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Despite Q1 Revenue Slump for Tech Unit, Evotec Foresees Recovery on the Horizon

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German drug-discovery firm Evotec last week reported a 10-percent increase in its 2005 first-quarter revenues. However, the company's Tools and Technologies division (Evotec Tech), which counts among its stable of products the Opera confocal high-content plate reader, posted a 44-percent decrease in organic revenues for the period.

Despite Evotec Tech's lackluster showing — and Evotec's continued assertions that the unit is no longer core to its overall business — the unit still contributed approximately 24 percent to the firm's 2004 top line. And Evotec believes that it is primed for a turnaround in the remainder of 2005 based primarily on the pending Q2 introduction of an enhanced version of Opera, Anne Hennecke, Evotec's director of investor relations and corporate communications, told CBA News last week.

Since the first quarter of 2004, Evotec has seen a steady decline in contributions from Evotec Tech to its overall revenues (see chart) — save for Q4 2004, when Tech revenues jumped drastically due primarily to the sale of several instruments to the Institut Pasteur in Korea.

Evotec Tech's steadily declining revenue contributions have caused some industry insiders to speculate whether Evotec will continue to oversee the division completely, or whether it will hand off a certain amount of oversight to an outside party. This speculation is supported in part by Evotec's recent effort to focus more fully on its two other business areas: screening services for pharmaceutical and biotech customers, and internal drug discovery.

Evotec's overall revenues for the first quarter increased to €15.9 million ($20.2 million) from €14.4 million in the same quarter last year. The company said that this growth was driven primarily by a 36-percent increase in revenues in its Discovery and Development Services unit.

First-quarter receipts at Evotec Tech, however, fell to €2.3 million from €3.4 million in the year-ago period. These numbers actually included €400,000 from Evotec's recent acquisition of Carl Zeiss' µHTS technology (see sidebar for more); therefore, organic receipts totaled €1.9 million.

Can Evotec's Acquisition
of Zeiss' µHTS Drum
Up Additional Sales
in Tech Unit?

Last week, Evotec said that it had completed its acquisition of the micro-high throughput screening (µHTS) business from microscopy giant Carl Zeiss. Evotec first disclosed this acquisition in a March conference call.

Financial details of the agreement were not disclosed. However, according to Roman Nagel, an equity analyst for German investment bank BHF-Bank, Evotec said the deal was worth approximately €1.2 million, and that its major impact would be in the Technology unit, with "only a minor impact on the company as a whole."

At second glance, however, the move may end up drumming up more business for Evotec Technologies' existing instrumentation platforms.

According to Nagel, Evotec also "more or less bought a customer base. They extended their customer base by buying the technologies and the headcount, and they also increased the customer base, I think, to improve the Opera business," he said.

As part of the transaction, Evotec Tech was granted exclusive rights to commercialize Zeiss' µHTS product portfolio, which includes the plate::vision reader, the plate::explorer µHTS system, and the plate::works software — all of which are for conducting biochemical screening assays.

In addition, Evotec Tech assumed service responsibility for the installed base of the Zeiss instruments, which include 10 µHTS systems in operation at leading pharmaceutical companies, Evotec said in a statement.

"In one case, it impacts the Tech division, but in the other case, some of these applications are part of the EvoScreen technology," said Nagel. "And Evotec also uses its own EvoScreen tech in their support and service business for the pharma industry."

Evotec said the poor Q1 showing was due in part to the impending Q2 release of a new version of Opera. "Customers wait to get the new release instead of taking the older one in Q1," Hennecke said.

Although Evotec Technologies offers several products for drug screening, Opera is "one of the biggest sellers," according to Hennecke.

"The Opera is definitely a key selling product for Evotec Technologies, and it's performing really well," Hennecke said. The company does not break out revenues by product line.

Although she declined to disclose exact sales figures or pricing, Hennecke said that the Opera can cost anywhere from about €400,000 to €700,000 — but is "usually in the half-million Euro range" — depending on its exact specifications. Hennecke also said that the company sold a "double-digit number" of units last year.

Using estimates of €500,000 per Opera platform and between 10 and 20 customers results in a contribution of somewhere between €5 million and €10 million to Evotec Tech's overall €17.7 million in 2004 revenues. These are, of course, very rough estimates, but it is safe to say that Opera sales have a significant impact on Evotec Tech's revenues.

In addition, Hennecke said, the EvoScreen system — which is a much more comprehensive and integrated high-throughput screening system that performs both cell-based and biochemical assays — is also a large contributor to Evotec Tech's revenues.

"We also have a medium-throughput screening system called Clarina, which is not for cells, but is a smaller version for doing biochemical assays on the benchtop," Hennecke added. "And then we have service and maintenance. These are the biggest sellers, and we also have some smaller products."

Despite the weak Q1 performance, Evotec said in a statement that "the currently observed healthy order situation, comparable to the order book recorded at the same time in the previous year, supports our belief that the full-year performance of Evotec Technologies will be strong."

Will Evotec Tech Remain at Evotec?

But will Evotec keep Evotec Tech in the fold?

In the near future, it appears as if it will. But Evotec has recently made an obvious effort to focus more fully on its two other business areas — screening services for pharmaceutical and biotech customers, and internal drug discovery. The most concrete example of this is Evotec's announcement in March that it was acquiring the remaining 78 percent of spin-off company Evotec Neurosciences — which is focused on therapeutic development — not already owned by Evotec.

Evotec has also been hinting for some time that Evotec Tech is less important than it used to be to its core business — a notion that was most recently reinforced by CEO Joern Aldag in a March conference call (see CBA News, 3/29/2005).

"I think that this means in the medium term, they want to have a partner for the [Tools and Technologies] business," Roman Nagel, an equity analyst for German investment bank BHF-Bank, told CBA News. "This is because they are definitely concentrated on their service business as more or less their base business, and on top of that, they want to improve their own proprietary drug development activity.

"That means that the tools and technology business is, and will be, non-core, and if there is a partner in the market that can take over, for example, a minority of this business, that would be one of the best things [for Evotec]," he added. "Their base business is absolutely OK, I think, and in Europe, they are a market leader in this area, and I think the future will come from their own drug development activity."

Hennecke declined to comment on whether Evotec might eventually sell part of or its entire Technology unit. However, she reiterated that the company does not think the first quarter is indicative of the expected full-year performance.

"The enhanced Opera is being launched in the second quarter, so you will expect to already see a stronger Q2 than Q1," she said. "You always have a strong Q4, and Q1 was extremely weak due to the extended version announcement, but it's nothing to worry about.

"We already have orders in for more Opera analyzers than we have sold last year," she added. "I think this gives a good indication. They have not been delivered yet, but they have been ordered."

The new version of Opera, according to a company spokesperson, will offer more colors for simultaneous imaging. It will come equipped with four lasers (405, 488, 532, and 635 nm), as well as a high-pressure xenon lamp for fluorescence excitation in the 360-nm to 635-nm range. Furthermore, images can now be acquired by as many as four CCD cameras in parallel.

In comparison, the earlier Opera had only three lasers (488, 532, and 635 nm), and only two cameras for simultaneous acquisition of two images.

Evotec said that the new version therefore extends the capability of the instrument farther into the UV wavelength range, and will enable high-speed multi-color image acquisition and analysis for multiplexed assays and fluorescence resonance energy transfer applications.

— Ben Butkus ([email protected])

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