance reforms that will take effect over the next decade. Among the goals of Health Care Reform are the expansion of health
insurance coverage and the scope of that coverage as well as changes in the way that payments by government health programs for drugs are determined. We cannot predict whether or how such changes will affect our business.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our employees former employers.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.
We face potential product liability exposure far in excess of our insurance coverage.
The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. These claims might be made directly by patients, health care providers, pharmaceutical companies or others selling our products. We have obtained limited product liability insurance coverage for our clinical trials and such insurance may not be sufficient to cover expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, juries have awarded large judgments in lawsuits based on drugs that had unanticipated side effects in the United States. A successful product liability claim or series of claims brought against us would increase our costs, decrease our cash reserves and could cause the price of our ordinary shares and ADSs to decline.
We and our German affiliates have product liability insurance in place with a combined single limit for bodily injury and property damage of 10 million per occurrence and a limit of 20 million for any one calendar year. Evotec (UK) Ltd. has product liability insurances in place with a joint limit of indemnity of £20 million per occurrence. The product liability for clinical trials is insured separately on a case by case basis, usually in the range of $3 million per subject. The cost of such coverage is not material. Our U.S. subsidiary, Renovis, is included in our German product liability insurance. We are not aware of any pending threats of product liability claims.
We are subject to significant environmental, health and safety regulations, compliance with which can be expensive.
We are subject to a variety of health, safety and environmental laws and regulations in the United States, Germany, the United Kingdom and other countries. These laws and regulations govern, among other things, wastewater discharge, air emissions and waste management. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations. Because we produce small amounts of experimental compounds and operate laboratory facilities, some risk of environmental liability is inherent in our business. Additionally, material costs of environmental compliance may arise in the future, increasing the overall costs of regulatory compliance.
Our activities involve biological, genetically modified and hazardous materials, and we may be liable for any resulting contamination or injuries.
Our manufacturing and research and development activities sometimes involve the controlled use and disposal of potentially harmful biological materials, genetically modified materials, hazardous materials, chemicals and infectious disease agents. Although management believes that our safety procedures for handling,
storing and disposing of such materials comply with the standards prescribed by applicable regulations, we cannot completely eliminate the risk of contamination or injury from these materials. We also occasionally contract with third parties for the disposal of some of these materials. In addition, our collaborators and service providers may be working with these types of materials in connection with our collaborations. In the event of an accident or contamination, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these materials and could be held liable for significant damages, civil penalties or fines, which may not be covered by or may exceed our insurance coverage.
We and our German affiliates have insurance coverage in place for our use of biological, genetically modified and hazardous materials with limits of 10 million per occurrence and a limit of 20 million for any one calendar year. Evotec (UK) Ltd. has such insurance coverage in place with a joint limit of indemnity of £20 million per occurrence.
Additionally, we are subject on an ongoing basis to a variety of laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of continued compliance with current or new laws and regulations might be significant and could negatively affect our profitability, and current or future environmental regulation may impair our ongoing research, development or manufacturing efforts.
We may not be able to conduct, or contract others to conduct, animal testing in the future, which could harm our research and development activities.
Certain laws and regulations relating to drug development require us to test our product candidates on animals before initiating clinical trials involving humans. Animal testing activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and individuals have attempted to stop animal testing activities by pressing for legislation and regulation in these areas and by disrupting these activities through protests and other means. To the extent the activities of these groups are successful, our research and development activities may be interrupted or delayed.
Item 4. Information on the Company
History and Development of the Company
Our legal and commercial name is Evotec AG. Our principal executive offices are located at Schnackenburgallee 114, 22525 Hamburg, Germany and our telephone number is (49-40) 56-0810. Our corporate website is located at www.evotec.com. Our authorized representative in the United States is Jeff Naroian, Evotec Inc., 5 Turley Court, North Potomac, MD 20878. Our agent for service in the United States is Corporation Service Company, 1133 Avenue of the Americas, Suite 3100, New York, NY 10036. We completed our initial public offering in Germany on November 10, 1999 and our ordinary shares are traded on the Frankfurt Stock Exchange under the symbol EVT. Our ADSs, each of which represents two of our ordinary shares, traded on the NASDAQ Global Market from May 6, 2008 until our voluntary delisting from NASDAQ effective November 30, 2009, and are currently traded on the over-the-counter market under the symbol EVTCY.
We were originally formed as a limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) under German law in December 1993 under the name Evotec BioSystems GmbH. On August 7, 1998, we transformed into a stock corporation (Aktiengesellschaft or AG) under German law and changed our name to EVOTEC BioSystems AG. Following the acquisition of Oxford Asymmetry International plc, or OAI, in 2000, we changed our name to Evotec OAI AG.
In May 2005, we acquired the remaining and total outstanding 78% interest in Evotec NeuroSciences GmbH, or ENS, in exchange for 14,276,883 ordinary shares of Evotec AG. The 40.9 million net purchase price was allocated to the assets acquired and goodwill. Upon acquiring ENS, we changed our name to Evotec AG. ENS is party to our licensing agreements with Roche.
In March 2007, we acquired all of the shares of the privately held French company Neuro3d S.A., or Neuro3d, in exchange for 5,726,012 of newly issued ordinary shares. As a result of the acquisition, we acquired more than 18.9 million net cash and investments and some early stage CNS discovery assets. Neuro3d has been consolidated in our financial statements since April 1, 2007.
In 2006 and 2007, we divested businesses that were not core to our strategy, at that time, of focusing on higher-value discovery projects. Effective January 2007, we sold our 89% interest in Evotec Technologies GmbH to PerkinElmer for 23.9 million in cash. Evotec Technologies GmbH comprised our activities in the development and manufacture of research tools and instruments for the life science industry. Evotec Technologies GmbHs product portfolio was focused on high-end technologies for automated cell biology and ultra-high throughput screening. With 80 employees at year-end 2006, Evotec Technologies GmbH accounted for 17.3 million, or 20.5%, of our total revenue for the fiscal year 2006.
In November 2007, we divested our Chemical Development Business to Aptuit, Inc. for 42.5 million. The Chemical Development Business comprised our capabilities in process research and development, custom preparation, analytical development, pilot plant manufacturing and formulation. With approximately 203 employees based in Oxford and Glasgow, UK, the Chemical Development Business generated 26.8 million of third-party revenues (40% of our total revenues) for the fiscal year 2006.
With our disposal of Evotec Technologies GmbH and the Chemical Development Business, we focussed our strategy on higher value, results-based projects in which we share in our customers success through milestone payments and royalties in addition to ongoing research payments, while at the same time continuing to enter into collaborative projects that generate steady revenues from contract research.
In addition, in 2007, according to our strategy to focus our capabilities on high value-added research and to leverage the potential of offering this capability based on lower cost, we transferred our chemical library business to India. In a joint venture with Research Support International Limited (RSIL), Evotec-RSIL Ltd. offers the design, synthesis, management and commercialization of compound libraries at competitive prices for customers. In 2006, the last full year we wholly owned this business, the library business generated revenues of 6.6 million. Revenues for the period January through August 2007, prior to the transfer to the joint venture, for the library business were 0.8 million.
Effective May 2, 2008, we acquired the biopharmaceutical company Renovis, Inc., or Renovis. Renovis added to our internal pipeline a number of complementary late-stage preclinical programs for pain and inflammation. As a result of the transaction, Renovis became our wholly owned subsidiary. In the share exchange Renovis stockholders received 0.5271 of an Evotec ADS for each outstanding share of Renovis common stock. Each ADS represents two of our ordinary shares, resulting in an issuance of 34,970,268 of our ordinary shares in connection with the acquisition. Our ADSs traded on the NASDAQ Global Market, under the trading symbol EVTC from May 6, 2008 until our voluntary delisting from NASDAQ effective November 30, 2009, and are currently traded on the over-the-counter market under the symbol EVTCY.
On December 10, 2008, Jörn Aldag resigned as our President and Chief Executive Officer. On March 6, 2009 Dr Werner Lanthaler was appointed as Chief Executive Officer.
On May 5, 2009, we announced that we were implementing a re-engineering of our drug discovery and development operations. As a consequence of this reorganization all of our proprietary programs are now managed through our European operations and we wound down our U.S. operation at Renovis in South San Francisco, California.
In May 2009, we acquired the zebrafish screening operations of Summit Corporation plc, including operations in Abingdon, UK, and Singapore, for £0.5 million in cash. This capability provides important whole organism data about the safety and toxicity of drug-like molecules at an early stage of lead optimization and we expect to grow revenues and profitability over the next years.
Effective August 31, 2009, we acquired 70% of the shares in Research Support International Private Limited, Thane, India (RSIPL). RSIPL is a company providing drug discovery and development services. The purchase price of 2.4 million in cash includes a potential earn-out.
Description of Our Business
We are a drug discovery and development company focused on providing integrated and innovative drug discovery services and alliances to the pharmaceutical and biotechnology industry. In addition, we have a small number of our own drug candidates at various stages of development either partnered or available for partnering. We provide innovative and integrated solutions to the pharmaceutical and biotechnology industry from target to clinical development through a range of capabilities and capacities, including early-stage assay development and screening, fragment-based drug discovery through to medicinal chemistry and in vivo pharmacology. In our proprietary projects, we are developing new treatments for diseases related to neuroscience, pain and inflammation.
Our partners include, among others, Boehringer Ingelheim, CHDI, Novartis, Ono Pharmaceutical and Roche. In exchange for access to our integrated discovery offerings, we receive contractual service fees and ongoing FTE-based research payments and, in certain circumstances, milestone and royalty payments related to the achievement of certain research, development and sales milestones.
Our late-stage preclinical research programs focus on H3 antagonists for the treatment of cognitive disorders and/or narcolepsy as well as antagonists for the purinergic receptor P2X3 for the treatment of pain.
Clinical development activities in 2009 were primarily focused on advancing our EVT 101, EVT 103, EVT 302 and EVT 401 programs. In the second quarter 2009, however, the EVT 302 project was suspended after failing in a Phase II study for smoking cessation.
We have subsidiaries in Hamburg, Germany, Oxford, UK, South San Francisco, CA, and North Potomac, MD, USA, Thane, India and Singapore.
Our strategy is to build a sustainable biopharmaceutical company based on revenue generating alliances delivering best in class research solutions for the pharmaceutical and biotechnology industry. In addition, and to a lesser extent, we will continue to develop, in collaboration, our proprietary drug portfolio, not only in CNS-related disorders but also in inflammation and pain
The key elements of our strategy are as follows:
During 2009, we achieved two preclinical milestones from such collaborations, resulting in the receipt of payments of 4.0 million
Our Product Pipeline
Through selective in-licensing as well as our own discovery projects, we have developed a pipeline of drug candidates that has the potential to provide a steady flow of compounds for partnering, with significant future growth potential. Our pipeline consists of promising drug candidates with demonstrated proof-of-concept in patients or potentially earlier, which we intend to partner and out-license to pharmaceutical companies for upfront and milestone payments, as well as royalties for the future sale of drugs. Such royalties may be significant given the market potential of our clinical candidates.
The following table summarizes the development status of our product candidates in clinical development:
Products in Clinical Development
Selectivity for Better Treatment Options. Our product candidate EVT 101 is a first generation, orally available subtype-selective N-methyl d-aspartate, or NMDA receptor antagonist with potential for the use in treatment-resistant depression, pain, Alzheimers disease and other indications. In all those specific indications, the market opportunities are large and growing. Preclinical and clinical studies we have performed appear to have shown that EVT 101 has good drug-like properties, good oral bioavailability and in vivo pharmacokinetics. It has been demonstrated to be safe and well tolerated in Phase I trials. Current treatments for treatment-resistant depression, pain, and Alzheimers disease are limited and often associated with significant side effects. If approved, selective antagonists of NMDA, receptors could be an attractive treatment option as they have potential for an improved side effect profile combined with superior efficacy. We partnered with Roche in early 2009 to investigate the potential of EVT 101 in treatment-resistant depression.
Treatment-Resistant Depressiona Significant Unmet Medical Need. More than 120 million people are estimated to suffer from depression globally. According to the National Institute for Mental Health, some of the symptoms include persistent sad, anxious or empty moods, feelings of hopelessness or pessimism, feelings of guilt, worthlessness or helplessness, or loss of interest or pleasure in hobbies and activities that were once enjoyed.
According to European Neuropsychopharmacology (D. Souery, 1999) it has been recognized that about one third of patients treated for major depression disorder do not respond satisfactorily to the first antidepressant pharmacotherapy. Treatment-resistant depression is a term used in clinical psychiatry to describe cases of major depressive disorder that do not respond to adequate courses of at least two antidepressants. There are only few new mechanisms in clinical development for depression.
Phase Ib Studies Showed Effect on the Human Brain. In 2008, we completed a series of Phase Ib studies of EVT 101. These studies were designed to show safety and tolerability over longer dosing periods at higher doses and also to provide signs of CNS activity in order to guide potential therapeutic doses. Results from a Phase Ib 4-week repeat dose study showed that the drug was well tolerated up to the highest dose tested. In addition, a sub-study in which the cerebral spinal fluid concentration of the drug was measured revealed that EVT 101 penetrates the brain leading to concentrations that should produce a high level of NR2B receptor blockade. In support of this, results from a second, brain imaging, Phase Ib study provided first evidence that the same doses as in the first Phase Ib study have an effect upon brain function in humans. They produced specific modulation of neuronal activity in relevant brain areas and were also well tolerated.
In parallel, we satisfactorily completed all studies on this compound requested by the FDA in connection with our investigational new drug, or IND, application.
Phase II to Start in 2010 in Collaboration with Roche. In March 2009, we signed a partnership with Roche for the development of the EVT 100 compound family with potential cash flows to us exceeding $300 million. Roche paid us an upfront payment of $10 million and will fund the Phase II clinical study for EVT 101 in treatment-resistant depression and a Phase I program for EVT 103. Roche has an option to buy back the entire EVT 100 series of compounds after completion of the Phase II trial. If Roche exercises this option, we will receive a $65 million payment from Roche plus substantial milestones and double-digit commercial payments. The Phase II study is expected to start in June 2010.
A next-generation molecule to EVT 101, EVT 103, is also in early development. It has a comparable pharmacological profile, but a less complex synthesis. In 2008, we completed all the entry-into-man enabling studies which cleared the way to begin a clinical Phase I study in the second quarter of 2009 in the context of our collaboration with Roche.
EVT 401, a P2X7 Antagonist Program
The purinergic receptor, P2X7, is a clinically-validated target for rheumatoid arthritis and other inflammatory diseases. It is a member of a family of ligand-gated ion channels found primarily in cells of the immune systems where it is thought to play a role in inflammatory processes. As it has been shown to initiate the processing and release of the IL-1 family of cytokines it is believed to play a critical role in the inflammation that underlies diseases like rheumatoid arthritis and inflammatory bowel disease and even respiratory diseases such as chronic obstructive pulmonary diseaseall representing large markets with urgent needs for safe and effective small molecule therapies. The goal for this program is the design of best-in-class P2X7 receptor antagonists that are distinguished by their potency, selectivity, pharmacokinetic properties and safety profiles.
Phase I completed in Q1 2009. The Phase I clinical studies with our lead candidate initiated in October 2008 to assess its safety, tolerability, pharmacokinetics and pharmacodynamics was successfully completed in the first quarter of 2009.
VR1 Antagonist Program
Certain ion channels are known to be key mediators of pain signaling. A specific family of ion channels known as transient receptor potential, or TRP, ion channels, are attractive targets for drug discovery. TRPV1 (VR1vanilloid receptor 1) is one specific member that has compelling preclinical validation as a target for the treatment of a number of different pain states. It may be activated by a wide variety of stimuli, including heat greater than 43°C and capsaicin, the active component of chili peppers. In addition, given VR1s role in inflammatory disease pathologies, it may also be possible to develop treatments for non-neurological conditions, such as urinary incontinence, irritable bowel syndrome and asthma.
Phase I Started in 2008. We are conducting our VR1 program in partnership with Pfizer. Jointly, we have identified chemical compounds that block VR1 and prevent it from signaling the sensation of pain. We have demonstrated oral analgesic efficacy in multiple preclinical models of pain. Progress under the collaboration has triggered total milestone payments to Renovis in excess of $6.0 million since the initiation of the collaboration. As expected, Pfizer advanced the lead candidate into Phase I clinical trials in mid 2008 to evaluate the compounds safety, tolerability and pharmacokinetic profile. During the first quarter of 2009 Pfizer stopped development of this clinical candidate. Pfizer will continue the collaboration and develop a follow-on antagonist. Although the joint research phase officially ended in June 2008, we are eligible to receive milestone payments and royalties on worldwide net sales per product successfully developed and commercialized, if any. If successful, we expect to have an effective, non-narcotic, non-addictive and non-steroidal analgesic to treat chronic pain, with minimal side effects.
EVT 302 is an orally active, selective and reversible MAO-B inhibitor. Phase I studies completed in 2008 showed that EVT 302 has excellent tolerability and the potential for a superior safety profile compared to less selective MAO-B inhibitors. In a Phase I clinical study conducted by us it was shown that, at therapeutic doses and above, EVT 302 did not interact adversely with tyramine, a substance that can be found in high amounts in certain drinks or foods such as red wine, cheese and chocolate. In extreme cases, such an interaction can dangerously elevate blood pressure, requiring patients to adhere to strict dietary restrictions. By confirming EVT 302s safety and tolerability, we laid a foundation for moving forward to Phase II proof-of-concept trials. In September 2008, we began a Phase II quit rate study, assessing the number of people who completely give up
smoking over a specified period of time. On April 14, 2009, we announced that the results of this Phase II study failed to demonstrate any significant improvement in the quit rate compared with placebo. We thus ceased further development of EVT 302 in smoking cessation and we are currently re-assessing the future of EVT 302, given the overall potential of MAO-B-inhibitors in a number of indications and the excellent safety profile demonstrated by EVT 302 in this study.
EVT 201 had been our lead compound in development for the treatment of insomnia which we anticipated to partner with a pharmaceutical company in 2008. Compared to current sleep aids, the profile of EVT 201 suggests that, combined with an excellent safety profile, the compound has strong efficacy in maintaining sleep throughout the night and ensuring next day alertness. However, the market environment for partnering of insomnia drugs has become increasingly challenging. As a result, we do not expect to conclude a partnering agreement for EVT 201 in the near term and we have stopped internal investment in clinical trials of EVT 201. In parallel, we have negotiated revised financial terms for EVT 201 with Roche. Instead of previous obligations to pay Roche defined future development milestones, as well as commercial payments, Roche will be receiving a pre-defined fixed proportion of any payments we receive from potential partnering collaborations. In light of this additional flexibility, we continue to reassess longer term options for potential further development and commercialization of EVT 201.
Other Research and Development Activities
From our own internal discovery programs we expect to identify at least one IND- track candidate in 2010. This is expected from the H3 antagonist program.
P2X3 and P2X2/3 Antagonist Program
The P2X3 and P2X2/3 receptors are also members of the P2X purinergic receptor family of ligand-gated ion channels. We believe that the P2X3 and P2X2/3 receptors are promising therapeutic targets for major medical needs in the areas of chronic pain and bladder dysfunction. These receptors are present in a restricted subset of primary sensory neurons which transmit pain signals, and preclinical studies examining their function suggest that they may have important roles in pain signaling and bladder function in humans. Studies conducted using small molecule antagonists of P2X3 and P2X2/3 as well as gene knockdown experiments, have demonstrated profound pain relief in multiple preclinical models of chronic inflammatory and neuropathic pain as well as urinary incontinence. Because the industry has struggled to design or identify drug-like ligands that inhibit these receptors, we believe we have an opportunity for a first-in class drug therapy.
We have identified proprietary small molecule antagonists of P2X3 and P2X2/3 and are actively engaged in late-stage lead optimization to support the selection of an IND-track candidate in 2011 for partnering.
H3 Antagonist Program
The histamine system constitutes one of the most important brain-activating systems regulating several brain functions. While, in the brain, histamine exerts its stimulatory action through post-synaptic H1 and H2 histamine receptor subtypes, H3 receptors are located presynaptically inhibiting histamine release. H3 receptor expression is not confined to histaminergic neurons, but, as a heteroreceptor on other neuron types, the H3 receptor is known to modulate various neurotransmitter systems in the brain, such as acetylcholine, dopamine and noradrenaline. As impairment in certain neurotransmitter systems is involved in neurological and psychiatric disorders, and given the modulatory effects of H3 receptors on multiple neurotransmitter systems, H3 antagonists are potential therapeutic agents for a variety of diseases such as cognitive impairment in Alzheimers disease and schizophrenia, narcolepsy and neuropathic pain. Data obtained with H3 antagonists as well as with H3 receptor knock-out models have provided a plethora of information on H3 receptor function and strengthen the rationale for H3 antagonists in these therapeutic indications.
We have identified and optimized novel and highly selective classes of small molecule antagonists of the histamine H3 receptor. Members of the active series have been tested in relevant in vivo models and have been shown to have promising profiles for progressing to the stage of preclinical development candidates. Selection of an IND-track candidate is expected for June 2010; three candidates are undergoing extensive profiling. We will make a decision on whether to continue to clinical development or partner at that time.
Discovery alliances are generating revenues and cash. Synergistic with our proprietary discovery and development programs and central to our business is the application of our drug discovery and disease biology expertise to collaborative research projects with industry partners, academic institutions and not-for-profit organizations. With an integrated drug discovery platform, we provide to our partners high quality drug discovery solutions from target to clinic. We are proud to collaborate with many of the worlds leading pharmaceutical companies including Boehringer Ingelheim, Japan Tobacco, Novartis, Ono, Pfizer, and Roche as well as many biotechnology companies that provide ongoing payments for research activities and mid-term revenue possibilities through achieving milestones.
High value-added, results-based alliances plus substantial contracts in preferred therapeutic areas are a foundation for growth. In the past, customers have engaged us to provide specific capabilities on a pure fee-for-service basis. Today, partners also seek broader, more innovative drug discovery solutions that require us to contribute disease expertise, specific know-how and resources previously available through their internal structures. Our expertise in neuroscience, pain, and inflammation has positioned us as a partner of choice for such large collaborations in these therapeutic areas, as illustrated by our partnerships with Boehringer Ingelheim, CHDI and Novartis. To fully capitalize on the potential of our capabilities and expertise, we also offer higher value, results-driven collaborations in which we share in our customers success through milestone payments and royalties along with FTE-based research fees in combination with our more traditional business model.
Boehringer Ingelheim. Since September 2004, we have been in a collaboration with Boehringer Ingelheim to jointly identify and develop preclinical development candidates for the treatment of various diseases including CNS-related disorders. Under the terms of the agreement, Boehringer Ingelheim has full ownership and global responsibility for clinical development, manufacturing and commercialization of the compounds identified. In return, we receive ongoing FTE-based research payments and preclinical milestones, plus clinical milestones and royalties on future sales of drugs derived from the collaboration. In January 2006, the collaboration doubled in size and was extended to the end of 2008. Since then, a team of approximately 80 scientists from both companies continue to work together on various projects. In early 2008, the collaboration was extended for an additional 12 months until the end of 2009. Between 2005 and 2008 we have achieved various milestones for the identification of a number of lead compounds on priority targets. In 2008, we identified our first preclinical development candidate. As a consequence, the partnership reached three milestones triggering payments to us of 8.5 million in the course of 2008 alone and a further 4.0 million in 2009. Further, in 2009 we extended and improved the reaserch fee terms of this collaboration for a further four years.
CHDI. In March 2006, we entered into a strategic drug discovery partnership with CHDI to help advance a number of their drug discovery programs. CHDI is a not-for-profit organization pursuing a biotech approach to finding therapies for Huntingtons disease. It operates as a virtual biotechnology company, progressing its discovery research entirely through third-party collaborations meaning that partners such as us are critical to their success. Through this business model CHDI seeks to identify and work with a network of the best companies available in order to successfully reach its goal to cure Huntingtons disease. In February of 2008, CHDI extended their collaboration with us to the end of 2010. Further, as of November 2009 this collaboration was extended to the end of October 2012 for which we will receive up to $37.5 million in research revenues.
Ono Pharmaceutical. In early 2008, we signed a drug discovery agreement with Ono Pharmaceutical. The collaboration applies our proprietary EVOlutionTM platform for fragment-based drug discovery to identify novel
and potent compounds against a protease target provided by Ono. In the collaboration, the platform is combined with our expertise in medicinal chemistry and Absorption, Distribution, Metabolism, Excretion, and Toxicity (ADMET) to further characterize active compounds identified using the technology and optimize their potency and selectivity to generate molecules for subsequent progression into clinical trials.
Under the agreement, Ono paid an initial, upfront fee for access to our fragment-based drug discovery technology, EVOlutionTM and provides research funding and success-based milestones based on the progress of the research. In the fourth quarter of 2009 we received a milestone payment from this collaboration and earlier in the year this collaboration was extended to address a further target.
Novartis. In December 2008, we entered into a research collaboration with Novartis to identify and develop novel small molecule therapeutics. We will apply our drug discovery platform in combination with our disease biology expertise to advance a drug discovery program against a target nominated by Novartis into the clinic. Furthermore, the agreement may be expanded by the addition of a second program. The collaboration will run for an initial period of three years.
Under the terms of the agreement, we will progress the programs up to clinical development and Novartis will then have the responsibility for all clinical development activities, manufacture and commercialization of the compounds. In return for our contributions to the research program, we are eligible for an upfront payment, research funding as well as preclinical and clinical milestone payments that could exceed $28 million. In addition, Novartis will pay royalties on sales to us for any marketed products resulting from the collaboration.
Other Alliances. During 2009 we entered into or initiated other alliances with among others, Cubist, Alios, Biogen Idec and Vifor.
Principal market in which the company competes
Our business is based on two pillars: internal development programs for proprietary drug candidates and innovative discovery alliances in which customers fund research. The focus of our internal programs is predominantly diseases of the nervous system, pain, and inflammation. In discovery alliances, we work with customers on a wide variety of disease areas and target classes. We are working towards increasing our level of participation through results-based partnerships with pharmaceutical companies, resulting in milestones and royalties for us in addition to FTE-based research payments. The customer segments addressed include pharmaceutical and biotechnology companies as well as academia and not-for-profit organizations. Geographically, North America and Europe are expected to contribute more than 80% to revenues, as these are the largest markets for drug discovery and development.
It is not practicable to provide a detail of revenues by category of activity.
Breakdown of revenue from continuing operations by geography for each of the last three fiscal years
Our business is not subject to seasonal patterns.
We do not depend on critical suppliers nor scarce raw materials.
We market our drug discovery solutions though a dedicated sales force to pharmaceutical and biotech companies. In addition, we have a Business Development team to seek partnering opportunities for some of our internal programs with pharmaceutical companies to conduct later stage clinical trials and later to potentially manufacture and distribute an approved product.
Patents, Trade Secrets and Licenses
We rely on a combination of patent, trademark and trade secret laws, in addition to confidentiality and inventions assignment agreements and licensing agreements, to establish and protect our intellectual property and proprietary information rights. We actively seek, whenever appropriate, patent protection for our intellectual property in Europe, the United States and other jurisdictions. In addition to using external advisors, we have dedicated internal resources to managing and monitoring our intellectual property and proprietary information rights.
The following factors are important to our success:
We will be able to protect our technologies and the competitiveness of our future products only to the extent that we are able to obtain valid and enforceable patents, protect our trade secrets and enforce confidentiality and inventions assignment agreements. For more information regarding the risks we face with respect to our intellectual property and proprietary information rights, see the risk factors set forth under the heading Risks Related to Our Industry.
As of December 31, 2009, we had more than 110 patent and utility model families under our full control. All of these are on file, or pending through national and/or foreign applications such as patent applications filed under the Patent Cooperation Treaty, or applications filed with the United States Patent Office, the European Patent Office, or the Japanese Patent Office. We review our patent portfolio regularly and decide whether to maintain or withdraw our patent applications and patents based on the importance of such intellectual property for our strategy.
In addition, pursuant to agreements with Roche, we have exclusively in-licensed several drug candidates, including the EVT 100 compound family, EVT 201 and EVT 302. These are protected by diverse composition of matter patent families as well as patents relating to their therapeutic use in major countries worldwide.
Furthermore, with our deep knowledge in CNS-related diseases we have established a solid position in the identification and validation of molecular targets involved in Alzheimers disease and other neurodegenerative diseases. Over the past years, we have built a patent portfolio that covers the use of such targets for diagnostic and drug discovery purposes.
We have also developed a number of biological assays, i.e. methods to measure the chemical or biological activity of any combination of targets and compounds, which are also patent protected.
Patents and patent applications for detection and other platform technologies support our intellectual property position. We own a portfolio of patent families as well as utility models on such technologies, many of which have been out-licensed to PerkinElmer Cellular Technologies Germany GmbH, our divested former subsidiary Evotec Technologies GmbH. Furthermore, we are the holder of non-exclusive licenses for technologies owned by PerkinElmer Cellular Technologies Germany GmbH, Olympus Corporation and other third parties.
Trade Secrets, Confidentiality and Assignment Agreements
Much of our technology and many of our processes depend upon the knowledge, experience and skills of our scientific and technical personnel. To protect rights to our proprietary know-how and technology, we generally require all employees, contractors, consultants, advisors and collaborators as well as potential collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information. The agreements with employees and consultants typically also require disclosure and assignment to us of ideas, developments, discoveries and inventions relevant to our business.
We operate in a highly regulated industry. In both Europe and the United States, our product candidates will require the submission of regulatory filings prior to clinical trials and regulatory approvals prior to commercial production and distribution. The regulatory approval process is generally stringent and time-consuming.
To obtain these approvals, preclinical studies and clinical trials must be conducted to demonstrate safety, efficacy and consistent quality of the product candidates. Preclinical studies involve laboratory and animal studies and clinical trials are the means by which product candidates are tested in humans.
Clinical trials are normally conducted in three sequential phases that may overlap or be combined:
Overview. Small molecule drugs and biologics are regulated by the FDA under the Federal Food, Drug and Cosmetic Act, or the FDCA and the Public Health Service Act, or PHS Act. The FDCA, the PHS Act and related regulations govern the testing, manufacturing, safety, efficacy, labeling recordkeeping, and advertising and other promotional practices with respect to these drugs and products. The FDA must approve a product candidate before marketing of that product may begin.
Conduct of clinical trials. Before a sponsor may begin clinical trials, it must submit an investigational new drug application, or IND, to the FDA. The IND typically includes information about non-clinical tests such as laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Performing the studies and compiling that information is a costly and time-consuming process. Generally, a sponsor of a clinical trial may begin the first phase of the trial thirty (30) days after the FDA receives the IND unless, before that time, the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with good clinical practice regulations which include the requirement that all research subjects provide informed consent. In addition, an investigational review board, or IRB, at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution. Each new clinical protocol must be submitted for review to the FDA and to the IRBs for approval. The sponsor must submit progress reports detailing the results of the clinical trials to the FDA, and the FDA may require modification, suspension or termination of a clinical trial if an unwarranted risk is presented to test subjects.
Application and approval process. After completion of clinical trials of a product candidate, the sponsor must obtain FDA marketing approval. If the product is regulated as a biologic, the sponsor will submit a biological license application, or BLA to the FDA. If the product candidate is a small molecule drug the sponsor will submit a new drug application, or NDA to the FDA. The BLA or NDA must include results of product development activities, preclinical studies, clinical trials and detailed manufacturing information among other things.
The FDA initially reviews all NDAs or BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept an NDA or BLA for filing. In that event, the NDA or BLA must be resubmitted with the additional information. The FDA review process is lengthy and thorough. The FDA may ultimately decide that the application does not satisfy its criteria for approval or may require additional preclinical studies or clinical trials. Before marketing approval is granted, the facility at which the product is manufactured will be inspected for compliance with current Good Manufacturing Practice, or cGMP requirements by FDA inspectors and will be inspected periodically for continuing compliance. Even if we obtain FDA approvals, the FDA subjects a marketed product to extensive and continuing review, including among other things compliance with cGMP, record-keeping, reporting of adverse experiences with the drug, and promotion and advertising requirements. Subsequent discovery of previously unknown problems or a failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of our product or mandated withdrawal of the product from the market, as well as possible civil or criminal sanctions. Failure to comply with these requirements could result in, among other things, restrictions on the marketing or manufacturing of the product, product recalls or seizures, warning letters, fines, injunctions or the imposition of civil or criminal penalties.
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval
process varies from country to country and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems, we must submit and obtain authorization for a clinical trial application in each member state in which we intend to conduct a clinical trial. After we have completed our clinical trials, we must obtain marketing authorization before we can market our product. We may submit applications for marketing authorizations either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. If a member state objects to the approval, an arbitration process is initiated and the final decision is made by the European Commission on the basis of an opinion of the Committee for Proprietary Medicinal Products, or CHMP. The mutual recognition procedure may be used more than once for subsequent applications to other member states in relation to the same product candidate.
We compete in the segment of the pharmaceutical market that treats diseases in the areas of neuroscience, pain and inflammation, which is highly competitive. We face significant competition from most pharmaceutical companies as well as biotechnology companies that are also researching and selling products designed to treat those diseases. Our main competitors for discovery alliances include, among others, BioFocus DPI, the service division of Galapagos NV, and Albany Molecular Research, Inc., as well as emerging Asian suppliers, such as WuXi PharmaTech, GVK Biosciences and Syngene. Many of our competitors have significantly greater financial, manufacturing, marketing and product development resources than we do. Large pharmaceutical companies in particular have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research capabilities than we do. As such, we currently intend to partner and out-license our product candidates to pharmaceutical companies to conduct Phase III clinical trials or potentially earlier trials and to develop, manufacture and distribute such product candidates in exchange for upfront and milestone payments and royalties for future sales. In the search for such partnerships, however, we compete with other biotech companies following a similar strategic approach. In addition, many universities and private and public research institutes are active in neurological research, some in direct competition with us. We also must compete with these organizations to recruit scientists and clinical development personnel.
We believe that our ability to successfully compete will depend on, among other things:
The following table includes all of the entities within our group, of which Evotec is the parent.
Property, Plants and Equipment
Our headquarters, which house our corporate offices and laboratories, are located in Hamburg, Germany. We lease approximately 5,620 square meters (approximately 60,500 square feet) in this facility under an operating lease expiring in December 2012 and approximately 1,400 square meters (approximately 15,000 square feet) under an operating lease with six months notice period. We also lease approximately 1,200 square meters (approximately 12,900 square feet) of office and laboratory space in another facility in Hamburg, Germany under an operating lease expiring in March 2015 and approximately 225 square meters (approximately 2,422 square feet) of office and laboratory space located in Berlin, Germany under an operating lease that is terminable upon six-months notice.
We also lease approximately 9,000 square meters (approximately 96,870 square feet) of office and laboratory space located in Oxfordshire, United Kingdom under operating leases expiring in 2023.
As a result of acquiring a majority/controlling stake in RSIPL in 2009, we acquired a lease for 45,049 square feet of laboratory and office space in Thane, India. The lease of 20,226 square feet of this space expires in February 2014; the lease of 14,553 square feet expires in June 2016 and the lease of 10,270 square feet in November 2016. These leases are terminable by giving three months notice.
Item 5. Operating and Financial Review and Prospects
This section contains a number of forward-looking statements. These statements are based on current management expectations, and actual results may differ materially. Among the factors that could cause actual results to differ from managements expectations are those described in the Special Note Regarding Forward-Looking Statements on page 1 and Risk Factors above.
Results of Operations
We are a drug discovery and development company focused on providing integrated and innovative drug discovery services and alliances to the pharmaceutical and biotechnology industries. In addition, we have a small number of our own drug candidates at various stages of development either partnered or available for partnering.
In March 2009, we published our Evotec 2012Action Plan to Focus and Grow. With this initiative, we communicated our strategy to invest into and grow our discovery alliances. In addition, we decided to concentrate our pipeline research and development on our most valuable assets.
Our current clinical pipeline comprises two partnered programs and three unpartnered clinical drug candidates:
In the first quarter of 2010, we announced the successful completion of the clinical part of this study.
The discussion and analysis of our financial condition and results of operations set forth below are based on our Consolidated Financial Statements contained in this Form 20-F, which have been prepared in accordance with IFRS. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto appearing in Item 18 Consolidated Financial Statements.
Our business has one operating segment in accordance with IFRS 8 Operating Segments. Effective January 1, 2008, following the disposal of our Chemical Development Business in 2007 (see Discontinued Operations below), the internal organization as well as the management reporting identifies only one segment. Previously we had two segments, the Pharmaceuticals Division and the Services Division.
Acquisition of Research Support International Private Limited (RSIPL)
In August 2009, we announced the acquisition of 70% of the shares of RSIPL, Thane, India including its 51% share in Evotec-RSIL Limited. RSIPL is a company providing drug discovery and development services and represents an important capacity expansion for us. We have a call option to purchase the remaining 30% in the event of a change-of-control. The acquisition added 164 headcount through the facility in Thane, India. RSIPL has been consolidated in our Consolidated Financial Statements since August 30, 2009.
Acquisition of Zebrafish Operation and Assets from Summit Corporation
In May 2009, we acquired the zebrafish operations and assets of Summit Corporation against £0.5m in cash. The acquisition has provided us with early discovery technologies critical to maintaining a differentiated discovery alliance platform. With this addition, we added 16 scientists in Abingdon, UK and Singapore.
Acquisition of Renovis, Inc.
In May 2008, we completed the acquisition of Renovis, Inc., a company operating in the field of drug discovery and development with a focus on pain and inflammation in exchange for 34,970,268 of our newly issued ordinary shares. As a result of the acquisition we acquired approximately 44.6 million of cash and investments, including auction rate securities, as well as some early and late-stage preclinical assets in the areas of pain and inflammation. Two of these later stage preclinical candidates subsequently entered Phase I clinical studies in 2008. The operating results of Renovis from the period May 2, 2008 through December 31, 2009 are included in our accompanying Consolidated Income Statement for the year ended December 31, 2009 and 2008 and the assets and liabilities of Renovis at December 31, 2009 and 2008 are included in the accompanying Consolidated Statement of Financial Position.
On May 5, 2009, we announced that we were implementing a re-engineering of our drug discovery and development operations. As a consequence of this reorganization all of our proprietary programs are now managed through our European operations and our U.S. operation at Renovis in South San Francisco, California has been wound down.
In 2007, we divested business that was not critical to our strategy, at that time, of focusing on higher-value discovery projects which feed into our proprietary pipeline or for our collaboration partners. On November 30, 2007, we completed the sale of our Chemical Development Business for a purchase price of 42.5 million after customary working capital adjustments, in cash and investments. The Chemical Development Business represented our activities in the development and manufacture of drug compounds and formulations. With approximately 203 employees when sold, the Chemical Development Business accounted for 21.5 million, or 39.5%, of our total revenue for fiscal year 2007 and 26.8 million, or 31.6%, of our total revenue for fiscal year 2006. Effective January 1, 2007, we sold our 89% interest in Evotec Technologies GmbH to PerkinElmer for 23.9 million in cash. Evotec Technologies GmbH comprised our activities in the development and manufacture of imaging tools and instruments for the life science industry. With 80 employees at year-end 2006, Evotec Technologies GmbH accounted for 17.3 million, or 20.5%, of our total revenue for the fiscal year 2006.
The term continuing operations refers to our Consolidated Income Statement and Statement of Financial Position for the periods indicated excluding the Income Statements and Statement of Financial Position of Evotec
Technologies GmbH and the Chemical Development Business. Discontinued operations refers to the Income Statement and Statement of Financial Position attributable only to these divested businesses for the periods indicated. Total refers to the aggregate amount for both continuing operations and discontinued operations for the relevant financial statement line item.
History of Losses
Since our formation, we have incurred significant net losses and had a total accumulated deficit of 618.9 million as of December 31, 2009. For continuing operations, our net losses were 45.5 million for the year ended December 31, 2009, 78.3 million for the year ended December 31, 2008 and 48.1 million for the year ended December 31, 2007. Our historical losses have resulted principally from costs incurred in connection with research and development programs, technology development, amortization of intangible assets and impairment of goodwill as well as selling, and general and administrative expenses (SG&A). In 2009, expenses decreased significantly from 2008 primarily as a result of reduced research and clinical trial expense as well as reduced SG&A expenses following a company restructuring. We expect to be profitable by 2012, but whether we are able to achieve operating profitability in the future will depend upon our ability to generate revenues that exceed our expenses.
Revenue from Continuing Operations
We expect to generate revenue in the near term primarily from ongoing research payments and upfront fees earned in drug discovery alliances. Milestone payments and royalties received from discovery alliances as well as from strategic alliance agreements may add to this revenue depending on the achievement of certain defined research milestones.
In March 2009, we entered into a strategic alliance agreement for Phase II clinical development of EVT 101 in patients with treatment-resistant depression with Roche. As part of this agreement, Roche has paid us an upfront fee of $10.0 million and has committed to fund clinical development of EVT 101, as well as EVT 103, the follow-on compound to EVT 101. If Roche exercises its buy-back option after the completion of the Phase II study, we will receive a $65.0 million lump-sum payment from Roche in exchange for returning the asset, as well as the entire EVT 100 compound family to Roche. We would also be eligible for further development, sales performance, and scalable double-digit commercial payments. We seek to out-license for further development and commercialization additional product candidates for which we hold licensing rights. As part of these out-licensing agreements we expect to generate upfront payments for those product candidates as well as additional clinical milestone payments and royalty payments from the potential future sale of product candidates.
We currently have research collaborations with more than 20 biotechnology and pharmaceutical companies.
Revenue from discovery alliance agreements generally includes:
In connection with our strategy of focusing on higher value collaborations with greater potential for sharing in any future upside, we are increasingly foregoing some short-term direct research payments in exchange for potentially larger later milestone and royalty payments.
For a discussion of our revenue recognition policies see Critical Accounting Policies below.
Cost of Revenue
Cost of revenue includes personnel expenses of employees directly associated with revenue-generating projects, facilities and overhead used to support these projects as well as materials consumed in the providing of services.
Our operating expenses consist primarily of research and development expenses, selling, general and administrative expenses and amortization of intangible assets. They have also been impacted by impairment of assets and goodwill. In the near term, we expect our operating expenses to reflect the costs associated with our ongoing drug discovery activities to develop selected drug candidates (e.g. our H3 antagonist and our P2X2/3 antagonist program) for future clinical development as well as the selling, general and administrative costs to support these efforts.
Research and Development Expenses
Research and development (R&D) expenses include the costs associated with research and development conducted by us and expenses associated with research and development carried out by us in connection with collaboration and licensing agreements, such as:
Research and development expenses are generally expensed in the period in which they are incurred. However, development expenses incurred in connection with product candidates are capitalized and recorded as intangible assets when there is sufficient certainty that future earnings of the product candidate will cover not only production and selling costs, but also these development expenses. Currently, we have determined that, given the uncertainties inherent in the regulatory approval process, these conditions have not been satisfied for any of our product candidates. As a result, all of our development costs for our product candidates were expensed in the periods presented, except for the purchase price of the intangible assets acquired from Roche as part of the Evotec NeuroSciences GmbH (ENS) acquisition as well as the intangible assets acquired related to the Renovis acquisition in 2008.
Early research expenses primarily depend on the number of scientific staff employed and outsourcing costs. The significant cost factors in clinical trials include manufacturing of compounds for product candidates, organization of clinical trials, including patient enrollment, production and testing of product candidates involved in clinical trials, and laboratory testing and analysis of clinical parameters. These costs may vary from year to
year depending upon factors such as the progress rate of clinical trials and other research and development activities, the timing of regulatory approvals, the duration of the regulatory-approval processes and the possibility of, and potential expenses related to, filing, prosecuting, defending or enforcing any patent claims or other intellectual property or proprietary rights.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses consist of personnel-related expenses, including non-cash stock-based compensation, not related to our research and development activities. Our SG&A expenses include our general management, corporate center and business development activities. The remaining costs consist of professional services, such as consulting fees, financial, legal and accounting fees, travel expenses, allocation of facilities and overhead and general expenses.
Amortization of Intangible Assets
Amortization of intangible assets relates primarily to the amortization of developed technologies, customer lists, patents and licenses from the acquisitions of Oxford Asymmetry International plc (OAI) and ENS.
Impairment of Assets and Goodwill
An impairment review, in accordance with IAS 36 Impairment of Assets, is performed annually for intangible assets with indefinite useful lives and goodwill, or whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. An impairment loss is recognized if the carrying amount of an asset (or a group of assets when considering a cash generating unit) exceeds its recoverable amount which is the greater of its fair value less costs to sell or value in use. The impairment charges we have recognized during the last two years are primarily from goodwill and intangible assets related to the acquisitions of OAI, ENS and Renovis. In 2009, following the replacement of the most advanced Phase I drug candidate under development at Pfizer, we impaired the carrying amount of our collaborative development program VR1.
Results of Operations: Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Our revenues in 2009 were 42.7 million, 8% above the prior year (2008: 39.6 million) primarily due to a strong performance of our discovery alliances, the out-licensing of the EVT 100 compound family to Roche, license and royalty income from Roche and DeveloGen AG with whom we had a joint venture until 2006, as well as additional revenues from the acquired RSIPL business. The milestone payments from the strategic alliance with Boehringer Ingelheim decreased from 8.5 million in 2008 to 4.0 million in 2009.
Currency effects had no significant impact on revenues for 2009 compared to 2008.
We expect that any revenue we earn will fluctuate from year to year as the result of the timing and amount of any milestone payments and research payments we earn or any new strategic alliances we may enter into in the future. For 2010, we currently expect that revenues before out-licensing income will increase by at least 15%.
Cost of Revenue
Cost of revenue was 24.3 million (2008: 22.0 million) which represents an increase of 10% from the prior year. The increase is primarily the result of the increase in revenues.
We expect cost of revenue in relation to revenue in the future to fluctuate with the amount and type of collaborative research projects we enter into.
Research and Development Expenses
Research and development expenditure decreased by 51% to 20.9 million from 42.5 million in 2008.
The sizeable reduction of R&D expenses was primarily for three reasons. (i) The focus on core programs and the reduction of early discovery expenses following the implementation of the Evotec 2012Action Plan to Focus and Grow, which followed a year of significant R&D expenditure in 2008, which was driven by the integration of Renoviss research programs and high clinical development cost, (ii) reimbursed expenditures by Roche for ongoing development studies with EVT 101 and EVT 103 following partnering of the program in March 2009 and (iii) the prior years first quarter inclusion of a milestone payment by us to Roche for the start of Phase II studies with EVT 302 ( 2.7 million).
As a percentage of R&D expenses, discovery programs represented approximately 52%, clinical programs represented approximately 29%, and overhead expenses and platform R&D represented approximately 12% and 7%, respectively. The platform R&D costs were focused on further development of high content screening, fragment based screening and novel computational methods for drug discovery.
Our clinical development program in 2009 included:
The following table summarizes the research and development expenses by project for the years ended December 31, 2009 and 2008:
We currently expect R&D expenses in 2010 to decrease to below 10.0 million as we primarily focus our R&D efforts on a few key assets and as a result of Roche funding the clinical expenses related to the Phase II development of EVT 101 and Phase I development of EVT 103.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by 16% to 16.7 million from 20.0 million in 2008. The decrease is primarily due to the site closure of Renovis and lower personnel expenses following the
restructuring of the European G&A functions. As of December 31, 2009, headcount in SG&A was 11 FTEs lower than at the same time in the previous year prior to the integration of RSIPL. The full effect of this restructuring will be reflected in our financial results for the years 2010 and beyond.
Amortization of Intangible Assets
Regular amortization of intangible assets declined to 0.5 million from 0.6 million in 2008.
The implementation of the Evotec 2012Action Plan to Focus and Grow resulted in restructuring expenses in the amount of 4.8 million in 2009. The closure of the Renovis site in South San Francisco, California, caused restructuring expenses of 3.6 million, the reduction in personnel in the German subsidiaries of 0.6 million and in the UK of 0.6 million. In 2008, we incurred 0.1 million of restructuring costs.
Impairment of Goodwill and Intangible Assets
As a result of our regular impairment review, a non-cash impairment of intangible assets ( 18.2 million) was recognized in the 2009 results. In 2008, the impairment of intangible assets amounted to 7.3 million.
A review of previously impaired fixed assets resulted in a reversal of an impairment of 0.4 million being recorded due to improved asset utilization in one of the two remaining buildings at the Abingdon, UK site.
The goodwill that originated from the acquisition of Renovis was impaired as a consequence of the restructuring and closure of its South San Francisco, California facility. We additionally performed an impairment analysis of the goodwill attributable to the laboratory-based Abingdon, UK operations and concluded that no need for an impairment existed.
We performed an impairment review of the intangible assets acquired from Evotec Neurosciences (ENS) in 2005 and an impairment charge of 4.4 million was taken against EVT 201, as a result of the continuously difficult partnering situation. We additionally performed an impairment analysis of the Renovis intangible assets and concluded that the VR1 program and EVT 401 both had to be impaired. The VR1 program was impaired in the first quarter of 2009 (6.6 million) due to the delay in its collaboration with Pfizer and further impaired by 0.4 million in the fourth quarter of 2009. The latter is not a result of scientific results but due to changes in capital market conditions. Despite the development of EVT 401 according to plan, management determined that an impairment in the amount of 6.8 million is required as a consequence of uncertainties regarding the future course of action.
Operating loss amounted to 42.3 million in 2009 and improved by 42% as compared to 73.2 million in 2008. The decrease is mainly a result of the reduced cost base, lower impairment charges and the increase in revenues, partially offset by higher restructuring expenses in 2009, as noted above.
Net Interest Income (Expense)
Net interest income decreased to 0.1 million from 2.1 million in 2008 and resulted from low market interest rates.
Other Income (Expense) from Financial Assets
In 2009, Other expense from financial assets was negatively impacted by the devaluation of the put option for auction rate securities (1.2 million), for which in 2008 a gain in the amount of 1.8 million was booked. In addition, in 2008, income from financial assets was realized from the sale of DIREVO convertible bonds in connection with the sale of DIREVO Biotech to Bayer HealthCare for 4.6 million.
Other Non-Operating Expense
In 2009, Other non-operating expense of 1.0 million was recorded, mainly due to a write down of a loan to European ScreeningPort GmbH.
Foreign Currency Exchange Gain (Loss), Net
In accordance with IAS 21 we recognized a foreign exchange loss of 1.6 million (2008: 11.8 million) as a result of the repayment of share capital related to the investment in Evotec (UK) Ltd, which was previously recorded as a component of equity and reclassified into our Income Statement.
Current tax expense decreased to 0.4 million for the year ended December 31, 2009 from 1.9 million for the year ended December 31, 2008. We incurred income tax in the amount of 0.4 million related mainly to Evotec AG and due to its exceptional taxable income in 2009. The 2008 income tax related mainly to our subsidiary Evotec (UK) Ltd.
Deferred tax expenses for the year declined from 0.4 million in 2008 to 0.3 million in 2009.
Our net loss from continuing operations decreased to 45.5 million in 2009 from 78.3 million in 2008 for the reasons described above.
Results of Operations: Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Managements following discussion focuses on our continuing operations.
Our revenues in 2008 were 39.6 million, 20% above the prior year (2007: 32.9 million) primarily due to the achievement of three milestones, amounting to payments of 8.5 million, related to our collaboration with Boehringer Ingelheim. Underlying revenues from discovery alliances, including 0.4 million from Renovis, were on 2007 levels despite negative currency effects in 2008 and the absence of library synthesis revenues following the transfer of this business into a joint venture with RSIL in October 2007.
Currency effects had a negative impact on revenues throughout 2008. At 2007 constant exchange rates for the U.S. Dollar and UK Sterling against our reporting currency, the Euro, revenues would have grown by an additional 6% to a total growth of 26% over the prior year.
Cost of Revenue
Cost of revenue was 22.0 million in 2008 (2007: 24.9 million) which represents a decrease of 12% from the prior year. The decrease was primarily the result of favorable currency effects related to converting the UK Sterling denominated UK related cost of revenue to the Euro with a smaller impact resulting from cost reduction efforts and increased capacity utilizations in 2008.
Research and Development Expenses
Research and development expenditure increased by 15% in 2008 to 42.5 million from 36.9 million in 2007. The increase was primarily due to the inclusion of Renovis R&D expenses (8.1 million) subsequent to the
acquisition in May 2008 and a milestone payment of 2.7 million to Roche that was incurred when we initiated Phase II studies with EVT 302 in the first quarter of 2008. These increases were partially offset by a decrease in clinical expenses in 2008 as compared to 2007.
As a percentage of R&D expenses, clinical programs represented approximately 49%, discovery programs represented approximately 39%, and overhead expenses and platform R&D represented approximately 8% and 4%, respectively. The platform R&D costs were related to expanding our capabilities in structural biology as well as fragment-based screening.
Our clinical development program expenses in 2008 included:
The following table summarizes the research and development expenses by project for the years ended December 31, 2008 and 2007:
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 12% in 2008 to 20.0 million from 17.8 million in 2007. The increase was primarily a result of the inclusion of Renovis SG&A expenses subsequent to the acquisition, consultancy expenses related to Sarbanes-Oxley compliance efforts and certain severance costs incurred in 2008.
Amortization of Intangible Assets
Regular amortization of intangible assets declined to 0.6 million in 2008 from 2.6 million due to certain intangible assets acquired with Evotec Neurosciences in 2005, which were completely amortized during 2007 or in the first quarter of 2008.
Impairment of Goodwill and Intangible Assets
During the fourth quarter of 2008, we recognized a non-cash impairment of goodwill of 20.3 million. Additionally, we recognized an impairment charge of 7.3 million related to intangible assets acquired as part of the acquisition of Evotec Neuroscience in 2005. The majority of these impairment charges resulted from our decision to focus on core assets and to discontinue earlier discovery projects in order to reduce annual R&D spend in future years as well as a result of partnering delays related to EVT 201.
Operating loss amounted to 73.2 million in 2008 as compared to 58.1 million in 2007. The increase was mainly a result of the increase in impairment charges and R&D expenses in 2008 as noted above.
Net Interest Income (Expense)
Net interest income increased to 2.1 million in 2008 from 1.5 million in 2007 and resulted from higher average cash and investment balances in 2008.
Other Income from Financial Assets
Other income from financial assets increased to 7.2 million in 2008 from 0.5 million in 2007. The increase from the prior year was primarily due to the income earned by us related to the sale of the DIREVO convertible bonds (4.6 million) which we received as part of the consideration of the sale of our interest in DIREVO in May 2007. Additionally, in 2008, non-cash income of 1.8 million related to a right to sell our auction rate securities, at par, back to the investment firm that sold the investments to us was recorded (Put Option). In accordance with IAS 39, the Put Option we hold is a derivative and measured at fair value with gains or losses recorded in the Income Statement.
Foreign Currency Exchange Gain (Loss), Net
Foreign exchange loss increased to 12.1 million in 2008 from a gain of 1.6 million in 2007. The increase in the foreign exchange loss was primarily due to a reduction of the capital reserve of a foreign subsidiary which was paid to us in 2008. In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates, this is deemed to be a repayment of share capital resulting in a portion of the foreign exchange losses related to the investment in this subsidiary which were previously recorded as a component of equity being reclassified into our Income Statement in 2008.
Current tax expense increased to 1.9 million for the year ended December 31, 2008 from 0.1 million for the year ended December 31, 2007. This increase was primarily due to the income taxes incurred related to our subsidiary, Evotec (UK) Ltd., which reported a net profit in 2008.
Deferred tax benefit for the year ended December 31, 2007 of 6.4 million was primarily due to the recognition of deferred tax assets on tax loss carryforwards of Evotec Neurosciences, which was utilized by the reversal of the deferred tax liabilities incurred in the acquisition in 2005. There was no corresponding tax benefit for the year ended December 31, 2008.
Our net loss from continuing operations increased to 78.3 million in 2008 from 48.1 million in 2007 for the reasons described above.
Net Income from Discontinued Operations
There were no discontinued operations for 2008. The net income from discontinued operations for the year ended December 31, 2007 of 36.9 million was primarily a result of the gains resulting from the two divestitures accounted for in 2007: the Chemical Development Business to Aptuit (25.2 million) and Evotec Technologies to PerkinElmer (11.2 million).
Liquidity and Capital Resources
Our cash, cash equivalents and investments, including auction rate securities, totaled 70.6 million at December 31, 2009.
We have historically financed our operations through the issuance of equity securities, cash resulting from divestures of non-strategic businesses, the sale of research instruments, revenue from discovery alliances, including upfront fees and milestone payments, interest earned on investments, government grants, capital lease financing and medium-term bank debt.
Selected Cash Flow Information
The following table sets forth selected cash flow information for us, including both continuing operations and discontinued operations, for the years ended December 31, 2009, 2008 and 2007:
Year Ended December 31, 2009
Cash flow used in operating activities was (21.9) million in 2009 compared to (41.3) million in 2008: The decrease is the result of our lower cost base (R&D and SG&A) in 2009, partially offset by exceptional employee severance payments following the restructuring efforts in conjunction with the implementation of the Evotec 2012Action Plan to Focus and Grow.
Cash flow used in investing activities was (2.1) million in 2009 compared to cash flow provided by investing activities of 61.0 million in 2008. In 2009, cash was primarily used for capital expenditures which amounted to (2.1) million and for the acquisition of the Indian company RSIPL (1.6) million. The sale and purchase of current investments in money market funds resulted in a net cash increase of 1.4 million. The purchase of entities (1.9) million, intangible assets (0.1) million and the cash acquired 0.2 million were a consequence of the acquisitions of RSIPL and the zebrafish business of Summit. Proceeds from the sale of property, plant and equipment 0.3 million related mainly to the wind down of our U.S. operations. Proceeds from the sale of financial assets 0.2 million resulted from a purchase price adjustment related to the sale of DIREVO convertible bonds.
Net cash flow provided by financing activities was 1.5 million in 2009 (2008: (4.3) million) and related mainly to an increase in bank loans and proceeds from equity instruments for employees.
The exchange rate difference on the net increase in cash and cash equivalents amounted to 0.3 million.
Year Ended December 31, 2008
Cash flow used in operating activities was (41.3) million in 2008 compared to (31.7) million in 2007 and was mainly the result of the continued high level of investment in our R&D pipeline and related higher administrative expenses. Net cash used in operating activities related to continuing operations was (33.4) million for the year ended December 31, 2007.
Cash flow provided from investing activities was 61.0 million in 2008 and resulted primarily from the sale and purchase of current investments which resulted in a net cash increase of 49.5 million and cash acquired from Renovis of 10.7 million. In addition, 4.6 million in cash was received in the fourth quarter of 2009 related to the proceeds from our sale of DIREVO convertible bonds and 2.0 million was received from escrow related to the sale of our instrument business in 2007. This was partially offset by capital expenditures of 3.5 million and transaction costs related to the acquisition of Renovis of 2.2 million. Net cash provided by investing activities related to continuing operations was 22.8 million for the year ended December 31, 2007.
Net cash flow used in financing activities was 4.3 million in 2008 and was primarily composed of transaction costs related to the capital increase for the acquisition of Renovis of 2.6 million and repayment of loans of 2.4 million partially offset by new loan proceeds of 0.6 million. Net cash used in financing activities related to continuing operations was 0.2 million for the year ended December 31, 2007.
The exchange rate difference on net increase in cash and cash equivalents in the amount of 1.6 million resulted from the strengthening of the U.S. Dollar, offset slightly by the weakening of the UK Sterling, in relation to the Euro when comparing the Statement of Financial Position dates of 2008 and 2007 and their effect on historical book values.
Liquidity Based upon our current financial plan we expect that our current cash and cash equivalents, short-term and long-term investments, together with our operating revenues will be sufficient to fund our planned activities beyond of 2012. In 2010, top-line growth and the adjusted cost base are expected to significantly reduce the cash requirements compared to the 2009 fiscal year. Consequently, at constant year-end currencies, we expect to end 2010 with a liquidity of more than 60 million, excluding any potential cash outflow for M&A or similar transactions.
Research and Development, Patents and Licenses
Please see Item 4. Information on the Company above for this information.
Please see Item 4. Information on the Company and Item 5. Operating and Financial Review and Prospects above for trend information.
Off-Balance Sheet Arrangements
We have not had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we have not engaged in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had been engaged in these relationships.
Set forth below is a description of our contractual obligations as of December 31, 2009:
In addition to the contractual obligations set forth in the table above, we are subject to contingent contractual obligations arising from our licensing agreements with Roche. The incurrence of a liability to make payments to Roche and the timing of any such payments is contingent on achievement of certain preclinical and clinical development and/or commercialization events. The aggregate of the potential milestones that would be due in a situation only wherein all contractually agreed scientific and commercial events are achieved are as follows:
The aggregate of the potential milestone payments will become due, if at all, over a period of years reaching substantially into the future. Furthermore, prior to the incurrence of major milestone payment liabilities, we expect to enter into commercialization agreements with third parties leading to milestone payment claims against these third parties upon the same or similar events and in the same or similar magnitude as stipulated in the Roche agreements.
Certain of the statements included in this Annual Report and the documents incorporated herein by reference may be forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Please also see the discussion regarding forward-looking statements at page 1.
Critical Accounting Policies
The preparation of our financial statements which are prepared in accordance with IFRS requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions
or conditions. While our significant accounting policies are described in more detail in the notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 20-F, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our Consolidated Financial Statements.
Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to us based upon the performance requirements of the respective agreements.
Revenues generated from contracted services are recognized as the services are rendered. Payments for contracted services are generally paid in advance and recorded as deferred revenue until earned.
Deliverable kind of contracted services and chemical compound sales are recorded as revenue upon delivery if we have received a customer order, the price is determinable and collectability is reasonably assured. We assess collectability based on a number of factors, including past transaction history with the customer and the customers credit-worthiness. Payments for deliverable kind of contracted services are generally paid in advance and recorded as advanced payments received. Revenue from compound access fees is recognized ratably over the related forecasted service period.
Revenue under long-term collaborative agreements includes, but is not limited to, the following:
When we enter into multiple-element contracts we carefully determine whether the different revenue-generating elements are sufficiently separable and whether there exists sufficient evidence of their fair values to separately account for some or all of the individual elements of the contracts. Only if an element is considered to meet these criteria will it represents a separate unit of accounting. We have no refund obligations included in our service agreements.
Impairment of Assets and Goodwill
We are required to test for impairment of our property, plant and equipment and intangible assets in use, whenever events or changes in circumstances indicate that the carrying amount of an asset or assets may not be recoverable. Goodwill, intangible assets with an indefinite useful life and in-process research and development projects not yet completed are tested at least annually in accordance with IAS 36. An impairment loss is recognized if the carrying amount of an asset (or a group of assets when considering a cash generating unit) exceeds the greater of its fair value less costs to sell or value in use. The value in use for an asset or cash generating unit is calculated by estimating the net present value of future cash flows arising from that asset or cash generating unit. The discount rate used to calculate the value in use is determined to reflect the risks and rewards inherent for that asset or cash generating unit. The determination of the underlying assumptions related to the recovery of long-lived assets, in particular estimates of discounted future cash flows, is subjective and requires the exercise of considerable judgment. Any changes in key assumptions about our business and prospects could result in an impairment charge. Impairments can also occur when we decide to dispose of assets.
A cash generating unit had been subject to an impairment charge in a prior year resulting in a permanent reduction of goodwill allocated to that cash generating unit. The value in use of our cash generating units substantially exceeded their carrying amount at the most recent annual test date of October 1, 2009.
We grant stock options to the members of our Management Board, senior management and employees. Under the terms of our stock option plans, options are exercisable within six to ten years of the date of grant, subject to an initial waiting period of at least two years as required by German law. The exercise price equals either the market price of our ordinary shares the day prior to the grant or the average of the market price of our ordinary shares over a three-day period prior to the date of grant.
We apply the provisions of IFRS 2 Share-based Payment in accounting for options granted under our stock plans. Compensation cost from the issuance of employee stock options is measured using the fair value method at the measurement date and is charged to expense over an estimated period in which the employee renders the services.
We estimate the fair value of our stock options using several variables, including share price volatility, risk-free interest rate, future dividends to be paid by us, the life of the option and the expected forfeiture rate. We estimate share price volatility based on actual historical share prices over the estimated life of the option. We revise the estimate of the share price volatility at the beginning of each year and use the same volatility for all options issued during the year, unless the market for our shares fluctuates significantly during a period, in which case the calculation is updated quarterly. The risk-free interest rate used in the calculation is the interest on debt issued by the German government with a maturity similar to the estimated life of the stock options. We estimate that we will not pay dividends in the foreseeable future and we estimate the life of the option to be six years. Any changes in estimates of volatility, risk-free interest rate, future dividends, the life of the options and forfeitures would result in increases or decreases in the amount of compensation expense recognized.
Deferred Tax Assets
Deferred tax assets are recognized to the extent that it is probable that there will be future taxable income against which the temporary differences can be utilized. The valuation of future taxable income depends on assumptions that can change through time, with the possibility of significant differences in managements final valuation of deferred income tax. Judgment is required when determining the key assumptions used in the assessment and changes to the assumptions can significantly affect the outcome of the assessment.
Recent Accounting Pronouncements
Please refer to Note (2) in the Consolidated Financial Statements included in this report.
Item 6. Directors, Senior Management and Employees
Under German law, the minimum number of members of the Supervisory Board (Aufsichtsrat) is three, unless the articles of association provide for a higher number, which must be a multiple of three. The maximum number of Supervisory Board members allowed depends on the amount of the stated capital of the company and can be between nine and twenty-one members. If a company has more than 2,000 employees, the number of members depends on the number of employees of the company.
Our Supervisory Board regularly consists of six membersas provided in our current articles of associationall of whom are elected by the shareholders by a simple majority of the votes cast at a shareholders meeting in accordance with the provisions of the German Stock Corporation Act. The Supervisory Board appoints a chairman and one or more vice-chairmen from among its members. Currently our Supervisory Board consists of five members.
The members of the Supervisory Board are elected for terms of up to approximately five years. Each term expires at the end of the annual general shareholders meeting after the fourth fiscal year following the year in which the Supervisory Board was elected, unless the shareholders meeting, when electing the members for the Supervisory Board, decides on shorter terms. Re-election is possible. The term of the current members of the Supervisory Board will expire at the end of the annual general shareholders meeting held in the year 2014. Dr Corey Goodman resigned from the Supervisory Board effective January 31, 2010; he will be replaced by a suitable successor in due course.
Our Management Board (Vorstand) currently consists of three members. Under our articles of association, the Supervisory Board determines the size of the Management Board, which must have at least one member under the German Stock Corporation Act.
The statutory maximum term for members of the Management Board is five years. Management Board members may be reappointed.
Our Management Board Members and Supervisory Board Members, and their ages as of April 30, 2010, are as follows:
Management Board Members:
Supervisory Board Members:
The following is a brief summary of the background of each of the Management Board Members and Supervisory Board Members:
Dr Werner Lanthaler was appointed Chief Executive Officer of Evotec AG on March 6, 2009. From March 2001 to March 2009 he was Chief Financial Officer at Intercell AG. During his tenure, Intercell developed from a venture-backed biotechnology company into a global vaccine player. Dr Lanthaler played a pivotal role in many of the companys major corporate milestones including the product approval of Intercells Japanese Encephalitis Vaccine, the companys acquisitions and strategic pharma partnerships, as well as the companys Initial Public Offering on the Vienna Stock Exchange in 2005. Previously, from 1998 to 2001 Dr Lanthaler served as Director of the Federation of Austrian Industry, and from 1995 to 1998 as Senior Management Consultant at the consulting firm McKinsey & Company. Dr Lanthaler was a member of the Board of Directors of BioXell S.p.A until end of March 2009. He holds a doctorate in economics from Vienna University, earned his Masters degrees from Harvard University, and holds a degree in Psychology.
Dr Klaus Maleck joined Evotec AG as Executive Vice President Finance and a member of the executive committee in April 2007. He was appointed as a member of the Management Board as of November 1, 2007. Prior to joining us, he co-founded BioGeneriX AG in 2000. Dr Maleck worked as a Senior Consultant at
McKinsey & Co. from 1999 to 2000, and as a scientist in the genomics field at Novartis, Inc. from 1996 to 1999. He is also a lecturer at the Mannheim University in Economics. Dr Maleck received his Ph.D. in biotechnology from the Max-Planck-Institute in Cologne, and holds a masters degree in biotechnology of the Ecole Supérieure de Biotechnologie in Strasbourg France. In addition, he received post-graduate training in Economics at Ashridge College in the U.K., and at Swiss-based Educatis University, where he earned an M.B.A. degree. He was a fellow of the Conseil Régional dAlsace, the Daimler-Benz-Foundation and the German Scholarship Foundation.
Dr Mario Polywka is Chief Operating Officer and as such, was appointed as member of the Management Board as of November 1, 2007. He has been a member of our executive committee since 2004. Dr Polywka also currently serves on the Board of Pharminox. Dr Polywka was a Founding Chemist of Oxford Asymmetry International (OAI) in 1991, became Director of Chemistry in 1993 and became a member of the Board of Directors in 1996. In 1999 he was appointed Chief Operating Officer and in 2000 Chief Executive Officer of OAI plc. From 1989 to 1991 he worked as Senior Chemist at Oxford Chirality Ltd., the predecessor to OAI. Dr Polywka received a doctorate from the University of Oxford in Mechanistic Organometallic Chemistry and continued at Oxford with post-doctoral studies on the Biosynthesis of Penicillins. Dr Polywka is a Fellow of the Royal Society of Chemistry.
Dr Flemming Ørnskov has been Chairman of the Supervisory Board of Evotec since August 2008. He is a well known executive with extensive experience within the pharmaceutical industry. As Global President of Pharmaceuticals at Bausch & Lomb, Dr Ørnskov is responsible for the companys prescription ophthalmic pharmaceuticals and generics, as well as its OTC business. Most recently, Dr Ørnskov was CEO and President of LifeCycle Pharma, an emerging cardiovascular and transplantation specialty company. Prior, he served as CEO and President of biotech start-up Ikaria, Inc., which was sold to a private equity company within a year of him taking office. From 2002 to 2005, he was President of the Ophthalmics Business Unit for Novartis and from 2001 to 2002, he led Novartis U.S. cardiovascular franchise. Prior to joining Novartis, Dr Ørnskov held multiple leadership positions at Merck & Co. Dr Ørnskov serves on several boards, and is Chairman of the board for Santaris Pharma A/S and Astion Pharma A/S. Dr Ørnskov received a MD degree from the University of Copenhagen, a MBA degree from INSEAD and a Master of Public Health degree from Harvard University.
Dr Hubert Birner has been a member of the Supervisory Board of Evotec AG since June 2005, when we had re-acquired full ownership interest in Evotec Neurosciences from TVM Capital as the lead and other venture capital investors, and its vice chairman since August 2008. He joined TVM Capital in 2000 and is General Partner for life sciences in the firms Munich office. Prior to that, Dr Birner was Head of Business Development Europe and Director of Marketing Germany at Zeneca. He joined Zeneca from McKinsey & Companys European Health Care and Pharmaceutical practice. Dr Birner was also an assistant professor for biochemistry at the Ludwig-Maximilians-University in Munich. Dr Birner serves as Chairman of the Board of Argos Therapeutics Inc. (Durham, North Carolina) and Spepharm Holdings BV (Amsterdam, Netherlands). He is also a board member of Jerini AG (Berlin, Germany), Spepharm Holdings BV (Amsterdam, Netherlands) and BioXell SA (Milan, Italy) and represents the interests of TVM Capital at Ardana Bioscience plc (Edinburgh, UK) and Proteon Therapeutics, Inc. (Kansas City, Missouri). Dr Birner holds an M.B.A. from Harvard Business School and a summa cum laude doctoral degree in biochemistry from Ludwig-Maximilians-University in Munich. His doctoral thesis was honored with the Hoffmann-La Roche prize for outstanding basic research in metabolic diseases.
Dr Peter Fellner has been a member of the Supervisory Board of Evotec AG since June 2005. He was appointed as Chairman of Vernalis plc in January 2003 and as Executive Chairman in April 2003. Previously, he was Chairman of Celltech Group plc, having served as its Chief Executive Officer from 1990 to 2003. Before joining Celltech, Dr Fellner served as Chief Executive Officer of Roche UK, from 1986 to 1990. From 1984 to 1986, he was Director of the Roche UK Research Centre. Dr Fellner is also Non-Executive Chairman of Astex Therapeutics Ltd, and a non-executive director of UCB S.A., QinetiQ Group plc, and Consort Medical plc. In addition, he is a member of the UK Medical Research Council and a member of the Apax Healthcare Advisory Board.
Mary C. Tanner has been a member of the Supervisory Board of Evotec AG since January 2005. Before joining us, Ms. Tanner served as a Senior Managing Director at Bear Stearns and Lehman Brothers, specializing in the health care and consumer products industry. In 2004, following her retirement from Bear Stearns Ms. Tanner founded Life Sciences Partners, which specializes in healthcare investment and advisory work. Most recently, Ms Tanner was hired as managing partner at Peter J. Solomon Co. heading the investment banking advisory firms global pharmaceutical and life sciences practice. She is a non-executive Director of Synvista Therapeutics, Inc. Ms. Tanner received her university degree from Harvard in 1973 in philosophy and related fields.
Dr Walter Wenninger has been a member of the Supervisory Board of Evotec since June 2009. He has profound experience in strategic management, research and development and sales and marketing from leading positions in the international pharmaceutical industry. His career includes more than 30 years at Bayer AG where he held top-executive management positions within the lifescience business in Europe and the United States. From 1994 to 2000 Dr Wenninger served as a member of the Management Board of Bayer AG responsible for the healthcare sector. Following his retirement at Bayer, he has been involved in corporate development of several life science organizations. He is a member of the Executive Committee of the German Cardiac Research Foundation, the Executive Committee of the Robert-Koch-Foundation, and was a longtime member of the Board of Trustees of the German Cancer Research Center. Dr Wenninger currently serves on the boards of various other European pharmaceutical and biotechnology companies including Noxxon Pharma AG, Paion AG, Recordati S.p.A. and Santaris Pharma A/S.
Compensation of Directors and Officers
The remuneration paid to the members of the Management Board in 2009, totaled T1,201 (2008: T1,264) of which T395 (2008: T357) was variable remuneration. Fixed remuneration includes base salaries, contributions to personal pension plans, premiums for accident and accidental death insurances as well as the benefit derived from the use of company cars. The variable remuneration of the Management Board is based on a bonus scheme designed by the Remuneration Committee of the Supervisory Board and is then approved by the Supervisory Board. The scheme for the variable portion of the remuneration paid in 2010 relating to the 2009 fiscal year was based on the following criteria:
Dr Mario Polywka and Dr Klaus Maleck were granted an extra bonus (which is included in the variable remuneration mentioned above) paid out in 2009 as compensation and incentive for jointly leading the Company during the period of vacancy of the CEO position until Dr Werner Lanthaler joined Evotec in March 2009.
The variable portion of the remuneration paid out in 2009 was based on the achievement of defined milestones, the achievement of budgeted financial targets and the achievement of personal objectives during 2008.
In addition to their fixed and variable remuneration, the members of the Management Board received a total of 700,000 stock options to purchase our ordinary shares in 2009 (2008: 600,000) under our stock option plans. The options granted in 2009 are subject to the stipulations of the Option Plan 2008 and 2007 and may be exercised after three years if the conditions of this plan are met.
The individual contracts of the Management Board members contain a change-of-control clause, which would allow them to terminate their current contracts in the event of a change-of-control. A change-of-control occurs when a new investor assumes more than 30% of the shares of the Company. Upon contract termination, Dr Maleck and Dr Polywka are entitled to severance payments of one years base salary plus bonus, calculated on the basis of the prior years remuneration, while Dr Lanthaler is entitled to two years base salary, but no more than the total remuneration due for the remaining term of the contract. We have a Directors and Officers (D&O) insurance policy in place for the Management Board, the Supervisory Board, the executive management and the managers of our subsidiary companies. The insurance expense totaled T180 in 2009 (2008: T179), and was paid by us.
When Jörn Aldag resigned as our President and Chief Executive Officer and from our Management Board in December 2008, we entered into a non-competition agreement with him exceeding the regular duration of his service agreement. We also agreed to pay him a lump-sum payment equivalent to the remuneration that he would have received had his contract expired and not been terminated. No further severance payments were agreed to be paid by us. The exit agreement stipulated gross total payments of approximately 2.0 million to Jörn Aldag, including the bonus for the business year 2008 (0.3 million). These payments include T573 fixed and T805 variable remuneration for the period until his contract would have expired if not terminated as well as T644 for the non-competition agreement. Of this sum, 1.7 million was paid in early 2009 and the remaining 0.3 million was paid in early 2010. Mr. Aldag retained 947,600 of unvested options granted to him in the past. They continue to be valid, to vest and expire in line with the respective resolutions of the annual general shareholder meetings.
The remuneration accrued in 2009 and paid in 2010 to the members of the Supervisory Board as remuneration for the 2009 financial year totaled:
The remuneration accrued for the members of the Supervisory Board in the 2008 financial year and paid out in 2009 totaled:
For 2009, the remuneration of each Supervisory Board member amounted to T15 per year, with the chairman receiving three times that amount and the vice chairman twice that amount. The additional remuneration for a member of a Supervisory Board Committee amounts to T3.75, for the chairman of those Committees to T10. The total cash remuneration paid to Supervisory Board members for the financial year 2009 was T280.0. In addition to the cash remuneration, the members of the Supervisory Board receive payments in the form of Evotec shares. Members of the Supervisory Board receive shares valued at T10 (chairman three times, vice chairman twice this amount) and Committee chairmen receive additional shares valued at T10. We have a Directors and Officers (D&O) insurance policy in place for the Management Board, the Supervisory Board, the executive management and the managers of our subsidiary companies. The insurance expense totaled T180 in 2009 (2008: T179), and was paid by us.
For the period from December 2008 to June 2009 we entered into a consultancy agreement with a consultancy firm led by Dr Flemming Ørnskov outside the scope of his Supervisory Board activities with the approval of the full Supervisory Board. The relating expenses amounted to T13 in 2008 with relating payables in the same amount as of December 31, 2008. From January 2009 to the termination date the consultancy firm received T25 per month, in total T150.
Both Mr. Walker and Dr Goodman received Renovis restricted stock unit awards as compensation for their services to Renovis prior to the merger with us. Under the terms of these awards the restricted stock units for Mr. Walker and Dr Goodman continue to vest as long as they continue to provide services to Renovis or its successor. Membership on our Supervisory Board constitutes such continued service and as such these restricted stock units, which were converted to restricted stock units for Evotec ADSs at the time of the merger, continue to vest through each individuals applicable vesting date, so long as such individual remains a member of our Supervisory Board. At the close of the merger on May 2, 2008, Mr. Walker had unvested restricted stock units for the equivalent of 58,560 Evotec common shares and Dr Goodman had unvested restricted stock units for the equivalent of 231,320 Evotec common shares which vested in conjunction with their continued service to Evotec latest until December 31, 2009.
After his resignation from the Supervisory Board in August 2008, Professor Dr Heinz Riesenhuber entered into a two-year consultancy agreement with us. Thus we will be able to call upon Professor Dr Riesenhubers knowledge and expertise of our business activities and our business environment. The agreed compensation amounts to T23 in the first 12 months and to T25 in the last 12 months of the agreement.
We operate a defined contribution Group Personal Pension Plan (GPPP) and make contributions to employees own schemes. The pension charge for the year represents contributions payable by us to the fund (and to employees own pension schemes) and totaled T520 in 2009 (2008: T645). Contributions of T68 in 2009 (2008: T67) were payable to the fund at 2009 year end and are included in provisions. Our contribution rate is determined by the employees contribution and their age. In addition, we operate a pension plan for one former member of our Management Board. The provision for this pension is calculated using the projected unit credit method in accordance with IAS 19. The provision amounted to T105 and T104 as of December 31, 2009 and 2008, respectively.
For additional detail, please refer to Note (32) of the Consolidated Financial Statements included in this report.
See additional information regarding the board practices below in Item 10 Additional Information.
Committees of the Supervisory Board
The Supervisory Board has established an Audit Committee and a Remuneration Committee, which are comprised of the following members:
Our Supervisory Board has established an audit committee comprised of three members of the Supervisory Board. The primary function of the committee is to assist the Supervisory Board in fulfilling its independent oversight responsibilities with regard to financial reporting and control.
In particular, it is the committees responsibility to review the auditing process, audit results and reports of the companys public accountants (auditors) as well as their independence, and issue the audit mandates.
In addition to fulfilling its oversight responsibility, the committee shall review:
The committee meets at least four times annually. The audit committee shall have a quorum if at least two of its members participate in the passing of a resolution. Resolutions require a simple majority of the votes cast.
Our Supervisory Board has established a remuneration committee. This committees duties include preparing the appointment and remuneration of Management Board members.
With the acquisition of RSIPL, which counted 147 employees at year-end, our group-wide headcount increased by about 16% as of December 31, 2009 compared to the end of 2008.
At the same time, we have tightly managed our capacities and reduced headcount in overhead and other areas. With a clear focus on discovery alliances, we have adjusted our research operations by concentrating on our European operations and closing our U.S. facility in South San Francisco, California.
Headcount Analysis by Area as of December 31, 2009 and 2008
In March 2009, we implemented a restructuring plan which resulted in us reducing our workforce by a total of approximately 50 positions across all subsidiaries in the U.S., UK and Germany. Additionally on May 5, 2009, we announced that we were implementing a re-engineering of our drug discovery and development operations. As a consequence of this reorganization an additional 45 positions were eliminated bringing our workforce to a total of below 350, and the U.S. operations of our subsidiary, Renovis, Inc., in South San Francisco, California have been wound down.
As of April 30, 2010 we had an aggregate of 108,838,715 ordinary shares outstanding. The shares are issued in bearer form. Therefore, it is difficult for us to determine with precision how many shareholders we have or how many ordinary shares a particular shareholder owns. The major shareholders do not have different voting rights from other ordinary shareholders.
The following table shows the beneficial ownership of our ordinary shares by members of our Supervisory and Management Boards as of April 30, 2010:
No other member of the Management Board own options to acquire shares of the company which are exercisable within 60 days of April 30, 2010. No member of the Supervisory Board except Dr Corey Goodman owns any options to acquire shares of the company. Dr Corey Goodman owns no options to acquire shares of the company which are exercisable within 60 days of January 31, 2010 (his resignation date from the Supervisory Board).
Dr Birner, a member of our Supervisory Board, is general partner of TVM Capital, an affiliate of TMV Life Science Ventures GmbH & Co. KG, which holds approximately 6.4% of our outstanding ordinary shares as of April 30, 2010. Dr Birner disclaims beneficial ownership of such shares.
The maximum number of shares that can be received by the members of the Management Board and the management team under the provisions of the stock option plans is as follows (as of December 31, 2009):
For the arrangements involving our employees in the capital of the company please refer to Note (19) to the Consolidated Financial Statements included in this report.
Additionally, at the effective time of the merger with Renovis, each outstanding equity award, whether vested or unvested, under Renoviss previously existing equity plans were assumed and become an award with respect to our ADSs, unless the award had an exercise price per share of more than $9.00, or unless the option was issued pursuant to the Renovis employee stock purchase plan. These options were not assumed by us and were cancelled in connection with the merger, and the Renovis employee stock purchase plan was terminated as of the effective time of the merger. The number of ADSs subject to each Renovis equity award assumed by us was determined by multiplying the number of shares of Renovis common stock that are subject to the Renovis equity award immediately prior to the effective time of the merger by 0.5271 and rounding down to the nearest whole share. With respect to Renovis equity awards in the form of stock options, the exercise price was adjusted by dividing such price by 0.5271 and rounding up to the nearest whole cent.
Renovis has established a trust, the Company Trust, in order to hold our ADSs after the merger, that are issuable to holders of Renovis equity awards assumed by us. As of December 31, 2009, there were 823,386 ADSs outstanding related to these assumed equity awards.
Compliance with German Corporate Governance Code
We comply with the German Corporate Governance Code, with three minor exceptions from its recommendations.
A declaration according to Section 161 of the German Stock Corporation Law (Aktiengesetz) was made by the Management Board and the Supervisory Board. This declaration regarding our compliance with the Corporate Governance Code is accessible to the shareholders on our website.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information as of April 30, 2010, concerning the ownership of ordinary shares of each holder of greater than 5% ownership, and is based on 108,838,715 ordinary shares outstanding on such date. None of these holders have any different voting rights than other holders of our ordinary shares.
Our ordinary shares are traded on the Frankfurt Stock Exchange in Germany. Our ADSs, each of which represents two of our ordinary shares, were traded on the NASDAQ Global Market in the United States until November 30, 2009, at which time we voluntarily delisted trading of the ADSs on the NASDAQ Global Market, and are currently traded on the over-the-counter market . A significant portion of our shares are held in street name, therefore we generally have no way of determining who our shareholders are, their geographical location or how many shares a particular shareholder owns.
To our knowledge, we are not directly or indirectly owned or controlled by another corporation, by any foreign government, or by any other natural or legal person. As of April 30, 2010, our current officers and directors as a group beneficially owned 600,242 ordinary shares or 0.55% of our then outstanding ordinary shares.
B. Related Party Transactions
According to IAS 24 Related Party Disclosures we disclose related party transactions where our Supervisory Board members and Management team members have significant influence on companies with which we work in the ordinary course of business (the figures reflect the total group):
The spouse of Mary Tanner was Vice Chairman of Lehman Brothers, Inc. (Lehman). Lehman represented and advised us with respect to the acquisition of Renovis, Inc. (since 2007). The relating capitalized expenses amounted to T0 in 2009. The amount of the related payables was T837 as of December 31, 2009.
We entered into a consultancy agreement with Dr. Flemming Ørnskov outside the scope of his Supervisory Board activities with the approval of the full Supervisory Board, which ended in June 2009. The relating expenses amounted to T150 in 2009 with relating payables as of December 31, 2009 in the amount of T0.
After his resignation from the Supervisory Board in August 2008, Professor Dr Heinz Riesenhuber entered into a two-year consultancy agreement with us. The agreed compensation amounted to T22.5 in the first 12 months and to T25.0 in the last 12 months of the agreement.
We, including our subsidiaries, have recorded no revenues with related parties in 2009.
Administrative services provided by us to Management Board or Supervisory Board members for their private purposes, if any are reimbursed to us at cost.
Item 8. Financial Information
A. Financial Statements
See Item 18.
B. Legal Proceedings
We are not a party to and are not aware of any pending or contemplated material litigation.
We have not declared any cash dividends on our ordinary shares since inception and have no present intention to pay dividends in the foreseeable future. We currently intend to reinvest the profits, if any, generated from the outlicensing of our clinical candidates and contract research fees in further advancing our clinical candidates.
Item 9. The Offer and Listing
The table below sets forth, for the periods indicated, the high and low intraday per share prices of Evotec AG ordinary shares on the Frankfurt Stock Exchange (XETRA). Prices are rounded to the nearest EUR cent.
The table below sets forth, for the periods indicated, the high and low intraday per share prices of Evotec ADSs traded on the NASDAQ Global Market from May 6, 2008 until November 30, 2009 under the symbol EVTC and on the over-the-counter (OTC) market from November 30, 2009 to the present under the trading symbol EVTCY. The OTC market is a significantly more limited market than NASDAQ, and as a result trading volume in the ADSs may be limited and investors may not have sufficient liquidity. Prices are rounded to the nearest USD cent.
Item 10. Additional Information
Set forth below is a summary of certain information relating to certain provisions of our articles of association and relevant German law. This summary is not complete and is qualified in its entirety by reference to our articles of association and German law in effect at the date of this Annual Report on Form 20-F.
As required by the German Stock Corporation Act (Aktiengesetz), we have a two-tier board system consisting of our Management Board (Vorstand) and our Supervisory Board (Aufsichtsrat). Our Management Board is responsible for managing the company and representing us in our dealings with third parties, while our Supervisory Board appoints and removes the members of our Management Board and oversees the management of the company. German law prohibits our Supervisory Board from making management decisions. The rules of procedure for our Management Board, as adopted by our Supervisory Board, provide that some actions and business measures by the Management Board require prior approval by our Supervisory Board.
Our Management Board reports regularly to our Supervisory Board, including with respect to proposed business policy or strategy, profitability, our current business, business transactions that may affect our profitability or our liquidity and any exceptional matters that arise from time to time. Our Supervisory Board may also request special reports from our Management Board. German law prohibits simultaneous membership on the Management Board and the Supervisory Board of a company.
The members of our Management Board and the members of our Supervisory Board must act in accordance with the laws of the Federal Republic of Germany, the provisions of the articles of association and the internal rules of procedure of the respective board, and take into account the resolutions adopted by the shareholders meeting. Our Management Board and our Supervisory Board owe a duty of loyalty and care to Evotec AG. In carrying out their duties, members of our Management Board and of our Supervisory Board must exercise the standard of care of a prudent and diligent business person and meet the burden of proving that they exercised such care if it is ever contested. A broad spectrum of interests, especially those of the company, its shareholders, employees, creditors and the public, must be taken into account when discharging these duties. Our Management Board must particularly consider the rights of shareholders with respect to equal treatment and equal information. Our Management Board also has a duty to maintain the confidentiality of corporate information. Members of our Management Board who violate their duties may be held jointly and severally liable by the corporation for any resulting damages, unless their actions were validly approved by resolution at a general meeting of the shareholders. The members of our Supervisory Board have similar liabilities in respect of the corporation if they violate their duties.
Supervisory and Management Board
Under German law, the minimum number of members of the Supervisory Board is three, unless the articles of association provide for a higher number, which must be a multiple of three. The maximum number of Supervisory Board members allowed depends on the amount of the stated capital of the company and can be between nine and twenty-one members. If a company has more than 2,000 employees, the number of members depends on the number of employees of the company.
Our Supervisory Board regularly consists of six membersas provided in our current articles of associationall of whom are elected by the shareholders by a simple majority of the votes cast at a shareholders meeting in accordance with the provisions of the German Stock Corporation Act. The Supervisory Board appoints a chairman and one or more vice-chairmen from among its members.
The members of the Supervisory Board are elected for terms of up to approximately five years. Each term expires at the end of the annual general shareholders meeting after the fourth fiscal year following the year in which the Supervisory Board was elected, unless the shareholders meeting, when electing the members for the Supervisory Board, decides on shorter terms. Re-election is possible. The term of the current members of the Supervisory Board will expire at the end of the annual general shareholders meeting held in the year 2014. Dr Corey Goodman resigned from the Supervisory Board effective January 31, 2010; he will be replaced by a suitable successor in due course.
Our Management Board (Vorstand) currently consists of three members. Under our articles of association, the Supervisory Board determines the size of the Management Board, which must have at least one member under the German Stock Corporation Act.
The statutory maximum term for members of the Management Board is five years. Management Board members may be reappointed.
The Supervisory Board may remove a member of the Management Board prior to the expiration of his or her term if such member commits a gross breach of duty or is incapable of carrying out his or her duties or if there is a bona fide vote of no confidence by a majority of the votes cast at a general shareholders meeting. In the case of vacancies, our Supervisory Board may fill the vacancy by appointing a new member of our Management Board.
A member of the Supervisory Board elected by the shareholders may be removed by the shareholders by a simple majority vote cast at a meeting of shareholders. Further, any member of our Supervisory Board can be
removed for good cause, including gross breach of duty, by a court decision upon request of our Supervisory
Board. In such case, our Supervisory Boards determination to take such action requires a simple majority vote with the member affected having no voting power. At the general shareholders meeting, shareholders may appoint substitutes for the Supervisory Board members which they have elected and who cease to continue as members of the Supervisory Board prior to the expiration of such members respective terms. Such substitutes will become members of the Supervisory Board as determined by the general shareholders meeting. The term of office of such a substitute member expires upon the conclusion of the next general shareholders meeting if an election is held. If an election is not held at such shareholders meeting, the term of office of the substitute member will be extended until the end of the term of office of the member of the Supervisory Board for which such substitute is acting. In the case of vacancies, the competent court upon a motion by the Management Board, by a member of the Supervisory Board, by a shareholder or by an employee representative, may fill the vacancy for the interim period until the next election by the shareholders.
The German Securities Trading Act (Wertpapierhandelsgesetz) provides that any person whose voting interest in an issuer (country of origin of which is the Federal Republic of Germany) reaches, exceeds or falls below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% through acquisition, sale or other means must give written notification to the issuer and to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), hereinafter the BaFin, in writing without delay, but in any event within four business days.
In connection with the notification requirements, the German Securities Trading Act (Wertpapierhandelsgesetz) contains several provisions designed to ensure that shareholdings in listed companies are attributed to those persons who in fact control the voting rights associated with such shares. For example, if a party subject to the notification requirement controls a third party that owns shares, such shares are attributed to the party subject to the notification requirement. If the third party holds shares on behalf of the party subject to the notification requirement or a company controlled by it, the shares are attributed to the party subject to the notification requirement.
If the notification described above is not filed, the defaulting party subject to the notification requirement will be precluded from exercising certain rights (including voting and dividend rights) attached to its shares for the duration of such default.
Further, anyone holding, directly or indirectly, financial instruments that result in an entitlement to acquire, on the holders initiative alone and under a legally binding agreement, shares in an issuer (whose country of origin is the Federal Republic of Germany) that carry voting rights and have already been issued, must, without undue delay, but in any event within four business days, notify this to the issuer and simultaneously to BaFin if the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% have been reached, exceeded or fallen below.
An issuer in Germany must publish these notifications without undue delay, but in any event within three business days of receiving them. The issuer must also, without undue delay but not before publication, register the notification with the commercial register and simultaneously report the publication to the BaFin.
In addition, the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) provides that any person whose voting interest in the company reaches or exceeds 30% of the voting rights must, no later than the seventh calendar day following when the 30% threshold is reached or exceeded, publish this fact, including the new percentage of his voting rights. Unless granted an exemption, such person must make a mandatory public tender offer to all shareholders of the company.
According to our articles of association the general meeting of shareholders may be called by the Management Board or, if the wellbeing of the company so requires, the Supervisory Board. A general meeting of shareholders also must be called upon the written request of one or more shareholders holding ordinary shares representing an aggregate of 5% or more of our issued share capital. Notice of a general meeting must be given at least 30 days prior to the date by which the company must have received the shareholders registration for participation in the meeting. The notice, the agenda and the text of proposed resolutions (drafted by the Management Board and the Supervisory Board or, in certain cases, only by the Supervisory Board) must be published in the companys designated journal for public disclosures, the electronic version of the German Federal Gazette. The ordinary general shareholders meeting takes place within the first eight months of each business year at the registered office of the company.
Pursuant to our articles of association, only those shareholders are entitled to attend the shareholders meeting and exercise their right to vote who register with the company by giving written (Textform) notice of their attendance in German or English. The notice of attendance must reach the company at its business address, or any other address designated in the published notice through which the shareholders meeting is announced, no later than on the seventh day prior to the date of the shareholders meeting; the notice of attendance must include the amount of shares the shareholder is registering. If the end of the deadline falls on a Sunday, on a legally recognized holiday at the registered office of the company or on a Saturday, then the notice of attendance must be received by the company on the workday prior to such day. In addition, the shareholders must provide proof of their eligibility to attend the general shareholders meeting. Such proof is provided by a written (Textform) confirmation of share ownership in German or English by the custodian bank or financial services institution and must refer to the shareholdings at the beginning of the twenty-first day (record date) prior to the shareholders meeting.
The right to vote may be exercised by proxy. Details on how to vote by proxy are published together with the notice and the agenda of a general shareholders meeting.
There are no quorum requirements for our general meetings. Shareholder resolutions are generally passed at a general meeting of our shareholders by a majority of the votes cast, unless a greater majority or further requirements are required by law or by our articles of association.
According to the German Stock Corporation Act (Aktiengesetz), one or more shareholders holding ordinary shares representing an aggregate of at least 5% of the issued share capital are entitled to request that a general shareholders meeting be called. Shareholders holding ordinary shares representing an aggregate of at least 5% of the issued share capital or holding shares in an aggregate nominal amount of at least 500,000 are entitled to require that a matter be placed on the agenda of the general shareholders meeting for resolution. The requests must be made in writing stating the purpose and the reasons therefore and must be addressed to the Management Board (Vorstand) as representative of the company. A proper request shall be published together with the notice of the shareholders meeting and the agenda in the electronic version of the German Federal Gazette (elektronischer Bundesanzeiger), or, if a request was made after the publication of the notice and agenda, shall be published separately within ten days after the notice was published. In addition, each shareholder may also submit, at or prior to the shareholders meeting, counter proposals to the proposals submitted by the Management Board and the Supervisory Board. Under certain circumstances, such counter proposals must be published in the electronic version of the German Federal Gazette prior to such shareholders meeting.
If the election of members of the Supervisory Board is an item on the agenda of the shareholders meeting, shareholders may nominate individuals for election to the Supervisory Board, in addition to those recommended by the Supervisory Board. The company will publish a shareholders nomination in the electronic version of the
German Federal Gazette if it receives the nomination at least two weeks prior to the date of the shareholders meeting. The nomination must contain the name, profession, domicile and membership in other Supervisory Boards or in other comparable domestic or foreign financial supervisory bodies of the individual so nominated. In addition, any shareholder entitled to attend and vote at the shareholders meeting can nominate individuals for the Supervisory Board at the shareholders meeting if the election of members of the Supervisory Board is an item on the agenda.
Each of our ordinary shares entitles the holder to one vote at meetings of the shareholders. Shareholders may appoint proxies to represent them at a shareholders meeting. Shareholder resolutions are generally passed with a simple majority of the votes cast, unless statutory law or our articles of association require otherwise.
Resolutions of the general shareholders meeting are adopted with a simple majority of the votes cast and, if a capital majority is required, with a simple majority of the share capital represented, unless a greater majority is required by mandatory statutory provisions or our articles of association. If a simple majority of votes cast is not achieved on the first ballot during an election, a second ballot shall take place. If the highest number of votes was received by two or more persons, there shall be a run-off ballot between the two persons who received the highest number of votes. In the event of a tie on the second ballot, a decision shall be made by random drawing.
According to the applicable German Stock Corporation Act (Aktiengesetz), certain resolutions of fundamental importance require not only a majority of votes cast but also a majority of at least 75% of the share capital represented when a vote is taken on the resolution. Our articles of association specifically provide for such a 75% majority for resolutions on:
Further resolutions of fundamental importance that require such a 75% majority under German Law include resolutions on:
Neither the German Stock Corporation Act (Aktiengesetz) nor our articles of association have any minimum quorum requirement applicable to shareholders meetings.
Shareholder Action by Written Consent
The German Stock Corporation Act does not permit shareholders to act by written consent outside a general shareholders meeting.
Amendment of Articles of Association
Amendments of our articles of association may be proposed by our Supervisory Board or our Management Boardin which case they must be announced together with the notice and the agenda for the shareholders meetingor by one or more shareholders holding ordinary shares representing an aggregate of at least 5% of the issued share capital or holding ordinary shares in the aggregate amount of at least 500,000. Any amendment of our articles of association requires a resolution of the general shareholders meeting passed by at least 75% of the share capital represented when a vote is taken on the resolution.
In addition, the Supervisory Board may adopt amendments that relate solely to the wording of the articles of association.
An appraisal proceeding (Spruchverfahren) is available to our shareholders under the German Appraisal Proceedings Law (Spruchverfahrensgesetz) according to which a court can be asked to determine the adequacy of the consideration or compensation paid to (minority) shareholders in certain corporate transactions. These transactions include, inter alia, (a) the consolidation or merger of companies according to the provisions of the German Transformation Act (Umwandlungsgesetz); (b) the conclusion of a control or profit transfer agreement between a controlling shareholder and its dependent company; (c) the squeeze-out of minority shareholders by a shareholder holding at least 95% of the share capital of a corporation; and, (d) according to the German Federal Court of Justice, the delisting of the company from the German stock exchange; provided, in each case, that the shareholder seeking the adequacy determination complies with the procedural requirements specified in the respective statutory provisions.
Limitation of Directors Liability
Under compulsory provisions of the German Stock Corporation Act (Aktiengesetz), a stock corporation is not allowed to limit or eliminate the personal liability of the members of either the Management Board or the Supervisory Board for damages due to breach of duty in their official capacity. We may, however, waive our claims for damages due to a breach of duty or reach a settlement with regard to such claims if more than three years have passed after such claims have arisen, but only with the approval of the general meeting of the shareholders, provided that such waiver may not be granted and such settlement may not be reached if shareholders holding, in the aggregate, at least 10% of the issued shares file an objection to the protocol of the shareholders meeting.
Indemnification of Officers and Directors
Under German law, we may indemnify our officers (Leitende Angestellte), and, under certain circumstances, German labor law requires a stock corporation to provide such indemnification. However, we may not, as a general matter, indemnify members of our Management Board or our Supervisory Board where such members are liable towards the company based on a breach of their fiduciary duties or other obligations towards the company. A German stock corporation (Aktiengesellschaft) may, however, purchase directors and officers insurance. Such insurance may be subject to mandatory restrictions imposed by German law. In addition, German law may permit a corporation to indemnify a member of the Management Board or the Supervisory Board for attorneys fees incurred if such member is the successful party in a suit in a country, such as the United States, where winning parties are required to bear their own costs, if German law would have required the losing party to pay such members attorneys fees had the suit been brought in Germany.
We maintain insurance for the members of our Management Board and Supervisory Board with certain deductibles as stipulated by the German Stock Corporation Act (Aktiengesetz) and with respect to the Supervisory Board, as provided by our articles of association.
In any transaction or contract between us and any member of our Management Board, we are represented by our Supervisory Board. The members of the Management Board are subject to a statutory non-compete provision. If this duty is breached the member of the Management Board is liable for damages or the company can demand to receive any profits or compensation the member of the Management Board has received or will receive through the competing transaction. Other conflicts of interest may have to be disclosed to the Supervisory Board if the member of the Management Board is unable to perform his fiduciary duties correctly.
The compensation of the Supervisory Board members is decided on by a shareholders resolution. Any contract according to which a member of the Supervisory Board is to provide services to the company beyond his statutory duties as a Supervisory Board member requires approval of the Supervisory Board to be valid. Any compensation received for such services must be repaid to the company if the Supervisory Board did not approve the underlying contract. In all other cases of conflicts of interests a Supervisory Board member is obligated to act according to his duties of care and loyalty. Beyond this there is no clear rule under German law for the treatment of such conflicts. However, pursuant to the German Corporate Governance Code and the rules of procedure of the Supervisory Board each member of our Supervisory Board shall inform the Supervisory Board of any conflicts of interest which may result from a consultant or directorship function with clients, suppliers, lenders or other business partners of us and our affiliates. Material conflicts of interest and those that are not merely temporary in respect of the member of the Supervisory Board shall result in the termination of the mandate of the respective member.
Loans to Directors and Officers
German law requires that any loan made by us exceeding a months salary to (i) any member of the Management Board, any authorized signatories or general managers; (ii) their spouses, partners or minor children; or (iii) any person acting on behalf of or for account of one of the aforementioned, must be authorized by a resolution of the Supervisory Board. Loans made by us to (i) a member of our Supervisory Board; (ii) their spouses, partners or minor children; or (iii) any person acting on behalf of or for account of one of the aforementioned, must also be authorized by a resolution. In such a Supervisory Board resolution, the member of our Supervisory Board who would be, or whose spouse, partner or minor child would be, or on behalf or for account of which any other person would be, the borrower is not entitled to vote.
German law does not provide for class actions and does not generally permit shareholder derivative suits, even in the case of a breach of duty by the members of the Management Board or the Supervisory Board. Company claims for compensatory damages against members of the Management Board or the Supervisory Board may, as a rule, only be asserted by the company itself, in which case the company is represented by the Management Board when claims are made against members of the Supervisory Board and the Supervisory Board when claims are made against members of the Management Board. According to a ruling by the German Federal Court of Justice (Bundesgerichtshof), the Supervisory Board is obligated to assert claims for compensatory damages against the Management Board that are likely to be successful, unless important company interests would conflict with such an assertion of claims and such grounds outweigh, or are at least comparable to, the grounds in favor of asserting claims. In the event that the relevant entity with powers of representation decides not to pursue such claims, then such claims of the company for compensatory damages must nevertheless be asserted against members of the Management Board or the Supervisory Board if the general shareholders meeting passes a resolution to this effect by a simple majority vote. Any damage claims should be brought within six months from the date of the shareholders meeting. The shareholders meeting may appoint special representatives to assert a claim for damages. The court shall, upon petition by shareholders whose aggregate holdings amount to at least 10% of the share capital or 1,000,000, appoint persons other than those appointed to represent us to assert the claim for damages, if in the opinion of the court such appointment is appropriate for the proper assertion of such claim.
In addition, shareholders whose aggregate holdings amount to at least 1% of the share capital or 100,000 are entitled to request admission to file a claim for damages on our behalf. The court shall admit the claim if (a) the shareholders exercising the right to file a claim for damages establish that (i) they have acquired the shares prior to the alleged breach of duty; and (ii) they have demanded, to no avail, that we file the claim within a reasonable period of time; (b) facts have been presented that justify a suspicion that we have been damaged by improprieties or serious breaches of the law or our articles of association; and (c) no overriding interests of us prevent the enforcement of the compensation claim.
Finally, each shareholder who was present at the general meeting of the shareholders and has objected to the resolutions in the minutes may, within one month after adoption of the respective resolutions of the general meeting of the shareholders, take action against us to contest the resolutions (Anfechtungsklage).
Rights of Information and Inspection
German law does not permit shareholders to inspect corporate books and records. However, Section 131 of the German Stock Corporation Act (Aktiengesetz) provides each shareholder with a right to information at the general meeting of the shareholders, to the extent that such information is necessary to permit a proper evaluation of the relevant item on the agenda.
The right to information is a right only to oral information at a general shareholders meeting of the shareholders. Information may be given in writing to shareholders, but they are neither entitled to receive written information nor to inspect any documents of the corporation. As a practical matter, shareholders may receive certain written information about us through our public filings with the commercial register (Handelsregister) and the electronic German Federal Gazette (elektronischer Bundesanzeiger) and other places for publications of the company.
On December 20, 2001, the German Securities Purchase and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz , hereinafter, the TOA) came into effect. The TOA, as amended, regulates all public offers to acquire certain market traded equity securities of German-based stock corporations (Aktiengesellschaft) or partnerships limited by shares (Kommanditgesellschaft auf Aktien ), whose stock is admitted to trading on a regulated market in Germany or anywhere within the European Economic Area, whether for stock, cash or a combination thereof and irrespective of the size or purpose of the acquisition.
The TOA distinguishes between public offers (Öffentliche Angebote), takeover offers (Übernahmeangebote) and mandatory offers (Pflichtangebote). A public offer is defined as a publicly announced offer to acquire a target companys stock (or equity-backed securities, i.e. convertible stock) through purchase or exchange from the individual shareholders. Once a party decides to submit a public offer, it is, pursuant to the TOA, obliged to publicly announce its intention promptly. Prior to the announcement, the offeror must notify the BaFin and the relevant stock markets. Typically within four weeks of such public announcement, the offeror is required to submit a detailed offering document (Angebotsunterlage) to the BaFin. The offering document may be publicly distributed only after its approval by the BaFin. Once approved, the offering document must be posted on the Internet and either broadly distributed free of charge or published in the electronic German Federal Gazette (elektronischer Bundesanzeiger). The offer must remain open for not less than four weeks. Such period will be extended automatically if the offer is modified or if during the offering period a third party makes a competing offer.
Takeover offers (Übernahmeangebote) are offers directed at gaining control of the target. Pursuant to the TOA, control is deemed to be gained if at least 30% of the voting rights of a company are held. In addition to the provisions regarding public offers, takeover offers are subject to further regulations. The TOA provides, among other things, that a takeover offer must be extended to all shareholders in a non-discriminatory manner. A limited
takeover offer (i.e. a takeover offer through which the offeror seeks to acquire 30% or more but less than 100% of the remaining outstanding voting shares) is forbidden. Further, the consideration offered for the shares must be adequate. The adequate consideration must be the higher of the weighted average market price within the three-month period preceding the announcement of the offer and the price paid by the offeror (or such persons acting in concert with the offeror or their subsidiaries) for any shares acquired within a six-month period preceding the publishing of the offering document, including off-market block trades.
Pursuant to the TOA, in the period from publication of the decision to make a takeover offer through publication of the outcome of the offer, the Management Board of the target company may not take any action which might prevent the success of the offer. This prohibition, however, does not apply to (a) actions that would also have been performed by a diligent and prudent manager (ordentlicher und gewissenhafter Geschäftsleiter) of a company that is not the target of a takeover offer; (b) the seeking of a competing offer; and (c) acts approved by the Supervisory Board of the target company. Further, prior to the announcement of a takeover offer, the shareholders of a potential target may authorize the Management Board to undertake specifically determined measures aimed at preventing the success of a future takeover offer with the approval of the companys Supervisory Board. Such authorization is valid for a maximum of 18 months.
If a person or a legal entity comes to hold, directly or indirectly, 30% or more of a target company and, therefore, controls the target company according to the TOA, that person or legal entity is obligated to make a tender offer for all outstanding securities of the target company (a mandatory offer, Pflichtangebot). A mandatory offer is, however, not required if the person or legal entity acquires control of a target company pursuant to a takeover offer. Mandatory offers are subject to the provisions on takeover offers and certain additional regulations.
Under the German Stock Corporation Act (Aktiengesetz), the shareholders of a corporation can, at the request of a person or a legal entity that holds, directly or indirectly, at least 95% of the share capital of the corporation (a majority shareholder), resolve to squeeze-out the remaining minority shareholders for a settlement in cash. Upon entry of such shareholders resolution in the Commercial Register, the shares of the minority shareholders are transferred to the majority shareholder. The majority shareholder determines the amount of the cash settlement to be paid to the minority shareholders. However, if such amount is not adequate, an adequate amount will be determined by the competent court at the request of any minority shareholder. If a shareholder owns more than 95% of the share capital immediately following a takeover offer a court will, at the request of such a shareholder filed within three months after the takeover procedure, decide to squeeze out the remaining minority shareholders for a settlement in cash. In such a case, but only if the majority shareholder received at least 90% of the share capital through the takeover offer itself, the offer price is considered adequate compensation for the squeezed out minority shareholders.
Dividends and Other Distributions
For each fiscal year, the Management Board prepares the annual financial statements and submits them to our auditors. The auditors report, the annual financial statements and the Management Boards proposal as to the disposition of the annual profit (either payment as dividends, transfer to reserves or carry forward to the next fiscal year) are submitted to the Supervisory Board. Upon final approval by the Supervisory Board, the Management Board submits its proposal as to the disposition of the annual profits to the shareholders at the shareholders meeting. Shareholders participate in profit distributions in proportion to the number of shares they hold. Dividends approved at a shareholders meeting are payable promptly after such meeting, unless otherwise decided at the shareholders meeting.
Under the German Stock Corporation Act, an existing shareholder in a stock corporation has a preferential right to subscribe for issues of new shares by that corporation (as well as bonds convertible into shares, bonds
with warrants to purchase shares, profit participating bonds and profit participating rights) in proportion to the number of shares such shareholder holds in the corporations existing share capital (pre-emptive rights or subscription rights; Bezugsrechte). The German Stock Corporation Act allows companies to exclude this preferential subscription right in limited circumstances and only if so provided in the same shareholder resolution that authorizes the accompanying capital increase or share issuance. At least 75% of the share capital represented at the meeting must vote to authorize the exclusion of subscription rights. Prior to approval by the shareholders, exclusion of subscription rights requires the Management Board to report on the reasons for the exclusion to the shareholders in writing. With regard to the authorized capital, our Management Board may increase our share capital without offering subscription rights with the approval of the Supervisory Board.
In accordance with the German Stock Corporation Act, if we are liquidated, any liquidation proceeds remaining after all our liabilities have been paid off would be distributed among our shareholders in proportion to their holdings.
Share Repurchases by Us
German law allows a stock corporation (Aktiengesellschaft) like us to acquire its own shares on the basis of an authorization by the shareholders within the preceding up to 5 years and which sets forth the lowest and the highest price for the shares, as long as it acquires no more than 10% of its issued shares; the purpose of the acquisition by us of our own shares may not be trading in our own shares and resales must be made either on the stock exchange, in a manner that treats all shareholders equally or in accordance with the rules that apply to subscription rights relating to a capital increase. Further, we may purchase our own shares for certain defined purposes (e.g. if the acquisition is necessary to avoid severe and immediate damage to us, if the shares are to be offered for purchase to persons who are or were in an employment relationship with us or an affiliate or if the acquisition is made to compensate shareholders in connection with the German Transformation Act (Umwandlungsgesetz)). We have been authorized by a shareholders resolution adopted on June 4, 2009 to repurchase shares for Supervisory Board remuneration.
Our ordinary shares are listed on the Prime Standard segment of the Frankfurt Stock Exchange under the symbol EVT. The ISIN International Securities Identification Number of the ordinary shares is DE 000 566 480 9. Our ADSs, each of which represents two of our ordinary shares, were listed on the NASDAQ Global Market from May 6, 2008 until November 30, 2009 under the symbol EVTC, at which time we voluntarily delisted trading of the ADSs on the NASDAQ Global Market. Our ADSs currently trade on the over-the-counter market under the trading symbol EVTCY.
Pursuant to our articles of association, share certificates may be issued in the form of global share certificates. Shareholders do not have the right to request the issuance of individual share certificates. The form of the share certificates and the dividend and renewal coupons is determined by our Management Board. Our 108,838,715 ordinary shares are issued in the form of global share certificates with dividend coupons, which are deposited with the German clearing system of Clearstream Banking AG, Frankfurt am Main. We do not intend to print individual share certificates.
Material U.S. Federal Income Tax Consequences Relating to the Ownership and Disposition of Evotec ADSs
The following summary is for informational purposes only and is not intended as tax or legal advice. Each holder should seek advice based on the holders particular circumstances from an independent tax advisor.
The following summarizes the material U.S. federal income tax consequences of acquiring, holding, and disposing of our ADSs. This discussion is based on the U.S. federal income tax laws as currently in effect as contained in the Internal Revenue Code (Code), Treasury Regulations, relevant judicial decisions, and administrative guidance. The U.S. federal tax laws are subject to change, possibly on a retroactive basis, and any such change may materially affect the tax consequences of acquiring, holding, or disposing of our ADSs. No rulings or opinions of counsel have been or will be requested with respect to any tax-related matter discussed herein. There can be no assurance that the positions we take on tax matters will be accepted by the Internal Revenue Service (IRS). This discussion relates only to U.S. federal income taxes and not to any local, state or foreign taxes or U.S. federal taxes other than income taxes.
This summary is based in part on the representations and covenants of the parties to the deposit agreement and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. Any breach of such representations or covenants or failure to perform such obligations could have a material effect on the U.S. federal income tax treatment of acquiring, holding, and disposing of our ADSs.
Because this discussion is a general summary, it does not address all aspects of U.S. federal income taxation that may be relevant to a particular holder in light of the holders particular circumstances, nor does it address certain types of holders subject to special treatment under the federal income tax laws, including but not limited to tax-exempt organizations, qualified benefit plans, insurance companies, financial institutions, broker-dealers, dealers in securities or currencies, traders in securities that elect to use the mark-to-market method of accounting for their securities, holders which are partnerships or other pass-through entities for federal income tax purposes, regulated investment companies, real estate investment companies, real estate mortgage investment conduits, expatriates, persons liable for alternative minimum tax, persons who directly or indirectly own or are deemed to own more than 10% of our voting stock, persons whose functional currency is not the U.S. Dollar, persons holding their investment as part of a hedging, constructive sale or conversion, straddle, or other risk-reducing transaction, and persons acquiring ADSs in connection with the performance of services.
This discussion addresses only holders: (i) who are U.S. Holders (except as specifically noted under Non-U.S. Holders of ADSs); and (ii) who hold our ADSs as capital assets. For this purpose, U.S. Holders are beneficial owners of our ADSs who are individual citizens or residents of the United States, corporations or other business entities organized under the laws of the United States, any state, or the District of Columbia, estates with income subject to U.S. federal income tax, trusts that are subject to primary supervision by a U.S. court and for which U.S. persons control all substantial decisions, or trusts that have made a valid election under applicable Treasury Regulations to be treated as a U.S. person (within the meaning of the Code).
Ownership of ADSs in general
For U.S. federal income tax purposes, a holder of ADSs generally will be treated as the owner of the shares represented by such ADSs. The U.S. Treasury Department has expressed concern that depositaries for ADSs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by holders of such receipts or shares. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for German taxes and sourcing rules described below could be affected by future actions that may be taken by the U.S. Treasury Department.
Subject to the discussion of the passive foreign investment company rules below, a U.S. Holder will be required to include in gross income as dividends (taxable as ordinary income) the gross amount of any distribution (before reduction for any German taxes withheld there from, but excluding any distribution of our shares distributed pro rata to all our shareholders, including holders of ADSs) paid on ADSs to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income
tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holders basis in the ADSs and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of ADSs. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a distribution to a U.S. Holder may be treated as a taxable dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. Dividends will constitute foreign-source income for foreign tax credit limitation purposes.
In the case of a U.S. Holder that is a corporation, a dividend from a non-U.S. corporation will generally be taxable at regular corporate rates of up to 35% and generally will not qualify for a dividends-received deduction. Certain non-corporate U.S. Holders receiving dividends from a German corporation may be eligible for a reduced U.S. tax rate (equal to the tax rate on long-term capital gains) on qualified dividends if received in tax years beginning on or before December 31, 2010 as long as we are not a passive foreign investment company (discussed below) and the holder satisfies certain holding period requirements.
Distributions of current or accumulated earnings and profits paid in a non-U.S. currency to a U.S. Holder will be includible in the income of a U.S. Holder in a U.S. Dollar amount calculated by reference to the exchange rate on the day the distribution is received by the depositary. A U.S. Holder that receives a non-U.S. currency distribution and converts the non-U.S. currency into U.S. Dollars on the date of receipt will realize no foreign currency gain or loss. If the U.S. Holder converts the non-U.S. currency to U.S. Dollars on a date subsequent to receipt, such U.S. Holder will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the non-U.S. currency against the U.S. Dollar from the date of receipt to the date of conversion, which will generally be U.S.-source ordinary income or loss.
Disposition of ADSs
Subject to the discussion of the passive foreign investment company rules below, upon the sale, exchange, or other disposition of ADSs, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holders tax basis in our ADSs and the amount realized on the disposition. A U.S. Holders tax basis in our ADSs will be the U.S. Dollar value of the Euro denominated purchase price determined on the date of purchase. If the ADSs are treated as traded on an established securities market, a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. Dollar value of the cost of such ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. If a U.S. Holder converts U.S. Dollars to Euros and immediately uses that currency to purchase ADSs, such conversion generally will not result in taxable gain or loss to such U.S. Holder. The amount realized on the disposition of ADSs generally will be the U.S. Dollar value of the payment received determined on (1) the date of receipt of payment in the case of a cash basis U.S. Holder and (2) the date of disposition in the case of an accrual basis U.S. Holder. If the ADSs are treated as traded on an established securities market, a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. Dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale. A accrual basis U.S. Holder that does not so elect must translate the amount received at the spot rate of exchange on the trade date.
Capital gain from the sale, exchange or other disposition of ADSs held more than one year is long-term capital gain. Long-term capital gains recognized by certain non-corporate U.S. Holders in tax years beginning on or before December 31, 2010 may qualify for a maximum rate of taxation of 15%. Gain or loss recognized by a U.S. Holder on a sale, exchange or other disposition of ADSs generally will be treated as U.S.-source income or loss for U.S. foreign tax credit limitation purposes. The deductibility of a capital loss is subject to limitations, as are losses upon a taxable disposition of ADSs if the U.S. Holder purchases, or enters into a contract to purchase, substantially identical securities within 30 days before or after any disposition. A U.S. Holder that receives non-U.S. currency proceeds and converts the non-U.S. currency into U.S. Dollars on the date of receipt will realize no foreign currency gain or loss. If the U.S. Holder converts the non-U.S. currency to U.S. Dollars on a date subsequent to receipt, such U.S. Holder will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the non-U.S. currency against the U.S. Dollar from the date of receipt to the date of conversion, which will generally be U.S.-source ordinary income or loss.
Deduction or Credit for Foreign Taxes Withheld
U.S. Holders will have the option of claiming the amount of any non-U.S. income taxes paid or withheld at source either as a deduction from gross income or as a credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the non-U.S. income taxes withheld, but such amount may be claimed as a credit. The amount of foreign income taxes which may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each holder. These limitations include, among others, rules which limit foreign tax credits allowable with respect to specific classes of income to the U.S. federal income taxes otherwise payable with respect to each such class of income. The total amount of allowable foreign tax credits in any year cannot exceed ones regular U.S. tax liability for the year attributable to foreign source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to non-U.S. income tax withheld from dividends received on the ADSs to the extent such U.S. Holder has not held the ADSs for at least 16 days of the 31-day period beginning 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ADSs are not counted toward meeting the 16-day holding period required by the statute.
Passive Foreign Investment Company Considerations
We will be a passive foreign investment company, or PFIC, if 75% or more of our gross income in a taxable year, including the pro rata share of the gross income of any company in which we are considered to own 25% or more of the stock by value, is passive income. Alternatively, we will be a PFIC if at least 50% of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value, including the pro rata share of the assets of any company in which we are considered to own 25% or more of the stock by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. PFIC status cannot be determined until the close of the year in question and is determined annually.
If we are a PFIC, each U.S. Holder, upon certain excess distributions by us and upon disposition of ADSs at a gain, would be liable to pay tax at the highest then-prevailing income tax rate on ordinary income, plus interest on the tax, as if the distribution or gain had been recognized ratably over the taxpayers holding period for the ADSs. Additionally, if we are a PFIC, a U.S. Holder who acquires ADSs from a deceased person who was a U.S. Holder would not receive the step-up of the income tax basis to fair market value for such ADSs. Instead, such U.S. Holder would have a tax basis equal to the deceaseds tax basis, if lower. Furthermore, the IRS has issued proposed regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by a certain U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. This proposed regulation is not yet effective, but the IRS could make it effective at any time, possibly with retroactive effect.
If a U.S. Holder has made a qualifying electing fund (QEF) election covering all taxable years during which the holder held ADSs and in which we were a PFIC, distributions and gains will not be taxed as described above, nor will the denial of a basis step-up at death described above apply. Instead, a U.S. Holder that makes a QEF election is required for each taxable year to include in income the holders pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term capital gain, regardless of whether such earnings or gain have in fact been distributed. Where items that were included in income under this rule are later distributed, the distribution is not a dividend. The basis of a U.S. Holders ADSs under the QEF rules is increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Payment of taxes on undistributed income may be deferred under a separate election. If deferred, the taxes will be subject to an interest charge. Where a U.S. Holder has elected the application of the QEF rules to its PFIC ADSs, and the excess distribution rules do not apply to such ADSs (because of a timely election or a purge of the PFIC taint), any gain realized on the appreciation of the PFIC
ADSs is taxable as capital gain (if the ADSs are a capital asset in the hands of the investor) and no interest charge is imposed. In order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from us. We can provide no assurance that we will possess or provide the information necessary for U.S. Holders to make a QEF election.
If a U.S. Holder held ADSs in a year in which we were a PFIC but had not made a QEF election covering such years, such U.S. Holder may make a QEF election and purge the PFIC taint by recognizing gain as if it had sold the ADSs on the first day of the taxable year for which the QEF election is made, as long as the U.S. Holder held the ADSs and can establish their fair market value on that day. The U.S. Holder will treat that deemed sale transaction as a disposition of PFIC stock and will, thereafter, be subject to the rules described above applicable to U.S. Holders making a QEF election.
Although a determination as to a corporations PFIC status is made annually, an initial determination that a corporation is a PFIC will generally apply for subsequent years with respect to holders of ADSs in the year of the initial determination, whether or not the corporation meets the tests for PFIC status in those years. A U.S. Holder who makes the QEF election discussed above for the first year the U.S. Holder holds or is deemed to hold ADSs and for which we are determined to be a PFIC, or who has made the QEF election and purged the PFIC taint, however, is not subject to the PFIC rules or the QEF regime for the years in which we are not a PFIC.
If our ADSs are treated as regularly traded on a qualified exchange or other market, as provided in applicable Treasury Regulations, a U.S. Holder of our ADSs may elect to mark the ADSs to market annually, recognizing as ordinary income or loss each year an amount equal to the difference between the holders adjusted tax basis in such ADSs and their fair market value. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election in previous taxable years. As with the QEF election, a U.S. Holder who makes a mark-to-market election would not be subject to the general PFIC regime and the denial of basis step-up at death described above. We can provide no assurance that our ADSs are or will be in the future eligible for the mark-to-market election.
If we are a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a PFIC, U.S. Holders of ADSs generally would be deemed to own, and also would be subject to the PFIC rules with respect to, their indirect ownership interests in that lower-tier PFIC. If we are a PFIC and a U.S. Holder of ADSs does not make a QEF election in respect of a lower-tier PFIC, the U.S. Holder could incur liability for the deferred tax and interest charge described above if either (1) we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or (2) the U.S. Holder disposes of all or part of its ADSs. A mark-to-market election under the PFIC rules with respect to ADSs would not apply to a lower-tier PFIC, and a U.S. Holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC. Consequently, U.S. Holders of ADSs could be subject to the PFIC rules with respect to income of the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. Similarly, if a U.S. Holder made a mark-to-market election under the PFIC rules in respect of the ADSs and made a QEF election in respect of a lower-tier PFIC, that U.S. Holder could be subject to current taxation in respect of income from the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. U.S. Holders are urged to consult their own tax advisors regarding the issues raised by lower-tier PFICs.
Our PFIC status is a factual determination made after the close of each taxable year. There can be no assurance that we will not be treated as a PFIC for any particular taxable year.
The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above, including our ownership of any non-U.S. subsidiaries. As a result, U.S. Holders of ADSs are strongly encouraged to consult their tax advisors about the PFIC rules in connection with their purchasing, holding or disposing of ADSs.
Non-U.S. Holders of ADSs
Except as described in Information Reporting and Backup Withholding below, a non-U.S. Holder of ADSs will not be subject to U.S. federal income tax on the payment of dividends on ADSs and gain from the disposition of ADSs unless such income is U.S.-source income and: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, where required by an applicable income tax treaty, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; or (2) the non-U.S. Holder is an individual who holds the ADSs as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition, certain other conditions are met, and such non-U.S. Holder does not qualify for an exemption. If the first exception applies, the non-U.S. Holder generally will be subject to U.S. federal income tax with respect to such income in the same manner as a U.S. Holder unless otherwise provided in an applicable income tax treaty. A non-U.S. Holder that is a corporation for U.S. federal income tax purposes may also be subject to a branch profits tax with respect to such income at a rate of 30% (or at a reduced rate under an applicable income tax treaty). If the second exception applies, the non-U.S. Holder generally will be subject to U.S. federal income tax at a rate of 30% (or at a reduced rate under an applicable income tax treaty) on the amount by which such non-U.S. Holders capital gains allocable to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of disposition of the common shares.
Information Reporting and Backup Withholding
Information and backup withholding requirements may apply to payments in respect of our ADSs. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, ADSs made within the United States, or by a U.S. payor or U.S. middleman to a holder of ADSs, other than an exempt recipient, including most corporations, a payee that is not a U.S. person that provides an appropriate certification, and certain other persons. For payments made by or through a U.S. person or a U.S. office of a non-U.S. person: (1) U.S. Holders will be subject to backup withholding (currently at 28% for taxable years through 2010) on dividends paid on ADSs, and on the sale, exchange or other disposition of ADSs, unless the U.S. Holder provides a duly executed IRS Form W-9 or otherwise establishes that it is an exempt receipient; (2) non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on ADSs, or the proceeds from the sale, exchange or other disposition of ADSs, provided that such non-U.S. Holder certifies to its foreign status on the applicable duly executed IRS Form W-8 or otherwise establishes an exemption. Backup withholding is not an additional tax and the amount of any backup withholding will be allowable as a credit against a holders U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
Effective for tax years beginning after March 18, 2010, Code section 6038D requires that individuals who are U.S. Holders and who hold specified foreign financial assets (as defined), including a foreign corporations ADSs, whose aggregate value exceeds $50,000 during the tax year (and which assets are not held in an account maintained by a U.S. financial institution, as defined) must attach to their tax returns for the year certain specified information. An individual who fails to timely furnish the required information may be subject to a penalty.
THE U.S. FEDERAL AND NON-U.S. INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE BASED ON PRESENT LAW AND DO NOT PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS THAT MAY APPLY TO A HOLDER OF OUR ADS, OUR ADS HOLDERS ARE ACCORDINGLY URGED TO CONSULT THEIR OWN TAX ADVISORS.
Documents on Display
Documents referred to in this Annual Report on Form 20-F may be inspected at our principal executive office located at Schnackenburgallee 114, 22525 Hamburg, Germany.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Our only exposure to market risk for changes in interest rates is in connection with our available-for-sale financial assets and borrowings. The primary objective of our cash investment activities is to simultaneously preserve principal and maximize interest income without significantly increasing risk. To minimize risk, we maintain our portfolio of cash and cash equivalents and available-for-sale financial assets in a variety of interest-bearing instruments, including money market funds. We do not consider our current exposure to risks for changes in interest rates to be material. Please see also Note (29) to the Consolidated Financial Statements included in this report.
Foreign Currency Exchange Rate Risk
We, with all financial instruments recorded at December 31, 2009, are exposed to currency risks associated with the U.S. Dollar and UK Sterling due to financial instruments held in currencies which are not in our functional currency, the Euro. Our subsidiaries situated in the United Kingdom, in the United States and in India are additionally exposed to currency risks associated with the Euro in relation to their functional currency. Please see also Note (29) and Note (30) to the Consolidated Financial Statements included in this report.
In 2009, our primary foreign currency risk related to changes in the exchange rate of the U.S. Dollar and the UK pound Sterling versus the Euro.
We are exposed to translation risk because a significant percentage of our revenues and expenses are realized and incurred in currencies other than the Euro, which is our reporting currency. We are also exposed to translation risk because certain of our assets and liabilities are denominated in currencies other than the Euro. We are exposed to transaction risk because it generates revenues in foreign currencies while our consolidated entities incur costs in their respective local functional currencies. As a result, there are receivables denominated in a foreign currency. Please see also Note (30) to the Consolidated Financial Statements included in this report.
Our UK operations represent a substantial portion of our operations. The UK operations are translated into Euros for inclusion in our Consolidated Financial Statements. Thus, a decline in the value of the UK pound Sterling against the Euro would negatively affect our revenues and positively affect expenses in the Consolidated Income Statement reported in Euros even if the subsidiarys result in local currency did not change.
Our U.S. operations represented a substantial portion of our research and development activities until May 2009. The U.S. operations were translated into Euros for inclusion in our Consolidated Financial Statements. Thus, a decline in the value of the U.S. Dollar against the Euro would have negatively affected our revenues and positively affected expenses in the Consolidated Income Statement reported in Euros even if the subsidiarys result in local currency had not changed.
After the acquisition of RSIPL, our Indian operations represent a material portion of our operations. The Indian operations are translated into Euros for inclusion in our Consolidated Financial Statements. Thus, a decline in the value of the Indian Rupee against the Euro would negatively affect our revenues and positively affect expenses in the Consolidated Income Statement reported in Euros even if the subsidiarys result in local currency did not change.
In addition, the investments in the UK, the U.S. and the Indian subsidiaries are subject to exchange rate risk which is directly reflected in equity.
We are exposed to transaction risk because of expenses denominated in UK pound Sterling which cannot be offset against revenues in the same currency. The transaction risk due to revenues denominated in U.S. Dollars declined because of the natural hedge effect from counteracting research and development expenses in the U.S. With the wind down of our U.S. operations the natural hedge effects decrease. Accordingly, changes of the exchange rate of the U.S. Dollar against UK pound Sterling or Euro as well as the UK pound Sterling against the Euro can significantly affect our results of operations depending upon the size of offsetting currency effects from natural hedging. In attempting to mitigate our exposure to foreign currency transaction risks, we periodically enter into agreements to obtain or sell foreign currencies at specified rates based on expected future cash flows for the respective currency.
Currency exchange rates were again volatile during 2009. The U.S. Dollar continued to be strongly volatile against the Euro, but over the year this had only a minor impact on reported revenues compared to 2008. The weak UK Sterling against the Euro during 2009 in comparison with last year positively affected the cost base of the UK operations.
Concentration of Credit Risk
Although we have a policy of entering into collaboration and licensing transactions only with highly reputed, financially sound counterparts, we are exposed to credit risk from our trade debtors as our collaborations and licensing revenues arise from a relatively small number of transactions.
Credit risk arises from the potential failure of a counterparty to meet its contractual obligations. We are exposed to counterparty risk primarily with respect to trade accounts receivables. Our policy is to manage these risks by having a number of geographically diverse customers and review of the counterpartys creditworthiness. In addition, we are exposed to concentrations of credit risk due to investments in money market funds, which are classified on our Consolidated Statement of Financial Position as available-for-sale. Although we monitor the credit quality of the financial institutions where we hold bank accounts, cash balances and securities, we are exposed to concentrations of credit risk that arise from these holdings.
Item 12D. American Depositary Shares
12D.3 Depositary Fees and Charges
Our American Depositary Shares, or ADSs, each representing two of our ordinary shares, were traded on the NASDAQ Global Market (NASDAQ) from May 6, 2008 until we voluntarily delisted trading of the ADSs on NASDAQ effective November 30, 2009. The ADSs are now traded on the over-the-counter market. The ADSs are evidenced by American Depositary Receipts, or ADRs, issued by JPMorgan Chase Bank, N.A. as Depositary under the Deposit Agreement dated as of April 15, 2008 between Evotec AG, JPMorgan Chase Bank, N.A. and holders of ADRs. ADR holders may have to pay the following fees and charges to the Depositary:
12D.4 Depositary Payments to us for 2009
In the year ended December 31, 2009, our Depositary, JPMorgan Chase Bank, made a payment to us of U.S. $31,389.73 as reimbursement for certain expenses in relation to our ADR program.
Item 15. Controls and Procedures
(a) Disclosure Controls and Procedures
Our chief executive officer (principal executive officer) and chief financial officer (principal financial and accounting officer) are responsible for establishing and maintaining a system of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, and have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 20-F. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our current disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act. is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms, and is accumulated and communicated to our management, including our chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, no matter how well designed, such as the possibility of human error and the circumvention or overriding of the controls and procedures. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance of achieving their control objectives. In addition, any determination of effectiveness of controls is not a projection of any effectiveness of those controls to future periods, as those controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
(b) Managements Annual Report on Internal Control over Financial Reporting
Our chief executive officer (principal executive officer) and chief financial officer (principal financial and accounting officer) are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934, as amended. Our system of internal controls over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment under the COSO Internal Control-Integrated Framework, management believes that, as of December 31, 2009, our internal control over financial reporting is effective. From internal assessments no material weaknesses were identified and detected deficiencies were remediated immediately.
(c) Attestation Report of the Independent Registered Public Accounting Firm
KPMG AG Wirtschaftsprüfungsgesellschaft, the independent registered public accounting firm that audited our Consolidated Financial Statements has also audited the effectiveness of Evotecs internal controls over financial reporting as of December 31, 2009. Their report is included in this Annual Report on Form 20-F on page 88.
(d) Changes in Internal Control over Financial Reporting
The assessment of effectiveness of internal controls over financial reporting by management as of December 31, 2009 was the initial assessment by the Company. There has been no change in our internal control over financial reporting during 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of Evotecs internal controls over financial reporting was audited by its independent registered public accounting firm as of December 31, 2009. The audit has not led to any qualifications.
Item 16A. Audit Committee Financial Expert
The Supervisory Board has designated Dr Hubert Birner as an audit committee financial expert as that term is defined in the SEC rules adopted pursuant to the Sarbanes-Oxley Act. Dr Birner is independent as defined in the Marketplace Rules of the NASDAQ as applicable to Audit Committees.
Item 16B. Code of Ethics
We have adopted a code of conduct, which is our ethical business conduct policy and which we believe qualifies as a code of ethics, as required by the SEC. Our code of conduct is published on our website www.evotec.com. The code of conduct applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions.
Item 16C. Principal Accountant Fees and Services
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has adopted a pre-approval policy that requires the pre-approval of all services performed for us by our independent registered public accounting firm. All audit-related services, tax services and other services rendered by our independent registered public accounting firm or their affiliates are pre-approved by the Audit Committee and are compatible with maintaining the auditors independence.
At our 2009 Annual General Meeting of Shareholders held on June 4, 2009, our shareholders appointed KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG) to serve as our auditors for the fiscal year ended December 31, 2009. Set forth below are the total fees expensed, on a consolidated basis, by KPMG, for providing audit and other professional services in each of the last two fiscal years:
Audit fees consist of fees and expenses billed for the annual audit of our consolidated financial statements as well as the financial statements of the legal entities in the group. They also include fees billed for other audit services, which are those services that only the statutory auditor can provide, and include the review of documents filed with the Securities and Exchange Commission.
Audit-related fees in 2009 mainly consist of the required audit of the effectiveness of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.
Tax fees include fees and expenses billed for assistance on the preparation of tax returns and assistance in connection with tax audits, tax advice and tax advice related to mergers and acquisitions.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On February 10, 2009, we purchased 59,865 of our own shares at price per share of Euro 0.728. The purchase was not part of a publicly announced program. The purchased shares were distributed to the members of our Supervisory Board as part of their remuneration under the authorization granted by the AGM of Evotec AG on August 28, 2008. For details of Supervisory Board remuneration, see Item 6 of this Form 20-F.
See Item 18.
Item 18. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Evotec AG and Subsidiaries
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Supervisory Board
We have audited the accompanying consolidated statements of financial position of Evotec AG and subsidiaries (Evotec or the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. We also have audited Evotecs internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Evotecs management is responsible for these consolidated financial statements, and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evotec AG and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards
Board (IASB). As discussed in note (2), the Company adopted IFRS 3, Business Combinations (revised 2008) and IAS 27, Consolidated and Separate Financial Statements, and changed its accounting for business combinations in 2009 and the presentation of minority interests. Also, in our opinion, the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Evotec AG maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the COSO.
/s/ KPMG AG
June 4, 2010
Evotec AG and Subsidiaries
(Euro in thousands, except share data)
See accompanying notes to consolidated financial statements.
Evotec AG and Subsidiaries
(Euro in thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
Evotec AG and Subsidiaries
(Euro in thousands)
See accompanying notes to consolidated financial statements.
Evotec AG and Subsidiaries
(Euro in thousands)
See accompanying notes to consolidated financial statements.
Evotec AG and Subsidiaries
(Euro in thousands, except share data)